The Beast From Bentonville Delivers...

Three weeks ago, I recommended going long WMT at $44.90. Today the company came out and said that October sales were above expectations -- the stock traded as high as $47.40, which is very close to my original first trading price target of $48. There is no doubt in my mind that WMT is a very controversial name -- only last week, there was a memo leaked out about high-ranking company officials thinking of a variety of ruses to lower WMT's employee benefits costs (not that it had a lot of those in the first place, considering 5% of WMT workers are on Medicare, i.e. they are too poor to afford anything else) by not hiring handicapped people, for example.

However, there is a price for everything and at $44, WMT was just way too cheap, both from a historical perspective (where the stock has been in the past 4 years), and from a future earnings perspective. Love it ot hate it, WMT will eventually deliver -- its sheer mass and consumer market power makes it a survivor in almost any U.S. macro- economic environment. Hence, despite its many internal problems, WMT, more likely than not, will just steamroll ahead -- most Americans can't afford not to shop there. It's tough to beat WMT on price, and in the current energy-induced squeeze on consumer wallets, price will always come first before quality, plus WMT is actually working on cleaning up its quality image anyway (see its latest fashion drive, for details). Hence, my call from a few weeks back, proclaiming the stock to be a longer-term value buy. It ain't gonna get to $55 "tomorrow", but coupled with a juicy 1.3% dividend yield and its relevantly safe position in the U.S. retail world and the fact that the stock has taken a lot of bad news (and a huge SPX index rebalance overhang) over the last 6 months, I do consider the name to be a "buy it and put it away for a while" type of an investment.

The good news out of WMT is obviously helping all retailers (the MRVX and RTH are both up over 3%) and the market in general: the SPX is actually trading at or slightly above my resistance level of 1205. Energy has stabilized, and technology and financials (take a look at Goldman (GS) and Morgan Stanley (MWD), for example) are dragging us higher, which is what I expected to see if the 4Q rally were to happen. Well, it's happening right now, I think (and I am crossing my fingers and toes as I write this) -- and yes, I know it's the last day of October and perhaps a few funds are doing a bit of window-dressing, but overall, all signs point in the direction of a rising tide over the last two months of the 2005 calendar year. As a friend of mine from London always says, "there is just too much nervous U.S. cash out there, sitting on the sidelines", courtesy of Mr. Greenspan.

8 or 9 More SPX Index Points And We Are Out Of The Woods!

As I write this at the end of the day, I can't help being surprised by the sheer power, stealth and breadth of the rally today. The GDP numbers were indeed good, and yes, some of the impressive gains that we saw were probably driven by month-end window-dressing that a lot of mutual funds started to do today before the Fed meeting next week. The reality however is that the SPX still closed below its relevant resistance levels (hence those extra 8-9 SPX index points, that we need to see, are indeed important). Last but not least, the XLE (the energy sector ETF) recovered a lot of ground today, especially in the afternoon, thus spurring the momentun behind this rally. All that remains now is for the market to clear the 1205 SPX index hurdle level, and maybe then we will finally see that long-awaited 4Q rally. Tomorrow is another day!

Waiting For Godot... Part II

The market is trying hard to rally off of the very solid GDP numbers (3.8% annualized rate growth vs. 3.6% expectations) that we had this morning. However, the rally seems half-hearted, almost as an afterthought following the bad trading pattern that we've had in the last week -- the market rallies and then proceeds to sell off from quite obvious technical resistance levels (1205-1207) overhead. As expected, this tug-of-war between the bulls and the bears has resulted in increased intraday volatility. However, in order for us to feel confident that we are not just wasting our time trying to trade this market, we do need a definite resolution about the possibility of a late 4Q rally.

I still think it will happen, though it might take longer than initially expected for the SPX to negotiate the 1205 resistance level. The collapse in the XLE (energy select ETF) and the SOX (the Philly semi-conductor index) hasn't helped at all. Other sectors haven't picked up the slack, though one would normally expect that there is a good reason why people are raising cash selling their YTD energy winners such as ExxonMobil, Chevron, etc. So far, the cash hasn't flowed back in the market to other sectors (for example, the retail, gaming, homebuilders and consumer discretionary sectors continue to look like death incarnate!), which makes me... yes, nervous and worried!! The silver lining of all this cloud of worries may be that no significant downside support levels have been broken yet (e.g. the 1160 SPX support) in the major indices, and investors might just be waiting for the early November Fed meeting to get out of the way, before they lean long on this market, going into 2005 year-end.

What is one to do? When there is no money to be made, the best action then, by definition, is not to lose any money. Either stay on the sidelines or buy some longer-term value names, which I have highlighted in previous postings. Crucially, in the absence of any other winning sector candidates, I think we would still need the energy sector to at least stabilize, before the market as a whole can proceed higher, the reason being that the U.S. consumer is definitely not going to be the one to pick up the slack over the holiday period (like he has done on many other occasions!) -- it is obvious [from the economic data] that he is actually cutting back on spending, not increasing it. I doubt as well that this is only a temporary phenomenon, considefing that the proverbial noose is tightening both from the credit side (interest rates are going higher) and from the cost side (energy prices are indeed significantly eating into take-home pay). It is tough to make the argument, at this point, that this situation would change next year. There is still a good chance that the Fed overshoots its "neutral" interest-rate target and the economy might actually plunge back into recession, which might affect the revenue side (real incomes from employment) of the equation. But hey, maybe I am just worrying too much, and Mr. Bernanke already has a solution in mind. We'll wait and see.

Waiting For Godot...

Yes, that's what it feels like trading in this market. The sickly tree, played by the 1168-1205 SPX technical trading range [described at length in previous posts], has indeed sprouted a few leaves, those being a few of the stellar earnings announcements over the last week or two. The two tramps of course are being played by the bullish and the bearish investors, who keep waiting and waiting for Godot (a.k.a. the market) to do anything. Well, Godot is not showing up any time soon, it seems. As soon as the top of the range is reached, like yesterday's 1204 top, the market retreats. Same thing goes for the bottom of the range, where there are quite a few willing value buyers. What is the catalyst for some excitement?

It's hard to say at this point. Exxon Mobil and Royal Dutch Shell posted unbelievable 3rd quarter results, net profits of $19bn combined, rivaling the GDPs of quite a few small countries. Yet, those earnings are not enough to move the needle -- it's all already in the price. The market and everyone's expectations out there care about one thing only: the next sector leadership wave; who is going to lead us higher? I've been saying for some time now that it simply has to be technology and financials, in the absence of the obviously exhausted energy sector, but we can't seem to get over the overhead resistance hump that's looming just above us at the 1205 SPX index level. The longer we stay below that level, the more courage the bears will gather, and the more they can push the market below the lower end of the range -- below 1168. I still don't think that will happen, but my faith had better be rewarded pretty soon, because we are simply running out of time and steam this year. And 2006 is likely to be a whole different ballgame -- a new Fed chairman, questionable prospects for growth in the U.S, given the macro climate, and last but not least, probably much higher interest rates to counteract the inflation scare (which I wrote about only yesterday!).

Speaking of interest rates, let's take a look at Toll Brothers (TOL), the dearest of darlings of many a homebuilder-bullish fund manager this year. Well, the stock is pretty much flat for 2005 YTD, having described an almost perfect triangular-looking curve from $34.5 in January to $58 in July back to $34.5 in October. I do admit that it looks cheap here again, based on a variety of fundamental metrics; however, with the inevitable slowdown in the housing market (and by this I mean prices just ceasing to go up and maybe homes staying unsold for longer than expected), one has to wonder about the prospects of this sector for the next few years. TOL insiders seem to agree -- they have been selling their holdings in very decent size on the way down. Still, it remains a good company, so should you wish to be a contrarian and buy a homebuilder with a great track record, look no further than TOL.

Which brings me to good companies vs. bad stocks and vice versa. Personally, I like buying junk. By this I mean that I like buying companies that are so crap, and so beaten-down (usually under-followed by the Street), and so vehemently hated by the investment community, that they could not possibly do any worse than they already are doing. These are also the type of stocks that one should never ever be short, especially if those companies still possess juicy-looking assets which might attract the hungry packs of private equity or distressed fund managers wallowing in cash and willing to take the risk of turning around the situation. Albertson's (ABS) -- the supermarket and food-drugs chain -- was one example earlier this year where careless shorts suffered because of buyout bids that suddenly materialized out of thin air, despite the general incredulity of the investment community. Safeway (SWY), ABS's miserable food-chain cousin, could be next. And no, I wouldn't be short that stock either. Petco (PETC) and Pier 1 (PIR) are two other names, albeit in different industries, which I would stay away from on the short side, in spite of the multitude of problems they face, and the poor management execution of their respective strategies. Bad companies rarely stay bad stocks for long, because their stock prices adjust to expectations much quicker than most of us think.

Well, where can we find good shorts? How about good companies whose stocks have risen so much and become so expensive that it makes sense to short them, even if they are "printing" cash at that particular moment. TOL at $58 was a good example. A 40% return on the short side isn't something one should turn one's head at. The market tends to overshoot both on the way up and on the way down. Another good company that might be a great short early next year (after the holiday period) is ... oops, bad man, bad man, how dare I say it!! -- Apple (AAPL). When all the lofty expectations are in the price and things" just couldn't get any better", then and only then is the right time to put on a short. Even great companies suffer from unrealistic expectations.

Oil Stocks Revisited...

If you needed any more proof of the importance of oil stocks to this "falsely buoyant" market, all you have to do is take a look at ConocoPhilips (COP is its aptly-named ticker). The stock is flying, after the company reported stellar results this morning... Consequently, the XLE (the Energy Select Sector Index) is being dragged 1-2% higher as well, thus supporting the SPX, which incidentally went all the way up to my 1205 overhead resistance level this morning, and then proceeded to slowly retreat from there. I expect this level to be broken before long. There is too much nervous money on the sidelines afraid to "miss out" on the usual 4Q rally this time of the year -- performance anxiety is a powerful motivator for fund managers to follow the herd, so to speak. As long as the SPX index doesn't break the 1168 level on the downside, one could actually say that the bulls have won the tug of war against the bears... for now.

Speaking of that tug of war, I found this article absolutely fascinating. While the bulls seem to have won "the battle" for now, the longer-term picture, say 2006 and beyond, does not look pretty at all, one of the main reasons being that inflation may be raising its ugly head again. I couldn't have said it better than Barry Ritholtz. It is worth reading his thoughts if only to understand to what extent Americans like to look at their economy with rose-colored glasses. And who's going to deal with the consequences when Super Al (lucky or smart, he is still considered super, given that he has continued to assure investors that the Fed is here to bail them out of all sorts of troubles) retires? We found that out the other day -- Mr. Ben Bernanke who was nominated by Bush, and who seems to be the man that the Street wanted the most, and therefore is expected to be confirmed without too much fuss. Here is his behavioral finance profile. He is definitely smart and educated, but can he really, really fight Barry's definition of inflation?? We'll soon find out -- March 2006 to be precise.

"Surprise, Surprise" -- Consumer Confidence Drops

Consumer confidence seems to have fallen out of bed. Retail, consumer discretionary and gaming follow suit. The SPX index is retreating a bit from yesterday's lofty levels, especially since it was well contained by the huge overhead resistance at 1205 earlier this morning and the disappointing forecast out of Texas Instruments (TXN). I do expect technical supports to hold for now though, and for the market to find its legs for a late 4Q holiday rally. Value buyers seem to step in every time we near some good support levels. Volatility should remain relatively high, and investors need to be nimble and look for new market leadership to reassert itself later this year. My best candidate for that are the technology and financials sectors. Cash raised by selling energy stocks in recent weeks needs to flow somewhere, and I just can't see it going in too many other sectors apart from technology and financials -- the macro environment is just not supporting the fundamentals elsewhere. Consequently, if 4Q rally is to materialize and the 1205 SPX index resistance level is to be taken out, I would look for technology and financials to give us the thumbs up, so to speak!

Cablevision -- Time to Buy?

Well, those crazy Dolans are at it again -- after months of negotiations, they today withdrew their offer to take Cablevision (CVC) private, the media company in which the Dolan family still holds a 20% equity stake/71% of voting shares. The stock promptly proceeded to drop as much as 14% earlier today, and is still down at around $24.25. Considering that, a few months ago, most analysts valued the company at $34-$35 and the Dolans themselves were negotiating about an offer of about $2-$3 below that, CVC might look like a tasty morsel at these levels. The company was valued as a stand-alone entity at $26, even before the Dolans bid for it, and that is probably already including a decent 10%-15% discount for the disproportionate shareholder power that the Dolan family wields with this stock.

Just because an offer is withdrawn and the shares fall, doesn't mean that there won't be another offer. The assets of this media company are definitely worth north of $30 (in fact, the bond market seems to be even more bullish than the equity market about those); how much north of $30 is open to debate and would depend on how deep the buyer's pockets are. Investors who didn't get on the gravy train back in June might consider this to be a longer-term buying opportunity at knock-down prices. I would certainly look to buy a few shares down here around the $24 level, the downside risk is minimum, despite the dreadful performance of the cable operators in the last few months. People who are selling CVC today are people who bought into the Dolan bid 4-5 months ago and are stopping themselves out -- obviously disappointed!! Value investors who don't own the stock might well be looking to load up at these levels. The company has a dominant position in the NYC market where people on average pay about $100 for cable services. CVC has some very juicy assets, which cannot remain undervalued for long. The Dolans might be back in a few months, who knows, if the stock remains depressed.

For investors with a greater appetite for risk, I would also recommend buying some CVC Jun06 27.5 calls @ 1.40 vs. stock @ $ 24.25 [around 30 vol]. While the volatility of this option may look expensive, especially if the stock quiets down now that the Dolans have withdrawn, -- as I pointed out, the saga might be far from over and another decent bid might soon materialize. The option that I described is a good way to lever returns for a potential bid in the high $20s to low $30s. I don't think the special dividend, proposed by the Dolans as an alternative to their offer, is going to fly, since the company would need to borrow money to put that cash into the Dolans' pockets -- something which the rest of the shareholder base might be strongly averse to.

Hence, my recommendation is to either buy a few CVC shares outright, right here @ $24.25, and look to add some more below $24, or lever up using calls with 9-months maturity, plenty of time for the continuation of the CVC saga to unfold. Last but not least, given the awful performance of the cable operators in the last few months (part and parsel of the consumer discretionary sector having a miserable few weeks), I would expect those media stocks to rally into 2005 year end and early next year, since they are starting to look cheap on a variety of fundamental and technical metrics. Comcast (CMCSK), boring as it is, might be a good buy at around $27.50. CVC is obviously a lot more risky of an investment, but the potential payoff for it could also be a lot greater, given that the company remains a takeover target -- its knock-down price of $24 today might not remain at this level for long.

A Couple of Interesting Articles

• High gas prices a blessing in disguise? Some sure think so.
• Frustration all around...
  

Bernanke It Is And The Market Likes It...

Wow! What a day -- the market posted its best gains in months and the SPX closed just below the significant overhead resistance level of 1205, which would confirm the start of the long-awaited 4Q rally. Now that the Fed Greenspan successor nomination is out of the way, and October is almost behind us, some long-only money may well step in and buy this market as a "value play". I think the odds are better than 50/50 at this point that we see that rally finally.

Back to the Fed chairman nomination. Bernanke is no genius, but he looks qualified on paper to pick up where King Al left off. Maintaining *continuity* seems to be the priority here, and Big Ben, with his mainstream economist credentials and a wealth of experience, both academic and "political" (to the extent that working for Bush qualifies as "political credentials"), surely looks like a good pick, so I expect him to be confirmed without too many problems. While the initial reaction looks positive, Bernanke will face significant macroeconomic challenges next year, inflation and high energy prices being the top of the iceberg, so to speak. How well the market likes him then, after he has had a chance to express his interest rate views, remains an open question. It all looks pretty rosy right now, but it may not be so easy, come next spring. Bernanke may well need to establish his credibility pretty soon after January'06, if the market is to remain convinced that he is indeed a staunch inflation-fighter, not only on paper but in reality.

Positive Stance Maintained

As suggested previously, the market should be and is maintaining its positive stance in this busy-for-earnings week and ahead of the Fed meeting next week. The bulls seem bent on keeping the SPX above its support levels of 1175 and 1160 for a late 4Q rally. For me, the 1205 level in the SPX Index is the "make-or-break" spot about the infamous 4Q rally that many people have called for (and burned themselves in the process being long;-). Above 1205, I think the rally is happening (and we may even exceed yearly highs in the process); below it, er.. not really. Paradoxically, I think we would actually need the oil sector to stabilize before we rally, unless of course, the technology sector wakes up and leads us higher, as I have described in previous postings.

Overall, earnings haven't been disappointing at all, and there are some incredible gems of companies out there, which are firing on all cylinders. For example, GOOG absolutely blew away all expectations out there, and is now worth more (as measured by its market capitalization) than EBAY and YHOO taken together (who would have thought that a year ago)? They are riding the surging wave of online advertising, and the 4Q being a seasonably very strong one because of all the holidays, it is reasonable to expect a continued strong growth there, especially since GOOG's management execution seems flawless so far. In addition, one can also make the argument that with high gas prices crippling travelling over the winter period, more and more people may be using the internet to surf and search, and do their holiday shopping "remotely" -- all things that should favor the behemoths in the sector: YHOO and especially GOOG. GOOG looks to me better positioned overall, given their dominance internationally as well; however they may also be more expensive (and for a good reason!). I am also worried about their cost structure management -- GOOG has been hiring people left and right, and while their integration so far has been excellent, there may be unavoidable speed bumps in the future: the pace of growth of this company just seems too dazzling too fast for it not to run into some problems eventually. YHOO on the other hand seems almost like a "value"-type of investment by comparison. They too had great earnings last week, and are executing their strategy reasonably well. Investors with lower risk tolerance (I never thought I would write this regarding any internet stock, let alone YHOO), might prefer to buy that latter name instead of GOOG. Either way, GOOG and YHOO should continue to do well over the forthcoming holiday periods.

I am hearing some chatter about Bush nominating Greenspan's successor this week. If this is true (even if most plugged-in observers seem to think it's Big Ben Bernanke!), we might see some more volatility ahead of us, even without the pending earnings announcements. Consequently, the VIX should continue to stay well above the 14 level (see my previous posting about what that means). Get ready for some rollercoaster action!

The VIX and What It All Means...

The VIX has been a bit of er.. vixen lately ;-). As a measure of investor risk-aversion, it has been, frankly speaking, all over the place this week. From 13.50 to 16 in 2 days?? Some of it of course is quite artificial, as we are after all in options expiry week, but one can't help but wonder what this yo-yoing all means.

The way I look at it, there are three distinct ranges of the VIX, as a measure of investor risk-aversion: "20 and above", "between 14 and 20", and "below 14", with 10 being sort of a natural lower limit (i.e. the market should possess some intrinsic volatility in it, caused most likely by trading activity itself). We spent the latter part of 2004 and a good part of 2005 in the 14 to 10 range, because, apparently market participants thought that the Greenspan put -- the one where the Fed is handing out loads of cash/liquidity to everyone and their brother to encourage them to speculate/trade/"invest" -- is going to last "forever". I am afraid to say that the Greenspan put is going away, not only because the Man himself is retiring soon, but because the reality of the macroeconomic climate we currently live in, dictates that the excess liquidity with which the Fed supported the market post-9/11 HAS to be removed, or the U.S. will suffer unbearable monetary and fiscal consequences (read inflation, credit crunch, savings shortfalls, massive indebtedness, etc.).

The "above 20" VIX range is probably reserved for "disasters of all sort", and a lot of those happened between 1997 and 2002 -- we had the Asian crisis, the Russian default, the LTCM debacle, the 9/11 scare, the Iraq war, etc. When you hit someone a lot of times with a bamboo stick on the shins, those shins will become used to the pain - in fact that's how Thai-kickboxers train. The market sort of got used to the pain during that period of time, and for this reason, it would be hard for the VIX, in the short run, to reach those lofty levels again so soon after 2002, even if similar "disasters" happen. The market has lived through those events too recently and its memory being so fresh, I doubt the reaction would be as drastic as if those things had happened for the first time. In other words, investors are afraid but not afraid enough -- i.e. experience counts.

Which leaves us with the last range - the one "between 14 and 20". This is the range that I think we are going to see in 2006. The VIX has slowly ticked up in the last 2 months, not least because investors know that the Fed is removing its accommodative monetary policy, high energy prices notwithstanding. In the last year, high oil prices have been offset by low yields, creating sort of a "lazy, goldilocks" economic scenario, which may have lulled a lot of investors to sleep, thinking that the economy is going to continue to grow without inflation, in spite of the pressure from energy prices. This is down to pure luck. This luck is about to run out in 2006. Credit spreads will gently widen, leverage, and hence volatility, will gently increase, the Fed will find a Greenspan successor who might not be as market-friendly as investors think, and America will have to face up to its fiscal and monetary excesses from years past. This is probably one of the reasons why the U.S. has been stuck in a rot this year, while pan-European and Japanese markets are seemingly booming. Global investors are concerned about the U.S. market's prospects, given all the headwinds that I mentioned above. The gradual increase of the VIX to its middle-range is just one more reflection of this global "avoid U.S. risky assets like the plague" phenomenon.

Whatever Happened to Oil...

One look at the XLE and the SPX index charts today is enough to tell us that it is the oil stocks which are capping the rally that began yesterday. With oil ticking down and with the lack of leadership from the rest of the sectors, the market just can't seem to get over the hump here. ExxonMobil and ChevronTexaco have quietly come down 15% month-to-date -- could this be the start of a sector rotation into technology, perhaps?

WMT, now trading at $46.50, is nearing my short-term price target since I recommended the trade a few days back. It could be wise to take 1/4 of the short puts position off here (especially since the volatility has come down as well), and see what happens next month, after the Fed meeting and just before its earnings announcement.

Speaking of earnings, those have generally been quite good (especially if you sell cellphones or financial advice), with a few notable exceptions (INTC, EBAY), but the question remains how sustainable any rally would be, given the tough macroeconomic climate. For example, I can't be positive about retailers which cater to the middle class -- if there is even such a thing called middle class left in America anymore. With the long, cold, hard winter ahead of us, and gas prices remaining high, "middle-class consumers" would be hard pressed to loosen their wallets and live on credit, day-by-day like they have done in the past. The luxury retailers and the ones catering to the least fortunate amongst us, I feel will do just fine, because their clienteles either don't care too much about gas prices (basking in the glory of earning over $250k/year as a household), or are just too poor to shop anywhere else but at the discounters, respectively (because they do have to shop SOMEWHERE). Thus, we are left with a big void in the middle: perhaps the works of not only the macroeconomic climate, but also of social and political conditions that have shaped the demographic landscape of this country in the last decade or so. But that's probably food for thought for another discussion...

In the meanwhile, I would continue to have a mildly bullish bias heading into the end of the month. If the XLE and oil firm up, I would expect the market to slowly creep up -- climbing the wall of worry, as a lot of pundits like to say. ;-)

That's More Like It...

It was only a few short hours ago that I wrote that I felt the market was forming a double bottom... and now that is actually in place. The SPX successfully defended the 1175 closing support level. Coupled with the fact that it is expiry week, I expect the market to head upwards now toward the 1,200 strike (the open interest of the 1,200 calls + puts strikes exceeds 100,000 contracts).

The bulls should have a lot of running room now heading into the Fed meeting on Nov. 1st. The SPX index might have already taken the bears' best shot for the quarter. 1203-05 is the immediate overhead resistance in the index. Technology shares should do well.

Double Bottoms...

As a technical strategist/chart magician friend of mine frequently used to say: if it looks like a double bottom and it smells like a double bottom, it might well BE a double bottom... The SPX Index has tried hard to spook the bulls in the last couple of days. Intel's guidance was bad, but earnings out of Motorola, Yahoo and J.P. Morgan were impressive. The market TRIED to go down off of those -- the way I see it, there are two major support levels underneath here: the 1160 and the 1140 SPX index levels. We can potentially reach the first one. The second I would venture a guess is a little out of the way, unless something drastic happens in the market.

Generally, if the market doesn't want to go down on bad news, it SHOULD go up. If the SPX stays above the 1175 level on a closing basis, one could say that the index has absorbed most of the selling pressure quite well and is trying to form a bullish technical configuration, known as a double bottom (which just means that it's forming another low, potentially even a higher low than the previous one set at 1167.75 last week). The bottom line (yes, i know too many bottoms, no pun intended) is that the bulls would be looking to buy the market, for the long-anticipated "4Q year-end rally" around the 1160 level, with a stop-and-reverse below 1140. I can see the week before the Fed meeting on November 1st as a really crucial one. If the market manages to hold above the previously-mentioned support levels until then, there is a better than 50% chance of the "4Q year-end rally" happening, if only because shorts would become increasingly nervous and cover their positions ahead of whatever the Fed has in store for us in terms of language: that "measured" phrase may finally be history, who knows...

Either way, I am encouraged by the fact that a few big cap bellwether names have stopped going down: MSFT, WMT come to mind. They look cheap to me from a fundamental/earnings perspective and, after all, markets in the end, when all is said and done, care about future earnings primarily, period. WMT for example has come down to levels that are extremely attractive for value buyers. I recommended the name a few days back (those Dec 45 puts are worth less than $1 now if you shorted them), I continue to believe that it will hold up relatively well in this tough macro environment.

Watch out the energy sector! With oil heading back down toward the $60, hurricanes or no hurricanes, some savvy investors may be looking to raise money out of the energy outperformers and put it into, oh say, technology. It is not merely a coincidence that the SPX's recent poor form has gone hand in hand with the XLE (energy ETF) diving from the mid-$50s to the mid-$40s. The problem is that we haven't had any other sector to step in and take leadership/ownership of the market. Should we eventually see a meaningful 4Q rally (and this can happen quite fast, as previous years' experience bears witness), I would be looking to see whether some other sectors pick up the slack.

Only in America...

Whoever came up with the idea of celebrity-designed mass-market goods is an astounding genius. Why collect $10 for a simple grill, if you can collect $19.99 for a George Foreman-designed one. Remember Salton (ticker: SFP), anyone? And that toaster you've always wanted to have, wouldn't you be 10x happier if it was designed by some "well-known" (no-name to most of us) fashion designer. I'd be curious to see the stock performances of all companies which stoop so low as to hire a celebrity to promote their mass market products. If SFP's performance is any guide, the trend doesn't look too good. The stock traded as high as $60 in 2000, it's stuck around $2.50 these days. Not bad, eh?

So what was KB Homes (KBH) thinking when it teamed up with Martha Stewart (MSO) to sell Martha-Stewart-(convicted felon)-designed homes? MSO's stock price performance follows the ups and downs of its short interest. And if only people woke up and took a look at what the company actually does and what their financial metrics are, perhaps the price wouldn't be $20, or even $34 (where it was a few weeks back), but more like, oh, say $7, once the shares discovered the physical nature of the force of gravity. It seems Martha's new shoddy TV show isn't quite enough to propel her stock into the stratosphere, so she needs KBH (which, incidentally, has a reputation for building shoddy houses) to prop up her image. I don't know, who is the greater fool here?

A lot of the homebuilder sector performance over the last 6-7 weeks reminds me of the CSCO days in 2000 -- greatest ever earnings and euphoria and then down, DOWN, D O W N. When expectations are fully priced in and funds such as Lone Pine and Citadel have already loaded up and gorged themselves on the sector, how much more upside could there be, given the macro environment? KBH, TOL, DHI, PHM -- they are down tremendously in the last two months, and I can't help but think that we'll be seeing a lot more downside to these names in the coming quarters as well. I expect some of these funds to start puking the above names (if those stock don't perk up sooner rather than later), even if their cost basis may be a lot lower. Add the homebuilders to my list of private secular bear market sectors such as retail, consumer discretionary and gaming.

If it wasn't for the oil&gas (including refineries & oilfield exploration) sector, the SPX would be down 15% YTD by now. What happens if the energy outperformers stagnate as well?

Lazy Market Price Action... and More

As suggested in my previous posts, the market is lazily drifting upwards. The news out of GM today was quite positive, though I have a feeling one could almost see this agreement coming after Delphi's bankruptcy last week -- it seems like the GM management may have used that unfortunate event to "soften up" the UAW stance over a variety of issues such as health care and retirement benefits.

Longer-term, the jury is still out about the sustainability of GM's business while America is shifting from a manufacturing to a service economy. These issues are so political that it may take years for them to completely play out. But one can't help but fear for the competitiveness of the U.S. middle-class manufacturing worker in the context of global competition.

Does the U.S. have the necessary technological and, more importantly, EDUCATIONAL edge to fend off the ambitious, hungry, highly-educated and motivated Chinese and Indian workers who will be competing with Americans about these types of jobs? Some would say that we may be dealing with a small slice of those two Asian countries' population, but 1% of 2.5bn people is still 25mm people... Law of large numbers of demographics. The odds are America loses this battle in the long run.

Real Estate Madness and the Commercial Banks Who Support the Habit

http://money.cnn.com/2005/10/14/news/economy/loans/index.htm

I've just read in this intriguing article that, apparently, banks are raising the limits of the typical consumer mortgage, ahead of even the Fannie Mae estimates. This is the equivalent of trying to get someone to stop using cocaine by er... giving him more cocaine... Yes, THAT makes sense. Why don't we make it easier for the borrower to finance his excesses further, because apparently, the U.S. consumer isn't indebted enough, doesn't have a negative real savings rate, and the macro environment (high energy costs, rising interest rates, etc.) is REAAALLY conducive to the "spend and spend until you drop, and MAYBE pay later" type of consumer behavior.

Where is the inflation in the economy the bulls ask? My answer to this is: in all the places where we don't normally look. Inflation is in the consumer credit, in the real estate, in the stock market, in the dollar... If you flood the economy with liquidity as the Fed did for 3 long years following 9/11, the price of *everything will rise*. THAT's the classic definition of inflation, not the one where we don't count home prices, energy prices or food.

Home prices don't need to crash for the U.S. consumer to feel REAL pain. They just need to stop rising. If real wages trends don't improve (and, judging from the latest wage data quoted by Lehman Brothers and Goldman Sachs economists, they won't!), the U.S. consumer is basically committing a financial suicide. There is also already data out there pointing out to a record number of credit card delinquencies and falling behind schedule payments.

I just don't see how the solution to these problems would be for banks to encourage even greater consumer borrowing. What will be the straw that breaks the proverbial camel's back?

Nice and Easy On The Way Up...

Yes, the rally is happening. The market took the bears' best shot, and I think for now the downtrend is exhausted. I wouldn't be surprised if the SPX index reaches the 1203-1205 level by the middle of next week... It seems like the bulls have a little breathing room ahead of the earnings season.

Mighty WMT continues to do well. Volatility in the name has gone down slightly since we recommended selling the Dec05 At-The-Money 45 puts @ 1.40 (and also the stock is going up), hence today's mark for those puts is 1.25 -- already 15c in the black! Anyway, I think short-term resistance in the stock is around $45.5-$45.75 -- if this level is broken, the stock could quite easily fill the gap to $48-48.25. Hence, I remain bullish on WMT, both in the short-term and in the longer-term, especially if the U.S. mid- to high-end consumer continues to feel the squeeze on his wallet and "trades down" to shopping at WMT and the "dollar stores"... Incidentally, take a look at FDO -- Family Dollar, another dollar discount store that I like. I think this name is extremely cheap as well, and has some upward momentum to the $25 level. If the U.S. economy enters into a recession next year (50/50 likelihood at this point), these bargain-basement retail names could find themselves with a few more customers, and their stock prices could really take off!

The Fed is definitely raising rates during their next meeting in November -- that much was telegraphed already. I don't think they will stop until we see 4.50% or even 4.75% early next year. ARM (adjustable rate mortgage) buyers, especially the aggressive interest-only payers, BEWARE... Banks could be looking to significantly decrease the number of such ARMs -- and it could indeed cost some people er... an arm and a leg ;-)

Have a great weekend everybody! Happy Investing!

Do We Or Don't We...

Bounce that is... I think we do. This has been the worst start to a fourth quarter... EVER. The SPX index is down 4% from its highs. Just reversing those losses would itself represent a nice little rally into year-end. I think we will see that. The question is whether it is going to resolve the larger macro issues at hand, such as "where does the Fed finally stop?", "what is the REAL inflation rate in this country?", and "how come the U.S. has sucked as an investment haven for the past year in comparison to oh, say, Germany and Japan"? Simple answers to those questions I don't readily have, but I do want to caution the reader that one shouldn't be putting money to work before they ARE answered.

There may well be some hidden gems amongst the retailers after all. I know I railed against them just yesterday, but hey, that sector deserves it... Down 15% since August -- it's insane! Anyway, take a look at WMT -- the biggest retailer in the world, the mighty behemoth from Bentonville, Arkansas. It is CHEAP by almost any financial measure, it is CHEAPER than it's been historically speaking as well. It may be entering Russia soon and it has embarked on the path of modernizing its fashion image (yes, Urban Outfitters of all places is moaning about WMT's new fashion drive). In addition, GUESS where the gas_price-squeezed U.S. consumer is going to gravitate if he can't afford those sexy high-fashion clothes anymore? That's right -- WMT should do well in a slow-growth, low-consumer confidence environment -- because that's where most middle-class American families can still afford to go shopping and not get their faces ripped off price-wise... I recommend selling some at-the-money WMT Dec05 45 puts @ 1.40 vs. stock @ 44.90 -- this is 19 volatility (average daily move of 1.2%) and pretty high, historically speaking again, for the name. The premium would give the seller a break-even purchase price of WMT stock @ $43.60 (not bad at all!!), and if the stock closes above $45 on December expiry, the seller will just get to keep the premium. It's a 49 delta option, so for every 100 option lots sold, the seller in effect gets longer by 100*0.49*100=4,900 shares of WMT. The premium kept for every 100 lots is 100*1.40*100= $14,000, not bad going at all. Note also that WMT has OUTPERFORMED the rest of the retail sector in the last month, just as every other stock in retail universe has coming crashing down to earth (take a look at ANF, KSS, AEOS, BEBE). There is money to be made in this name and the smart money is going to plough back in here, once things stabilize a bit in the market. Just my 2 cents worth for the day.

The Barbarian Market Report

Another day, another miserable performance by the market. This time, the culprit seemed to be technology. AAPL sucked. INTC sucked. But pay attention to retail and consumer discretionary. Those two have REALLY sucked for a long time now. Take a look at the performance of the Morgan Stanley Retail Index (the MVRX -- which only assigns a small weight to big-cap retail behemoths such as WMT) since the end of July. It's down more than 15% now. Wow. Retail, consumer discretionary, and gaming -- are these three babies in their own private bear markets? It sure looks that way to me.

One more thing: take the oil and gas sector (and in this I also include refineries and oilfield exploration companies) out of the SPX index... What do we get? A down 15% year-to-date performance from the world's benchmark about the "strength" of the U.S. market -- I call this a bear market, I don't know what you call it. Just some food for thought on a rainy Wednesday here in NYC.