Is The BKX Topping Out?

The BKX (the Bank Index) is showing some signs of topping out at the 105-106 level. This may have significant ramifications, as the BKX -- having rallied 14% from its October lows -- has provided much of the fuel behind the SPX's 7% rally over the last 6 weeks. A few days ago, I wrote that I expected the market to re-test the 1,245 area again (before we can proceed higher) -- the profit-taking in the BKX might just make that happen quicker than I thought.

I wouldn't worry too much about profit-taking at this point though. I think the market may be quite safe until Helicopter Ben takes over the Fed's chairmanship at the end of 1Q 2006. Considering that retailers are cutting prices like there is no tomorrow in order to spur on consumer spending, and energy prices seem to have stabilized in recent months (down nearly 20% from the Katrina highs), I think the U.S. economy will just continue to hum along fine for now (as today's GDP report confirmed). Darker clouds await us in the latter stages of 2006 though, as a combination of housing market softening, job growth slowdown and the return of core inflation might be too big of a stumbling block for the U.S. to overcome without some unpleasant consequences. Until then, buy equities on dips and take profits on rallies toward the 1,300 area in the SPX.

Did Someone Suddenly Wake Up Today And Decide That GOOG Is Expensive?

I surely think so -- currently trading down $18 at around $405. I have insisted for some time now that, while this truly may be a great company, its stock has gotten quite a bit ahead of itself. It was trading a bit over $430 the other day (after I had called, for like the 3rd time in a week, for people to lighten up/short it @ $424), and I was thinking to myself "Am I the only fool who reckons this stock is overpriced here?" Apparently not anymore. Which does not of course mean that those of us who think that GOOG is overpriced are suddenly not fools. For all we know, we might wake up tomorrow morning and see the stock trade with the 5-handle in front of it. But hey, it's called a market, and that's why it serves healthy doses of humble pie to anyone and everyone who thinks they know it all.

Still, as Warren Buffett once said, it's pretty dangerous for a company to claim 15% year-on-year growth for a long time -- unless the economy itself is growing at 15% (which it ain't), that bold statement eventually catches up with you (and, I would add, makes...er... ketchup out of you -- forgive me, please, the cheesy pun). So, a couple of downgrades and a few insider sales later, it would seem that GOOG is destined to trade under $400 before long -- which, by the way, still doesn't make it "cheap". If it falls to under $300 any time soon, given its current financial metrics, call me -- then we are talking!

On a side note, my MWD-GS spread continues to do well (11.5% in the money so far after a little more than 3 weeks since I suggested it), and maybe after another 4-5% of MWD outperformance, I would be tempted to trim that position by a 1/3rd or so, and then leave the rest in peace for the 2006 calendar year. MWD has some catching up to do -- "The Mack is Back and Is Even More Wack", say some insiders.

Expected/Normal Retracement Happening

Turkey-eating time is unfortunately (if you hate the turkeys species, i.e.) over... The holiday euphoria has perhaps given a bit of way to profit-taking, but this sort of normal retracement/reaction was to be expected, as I mentioned just before Thanksgiving. Whenever the market takes out (quite easily I must say!) a significant overhead resistance level such as 1,245 (which, until November, was actually the yearly high for the SPX index), we shouldn't be too surprised to see a re-test of that level at some point over the next few trading days. That action would only serve to confirm the bulls' resolve to hang on to their hard-earned gains. Hence, I remain bullish over the next few months as the SPX establishes a nice base in the 1,245-1,235 area for what may be its final bull-market extension (toward the low 1,300s) higher.

What is of great concern however, longer-term, is that the U.S. housing market gives off some serious signs of overextension. Unsold homes reached an 18-month high today, and judging from housing affordability data -- the ratio of the median U.S. home price to the medium disposable income (apparently hitting a cyclical high), -- there is no way but down for house prices. I am not saying that the market is going to crash or anything, but some softness (5-10% down) is to be expected next year. This is probably going to be enough to shave off a decent percentage of home mortgage refinancings (which have been a signficant source of U.S. consumer spending power), and thus contribute to the slowing of U.S. consumer spending and confidence, going forward. Mind you, this is not the "worst" case scenario -- we have already seen similar circumstances develop in the U.K. and Australia. What is more troubling though is the apparent blissful ignorance of the average U.S. consumer as to what the consequences of all this may turn out to be. The level of average consumer indebtedness is only sustained by the relatively strong job market. If that gives way, and it may well do, then all hell might break loose. Merck and GM, which have been eliminating jobs left and right, may well be precursors of what lies in wait. The situation may well be more serious than investors think -- the ongoing structural economic shift in the U.S. -- from a manufacturing to a service economy -- is going to leave the average U.S. consumer standing on very thin ice, when it comes to affordability of basic things. Retailers may slash prices all they want (and they have!), but I am detecting a false sense of trust when it comes to the way companies view the U.S. consumer. The latter has indeed been remarkably resilient so far, but then again, the house market and job growth have been quite perky as well so far. This is hardly going to be the case forever. Tread carefully, caution is needed.

Aaarrgh... Good Point!

I goofed up a little yesterday -- Brazil did win the FIFA World Cup once before in Europe: in 1958 in fact, in Sweden, beating... er... Sweden 5:2 in the final. A big 'thank you' to the anonymous football history buff who kindly pointed that out to me. My apologies, I should have known better -- that World Cup also announced the majestic arrival at the worldwide stage of a certain 17-year old football prodigy by the fascinating name of Edson Arantes do Nascimento, a.k.a. Pele. It seems his second coming is playing for Barca today and is called R o n a l d i n h o, a.k.a. The Ever-Smiling-Toothy-Rabbit-Football-Genius Boy.

Not much to report on the market side today, except that if you're trading this week, I hope to God you didn't try to short a dead(ly buoyant) market, especially if this guy is right (which, given what I have been saying over the past month, I think he is!).

If you are still looking to sell anything, you can definitely sell GOOG @ $424 -- trust me, it's super expensive!! I have been calling for people to lighten up on that internet monster since it hit $380, but I guess what's saving my blushes now is my (other/pair) trade on getting long YHOO instead @ $38 (that one, thankfully, is trading at $43.40 right now, so is still technically outperforming GOOG by a couple of %). Still, anyone who thinks that GOOG is a bargain at $424 on its current financial metrics, should have their 'ead examined. I don't care if Fidelity has gone bonkers again, and are buying another 3% of the stock here, it's just the wrong price! Granted GOOG is a great company, but it is no longer a great stock at these stratospheric levels.

Last but not least, Happy Thanksgiving everyone -- eat safely, maybe even consider pardoning a turkey if you ain't that hungry!! Will be back in the blogging saddle on Monday.

Thanksgiving Means The Bulls Should Be Thanking Their Lucky Stars That The Bears Have Gone Hibernating

My bullish stance on equities is slowly but surely being vindicated. It seems the bears have burrowed in somewhere to hibernate (until March 2006, to be consistent with what I wrote yesterday), while the bulls are gently taking this market higher. My 'better than 50/50 chance posting' elicited quite a few pleasant private commentaries about my giving too much of a chance to Brazil winning the World Cup, but almost no one is disagreeing with my SPX directional comments. That worries the contrarian in me. I'd much prefer it if people were giving me stick for my market direction opinion than for my football stance. So, for all of you European and English football fanatics out there, you heard it here first: yes, Brazil will indeed become the first South-American football team to win the World Cup in Europe, despite what all those useless statistics say. One can argue with history, but one can't argue with pure, unadulterated, raw talent: Robinho+Ronaldinho+Ronaldo+Kaka+Adriano = 2006 World Cup Victory. You can let it go now.

Two weeks ago, I wrote about herd behavior in the oil and euro/$ markets. Just like I said that one shouldn't be selling oil ONLY because of the "mild weather", now one shouldn't be buying it either ONLY because of the (forthcoming in the NorthEastern United States) "cold weather". Please get a grip and find yourself a *non-weather* reason why you like or dislike oil and stick with it. No significant amount of money can ever be made following the herd, especially when that herd is making the most noise -- for example, as it seems to be the case with the very clamorous (and sometimes glamorous) bullish/long $ herd. The truth of the matter is that, while all that noise 'about how the $ is just going to kick every major currency's butt out there' has been going on -- the euro has either been stable or actually rallied slightly in the last two weeks, since I started counting the daily bullish $ headlines in the WSJ (which every FX honcho and his brother seems to be reading and quoting these days). If I were a $ bull, I'd be making lots of noise as well -- and taking profits when no one's looking, and that's exactly what seems to be happening by the looks of it.

I would expect a small retracement in the SPX before we can resume our course higher, given that the market has gone from overbought to super-overbought territory (1,261 was the actual SPX index close today) during this pagan-holiday week. If no retracement to, say, the 1238-1235 area happens soon, then I think it might be safe to holler "ladies and gentlemen, please buckle up your seatbelts and enjoy the ride!", and I might just have to update that 'better than 50/50 chance' posting with something like the 80/20 rule, which might prove to be a more aggressive but fairer reflection of reality...

There Is Better Than 50/50 Chance That...

-- The SPX Index reaches 1275-1280 by X-mas time 2005.
-- The SPX Index reaches 1,300-1,310 by March 2006.
-- The SPX Index closes lower in Dec'2006 than in Dec'2005.
-- The euro/$ rallies back to 1.21 by Feb 2006.
-- Brazil Wins the 2006 Football World Cup Final Against One of The Following Four Worthy Competitors: Argentina, England, Holland or Italy.

I got your attention, didn't I? The more I look at U.S. equities, the more [reluctantly] bullish I get, in the short run. I am encouraged by the fact that, despite obvious macro worries, the U.S. market just keeps plugging away at upside resistance levels. For those who don't recall which ones those were, let's revisit. We broke the 1205-07, 1223-25, 1238-39, and 1245 (yearly highs) resistance levels in a little over 3 weeks. Moreover, consecutive higher closes on the last two Fridays is the most bullish signal I have seen so far for a continuation of the 4Q rally above 1,245. I now think that, as long as we manage to stay above 1,235 in the SPX index by 2005 year-end, we will slowly and inexorably make our way higher to the 1,300s by March 2006. What happens beyond there would depend on how many monetary mistakes Helicopter Ben makes -- my guess is that he will make at least a couple of judgment errors, considering his lack of market acumen, which may or may not be compensated by his obvious academic ability. My instinct tells me that downside volatility will therefore return to the markets in mid- to late 2006, and hence I don't expect the SPX to close higher in 2006 than it did in 2005. You can read this as: yes, there will be lots of trouble ahead. And it won't be the kind of trouble that the Fed has routinely been able to bail the lazy (or stupid) investment community in the past. It will be genuinely*bbbaddd*, it will be ugly and, it will be there to stay for a while. Some people call it a macroeconomic cycle.

As far as the euro/$ is concerned, there is not much more to say beyond my contention that I think the $ may be topping out here vs. the major currencies. How it has been able to rally this high is beyond me, considering the massive U.S. current account deficit (which matters, despite the nonsense that WSJ economic "gurus" have written lately), but I do believe that if you are a $-bull, you should be in profit-taking mood right now.

Last but not least, in view of what I wrote in the previous three paragraphs, let's not forget that Football World Cup summers have been notoriously bad for the markets (remember 1998 and 2002??), partly because market participants tend to be easily distracted by the excitement of the occasion (in this case Brazil successfully defending its 2002 title). Does anyone even doubt that Brazil will win it again? If so, let's just remind ourselves that Brazil boasts 7 of the world's best players in their positions: Ronaldinho, Ronaldo, Robinho, Roberto Carlos/Cicinho, Adriano, Kaka, and Lucio. Let's say 6 out of the 7 have an "off day". Then the best football player who has ever lived -- Ronaldinho -- can still win the match by himself. Anybody who doubts this should watch the Barcelona-Real Madrid game from this past weekend. Maradona, Pele, Cruyff, Platini and Van Basten never played against the fit and fast defenders of the modern game. Ronaldinho is, simply put, a magician.

The Sun Is Finally Shining On GM...

After I asked *The Question* 2 days ago -- whether GM might be a buy @ $21.25, -- the company's CEO took it upon himself to say that "No, we don't plan to file for bankruptcy any time soon", and the stock, of course, promptly proceeded to rally 13% (to slightly above $24 as of Friday's close). Lucky timing on my part I figure, though some sort of a snap-back rally was to be expected, I guess. In addition, let me also point out that nobody ever admits to planning to filing for bankruptcy (until it is time to!), especially if they are heavily vested in the equity of the company. So, all I am saying is that one should take GM's CEO statement with a pinch of salt, to say the least -- it's too early to tell whether GM will survive... or not. One thing is for sure though: Kirk is probably feeling a couple of years younger after those last 2 days.

And the market? As previously suggested, the inexorable rally in the SPX index is more the result of stubborn performance chasing (by desperately underperforming fund managers) than a real fundamental shift in the way investors perceive the U.S. market. Hence, I would expect a bit of consolidation around here (within the 1238-1250 range), before we slowly make our way up -- to what I deem to be an upside attraction point of 1275-80 in the SPX index. Just in time for X-mas I reckon.

YHOO vs. GOOG Revisited...

A couple of weeks ago, I recommended buying YHOO @ $38 vs. selling GOOG @ $380. While YHOO has indeed outperformed GOOG by roughly 4% since then, I can't say that I am especially pleased about my call on GOOG. Can't argue with the market though. GOOG was expensive at $380, and it is still very, very expensive @ $403 (Google Base or no Google Base). How long would GOOG's phenomenal growth continue? I really have no idea, but when the inevitable deceleration comes (probably when the cost side of the growth equation catches up with them!), there is a long, long way down... Apparently, GOOG now is only behind MSFT, INTC and IBM (from the crowd that we normally consider as "tech stocks"), in terms of equity market capitalization. I stick to my guns: continue to still buy YHOO (value growth) and sell GOOG (expensive growth).

I'll Take "Ridiculous Headlines" For $100 Please

What's wrong with this Bloomberg headline: "Gold Rises to Near 18-Year High On Alternative Investment Demand"? Apparently, investors have been purchasing gold because they have been seeking... (gasp!) alternatives to U.S. and European currencies, bonds and stocks (oh, forgot to add Bulgarian real estate, timber, and Czech-assembled AK-47s). Uhu... It used to be the case that investors would purchase gold because they were fearful of inflation. But, NO, we *don't* have any inflation in the U.S. (!) -- or do we? My point is this: either the price of gold is overvalued here, or we do indeed have significant inflation in the U.S., which is not reflected in the officially distributed government statistics. I lean toward the latter. I don't believe in coincidences -- there is always a reason why something is happening when it is happening. We may of course find out that particular reason 18 months from now (when it might turn out that the Fed has been playing M3 -- the money supply, not the BMW model -- shenanigans all along), but I, for one, would never invent an inane headline to hide the fact that I just have no idea why something is happening. I would advise the folks at Bloomberg to kindly change the headline to "Gold Rises to Near 18-Year High And We, Just Like The Rest Of You, Sorry Lot, Have No Bloody Idea Why -- But Do Please Stay Tuned, Because There May Be A Lot More To It Than At First Meets The Eye!". There, I said it.

Otherwise, the market is stuck in a rot during option expiration week, with SPX index resistance at 1238 and support all the way down at 1225. I said a few days ago, that the bulls' obstinacy is going to be hard to argue against, given the 4Q-seasonality strength (this time of the year), and the absence of any new bad news out there. The longer we stay in the 1225-1238 range, the greater the likelihood that we break the 2005 yearly highs (around 1245), come December. In fact, possibly overshooting all the way up to 1275 might not be such a far-fetched goal after all.

Is GM a buy at $21.25?

Only yesterday, I wrote that Kirk Kerkorian kept buying GM shares and those kept falling and falling. Now, while I did say that Kirk might indeed have some "legacy issues" (to put it mildly) with this name, I don't think Kirk is a fool either. Hence, I need to ask the question whether GM is a buy @ $21.25 (down 5% or so from yesterday's close). What does Kirk see here that we don't see to put himself under water by, oh, give or take, half-a-billion dollars at this point?

Is GM likely to go bankrupt? Uncertain, to say the least -- yesterday I did say it's a 50/50 case, but looking at the UAW situation, the fact that GM still has a bunch of cash and management is truly going to be literally scared into drastic action (Kirk might just make sure of that!), I can't in all honesty claim that GM is heading for bankruptcy, despite the obvious bad omens from the credit derivatives world. Could some foreign car manufacturer buy GM? Possible, but not likely at this point. Does GM have a valuable franchise? Arguably so, but they have made some wrong decisions lately. What's the story with the discounts for example? I can't fathom what GM management is thinking, even less so what Kirk might be thinking putting his money into this stock, which is beginning to look more and more like one of those old GM lemon cars that they used to make.

In summary, I would [reluctantly] still have to give the benefit of the doubt to the company's management and Kirk at this point, that they might indeed be able to turn around the situation. GM is not a Delphi-type of disaster quite yet, and I do think the UAW (especially after Delphi) is actually going to play ball, when it comes to saving this company, for the longer-term. How long-term, you say? What I said about Kirk yesterday remains valid -- even if he is eventually right, I hope he is around to see his "success". Buying longer-term 115%-120% leaps (GM Jun07 25 calls for example), if one is bullish, would be my only intelligent advice at this point -- and that only for investors who are definitely not of the faint-hearted type. It will be a bumpy ride, even if the story works.

Back To Being Friends Again...

I mentioned a week ago that GDT at $55.50 was a bit too steep of a discount for the stock to stay there for long -- hence, my advice at the time for first-time buyers to plough in there and load up on some cheap GDT shares. I thought the stock looked attractive both on a stand-alone basis and especially on a potentially newly-renegotiated (with JNJ) deal basis. I just didn't think that either one of those two companies would show themselves to be tough bullies for long. Being friends is so much easier. Neither company stood to gain much from an extended fight -- GDT would obviously invite lots of unpleasant lawsuits and JNJ needed the acquisition to bolster its flagging growth.

While the JNJ announcement today that it has indeed come to an agreement with GDT on a new all-in (cash & stock) purchase price of $63.08 is a little below the minimum that I expected GDT to settle for ($65), it's still 13.5% higher than $55.50, so I guess their shareholders can't be too unhappy with the situation, especially if they bought the stock last week for the first time.

On another note, Bloomberg has come up with an interesting article on GM today, basically pointing out how Kirk Kerkorian keeps buying, and the stock just keeps falling. At current levels ($23.74 closing price from yesterday), the loss might well be on the order of $350mm. My view on this is simple: the man is 88-years old. Unless he has suddenly found the elixir of eternal life, I can't imagine he will be around for too much longer, as sad as it sounds. He is going to go out with a bang - the ultimate contrarian's dream. I roughly estimate GM's probability of bankruptcy at this point to be around 50%, give or take... Kirk, having made his (very large) fortune owning and operating casinos, is obviously a gambling man. The question is not necessarily how much he wins or loses on this particular bet; in my mind, it's more about whether he wins or loses his race against father Time -- the eternal foe...

MWD-GS Spread Back In Line...

8 days ago, I recommended putting on the "long MWD/short GS" spread at $52/$131 respectively. Today MWD is trading at $55.70 and GS is at $129.25, which puts the two firms at roughly equal equity market capitalization, and the spread in-the-money by about 8.5%, despite some vocal protests from the "GS is the better investment bank" camp. As I have said all along, this is not an argument about "which is the fairest beauty of them all", but about relative valuation. GS is probably the better bank but not at any price.

I can't believe the USD bulls. I heard some investment banks (who were formerly massive USD bears!) came out today with a target of $1.10 for USD/Euro by 2005 year end. In my mind, nothing much, in terms of $ fundamentals, has changed, but hey, it's a free market -- let's see who is right a few months from now. I am stubborn that way. My stop loss (from my $1.175 USD short) is $1.1490. I read today that USD bullish sentiment is at a 5-month high.

As far as the SPX market direction is concerned, I would be buying deep dips toward the 1220-1215 level, heading into Thanksgiving week. This is one of those periods (Thanksgiving-Christmas) when, despite my obvious misgivings which I have explained at length before, I'd rather be with the bullish herd (who are probably going to be dead wrong 6 months from now), than being carried out, feet first, because I wanted to be a "shorting hero".

Why I Should Stick To What I Know And Do Best...

i.e. if there is even such a thing -- that premise is also debatable, though, on good days, I'd like to think that I do know a thing or two about equities and derivatives. A few days ago, I wrote that I might regret shorting the dollar against the euro @ $1.175. I do now -- probably a chronic case of bad timing on my part, which happens when I get involved in something which I think I understand well (because it looks simple), but I actually don't. Am I changing my view? No. Why not? Because my stop loss is at $1.1490. Trading FX is remarkably simple and, at the same time, remarkably complicated. This is why some of the biggest losses (and profits) have been made in this asset class -- by people who think they are better than the market, or rather, that they are the market.

I must admit that, from just looking at the dollar/euro chart, my trade looks worse by the minute (which makes me practically puke in disgust!), but there is nothing for me to do until my stop loss is hit -- I am just going to take a walk with my dog Rufus (who is remarkably calm about the situation, probably because he has just done his business for the morning), drink some cold water, and wait, and then wait some more. FX stop losses should be tight (unless of course you are good 'ole Warren Buffett...), because position sizes tend to be so big, as everyone and their brother (but evidently not me!) seems to know where the dollar is going. Why is the dollar going higher, I ask? Because some macro model says so (?), because U.S. rates are going higher (?), because Paris is/was burning (?), because Warren Buffett is no longer so bearish on it (?), because I am short it and it wants to spite me (?). I have no idea, but I do know that, despite what the Wall Street Journal would have you believe, the U.S. dollar structural-decline issues have not yet been resolved, hence I am willing to stick it out for a while, and probably have my a$$ handed to me in the process -- so be it!

As far as the rest of the market is concerned, I have nothing to add to yesterday's comments, except that it's Veteran's Day here in the U.S., and shorting a boring/lackadaisical tape is a sure recipe for disaster -- defined, in my dictionary, as having one's head taken out by a stampeding herd of bulls (who are "bullish" because they are too confused to ask themselves why exactly they are "bullish"). Yearly highs (1245 in the SPX), here we come!

Patience Is A Virtue Indeed

I got some stick regarding my comments about which sectors are going to lead us slowly higher. But today is a good example why I think I am going to be right. The SPX is buoyant one more time (flirting again with the 1225 overhead resistance level against which it has been banging for a while now, but which level I think the SPX is going to break today), and is being led by blue-chip big cap names such as GE (essentially a financial company because of GE Capital), Citibank (the biggest financial company in the world), Bank of America (another financial behemoth), INTC (through its fresh $25bn stock buyback and dividend raise) and my favorite retail stock WMT (which I had "banged the table on" several weeks ago). The sectors which are lagging are energy (again!) and autos (GM -- what a disaster, it's maybe even time for distressed players to take a look at this, methinks!).

To make a long story short, like it or not, we are rallying. And the stocks that are leading us higher are exactly the stocks that should lead us higher (the XLF {financials sector ETF} is continuing to do well) -- the big blue-chip names with tons of earnings and cash. What is even more important is that they have actually assumed leadership from the energy stocks (which are continuing to see heavy selling due to their prior outperformance, earlier this year). Don't get me wrong -- it's not going to be a "home run" type of rally, it's just going to be a slow, almost boring tape that rallies because... it can! No new bad news or the absence of any news, period, is actually GOOD NEWS, this time of the year!

Slow Consolidation Is A Bullish Sign...

I have for some time now hammered home the point that as long as the SPX index is contained between 1205 and 1225, and is not doing too much, it's a bullish sign for better things to come toward the 2005 calendar year end. I am now much more confident that when the market takes out the 1223-25 overhead resistance level, it will eventually challenge the yearly highs toward the 1245 level.

Sure, worries persist -- the homebuilders don't look too good after TOL's warning, the average consumer is probably as stretched as he has been in the past decade, and I don't think energy prices retreat too much below current levels (though that is to be distinguished from energy stocks which might well have seen their yearly highs already!). However, now is the time for the performance-chasers to wake up, and in the absence of any super-bad news from the economy (which doesn't look likely at this point), the market may just slowly, almost stubbornly eke out a 3-4% gain for the year -- maybe even out of boredom. Oh, I am not bullish, but it's even harder to be bearish in a languishing, sideways tape. I would look to buy deep dips in technology and financials, and would stay away from energy, retail, autos, gaming and homebuilders.

Toll Brothers Takes Its... Toll!

On October 27th, I wrote that TOL at $34.50 looked cheap fundamentally and that it had a great track record, so contrarians who believe that the housing market isn't overheated should look no further than TOL -- a high-quality, well-run business -- to gain exposure to the homebuilders sector. Yes, that would have been a great idea... er, for about 10 trading days. While the stock rallied, like the rest of the market, after my recommendation, today's news poured cold water on TOL's performance, and we're basically back to square one. And now, I am actually much more worried than before, even if TOL's price is the same ($34.50)...

While I did express my misgivings about the homebuilders sector in general at the time, I didn't really believe that the storm would be upon us so soon. There are two schools of thought: one is that it's just a temporary phenomenon (the slowdown in housing demand); and the other is that it's actually the beginning of the bursting of the housing bubble. I don't know which theory would turn out to be correct, but one can't argue with the fact that mortgages are becoming a lot more expensive to carry and the U.S. consumer is stretched to his limit. All in all, it doesn't bode well for the "temporary phenomenon" camp. These unpleasant announcements, once they get rolling and start popping up here and there, have a tendency to stop a lot further down the slippery slope than most people initially expect them to. TOL might indeed take its toll on the whole homebuilders sector for some time to come.

A Non-Day... Part II

The SPX seems hellbent on trading in an extremely tight range, given that there aren't any major catalysts to propel it (yet) over and above the 1223-25 resistance level, which I had previously mentioned. I would look to buy any dips toward the 1210-05 level, as I feel the bulls are needlessly trying to push their luck here, not realizing we came up too high too fast. There is no rush -- we are not even buying Thanksgiving turkeys yet, so the market has plenty of time to find a base in the 1205-1225 range before it eventually decides to go higher, (provided bad macro news don't spook it!), for calendar 2005 year end.

Everyone's talking about the "mild weather". What are we, English? It's going to be freezing in 2 weeks time, so if you are selling oil/natural gas/heating oil because of the "weather", please stop! Don't follow the herd. There are perfectly good reasons why oil is going down, but "weather" isn't one of them. In America, when the media can't find a reason why certain things are happening, they just invent one!

Speaking of herd mentality, Warren Buffett [of all people] has apparently "reduced" his massive bet against the dollar, due to some heavy losses in recent months. Correct me if I am wrong, but the last time he and his good friend Bill Gates ganged up on the buck, the $/euro was trading at around 1.30 and Bill even mouthed something like this: "Yep, the ole dollar is goin' down, down, down!". I might live to regret this, but I actually want to be short $/euro @ 1.175, i.e. I want to place the contrarian trade to the one that the media reports that "everyone else" is doing (including Warren and Bill). Judging from the herd's track record, it might be an opportune time to short the dollar again (higher 10-year yields and interest rates notwithstanding!) -- there is still the "small matter" about the global savings imbalance and U.S. deficit.

Last but not least, what is up, or shall we say, "down" with Guidant (GDT) these days? Now they are suing Johnson&Johnson (JNJ) to force them to complete the acquisition?!! GDT stock is at $55.50. Wow! Now, there is of course no argument from me that GDT is no longer the same company it used to be a year ago (they got hurt by all those recalls!). But trading at $55.50 when there is still a good chance that they get taken out at $65 to $68 on a renegotiated deal? That's a bit too steep of a discount, I feel. I would buy GDT @ $55.50, for a first time purchase/punt, and put it away for a while -- the stock should be worth more even as a stand-alone entity. A few angry and scared shareholders who are getting out of their losing positions don't change the fundamentals (granted those might have worsened a bit, but that's already in the price!). I expect the stock to trade at $60 before long (without a deal), and much higher should JNJ negotiate a nice discount to the original deal price, due to "material adverse change in the acquisition circumstances".

A Non-Day...a.k.a. A Consolidation Day

On this unseasonably sunny and warm November NYC Friday, the market went down a little in the morning and then went up a little in the afternoon to close practically unchanged for the day. If one is bullish, this is practically music to one's ears, as the gains we've had this week have indeed been exceptional. As I wrote yesterday, if, heading into next week, the SPX was contained between the 1225-23 (where it's definitely short-term overbought) and the 1207-05 levels, we should count this as a victory for the bulls -- the ones who have been conditioned, time and time again, to buy the market in November for the traditional 4Q rally. Hurray, performance chasing wins again... for now i.e. :-)

One notable trade that I am currently thinking of putting on: going long Morgan Stanley (MWD) @ $52 against shorting Goldman Sachs (GS) @ $131. MWD is down a little over 5% YTD, while GS is up more than 25% at this point. While I am not arguing that GS is firing on all cylinders and is perhaps "the better blue-chip investment bank" (whatever that means!) , I do think that MWD is undervalued here, on almost any fundamental metric. Consequently, I don't agree with Merrill's Guy Moszkowski downgrade of the name today -- I feel he may be jumping the gun a bit prematurely, even more so since he only upgraded the stock a few months ago and MWD's chart has really been flat over that time. Give them more time! I reckon MWD will definitely turn things around on the trading side. GS is doing well, but not well enough to justify being worth more than MWD on a market capitalization basis, and I am not even going into the whole book value vs. P/E comparisons, because the GS premium (over MWD) has truly stretched its luck at this point, considering that some astute observers might actually claim that GS is, in essence, a massive glorified hedge fund (and is thus more exposed to the vagaries of inherently risky trading). There is a proper price for everything, and I am just saying that, over the next 24 months, MWD stock should outperform GS stock, so that the two names would come back in line. It's a bit like the Credit Suisse (CSGN VX) vs. UBS (UBSN VX) pair trade from early March of 2003 -- CSGN has since tripled in price, while UBSN has "only" doubled...

And with those happy thoughts, I leave you for the weekend! Go ManU (and that from an Arsenal fan!) -- crush the Chelski impostors!!

When It Shines, It's Scorching...

The MVRX (Morgan Stanley Retail Index) has rallied 10% in less than 5 trading days -- very impressive! The stock-specific retail sales data that we saw today wasn't as bad as people feared, and a few (really) beaten-down names such as Abercrombie&Fitch and AnnTaylor (ANN) are simply flying, having handily beaten expectations. This, in turn, has propelled the SPX index to what, in my humble opinion, is an overbought area of 1223-1225, from which I expect it to retreat slowly downwards, before gradually basing for one final push higher into calendar 2005 year end. The SPX index area of 1205-1207, which, when the market was a lot lower, I had identified as the "make-or-break significant overhead resistance" as far as the 4Q rally was concerned, should provide a nice little cushion for any hard market selloff. The bears spent a lot of ammunition defending that 1205-1207 level for almost a month, and when they finally surrendered it earlier this week, it was with something resembling a blood-curdling scream of defiance immediately preceding a slaughter... Or so my active imagination is replaying the situation in my head over and over again, when it comes to visualizing the type of monstrous stop-losses that must have been triggered and were quickly taken out on the way up. The bulls have roared back with a vengeance, their sentiment propped up by a series of relatively good (or not-as-bad-as-people-expected) economic releases.

I am particularly encouraged by the reaction of the SOX (the Philly Semi-Conductor Index) off its lows. Coupled with the fact that the energy sector has finally stabilized, we are starting to finally see some leadership out of the tech-laden NDX, which is what we needed for a sustained 4Q rally. As I wrote a few days back when the market was still trying to find the bottom of the barrel, so to speak, I hope no one shorted stocks such as PIR and PETC -- because, every dog has their day, and I do believe those two might just be out of the woods, price-wise -- i.e. the bad news is already out there, so that any "further confirmation of bad news would actually be *good* news". On a similar note, FDO and WMT, which I highlighted in early October as nice, safe value longs (at a time when everything else was falling out of bed), have put up quite a performance. I would exit 3/4 of the WMT long position here at $48, as the stock has closed its bearish gap from August, and I expect it to trade sideways for a while, before eventually going higher. It's all about velocity of capital -- value buyers are already in the stock and will probably stick in it for a good 1 to 2 years (and maybe 15 to 20% higher), but traders should think about exiting, because, as that nut Jim Cramer always used to say: "it's hard to resist the ring of the cashier register in this crazy market".

Last but not least, index vols have come down quite a bit, so now is the time for proactive fund managers to load up on some 6 to 9 months-maturity downside puts or put spreads in the SPX -- to protect the portfolio (relatively cheaply!) for what I think may be a challenging 2006 year. Fix the roof while it's shining!

Time-Warner Powers Media Sector And Market Higher

Who says that Time Warner (TWX) isn't responsive to investor criticism? Short of going all the way and spinning off their cable operations (what Carl Icahn really really wants), they are doing their utmost to keep their other shareholders happy: making loads of cash and giving it back to investors in the form a nice little $12.5bn share buy-back (double what it used to be!). This is lifting not only TWX's valuation, but also the media sector's valuation as a whole. And lest there was any doubt, that sector's valuation was in dire need of lifting -- it had been the second-worst SPX performer YTD. My favorite media long from last week, Cablevision (CVC), seems to have responded well to the latest news that the board of that company is actually telling management to "batten down the hatches and prepare for the $3bn special dividend issue". The stock is up 6.5% from last week's lows around $24.25 and, while the announcement is sure to displease CVC's bondholders (the company might need to borrow more money to fund the payout), CVC's shareholders, especially those who bought, as I suggested, after the Dolans withdrew their bid last week, don't mind the excitement -- the stock keeps going up!

Speaking of going up, what a difference a few days make. As suggested previously, the market needed energy stocks (XLE) to stop going down, and a spark from tech and financial land, before it made its way higher after blowing through the 1205 SPX resistance level. The SPX has rallied hard -- 3% in 3 trading days really! -- to go from short-term oversold to short-term overbought! The good news out of WMT earlier this week, helped the MVRX (the Morgan Stanley Retail Index) to rally 7% (!) from extremely oversold levels (from 142 on Thursday to 152 today!). Not bad for a great start of the 4Q rally. After October's terrible returns across the board (especially since energy stocks retreated significantly), performance-chasers -- mutual funds and hedge funds alike, who are basically flat for the year -- would be extremely motivated to buff up their returns for the year. This practice is dangerous and leads to stretched valuations in higher-beta YTD winners such as GOOG. Yesterday, I suggested not buying the stock above $380, and if possible, lightening up on the name if you've owned it for a while -- it is still a great company, but that is to be differentiated from a great stock (the latter is dependent on price!).

On a slightly different note, yesterday's FT article by Stevie Roach of Morgan Stanley left me slightly perturbed. Helicopter Ben (yes, the 99.9% likely new Fed chairman as of Feb 2006) has had a distinct tendency to underestimate the impact of the level of U.S.'s indebtedness and deficit in the past. If Stevie is right, the Fed might be fighting only one battle (and that might be the wrong one!) -- i.e. inflation. What they should be also worried about is what happens when the world stops sending their surplus savings to gluttonous America. Higher U.S. interest rates and weaker dollar? Hard landing? It may not look like it's happening right now, but I can't help thinking that we are standing on very thin ice when it comes to the U.S. markets, in any shape or form. The Fed has been bailing us out for a long time now -- the question for the future remains: can they afford to do it if the world's other big economies start consuming their extra savings rather than giving it to the U.S. for next-to-nothing in return.

Ain't No Stopping Them Now...Da-Da Da-DA

YHOO and GOOG. GOOG and YHOO... Who can afford not having them in their portfolios... Perhaps this is why the performance chasers are still loading up on them. Only a week ago, I recommended owning both (even at the *then* elevated levels -- $35 for YHOO and $340 for GOOG), with YHOO being "the cheaper one" if such a thing even made any sense at the time. What makes sense now though is that, with GOOG trading above $380, it has become a trading sell, which we traders like to "loosely translate" as "if you own it, brother, sell a substantial portion of it to buy it lower or just buy something else; and if you don't, well... definitely don't buy it here!". YHOO at $38 is still much cheaper than GOOG at $380 (and no, the extra 0 has nothing to do with it -- I am just talking fundamentals!).

Otherwise, as a Halloween afterthought, I propose changing DELL's ticker symbol to DETH, because the stock's performance reminds me of the inexorable force of gravity (the one which one discovers when one jumps off an impossibly high cliff) which leads to inevitable...er... death. Is DELL "cheap" here, below $30, at $29 or so? Yes, but not "cheap enough". The growth expectations for this company have to be readjusted (downward, and make it several notches while you are at it!) -- this is no longer the same DELL that was the darling of tech enthusiasts of the 90s. The new DELL is GOOG -- the money-making model of the service-driven U.S. economy which everyone craves for themselves, and which nobody [as of yet] has figured out how to compete with. But no company can grow forever. MSFT is today a "value" stock. I already suggested that YHOO may be transforming itself into a similar phenomenon. GOOG, on the other hand, is still a growth stock, but not at any price. 5 years from now, we may be talking about GOOG in the same way we are talking about MSFT now -- big and strong and powerful, but no longer a growth name. It all depends on the time horizon perspective. As Keynes once said, in the long run, we are all dead. I bet Michael (as in Michael Dell) is thinking along similar lines today.