GM Stands For General Mismanagement...

What a load of doodoo! Kerkorian sells 12 million shares of GM @ around $20 for "tax purposes"?!? Sounds like a $575mm stop-loss to me! I had already questioned the logic and the timing of the original trade. I had also asked the question whether GM is/was a buy @ $21.25. Clearly I am not so sure anymore as I am also getting stuffed a bit here at these levels, but evidently not as much as Kirky boy -- this might well be one of his worst trades ever.

On this "happy" note, I am off for my X-mas break today. I wish everyone a peaceful and restful holiday period. Will be back in the blogging saddle in early January.

Closing 1/3 of MWD-GS Spread After Excellent MWD Earnings.

Almost 17% of MWD outperformance in 6 weeks. Bought MWD @ $52, selling some @ $58.25 (stock is up in excess of 2.5% today); shorted GS @ $131, covering some @ $124.75. John Mack finally delivers!

Yeaaah, I Am On Strike As Well... Easy, Ain't It?

Holding 7 million people hostage in NYC just before X-mas is no good way to ingratiate yourself to the general public and thus win popular support for whatever "issues" may be at stake. In the long run, the transit workers will lose. It's just the name of the game.

The SPX has retreated somewhat after reaching my pre-X-mas target of 1,275 the other day. Aggressive bulls should look to plough back into the market around 1,249-1,245 which was the upper end of the previous 3% range within which the market was well contained for a long, long time. I still expect the SPX to eventually make its way higher toward the 1,300-1,310 level by March of 2006.

MWD Overtakes GS In Terms Of Market Capitalization

The MWD-GS spread has moved 12.5% in the money with MWD now overtaking GS in terms of equity market capitalization. I expect the trend to continue in the new year, as MWD has a lot of ground to make up on its peers, since its stock has been stagnant (when compared to stalwarts such as Lehman, Bear and Goldman) for the past 30 months or so.

The bloggers are up in arms outraged at the company management behavior of this stock: IDT. Note to PR people: if your company is in trouble, ticking off investors and/or running and hiding to buy time probably isn't very smart. Having said that, it may all be just a nasty case of genuine miscommunication -- so if possible, do your own homework before jumping into profound conclusions.

Gold Bounces From $493.30...

It seems like there was some sort of liquidation going on early this morning (during Japanese market hours), as gold spot touched $493.30 but then proceeded to bounce hard to well above $500... That was the first meaningful level from which I expected a strong bullish reaction. So far, it looks like the gold bugs are showing the necessary resolve to defend that obvious support level.

All That Glitters Ain't Gold...Revisited

A friend of mine was quoting a Japanese proverb to me the other day, which translates to something like this: Jaywalking is "safe" as long as all of us do it together, at the same time. That's a bit like what's happening in the gold market. This is also one of the reasons why, a few days ago, I called for shorting gold as it was spiking vertically higher on some pretty obvious panicky-type of overseas buying. Herd mentality rules, but even more so in December when routine moves are exacerbated by people ganging up obsessively on the bid or offer side of a particular asset class. Gold spot should bounce from somewhere between the $485 and $495 level, but the exact price would very much depend on where the herd takes it in the last 2 weeks of December. Savvy traders usually avoid trading during this time, unless of course they have a death wish.

... And The Worthy Winner Is... $/yen Bear By A Technical K.O.

$116.75 trades. Wow. Wow!! Biggest absolute move in almost 5 years, a 3-standard deviation drop! A lot of bullish macro funds are hurting today. The ultimate contrarian trade makes it big today -- I am taking partial credit for being 80% lucky with the timing!

Where Are The "Consensus" Dollar Bulls NOW?

The dollar bulls are really taking it on the chin again today. After the Japanese Tankan survey of business confidence, the yen rallied the most in 4 months against the dollar -- to 118.50 from about 120 late yesterday. I did write a few days ago (with the yen at 121) that the yen looks like the most undervalued of all major currencies against the dollar. A nice correction toward the 115 level may be under way, since the trend line at 119.50 was broken earlier today.

On a slightly different note, with the euro trading at 1.205, it is within a shout of my target of 121 by February 2006. I am surprised it got here as quickly as it did, but I guess it's December and even small price movements can be exacerbated by thinnish trading volumes (due to a lot of people taking off early from work, ahead of the X-mas holidays).

The Fed did its little semantic exercise yesterday, basically saying that "some further measured policy firming is likely". I have no idea why anyone would ever consider that statement to be "dovish" or "hawkish" for that matter -- my take on the whole thing is that the Fed has absolutely no clue what is going to be needed, hence they hedged their future actions both ways, if you will. Good thing they are not traders, because they probably won't make the cut with their willy-nillying. Gun to my head, my bet remains that the Fed benchmark lending rate is going to 4.75%, no matter what.

To Accommodate Or Not To Accommodate...

That is the question in front of Greenspan, as he looks to cement his Fed chairmanship legacy (to the extent that there even is one, since we may be seeing the unintended economic consequences of his policies for years to come!). Part of the reason why long-term yields have remained low may be because Greenspan has been remarkably transparent (and consistently so!) with his "measured" language rhetoric which has created an incredible price stability and has thus aided the U.S. economic expansion since June of 2004. Does he give the market false hope that the rate rises are nearing an end? Or does he stick with a tried and tested approach which has been so successful in the last 17 months -- why fix something if it ain't broke? I am leaning toward the latter, as I think Greenspan might want to let Ben Bernanke establish his own credibility and make his own mistakes (and yes, there will be mistakes!). To be honest, I could be way off here, as again, I am going against the generally accepted market consensus, but that tends to be the flavor of the month, as I did call for a higher euro when everyone else was extolling the virtues of the greenback -- and I lived to tell the story ;-)

The Market Always Goes Where It Can Hurt The Most People...

It's only a few hours ago that I wrote the eurodollar is poised to rally and even that already seems like old news... There is much blood on the street/carnage today for the "vociferous consensus" $ bulls -- euro at $1.1975, pound at $1.7750... One more reason why I always insist that it never pays to follow the herd (or to read the WSJ for trading ideas for that matter!!). I expect great FX volatility going into month-end, as lower volumes exacerbate even routine daily moves.

Eurodollar Poised To Rally

It has been my assertion for a while now that the $ will top out out against the major currencies during December of 2005. The price action in the eurodollar would certainly suggest that the $ will have a hard time breaking out against the euro around the 1.165 level. In fact, as things stand right now (1.1875), if the eurodollar closes above 1.19, it has a pretty decent chance of clearing, before the end of this month, the psychologically important 1.20 hurdle below which it has been trading for over 5 weeks. The Fed might come out tomorrow and say that "accommodation" is history, and some people are already betting that the end of the raising-rates cycle is just around the corner. I happen to think this may not be the primary factor driving the $'s FX valuation, but at least it may divert people's attention back to the "small" matter of the fundamental structural problem with financing the U.S. current account deficit. I am sticking with my 1.21 target for the eurodollar by February of 2006.

Time To Buy The Yen?

There is an incredible consensus in the market that the Japanese yen is "supposed" to weaken further. I am not so sure. Interest rates are going to go higher there... eventually -- the Japanese government said so themselves recently. In my opinion, at 121 against the greenback, the yen has already fully reflected i-rate expectations in both countries. Part of the reason for the yen's recent pronounced weakness may be that people buying Japanese assets (such as equities) may be hedging out there yen exposure by selling the actual currency -- indeed the correlation between the Nikkei and the yen during the last 2 months has been nothing short of extraordinary. Still, something is bound to happen -- either the Nikkei rally isn't for real, or the yen is going to strengthen. The Nikkei rally to me looks like it's not "just a bounce" (there are some very good reasons to believe that the Japanese economy is doing very well) -- local institutions may just now be stepping in to follow foreigners (mainly hedge funds) in their buying of the Japanese equity market. Hence, my bet is on the yen strengthening significantly -- I have a lot of conviction that we are going to see the yen rally back to 115-112 within the next 5 to 6 months to reflect a fairer fundamental relationship between interest rate expectations in the U.S. and Japan.

Not All That Glitters Is Gold...

... including..er...gold itself. The front month contract is already trading at $521.20, a good 14% higher from just a month ago... It's hard to say why investors are buying it. As I have already suggested previously, I don't believe in the "diversification into alternative assets" principle. Having said that, one can't argue with momentum. Gold at these levels has reached a pretty good long-term resistance however, hence I would be tempted to recommend for long investors/traders to look to exit their positions around here. Those who have a death wish might even dare to put on some speculative shorts here with some tight stop losses around $535. I have a feeling we are going to see a good retracement in this shiny metal commodity over the next 3 months...

SPX First Target Almost Reached...

As I write this, the SPX is trading at 1,272.50 -- within a couple of points of my 1,275 (by X-mas) target. I think that level will be easily reached now, especially since the SPX 1275 Dec05 call (expiring next Friday) has a pretty good open interest. I expect the SPX to stall around that strike in the absence of any catalysts. 1,280 in the SPX may well be a level where one would look to put on a short-term pullback/retracement trade/short. More on that to come perhaps later, depending on how the market acts between now and expiration Friday next week.

Guidant Revisited...

I really thought the GDT saga was finished for good when JNJ came back with their revised bid, after initially threatening to walk away from the deal altogether (because of GDT product recalls). At the time, everyone thought JNJ got themselves a sweet deal (through some tough negotiating!) at around around $63 ($13 lower than their original bid). Boston Scientific however today announced a 14% higher bid, which throws the whole deal up in the air. In either case, GDT shareholders who bought the stock @ $55.50 (as I suggested) on Nov. 7th are currently sitting on a solid 20% profit with the potential for a bit more, should the M&A process drag on for a while longer. I would be curious to see what JNJ's reaction to all of this is going to be. My bet would be that they may need to raise their offer as well -- they can't afford to be left behind in the dust, when it comes to the therapeutic medical devices business.

Yep, This Might Just Be A Good Trade After All...

Two days ago I wrote that the BKX (the banking index) might be topping out around these levels ($105-$106). I would like today to put some more substance to this trade by actually going long the S5PROP (S&P500 property and casualty insurers) @ $287.25 vs. shorting the BKX @ $104.65, as a pair trade. Not saying that S5PROP won't go down, just saying that BKX would go down further if that was the case. Why? First, I think that, following this year's record -number-of-hurricanes season, the insurers are entering what I deem to be a cyclical bull market in terms of premium power, whereas the banks might just be coming out of one, if my "not-so-rosy" scenario for the U.S. economy materializes in the second half of 2006.

Second, insurers tend to do better in a rising interest rate environment -- so, if Helicopter Ben goes nuts with the i-rate lever (and the current strength in the U.S. economy seems to indicate that the Fed indeed won't stop raising rates until we see the 4.75% level at least), that would also be better for the insurers than the banks. Third, if the yield curve inverts (as I discussed yesterday), the banks would then be even more hard-pressed to reproduce their stellar performances and record profits of this past year. And yes, I come from the old school of thought which advocates that banks are way too accustomed to making "the easy money". Sorry to rain on someone's parade, but the easy money is already made, mates! Going forward, making money is going to require much smarter risk-taking (with possibly lower leverage or else we would be really asking for trouble!). Except for Goldman (which, let's face it, is actually a hedge fund with an M&A advisory department), I am struggling to name an investment bank which really knows what they are doing in that department. The bottom line is the end result of all this has to be higher volatility in the market, which isn't so good for the banking brethren either.

Maybe this trade is way too obvious and thus, by definition, will fail. Maybe... I have a feeling though that we won't be seeing VIX at 11 for too long. Buy 18-month SPX vol. The storm is coming.

Busy Day For The Market, Lazy Day For ME...

The market woke up today and decided that the U.S. has a strong economy with (apparently) low inflation and solid, ever-growing profits. I disagree with at least 2 out of those 3 points, but who am I to argue with pure year-end "holiday rally" momentum. All kinds of sectors rallied today -- energy, banks, tech, even gold and oil. My SPX targets remain the same as before, the index having rallied from just above the solid area of support (1,245-1,235), even if I thought the market would take a bit more time to negotiate its overbought condition. Nope, no chance -- I guess the bulls are just being..er.. bullish in a seasonably bullish period. No surprise there.

Given that it was my birthday today, I decided to dedicate a lot more time than normal to reading the serious papers (of which the WSJ is not one of them). There was an interesting article in the FT today on what a potentially inverted yield curve could mean for the equity market (the yield curve is pretty darn close to being inverted and there is a good chance that it will invert by the time Mr. Bernanke shows up for his first day at The Job). I am not smart enough to figure out whether a recession is looming or not, but what I, as a professional derivatives trader, would wholeheartedly agree with is that flat or inverted yield curves are usually followed by periods of high volatility in the equity markets. This may be because the angst/disagreement/confusion (arising from the different investors' yield curve views) is being expressed in their nervous trading. Add to that already volatile mix, the fact that we have a Fed chairman leadership change (with all the unintended "Greenspan shoe-filling/legacy" consequences that this entails), and the fact that 2006 is actually a Football World Cup year (anyone care to remember the "fun" summers of 1998 and 2002?), and we might be in for some very volatile and gut-wrenching summer of 2006. I don't know about you, but I am buying 18-month variance swaps here, especially if vols get hammered again just before X-mas. I am fixing my roof while it's shining -- it may very well be the last sunshine we see in quite a while...