Fed Decision Today...

The debate seems to be whether Bernanke moves in to raise rates one more time after Al is gone (to establish his inflation-fighting credentials immediately) to 4.75% or whether the Fed is going to be done after today. In the last couple of weeks, bonds have sold off dramatically and the dollar has rallied somewhat against the major currencies, which makes me think that people are attaching a higher probability (perhaps as high as 80% judging from the futures expectations that I saw this morning!) to another rate rise in March than they did just a few days ago.

I have always been in the "more rate rises to come" camp, so I will stick to that view still, even if it's the majority-dominated stance right now. Whatever the "neutral rate" may be, it sure as hell ain't 4.50% -- just watch the price of gold for an indication of what savvy fund managers think about inflation... The Americans have done a pretty good job hiding their real inflation number -- the one that has inflated the asset prices (read house market, stock market, energy prices, etc.), not the price of a cheap pair of pants from Walmart that, yes, costs about the same as last year.

Unexpected, Counterintuitive, Unwelcome $ Rally Anyone...?

I am now out of all $ longs. I was expecting just a relatively small bounce (which we got) in the big picture scheme of things, and I didn't think it would be anything more than that. The $ however has proceeded to inflict significant technical damage on the $/euro and $/yen below 1.2175 and above 116.50 respectively. I would therefore have to say that one needs to treat these kinds of technical breakdowns with a healthy dose of respect. So let's sit it all out and wait... And then wait some more... I have a feeling that the combination of the Chinese New Year in Asia and tomorrow' Fed meeting has exacerbated the situation a bit, but one nevertheless needs to be cautious with $/euro trading below 1.21 and $/yen trading above 117.50. If my suspicions turn out to be correct, we could see 1.18 $/euro and 120 $/yen handles within a couple of weeks, as the majority of market players, it would seem, are JUST NOW positioned for $ weakness (yes, I just saw the IMM FX data!). Not a good sign to say the least!

I know the U.S. economy fundamentals don't exactly support a stronger $ at this point, but one can't argue with the market. It could be right for a lot longer than we could be solvent...

What's In A GDP Release...

So the GDP growth number comes in at 1.1%, about oh... 1.7% off the pace and the soothsayer market "gurus" are already out in force screaming their heads off that, you see, everything is just alright, the U.S. economy is humming along just fine, things couldn't be better, the economy will of course bounce back in the next quarter. What a load of crocrap! I'd much rather for someone with a half a brain to come out and say something like this "Look, guys -- the number is just crap but we choose to ignore it because we have cash to invest and can't afford to miss the boat on this rally. This is a one-off, I promise..." I already talked about the January craziness that people are prone to, and today's price action is further solidifying my view.

I therefore choose to sit by and wait on the sidelines. The market is not cheap and people are doing stupid things. Performance chasers are playing a dangerous game -- so when they get taken out, feet first, later on this year when the SPX drops down to er.... about 1,150, I will not a shed a single tear for them, I will not have a gram of sympathy for their bloated egos which will start exploding with a nice plomp like water balloons hitting the pavement from a pretty decent height... And that height as I have said all along is somewhere above 1,310 (by the end of the first quarter). It's the nature of the sport -- greed and fear, fear and greed.

Well... It Could Be Worse...

After shorting AAPL @ $86, I bought it @ $73 (trading a bit lower now), and sold out $/Y at 116 (after going long at 114) just as shorts were stopping themselves out. Better than a kick in the teeth. Fed decision coming early next week -- the consensus right now is that the Fed has at least one more rate hike left after this coming one. But things might well get dodgy soon with Bernanke stepping in Al's shoes next month. So, unless there is something immediately obvious which warrants a big position, it might be best to step back and take some risk off the table.

As I suggested yesterday, the bull party still seems to be going on, as it's January and people are not afraid to go crazy early on in the year (as there are still 11 months to make up for any mistakes). Might still be better to stand back and watch the craziness unfold though.

Getting Ready To Take Some Profits...

On my AAPL short (since $86 -- overvaluation/stupid fundamentals) trade -- will wait for $73, current price around $73.75...
On my $/yen (since 114 -- bounceback from 200 mavg/oversold) trade long -- will wait for 116.

I try to buy or sell when others are stopping themselves out. It's just the nature of the game.

Otherwise, the invisible hand in the SPX is doing its utmost to support the market here, and I can't say that I blame them. Good for them! Since we all know it's EVENTUALLY all going to end up in tears, we might as well enjoy the happy-go-lucky ride.

Food For Thought...

Investors usually look at the first five trading days of January (of each new year) as an indicator of how that year is going to turn out to be. Judging from this year's flying start (the market being up well over 3% in the first week), we should expect a bull market year. A lesser well-known fact perhaps is something called the December low indicator -- which just states that if the market crosses the Dow December low (made on December 30th, 2005 @ 10,717.50), especially in the first trading month of the following year, there is bound to be trouble ahead. The Dow crossed and closed below that level last Friday, after the expiration-exacerbated selloff, and Monday's recovery wasn't anything to write home about either. So, two conflicting views are clashing right now and it's hardly surprising that vols have picked up recently. I expect the bulls to eventually win, but only as far as the first quarter is concerned (hence my March'06 level of 1,310 in the SPX still stands). I am not sure what happens beyond that. If someone does, I tip my hat off to them.

Important Things Happening...

-- SPX overshot on the way down on expiration Friday (stopping me out on the intraday bounce trade in the process), bearish momentum increased;
-- GOOG, AAPL among other stock market's darlings took a real beating, finally vindicating my bearishness on high valuation grounds;
-- Eur/$ broke upside resistance at 1.22 and proceeded higher (where are the dollar bulls now?);
-- the VIX closed the week at 14.56 -- the highest level since late October;
-- the Nikkei looks perilously close to a major double digit % correction, if 15,100 doesn't hold;

I feel we are at a decent inflexion point which may determine what kind of a year it's going to be. For the short term however, there may be just too much money around for the market to totally collapse here. 1250 SPX support. Too close to scare away lots of 2006 longs yet.

SPX Reaching First Support Here...

I had earlier called for a "mild" retracement which is happening right now -- helped by some so-so or simply atrocious earnings during this past week, and probably also because of option expiration today. I do think however, we are reaching the intermediate level of support in the SPX at 1,271-1,267, which should provide the first opportunity for the bulls to defend their 2006 yearly gains. Below that, I am afraid there is nothing of significance until the low 1,240s... So, I reckon it would be important to see what kind of reaction we get out at these levels. As I am writing this, the SPX is trading just below 1,270, but I am still going to stick with my bullish call for the end of March, but I might need to revise it, should the market render significant technical damage here. For now, buy the dips below 1,270 with a stop loss at 1,264...

AAPL Is A Short... Revisited

A couple of days ago, I (actually it was my wife with whom I wholeheartedly agreed) called for shorting AAPL @ $86. The stock seemingly can't keep up with the market's lofty expectations... Again, great company but expensive (therefore bad) stock. Some people confuse the two. A 10% correction is nothing for this name. It is still far from being cheap on a variety of metrics and I can't see why anyone would want to plough back in it around here, just for the (momentum) hell of it. Stay short, we may see $70 soon before this "mild correction" is over.

Predicted Retracement Happening...

The retracement which I called for a few days ago is happening as we speak. INTC and YHOO severely disappointed investors with their earnings announcements and the Japanese herd mentality from overnight didn't help either. The low end of the range in the SPX would be round 1,270; so we might see some pressure still in the days ahead, especially if it continues to be tech-driven (until now, the stellar outperformer of the year). Stay tuned, at least the markets are no longer boring!!

Guidant On Cloud Nine...

Six weeks ago, I was patting myself on the back saying how $10 profit for 3 weeks on the Guidant deal isn't that bad. Well, it's $12 more since then (coming to around $80 in total), and this is higher than any price any GDT shareholder has ever gotten out of any acquiror, even before all the controversies hit the newswire. It's a stupid price and Boston Scientific is looking desperate, to say the least. GDT should hit that bid and make their shareholders happier than ever.

$/Yen Showing Signs Of Strengthening...

Three days ago, I pointed out that at 114, $/yen looked a bit short-term oversold and I called for a possible "breathing space" bounce. The market seems to be agreeing with me, given that today it touched 115 on virtually no new news. My initial (and probably 1/2 P&L monetization) target would be 115.50, where I hear a lot of big boyz (read big banking prop/macro FX desks) have their sell orders for the (potential) second stage of the $/yen carry trade liquidation. I concur. My only concern would be if Bernanke goes a bit nuts on the i-rate lever and overshoots to over 5% on the Fed funds rate. Unlikely, but still quite possible. Stay tuned -- it's going to get exciting soon!

Hmm... I Might Not Be The Only Crazy One...

It would seem that the adorable Mr. Henry Blodget must have read my note from this past Monday, because he came up with a $100 price target for GOOG to join that other lunatic-cum-analyst Philip Remek who dared to suggest that GOOG might only be worth $260!! Quick, lock'em up at once lest this blasphemy becomes a widely held belief!

AAPL Is A Short...

My wife tells me that AAPL is a short @ $86. I always listen to my wife. Therefore I must concur with her and must strongly insist that AAPL is indeed a big, big short here. Seriously, can we all agree that AAPL is pretty far from being cheap @ $86, and it's become a "fashionable" stock (just like that other belle du jour called GOOG) which people buy blindfolded because their grandma is calling and asking them about iPods. Speaking of fashion: it tends to be a real fickle thing, and hence I wouldn't put it past Samsung, for example, to soon become the new premier "digital lifestyle" brand, the posterchild of the very fashion-conscious (and super-naive) MP3 generation.

After releasing stellar preliminary sales figures and getting upgraded by a bunch of trend-following Wall Street analysts, the good news for AAPL, from a financial/investing perspective, may well be over. Sell it if you own it or short it if you don't.

Is $/Yen Poised For A Bounce?

The yen has rallied over 6% in a little over 4 weeks (not counting the slow X-mas period) to reach the key 114 level. It seems people are well-positioned by now for more $ weakness this year. However, the yield advantage of the $ cannot be ignored completely. Fed fund rates are likely to rise at least one more time to 4.50%. Technically speaking, the 113.75 level is a very good trend line support (below which we will probably see the 200-day moving average around 112 pretty quickly!). We could therefore see a short-term bounce from here, perhaps toward 116.50 or so... especially if the trade figures tomorrow surprise on the positive (less negative) side... Longer-term, I am still quite convinced that the yen will see 110 before 120 (if ever). I correctly predicted the original correction from 121. Let's see if lightning can strike twice as far as this potential short-term bounce is concerned...

SPX Severely Overbought Here On A Short-Term Basis

1290 traded yesterday -- that is a flying start for 2006, a gain of about 3.5% just in the first five trading days. My March'06 target for the SPX of 1,310 is not that far away, but I think we will head lower soon, as I reckon that gain is just a bit too much too fast in the short run. The market needs space and time to establish a new 2-3 months trading range (possibly 1,270 being on the low end of it) -- hence, the SPX needs to come off its highs here and head perhaps 15-20 points lower. If it doesn't... well then, it's a crazy bull market again!

GOOG Ripping My Face Off...

I do hate this stock with a vengeance. Being short from $424 is no fun, especially since, by this time, it's no longer a valuation game, but a competition between fools and er... greater fools. $2,000 price target? Hello, doesn't anyone remember Henry Blodget and the tech excesses of the late 90s? Apparently not, it seems.

I am pretty sure GOOG (being one of the more arrogant, secretive, and investor-UNfriendly companies!) will come back to earth at some point this year, the question is whether this fool (me) would stick it out till then. The safest way to express a short view at this point is to buy some Jan07 put spreads -- the GOOG 420-390 put spread is going to cost you around $10 (the premium spent being less than 2.1% of the current stock price of $472). Even a mild correction in the short-term would double your money, without causing too much decay pain. And, in the longer run, there is plenty of time for the stock to go back to under $400 (down 15%) at which level it was only a month ago.

Not Too Hot, Not Too Cold...

... is the mantra repeated by most investors after the non-farm payroll data came out today. The increase of 108,000 jobs was a lot less the projected 200,000, but the upward revision from the previous month more than assuaged any "cold" fears. So the market promptly took its cue from this and proceeded to rally another 1% to above 1,285, thus overcoming the psychologically important resistance level of 1,277-1,280, at which hurdle it had stalled on several previous occasions in December of 2005. What's more, today's SPX gain brings the total gain from the first 4 trading days of the 2006 year to somewhere in the vicinity of 3% -- and, you know what they say: as the first few trading days in January go, so does the whole year... Hmm.. we'll see. At least I am well on track for my next "prediction" to come true -- that the SPX reaches 1,310 some time by March of 2006. From there on, I think we will see a substantial correction. I am afraid the goldilocks scenario for the U.S. economy might prove to be too good to be true, longer-term. Prepare for the worst and let's hope for the best, as they say.

What Are The Chances Of...

... the Fed pausing in their January meeting? Hell might freeze over twice before that happens; none, zero, zilch -- some would say! But in the Fed minutes notes (released the other day) from their last meeting in December, it would seem that the FOMC members were having a real hard think about whether it may actually not be more prudent to wipe the slate clean for Bernanke, so to speak. I believe the exact wording was "the number of future Fed tightenings may not be large"... What does "not large" mean? Is it the same as "small" or perhaps even "none"?!? Is the Fed taking the mickey out of investors? I thought all these things were "economic data-dependent"... Could Greenspan be saying in his own weird, roundabout way that he thinks it's for Bernanke to decide "just how large" is "large". The market is currently attaching almost 100% probability that we shall see a rate rise this month as well; hence if one wanted to spend a small $ amount/premium to be the silly contrarian on the odd chance that Greenspan goes out with a bang-bang, surprising everyone -- the payoff could be huge. Perhaps it's time to buy some out-of-the-money March Eurodollar calls -- take a look, it may well be worth a hail-mary punt.

EuroDollar Target Reached...

1.21 eurodollar trades and proceeds to go a little higher on the day as well... I must admit it all came to pass a little sooner than I thought, but it would seem too many people were still harboring dreamy hopes of a strong dollar into 2006... Yes, I can feel their pain... not! Overall, my bearish call on the $ was vindicated to the tune of a 3.25% gain, which, in the world of FX, is quite a move for the world's two major currencies within the span of just eight weeks. Coupled with the fact that my pre-X-mas target of 1,275 in the SPX was also reached on time, I feel confident that my other "predictions" for 2006 would also materialize before long, especially the one about Brazil winning the World Cup. Sorry England fans -- one boorish yob Rooney doesn't a winning team make.

The Dollar Bulls Seem To Have All Abandoned Ship...

First trading day of the new 2006 calendar year and already the first trade the FX masters of the universe are doing is dumping the old greenback against almost anything that moves. How quickly times change... Six weeks ago, one couldn't pick up a decent newspaper without stumbling upon an article about just how great the U.S. currency looked. I am no FX guru, but I was right about being sceptical about the overly bullish dollar sentiment. My 1.21 euro/$ target by February of 2006 is not that far away.

The Fed minutes today indicated that the tightening cycle is drawing to an end. Consequently, the market tested the 1,245 SPX support level briefly and then proceeded to rally on the expectation that the Fed will finally loosen the reins so to speak. Gold investors seem to be betting that we are still far below "neutral rate" though -- or why else would gold be hitting new highs if there was indeed "no inflation" and the other asset classes offered "good value". Something is amiss here and I've been trying to put my finger on it for a long time without much success I am afraid. I do however feel that the U.S. economy is setting itself up for a massive disappointment this year. The brief yield curve inversion (10s yield dipping below 2s yield in late December'05) is but just a harbinger of the troubles ahead. Watch the house market -- the mother of all bubbles, even bigger than the one which brought the tech market to its knees in the late 90s. This is what ultimately may bring down the "invincible" U.S. consumer -- the engine behind the growth in the U.S. economy.