Thursday Morning

Yesterday was not as much fun…

After a great Tuesday, we were really in no mood for yesterday's nonsense as we gave back most of Tuesday's gains in a terrible session.  As I said in yesterday's morning post, fortunately we had gone bearish – but that doesn't mean we WANTED to break back down, just that we were ready for it. 

We were skeptical of the boost from the ISM report, especially as the oil build was well above the 5M mark I predicted (more than double what "experts" predicted) and our long-standing premise is that the energy sector can still wreck the market.  My suggested plays in the morning post to short USO and XLE on the predicted BS reaction to a build were right on the money.  For members, the only bold (featured) trade idea I had all morning was shorting the OIH at 11:31 and then nothing at all until 2:13 when we had our usual fun with SKF and, at 2:29, I decided BAC had suffered enough (it hadn't) and we stuck our toes in with a leap.  Near the close we liked WMT at $46.50 and FAS, but of course, it was just tentative bottom fishing as FAS has held $8.40 well and we just go in and out looking for 5-10% with a 2.5% stop out so not exactly high-risk day trading and lots of fun so far.

So all in all a bearish time was had by all and, not surprisingly, people ran to gold overnight – sending it back to $920 and a big ca-ching on our ABX play from Tuesday afternoon when we couldn't believe the sale price they were offering back at $35.50.  Speaking of SKF by the way, my daily outrage is to be outraged by Cramer's daily outrage, where he misleads his sheeple into thinking they don't correlate with the financials over the long haul.  I don't know what Cramer's agenda is against SKF, which we have tons of fun trading, but if you compare the 2x ultra-short financial to the XLF financial index over 5 days you can see SKF up 17%, XLF down 8%.  Over 1 month SKF is up 43%, XLF down 24%.  Over 2 years SKF is up 125% and XLF is down 70%.  Of course the correlation isn't perfect and all these ultra indexes tend to underperform and need to be used sparingly.  It is hard to tell if Cramer is incapable of reading a chart or if he is simply misleading his viewers in order to continue his long-standing attack on what is really a very useful hedge for the average investor looking to protect their virtual portfolio against the short-term shocks to the financials – which come with alarming regularity.

Perhaps the problem for Cramer and his masters is the ability to hedge with an ultra-short like SKF allows the average investor to hold on to the beaten down bank shares even as CNBC tries everything short of satanic rituals to kill them off.  How can his fund buddies drive more financials out of business if you don't panic out of them?  There are a lot of powerful people who are counting on more financial institutions going bust and Cramer is unable to deliver if a person can hold onto their financials until the bailout starts to take effect.  Notice Cramer says "…even though we're getting lots of Emails saying it's a perfect hedge to protect financial positions in your IRA or 401K" and then tells those people they are wrong but offers NO constructive way for those people to protect their virtual portfolio otherwise.  Is that really looking out for their interest or simply attempting to get rid of the one tool they have to help them hold onto their positions? 

By the way, I did try to read what Eric Oberg had to say about the SKF, as Jim suggested but the SKF article was behind his paid firewall and I'm not falling for that one!  I did notice that Steve Halpern, of ETF Investing, had Changewave's Mike Shulman pick SKF as his top of his '09 buy list (and it's performed better than almost anything else this year) and Trader Radar has a great article on using ultra-shorts to your advantage while Chad Gray does a great job in pointing out the hidden costs you need to be aware of, which is why our primary day-trade strategy on the ultras is to short the calls at the top of a good run!

Buffett continues to call a bottom in financials with a $2.6Bn investment in Swiss Re, a timely investment that should protect their AA credit rating but the onerous terms of the deal sent the stock tumbling 25% in today's trading.  Berkshire is in a very similar business in the states (reinsurance) and this is a big step towards the firm expanding their empire overseas – very interesting considering Buffet's age. "We are delighted to have this opportunity to increase our investment in Swiss Re," Mr. Buffett said. "I am very impressed by Jacques Aigrain and his management team," he added.  Buffett's $5Bn investment in GS looks good so far but not so much the $5Bn he gave to GE, who are off 30% since his infusion but I've been going back and forth on BRK.B as a buy and hold play for members and I think we can use the $3,000 line as an entry/exit point and we'll be looking for them to head up to at least the 50 dma at $3,200 when the market rallies during expiration week.  If BRK had options to sell, it would be a major holding for us long-term!

Asia had an interesting morning with the Hang Seng up 1% and the Shanghai down 1% but nothing to make us regret our hedged FXI play.  Financials dragged down th emarkets and the Nikkei also gave up a point but a 14% jump in the Baltic Dry Shipping Index (which I now wish we could have bet directly when I made my bottom call) made shipping the best performing sector. "There was obviously opportunism about China growth, commodities and shipping. On the downside, we had weakness from Japanese corporate earnings and downgrades and from Macquarie on the banking side. … But by the end of the day negative sentiment won the battle," said Andrew Sullivan, a sales trader at Main First Securities.

I said somebody, somewhere must be buying something and it turns out that China has, for the first time ever,surpassed the US in monthly auto sales and beat us big with 790,000 vehicles sold in January vs. 657,000 sold in the US.  There is an impending shake-out of small car makers in China that could be a huge benefit to VW, TM and HMC as well as the leading Chinese auto makers who face unrealistic price competition from failing companies who are burning through what used to be easy investment capital to stay in business.  China is also being hit by a drought, where 105 days without rain is threatening a major wheat-farming area so nice info if you play those futures…

Europe was off to a bad start and things have not improved as the ECB, as we expected, stands pat on rates this morning.  The BOE dropped their lending rate down to 1% from 1.5% but the EU is the big enchillada and Trichet's hard stance will hit the dollar this morning but he's not wrong as Europe’s employment laws and powerful trade unions make it harder for companies to fire staff or revise compensation even in a slump, supporting disposable incomes and reducing pressure on retailers to lower prices so the situation there is NOT comparable to the US, where deflation is a very real concern for our Fed (or at least an excuse to inflate the money supply to ridiculous levels (have I mentioned I like gold lately?)).

UL had surprisingly good numbers but gave no guidance: "Given the economic uncertainty I believe it would be inappropriate at this stage to provide an outlook specifically for 2009 or to reaffirm 2010 targets," said Chief Executive Paul Polman."  WMT came through for us with a 2.1% rise in sales vs. 1.2% expected by analysts who herded the sheep out ahead of the January figures. M (also on our buy list) also justified our faith in them with BTE sales but they did, as we expected, cut the dividend from 13.25 to 5 cents a share, which is still 4% so not terrible.  ARO had a nice gain and guided up and we'll be looking for a play on them later as we could use another retailer and ANF is also looking good despite a 20% comparable drop over last year's excellent January.  HOTT also put up good numbers but it was slim pickins after that.

Productivity was up huge at 3.2% but that is normal when everyone is terrified they will be fired and hours are being cut to the bone.  Perhaps people worked so hard to avoid being one of the 626,000 people who lost their job last week – the highest level in 26 years (October 1982), 2 years into Ronald Reagan's Presidency and I'm sure that the conservative pundits were calling Reagan a failure as well after his first 600 days in office failed to turn the country around.

We'll be testing the Monday lows of 7,881 on the Dow and 812 on the S&P, 5,090 on the NYSE, 439 on the Russell but not 1,468 on the Nasdaq or 204 on the SOX unless something is going terribly wrong.  A lot of the selling still looks rotational and we expected a little pain as bets are first withdrawn from poor performers before being placed on "the next big thing," which we have long been playing as the Nasdaq.  $24.50 was our buy point on QLD with our hedged entry paying off above $22.50 and we'd love it if they simply drift into expiration so we can sell again.  We'll see how we ride out those shocking unemployment numbers but it looks like Matt's going to win our bet today as it's a long, long way to get back to 8,000 from this morning's open!

We will be bargain hunting today as we expect Monday's lows to hold but look out if they don't and have some downside bets ready – maybe those SKFs!