I told you yesterday would be fun!
Will today be funner? Is funner a word? As you know, I have been determined to get more bullish and our Watch List is growing every day as I add more and more undervalued companies that still have room to fly if we are truly going to run the S&P back over 1,100 this year. We remain skeptical but you can be skeptical and still make money, as you can see from Corey's (Afraid to Trade) very nice S&P Chart, you can do very well in this market buying the dips OR selling the tops – we kind of like to do both…
Despite the low volumes, buyers are clearly in control of this market and, in Member Chat yesterday, I compared the situation to having a bet on the Raiders, who lost 44 to 7 on Sunday. You can start out with a bet on the Raiders (in this case, the Bears) but there’s a certain point, perhaps when the 3rd consecutive possession by the Giants (Bulls) ends in a TD, that you have tgo admit you aren’t going to win.
You have a few choices at that point: You can be a perma-Raider and keep betting more and more on your team (not smart); You can swallow your losses and leave the stadium; You can swallow your losses and stay on the sidelines and watch the game; Or you can switch sides and start betting on the Giants, maybe even recovering some of what you lost. You can keep some of your useless-looking Raiders bets, just in case a miracle occurs but what’s the sense of not betting on a clear winner when it's right in front of you? Even if you are skeptical, that can be useful as it keeps you out of trouble as you should be wise enough to take your profits off the table.
I never understand the "fan" behavior of market players. If you see the market going up and up and up and up – perhaps it's time to make a few up bets. Bears don't earn loyalty rewards or get frequent-complainer points from the market so, if your "team" is getting trampled, it's OK to switch sides – at least for a while – no one will think any less of you. In the case of our bull-market bets, we have a great opportunity to switch sides at a very significant line this week, the 2009 highs of Dow 9,829, S&P 1,071, Nas 2,146, NYSE 7,047 and Russell 620 – 3 of which held up yesterday despite the afternoon sell-off. If we can confirm these levels on real volume today, it will simply be madness to be bearish until those lines are crossed again to the downside.
If you are a football fan, consider it "mid-field" and consider that you are allowed to switch your bet to whichever team has possession of the ball AND has crossed their opponent's 50-yard line. If this were a football game and the Giants, who were already up 31-7 at halftime, had the ball on the Raiders 40-yard line in the 3rd quarter and were about to take the snap – which team would you bet is most likely to score on that drive? You can bet on either – the Giants, who have the ball, have crossed the 50-yard line and are 40 more yards from another goal, or the Raiders, who don't have the ball, are demoralized and confused, do not have control of the football and are 60-yards away from a score even if they did?
That's the wonderful thing about the markets, you can have all this information and you can watch half the game and THEN you can place your bet. If you could do that in Football I bet your bookie would be miserable but this advantage you have only works IF you use your ability to switch. If you are a Raider fan and your answer to the above question is "I'd bet the Raiders will score," then it's not likely I'm going to be able to help you if you are also a bearish investor. There is a point in any game where a clear winner emerges and you have to GET REAL. You don't have to like or agree with the outcome but don't let that blind you to the point where you insist that red is green or you may be heading into one Hell of a traffic accident!
Now, to be clear, we are NOT there YET. We have drawn our line in the sand for the bulls and they failed to hold the levels yesterday but we have evened out our virtual portfolio as best we can and we are PREPARED to go bullish if we get our market crosses. S&P 1,100 and Dow 10,000 are in sight and it would be a shame for the bulls to come this far and not pull the trigger but, should that be the case, we're not all that attached to our bullish plays and we also stand ready to get back to a 60% bearish posture.
As we like to do near market inflection points, we did pick up some (hopefully) cheap bearish plays yesterday as the market tested the highs. Our selections included ERY, GLL and UGL (a pair trade), USO (short), TM, GS (short), DXD, CERN (short), and BAC. Notice the MIX of bullish and bearish trades but still mostly bearish as we still haven't topped our levels with any authority but we ARE READY for anything.
Cramer's CIT investors better be ready for anything today as it looks like they are getting little interest from bondholders for its debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely. CIT is thought to favor a prepackaged bankruptcy, but sources say it may not find enough debtholder approval for that either, forcing it into a "prenegotiated bankruptcy." CIT chairman and CEO Jeffrey Peek will step down at year-end. "Now is the appropriate time to focus on a transition of leadership," Peek says. "Now?" – As in with the company teetering on the brink of bankruptcy?
Meanwhile, our gal-pal Meredith Whitney drops her rating on GS, until now her only Buy-rated stock, to Neutral – possibly because we shorted it yesterday in Member Chat. Whitney had upgraded Goldman to Buy on July 13th, and shares have risen 34% since then. As recently as Sept. 10th, she said Goldman "still has a lot of gas in its tank" but that was 10% ago and both Whitney and I felt they were a bit toppy yesterday. Earnings will tell on Thursday…
Asian markets were undeterred last night with the Hang Seng and Nikkei gaining about half a point while the Shanghai Composite shot up 1.4%, back to 340 and up 100% from last October's lows. Despite the spectacular comeback, the Shanghai composite is still 40% off it's highs and still 20% off the August peak – for a global recovery that is mainly based on speculation that China will be leading us out of a recession, this premise seems just a little bit thin… Also of note in Asia, top investors over there lost 35% of their wealth in 2008 according to a joint study by Merrill Lynch Global Wealth Management and Capgemini.
China's gain today was led by energy stocks, including coal as demand for energy is expected to bounce as manufacturers return to work. Chinese automobile shares also advanced on news that passenger vehicle sales jumped nearly 84% in September from a year earlier lifting total sales in the first nine months of the year by more than 34% to 9.66 million units, more than were sold in America.
This boosted all Asian car makers, who led the rally in that part of the world and that, in turn, popped the steel makers. China's demand is, of course, driven by MASSIVE stimulus: "Auto sales rely heavily on policies, just like the stock market. It's hard to predict sales outlook for next year as we don't know whether the government would renew the tax cuts for small cars after they expired at the year end," said Qin Xuwen, an analyst with Orient Securities.
Thanks to China's drive to drive, OPEC was able to raise their 2010 demand forecast another 200Kbd, to 84.9Mbd or 700,000 barrels a day more than this year. Of course, this does little to reverse the 11Mbd DROP in demand we've experienced in the past 5 quarters of ACTUAL data but energy traders are making the most out of the projected 0.8% recovery and have bid oil up over $74 in pre-market trading, where we will be happily adding to our Nov USO put position.
Europe is down about half a point ahead of our open (9 am) as the CPI in the UK falls to a 7-year low. Germany's ZEW survey dropped unexpectedly in October and that has been enough to apply the brakes as both the FTSE and DAX bounced off their year highs yesterday. The financial sector led the declines with LYG and BCS already down at the 2.5% line.
That has put a damper on our own futures so today still may not be the day that we finally flip bullish, which is good as we are still sitting on a ton of bearish bets from last week. Dow component JNJ had 8% lower revenues and missed forecasts for sales, despite having a nice 6% earnings beat on cost cutting. Cost cutting will only get you so far it seems because after a while you have a great big, bare-bones operation and STILL no customers so I don't think this earnings season is going to just be about good earnings, I think investors are going to be looking for some good news on sales for a change.
The ICSC Chain Store Sales Survey did show a 0.6% rise in sales this week over last week and a 1% gain from last year and Redbook is backing that up with a 0.6% gain over last year, the best move upwards since April. The report notes that Halloween sales are on track, boosted by earlier-than-usual displays. Redbook also notes that some retailers are marking down toys earlier than usual. The results offer an early indication of month-to-month strength compared to September. The Commerce Department will post September retail sales tomorrow in what promises to be the week's most important economic news.
So this is very good news – it would be a real shame if this can't get us past our levels…
