February 27, 2017

Market Risk outweigh Rewards

" Yesterday all my troubles seemed so far away.
Now it looks as though they're here to stay.
Oh, I believe in yesterday."  --The Beatles, "Yesterday"

Above all, please remember that in a quant-dominated world, which worships at the altar of price, buyers live higher and sellers live lower.

As such, the irrationality of market valuations is too often rationalized by commentators and strategists as the market rise moves parabolically.

As I will discuss shortly in my opener, possibly for the first time in the rally there have been some concerning signposts.

I have recently suggested that we may be in the blow-off phase. I still believe so and I have observed too many talking heads in the business media rationalizing the irrational. Many of them are convinced they will know "when" to get out, but for now they are dancing while the music is playing.

It is my strong view that the market risks dramatically eclipse the market rewards.

As a consequence, I have added materially to my SPDR S&P 500 ETF (SPY) and PowerShares QQQ Trust (QQQ) shorts and to financial shorts such as Goldman Sachs (GS) and Lincoln National  (LNC) in light of the conflicting action in bonds (higher in price, lower in yield).

Position: Short QQQ, LNC, GS, SPY.

February 22, 2017

Jeff Lacker retiring in October 2017

With his retirement ahead in October, Federal Reserve Bank of Richmond President Jeffrey Lacker wants to cement his reputation as a hawk on the Fed even though he doesn't vote in his last year. "With unemployment at or below levels corresponding to maximum sustainable employment and with inflation very close to our announced target of 2%, significantly higher rates are warranted," he stated. The underline is mine. As to when to hike next, he recommends "sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on."

Non-voting Dallas Fed member Robert Kaplan also said something similar late yesterday on the timing.

As both don't vote, it really doesn't matter what they think, especially Lacker, because he has been a longtime hawk anyway. Chairwoman Janet Yellen, Vice Chairman Stanley Fischer and the New York Fed's William Dudley rule the Fed roost.

February 20, 2017

Market continues its push higher until......

The rise in equities has been unrelenting. The bears have been bloodied. Volatility has collapsed.

Bond prices are dropping posthaste as yields may begin to provide competition to equities. Certain valuation metrics are in the 98% decile.

Complacency may be at an extreme, as there is NO fear of a market drawdown.

Stocks and sectors (especially of a financial kind) are in dangerous territory, driven by ETFs, indexing and quant strategies that are divorced from fundamentals.

......The president's policies are very far from being adopted. The global economy's trajectory is fragile and vulnerable, sovereign/public/corporate debt is high and the Fed is no longer market-friendly.

A market blow may be at hand.

As for signposts: Watch for a continuation of deteriorating breadth ..... and a decline on higher volume.

February 15, 2017

Obamacare - What will happen to it

There are a lot of unknowns about the overall health care market right now, as no one knows what will happen with the Affordable Care Act this year.

I am more than amused by calls on both the left and the right complaining or rejoicing that the ACA's repeal and/or replacement has not been put in motion yet. The new POTUS has not even got his cabinet nominees approved yet. It's amazing how little patience both sides of the aisle and their grassroots supporters have these days. The previous POTUS was in office almost two years before the ACA was passed, and it was even more years before full implementation occurred. It is not going to be altered or undone overnight.

via thestreet

February 14, 2017

This is a bull market - covered shorts

I've seen a lot of traders come and go. Usually, they go when they fail to adapt. Believe it or not, I knew people who couldn't handle the change from fractions to decimals, which happened over 15 years ago. I've seen many similar situations over the years.

I'm a technical trader, but I also try to respect the fundamentals. However, the level of attention that I'm willing to give fundamentals can change depending on the environment. Fundamentals didn't matter in 1999, when the Nasdaq climbed more than 80%. They mattered a heck of a lot more in March 2000, when stocks crashed.

I've covered most of my shorts. Many of those shorts were initiated when the market was drifting sideways, as it did for a good chunk of the past year. At the time, it made sense to play the market from both sides because it had no clear direction.

Now the direction is clear, and I've adjusted. It's no fun taking a loss on a stock such as Chipotle Mexican Grill, which I shorted at $385 and covered at $415, but I'm not going to exercise the same level of patience with shorts in a roaring bull market as I would in a weaker environment.

Nvidia is a great example of the current "damn the fundamentals, full speed ahead" market environment. The stock trades at 76x trailing earnings and 43x forward earnings. None of that matters right now because traders are simply buying every dip that Nvidia can muster.

That's not a knock on this stock, or any stock. As traders, it's our job to adjust to whatever environment the market presents.

This is a bull market, the S&P 500 is trading at all-time highs, and corporate taxes are likely to be slashed in the near future. If the market (or an individual stock) wants to go higher, why fight it?

February 13, 2017

Greek Debt Crisis - Nothing has changed

Going to the other extreme, the Greek debt crisis seems to be raising its ugly head once again for the umpteenth time since 2010. Recently the International Monetary Fund has suggested that a looming "debt Armageddon" potentially could pose a risk to the broader euro-zone. The German finance minister, of course, stated the country would need to leave the European Union to get a debt haircut.

This Mexican standoff was old years ago, but still has the potential to cause volatility in the euro-zone. The Germans will continue to "extend and pretend" on the Greek debt rather than provide any sort of debt forgiveness, which would be hard politically. 

The Greeks, on the other hand, continue to refuse to make the necessary labor and other structural reforms needed to make their economy competitive. Unfortunately, I don't see either side changing their stance.

February 8, 2017

full time trader vs part time trader

As I like to write, the only certainty is the lack of certainty. And I can't remember a point in time when I wasn't long some stocks--despite how negative I might be! (Right now I am quite negative on the markets)

But, I run a hedge fund (24/7) and I am trying to realize absolute returns for aggressive and wealthy investors with a shorter time frame than you should be looking at--of between six months to 18 months.

You likely have a job, and you are probably an investor on a part-time basis.

I am a full time investor/trader, a different animal than your personal account, IRA or 401(k).

I am quick on my feet and make swift decisions. I am nearly always in front of my turret and I understand the risks inherent with short selling (reward vs. risk is asymmetric!).

I have been doing this, day after day, for four decades.

And I attempt to utilize tight risk-control management to avoid mistakes when I am wrong in view. 

Consider these factors and conditions when you read my Diary and Jim's thoughtful and instructive words. 

February 6, 2017

Skeptical of Apple growth prospects but reducing short position

I have reduced my Apple ( AAPL) short to small (for a loss) after the release of earnings.

First-quarter sales and profits were not as weak as feared by some. ASP's rose slightly and the iPhone shipments beat, as did the mix of product, leading to a 5% iPhone sales beat.

Apple reported a stronger-than-expected quarter but the forward guidance was weaker than expected.

On the later point, second-quarter sales guidance was 2.5% under consensus and earnings guidance was nearly 6% below general expectations.

Apple's 2017 estimated earnings per share look to be below the 2015 peak (part of my bearish thesis), but investors clearly are willing to look toward the next iPhone introduction and for a hockey stick to EPS growth in 2018.

As this year's Wall Street EPS forecasts for the company have not changed, the company's valuation consistently has been upgraded over the last six months -- something I had not expected given the maturation of the smart phone business and the arguably non-differentiated (and expensive) Apple offerings.

I remain skeptical of Apple's secular growth prospects.

But, price discipline trumps conviction, so I decided to reduce my short position.

Position: Short AAPL small.

February 1, 2017

Could there be further troubles ahead for Sears ?

Both Moody's and Fitch have downgraded Sears paper. This was in spite of the planned sale of the Craftsman brand. The ratings agencies cited a still significant expected cash burn in 2017. Sears was a large customer of Mattel, and I suspect the toy maker may have refused to ship to Sears.

Sears shares declined another 7% today in morning trading, and the Moody's downgrade came out after the close.

Though Edward Lampert has pulled several rabbits out of his hat, Sears' cupboard is now almost bare.

I now believe ... that a financial event at Sears may be imminent. If I am correct, a large portion of the retailer's stores will be closed and with this, about 100,000 jobs will likely be eliminated in bankruptcy.