Meme Watch - The Iraqi Effort is Falling Apart

If you watch a broad spectrum of the media news outlets, I really don't know how you can tell WHAT is happening in Iraq. I watch NBC and they have all but written the effort off, acting as if we should be getting out immediately. Then I turn on Fox and actual soldiers are on TV saying that Iraq really isn't that bad. How in the world can you gauge the geopolitical risk?

While listening to a popular radio program the other day, I heard a soldier tell the host that he is 3 times as frightened about Iraq while watching the news media in the US, than he is while he is actually in Iraq. What is that saying? How are we to react to a news media that seems to want to hold us hostage to the lens with which they view the situation?

Is it just politics? Are we merely moving through a political cycle where everything (including the disruption of a nation) is fair game? Would this have worked during World War 2? Could we have fought a World War while obsessing about abuses in one prison camp? How many prison camps were there in World War 2? Do you mean to tell me this is the FIRST time this has happened? I say no. The only thing different is that the media has become ubiquitous. It seems wrong to me.

Not my job to judge here though. My job is to game this. So, as in any game I have to believe that you have to play this AWAY from the major networks. There is clearly a disconnect with their base when they feed this constant slam on the US administration. They forget that Americans always fall back on pride. Telling them that they have nothing to be proud of is a losers game. This will affect their revenues and further decentralize the average viewer. Making them more niche oriented as Cable variety moves in to fill the void (the harbinger of all this being the Fox New Channel).

Short and sweet. Here is how I would play this:

1. Short the networks and their associated stocks. They will loose viewers as alternatives from cable grow stronger. Mis-steps like their current jag only serve to further destabilize their base.
2. Buy cable companies with broadly diversified offerings for subscriber revenue. They will be the benefactor of the major network exodus.
3. Sell Major Advertising concerns. They will be faced with a landscape of smaller "cable savvy competitors as the network loose their clout. Their contracts with the major networks will render them useless.
4. Buy Niche oriented content plays. Buy networks, both interactive and cable video that cater to wide niches of people that have been overlooked by the networks.
5. Do not buy Network Sponsored entities. These are cable and content outlets that are owned by the networks and thus tied to their downward spiral. Buy scalable pure plays.

That is how I would play it.

DISCLAIMER: I own some stock that fit the above categories. However I do not own many and may have positions that contradict the above advice.

Cruelty- The ultimate backhand from the Market

Yesterday was just a cruel day for equities. Just cruel. We started the day up big, held it all day long, only to be sold off to a down 30 on the Dow by the time it was all over. Volume surged in the last hour as well, lending an exclamation point on this market that said "Nope, everyone is still too happy and optimistic for the market to move higher.". For those of us who are long, days like yesterday hold an irony reserved only for fools who try to divine the future.

Another funny thing I'm beginning to observe is the complete lack of reference for the type of movement we are seeing. Well respected writers I follow say things like "Why is this happening? I don't know." or "I have no idea who actually buys and sells these types of moves, but I'm sure glad they are there.". A complete lack of perspective.

Most say it is because Oil continues to make higher highs, the 10 year is now hovering around 4.80, and there is a general lack of urgency coming from the Fed.....Not to mention Iraq. I'm sure it is all of those things, but I'm starting to feel like we need to simply game the psychology and forget about fundamentals. When I get to this point, I always stop and remind myself that I'm not in this to fall folly to that markets whims. I'm in this to grow my investments at a more aggressive pace than a bond or a mutual fund. So I sit back down, take my hands off the keyboard, and stop trading. Which I will not do until some semblance of order comes back to this market. I suspect that the reason we can't break support or surge past resistance is because my view is a popular one.

Trading Track - A glimmer of hope in K-Mart

Ed. Note - We have added the ability to comment on these posts. Please let me know your thoughts! Just click on the comments link below each post, scroll to the bottom of the next page and add a comment! - GJL

Check out the action in K-Mart. Just bursting upward with no restraint. I'm encouraged by this since K-Mart got relentlessly pounded last year for poor management, slow growth, and underperformance in comps. The reason I'm encouraged is that K-Mart seems to be a bottom low enough for investment, and thus starts to show us where stocks need to be valued in order to move up in this market.

I'm sure you are going to stare in disbelief when I write that I'm hoping we go down further. K-Mart is WAY DOWN, and it now has upward momentum. The rest of the market, unfortunately, is not WAY DOWN enough to equal where K-Mart is rebounding. So we continue to drift around, never creating enough down draft to create a sustainable rally. I believe in this ideal fully. Market momentum is perhaps the most powerful thing it can provide us.

Heres hoping for Dow 9000!!! I hope I'm wrong, but without geopolitical catalysts, and without significant changes in business momentum, I'm afraid all we have is market momentum.

Trading Track - Gaming the 1990 Scenario

I'm hearing that traders are starting to compare this market to the 1990 scenario (Post War Daddy Bush's long slide into oblivion). The idea is that we have to price in a complete rollback of the last year to the beginning of the war, because inflation will kill the consumer, and the banks, and everyone is coming along for the ride. It is at times like these when we question the nature of our recovery in the US, and indeed the world.

I've always found that it is best to stop and take a pause at this type of juncture. We have been here before...Recently...From the 1987 crash, to the first Iraqi War, to the Dot Bomb Bubble, to 9/11, to Madrid. You have to look at the world and ask yourself if doomsday is actually around the corner, and make your trading judgments as a result of what you see. Right now I see instability. That is for sure. A geopolitical situation fraught with uncertainty and the ability to spiral out of control at a moment's notice.

I urge you all to see that while we seem to be teetering on the brink of something we all have no clue how to game, we have never actually gone over the brink. Right now the market is pricing in some sort of cataclysmic crush of problems that will seem to actually defeat our economy soundly. This is an extreme sentiment to say the least. The strength of the US business landscape is great enough to overcome this type of crush. The question is, when will the markets decide that they are at a level low enough to stop the onslaught of selling.

Indexes - Not even thinking about this yet.
Bonds - Had some trading activity here. Took advantage of some of the higher yields in the 18 year range, and took down a block of Floaters with good structure. I have a feeling that these trades are going to look even better once we start seeing the fear bid come back into bonds.
Equities - I'm getting shelacked. That's all I can say. I'm almost fully committed with about 3% cash left. If I try to take advantage of lower levels, I will have to start liq'ing down positions. I don't feel comfortable with that, particularly since this is clearly an exercise to wipe out all the bravado that was in the market. I feel like we can ride it out and not liq anything. Yes. I'm getting killed on all plays from raw materials, to the cable plays to the tech, to the advertising. Scaling into oil stocks over the last three weeks has been a buoy and kept the PF from falling. Right now I'm about to take the stance that most of my stocks pay divs and I'm just going to get paid to wait this one out doing no activity at all. Somehow I think that some angles will materialize and Ill start trading around the market again. Nothing right now.

Meme Watch - Rebound and The Election Year Media

Rebound

Watch carefully. There are a lot more signs that the market is bottoming out from this recent sell off. Did I get caught by surprise? Yup. Was I 80% committed at Dow 10,500? Absolutely. Do I have average downs the whole way back through 10,000. Most definitely.

Why? Because the sell pressure is subsiding. Things just cant go down much further without taking out stops that will bring us to Dow 8500. No one thinks we are going back there with an earnings picture like we have, and with economic indicators coming in the way they are. Even Inflation seems to be capped with a Fed number of about 2.5 to 3. That says we have a floor, and a top. A range that we are at the bottom of.

I know. I'm a bull. I can't help it. Believe me, two years ago, I was holding dividend paying stock only and not trusting market action at all. I guess you could say that I traded my way through the bad, and this is nothing compared to the market in 2001 and 2002. Back then we had to trade against abysmal earnings, and even worse economic numbers.

The Election Year Media

This can not be discounted the way everyone seems to be going along with it. Lets face it, the main media outlets are gunning for Bush. They report all of the bad and let the good bubble up every once and a while. Is it our fault? They seem to think that we WANT to hear this scandalous stuff. When I talk to people and read the blogs I read, I don't see that. I see people who want to have pride in their country as we are under siege and turn away from news that makes us feel shame. That's all I hear from the news outlets. Shame on the military, shame on Bush, shame on Rumsfeld, shame on the greedy CEOs, and on and on and on and on.

They are either working for the terrorists, or they want to change the political picture. Since Tom Brokaw wouldn't be able to survive in a cave without his "product", I have to believe that they are trying to affect politics. That is manipulation, and we have to turn away from it. Yet the markets seem to want to react to it. The trader in me KNOWS I have to game it that way, but the citizen in me, the US citizen who has invested in both the economic, municipal, and political landscape wants to expose it and bring it down. I have a feeling that it is going to have to be a little of both for me for now.

Trading Track - What more is there to say?

Many of you have emailed me wondering about my thoughts with this market. I haven't posted because I don't think anything has changed since my last post. We are getting the thing that I always knew we would have to face, the interest rate motivated selloff. The knee jerk reaction that most traders get when faced with a new interest rate environment. I was expecting it AFTER the Fed started to tighten, but I have to say I'm glad we are getting it out of the way. I know, this is exceptionally painful for the longs out there (of which I am now fully 100% a member of).

The nice thing about this move down is that we are wringing out a lot of the weak hands involved in the last run up. Many of whom were wondering if they should sell weeks ago, now see themselves at breakeven or a little worse and just capitulating. They have now had enough pain and want to make it stop.

I believe that this sets us up for a big run north after all the capitulation is done. But then again, I've been saying that for two weeks now (thus the lack of posting). Here is the fundamental thesis that works the same way that saying the jobs numbers were wrong when everything else was pointing to a better economy. This is economy is now solidly growing and expanding. This is something that was not present when we crashed so hard in 2000. Everything looked like it was behind us then. Now everything is in front of us and we have the economic engine to participate. People may be selling, but it sure isn't because business is bad. That is flawed logic, and I have to buy that.

Meme Watch - Inflation - Again

I'm getting very concerned about the future for growth in the stock market. Although a healthy dose of human nature should cure the condition, I feel like once interest rates ACTUALLY start rising, everyone is going to loose their heads. We have not even had ONE FED TIGHTENING, and everyone is acting like this is the end of things for stocks. What happens when things actually start going up and stay up? Its like watching a junkie wean off crack.

How do we play this? I've got some good sized bets on raw materials, cable, tech, and ad spending for medium term turns in stocks, and I'm starting to nibble at some bonds again. As yields perk up, there are some good deals in the "slightly under 20 year" range in munis so I picked some up yesterday with some new dollars from the stock PF. So, in a word, this next stretch in the market is going to be selective stock picking and a migration to better yields.

Trading Track - Uneasy relief

I really don't like what the general markets meme likes these days. I ask myself all they time why I feel different about it but I cant seem to work it through. Yesterday, the Fed came out and said that they were not raising right now, but that that they may act soon and in small "measured" levels. Meaning they would start tightening in .25 or .50 bp moves over a protracted period of time. The markets liked this because, while they don't like higher rates, they favor a slow, inch by inch approach.

I continue to wonder why the market feels this way. I wonder why we are paying attention at all until the fec gets to 2.5 or 3!!! That would put us in the mid range. For those of you counting, that would mean the Fed will need to do FOUR tightenings at .50 or EIGHT tightenings at .25! Eight tightenings would last two years using this approach. Even THEN we would still only be at a nominal FF rate. I don't think that the world is going to wait this long and the forces of inflation will creep up on the Fed and overwhelm it.

This says two things to me....Change the stock strategy, and wait for higher rates because they are right around the corner. Inflation isn't in check folks, and just because the government says that food, gas and general services costs are not part of inflation doesn't mean that the consumer doesn't get hit.

So....

Indexes - Still dormant here. Cant game a 10,000 to 11,000 range on the Dow when you are in the middle of it.

Individual Stock - Commodity recovery seems to be taking on some steam. Steep recovery in PD and a slight one in AA. CHRT getting hit but I remain steady on it and am looking to buy more at 3.5 if I get the chance. CMCSA recovering nicely after they dropped the Disney bid. About to go positive on CMCSA. Nice gain and holding in Estee Lauder. Going to liq it soon. EMC still down but inching back. Jury is still out on this one.

Bonds - Had a setback on a new CMO I was purchasing, had to bust the trade. Now have more FX cash than I'd like. Trying to hold out for a nice 5% muni. Going to wait as long as I can before the income picture starts to bother me. Gave up on trying to do a Treasury. Rather buy a muni instead.

Meme Watch - America is bad

First off, I believe in America and the American way of doing things. I'm a free markets kind of guy and would be pleased if absolutely EVERYTHING was open to a free and open marketplace. In this meme-watch, Id like to examine the prevalent, recurring meme (as opposed to a single, fading meme) that America, on a global scale equals domination, corruption and greed. This meme is affecting our markets in the terrorism/fear bid that surfaces in safe havens at the slight hint of geopolitical discord. Therefore it is important to develop a thesis about the meme and apply it to our trading methodology.

Here is what I feel the big secret is about "The America is Bad" meme. I always ask myself the question "As opposed to what?"......As opposed to Saddam? Nope. As opposed to the EU? The ever-capitulating, ever transient polices of the EU? Nope. As opposed to the Spanish Socialists? I'm not even going to answer that. As opposed to Putin? I think he has his own issues. America isn't bad, America is a mirror. America lets you see what happens under the covers whether you like it or not......And here is the big pitch, the big irony of this whole meme......It goes on EVERYWHERE, all the time, in all forms of badness. No one is immune, no country rules or governs better than the other....It is all messy, ugly, and insults the sensibilities. America is the ultimate victim of its' freedom. BUT THAT DOES NOT MAKE IT BAD.

This is why when we get these panic selloffs because of this meme, we should buy the weakness with both hands. Because the reality of it is, while we may seem bad for the moment, most realists examine the situation and realize that there isn't anything better than American freedom, which is why even though selloffs are bleak and the bears wring their hands. Dollars ultimately come back to the American markets. Always have, and always will until there is a better form of freedom. I wont hold my breath, and neither should you.

Trading Track - Winning the mental tug of war.

Jim Cramer said it best "....Did you really think that after a week like this, that we would rally into the weekend with every potential for bad news available and at the ready?".

Still taking massive amounts of pain, but Im winning the mental tug of war to cash it all in and go to bonds. Portfolio is off 5% at this point, and I have no reason to believe that Monday will bring new positive catalysts. In fact the ONLY catalyst out there is the fact that people might just get tired of selling eventually. I'm not swayed, and my hands remain strong. I'm a bull at heart and I continue to look at pullbacks like this as working off the outstanding year we had last year. Although I must admit that this selloff is stinging a lot worse than the last two. Our economy is working like gangbusters and we are emerging from a tough recession. The action this week seems to assume that we are going back to 2002. No way....Didn't work last year, wont work now.

Individual Stock - Let go of the last bit of Echostar for a loss. I couldn't in all good faith carry it any longer with the bets I've made on CMCSA and CHTR. Plus I don't need the extra drag right now. CHTR is getting hit, but I'm only a buyer under 4. If we get to 3.5, Ill take down another 500 shares. Took down another hundo IR today about 2% under my cost basis. PD and AA continue to get hit but are showing bottoming support (no consolation here since we are off big numbers right now), so I feel like we are getting stable with raw materials. FOLKS!! THERE ARE MORE GROWING NATIONS WHO NEED METALS THAN CHINA!! These stocks have become sources of huge amounts of pain.

Bonds - Liq'd nice chunk of cash representing my total realized gain for the year out of the stock PF and Im starting to look at a muni to replace it with. I'm not going to pull the trigger until I can get a +- 10 year muni in the high 4s. Want to buy the 10 year at 5 as well if it can get there. Saving floater income for that. CMO paper seems stable for now and are paying down nicely. Had some big paydowns last month for some and my principal came in quite a bit. Resisting the urge to do any more right now and saving it for the Muni or the T-Bill.

Index - My Q long that was so close to 2080 is now also producing pain. We really didn't see this slide coming so everywhere I look on the indexes are lost opportunities. May consider doubling down the Q stake soon if we get any more oversold. If the market gets too ridiculous, Ill get back into index moves, however right now I'm not going to do anything that produces anymore pain potential.

Meme Watch - Pain

Okay. Those of you who have been reading me for a bit know that I called for a second decline, similar to what we are now experiencing. The selling, the dirge of selling, is scary, and the fearful rule on the street this evening. The averages are down big at this point, we were oversold days ago and now we are worse.

One might think this is it. This is the big flush.... It is all downhill from here.

Thats why tonight's Meme Watch is Pain. The state of pain that the news, your broker, your portfolio, and pretty much anyone who is following the market wants you to reflect. Down here is where pain is produced. We need pain to ensure that stock changes hands and builds a base to move higher. We had no pain at all up until a day ago. Now we have real pain and those who are weak will capitulate. This is why this is NOT the big flush, but the forced rush downward in order to coil the spring.

The reason I want to highlight this very prevalent meme should be obvious. You buy when there is blood in the streets and you sell when euphoria is highest. I believe that the markets are beginning to pay their final penance for the stellar year they printed last year. Yes, I believe that when the pain is this intense, you force yourself to buy.

Here are my catalysts, one by one:

China - Everyone thinks that the government there is going to slam the brakes on the growth, forcing Asia into a recession. Just like all the other one day wonders that the news produces, this theme is being over reacted to. We now have PD and AA selling down huge (talk about pain), and all for what? A promise from a previously inept government to reign in the overwhelming forces of capitalism? No way. I'm sticking with my raw materials focus which at this point is a large part of my PF.

The 10 Year - 4.52 makes me smile. Id like to see it move higher but I really want the sell off in bonds to take a breather for a minute. In the grand scheme of things, we are going to 5 on the 10 year by year end, but I would like to see the bond market sell off more orderly. I'm still on the sidelines here. This erratic move higher is also spooking the markets something fierce.

Earnings - I really don't know what to make of this. By all accounts, earnings were out of the park outrageously great. Yet we have this continued selloff. This brutal, unrelenting selloff. My confusion is not why this is happening ("sell the news"), but how to price these great quarters and guidance into a market that cant keep a bottom. I believe that this is going to ultimately be a catalyst higher if we can mount an upward move any time soon. Let me tell ya though, the economy is back big.

Trading Track - Range Bound starting to move to upside

The PFs are pretty stable in here. I have a raw material, advertising, cable/entertainment, tech, mix going on and the current action keeps it pretty steady in the middle. I'm looking for an upside break past earnings on economic news that further supports what we are seeing in earnings. I feel like everyone is looking at the run we had in the beginning of 2004 and saying that we priced great earnings in. They seem to forget the slow painful Naz selloff, but that's okay.

- Index - Still holding the Q long trying to get out at the 2080 level. No Diamonds or IShares positions.
- Individual Stock Highlights - Not much trading action. Waiting for my big PD bet to start moving higher on realization of the shortage in copper. My HAL position is finally rocketing higher. People need to realize that HAL earns their money the hard way and is a great American institution. Can't figure out the DD position. 25% increase in earnings and they sell it off. Not like they ran it up to high to begin with.
- Bonds - Unwinding the inverse floaters....Moving some of the principal into the 10 year above 4.50 (still waiting). Sniffing around for good Muni yields.

Meme Watch - Inflation

I like to watch "memes" work their way through the media. A "meme" is a fairly recent phenomenon. As far as I can tell, a "meme" is a general ideal or theme prevalent in the current news cycle. Ya know how sometimes it just seems like all the media is talking about the same thing? That's a meme. Some of them impact that markets, and some of them don't.

One current meme I'm tracking is the Inflation meme. This is the story that takes a look at isolated numbers and attempts to show that Inflation is in danger of getting out of control. This is a very new meme for our economy since only months ago the Fed regarded Inflation risks as equal to Deflation risks. However this meme has found it's way into the psyche of the stock trader's head and the talking head alike. Why would we be getting the best earnings reports in years, yet have the stock market seem downright uninterested? The Inflation meme.

Now I've been on what seems to have been a never ending search for inflation for the last two years and I feel very comfortable in reporting that there IS core inflation going on (raw materials, hard goods, et al). However the real measure of inflation, the cost of money, is still quite low and likely to move slowly up the inflation scale. Imagine a big jumbo airliner taking off at super slow motion. So the truth is that inflation is coming, but it is coming at us slowly giving us enough time to reposition and prepare.

The moral of this meme? Get ready to get ready, and be forewarned, but don't jump off a cliff.

Trading Track - Current Market Strategy

Trading Track is going to be a new ethi-Letter feature. It is a quick, memo-style analysis of current trading strategies I'm employing broken up by Index, Individual Stock, and Bond plays. Kind of like a quick temperature of my trading activity.

1. Index - Long QQQ Looking to bail on some at 2080 Naz
2. Individual Stock - Picked up a bunch of PD at 68...Halved my cost basis. Caught a 1.75 updraft the next day. Went deeper on CHTR, waiting for convertible refunding to wash out the shorts and go higher. FRX is disappointing after a similar low end double and lost almost 3 points, not sure I want in anymore. Holding over 2000 IACI on a breakout yesterday on the Amazon numbers, looking for big upside here.
3. Bonds - Shut down and not doing anything. Waiting to see where interest rates shake out over the near term (Oct). Have a large stake of Inverse Floaters (CMOs) that I want to let unwind for a while. Not too worried about Rates getting out of control since we have no reason to believe that things wont be as orderly on the way up as they were on the way down. This says my floaters can unwind fully just in time to turn over some refunding next year and go straight into 10 year Munis.

Taking a victory lap...

Yesterday the Dow, Naz, and S&P blew the doors off. Huge gains across the board...2, 3 percent in some cases. This is the moment when buying at the bleakest possible moment pays off and you watch your hard work pay off. I sometimes think of this exercise as the "price" I pay to actively trade the market. The act of overcoming fear and doubling up your position on a stock that is already down 10 points (Phelps Dodge for me, Alcoa for others yesterday). Having enough courage and conviction to hold everything all the way through a down turn. Wondering, "Does the market have a bottom close to where I've made this huge bet?".

But then a day like yesterday happens. You feel the palpable turning of the tide and realize that you just paid your price and now you can take your profits.

Looking for a big follow through today to put us on a path up. Interest rates seem to have worked their way through the news "meme" cycle and we are now left with a slew of outstanding earnings reports to propel the market for a bit. I'm hoping for a couple days of upside before we try to work anything off. I still think we have one more big down turn to go before we go for Dow 11,000.

FUD - Fear, Uncertainty, and Doubt

When I hear someone say "FUD", cash registers ring in my head. Never has there been a better motivator to separate you from your cash. If you are going to trade the market, you have to resist FUD. Youhave to reject it completely. If your trading thesis has been established, and over the course of the day the market takes you into never-never land, you resist FUD impulses. If every economic indicator points to recovery, but the jobs number wont budge, you resist FUD impulses and buy......and when the Fed Gov starts talking and the weak hands start wringing.....you go on vacation...completely rejecting FUD.

Right now is the time to be looking at this market for the earnings growth, the snappy balance sheets, and most importantly the "buzz". Will the Fed raise rates sooner than later? I say Yes. Will the markets hate this idea...absolutely. Will the weak hands sell off, creating an opportunitiy? As sure as the sun will shine. I say "Step up and participate in the market here. You are buying the begining of a recovery and historically that has been a great time to either buy and hold OR trade."

Living with the weak and feeble.

Man, never is it more evident that weakness and fear rules the markets than when Mr. Greenspan speaks. Today was a doozy. The guy just hints at the fact that interest rates could go up without much pain and the markets sell off in a panic. The logic here is that higher interest rates are bad for stocks.

What all the weak-willed, moral relativists are forgetting is that we are currently sitting at historically low interest rate levels! The Fed could raise the Fed Funds rate almost two whole points (they tend to do things in quarters or half points) and only be at even when it comes to historic rate levels. So why the sell off if the boys move the FF rate a half point in June? Why? Fear, and weak hands.

Now is the time to be buying.....we have a long way to go once everyone wakes up and realizes that we are merely at the beginning of a glorious US expansion. So go ahead sucker...sell that stock....Im waiting over here to buy it cheap and sell it back to you 20% higher when you get over your lack of rationality.

Home on the range.

I hate range bound markets. I don't like the risk/reward of trying to time a range, and when you are wrong, you wind up giving back any profits you made from calling the range correctly.

Today I decided to hang out a bit before I posted to see if anything different or significant would happen. Not a thing. Pretty much all day we bashed around the range. You know...The range between Naz 1980 and 2080? I'm a bit hard pressed to do anything until we get a confirmation of an upward or downward bias. So far I don't know anyone who has been able to call this correctly.

Which leads me to interest rates. Some would say that the reason we have a range bound market is because no one is sure what the impact of higher interest rates will have on the market. This is the key reason why I'm buying dips and special situations right now. Everyone knows the answer is that rate movement under 3 points on the Fed Number only gets us back to normal rates! This is a fact historically, and we have no reason to believe that this will not occur now.

Therefore we need to be buying. Once everyone wakes up and realizes that we can own stocks as the Fed tightens we will go higher. Lower would be an insult to anyone's sense of historical relevance or accuracy.

On Vacation

Hello Readers!

Im on vacation this week and consequently will not be posting about the market. Please return here next Monday for more continued market commentary.

Still short..But for how long?

I'm still hanging on to my QQQ short into earnings. We had a nasty downturn last night post market. Alcoa, the first of the Dow components to report, reported a good quarter but said that they would not see the big jump in earnings (due to hyper-increased demand for aluminum) until Q2. This got the grumpy traders upset and they sold it off in the aftermarket. That will most definitely overhang the market today and we will probably go lower.

Good! I need to cram more dollars in, but it is important to note what is going on here. WHEN IS THE LAST TIME ANYONE WAS THIS CONCERNED WITH ALCOA!!?? I remember a time when Cisco would garner earnings attention, or perhaps Intel, but Alcoa? I think some folks want Alcoa to start swinging like a high beta tech name, and that just aint gonna happen folks. A 64 cent move in Alcoa is a big move for that stock. But what do I know? I own it a point and a half higher......

I believe earnings will ultimately post a great quarter. There will be more winners than losers, but make no mistake, you have to not only pick the winners, but do it at the right time due to the range bound nature of the market here. Right now I'm liking EMC for earnings. Guys like me have been buying this stock for weeks now and taking huge amounts of pain with no upside reward. If they post a great number, then I feel like the vacuum that has been created by the downside pressure will fill and we will go higher. I'm going to try to buy more under 13.

The Media is Frequently Wrong...

Hey I think it is important to note that as someone who follows markets closely, I see huge errors occurring in the media outlets who report business news. More on that in a moment......

Those of you who got last night's dispatch know that I nailed this downward turn on the nose. That, by the way, was luck with a little bit of "feel". Either way, we aren't done going down. I think we will see pressure well into earnings season. Where the market will drift lower, and begin the stair step that I really want to see to be a buyer of more positions higher. Since my trading discipline wont allow me to buy too far above my cost basis, chasing prices is not something I do lightly.

That said.....I feel like many of you who email me after listening to the news need to consider that the news HAS to write about something. When you listen to the radio "post market" and you hear an announcer saying things like "The Dow went lower as traders feared terrorism, and signs that the economy isn't as strong as they may have considered.". It is a subjective opinion. There is no official government or exchange office that universally tells us why the market did what it did.

What REALLY cracks me up is watching people like Tom Brokaw tell me about what happened in the market. It really helps me see throughout he hype that the major media outlets pump our way. He (or any other talking head) stands there and tells me that the economy is worse than traders thought. He does this in a very "matter of fact" way and almost assumes the posture that he seems to know something that we don't know. It kind of puts things in perspective for me when it comes to other news items. Its an act....He is trying to be Walter Cronkite even if he has to insert things that will intentionally scare you into listening. Folks we have a con-artist come into our living rooms every night and that is the evening news anchor.

Man, I hate the way the media dumb things down for Americans. They give us not credit and assume we just lap it up. I say revolt!! Make your own decisions and don't forget to put your money where you mouth is in the markets.....It is a real and legitimate way to capitalize on those who actually believe that BS the media feed them.

Gettin' on tha good foot....

Okay...That's enough. I think the market is topping here for a bit and needs a rest. We just jetted out of the mire that was a couple of weeks ago and we need to start that stair step action that got us up the number all last year. Our tell, the ten year is playing out correctly for us, but I think that this is where I get off watching the 10 year as a tell to the overall market. Feels like the fear trade has unwound enough to create momentum and it is no longer needed. Look for the 10 year to keep going though. We are hopefully, gleefully on our way to 5.

I took a short on the QQQ this afternoon and will continue doing this until we get a small correction. I anticipate that we will see some shake-outs near term and starting to build a short position here doesn't look too dangerous. For maybe 2.5 to 3 percent. Also bailed out of BP today after getting a 10% gain in a week on it. I actually bought it for the dividend, but given that, how can you ignore 10%? I feel a bit bad about it.....Mostly since I feel unfulfilled when I don't work a position to it's limits. But you gotta stay true to your own trading rules.

Jobs Number Confirms Thesis

308,000 new jobs.....Ill bet Bush has collapsed with joy. Not to mention the fact that he is now NOT going to create 0 net jobs during his term....

What a huge number this is. It tells me that our preserverance and attention to our vision has paid off and we are indeed on the track I outlined in earlier posts. This big of a number also implies that the last two horrible, stink-o numbers were indeed wrong. We even have 100,000 plus revisions of those numbers as well. Needless to say this drastically changes the bear thesis, dramatically hurts the Democrats chances of winning the election, and rewards those of us who had to sit and take the ridicule that we were dreaming about the growth going on in the economy.

10 Year to 4.5 by Year End....5 by mid 2005
Fed Raise of 3/4 point to a full point by year Year End
Stair step pattern in the Dow to 11,000 by year end.

Even a bad jobs number isn't going to shake this level of growth next month. Onward and Upward from here folks! Look at the markets today, they are not even over-reacting to the number. Nice and orderly, but moving higher. Watch for a huge short squeeze on the open. So much of a squeeze that Ill bet we squeeze all the way up to higher triggers and then go even higher!

Keepin' it real.

Ya know...I used to feel like that phrase "Keep it Real" was just a phrase that the MTV crowd was sporting this week. However I'm finding that more and more I am applying it to my trading stance.

"All the numbers are good but the job number!"
Keep it real. The evidence adds up!

"Inflation is going to consume any opportunities in the market"
Keep it real. Nothing is that absolute.

"Iraq is a quagmire and we will never recover!"
Keep it real. A US footprint in the Middle East while we are in the middle of a war on terror is appropriate and expected for security.

Every time you turn on the news and listen to the news...Keep it real and ask yourself one question. Tomorrow, will the story I'm listening to right now affect my life in any way, to any appreciable degree. Usually the answer is no. It is just the networks filling the news cycle. The markets are impacted by emotion but driven by speculation and analysis. Panic creates buying opportunities and nothing else.

So tomorrow. When everyone is over-reacting to the jobs number (up or down) remember to keep it real as to how it impacts your investments.

Is the jobs number really that bad or important when we have an evolving economy, and one of the best employment levels overall? Keep it real!

Where is this market going?

Well that was an interesting trading day. First it is down, stays down, and then as if on cue we start to get buying into the afternoon. Put buyers stepped in and really hammered any progress we had made but the filp flop really says something to me. Fear still exists in large buckets, and is actively hedging. That is a good thing since we need fear to continue going higher. It just makes the market look unstable to flush out the weak.

Look at our tell...The ten year is at 3.83 off from 3.88. These are small moves but they reflect the level of hedging going into this almighty number on Friday. God. I loathe this job number. Any way you look at it there is so much built into it that whatever it is, we are going to get a violent lurch when it comes out. We will either rinse out every short on our way to Dow 11,000 or test the lows once again. I cant say I know which way it will go, but I sure hope it doesn't stink. The lows are a very painful place to be.

Jobs....the real deal....

This morning I turned on CNBC and I heard Altman (one of Kerry's Campaign Advisors) talking about how "This president will be the first president to create 0 net jobs" (paraphrase).....The host asked the question..."What could President Bush have done that he didn't do to avert this?".....All we got was a repeat of how this President is poor on jobs....Then Mr. Altman decided to tell the viewers (most of which we can all agree are Business people) that "he is a business man, and he knows that this President is bad for business" (paraphrase). As if to suggest that we all just don't get it and that he is here to tell us. Thanks for the lesson in spin Mr. Altman, but there is a certain part of the populace who don't need the Democrats telling us what we should be looking at.

Here is how I'm trading the jobs situation. It is much better than the government numbers are reflecting. The numbers don't reflect self-employed (of which we have the largest number ever), they don't reflect partnerships (as the ones I run), and they don't reflect the true business hiring climate. Yes. Business is cautious on CapEx (thank you Mr. Altman), however that's just good business. The macro economics of the situation don't reflect the jobs numbers we are getting. More houses sold, better consumer confidence than expected, better personal earnings (but we still suck at saving) all say to me that consumers are making money "somewhere".....Probably somewhere that is not counted by the jobs number.

Markets opening lower, but if yesterday set up what I think it set up, we should see some institutional buying at the end of the day. I'm looking for the NDX to test support. If we break that all bets are off.

Volatility

Everyone is calling for high volatility as we go into the end of the month (more importantly end of the quarter). I guess I subscribe to this. Although merely predicting volatility is like saying...."It aint going to be boring.".

Where are we going when it comes to price? That's a much harder question. Our tell has stalled at 3.87 on the 10 year. This seems to suggest that the market will lack upside momentum today unless the late day traders get involved. The common wisdom is that large institutional traders run the last hours of the trading day. Given that these hours have been weak throughout this latest run, I think we may get a vacuum and see some significant selling today.

I view this as good. Right now I'm trying to game my way into PWI for the 12% yield it is sporting. Although yesterday the suckers came in and bought it up to 20 from 18.75 after some dope on Fox recommended it. I'm patiently waiting for some weak hands to dump it back to the low 19s. Then I'm going to load up for my fixed income PF.

Other than that, I'm on hold, hoping for a downdraft. I really need to cram some more dollars into this market because overall I feel we are going higher. Whether we play this volatility will be largely a function of whether the PF gives up some 15% or north gains.

The Art of Filtering

Great up day on the averages. This run is starting to make the pain of the last few weeks disappear very quickly. It has been my experience that ANYTHING that dulls the pain that fast is going to make you pay one way or another. I just don't feel like it is "up up up" from here. Which is the subject of this piece.

Filtering......I think if you brought the word up 20 years ago, people would think you were talking about a Mr. Coffee machine. In this case it means what you take and what you throw away from the information cycle broadcast to us daily. I think that to be successful in today's economy, you have to master the art of filtering information. For me, filtering the constant onslaught of "message" "spin" and "hype" that invade our very being 24 hours a day starts with a few guiding precepts. What do I stand for? What do I believe is reality? What REALLY makes money in America today? My precepts begin by answering basic questions. For the art of filtering requires that simplicity win over complexity.

Why basic? Why am I not looking for the riddle mixed up in an enigma? Think about he great frauds perpetrated upon the American public over the years? Think of how some were able to manipulate the masses. Think about it all and underneath the scheme you will find simple slights of hand. Not grandiose schemes. "Why steal a million dollars when you can steal one dollar from a million people easier."

Mix this fact with the idea that those who would want to influence the public would use the same approach and you can easily filter out 90% of the din. Those who can see clearly, those who can wipe away the grime and excess of the spin will see the way to succeed. In the markets and in life as we know it in the post 90s bubble.

Moving higher into mid-day.

Ten year at 3.90.
GE is up for the third day straight.
Commodity, and industrials all broadly higher.
Dow up 121.55

I feel vindicated. Last week I wrote about the idiocy of the panic selling. I had to exercise an extreme amount of strength as analyst after analyst bemoaned the fall of our grand capitalist system. While this type of panic buying is also not good for the markets, I suspect it is really more gap filling than panic buying. A vacuum of money coming in to fill the void that the weak hands created.

Action like this validates the painful value strategy that I've adopted. You have to buy when things are going down, but once they turn, you are so glad you did. The TRIN is rapidly approaching 0 (31) so I expect that this buying is going to give way to some selling soon. Danger in situations like this is that we go too far too fast and get a mini blowoff top. The buying has gotten more orderly as the morning has progressed, so I don't see a big risk of a blow off right now.

The finish is going to really tell if we are entering a new upward phase. If we close strong, watch for us to get overheated going into the jobs number Friday. Id want to consider putting on some index shorts if things get too out of hand.

For now, I'm just enjoying the ride.

Everything concludes with the jobs number....

I'm looking at this week as a "capped" week. The March employment report comes out on Friday, and that has been such a market mover, everything done this week will be in anticipation of that number. Economists (who are always wrong) are looking for job creation of 100,000 new jobs. The current trend of thinking is that for this number to be moving in a good direction we must create and sustain 100,000 jobs a month for three months. To date this number has been very bad and has been shaking both the markets and the fear bid in bonds.

This morning we are looking at a strong open. Our tell, the 10 year, is now standing at 3.87 (up another 3 bp over the weekend). This suggest that there is going to be fresh money on the open which should squeeze the shorts out of their interim positions and bring us higher. Will we gap? I feel like a small gap down is in order for traders. I'm still holding more cash than I would want at the start of what seems to be at least a bounce, and at best a resumption of the bull trend.

Tells tell the tale.....

So, we had another up day on Wall Street....Except for the close, where the bears sold us down to about even at the close. At one point, we were up 35 points on the Dow. Respectable, considering the 170 point day we had the day before....

Most importantly I think my tell is really on the money. The 10 year yield has backed up to 3.83 (which is a big move for the ten year lately), and is approaching "pre-February employment number" levels. Now, some would say that this is just a normal reaction to the upcoming March jobs number and that the action is not market related.

My retort to that is that correcting and basing action like that is usually more abrupt and any good govvie trader is going to wait next week to get the income numbers before they start trying to pin the yield anywhere. I believe this is the crawl towards 4 that will release the dollars back to the stock market and drive us higher. So far, the tell is moving in conjunction with the market in similar steps, Ill keep watching. However if we get to 4 before the jobs number, I'm going to take a short hedge in case the jobs number stinks it up. Please don't stink it up jobs number, please don't stink up the room.

Have a great weekend! More commentary on Monday....Is this thing on? If you read this blog and are finding the information useful, please email me at gerryl@ethigent.com Id be very interested to hear your views.

Watching tells, not doing anything...

That's about the sum of it for this morning. I'm a longer player than a short term day trader. I made my bets on this market on the way down and even caught what could have been the bottom on Wednesday by buying some good value. Right now the game is in play for me and I've locked and loaded. I'm hoping for a bit of a selloff so I can get some of the sacrificial funds from yesterday into the market.

However something is nagging at me that we are going to have another up day. Which will make me wonder where the money is coming from. Perhaps our tell is actually telling us something. The yeild on the 10 year has come up two basis points from last night to 3.76.....a small move, but perhaps an indicator that our tell on the 10 year is a relevant one.

Careful out there today. Fear is still all over this market like a wet blanket. Rumors, weekend flattening of accounts, and other factors could swag us lower quickly. Im hoping for low, but not lower than earlier so we can establish a stair step that gives a market legs.

Not worth the tape it's printed on.....

.....nope, not one bit. Stocks get pounded for weeks and the bounce that everyone said was going to happen after every "down over a hundo" day..... Finally happened. Is it a dead cat? I really hope it isn't because this is some powerful steam....But the weathered and beaten side of me just has to stand in disbelief.

So I trimmed. I had some nice points in my FDC position, and I took a 1/4 off the table. I know....Not the right thing to do from a positioning standpoint, but I'm superstitious and needed to sacrifice to the "sell it and it goes up" god. And guess what? FDC went down and everyone else went up! So I scored twice. Nice god, that "sell it and it goes down" god.

Why do I know it is going to go back down again? Well one of our tells is still not where it needs to be. The 10 year yield is still a paltry 3.74, and part of my thesis is that for the markets to advance, that fear trade has to unwind. So far.....Many are still firmly shaking in their boots.......And not doing anything. I know, this is not the greatest tell in the world but I feel like it is relevant since fear is what sent the markets to these levels in the first place. The high price of bonds is indicative of that fear. I think ultimately, the great company earnings we are about to hear about will weaken the fear position, and beg these dollars to come participate in an economic expansion once again.

Beware the head fake....

Im still not convinced. At midday we are up huge on the Dow, Naz, and the S&P. It sure is nice to see the breadth and the bounce, but I think this is a head fake. There is ONE thing that can get me to believe this rally. The virtuous cycle.

One of the reasons that I've decided to be a student of market psychology is that many times it feeds it's own momentum by setting up a virtuous cycle. This is the idea that if enough stocks show signs of life, if enough economic indicators show positive movement, heck even if enough best friends get together at BBQs and say "Im buying stock", that the market will follow suit regardless of technical indicators. Moves like today can either set fire to a virtuous cycle, or head fake you into oblivion.

At midday I trimmed some profits as sacrifice to the trading gods, who rewarded me and took my PF higher. Im waiting for a gap down to occur as a result of this bounce. If we don't test the lows of last week, but set up for a higher low, then Ill put some more dollars to work. Currently looking at doing some more DD (for the nice Divi and the contrarian oil play), more UVN, and perhaps even some more EL if we get a gap down.

Careful and steady....

A change in the tide? I think not...

Futures are higher this morning off some good economic numbers and a better than expected jobless claims number. Although the futures were good going into the numbers and didn't really fluxuate as they came out. I feel like this just a bounce and we will return to the nastiness either this afternoon or tomorrow. We still have to scare the crap out of more people before we go higher. This is a correction that will require a very high pain tolerance.....Im mentally and fiscally prepared....Are you?

Although I really hope IM wrong, the pain of watching big gains evaporate for the sake of averaging down to cram more dollars in is immense. It affects your whole spin on life and seems to somehow affect your unrelated fortunes as well. Don't ask me how market movement up can affect the sales we are closing at ReadyTechs but it seems to be a 1 to 1 relationship right now. Strange.....

The Un-Market....

So is this how we have to wait out this dismal period? Relentlessly bouncing between positive and negative territory on all the averages? I actually thought we were going to see a bounce today around 1PM, but it just fizzled like everything else. This really is not a market that ANYONE (long or short) can build wealth in....It is...The un-market.

One bright spot is that there are a lot of traders out there talking about a bottom for the NASDAQ. In all fairness, the Nazty has been selling off for much longer than the broader markets and it really SHOULD be the one to get bottomed first. However the last correction we had (early fall if memory serves), the same setup occurred only to find the NAZ lag everything else (first in, last out). Will it be different this time. Mmmmm....not so fast.

The post bell Micron call was downright mediocre. Not boding well for strength in chips tomorrow. Many people use stocks like Micron as a tell for overall PC demand. Im not too concerned with it for the fund. Our strategy doesn't need tech at all for recovery. We (Ethigent) need strong cyclical demand and a healthy interest in core materials. All the things that a recovery should get us and a bit more. Just to be safe though, I've got some Qs and a pretty hefty telecom bet going on in Nortel (exceptionally painful right now). Nevertheless, I feel like our ability to supply China with raw materials is what will swing the undercurrent in the market and our economy. If this thesis is true, we will see a gradual rise in prices from the DD, PD, and ALs of the world......ultimately this type of growth should END in Tech....not begin with it. This would mean that the Naz bottom is a head fake and that we are still stair stepping in the same type of core mix of businesses. If Im right, we will see the Dow turn back first in a nice solid pattern up.

Speculation indeed. But I need something to keep me from hitting the sell button all day long.....Don't I ?

Life in a vacuum

Interesting things Im reading about news, the absence of news, and how that relates to the Terrorist threat in the Markets. It seems that many traders are saying that the market has "priced in" the Terrorist Threat. In other words, because we didn't have any major economic or company news last week and again this week, the market was able to grind it's fears about terrorism into the market averages.

This essentially sets up an upside bias since if we get better news, Terror fears will not impact prices anymore. It is strange how the market reacts to things like Terrorism. It attempts to price itself as if we are going to have bombs going off all over the place that the hope of eliminating terror is non-existent. I have so much to learn about market psychology. It is so raw and unemotional, that you find yourself doing foolish trades and things just to counteract the stark contrast of it all.

More staring into the void.....Pre-Market

One of the nice things about a market that is down big and staying down is that you get the opportunity to do homework a little more dilligently. Today Im considering getting into Univision (UVN). Why? Because this network is actually "growing" in the face of the slump in traditional network viewership. Gotta wake up and smell the coffee here. The Latino market is a great place to be when it comes to sheer volume. So this morning, Ill be looking to get a nice price on an opening position, and would like to take this one up to a full load if we get some more market chop over the coming days. I think Ill be happy Im on board here once we start turning north, the price, at 32.50 pretty much erases the last 52 weeks of value that UVN ran up.

Otherwise, I think we will gap the open down and make another run at a solid day (but this time hold it). The ten year (our new tell) actually caught a small bid this morning running the yield down below 7.70. With bonds so range bound I dont expect much today. Ill be looking for the normal NDX breakouts as well just in case.

Whipsawed...while sitting and waiting.

The markets just dont want to go up. We spent the day trying to make a good showing to no avail. When all was said and done, we ended up almost even (after having gone up almost 70 points on the Dow). We need a catalyst.....but this needs to be more than the average catalyst. We need a good jobs number (even if it is shaky), we need the Fed to do or say something foolish (or at least radical), or, and this would be the best, we need "knock the cover off the ball" earnings reports. Thats what will move this market higher. Without a catalyst, we sit and wait for news....it could be good, or it could be bad.....but it has to be big.

So we sit and wait, watching the TRIN (which at one point yesterday was above 3, the sign of absolute oversold panic), and patiently waiting for the VIX to show us that the market is ready to be bought. I feel like Im watching a condemned man waiting for a last minute reprieve from the governor.

....and then the fighting takes over.....

Ahh me....let me set the stage.

I start this journal at a very low period in the markets. We have undergone weeks of pounding in the Nazty, and the Dow just fell prey to the selling a week ago. Yesterday, all the US markets sold off horribly in a death spiral that made everyone run for the hills. This morning we sit at levels that are moderately better, but one cant escape the stench of pain in the air, and the mood that we are in for far more flogging before we can declare a bottom.

The Tell? Low interest rates. Or rather, absence of higher interest rates. It is truly the weight around the market's neck.

The one market sage that I can say that I follow in a religious sort of way is Jim Cramer. This morning Jim started to use Interest rates as a tell for the market bottom. His article merely suggested that this could be a good tell, however I believe that this is much more significant a tell for the moment we are experiencing in the markets today. Once bonds back off (bonds, for the uninformed, have been on a tear in price for the last six months, which means low yields), and yields come up significantly (like to 4 or slightly higher on the 10 year) we will be able to say that the market is making a positive turn north.

This will say to me that the "fear bid" currently existing in the bond market is unwinding, and that the markets will be a recipient of the dollars. "Why take 4 when you can do 8 in a rising market". This ultimately will end once bonds back up to 4.5-5 on the 10 year because at that point, the market will not be as attractive on a risk/reward basis.

Let me also say something about this "fear bid" that I keep seeing. The fact that this market can be ignoring some of the outstanding growth we have been seeing from American public companies, real hard data that is completely ignored in favor of speculating what a Socialist Europe (which it is and always has been) means for our markets is absolutely insane. How can we fear terrorism to the level that rational data collection and analysis goes by the wayside? I will always side with cold hard facts in the face of an ever falling, fear encrusted market. That is the beauty of the market. You don't have to sit there and complain, you can put your money where your mouth is and step up behind your beliefs. My money is on the reality of an expanding market, not the fear of things that are at the worst hyped beyond recognition, and at best representative of a small minority. Lets not forget that the backdrop of Democratic fear stumping, combined with terror threats provide a layered fear landscape that takes twice as long to work it's way through the news cycle.

Strong hands folks...Strong hands indeed.

Welcome to the Ethi-Letter!

This Blog is here primarily as a way to track my thoughts about the state of the economy, the markets,
interest rates, and business in general. As a trader, it is helpful to be able to keep a record of your thoughts to ensure that you are being true to your original investment objectives. Therefore this Blog is first and foremost for me, as a tool. Some of you have expressed an interest in hearing about what I am doing in the markets, so I decided to make this journal public.

First, a bit about me:

I am an entrepreneur and Internet developer with roots in Online Service Delivery dating back to the start-up of the industry. I began my career at Charles Schwab and Company where I played several critical roles in delivering Schwab's online investing products: StreetSmart and The Equalizer. These products were the first of their kind in the investment industry and were a precursor to Schwab's eventual success on the Internet.

Following my accomplishments at Schwab, I formed G.Triad Development Corporation in 1995. Under my leadership, and with no funding or investment beyond my personal time, G.Triad became the Internet development services firm of choice for enterprise and "dot-coms" alike. G.Triad delivered some of the largest and most comprehensive Web applications in operation today, including such revolutionary projects as SmartMoney.com, Simon and Schuster's SimonSays.com, ToysRUs.com, Dow Jones University (an online distance learning application), and several award winning Intranet applications. Under my direction, the company grew from a modest 10 person technology company to a 300 person, multi-national IT consulting company; and in 1999, I led the acquisition of G.Triad by Computer Horizons Corporation.

I am a graduate of Seton Hall University in South Orange NJ. I have served on numerous technical boards of advisory for startup organizations ranging from CRM related enterprise software to network optimization and management, and actively mentor startup companies in my home state of New Jersey. I have been an active supporter of eGovernment initiatives around the country, and frequently gives my time to municipalities interested in bringing local government to the internet.

For the past two years, I have managed a private hedge fund and achieved an average yearly compounded return of 22%. I am also the current CEO of ReadyTechs LLC at http://www.readytechs.com/.