Where Are We Now

The market has had its run – and a big one at that.  Yesterday’s EU announcement was the big event bulls were waiting for and bears were dreading.  But where do we go from here?  That’s all that matters.  When the S&P has a near 4% increase in one day, on top of a double digit rise in the prior month, it’s time for a pause and some profit taking.  No one should be surprised by that.   In expectation of this give back I exited or significantly decreased my trading positions yesterday afternoon, but did not touch my core holdings.     Like the morning after hangover, the “why did I drink so much last night” question will plague many as they ask themselves why they dove into the market yesterday as it climbed higher.  Not only do they wake up with a pounding headache but they turn to the lump passed out next to them and think to themselves that he/she looked better in the bright lights of euphoria when their judgment was impaired by the toxicity of a spiking market.

My exposure is still higher than it was two weeks ago but still nowhere near fully invested although I never am completely in.  But even with that as a measure, I am what I would consider to be relatively light – roughly net long 35-40%.

For those without conviction, get out now, because the market will begin to dissect the EU solution in earnest and, more acutely, naysayers will circle around Italy, driving their rates higher and CDS spreads wider.  The volatility will continue unabated as news flow continues.  “Europe in Recession.”  “Super Committee Deadlocked; Parties Still Far Apart.”  “China Agrees to Buy EU Bonds.”  “China Declines to Participate in EU Bailout.” “European Leaders Disagreements Threaten Accord.”  “Italian and Spanish CDS Spreads Widen.” ” “France AAA Credit Downgraded.”  “Obama Has Not Been Seen in Washington for Weeks.” “Berlusconi Seen Partying with Lindsay Lohan and Porn Star Legislators Voice Their Jealousy in A No Confidence Vote.”   Expect to see them all. Yes, even the one about Berlusconi.

My primary issue with the plan announced yesterday is that there was no obvious ring fence around Spain and Italy.   There are tools that the ECB has at its disposal and will do all they can to make Italian and Spanish bonds look attractive but for those that take their cue from the credit markets, and I am usually one of those, the lack of any substantial rally in Italian and Spanish debt was a troubling sign.

So here is my conclusion:  the market is still fine.  I am not selling into the headlines but did lighten up into yesterday’s close. The markets continue to be in an overbought position.  But if the market just tracks reduced expectation for S&P earnings growth, it still has nice upside.   There is sufficient bearishness and cash to propel us higher into year end.   There will be profit taking and substantial volatility along the way as Merkel leads her colleagues through the hammering out of the details but as the biggest beneficiary of one currency, Germany still has much too much to lose if the agreement falls apart or doesn’t satisfy the markets.  My preference continues to be for defensive stocks so I capture some upside without being mortally wounded on the downside should the market collapse.

I got stopped out of some of my Euro short against the dollar but will add. Euro goes to par eventually.  I had sold most of NIHD before earnings but bought it back yesterday with an average cost near yesterday’s close.  Clearly that was a mistake but I’m sticking with it.  Less than 3X EBITDA is too cheap for this stock.   HPQ – still astonished about initial BOD approval to spin or sell PC business.  Apparently they did no prior analysis on that decision given comments from Whitman yesterday.  I’m still there but believe entire BOD should be fired.  Like KO, WLP., concerned about QCOM into EPS and high expectations.

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