Posts Tagged 'NIHD'

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.

Am I Bearish – Part II: Very Much Not – For Now

As I detailed in my post from 10/21, the resolution to the European sovereign debt crisis has played out according to what I had anticipated.  Merkel had sufficiently lowered expectations to allow for a plan the market would embrace.  U.S. corporate earnings are benefiting from the same mechanism: beating lowered expectations.  With bearishness so high, as expressed in cash not just sentiment, the market was spring coiled for a pretty strong move higher.   I had raised the prospect of a knee jerk sell on the news, always need an “out,” but that was not my high probability case and I did say I would have added on that momentary decline.  I dont’ expect same reaction in US markets as we had in Europe.  Asia type pop is more likely today.

But that is just for today, we will go up by 10-15% from here.  How do I get to my upside: market basically flat on the year despite S&P earnings up approximately 15% this year and forecast up 13% next year.   So we’re behind by that 15%, at least.

So where are we now?  Europe is in a recession and it will deepen.   In order for the banks to get to 9% Tier 1 ratios, they will begin by pulling in credit lines, removing that portion of  their liabilities.   This will lead to a further stifling of credit. Austerity measures will further crimp spending.

But most importantly we face the overhang of the details.  But at this point there is no reason not to believe that the EU will work out sufficient details to support the plan.  Maybe Washington can take a lesson on getting a plan to the finish line from the 17 EU currency countries. Nonetheless the trend of the market is higher. I am still sticking with high quality defensive stocks for the most part: WLP, KO.   After today, junk will still be junk and quality, still quality.  NFLX still overvalued, RIMM, despite all its problems, still cheaper than NFLX.  At least they are making money during an all out assault on their business model.  Hold sold most of NIHD before release given high expectations and big run but will buy tight here, down 14%.

Am I Still Bearish? Sort of Not

I have had very light equity exposure for an extended period of time with periods of being net short to being fairly long. Fortunately, with the indices having been range bound, the opportunity cost has been insignificant. As I mentioned in a prior note being bearish is exhausting, lonely and counter to my natural optimism (although I do admit to always maintaining a healthy dose of cynicism). Imagine taking your child to see 101 Dalmatians and loudly rooting for Cruella deVille to come out on top. Your kid shrinks away to another seat on the other side of the theater while others shun you. That’s how bears are treated.

I continually second guess my investment thesis, trying to see what the other side sees. I weigh the inputs underlying my stance, marking them to market. I try to remove the bias of my position as I seek additional data that is either supportive or unsupportive of my position. And of course, there is always the fear of acting from emotion that prompts a change in thinking, a feeling that you weren’t invited to the party, of being left out. And most of all, there is that greatest fear of all, of having reversed course at absolutely the wrong time. And in full disclosure, I have not always made the turn in a very timely fashion. I did well in 2008 but hardly made any money in 2009. Although I was still ahead of the game, it still didn’t feel good missing out on a ripping bull market move.

So where am I now? I am warming up to the market. Why? Well, I have often said I have seen this movie before and it ended badly but maybe there will be a different ending to this installment because everyone else had also seen the prequel to the 2011 financial crisis. My ending has banks struggling to raise capital, some, like Dexia or perhaps Greece, going belly up, credit continuing to tighten, economies contracting – the culmination of all these fears and others I haven’t listed causing a massive wave of selling. But guess what? Merkel and Sarkozy and the more responsible members of the G-20 and EU were also around in 2008 and they have no interest in revisiting that scenario. Granted they have waited too long and the cost of delay has ratcheted up the price of a cure. Germany and France have the most to lose by not putting forth a viable solution. While expectations for a total and complete solution are still high, they have been ratcheted down enough to be attainable, or near attainable with the promise to be completely resolved in the next 3 to 6 months. Shock and awe is not in the cards and everyone knows it. But will they give us enough to put a floor under the market and cause under invested funds to chase performance? I think so.

Swimming upstream, against the tide of bullishness that is the unwavering stance by the vast majority of pundits and market participants is difficult enough but imagine the flood gates being opened and the water gushing at you as you flutter kick your portfolio like a foam kickboard. The world is awash in liquidity. It all comes down to not fighting the Fed. But the much maligned U.S. Fed has recruited a legion of Central Bankers to fight the battle: the EU, IMF and China. This is a massive liquidity push by every printing press on the planet. So for now, I am entering into surrender negotiations and further increasing my exposure further.

I am by no means becoming fully invested for I still have that evil twin whispering in my ear. The global economy is in terrible shape but what do I know that others don’t? I don’t have an edge on China – it’s a property bubble that has already begun to leak – but the Chief Communist (as opposed to Chief Economist) knows that. I think that will end ugly but they can throw enough money at it in the interim to allow the S&P to rise to 1250, a random number, while their market declines. Europe is in recession but that thinking is convention and is nothing that $1.3 trillion can’t cure.

The most alpha will likely be generated through commodities and materials – the most economically sensitive investments – but I can’t go all that way in. There is too much risk in case I am wrong. I do like the fertilizer companies for the long term and although recovering, they have been beaten worse than a Middle Eastern dictator. I still prefer the more boring fundamentally, bottoms up investments epitomized by MDRX, KO, QCOM, WLP, NIHD. My risk is in bottom fishing on HPQ and, dare I admit it, RIMM. I cut back my Euro short against the dollar but will rebuild that position again at some point.

How long the cure lasts is what keeps a lid on my exposure. At some point austerity leads to slower growth and U.S. economic policy is non-existent as Washington remains rudderless. Everyone believes China will bail out every local government, corporate and individual spectators but I don’t. After all, they are communists and not prone to providing handouts to failing billionaires or local governments who have repeatedly disobeyed central government directives. There will be some pain to teach them a lesson.

I won’t be discouraged if there is a sell on the news mentality once the EU deal is announced. And I am rooting for another delay in the announcement because that means they are still arguing – eh, negotiating. And I expect leaks from the negotiations to cause some volatility. We should continue to move higher, perhaps rally 20% before going lower, likely hitting prior lows.

Whoops, there I go again.


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