Efficient or Not

Still confusing liquidity with solvency

2011-12-01T09:06:00.001-05:00

Here the Fed goes again! Flood the world with money. We will take it as it comes, who doesn't love a Santa rally? But the root cause of all ills in the financial system is solvency, no liquidity is going to eliminate it. Besides, when the market finally disciplines the bad decisions made in the past, the Fed can't trust the market anymore. Think about it for a minute, a group of unelected technocrats hiding behind a facade of "central bank independence" repeatedly postpones and disables the reckoning of market, while the riots are starting to build in the street. What bigger enemy do we need to destroy our democracy?

Who picks up the tab?

2011-11-11T09:20:00.000-05:00

Read the punch line: "He said to send the bill to a Mrs. Merkel in Berlin." Don't you love it when someone else is picking up the tab after you party?!

Have faith, will rally!

2011-11-07T15:02:00.000-05:00

More than one market participants have been heard muttering "this market wants to rally", since the crisis in Europe is not tanking the equity market today vs. two months ago. For over a week now, every day, when jitters out of Europe drops the indeices by 1-2%, some dubiously good news out of Europe invariably boost the indices back up and some more, all within the same trading session. To bolster their bullish case, they point to the supposedly low forward-PE ratio of the S&P 500 (which is more like a BS indicator), and the seasonal bias for upside (Santa rally brings everyone bonus).

Sure, if your investing time horizon is the next 2-3 months, you might catch a yearend rally, provided your stomach doesn't mind the burning feeling when volatility rears its head on a daily basis (see the chart from Deutsche Bank).

However, this is a classic example of the institutional bias of Wall Street that cheers a potential short-term gain when everyone (especially those on the sell-side) wants to bag a yearend gift from Santa. But this could be very hazardous to those who measure performance over a longer time horizon than one quarter or two. But then, how many money managers can live without tracking relative performance to benchmarks?

Recession, incoming

2011-10-25T10:15:00.000-04:00

After debating the onset of the last recession when most market pundits denied the risk back in 2007/2008, here we are again, a short three years later, staring at the noisy conflicting data. But the conclusion is undeniably clear: a recession is incoming.

October 2011 saw a powerful rally of 16% from the intraday low on Oct. 4 to the intraday high of Oct. 25, a rally powered by a blind belief that EU will figure out a way to solve its debt problems. Then came the news that EU really hasn't figured it all out until its leaders meet in 24 hours. Such nail-biting suspense, for an investor with a longer horizon than a few minutes/hours, why does one even bother to risk any capital?

Bear market rally

2011-10-14T10:27:00.000-04:00

Everybody talks about a bear market differently. My favorite explanation of how the name accurately describes the market during a bear phase is the viciousness of the bear market rally. Mind you, a bear attacks by standing up on it hind legs and viciously claw its prey to pieces and mauls them to death. That, in my view, most aptly depicts how today's market is behaving. From the early October low, the market has put on a very powerful rally. If one believes the news trickle coming out of Europe that a grand bargain is soon to be in place to end all the sovereign debt troubles, it is hard not to go along for a ride and even push the bull case that all is (almost) clear for a resumption of the recovery. The sad truth is, though, even if the debt crisis is resolved tomorrow, the growth is nowhere to be found. We have exhausted ourselves propping up the dead entities (from households to countries that overextended beyond their means), it will be a long while before we find our collective mojo again. Let's not forget, politicians are working overtime to make things worse, all around the globe. Batten down the hatches!

Under-appreciated idea from Soros

2011-10-13T15:43:00.000-04:00

If George Soros were to write his own epitaph, my guess is he would want either "philosopher" or the inventor of the philosophy of reflexivity included. His humanitarian efforts aside, Soros must wish his idea of reflexivity were not so under-appreciated. But then, how else does one make money in today's seemingly senseless market if not to exploit the inherent human traits of herding and running with the crowd and falsely feeling safe?

For the faithful followers

2011-09-24T23:25:00.000-04:00

This chart (from the resourceful Doug Short at www.dshort.com) is for those who believe in the mantra of "stocks for the long run". Wake up and smell the roses, or the corpse of broken retirement dreams!

World Markets: Selected Chart Overlays:

ECB split, loving my shorts!

2011-09-09T11:07:00.000-04:00

This just in: Infighting leads to Stark stepping down - FT.com:

Credit market has been crying uncle, equity market continues to stroll among graveyards while whistling Dixie. Time to prepare mentally for serious trouble ahead in all markets.

'via Blog this'

Time for October effect

2010-09-30T11:04:00.000-04:00

With tongue in cheek, I am pressing my shorts. The monthly effect adage is certainly just for entertainment, even though "sell in May" worked this year. The vacation was nice, but is now over. September was a nice month for anyone who didn't short the market. Now it's September 30th, time for a change in tune and tactic.

Come think about it, if the financial markets can't be counted on to scream bloody murder during October, how do we expect change on November 2nd and thereafter the Fed's meeting to deliver QE2? I'd bet the markets will scream like babies to get what they collectively want. Then, be careful that we get what we wish for.

My new favorite site

2010-05-17T16:15:00.002-04:00

Innovation is the key to the future. Here is the latest of my favorite. Found at finviz, it creatively presents information in one glance.

Short Gold, long Euro, long Equity, all for a trade, NOW

2010-05-17T16:09:00.000-04:00

What a ride since I last posted! I thought I was losing my marbles, just when Mr. Market lost his. I jokingly told a friend from business school that I wish they'd refund my tuition at the University of Chicago for the "efficient market" crap they spoon fed us. But don't give up, Mr. Market has a way of correcting himself just when you don't think he can ever see senses again.

I've been a fan of real assets, especially when it's expressed in unforgeable precious metal such as gold. Yes, alchemy of the financial kind is not within the grasp of most mankind, except maybe the self-acclaimed George Soros. While bashing gold as the "ultimate bubble", he went long gold. Nice trade!

For the moment, however, my trade is to short gold, long euro, long equities. It sounds contrarian because it is. Not long-term, but definitely short-term. Oh me, oh my, what funny things go by!

Contagion?

2010-04-28T11:51:00.002-04:00

Do I smell contagion? First Greece, then Portugal, now Spain, every one of them is getting a deserved credit downgrade. The market has rallied ignoring (discounting) all issues related to sovereign debts the last two months. Now what? One can safely bet our beloved Fed will come out with its now familiar soothing voice delivering near zero rates for "an extended period of time". Do you still wonder why gold is going higher?

Will we get a stock market sell-off? Certainly, the big one is overdue. But with the Fed firmly maintaining its easy stance, who knows what to expect? I used to hate the defense attorneys of rape cases blaming the victims alleged "promiscuous" behavior or background (remember Koby Bryant's knees?) to bring on the assult. Now with the Fed "raping" the savers of world (retirees who rely on fixed income, prudent people that don't want to speculate etc.) with zero interest rate, forcing them to go further out on the risk spectrum, it is the perpetrator's "promiscuous" behavior that deserves the blame.

Whether or not we get a contagion-induced sell-off now, the stock market and all asset price is destined to go higher, but we will all be worse off in due course.

Misery loves company

2010-04-08T21:50:00.001-04:00

Misery surely loves company. Although, it doesn't lessen the pain one bit to have good company in turning bearish against the optimism in the equity market over the last three weeks, even when the companion is someone as luminous as Jim Rogers. He was quoted today during an interview on Bloomberg that, for the first time in over 16-18 months, he started a short position on an unnamed major stock market index during the past two weeks (the interviewer was too sheepish not to probe whether it was the S&P 500 but wanted to know what gold would do in a month, she is obviously not the best Bloomberg has). Jim Chanos was also quoted today telling Charlie Rose that China was on a "treadmill to hell" with its property bubble. If China stumbles over the 12-18 months, the world recovery will be a horror show to watch.

The Money Illusion

2010-04-06T17:26:00.000-04:00

The voice of caution is not welcome in the market today. The Fed is on a mission to reflate the economy. Nothing is allowed to stand in its way. Currently, FOMC is more concerned about one half of its mission, the half that Congress loves to grill the Fed Chairman about and in the process putting on a lively show to advance their own political agenda. Until employment turns, the Fed will not change its tune. That translates into a guarantee of cheap money for an "extended period". How can one fault the market for loving the Fed's music, like a cobra dancing to the sound of the flute. But then, who is asking the question of the "The Money Illusion".

The audacity of hope/hype

2010-04-01T14:02:00.006-04:00

For the past month, I felt I was growing more and more out-of-touch with reality. I've been committing the ultimate sin in investing: leaning against the wind, i.e., reducing long positions and scaling into shorts as the market gradually marched higher (surely a fitting thing for the market to do in the month of March, what else means in a name these days?). It certainly made me feel being diabolical.

I wasn't seeing the end of world during early February's market swoon. I was actually buying aggressively. But I started selling once the market took off following the jobs number famously talked down by Larry Summers using poor weather as a cover (of course, the number was better than expected, igniting the latest ramp-up in equities). With hindsight, I have been early in trimming my longs.

My problem with the latest bout of optimism certainly is not shared by many in the market. So many sell-side strategists and fund managers have been pounding the table in favor of the bullish view lately. They come from all over the places, including both fundamental types and technicians. Well, I don't disagree with them to the extent if we just want to set a target for S&P to hit 1250 or 1300. My issue with the optimistic view is that the risk-reward is not in favor of buying into the rally at this late stage. For a 5-10% upside, the risk of a 15-20% downside (even with a 50-50 odds) is simply too great for my taste.

However, there seems to be a shift in the national mood lately. Not only are we witnessing the audacity of hope, a more apt description may be that we are embracing hype. Yeah, who in their right mind believes ObamaCare will reduce federal deficits? Who buys into the view that Greece can paper over its fiscal sham? That the other PIIGS will all turn out to be fine? Oh well, maybe this foretells the fortune of this nation. When we start to take a leap of faith and discount all problems and put our trust in the government, our trouble has just begun. I keep hearing a siren song with the lyrics "Under Pelosi and Obama, bets against America are not allowed". I beg to differ, with a heavy heart and lighter wallet.

Call me diabolical, I am adding to my shorts on this up April Fool's Day! No joke!

Long Gold again, finally

2010-01-23T14:09:00.003-05:00

I closed all trading shorts on gold last Friday and went long again. Sure, gold could go to $1040, or even $1000. That means I will have to buy more when that happens. But for now, the crowd seems to be cheering the demise of the precious metal, like they cheered the rally into $1200 just a little over a month ago. Who said it's easy to be contrarian?

Going up on escalator, and going down on elevator

2009-12-04T18:16:00.004-05:00

Thanks to Goldman Sachs for upping their price target on gold yesterday. They always manage to raise the price target before the selloff (remember $200 oil?). Will they disclose their own prop desk trades on gold around the "higher" price target announcement?

This is what happens to a crowded trend-following trade. The question now is: how many floors does the elevator stop at?

I am still bullish on gold. Closed some shorts today.

Je ne regrette rien

2009-12-03T13:16:00.006-05:00

Liquidate Savers to Save the World, Part Deux

An open letter

Ben Bernanke

(A parody)

Very well, on the day of my confirmation hearing on the Senate floor, the WSJ editorial page called me the Edith Piaf of central banking. Indeed, Non, Je Ne Regrette Rien. My job as a central banker is not to worry about any particular constituency, but to live up to the Federal Reserve's dual mandate. In the past two years, the best course of action for me and my colleagues to carry out that mandate has been to liquidate savers to save the world. Most pundits don't realize that savers don't have any lobbyist working for them. Nor are they represented by any congressman or senator. Some of them might be retirees (my apologies to them). More likely, they are people who have done well in the booming years. Most likely, they are foreign nations that have accumulated large foeign exchange reserves against the US. Going after them to clean up our mess in the financial market is my strategy. Let me explain.

People, thanks to the press, remember me too well for my "helicopter" remark (hence the moniker "Helicopter Ben"). But, rather than the image of helicopter dropping dollar bills over this nation, the one intellectual concept I am truly proud of myself for coining is "the global savings glut". Too bad, the press (other than the WSJ) fails to understand the significance of this concept. To understand modern finance and central banking, you need to understand the paradox of thrift. It may be sensible for an individual to favor saving over spending. But one man's savings is another man's lost earnings. If we all save more, collectively as a nation, our economy can't achieve its potential for full employment and our living standards go down (just look at Japan and where it has got with its high savings rate). Read slowly and digest every word I write, thanks to the Fed, Americans have found the holy grail of wealth creation. Contrary to what most people only follow (again, thanks to the press, think Lou Dobbs), i.e., the outsourcing of American manufacturing jobs, we have outsourced savings and concentrated on borrowing and spending for our own prosperity. This is a very important point, so allow me to elaborate further.

The Chinese (for whatever innate propensity to save due to their cultural background, plus the Japanese and the Korean, etc.) have chosen to save for their future. They have invested their savings in creating massive manufacturing capacity. Naturally, as a nation, we have picked up the baton to consume. Without Americans being the consumer of the last resort, the Chinese can't find a sizable market to export whatever they manufacture. The workers there will be out of a job, and revolution might ensue. By consuming, American citizens are not only living the American Dream, we are actually promoting peace in the world. Naturally, one would ask, how do we pay the Chinese for everything we buy? Even though we export to the Chinese (think hamburgers and Hollywood productions, plus frequently bootlegged software and intellectual properties we don't get paid for), we often come up short. That's where the Federal Reserve comes in. As the world's most important reserve currency issuer, I have a magic machine at work. That is the printing press of the United States. We keep printing dollar bills and send it to the Chinese, the Japanese, the Korean, the Middle East oil exporters, and whoever wants to take dollar as payment. Bear in mind, when other nations earn more than they can spend, they have to save. In what form do they save? Dollar bills! If you read the fine prints on your dollar bills, you will know it is the "legal tender for all debts, public and private". To make it sound sincere, we have also added the wording "In God We Trust". There was a time when people can tender the dollar bills for gold. President Nixon smartly reneged on the promise of exchanging gold for paper we print, and the world has accepted it for the past thirty-plus years.

As long as I keep the printing press fired up, the world is going to have a "savings glut". The "global savings glut" is going to keep the interest rates low. Yield-hungry investors will keep reaching for a few more basis points and finance economic activities. Everybody can live happily for some time. Clearly, this is unsustainable. I have tried to point out for the Chinese to save less and spend more. They politely declined to follow my advice. That means they are determined to keep the US as the target market of their exports.

In the aftermath of the credit crisis, people have been searching for the mastermind of such a disaster. Some has unfairly blamed the Fed, our former Chairman Greenspan and myself. A certain congressman from Texas even introduced a bill to start auditing the Fed's decision making process. I would like to remind them to look to the East for an answer. It is the "global savings glut" that caused the massive risk-taking in the financial markets, not the Fed's policy to keep interest rates excessively low. To deal with the crisis, we have introduced ZIRP (zero interest rate policy). Guess what, ZIRP is specifically designed to get to the root of the problems. We are going after the savers of the world. Following the 1929 crash, Andrew Mellon, then treasury secretary, famously said: "liquidate labour, liquidate stocks, liquidate the farmers, and liquidate real estate... It will purge the rottenness out of the system." I would like to be remembered by future generations as the one who said: "liquidate the savers."

In today's America, the savers are predominantly people who are already rich. Have you followed the confirmation hearing of Sonia Sotomayor, President Obama's nominee for the Supreme Court? She represents the new America. Her financial disclosure shows that despite having served as a federal court judge for years and being handsomely compensated, she has no savings under her name. In the new America President Obama wants to lead us to, nobody should have to save. If they have any needs, the federal government will provide. Healthcare, education, you name it. The president has indicated he will raise taxes on the rich. Supply-side conservatives argue that higher taxes will lead to lower growth and higher unemployment. In an environment with constant money supply, I might agree. But as I have indicated so many times, under my leadership, the Fed will keep the printing press running around the clock. In the end, only the savers will be liquidated. That refers to the Chinese. If you are a patriotic American, don't save. If you have any cash lying around, buy real estate and stocks. The price will come back. The sky is the limit.

Gold - the mug's game

2009-11-30T08:42:00.002-05:00

If central bankers are such a brilliant bunch, they shouldn't have sold gold in the 300s or 400s. But they did, for over a decade. Now they are either hoarding (the Europeans didn't meet their selling quota for two years in a row) or buying gold outright (Indians, Mauritiusians, Sri Lankans, what a smart collection!), I am getting uncomfortable with my long gold position. Having never enjoyed walking or running in the company of crowd (or I would have attended the annual Pomplona bull run), I think now is the time to play the mug's game -- fully hedge the long position with a small short bias. I know, I know, this trade may be too cute to execute profitably. But nothing goes up in a straight line without a pause. Not even gold, I bet.

Stock Market Confidence Indexes

2009-11-18T16:44:00.005-05:00

Aside from die-hard 401(k) plan participants who didn't change their asset allocation choices following last two years' drubbing (believe me, that was a hard thing to convince my mother-in-law to do), most individual investors didn't participate in the 60%-plus rally since March 2009. Historically, the retail investors usually make the wrong move in stock market at the exact wrong time when they make the move, either shifting into or out of equities/fixed income or any assets you can name. If you believe mass behavior is hard to change, here's something worth watching: Yale School of Management Stock Market Confidence Indexes.

This particular index prepared by the International Center for Finance at the Yale School of Management tracks the confidence level among institutional and individual investors about the stock market's ability to go up in the year ahead.

In the last couple of months, interestingly, individual investors started to feel more confident that the stock market will continue to go higher while institutional investors became less confident. It's worth pointing out that at the trough in March 2009, more institutional investors were confident that the stock market would go higher in the next 12 months. They have been proven right.

What this may imply is that, following a historical 60% plus rally and relentless media coverage, the retail investors (who traditionally worship at the altar of price momentum) are about to be suckered into embracing the rally. Don't forget to send Mr. Bernanke a Thank-You note when that happens.

Maybe it's time to revisit my mother-in-law's asset allocation.

Put your trust in Bernanke, really?

2009-11-17T22:24:00.004-05:00

With the benefit of hindsight, one can't help but notice how intellectually bankrupt the current Federal Reserve Chairman has been in recent history.

Reluctantly holding on to my gold position

2009-10-13T13:35:00.004-04:00

At the beginning of 2009, an investor asked me for my best investment ideas given the environment. This was back at a time when the equity market was still free falling. I told him there were two: TIPS and Gold. He was skeptical, to be polite. Gold? The barbaric relic! And TIPS, yielding nearly nothing above Treasuries. I am sure he thought I was a fool a couple months later when gold proceeded to have a technical correction down into the mid-800s.

How things have changed! Circa October 2009, equity markets around the world have rallied, relentlessly. Gold also rallied, relentlessly. Despite its impressive move 60-plus% above the March lows, S&P 500, when priced in gold, is up just 2% YTD. Gold, on the contrary, is up about 20% YTD.

Vindicated? No! I don't feel good at all about holding onto my gold, knowing it will go higher still because of the free printing of fiat money here and abroad. What troubles me is the uncertain future of the Fed policy, with one certainty that dollar debasement will continue. Coupled with the soon-to-be permanent damage done by the Obama Administration's wrong-headed (but widely lauded) policies to the American economic system as we knew, our future (and our children's future, for that matter) doesn't look rosy at all.

I'd rather take my money out of gold and put into a productive business. But there are only so many Apples and Googles around. Life in the Age of Free Money is not a title I hope to read in retirement. It is not a life to be remembered with fondness.

Old lesson for newly fashionable idea of redistribution

2009-10-05T21:59:00.001-04:00

On Communists
by Ebenezer Elliott (1781 – 1849)

What is a Communist? One who hath yearnings
For equal division of unequal earnings;
Idler or bungler, or both, he is willing
To fork out his penny and pocket your shilling

Liquidate savers to save the world - Part I

2009-09-28T09:56:00.006-04:00

Liquidate savers to save the world

An open letter

Ben Bernanke

(A parody)

There are still numerous people out there that doubt the wisdom and logic of the policy actions I have led the Federal Reserve to pursue since the onset of the financial crisis in 2007. Some have wisely recognized that we have prevented a second "Great Depression". Some even made a non-trivial fortune in the market rally since March 2009. Turning a potentially great depression into simply a bad recession may be the greatest accomplishment of my lifetime. It is a small contribution to the country I owe so much (so few recognize the Federal Reserve that I lead is the nation's real power center). Although, should the Nobel Prize Committee award me the ultimate recognition one day for my contributions to the dismal science, I would have no good reason to decline the million dollar prize. The latest financial crisis, while far from over, is on its last legs. One day, this may simply be remembered as the Financial Crisis of 2007/8, a much benign case than the alternative scenario had the Federal Reserve failed to act with great force.

I am aware that certain characteristics of the system I saved are undergoing fundamental transformation, namely, the government has replaced the private sector as the dominant actor in certain industries (e.g., housing, banking, auto for now, and healthcare soon). I hope such so-called transformation is transitory. However, should such transformation permanently alter the landscape of the American economy, I would view it as a natural progression that is commensurate with the natural evolution of our nation's political system. Honestly, people who hold no elected offices such as those of us at the Fed have always questioned how long a democracy can last without self-destruction? Frankly, this is a much delayed recognition in America of the great insight of the late Karl Marx, whose brilliant criticism of the capitalist system should have saved us from our own folly. If so, better late than never. With a timely elected charismatic President, and a fully empowered Congress, our nation is about to embark on the greatest journey yet.

I would like to use this letter to address a few issues that some market participants are still fiercely debating. Out of sheer concern for some people's financial well-being, I hope to set the record straight promptly so they may formulate suitable investment strategies that the Federal Reserve fully endorses (silently, of course). This will not only save them their hard-earned cash, but also (hopefully) channel their resources into productive use that benefit the American public. To borrow an old saying from the Chinese (whom I will specifically discuss later), when everyone pitches in the firewood, the flame will be much brighter. Let there be no doubt that the market rally we have ignited will be the greatest financial fireworks the homo sapiens will ever witness. Some poor souls will be burned in this fire, let me hope my letter ensures they are not average Americans.

The first question I would like to answer is whether this market rally is for real. The official way to state it may be whether the rise of risk assets price and the reduction in risk premium of various asset classes since March 2009 is sustainable. Personally, ever the commoner who speaks in plain English, I prefer to ask if the "green shoots" I have identified earlier this year will grow into something meaningful. To put it another way, does the Federal Reserve have the resolve to keep cheap money flowing despite its unintended consequences. My answer is an unequivocal YES. Let me explain.

The trouble we found ourselves in during 2006 and 2007 when the housing bubble (let's agree on it being a bubble with the benefit of hindsight, although one can argue if it can be identified beforehand) burst was not unprecedented in its nature but in its intensity. As a long-time student of the Great Depression, I am keenly aware of the dangers posed by deflation following the burst of asset bubbles exacerbated by tight money policy. Some, with their blind trust in markets (like the Chicago boys), would argue that the best course of action is to let the deleveraging process run its course so that resources can be reallocated from the irresponsible operators and inefficient sectors to responsible operators and efficient sectors. Their favorite statement is that the market will find its natural clearing price (translation: invariably lower price in such deleveraging process) as entities/people that have over-extended themselves are forced out of business/existence (at times through an open window of a building on Wall Street). My studies over the years have shown that it is precisely such a policy the Federal Reserve pursued following the stock market crash of 1929-1932 (the famous Andrew Mellon comes to mind: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate") that made matters worse. There is little doubt in my mind that was wrong-headed. My conclusion from my studies has always been that should conditions similar to the 1929-1932 crash reemerge, the correct policy response would be to flood the financial system with abundant liquidity (the metaphor I used years ago was "dropping money out of a helicopter" which led some pundits to dub me the "Helicopter Ben", a colorful but not entirely exaggerated moniker) so that all asset price can be reflated. People have to understand that even though asset price reflation will never be an openly stated policy goal for the Federal Reserve during and following a financial crisis, it will nonetheless be pursued by all of us on the FOMC as the ultimate goal. Let me also add, we will pursue it with the greatest force. No tool in our toolbox will be left unused.

To be continued ...

Resuming blogging

2008-05-14T21:53:00.002-04:00

During the financial crisis that accelerated since January 2008, I stopped blogging for two reasons:

1. I was too busy. The movements in the financial markets were too violent and frequent to allow much of a break.

2. I had no reason to spill the beans, as one of my professors used to say: when you have figured out a secret formula that makes you money, why would you publish it and tell the whole world?

Well, the results are in from the first four and half months of the year, and I had no reason to write about it or debate it in any shape or form. Suffice to say it was a great market environment to make money. Now that relative calm has returned before the next storm hits, I will take some time to write again.

Latest CPI and the make-believe world we live in

2008-05-14T21:41:00.002-04:00

Today's CPI numbers were better than expected, or so you were told by the government and the mindless mainstream media that reports anything the government says as truth except when it has to do with terrorism or the Iraq war.

The CPI numbers were better because gasoline prices in April had a "seasonally adjusted 2% decline", even while the compiler of such numbers (the much respected Bureau of Labor Statistics that used birth-death model to add 267,000 jobs last month) acknowledged that "Gasoline prices rose 5.6 percent in April ...".

Now that is art. To scientifically smooth out the rising gas prices you and I notice at the pump and make it contribute to a decline in inflation is akin to the creation of the magical emperor's clothes. You've heard this, even on CNBC, the question was asked where do we go to fill our tank with "seasonally adjusted gasoline".

The yield on long-end treasuries duly fell, then rose throughout the day.

Fed speak, only talk so far, time to act is NOW

2008-01-11T13:40:00.000-05:00

Fed chairman Bernanke gave clear indication yesterday that he is prepared to take "substantive" policy action to counter the threats to the US economy. Fed governor Mishkin today spoke of the readiness to act "decisively" to counter the turmoil in the market. It seems that they finally get it, that the US economy is facing increasing risk of recession.

What is puzzling is why there is just talk, not action. As is widely recognized, the housing bust and ongoing credit crisis in the financial market is starting to take a toll on the real economy. Granted, the Fed funds rate has been cut by 100 bps. If the Fed believes that is enough to forestall the risk to the economy, they should stop talking about the downside risk to the economy being "substantial", and becoming more "pronounced". Give the market time to sort it out. If they believe more policy action (i.e., rate cuts) is required to prevent or lighten a recession, they should cut the Fed funds rate now, not 3 weeks from today.

One, for sure, the Fed understands the time lag for their rate decisions to be felt in the real economy. Two, they should also understand if expectation for further rate cuts is widely held, it acts as a brake on economic activities that business and consumers would normally enter into today. Any reasonable expectation of change in the cost of borrowing in the future results in adjustments in financial calculations today. Put bluntly, the Fed's delay in a rate decision is causing everybody to postpone economic decision making that can be pushed off into the future, which in and of itself is a huge negative to the market.

To start the healing process, the time for the Fed to act is NOW.

The birth/death (of business) ratio and the jobs number

2008-01-05T17:39:00.001-05:00

Yesterday's jobs number was not good, to say the least. What most people are not aware of is that it could be really bad out there had it not been for the statistical method used by BLS. The so-called birth/death ratio tends to overestimate jobs created when the economy is at a turning point.

If we subtract the 66,000 jobs that BLS magically adds to the jobs number, we could be looking at a job loss of 48,000 in December. If that's the case, recession had started.

Herd mentality and unwillingness to give up

2007-12-20T17:05:00.000-05:00

Today, the Philadelphia Federal Reserve Bank said factory activity in the Mid-Atlantic region fell to a four-year low in December. To anyone who needs more data points that the economy is slowing, and slowing quite significantly, this is pretty solid evidence. Yet, the equity market closed higher. Numerous analysts were cited to insist that a slowdown is likely, but the risk for recession is still remote. Obviously, they drink a different brand of Kool-Aid.

This morning's jobless claims were expected to be flat or lower, yet crept up. The job market is one area that the Fed has repeatedly cited as a promising sign that the economy is still strong. Once the jobs go, the road to recession will appear very short, not windy and endless.

S&P 500 closed around 1461. Even after reluctantly giving up hope that Santa is coming to the Wall Street, the market refused to let reality sink in. It still has some catching up to do on the downside.

Don't fight the Fed, to some extent

2007-12-14T12:32:00.001-05:00

I went into Tuesday's Fed meeting with a short-term long view on the market, i.e., I believed in a continued Santa rally. It was foolish on my part to believe in what both Chairman Bernanke and vice-Chairman Kohn clearly led the market to believe: they understood how fragile the market is.

I had no quarrels with their rate decision. Actually, living a world with food and energy (not ex food and energy), I could appreciate how inflation might be a risk (yesterday's PPI and today's CPI confirmed that). What I couldn't comprehend is the amateurish way the Fed handled the rate decision and the announcement of coordination with 4 other central banks the next morning (after a deliberate leak Tuesday evening by a senior Fed official who asked not to be named). Had they made the announcement at the same time they announced the rate decision, the Santa rally might have continued.

What their inept handling of the two announcements revealed was a Fed that is behind the curve. In a credit crisis (i.e., a crisis of confidence), the Fed needed to exhibit confidence-inspiring steadiness.

My positions got whacked by the Fed, but I got the chance to short into the Wednesday morning rally, and I continue to short the market. What profit the Fed took away from me, I am going to claw it (and more) back on the downside.

The Fed blew it

2007-12-12T08:06:00.001-05:00

Until today, I kept my hopes up that the much-feared recession can be avoided. The Fed's failure to act more forcefully yestoday dashed that hope. I think the odds of a recession next year is now higher than 50%.

What the Fed seems to fail to appreciate is how severe the housing recession is (and will continue to be) and the resulting pains felt by the financial system. Individual members on the FOMC may get it. But the much-emphasized consensus-driven committee as a whole fails to reach an understanding on this and act on it.

It would be naive to sugar-coat this: the biggest housing bubble in US history is bursting. The S&P 500, even after yesterday's drop, still stands only 5% below its October all-time high. The equity market has some catching up to do, on the downside.

From American Dream to American Entitlement

2007-12-06T12:10:00.000-05:00

The bailout plan, not called a bailout of course, to be announced in more details later today by Hank Paulson and President Bush is a game changer. It is converting the much romanticized American Dream into the American Entitlement.

Coupled with next Tuesday's nearly guaranteed Fed funds rate cut, this plan may just provide enough rocket fuel for the stock market to rally before the yearend. This will also be a great time to sell before the market turns decidedly south again after this last euphoria.

A fake market rally

2007-11-23T16:47:00.000-05:00

Today saw thin trading and only half-day action. But the word "rally" crossed numerous news headlines on WSJ and CNBC. Cheer while you can, media friends, the shit will be hitting the fan again soon enough.

This summer, a partner at a big hedge fund described the credit crunch unfolding as a "shit storm". Usually, he is not a guy known for using such expressions. But I found these words to be extremely accurate at describing what's going on. Two rate cuts and a rally and a slump (some call it a 10% correction) later, the shit storm is still raging strong.

Today is Black Friday, when American consumers perform their patriotic duty of shopping. While I sit on the sideline myself, I cheer them on nonetheless to save this economy 'cause this economy really needs saving.

Another bad news

2007-11-16T10:13:00.000-05:00

The industrial output number today came in negative. The consensus estimate was for 0.1% increase. Instead, we saw a -0.5% decline.

This shows the industrial production, despite a weak dollar boosting export, is showing signs of a slowdown. Even though the sector counts for only 1/5 of the economy, it's another sign that the underlying economy is not faring well while the credit crisis continues.

Sure, we may be near the bottom of a technical correction. But the ensuing rally, as fierce as it may be, is just another chance to sell and get out of the incoming mess. Enjoy it while it lasts.

Talking down market expectation

2007-11-16T09:09:00.000-05:00

The market is pricing in a 100% chance of a 25 bp rate cut next month. Fed governor Kroszner just dumped some cold water on that expectation this morning. If more economic data come in to point at a slowing economy, the Fed may have no choice but to grant the market its Christmas wish. Until then, there will be more pain in the market.

If PIMCO's Bill Gross is correct, the fed fund rate will be cut to 3.5% before it's all over. That implies the economy is in much worse shape than the backward looking data so far indicate.

Can the biggest credit bubble in American history really burst without inflicting real pain beyond the subprime related parties?

The bad news from Starbucks

2007-11-16T08:44:00.000-05:00

The per-store traffic decline announced by Starbucks may be the first sign that consumers are finally holding back their spendings. A $3.50 Mocha is as close as it gets to be a sign of living a comfortable daily life for average American consumer in a calm and nicely humming economy. Now that may be changing.

Watch who's buying BARC shares

2007-10-25T12:21:00.000-04:00

Barclays lost the ABN AMRO bid to rival RBS, primarily due to the fall in its stock price. Despite the prevailing cloud in the financial sector, I believe now is a good time to buy Barclays shares (LSE: BARC, NYSE: BCS). I won't go into my analysis too far for the sake of time, let's just say it offers a nice dividend yield without obvious cause for dividend cut. If an investor hasn't heard of Barclays' iShares ETFs, he needs to catch up on the ETF train. That is but one business Barclays has a serious critical mass, though Vanguard is trying to grab more shares with its less costly imitators.

Watch what Barclays is doing to its shares. So far in October, it has purchased 79 mln shares under its share buyback program and continues to buy. Enough said.

CMI down and more to fall

2007-10-25T11:40:00.001-04:00

I can't be gloating here. Shorting CMI this year has been my toughest trade. To make money shorting one of the best performing (previously, now) S&P 500 stocks was insane. The crazy belief in this industrial company's ability to not go wrong was unbelievable. Last week, its peer CAT gave the market the scare. Today, CMI also disappointed the Street. This will get uglier, still.

What a ride! Another cut likely

2007-10-19T11:52:00.000-04:00

Whew! What a ride it has been since the last time I allowed myself time to write a posting. While I was on vacation in Jackson Hole, the market hit bottom. Then the Fed held a big gathering in Jackson Hole, haha. I don't think they were following my footsteps. But short dollar I did, and long yen at the same time. The surprise 50 bp rate cut on 9/18 just validated that trade.

It appears that another rate cut is on the table for Halloween. The credit market has not fully recovered. The hidden corpses have been buried to some extent in the big writedowns the major financials took this quarter. But more stinking smell continues to spoil everybody's mood. Housing continues its decline (who was predicting a bottom earlier this year?) While there are few signals, but there is an under-appreciated fact that the Fed is in the insurance business -- it is trying its best to insure the economy against a prolonged recession. (Read the commentary by Harvey Rosenblum of the Dallas Fed in the WSJ yesterday, you will see.) To apply that logic, and bear in mind that all rate cuts take a few quarters to trickle through the system to affect the real economy, a rate cut on 10/31 is highly likely.

Despite the selloff today (or you can count the last five days), one would be wise not to short the market and long dollar today.

Tough time for everyone

2007-08-09T18:47:00.000-04:00

Writing in abstract about my thoughts on the market has been a good therapy. While my education (apologies to my Chicago GSB professors, particularly Eugene Fama) taught me that the market is pretty darn efficient, the occasional instances in real life and market taught me that it is foolish to put faith in the market efficiency as if it were religion.

Just yesterday, the pundits were predicting that the market would be setting new highs soon, that the current credit correction is short-lived. Though I added to my positions against this line of thinking, I had to temper my risk management to allow myself the luxury of being wrong without being wiped out completely. Over night, another shoe (BNP Paribas) dropped. I have the sick feeling that this is not the last shoe to drop, despite being sweetly rewarded for calling last two days' rally for what it is -- a dead cat bounce.

Goldman Sachs simply cannot shake off the rumors about its inhouse hedge funds. Having just recommended risk-takers buying into the dip last week, while I still like the firm, I was glad to have the opportunity to sell into yesterday's rally. When it drops further, I would be buying again.

The party pooper comes out swinging

2007-08-08T18:20:00.000-04:00

Last Friday, it was S&P's move to revise Bear Sterns' outlook from "stable" to "negative" that spoiled the party. After Bear failed to convince investors that it was in good shape, the market sold off dramatically. S&P doesn't want to be remembered as the party pooper. In less than a week, it has come out publicly in support of the top five investment banks. Its analyst even claimed that the current credit crunch will be "short-lived". Nice!

If one believes that we have just witnessed the worst housing bubble in the US losing air (by all means, not yet fully pricked), and globally, we had the biggest credit bubble in a generation, it is far too premature to celebrate the credit correction to be short-lived. While the risk appetite seems to be back in the past two and half days, only a fool will believe a massive credit risk repricing won't sip into the equity market, that no serious dislocation will occur despite the pains in some corners of the credit market. Buckle up for a heck of a ride. I am not referring to just volatility.

Forget the experts

2007-08-01T11:47:00.000-04:00

If you listen to the experts interviewed on CNBC, you need to shed your holdings in financials (banks, broker/dealers) and hide out the current turmoil in industrials. Heed their advice at your own peril!

Now is the time to buy diversified financials (i.e., Citi, Goldman Sachs). It is even time to buy Blackstone (currently selling at $23.71, 23.5% below IPO), the much-hated PE shop if you listen to John Edwards. When do investors with less than $3 billion to invest in Blackstone get a better deal than the one that does (read Chinese government)? In times of trouble! Better yet, the Chinese sovereign fund can't double down like you can. So it's all yours to pick over, if you have courage. (If you don't, you should never invest in individual stocks. Buy an index fund or treasury bonds, instead.) Companies like BX and GS will come out of this credit crunch just fine.

You ain't seen nothing yet

2007-07-31T22:51:00.001-04:00

The rally this morning was a nice opportunity to build more short positions. For those who wish and hope the trouble in the credit market is over or not spreading outside subprime, there is that old saying: You ain't seen nothing yet!

I was wrong last week to believe more sense was present in the market. Wrong for me to predict that even a well-performing stock like CMI cannot ride the waves higher and higher, defying gravity. So far, I have been wrong on this call. But time is on my side. I went back and looked the company's old annual reports over the past 10 years. I am struck by the magnitude of the never-explained one-time charges that got buried in the financial statements while the stock was languishing. Some will say that was then, this is now. I suspect the funny accounting may be ongoing. More digging to do.

The long yen trade continues to profit in this environment. It's not over.

All is well that ends well

2007-07-25T12:15:00.000-04:00

I admit that I have been distracted lately and posted nothing for over a month. Two of my trades have consumed my attention and only now do I have time to entertain myself by writing.

My CMI short position was a burden, to say the least. To short one of the best performing stocks in S&P500 this year was as close to lunacy as I ever thought I'd attempt. When street analysts kept upgrading the stock, I thought the new generation of analysts must have learned something new in business school that older generation like myself didn't quite catch. Quite the opposite, the market can remain irrational longer than one can remain solvent is still a lesson worth remembering. So it took true conviction to short more CMI when it hit 118 and 120. Today it's down to 107, more to fall.

My short dollar and long yen position was another trade that delivered pain to me repeatedly, seemingly without end. When the dollar hit 124 yen, the pundits (technical chartists) were claiming there was no resistance to how high the dollar can go, since the yen is garnering no support from a low interest rate and equity market is still healthy. Healthy! Just ask Blackstone how its stock can fall so far below it IPO price. No one believed the problems related to subprimes will or can spread outside the subprime sector. Certainly Bernanke wants you to believe that. Until Countrywide reported yesterday that it was seeing problems spreading to its prime portfolio, all that uneasy feeling about subprime problem could at best be described as jitters and concerns. Now it's time to wait till the word du jour changes to panick. That's when the equity market will sell off, and reasonably so.

CMI short executed at $101

2007-06-07T14:33:00.000-04:00

I was too optimistic to expect CMI to break above its 52-week intraday high when it started climbing again two days ago. The intraday high it reached was around 101.80. Short order executed at $101.

Today, the stock has fallen to $92.92 as I write this post. I expect it to fall further.

CMI on fire again

2007-06-05T11:06:00.000-04:00

Cummins has risen 6.75% so far this morning, in the absence of any news. The stock is on fire again. One has to wonder how CMI, a NYSE stock supposedly heavily traded, consistently has a bid-ask spread of 8 ticks. There were 28,200 shares in block trade by 10am this morning, the rest of the 1.8 million shares traded are all in smaller lots. You have to give credit to the program trading capability of hedge funds like Renaissance Technology (which happens to have reported buying CMI in its SEC filing ened March 31, 2007). This stock has clearly been a favorite of the big boys.

Short more at $102 and $105. See if it will run up to above $105 today.

The Olympic Put

2007-05-30T22:24:00.001-04:00

We've had our years of the Greenspan put, now the Chinese are betting on the Olympic put. The rationale goes like this: the Chinese government will be so eager to showcase a brilliant China when it hosts the 2008 Olympic Game that it will lack the political will to prick the stock market bubble. Retail investors that bought into this theory are piling in and loading up on stocks, "like buying vegetables".

It has been long observed that the market can remain irrational longer than an investor who can remain solvent. Given that there is no effective way to short the Chinese stock if you are a local investor, the ride on the latest train can be breathtaking and wealth-endangering.

Meanwhile, the yen carry traders merely shrug off the latest bearish news coming out of China. There is very little sign of the unwinding of the carry trade, unlike last time around in February. How things have changed in just three months! Or have they?

USD/JPY continues to hover around 121.50, as of now. Technicians believe the trend is upward, that soon the barrier of 122 will be broken. They seem to believe several resistance levels will stop the USD/JPY from dropping to the 116-118 range, a range that was so familiar just two months ago. Looks like they would love to buy the Olympic put as well.

FX trading cost

2007-05-30T15:29:00.000-04:00

I did a comparison of the FX trading cost on dbFX and IBKR.

dbFX, as an arm of Deutsche Bank, is one of the world's leading FX dealers/market makers. IBKR, through its subsidiary Timber Hill, is more a FX broker than market maker.

dbFX has a bid-ask spread of 3 PIPs. IBKR's bid-ask spread is usually 1 PIP, but it also charges a commission of $2.50 per trade.

Given that the PIP cost of most major currencies today is between $7 and $10. One could conclude that, from a trading cost perspective, IBKR offers a lower cost solution.

JPY heading higher

2007-05-24T13:18:00.001-04:00

With today's new home sales data exceeding expectations, the dollar briefly rallied. Actually, the latest data should support a move by Japan's central bank to raise interest rate. The odds are improving for a rate hike sooner than later. If the US slowdown is not materializing, Japan's exports at the current exchange rate will only grow. The Congress seems focused on making the Chinese yuan a scapegoat for domestic issues, ignoring that yen has remained too weak for too long.

Mixed signals, steady Fed

2007-05-16T14:39:00.001-04:00

We've seen quite a mixed bag of signals lately. The economic indicators generally seem to imply a steathily strong economy with trouble spots like housing slowing the other vibrant parts down. But overall, the Fed was right to conclude that more clear evidence is needed before a rate cut or raise is justifiable. Until then, any pundit that opines one way or the other is just wishful thinking.

With a steady Fed rate, and with Euro zone and Japan rates heading higher, coupled with the prevailing US trade deficit, there is a strong case for a weaker dollar down the road. The recent dollar rally is mostly driven by technical trading and repositioning by traders. At 120.75 yen/dollar, I'd be selling more dollars at this or higher price.

More insider sales at Cummins

2007-05-15T11:34:00.000-04:00

Another senior exec at Cummins filed with the SEC about share sales. This management team is not interested in holding shares at the current price level. Expect more sales to be reported.

Steve did wrong, but the board is the culprit

2007-05-11T11:18:00.000-04:00

Apple has been on a tear. On a recent trip to London, I met a good friend I haven't seen for years over dinner. Even AAPL popped up in our conversation. Walking down Piccadilly, you would see the Apple store sign. It's a pretty sight among the Union Jacks. Its market power is increasing every day, as opposed to the "value play" DELL these days.

On the stock option backdating scandal, based on the former CFO's statement, one has to conclude that Steve Jobs did something wrong, the question is "where is the evidence". The trial of its former general counsel may reveal things that the Board doesn't want to see in the light of the sun. The Apple Board is so complacent, especially with a top performing CEO. Keeping Steve out of legal trouble surely is high on its agenda. As much as I like Apple, the credibility of its Board is in the gutters. Do I want to see Steve around to run Apple as is? Sure. Do I want to see the Board around and continue business as usual? No. ISS is right to recommend against the Board and shareholders should stand up.

Must-read for shortsellers

2007-05-10T16:05:00.002-04:00

This is not an easy time for shortsellers, an understatement. To keep one's sanity on days that are different from today, one has to go back to basics and cleanse his thoughts about fundamentals, perspective, and emotinal anchors.

Here's my latest favorite:

[quote] Retired short-selling guru David Rocker has some advice: “To maintain your sanity you should probably be on the sidelines during a period like this until the passion spends itself.”
[end quote]

http://blogs.wsj.com/marketbeat/2007/05/03/confessions-of-a-short-seller/

Negative on CMI - aggressive insider selling

2007-05-10T14:46:00.001-04:00

Cummins has had quite a run, being one of the top five best performing stocks in the S&P 500 YTD. All kinds of rumors fly, including that the company is a takeover target. Guess what? Nothing tells you more than the aggressive selling by its insiders that the stock's run has produced a great opportunity to cash out, rather than sitting around waiting for a higher offer.

CFO Jean Blackwell just sold a block of 18,500 shares. Senior executive Richard Freeland sold 17,736. The last Mr. Freeland sold any shares was back in August 2006, for a paltry 2,399. His latest sale is more than 7 times the number of shares (3 times if counting the split). Senior exectuve James Kelly sold 7,295 shares. Don't be surprised to see more filings in the coming weeks that more insiders are selling, and selling aggressively. This stock has had its run, if you believe in the signaling effect of insider sale.

Is LAZ a good bet?

2007-05-09T14:18:00.000-04:00

Lazard is one of my favorite long ideas ever since it went public. But its latest quarterly earnings gave me a good reason to short and profit from it. While I am still interested in going long at some point when the price drops further, I think its lack of disclosure on some advisory fee arrangement is troubling. Specifically, if the deal LAZ is hired to advise on doesn't close (e.g., the pending acquisition of ABN AMRO by Barclays), will it still get paid?

A clear answer to that question will let investors know if its supposedly heavily weighted 2nd half earnings will materialize.

IBKR IPO priced at $30.01

2007-05-03T23:30:00.000-04:00

Interactive Brokers Group IPO was oversubscribed and priced at $30.01 tonight. 40 million shares were offered vs. the initial planned offering of 20 million shares. The company was valued at $13.8 billion, 26x P/E and 11x P/Sales. Let's see how it performs tomorrow.

It's time to fire the CEO

2007-05-03T18:03:00.000-04:00

The Dutch Enterprise Court ruling on ABN AMRO's sale of LaSalle to BofA spoke loud and clear that shareholders have the ultimate say in the fate of the bank. ABN's CEO Rijkman Groenink has repeatedly shown his contempt for the shareholders in the process of finding a suitor for the bank that he really didn't want to sell in the first place. ABN's Supervisory Board should take notice and make a decision soon: it's time to fire its embattled CEO, who has failed spectacularly in serving ABN's shareholders.

IPO Watch: Interactive Brokers

2007-05-02T15:03:00.000-04:00

I can't help scratching my head trying to understand how to value IBKR. It may be known for its geeky TV ad depicting robots routing trades to obtain the best price. Yesterday's announced deal by Deutsche Borse to buy ISE definitely helps IBKR's pending IPO. The offer size is now nearly doubled and price pushed higher. It can be said a consensus is that the Germans overpaid for ISE. Will IPO investors overpay for IBKR, currently valued at $11.5B assuming a revised mid-point price of $29 per share?

If you think of IBKR as an online exchange (think of ICE, ISE, CBOT, CME), the valuation looks cheap. If you think of it as an online brokerage firm (like Ameritrade, E*Trade, or TradeStation), it looks expensive. If you think of it as a market-maker as its financials indicate (more than half of its revenue comes from market-making), then it's a toss-up. You can argue it's cheap since its system is automated (i.e., low-cost) or expensive (since market-makers like LaBranche may be a dying breed, but hardly disppearing anytime soon, and yet trade at a much lower multiple).

Fair enough, IBKR is opting for the OpenIPO/auction process, retail investors may get allocation like the big guys. If one remembers how Google did following the low auctioned price, one has to jump in the queue to bid for shares. But you can also look at Overstock (another auction IPO story), its business hasn't recovered.

There is no doubt the real winner is the founder and the management team. They are reaping a valuation as rich as a takeover target without giving up a bit of control. And the stock will trade more expensively than Goldman Sachs, whose revenue per employee is richer but profit per employee is lower due to the well-padded bankers' pay packages.

To compare with another company that went public this year, Fortress Investment Group, which manages a collection of hedge funds and private equity funds. Its market cap is about $11.4B. Is IBKR worth more than FIG?

Cummins has more to fall

2007-04-30T23:03:00.000-04:00

February was a good month. March and April were not good at all for shorts. Adding to the buyout threat, the euphoria surrounding dead companies coming back to life (like Cummins) can be quite a rude awakening to shortsellers.

After pushing a high of $107 and being the second best performing stock among S&P 500 this year, CMI has fallen to $92 and some more to fall. In addition to showing signs of a classic short squeeze (when it touched $107), CMI was way overbought and simply cannot justify the price with its fundamentals. Last time I checked, its CEO still derives more of his pay from benefits than stock ownership, not a good sign to convince the investors that the CEO likes the stock as much as they do. They say, every dog has its day. How wise!

Unsustainable bullishness

2007-04-27T18:03:00.000-04:00

The dollar has been rallying against other major currencies for the past two days. This is supposed to be technical, profit-taking after the dollar sold off to new lows earlier this week. Aside from the well-managed earnings from most companies this quarter, there is nothing fundamentally bullish about the dollar that can sustain its rise for long. We will have to see how Japan's CPI data points the direction near term. Regardless, the dollar bears will be back again.

After the short squeeze

2007-04-27T13:00:00.000-04:00

OK, I got my head handed to me on a platter when I called CMI a short suspect a couple days ago. The company announced higher than expected earnings and the stock shot through the roof. The shorts like me are getting squeezed, big time.

Come think about it, the irony is the earnings were up just 5.9%, with sales up 5.2%. The price runup prior to announcement had a lot of it priced in (especially after Jim Cramer called it a buy last Friday at IU). You would think Apple's 88% upside in earnings would have commanded a higher price jump. AAPL is now trading at $99 plus change, lower than the day high post-earnings.

Cummins is benefiting from a multiple expansion. Less than a year ago, its PE was 8x. Now, it's trading at 14x. When the Good, the Bad, and the Ugly all get high multiples, shortsellers can suffer a lot of pain. But we may just be a little early. This week's macro data had very little to cheer for. Existing home sales, consumer confidence, new home sales, GDP, you name it. We may be in a new phase of irratinal exuberance. Just got to have enough liquidity to stay alive till the reckoning comes.

What to like: Canadian Pacific Railway (CP)

2007-04-26T15:03:00.000-04:00

UPS is blaming the weather for its earnings. Despite the weather, CP came out ahead with a solid quarter and announced more buyback. You have heard Warren Buffet's interest in railways, and Bill Gates' personal investment in Canadian National Railway (CNI). Everything about CP says it is the kind of stocks you should buy if you didn't get in BNI before Buffet or CNI before Gates.

Give RBS bid some respect it deserves

2007-04-24T15:03:00.000-04:00

After being snubbed by ABN AMRO's maneuvering, RBS came back today with a 13% higher bid than the Barclays offer recommended by ABN. JP Morgan promptly downgraded ABN to neutral from overweight. Is the RBS consortium bid so far-fetched?

Not really. In theory, RBS consortium's bid of 70% cash and 30% RBS stock should look better than Barclays' all stock offer, if ABN had chosen to work with RBS with an open mind. The sticking point raised by ABN is the consortium's plan to cut up ABN (so-called "deconstruction"). What an irony! By agreeing to sell LaSalle Bank to BofA, ABN is deconstructing itself to preempt a deconstruction by others. Sure, if RBS and its allies win the deal, more cost cutting (i.e., jobs) will result in all markets ABN currently operates in. But the burden of a bloated cost structure and underperforming stock as a result was the reason that ABN was forced into play.

Even Barclays won't keep ABN's name in the new entity under its deal. ABN is history no matter how this plays out. The shareholders will be better served by going with the highest bidder, no matter how much the outgoing management's pride may be hurt. The battle-tested RBS CEO and his bid deserve more respect.

Follow the Mad Money

2007-04-23T15:03:00.001-04:00

Jim Cramer commands quite an audience, to say the least. But he is not the real money maker. To find out who makes the most, read today's Financial Times. To name a few: Jim Simons, Ken Griffin, Eddie Lampert.

But Cramer did have a field day yesterday when CMI rallied more than 10% after he raved about it last Friday. The stock continued its climb today to over $91 this morning (fallen a bit as of now). There were 11 blocks (483K shares) traded on a half day volume of 5.2M shares. Not bad, not bad at all. But one has to wonder who would be the buyer at this price, unless you subscribe to the speculation that CMI is a potential takeover target (if that Bear Sterns analyst knows a thing about what he is writing this morning).

If you listened to Cramer when he touted CLWR (paying $28 to $35 for the IPO shars), you wouldn't be too happy now. It's trading around $17-18 today. Guess you have to hope you hopped on CMI at the right price. But then, when do you sell (and to whom), is the real question? His show is not called Mad Money for no reason.

Buyout candidate or primed for shorts?

2007-04-23T15:03:00.000-04:00

You can't miss this price move today. Of three stocks that had significant move today, one is a M&A target, one is rumored to be in merger talks, the third one: an old industrial stock - Cummins.

MEDI (MedImmune, Inc.) +18.16%
CMI (Cummins Inc.) +11.19
SCGLY (Societe Generale ADR) +5.31%

Cummins will release Q1 earnings later this week. There may be some good news given the management has raised and reaffirmed 2007 outlook, a rare thing to do even among far better managed companies. By 2:10pm, more than 6.8M shares of CMI have traded hands. 5X the average volume over the past 10 days. Yet the stock is up more than 10%!

One has to question if this is indeed the breakout point for a hidden gem (as Jim Cramer wants you to believe) or a breakdown once more of the efficient market hypothesis. After all, there isn't even a shred of news today about the company so many traders pushed to a new 52-week high.

Even if the company surprises with great earnings news this week, with the level of uncertainty in the economy, it would be irrational to justify a 10% one day jump in the company's stock. Unless the company is ready to be bought out (but then, who would want this company that has a notoriously cozy union relationship and not too long ago talked more about stakeholder value than shareholder value?), this may be a good price point to short the stock.