Thursday, May 31, 2007

Thank God I'm Not Short...

The market has been just steamrolling the bears. I'm so happy that I learned my lesson with that stupid FXI put option trade. That was sure painful to watch those options expire worthless while Flotek kept skyrocketing. (FTK went up another 10% today)

Not much to say today except that I still think that the higher we go, the harder we are going to fall.

I'm still holding MIND, UXG, GBN.

Saturday, May 26, 2007

Market Sentiment

There is an excellent post on Decision Point regarding market sentiment. Tim Ord is looking for a short term pullback that is to be bought because a major rally is likely to follow. Check out the chart. It shows that there are still too many bears out there, so many in fact that it is probably going to take a huge rally to flush them out.

Thursday, May 24, 2007

Another distribution day...

That makes it 6 in the last four weeks on the Nasdaq.

Wednesday, May 23, 2007

5 Distribution Days!!!

We now have 5 distribution days on the Nasdaq. All are within the recent range and signal a possible change in direction.

Be careful.

MEMC Electroni Materials (WFR): serious supply

I like to keep an eye on WFR. I'm hoping there will be a continuation of the correction that began a few weeks ago.

Today, it was announced that WFR would be added to the S&P 500. I was a little bummed, because I expected the price to really skyrocket. As expected, the stock jumped and was up $2 before the open. What was really surprising was the price action for the rest of the day. WFR slowly gave up its gains and ended the day up only 0.4%. Tom O'Brien picked up on this today, and mentioned it on his show.

Looks like some big money players took advantage of the announcement and sold, sold, and sold some more. Perhaps I'll get my entry point after all. I'm looking to buy WFR at the 47 or 49 price point.

Saturday, May 19, 2007

Reflexivity and the "Buyout Bubble"

Let me first start out by saying that I read George Soros' book, "The Alchemy of Finance", and found it rather boring and a little difficult to follow. His idea of "reflexivity" is very subtle and very hard to explain. It basically has to do with bubbles, and how bubbles reinforce themselves up to the breaking point. I'll use an example from his book and then try to explain how it applies to the current market.

The following is an excerpt from Soros' book. It details the conglomerate boom of the late 60's and the subsequent bust.

"The key to the conglomerate boom was a prevailing misconception among investors. Investors had come to value growth in per-share earnings and failed to discriminate about the way the earnings growth was accomplished. A few companies learned to produce earnings growth through acquisitions. Once the market started to reward them for their performance, their task became easier because they could offer their own highly priced stock in acquiring other companies.

...conglomerates started out with high intrinsic growth rates that were rewarded by high multiples. They started to acquire more mundane companies, but, as their per-share earnings growth accelerated, the multiples expanded instead of contracting. Their success attracted imitators and later on even the most humdrum companies could attain a high multiple by going on an acquisition spree. Eventually, a company could achieve a high multiple just by promising to put it to good use by making acquisitions.

...The climactic event was the attempt by Saul Steinberg to acquire Chemical Bank: it was fought and defeated by the establishment.

When stock prices began to fall, the decline fed on itself."

This was an example of "reflexivity", a kind of feedback loop. Something gets out of whack but still seems to work. The more out of whack something gets, the more it is rewarded. Everyone else that is not out of whack begins to purposely push themselves out of whack. Finally, something happens that makes it clear that everything is out of whack. It ends with a bust, bear market, recession, or whatever. It's not pretty, but that is my definition of reflexivity. It is not hard to apply it to the dot-com bubble.

So what does this have to do with the market today? Well, for one, the market is being driven by leveraged buy-outs and stock buyback programs. The floats of all of these companies are being shrunk, resulting in an increase their earnings per share. It seems that every week we see another company being acquired, while other companies announce new stock repurchasing plans. So why is this happening? Will it go on forever?

The answer has been out there for a while, and Ken Fisher has been telling people for quite some time. Here is a quote from a recent interview:

"A medium-sized corporation today in America can borrow money at 6% or less. After tax, it's more like 4%. The average company has a price-to-earnings ratio of 15, and that's an earnings yield [earnings divided by share price] of 6.7%. So if a company can borrow money at 4% after tax and buy back stock with 6.7% earnings yield, it picks up 2.7% as free money, and that makes its earnings per share go up immediately."

Ok, that is why companies are being bought. But why are we seeing the stock buybacks? Fisher addressed this in another interview.

For Fisher, the question is determining which company is likely to get taken out by either a private equity buyer or a rival company and invest in those companies. Moreover, companies that feel threatened - either by hostile suitors or hedge fund activists - often respond by conducting share buybacks to raise their value. Either way, the investor wins. "If you can borrow money and buy back your own stock and make your stock go up in this day and age, if you don't do it, someone else is going to do it to you," says Fisher.

Fisher says more CEOs should also be thinking of making game-changing acquisitions, rather than leave them to private equity firms, which buy companies based on their market prospects and often sell them to strategic acquirers in ensuing years anyway. But at the very least, many companies should buy back their shares and jack up their share prices, says Fisher.

Steel Dynamics, he says, "is a great company with a great CEO, Keith Busse," But says Fisher, "Busse doesn't get the notion that he should be borrowing half his market cap and buying back half his stock and bidding it up."

"It's not an irreversible process," said Fisher. If the buyback fails to have the intended effect, companies "can sell their stock back to the market."For Fisher, investors should get while the getting's good, because it isn't going to last forever. "This is going to blow up and be a disaster eventually. Every bull market leads to a bear market."

So finally, what do we look for to spot the top? Simple. If interest rates go up, or stock prices get too high, the free money Fisher talks about will disappear. This will stop the repurchase programs and its "look out below"! Also, keep a look out for that Chemical Bank high-water mark type event that marked the end of the conglomerate boom of the late 60's.

Friday, May 18, 2007

oh cramer

The following is a direct quote from Jim Cramer on Real Money. He was talking about the endless stream of private buyouts of companies and contemplating a "bubble".

"What happens if it is a bubble and it bursts? Would stocks go down? I don't know. For the most part the companies that get these deals aren't expensive to begin with. Only one deal that I have seen, one deal for heaven's sake, targeted an expensive stock: Four Seasons The rest have pretty much involved companies that haven't done anything in years or are regarded as cyclical has-beens.

Still, it must be a given that these frightening stories have to be churned out.
Look at it this way: The biggest bubbles of our generation, the dot-coms and the housing bubbles, both popped. And what were the consequences?
How about next to nothing? "

Now I know he means that America survived the tech bubble and it will survive the next one, but I'm sure there are a lot of people who would disagree with Cramer. There were some serious consequences.

Thursday, May 17, 2007

Interesting developments in Genentech (DNA)

Genentech recently broke through some important support levels. I picked up some put options to offset my previously purchased call options. So basically I'm now long volatility (which looks good right now) and stand to gain if there are major moves either up or down.

The downside looks like the path of least resistance, with no support until $70 and $58.

I'll post more on the fundamental story with DNA tomorrow.

Wednesday, May 16, 2007

It's different this time...

I came home today and flipped on the TV just in time to see a very strange discussion about where the market is headed. I won't go into too much detail, but some guy on CNBC said that we don't have to worry about large market corrections because, wait for it..., it's different this time. He then went on to say that the investing public is just now putting money to work because of the "record high" headlines and claimed that this was bullish. Now I know that I haven't been in the market for a long time, but I've read enough to know that the public ALWAYS gets in at the top.

At least Michael Farr was on to counter this moron's view. You can watch it here.

I'm building a serious short list. I'm also looking to buy some puts on the Russell 2000 ETF (IWM). The small caps are extremely weak!

Tuesday, May 15, 2007

Wake up bear!!!

Nasdaq picked up another distribution day today. The small-cap Russell 2000 and S&P 600 are looking terrible!!!

This is getting ugly and I'm getting worried! Not just about the market (I'll get short) but about the economy.

Good luck.

Monday, May 14, 2007

Cramer Strikes Golden Star Resources!

I watch the price action in several gold stocks and saw some strange action in Golden Star Resources (GSS) the other day. I remember seeing the price jumping in the pre-market on the CNBC ticker. I was interested because I was waiting for GSS to pullback to the 3.70 area so I could pick up some shares. Well it didn't take long to find out that Cramer had given one of his very convincing recommendations the night before and people were clamoring to buy, buy, buy. It also didn't take long for all of the "smart money" who were originally selling GSS to dump their shares to the Cramerite morons.

It just amazes me that Cramer still hasn't burned out by now . Just look at the chart. The volume that day was massive, meaning that large numbers of his disciples are now in losing positions. There hasn't been so much as a bounce since then. What really sucks is that GSS is now filled with so many weak hands that it will take forever to get back to the highs (which is what really pisses me off!) I mean its like a raging, mindless horde has come into the fertile fields of GSS and not only burned the crops but also salted the soil.

I for one will not being buying GSS in the foreseeable future.

We picked up another distribution day on the Nasdaq and Tom O'Brien went from predicting a market correction to predicting a bear market.

I'm staying long here and hope to see a big pullback so I can load up at a market bottom. I've learned a lot this last year and would love to put my skills to the test when we finally get to a lower price point where I can load up on the long side. I'm tired of this nickle-and-dime crap.
As for what I'm looking for, big market tops are usually marked by a slow, rolling move down. Not the sharp spike down like we saw in Feb. If we roll over in such a way, I'll get short.

Sunday, May 13, 2007

NYSE Group (NYX)- At a critical point

NYX is a stock that I've been looking to pick up for a while now. I'm a little hesitant because this is a Cramer favorite and there has been a downgrade issued by Goldman Sachs, but the technicals seem to suggest that it is at a good support point.

I've drawn the support lines. Notice that the volume has really dropped off, which indicates that there are no more big sellers. I think it is also bullish that a big analyst can issue a "sell" recommendation and still have the price hold up pretty well. I guess Goldman has determined that NYX will not grow at the rates it first expected.

I'm not sure I'll pull the trigger, but I'm very tempted.

Saturday, May 12, 2007

Who would have thought

My goal was to find IBD stocks before they made the IBD 100 list. Well I did it with Flotek Industries. This week FTK debuted at #12 on the IBD 100. Pretty amazing.

I bought it at around 15. Unfortunately, I sold out at around 28, so I've also learned a valuable lesson about selling too early. I knew it would go higher but sold nevertheless. I should have just sold and got my principle back and let the rest ride. Lesson learned.

I think we'll get another chance with FTK however. They only have a couple more quarters to report triple digit growth. I expect to see a substantial pullback when the year over year growth gets back to the 20% range.

World market tops

This market is back into boring mode. Is it the calm before the storm? Probably. Are we closer to a top than to a bottom? Sure.

I was listening to the Tom O'Brien show recently and he had a very interesting caller. It was a long time caller who lives in India now and gave Tom and the rest of us an update on the world markets. What I found most interesting is when he mentioned that everyone in India is involved in the market. He says that it is now routine for rickshaw drivers to both offer and ask for stock tips. He also says that mutual fund billboards dominate the roads. I lived in San Francisco in the late 90's and all of those dot-com company billboards were everywhere. By most accounts, the same thing is going on in China. The markets look like easy money and the lessons that Americans learned just a few years ago are being totally ignored by Indians and the Chinese. Its different this time, I guess (yeah right).

Once again, the masses are getting in at the top, only to be destroyed on the way down. This type of euphoria is totally absent here, but you can bet that when the emerging markets fall, the US markets will surely follow suit. It makes me wonder if one of the reasons why the large-cap US stocks are making such a nice run right now is because the big players are looking for a relatively safe place stash their cash while the world bubble bursts.

I'm not going to anticipate the downturn because I think there will be plenty of time to get short. The higher these markets go, the longer and further they are going to drop.

Tuesday, May 08, 2007

Earnings for Flotek Industries (FTK)

Good 'ol Jerry Dumas is reporting the earnings of Flotek Industries tomorrow. I'll be listening intently and watching how the market reacts. FTK has made a huge run recently, giving me no opportunity to get back in. Interesting to note that there has been a lot of insider selling this last month, especially by Jerry.

I'm looking to jump in at around 32 or 33. It should be an interesting day.

Friday, May 04, 2007

Another sentiment post

I just read this from Bespoke Investment Group.

The plot is the most telling. This market sure is strange.

Thursday, May 03, 2007

Metalink Inc. (MTLK)

"...we were happy to have publicly announced the alliance with STMicro and Samsung, I'm pleased to report that we currently have similar alliances in the works that we cannot announce publicly."

This is a quote from the Q1 conference call of Metalink Inc. If you didn't know, last month MTLK announced a stratigic alliance with STMicroelectronics and Samsung to provides its chips for their HD IPTV boxes. These boxes will be in everyone's home in the near future. Most importantly, they will be in many of the homes in China.

Interestingly, another leader in this area, Sigma Designs has recently been downgraded by a few analysts due to increased competition from other companies in China. STMicro was explicitly mentioned. I'm very interested to find out what MTLK has in store for us.

Here is a list of some links regarding MTLK.

MTLK Press releases
Shlomi Cohen article on Seeking Alpha
Shlomo Greenberg article on Seeking Alpha
Sigma Designs Downgrade

Ok, this wouldn't be complete without a chart. Oh, and by the way, I own MTLK.

On a final note, don't expect MTLK to start ramping up revenues until late this year.

Its all about sentiment

We are back to sentiment arguments again. You know the drill, when everyone is bullish the market goes down and when everyone is bearish the market goes up. Guess where we are now?

On one hand, you have a market being led by the Dow 30, with the small-cap growth stocks lagging for the most part, which has usually been a bearish sign. (Especially for the Canslim investor.) On the other hand, I don't care where you look, everyone is bearish right now. The Fast Money guys, Tom O'Brien, and even the average investor. (AAII investor sentiment was 54% bearish)

If you want to see an intersting chart, check this out.

You can read the full story here. It talks about how sentiment readings show that we are nearer to a bottom than too a top. Amazing.

What to do? I don't know. I guess I'll just keep my strategy of buying pullbacks and not breakouts. My MIND trade is moving in the right direction. My DNA trade is flat. UXG is still strong, while GTW continues to go sideways.