Breaking a Major Rule

I almost never buy stocks in something I fundamentally don't understand. Bio-Pharma is exactly what I am talking about with the above statement and I avoid those stocks like the plague.

However, all rules are eventually meant to be broken. I nibbled at some Aspen BioPharma today (APPY). This speculative pharma play comes highly rated by my brother-in-law, who is a major broker at a large investment bank. A senior analyst that works for his company that he really respects believes that APPY may have a blockbuster test that is soon to be approved by the FDA.

APPY is this analyst's #1 recommendation for 2008 (the analyst is an M.D.) and I am attracted by the fact that they just performed a secondary placement of $18 million of new common stock at $7.28, basically putting a floor on the stock price at around $7.50.

Hedge funds are picking up this stock and it is starting to get noticed. They have a number of products focused on veterinary medicine, but they may have a major home run with an appendicitis blood test (a first of its kind) that will help doctors screen for this condition. The company is looking for final approval from the FDA and this test could become a staple requirement for every doctor that encounter patients with appendicitis-like symptoms.

This is speculative play and I am looking for an exit point around $12.00.

Weekly Recap

It has been the year of the Emerging Market. What I think is worth thinking about as we enter a new year is how crowded some of those trades are. For me, I am planning to stay in the US this year. After the Olympics, any China slow down could be ugly.

Anyway, the graphic suggests that we not drive too fast at the moment. Last week, I followed this advice, just setting up a few investment positions for next year and trading some Apple calls.

Other than trading in and out of Apple and dumping some PCP calls, I set up a position in ANSS and one with BTJ. I think that software will have a good year this year and ANSS has been a company that has consistently outperformed. With BTJ, it is a play on the energy sector that I think will continue to be strong in 2008.

Setting up the Mother of All Battles

I thought I would be a funny guy when selecting this image by continuing to use this overused phrase and jokingly calling folks attention to the upcoming TA that I see in the indexes. However, I then thought about our troops around the world keeping us safe over the holidays and will therefore tone things down a little out of respect - nothing compares to their sacrifice.


What I am talking about is something that I have been seeing for days, but didn't feel real confident in until I saw today's bounce right off the DJI trendline again this morning. Assuming that the "B" team can continue to keep things under control through Monday, the S&P and DJI indexes suggest a major push up (or down) next week.

The triangle patterns being set up by each index suggest that the move will be higher by a lot in the short term. The Nasdaq does not show the same pattern, which I would like to see, but it also just suggests that the sectors represented by the index are just rotating differently (the Nasdaq chart also looks OK and we bounced off the 20-ma today).

We are also seeing the same pattern in the XLF, suggesting to me that financials will participate in the short term rally as well. Here is the triangle pattern :

http://stockcharts.com/h-sc/ui?s=XLF&p=D&b=4&g=0&id=p27864979949&a=113339973

Now look at the DJI. It also confirms that 13,700 is a key area for break out:

http://stockcharts.com/h-sc/ui?s=$INDU&p=D&b=4&g=0&id=p31430554569&a=107565401

Finally, the S&P shows a similar pattern:

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&b=4&g=0&id=p14473809506&a=116688257

This pattern could also fail, but when combined with the January effect, my money is on a short term burst up into the 3rd week of January when the meat of earnings hit.

By the way, I added to BTJ this morning at $37.00, bringing my average cost down.

Nibbled at BTJ

BTJ's equipment is in search of more oil and I have been in search for an entry point. I started a position today, looking for a little bump after the 1st of the year.

PCP Boomerang?

The 1st time didn't work. Let's see if we get a little back with PCP. I re-entered with Feb140 calls when the stock hit $137.

The bad news (internationally and with durable goods) should not be enough to hold the market back for long.

Probably Getting Cute

Sold my PCP calls for a small loss. It was not working and I need to be more disciplined when it comes to cutting my losses. Piled more into AAPL calls. I am planning to take advantage of this frenzy while it lasts.

Get your Fruit and Vegetables

Sold the remainder of my AAPL Jan185 calls when it busted above $200 (sold when the price was about $200.80). The stock is in an awkward situation. It wants to run but technicals are slowing it down. Until the Bollinger gives it some room, we will have swing trading opportunities.

Planning to add Feb calls on any weakness - hopefully tomorrow.

Nibbled at ANSS

I have telegraphed that I planned to get long ANSS. I pulled the trigger today. It is a "starter" position, but I wanted to get in the stock before the end of the year.

AAPL Against $200

A friend posted a picture of Apple Store traffic on December 25th in New York City (posted by SP97330 on the TIE Board). Yes, on Christmas. The place apparently was a mob scene.

The stock is reacting in a similar fashion, although $200 seems hard to break today. We are right up against the top of the Bollinger Band and need a 1-2 day rest before going higher.

I sold half my AAPL calls near the close on Monday (based on the Bollinger situation), but was able to roll those calls over to February and a new strike price ($195) this morning when it opened lower. If we break $200, expect a lot of buying to kick-in to propel it even higher.

It is also worth noting that the S&P and Nasdaq are holding tough above 1490 and 2700 two hours into trading. Holding those numbers today is important for the week.

Happy Holidays everyone!

The Money Supply Conspiracy

I have seen a lot of message board posts about the Fed Conspiracy that ensued once the Fed decided to stop showing M3 data on a monthly basis. I am not an expert on money supply forensics, but know enough that I believe that the money supply data lately show fairly tight money conditions.

Regardless, I thought that the New York Fed did a very good job describing money supply and how they collect and use the data. Their explanation is provided below (http://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html):

• For decades, the Federal Reserve has published data on the money supply, and for many years the Fed set targets for money supply growth.
• In the past two decades, a number of developments have broken down the relationship between money supply growth and the performance of the U.S. economy.
• In July 2000, the Federal Reserve announced that it was no longer setting target ranges for money supply growth.
• In March 2006, the Board of Governors ceased publishing the M3 monetary aggregate.

The Federal Reserve System and public- and private-sector analysts have long monitored the growth of the money supply because of the effects that money supply growth is believed to have on real economic activity and on the price level. Over time, the Fed has tried to achieve its macroeconomic goals of price stability, sustainable economic growth, and high employment in part by influencing the size of the money supply. In the past few decades, however, the relationship between growth in the money supply and the performance of the U.S. economy has become much weaker, and emphasis on the money supply as a guide to monetary policy has waned.

Money Supply Measures

The Federal Reserve publishes weekly and monthly data on two money supply measures M1 and M2. The money supply data, which the Fed reports at 4:30 p.m. every Thursday, appear in some Friday newspapers, and they are available online as well. The Fed publishes measures of large time deposits on a quarterly basis in the Flow of Funds Accounts statistical release.

The money supply measures reflect the different degrees of liquidity—or spendability—that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.

The chart below shows the relative sizes of the two monetary aggregates. In June 2006, M1 was approximately $1.4 trillion, more than half of which consisted of currency. While as much as two-thirds of U.S. currency in circulation may be held outside the United States, all currency held by the public is included in the money supply because it can be spent on goods and services in the U.S. economy. M2 was approximately $6.8 trillion and largely consisted of savings deposits.

Historical Perspective

The Federal Reserve began reporting monthly data on the level of currency in circulation, demand deposits, and time deposits in the 1940s, and it introduced the aggregates M1, M2, and M3 in 1971. The original money supply measures totaled bank accounts by type of institution. The original M1, for example, consisted of currency plus demand deposits in commercial banks. Over time, however, new bank laws and financial innovations blurred the distinctions between commercial banks and thrift institutions, and the classification scheme for the money supply measures shifted to be based on liquidity and on a distinction between the accounts of retail and wholesale depositors.

The Full Employment and Balanced Growth Act of 1978, known as the Humphrey-Hawkins Act, required the Fed to set one-year target ranges for money supply growth twice a year and to report the targets to Congress. During the heyday of the monetary aggregates, in the early 1980s, analysts paid a great deal of attention to the Fed's weekly money supply reports, and especially to the reports on M1. If, for example, the Fed released a higher-than-expected M1 figure, the markets surmised that the Fed would soon try to curb money supply growth to bring it back to its target, possibly increasing short-term interest rates in the process.

Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. Depositors moved funds from savings accounts—which are included in M2 but not in M1—into NOW accounts, which are part of M1. As a result, M1 growth exceeded the Fed's target range in 1982, even though the economy experienced its worst recession in decades. The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987.

By the early 1990s, the relationship between M2 growth and the performance of the economy also had weakened. Interest rates were at the lowest levels in more than three decades, prompting some savers to move funds out of the savings and time deposits that are part of M2 into stock and bond mutual funds, which are not included in any of the money supply measures. Thus, in July 1993, when the economy had been growing for more than two years, Fed Chairman Alan Greenspan remarked in Congressional testimony that "if the historical relationships between M2 and nominal income had remained intact, the behavior of M2 in recent years would have been consistent with an economy in severe contraction." Chairman Greenspan added, "The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place."

A variety of factors continue to complicate the relationship between money supply growth and U.S. macroeconomic performance. For example, the amount of currency in circulation rose rapidly in late 1999, as fears of Y2K-related problems led people to build up their holdings of the most liquid form of money, and then it showed no increase (even on a seasonally adjusted basis) in the first half of 2000. Also, the size of the M1 aggregate has been held down in recent years by "sweeps"—the practice that banks have adopted of shifting funds out of checking accounts that are subject to reserve requirements into savings accounts that are not subject to reserve requirements.

In 2000, when the Humphrey-Hawkins legislation requiring the Fed to set target ranges for money supply growth expired, the Fed announced that it was no longer setting such targets, because money supply growth does not provide a useful benchmark for the conduct of monetary policy. However, the Fed said, too, that "…the FOMC believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions." Moreover, M2, adjusted for changes in the price level, remains a component of the Index of Leading Economic Indicators, which some market analysts use to forecast economic recessions and recoveries.

In March 2006, the Federal Reserve Board of Governors ceased publication of the M3 monetary aggregate. M3 did not appear to convey any additional information about economic activity that was not already embodied in M2. Consequently, the Board judged that the costs of collecting the data and publishing M3 outweigh the benefits.

What to do About Apple (Revised)

Every once and a while, my enthusiasm gets a little ahead itself. Yesterday, I posted about potentially exercising many of the AAPL calls I bought three days ago, but upon reflection, my plan is probably going to be more like my post on November 5th.

This post was based on a historical look at AAPL's stock price from quarter to quarter. Even though AAPL often beat estimates during the 4th quarter, the stock tends to sell off in January. It may be that all the good news is already baked in after MacWorld and 4th quarter earnings. It may also be that Q1 and Q2 are usually the weakest quarters.

Regardless, I have to respect the chart:

http://stockcharts.com/h-sc/ui?s=AAPL&p=W&b=5&g=0&id=p30442823133&a=121630432

The sell points are in red. The stock seems to consistently rest shortly after the first of the year.

I have heard that maybe "this year will be different". It is certainly possible. The iPhone is certainly a game changer. The reality, however, is that AAPL is not immune to the overall market tape and uncertainty during the beginning of the year (with more financial writedowns) is certainly likely.

An another point to consider is the distance between the current stock price and its 200-day moving average. Consider each time that AAPL has sold off this year in the following chart:











While each of AAPL's sell offs happened when the market also turned, the stock also consistently sold off when the stock was between 30% and 58% from its moving average. The average for each stock often acts as a magnet. When stocks get ahead of themselves, they often turn back towards their 200-ma.


Currently, AAPL is 43% above its 200-ma. My best guess is that the stock price will move above $200.00 in the short term, but will then move back towards its average and wait for future earnings to propel it forward again.


If you are a long term holder and patient, then this conversation is probably noise. For me, I am hoping to take advantage this possibility.

Understanding our Account Deficit

After a rant on the TIE message board, I realized that my message was getting lost with my tone. Economic terms really don't always explain the emotions that people feel about issues that are often affecting their livelihood.

Many folks fear change. Globalization causes very real and painful dislocations. My message on the TIE Board was NOT focused on the real changes that are causing people to feel the way they do. I was focused economic terminology and explaining how policy affects economic growth, trade, the dollar, etc.

I have edited my original post below. The purpose of reporting this is on my Blog is to try to elevate the discussion about economic policy. I am a Free Trader, but think that the US and US Policy could do a much better job maintaining and enhancing our standard of living and preparing our current and future work force for global competition.

The current US Account Balance is defined as the difference between a nation's saving and its investment. These definitions are taught in ECON class, but let’s discuss this a little. The theory goes that the US is saving too little relative to its investments, causing an “account deficit”. This is often compared to other countries (such as China or Japan) that are saving too much relative to its investments. It is simple accounting on a VERY LARGE Macro scale.

Almost every economist that knows anything about this will tell you that the trajectory of the current Account Deficit is unsustainable. The bottom line is that our foreign assets are less than our foreign liabilities, making our net investment position to currently exceed ¼ of our GDP. Sooner or later this trend has to reverse itself or the cost of servicing this negative international investment situation puts the very loans that we are talking about (US Treasuries, etc.) in jeopardy.

In other words, foreign investors are already investing in us in T-bills. They don’t want us to fail, so they will have to work with us. Part of that process is making “investments”. These investments adjust the current Account Deficit.

It has been noted by folks smarter than me that our Account Deficit can be placed into five buckets that all have impact. Some are more important than others. The two most often used by “the sky is falling” crowd are the first two and they have a minor role in my opinion. The next one is actually a positive and the last two (or fourth and fifth) buckets are the "big burritos" and what is happening.

• The Federal Government Fiscal Deficit. Sorry, but this is one of the issues. We have too much focus on consumption (Health Care, Social Security, and other consumption categories) and not enough on investments (roads, infrastructure, etc). We also pay out more than we bring in. A larger fiscal deficit boosts domestic demand, pushing up domestic interest rates relative to foreign rates; this, in turn, attracts investors and raises the value of the dollar, thereby leading to a larger current account deficit. The reverse of this (lower domestic demand) does the opposite and is like what I think is happening now (improving the account deficit). I think this is a very small issue relative to the others. Japan, for instance, has a fiscal deficit, but an account surplus – kind of disproving the relationship. To the extent that this is an issue, the theory goes that the fiscal deficit crowds out some private investment, which would be helpful to the situation.
  
• Decline in the private saving rate. We almost hear this story every day on CNBC from some pundits. The problem with this point of view is how much lower could it go? If we saved more, would the account deficit turn positive? Most economists believe that the effect is indirect by mainly affecting a change in consumption (we would buy less). High private consumption boosts GDP growth, and with everything being equal, forces the Fed to increase interest rates. Although the rise in interest rates strengthens the dollar, it leads to much lower investment spending. Therefore, a further decline in our savings rate appears to crowd out investment more than it crowds out net exports, and thus leads to little change in the Account Deficit.
  
• Productivity Growth. Higher productivity growth increases perceived rates of return on US investments, which in turn generates capital inflows that increase the value of the dollar. These higher rates of return lead to a rise in domestic investment. Expectations of higher returns boosted equity prices, household wealth, and perceived long-run income, and so consumption rose and saving rates declined which leads to a higher Account Deficit. While Productivity Growth has major benefits to the US, it does affect the Account Deficit.
  
• Changes in Foreign Demand. Foreign demand growth has not been strong enough in many foreign economies because of varying combinations of an increase in saving rates and a decline in investment. Weak foreign spending has enhanced the supply of capital available to the US, put downward pressure on U.S. interest rates, and put upward pressure on the dollar. This situation is improving. The global growth story is helping our Account Deficit, but will put downward pressure on the dollar. As foreign demand improves, the account deficit will improve and this is what is happening.
  
• Changes in Global Financial Investing. Have you looked at mutual fund inflows lately? They are going overseas. In the past, folks basically invested within their own country. This is changing and I believe is leading to big swings in the US Account Deficit. It is hard to measure but the US Government should focus on it. When our savings increasingly are being used to finance investment in other countries, the Account Deficit reflects that. Is that all bad? Of course not. Our money (our savings) is being put to work elsewhere. In theory, that savings would be repatriated if the economic conditions overseas change, thereby changing the Account Deficit. As our savings are invested overseas, foreign consumption will eventually increase as their economy grows. As foreigners are investing less in the US than the past (because their economy is hot) and US investors are doing the same, the account deficit grows.

So what does this long post mean? Anybody harping about the account Deficit (or trade deficit as the media likes to use) needs to understand what is happening. In a macro sense, there is nothing the US is “doing” that is really causing this Account Deficit other than a series of policies that are not altogether horrible.

If someone wants to change things to improve the Account Balance, then have the Government spend less (note that I did not say balance the budget through tax increases), create incentives for Americans to save more (like increase 401 or IRA savings) or encourage foreigners to save less, provide mechanisms to increase productivity through investments in technology (tax breaks, etc.) or education, encourage growth (both here and globally) while minimizing inflation, and encourage foreign investment in the US (we are doing it in their country) which means buying stuff like Citi and Morgan Stanley.

Weekly Recap

Slow week for me. My portfolio took a nap while I waited for the smoke to clear. The market rebounded strong on Friday on good volume, reaffirming a trend that Option Expiration weeks are typically positive.

We are now in that upper end of the defined trading range, closely watching for the S&P to breach 1490 and the Nasdaq composite to breach 2700 again. Unfortunately, they may end up moving above these numbers next week on thin trading, thereby not giving us the possibility of a technical confirmation that the uptrend will continue.

Oh well, up is up. I sound like a complainer when the market has held up really well against an onslaught on negativism from the media. I have been fairly negative since the Fed Communications disaster. Not because I am worried about a recession (unlike others), but I am worried that the Central Bank can't seem to effectively communicate with or understand what the market is telling them.

This negative stance caused me to cash almost all my calls last week, and this Tuesday, I basically went to cash. I kept only three stocks - PCP, ROCM, and SIRO. I did this because the market was continuing to sell any news and I didn't want to be the "last one out".

The first stock that I kept, PCP, is because I just went long term (capital gains) with PCP and I wanted to try to take my profits (a double) into next year to avoid the tax man a little longer.

The second and thrid stocks (ROCM and SIRO) are in good defensive sectors (medical devices and dental).

Well, my "official" cash position only lasted one day. By Wednesday afternoon, I was nibbling at some AAPL calls again. The market finally showed some bottoming signals and the volatility indexes were losing ground even when the equities market was still red which suggested to me that Thursday would set up for a positive tape.

The tape on Thursday confirmed my trading suspicions (Oracle's blow had numbers also had a lot to do with it) and I added some PCP calls. On Friday, I just rode the Santa Rally wave with those calls.

I couldn't really follow the market closely on Thurday and Friday because I was traveling, so I just kept a lot of cash on the sidelines waiting to add as the market clears the current trading range. Friday's volume and positive price action was very encouraging and should continue to bode well for next week.

Starting Over

Renewal. A fresh year. Time to rethink things. That is what this time of the year is about - well almost. We aren't yet past Christmas and I am already thinking about how I "will do better next year". I guess that is the way that most investors think - eternally the optimist and always after unattainable wealth.

I just spend the last two days on a business trip, dying to be following the Santa's "helper" rally that was unfolding. I use the word "helper" because it is a little late, a little subdued, and a little uncertain. I am not trying to slam a 200-point "up" day, but what it means will still be debated into the new year.

For me, I really don't care. I am focused on the New Year.

I last left everyone mostly in cash. I admit that I lost discipline and nibbled again twice over the last few days (got to love a laptop with wireless!). Sorry that I didn't post, but I bought some AAPL calls on Wednesday and some PCP calls on Thursday. I look smart at the moment, but these two stocks have different futures in my opinion.

AAPL may continue to be the stock of 2008. With MacWorld and earnings coming up in January, we may be looking at new product (or add on) introductions and new earnings blow-outs. They seem to have everything going for them and only themselves to blame for execution issues. I plan to ride this stock further and will probably be exercising some calls in January.

With PCP, however, I am probably going to be unloading my stock and move towards trading the name. It is no longer a buy and hold stock as the aerospace sector cycle continues to get "long in the teeth". They have excellent management, and are great at adding companies to their portfolio and integrating them, but the money is going to get harder to make. Money managers look for slowing growth figures in a stock and then bail. PCP is slowing (in my opinion) and I am noticing that a number of money managers are taking profits. I will not be long behind them. I am just trying to ride the "boost" one more time and I am looking at $155 as a decent exit point.

By the way, that PCP money is probably going into ANSS. More this weekend.

So What's Next?

I am not taking vacation just because I mostly went to cash. I am still watching the charts and the news for technical and fundamental information regarding the stocks I watch. I am also paying attention to my shopping list.

I was very negative this morning thinking that the morning bounce would be sold (it was), but I was slightly surprised that the market held in there this afternoon and is finishing positive. Therefore, calling it a "year" may be a little premature (Full Disclosure: I hate sitting on the sideline. Patience, or lack thereof, is something I need to work on).

So looking at that shopping list, I identified AAPL as a "buy" at $179.00. I choose that marker because this was the approximate 61.8% Fib retracement range from its recent high. It hit $178.60 and bounced. I call that close enough. If I had more confidence in the market, it would have been a good purchase. I have sat it out so far, but will re-enter AAPL as soon as a positive trend starts again. By the way, AAPL retraced exactly to the 61.8% Fib number in November as well. It appears that there is a trend here and it is worth watching in the future (the tutes have a game plan to sell until the fib). Here is a link to the chart:

http://stockcharts.com/h-sc/ui?s=AAPL&p=D&b=5&g=0&id=p33882970236&a=114964461

I am also looking at ANSS. It bounced today at $37.25 (just off my $37.50 buy point). Again, I didn't pull the trigger, but it is nice to see that ANSS is defending its support areas.

I am also looking at BTJ. It is under my $36.00 buy point (it closed at $35.08 after hitting a low of $33.25), but it is a thinly traded stock so we should expect some slop. I don't get the sense that the stock will run away from me (the price of oil, as it goes lower, is giving it some headwind at the moment).

Finally, I last said that I walked away from GRMN because the chart was too choppy and no pattern existed. I love this stock and want to get back in when a trend becomes apparent. Today may have washed out any weak hands. It was a huge distribution day and I would need confirmation that $91.46 was a bottom (it closed at $94.35), but it may have set up a inverse head and shoulders pattern. If this fails, then it will probably re-test the low in November. Here is a link to that chart:

http://stockcharts.com/h-sc/ui?s=GRMN&p=D&b=5&g=0&id=p45513063705&a=117703496

I actually hesitate with the GRMN chart because the head and shoulders pattern is not clean and I also notice a gap that needs to be filled from November just under $90.00.

One day is not a trend and the rally from November is under pressure and the bears still own some territory, but I am not as negative as this morning. We just need some positive to pull off some upward movement.

Cash is King

I sold the rally this morning. The technicals are setting up for something ugly. The uncertainty is making it too hard to trade. I still hold stock in PCP, ROCM, and SIRO. Everything else was sold.

I suspect that we will have relief rallies into the New Year, but I am not sure that they are sustainable or worth trading (with thin days coming up). Time to call it a year and wait for the technicals to set up into something a little more predictable.

Watching PCP

I hate to identify stocks technically when the tape is taking ALL of them in a sector out and shooting them, but PCP bears some watching. I am not trying to scream wolf here, but PCP has been a predictable stock for the last year.

Whenever it has fallen back hard, it has fallen back to the trend line and bounced. Is this another occasion? We shall see. The green trend line below is the point worth watching.

Given my tax situation, I may not be hanging on to give back my profits if I see selling with volume below the trend. The volume and negative money flow suggest that we may snap back back, but the overall tape is still calling the shots.

Getting Ready for Taxes

December is the time of the year that we all get ready for the tax man. Over the last 30 days, I have been looking for losses to take to offset the AMT and re-balancing the portfolio to be able to (hopefully) afford to pay those capital gains. This last correction in November caught me slightly off guard so I now don't plan to have the year I would have had if I had just gone to cash and taken the rest of the year off. As they say, traders are often wrong just slightly less than they are right.

Most of my losses have been taken so these last few days have been about trying not to take some additional gains on existing long positions that will dramactically increase my tax bill. Rarely does it make sense, in my opinion, to not sell a stock when the trade or investment thesis is over. When it is time to get out, get out regardless of the tax situation. However, in some cases when the stock is just drifting with the overall market and the fundamentals and the thesis for holding are still intact, then holding a Capital Gain into the next tax year may make sense.

For instance, my core position with PCP went long term at the end of November. My cost basis is $74.00 and the long term capital gain is very substantial. My feeling about the stock is that the run is not yet over, but the easy money has been made. I am thinking that $160 is reachable by earnings at the end of January, but I may not want to hold that long if events change.

During the November sell-off, I kept with my long position because I knew the stock would bounce back and I also was so close to locking in the long term capital gains rate. Now I have the ability to sell it without additional tax consequence, but I would also like to pay the taxes in 2008. Hopefully, the market will give me a reason to hold the stock another 30-45 days to postpone the tax man.

Weekly Recap

As we follow the market's path, are we headed towards darkness or just different scenery? Last week tells us that the market is still unsure. The week was a loser - all caused by the Fed's failed communication strategy. However. as we get a few days beyond the Tuesday meeting, is it time to rethinking the market's direction?

Friday's selling (on bad CPI inflation news) may have a silver lining. The volume was very weak and the bears didn't look committed to taking the market down. On the other hand, buyers were on strike. Next week will shake out what the month will look like.

Last week, I was contently holding stocks and options long until 2:15 PM on Tuesday, when the Fed's decision and statements caused traders to groan audibly on CNBC. I sold my GS calls as soon as possible (and they were slaughtered) and threw up some XLF puts to try to stem the bleeding.

Wednesday saw me sell off some PCP calls (for a profit) early to raise cash, and GRMN's erratic run has forced to have me admit defeat in trying to trade calls with the security. I sold all my GRMN calls and started to "get simple" with my portfolio.

Thursday's news (PPI) continued my negativity and concern for the market's direction. I sold all my calls (except a few AAPL and PCP strikes) and put about 40% of my portfolio in cash.

Friday's move would have normally had me going to 100% cash, but the selling was so weak (though efficient) that I have decided to stay put. I covered my XLF puts on Friday and stand ready for next week.

Will it be up or down? Into the light or into the dark? I will wait until Mr. Market tells me before jumping in. The trend changes have just become too difficult to read for this trader.

P.S. I did have a very short ride down with UA on Friday (bought at $45.35) before getting stopped out at $44.90. That stock was mentioned on my shopping list, but more technical damage was done there again on Friday and I will continue to watch it.

Setting up a Shopping List

So what to do now? If things get ugly, I plan to collar my long position with puts. Otherwise, I am also putting together a shopping list. This list includes ANSS, AAPL, BTJ, PCP, GS, UA, and GRMN.

Until the trend changes, there is no hurry to run out and buy, so I am looking at good entry points for these stocks. Here is what I am thinking:

• ANSS. Buy at $37.50 with a stop at $36.50
• AAPL. Buy at $179.00
• GS. Buy at $189.00
• BTJ. Buy at $36.00
• PCP. Buy at $138.00 with a stop at $133.00
• UA. Buy at $46.00 with a stop at $45.00

Now with GRMN, I really don't yet have a clue. After looking at that chart, I would just be guessing. I want to buy more when it gets cheaper, but it is a stock without a solid base. We shall see.

These stocks may never get to these prices, but if I think that the market tape is as bad as I fear, they may be there very soon. I am watching the trend for a change, but this is my Christmas list.

Getting Simple

Emotionally, the market is in trouble. The way that the Fed has handled things (their communications strategy and not their policy) has investors at wits end. What was a bullish feeling going into the Holidays is now doom and gloom.

Confidence is a fragile thing and the Fed crushed it. The trend is to sell any strength. So I got simple yesterday and this morning. I have sold almost all my calls. I have a few token APPL and PCP calls left as a placeholder more than anything else. I haven't hedged my long stock positions, but probably will if the market tries to rally.

I haven't been this negative about conditions in five years. Nothing has fundamentally changed since Monday, but the feeling that the Fed was competent has left the market. As a trader, this is a big deal. We may be headed for 1390 on the S&P, breaking the low established in November.

GRMN is Tough To Handle

Today's further sell-off of GRMN is getting too tough to handle from an options perspective. I sold my GRMN calls this morning and bought some Jan100 puts to collar my long stock position. I plan to probably sell those puts later today; the plan was just to try to stem the losses.

I am only guessing why the stock is down at this point, but Microsoft bought Multimap, one of Great Briton's largest on-line mapping companies to expand its search capabilities. It may be that folks think that MicroSoft will be less likely to buy GRMN, but who knows? (if you do know, then please comment).

Anyway, I have been giving back a lot of my profits on GRMN options because of stock investor mood swings about GRMN's future. Time to do something different when it is not working. No more options in the short term for GRMN. Stock only (and maybe a covered call or two).

They Know Nothing!

I think that Cramer was statesmen-like about the Fed on CNBC in August with his infamous "they know nothing!"rant. My goodness is this Fed tone def.

The rate cut was not the issue. As described in my last post, the wording was everything and it is clear that they have no idea how to manage monetary policy during a possible recession. The argument was that the Fed has been behind the curve on the credit issue and a slowing economy. Their statement does not provide anyone with any confidence that they are catching up.

Here is what the Fed said:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

OK. The guidance paragraph in the statement highlighted in red says it all to me. It basically says that the economy and inflation are negatives and that we are not sure what to do about it because we can't predict the future. Right now the "prudent thing" is not what the market wants to hear and, if this is an honest statement, then we ought to be scared to death (or at least out of our long positions).

I normally don't get too worked up about Fed statements, but this is the worst I have seen in 15 years.

I sold GS as soon as I possibly could after the announcement, but held everything else (and added some PCP calls near the close). I am hoping for a bounce back tomorrow, but I am not counting on hope. We broke down technically and this could be the beginning of the end.

I have not been this negative since 2001.

Reacting to the Fed

(This was also posted on the TIE InvestorVillage Message Board by me this morning).

I really believe that traders don't give two hoots about whether the Fed cuts by 25 basis points or 50 today. It has been about the wording of the statement that matters. The CNBC talking head frenzy is almost funny about what people think (25 or 50?), but a few get it right in my view that the wording is important.

Here is the statement from the last Fed meeting on Halloween:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

So what should we looking for this time? Well, this is all about whether the Fed is on the same page as the market.

Note the 1st paragraph last time around. The comment about "strains in financial markets have eased somewhat on balance" has got to go. Clearly the financial markets are as bad, if not worse that last August. The LIBOR and the commercial paper markets are under tremendous pressure. A realization by the Fed that more work needs to be done here will be important.

Secondly, the third paragraph is out of step with what the market thinks. The wording that "The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth" may sound good to inflation hawks, but it signals to most that the Fed is behind the curve. Balance? What Balance? The mortgage market is frozen. The risk of recession is serious enough that the market will want the Fed to address the wording to suggest that further easing is very possible to generate growth and stabilize the financial market.

The message is everything. The first move at 2:15 pm may easily be a head fake. It is often about folks that are looking at the headline (25 basis points or 50 basis points). The market will move with the wording and that takes a moment to understand.

Cramer Pumps ANSS

Those that follow my blog have known that Ansys, Inc. (ANSS) has been on my watch list for some time. This is a company that Cramer discussed at length last night on his show. The reason for the comments was that he felt that ANSS was a company that consistently under promised and over performed.

Well, I can only say that I am glad that he is finally on board! Unfortunately, he didn't let me in on the fact that he was going to have these comments so that I could be long the stock beforehand. Now I will have to potentially chase the price like everyone else.

Or not. I am looking for an entry point and I will wait for a dip over the next few weeks. For those interested in finding out about this company, my post from early November explains the company in greater detail (http://sneakdoggiedog.blogspot.com/2007/11/sailing-will-never-be-same.html).

Weekly Recap

The week that started out so slow got exciting up until the end (well, Friday was pretty boring). Anyway, Monday started out with me being skeptical that the market would drive through the technical barriers in front of it by week's end.

I started out the week buying TIE puts and XLF puts to protect myself, but by Thursday I was covering these bets and celebrating the technical advances of each of the market indexes.

The market had a follow through of the bottom established on November 20th. This made Friday a buying day and I picked up BTJ and GS calls for the expected rude during the upcoming week.

The Bollingers are in the way, so I expect very little until Tuesday afternoon. I think that the pundits keep missing the Fed news. It is not about whether they cut by 25 or 50 basis points, but what they say that will move the market. We can have 25 basis points and a sell off or another leg up with the same basis point cut. It is all about the wording. If it is about "inflation", then hide the women and children.

Going Shopping

Went shopping this morning. I decided to put some cash to work. You just have to follow the trend and the trend is up.

I purchased some GS Dec220 calls and bought BTJ. The GS calls may be rolled quickly to January strikes this afternoon. The market dipped soon after open and I just reacted to the dip. A January option to ride the symmetrical triangle pattern I mentioned last night makes more sense past today.

With BTJ, the stock has just gotten to the point where it looks attractive technically. I expect this company to continue to outperform and it has been on my watch list for some time.

SIRO Reports a Good Quarter

Sirona Dental reported solid earnings and positive guidance today and the stock is up this morning. According to the Press Release, revenue was $177.9 million (an 31.3% increase year over year) with growth registered in all the company's business segments. In particular, Dental CAD/CAM Systems increased 68% and Imaging Systems increased 27%. Revenue in the United States increased by 32%. Outside the United States, revenue increased 31%.

Dental CAD/CAM revenue growth was mainly driven by sales of the Company’s new MC XL systems. Imaging Systems’ revenues increased due to the continued adoption of digital radiography, increased sales of panoramic imaging units and sales of the Company’s Galileos 3D imaging system.

Gross profit increased year over year by $23.8 million to $82.7 million (up 40.4%). Gross profit margins also increased three percentage points. Net income was $51.8 million (compared to a net loss of $1.5 million last year) .

These results included a one-time benefit of $45.6 million, due to the revaluation of deferred tax assets and liabilities resulting from a reduction in the German tax rate. If you net out the one-time benefit, my math has the company's EPS at $0.27 per share (diluted) vs. a consensus number of $0.29. Despite the "miss", the earnings included a huge currency loss of almost $7 million. More importantly, however, is that revenue exceeded expectations by 13% or $20 million and guidance for 2008 looks very good with expected revenue between $705 and $725 million within analyst expectations of $717 million.

SIRO's stock price has been down sharply over the last month because of fear that the dental market has been slow lately. Today's numbers suggest that this is not the case.

One More Chart Tonight

I am pretty impressed with the BTJ chart. It is looking like the stock has paid some dues and has bulit a base before moving higher. I may be adding some here above $41.

GS Technicals are Scary

Wow. GS is now is what is called a perfect symetrical triangle, which is a continuation pattern of the previous uptrend. Well almost. The only thing not prefect about this pattern is that the trend is a little short. It should be at least a couple months and it has been only six weeks. Somehow, I don't think that this stock is going to wait.

Next stop is $275 by the end of January:

Ignition

We definitely had lift off today. I just took a look at the index charts and the bulls really took it to the bears. Not only did the S&P take out technical resistance but the Nasdaq took at resistance at 2700 as well. I was so focused on the S&P that I didn't focus at all on the COMPQ.

The Chart is linked:

http://stockcharts.com/h-sc/ui?s=$COMPQ&p=D&b=5&g=0&id=p77158632644&a=106542318

The S&P also took out the bearish trend on the Point and Figure.

The Little Engine Did It!

The Little Engine not only got to the top of the hill, but down the hill and through the tunnel and out the other side. In fact, if I hadn't covered my puts at 1490, that damn train might have run me over!

Sold my XLF puts, but kept my TIE puts. So far, so good. Now I'm exposed going into tomorrow's jobs report, but I have to trust my thesis. I just can't walk away too far from the monitor until the jobs report is out in case I need to bail. If the tape gets ugly from the jobs number, I may collar my positions. Otherwise, it is time to ride the Santa Claus rally.

The Little Engine that Could?

My gut says that we will get a decent December/January rally here. My brain is telling me to wait until we get the signal. The S&P is right at the cusp of pulling it off this morning and reaching 1490. Will the Little Engine make it?

It not only has to surpass it intraday on volume, but it needs to close above it. The timing is interesting as we await tomorrow's jobs report. It is poised to make a move if the news is well received. If not, well we may be retesting the lows.

So I sit and wait and watch myself throw away a little cash with my XLF puts, but it helps me to sleep at night. My portfolio has grown larger 4 out of the last 5 trading days (although marginally), so I shouldn't be complaining.

Come on Little Engine. This investor wants to go long and go deep for the next 60 days.

A Dog's Take on the Market, Part 2

The Federal Reserve is set to cut interest rates again on December 11th. Conventional wisdom tells everybody that the dollar will continue to fall as a result of easy money, ignited inflation, etc. Well, it may fall for the first day, first week or first month, but the dollar is near a bottom.

I base this statement on the current state of the global economy. The US Federal Reserve is not the only Central Bank in the World considering a rate cut. The Fed is considering a cut because of fears that the US economy is heading into a recession. While I don't see signs of a recession, a slowdown is definitely in the cards.

So the question becomes what happens to the global economy if the US economy slows significantly? In the past, it meant that if the US economy had a cough, then the rest of the world probably would get a major cold. There are some that are saying that this rule has changed because of the emergence of the developing world and BRIC. While I agree that other economies have expanded impressively, I am not yet ready to buy into the notion that the change has been significant enough to change my way of thinking. If the US economy falls into recession and the global economy slows, then the world's wealth will seek a safe haven and that is currently the US Dollar and US Treasuries.

So we have a conflicting trend. The dollar falls when the Fed eases. It rises during geopolitical events or global economic stress. The following chart details the dollar against major currencies over the last 13 years. The chart also show the inverse relationship between the dollar and gold (1/price of gold is shown on this chart):



A contrarian view is also worth considering here. Every trader in the world is long of gold because of the global demand for the commodity. Every trader in the world is short of the dollar because the Fed is going to cut rates. Hmmn...notice a pattern?

If the global economy slows, what do you think will happen to the price of gold? Demand for gold will decrease and the price of gold will decrease pulling up the dollar.

So you have every trader on one side of the bet that the dollar will fall and gold will rise. You have the possibility that the Fed will ease, but the ease is based on the fear of a US slowdown that will probably lead to a global slowdown that tends to cause global investors to seek safe haven in the dollar and treasuries.

One last piece of the puzzle and it is longer term. The Fed ease will stimulate the economy 12-18 months from now. History has shown that the dollar is strongest when the economy is growing. Growth pulls up the dollar. This last piece confirms for me that the dollar will be higher than where it is a year from now.

So I am not worried about the dollar at ALL.

This short post is very simplistic. There are other economic reasons at play, but the basic premise is that the dollar has bottomed or will shortly.

Of course, I encourage comments.

A Dog's Take on the Market, Part 1

I just realized that I have a blog. Not really, but compared to a message board where everyone argues with whatever economic point one makes, I have the benefit of posting a few thoughts here periodically for a few friends that stop by from time to time without fear of retribution.

A lot of my focus over the last two months has really been on the stocks I own and the tactical moves I make from day to day. While that will continue (it is really my way of tracking what worked and didn't work), I also do plan on sharing a few thoughts about where the market is headed and what I think of certain economic "facts" that the traditional media incorrectly spouses.

I was on a plane tonight and looked at the Wall Street Journal and saw an article with a headline that said something like "Oil Headed Lower...." Excuse me, but when did this junior journalist become a commodities trader worth respecting? I didn't bother to read the article because I was so disgusted. I am not blaming the young "cub" reporter, but please, if we all could predict where a market was headed, we would all be rich.

Of course, the reporter probably took an anecdotal poll of traders to gauge what they thought of the market, but the smart money is not reading this trash - it biases an open mind to a market.

So where is the equities market going short term? Heck if I know. That doesn't mean that I'm not willing to invest or trade (I have a current net long position), but my view is that the market has now entered a trading range within the next phase of this correction. It may or may not take the next 3-4 weeks for the market to move out of this range. We are in an events-driven market and very few stocks are currently immune to the daily gyrations of fear and greed.

The daily and weekly index charts tell us nothing. It is all about "intraday" and the mood of the day on the floor. So we have the jobs report on Friday, the Fed Meeting next week, and then some thinly traded periods with the usual holiday mood to finish out the month before the "January Effect". I think that most of these events have the opportunity to be bullish, but I am not willing to bet big on this. Hence, I have hedged a lot of my portfolio.

So far it is working, but mileage may vary.

Tomorrow - my thoughts about the Dollar and Foreign Equities Markets.

Building Some Defense

Castles worked in the Middle Ages as a good form of defense and kept invaders from pillaging the population. Today, we fight a different battle between the bulls and the bears and I have re-added some XLF puts to hedge a little against any downside moves.



We still have not penetrated the 1490 level on the S&P and I am planning for us to be in a trading range until at least December 11th. Therefore, buying some "protection" makes sense. The TIE puts that I own also help with any downside in the market tape.

Nibbled at TIE Puts Again

I nibbled at some TIE puts this morning shortly after open. I planned on taking a big bite, but a TIE upgrade from CitiGroup this morning (initiated at buy) gave me a little pause. My on-line broker having an option market technical hick-up for 30 minutes (9:45-10:15 AM) also affected my purchases. Not knowing the bid and ask for 30 minutes definitely causes issues.

Anyway, I have a marker down and will be adding on any move above $30.00 or any real trend down. I bought Jan30 puts.

Weekly Recap

November is in the books. A hangover? A bad hair month? No it was the subprime mess rearing its ugly head again that caused the markets to ring up one of its worst November on record.

Last Tuesday was a busy day for my portfolio, having sold ETFC for a gain, thinking that an AMTD deal would have happened by Tuesday (which would have had more upside to the stock price). As it turned out, the Citadel investment didn't move the stock and, so far, seems to have been the right decision. The proceeds from this speculative play went into more ROCM and the beginning of another position with SIRO. Both ROCM and SIRO were on-sale and usually hold up well defensively if the market moves south.

I also lightened up on my AAPL and GRMN calls - again getting slightly defensive. Finally, I bought some ZOLT puts on Tuesday to play the ZOLT earnings announcement on Wednesday night. This last trade was a mistake. ZOLT's earnings were good enough to propel the stock and I had to bail on these puts ASAP on Thursday morning. The trade was a token amount, but I hate to be so wrong.

Wednesday's market tape caused me to get more defensive. With the bulls driving up the DJI market tape more than 550 points, I started hedging my bets by buying some XLF puts and some TIE puts (after TIE rocketed up on Wednesday).

Thursday's tape caused me to sell those puts as it appears to me that folks began buying the dip, waiting for the Fed Chairman to speak in the evening (hopefully juicing stocks some more on Friday). Friday's tape began to convince me that we had come too far, too fast and I sold half my remaining calls shortly after open.

So I now have some cash on the sideline for next week - a week that should be interesting.

Jobs report next week which will be a set-up for the Fed meeting on the 11th. It seems like we have a very serious debate going on between the bulls and the bears, meaning volume next week may be heavy.