I am not calling a top...

Discussion in 'Trading' started by ByLoSellHi, May 8, 2007.

  1. ...because I know better. Honestly.

    I will say this. With the U.S. economy slowing, noticeably and appreciably, including a serious and now quantifiable hit to home equity values in many parts of the country, higher energy prices, and an absolutely bubble-licious Asian stock market rise, including having many Chinese equities at much higher P/E ratios than dot.com's in 1999 (assuming the published data can be believed - no transparency on Chinese balance sheets)...

    ..only the most risk-welcoming individual mindset would want to try and juice the pulp here.

    M&A activity and corporate repurchasing of their shares have fueled this latest ramp up, and that can only last for so long.

    I can't possibly envision foreigners lusting after U.S. based companies, no matter how cheap the dollar gets, because of the fundamentally weak American economy. I do, however, believe that 1st rate, multinational companies like HON and BA can continue to thrive on a business model basis (if not an eps growth based one).

    And besides, Abby Joseph Cohen came out this morning feeling the apparent need to lend her credible (sarcasm) voice to the argument that there's a lot of value out there.

    That's really all the caution I need.

    Happy trading. May your longs and shorts win.

    *I will not implement a short portfolio at this time - I will wait for a confirming 3%-5% or greater correction, over a period of a couple of months, at minimum, with continuing degrading fundamentals in both the consumer (who is taking on debt on credit cards at levels not seen in a while) and corporations (subtract share buy backs and M&A activity, and the eps growth has been about 1/2 the published rate).

    When I do implement a shorting portfolio, assuming we get a verifiable and sustained pullback, it will be targeting high multiple, fundamentally weak companies, with exposure to biotech, consumer discretionary, and metals and energy (not high multiple now, but I can feel the meltdown coming).

    You may be right, I may be crazy, but time will tell. I'm fully willing, as always, to face my bad calls. If Abby can do it, so can I.

    The next bubble: People chasing jobs that pay modest incomes, rather than flipping homes, or investing in the financial markets. Hopefully, for everyone's sake, these jobs will be there.

    So mark this thread, on May 8th, 2007, and let's revisit it in three, six and nine months, and let's see what unfolds. I won't hide or gloat, whether right or wrong.
  2. Mvic


    If you are so sure about this scenario then $ cost average in to a short EFT or in to out month puts (which will also allow you to participate in an increase in volatility when it arrives). Find some very liquid hedges (DIA or YM) so you don't get hurt if the market continues to rise. Maybe even sell some near month puts against your out month puts if you have confidence in your tape reading.

    Waiting until we are down 3-5% to enter a short may work (though not so much if we are down 10% in one/few days) but remember that you will likely have to sit through some vicious bear market rallies to make any money.

    This is speculating, not investing. What that means is that if you are taking a macro approach you trade around your position such that if you are wrong you don't get hurt too much (easier said than done and I haven't done it particularly well myself this year) and you buy yourself time to be right.

    Good luck either way.
  3. Mvic, I should have said that what I stated was assuming a secular downturn because of waning fundamentals and liquidity being reduced (it's being reduced now with each share buyback, M&A and dividend increase on the corporate side, and by tightening of lending standards to consumers and small businesses, too).

    That's why I want to see a 3% to 5% pullback, over some duration, to minimize the odds that it's a one day drop or one week drop. I don't want to set up a short portfolio based on a sharp pullback due to a one-off or two-off event, only to see recovery.

    I believe a secular downturn is coming. I would be taking profits now if I already hadn't.

    I don't think this is a macro strategy, because if you honestly look at eps growth, much of it has been due to share buybacks...more so than in the past (someone posted an article about IBM that was spot on).

    So, companies are not engaging in cap-ex spending, but using the cash they've accumulated to boost short term returns to shareholders.

    That's their perogative, but it doesn't instill confidence in the underlying health of the economy if they aren't investing in machinery, plant and capital to increase production.
  4. Another feeble attempt at fighting against the trend.
  5. we'll see what happens

    As I have written before the bears can make money for a couple months during the market dips but eventually when the market rebounds and makes new highs they are all forced to cover. The market is never too cheap for too long; nor too expensive for too long either.