Market Commentary
In a recent businessweek article, the 1920 Economist Knight was aptly referenced for his understanding of the difference between Risk, which the Markets know how to deal with, and Uncertainty, which the Markets don't - "Risk is what you face when you have a basic understanding of how things work but there's a degree of randomness or luck involved. Knightian uncertainty is when you're really just stumbling around in the dark."
I believe we are currently in the latter category. We are stumbling in the dark. It is not often that I have seen the media, be it the veterans in financial journalism or blogs like this one, so divided over the fate of market over the next two to three months. Parallels are being drawn to 98 drawdown and 87 crash. Some examples are here, here, and here. Speculations are being made on either side of actual fed fund rate reduction (the fed fund futures seem to be pricing in at least 50 basis points rate cut by the next FOMC meeting). Some examples are here, here and here.
Everything said and done, what do we need to know in terms of the market direction? My feel is last Thursday or Friday could not be picked as an absolute bottom. How many times have you seen a market stage a V-shaped recovery? The fact that we may revisit the bottoms or close to those levels is also bolstered by the degree of uncertainty as to what is exactly going on. Could we see a short term recovery period? Yes that is highly possible. Would it be sustainable? My answer would be no..not until we get back close to the bottom of last week.
At times like this, it makes sense to also keep an eye on the longer term trend. I would opine that the longer term still remains bullish. Besides I would consider it stupid to ignore a stance by Fed that pretty much says "we will take whatever actions necessary to keep the markets stable" (paraphrasing from here, here and here). Okay so the Fed may not be the best timers in terms of their actions but you at least know that they are not asleep. And that speaks volumes. There are two things you never bet against - the tape and the Feds. Bottomline - I will trade for short term in volatility and good stock picks. I will trade with a bullish intent for the long term.
If you need to understand more on the underpinnings of how the Fed is currently thinking without the interpretations of journalists, a new academic paper has been published on the Fed site on households becoming indebted relative to their assets. I am sure there are going to be lot of interpretations. To me, it seems to indicate Fed's inclination towards further rate cuts. Seems like one of their key objectives is to make access to credit for the little man, easy. Hmmmmm...
New Picks
Finally after a long draught, I have not one but two new picks!
ANF Long - Abercombie reports earnings August 22nd. This is a short term trade by buying September options. I am betting that the earnings report will have a surprise to the upside. Fundamentally, ANF can't seem to stop doing the right things in expanding and honing at the same time, their core competencies in targeting the young demographics. You know what is really interesting about young teenagers? They are likely to spend more money on clothes than their parents. And it is NOT their money! So there is no remorse in buying. Positive vibrations, anyone? And nobody knows better to capitalize this simple fact than ANF. I don't mean to imply every teenager gets a generous allowance from their parents or that ANF is completely banking on reckless spending but then this psychology plays into ANF's hands especially when they are firing on rest of the cylinders so pretty well. For numbers, go to any financial site and you will be impressed. Two things that I would highlight here in favor of ANF are its extremely strong brand and the best profit margins in the Industry (currently at 12.52%). Not to mention a consistent revenue growth that has outpaced the industry average. Because of all this and the past earnings estimates, there is a very good chance the earnings report this week may give a reasonable lift to the stock.
The Trade on ANF - Bought September calls with strike price of 70 at 9.60. You will possibly end up getting the same price if you put in your orders as soon as the day begins since the market action was flat to down towards the close for this stock.
SNDK Long - This is again a short term trade plus the stock has good fundamentals going for it. I will admit though my trade on this one is primarily based on chart patterns. The daily and weekly charts are showing bullish signs along with half a dozen reliable technical indicators.
The Trade on SNDK - Bought January calls with strike price of 50 at 9.70. Again there is a good chance you might get the same trade in the morning since this is where the last price was.
Please note both the above trades are very short term and I wouldn't risk playing them if you are not adept at options trading or not disciplined enough to put tight stops. SNDK is more speculative than ANF.
Some Stray Thoughts
Okay I have to vent but I will keep it brief. If I had to pick my favorite financial publication, it has to be hands down - Barron's. And yet reading the cover of this week's issue made me slightly queasy. To quickly summarize, it blasted Cramer (Jim Cramer of Mad Money, CNBC) and went all out to discredit his stock picking ability. Now I am not a big fan of Cramer and I agree many of his picks stink. But the man has wealth of insider knowledge and a wonderful insight on position and intermediate term trading. He in fact says not to buy his picks the next day due to the fabled "Cramer bounce" and also tells you to do your homework. What made me queasy was not that I feel very bad for Cramer but the fact that a publication that I put on pedestal in terms of credibility had to take a cheap shot when there was absolutely no need to. It was a cheap shot in more ways than one. To a certain extent Cramer may have deserved it because he underplays the role of timing in his stock picks. But he definitely doesn't deserve something like getting anointed with a dunce cap on the cover of a reputable financial publication. Allright I promised to keep this one brief so I will end my rant here. I will continue to be a big fan of Barrons though and I hope such pieces of journalism are far and between. Or wait a second .. Mr. Murdoch, have you already started interfering? :)
Open List
- BZH (Stock) - Sell Short - Opened on 2/14/07 at $41.54. Currently at $11.35 with 72.68% Gain
- ISRG (Option) Jan08 130 Call - Buy Long-Opened on 3/8/07 at $9.60. Current at $66.70 with 594.79% Gain
- GLD (Stock) - Buy Long - Opened on 7/10/07 at $65.61. Currently at $65.12 with 0.75% Loss
- PLUG (Stock) - Buy Long - Opened on 7/16/07 at $3.25. Currently at $2.64 with 18.77% Loss
- SNDK (Option) Jan 08 50 Call - Buy Long - Opened today on 8/20/07 at $9.70
- ANF (Option) Sep 07 70 Call - Buy Long - Opened today on 8/20/07 at $9.60
Closed List
- CRDN (Stock) - Buy Long - Opened on 2/14/07 at $56.44. Closed on 07 at $79.37 with 40.63% Gain
- TSO (Option) Jan 50 call - Buy Long-Opened on 7/10/07 at $14.40. Closed on 7/14/07 at $12.70 with 11.81% Loss
- CTXS (Option) Jan 08 30 Call - Buy Long - Opened on 7/18/07 at $6.90. Closed on 7/23/07 at $9.20 with 33.33% gain
Total Percentage Gain/Loss of Closed List Since Inception: 32.7% Gain
No comments:
Post a Comment