Investment Capitalist

Corporate bonds have been on a tear since April; however, the paper of financial firms has outperformed all other categories by a significant margin. This is odd and perhaps suggests the market is either not correctly pricing this paper, or something is artificially preserving their value. During April and May, investment-grade subordinated financial bonds returned an average of 18%. Certain subordinate notes from SunTrust, Capital One, Regions Financial, Fifth Third, and PNC have posted gains of 50% or more in May alone.

Fear and risk aversion are creeping back into the market. Will this be an acute development or something with longer duration? Data coming in very discouraging. March ADP employment figures were a disaster with over 50% of the losses coming from the service sector.

It looks like most promising equity market is China. The Shanghai Composite is in the advanced stages of completing a tradable base:

For all you POT lovers (MOS, AGU, IPI as well):

If you trade DRYS, or any of the other shipping stocks:

Week of November 10

Still bullish on the market but defensive
in nature. Not putting myself out there for anything, in either
direction. Take trades for the time being and generate cash flow. When
the rally comes, it’ll be obvious. TRIN behaving very bullish all week,
spending Wed & Thur around 3.00 and as high as 4.0. Didn’t show
overbought on Friday. Seemed like major indices were covering up
underlying weakness in equities. SKF and the DOW both positive. Bizarre.

Bank index at 5th point inside triangle pattern. Could jump to 62 if 52-53 holds.

Week of November 3

THUR-
Heavy volume on the sell-off. Market’s spooked by the lopsided gov’t. As expected, but didn’t exploit.
Monitor airlines for entry levels (see below).  Many charts look like gaps from Tuesday were closed. Only problem is volume expanding across the board. So many charts look terrible, I feel like we’re going to revisit the lows. This is all because the Dem’s came 1 senate seet away from a super-majority. Maybe we will become full-blown, open, French style socialists. Who knows.

Short Looks-

AGU, POT, AMX, BAC (maybe), CRM, FSLR, GENZ, GOOG (monitor), ISRG, PCLN, WLP,

“We’re going to see five hedge funds fail for every bank, maybe more,”

A moment of reckoning for many hedge funds may come at the end of this month, when their exposure to credit default swaps must be “marked to market” to reflect the increased obligations at the end of the third quarter.

Olivant, the investment group run by former Abbey boss Luqman Arnold, revealed last week that its 2.8% stake in UBS was held through an account at Lehman in London which the firm’s administrators are refusing to release.

Short M&M’s Anyone?

Perhaps it’s time to put on the contrarian hat and re-visit metals and mining stocks. Aside from the macro tide that could be turning against the sector in the long-run, the near term is looking more and more like a blow-off top could be underway. The group has had the wind at its back with a declining dollar and surging demand in emerging markets, but with a coordinated defense from further declines in the Dollar underway by the Treasury and Fed, that tailwind has been neutralized. Furthermore, record breaking prices after a parabolic run in these stocks since the start of 2008 is leading to what PhD laden economists like to call “demand destruction”, although that term is more applicable to oil, there are similarities in metals attributable to substitution. Stock prices have gotten way out in front of earnings growth for now and although setting up short trades would be counter to the primary long-term uptrend’s, in the near term stock has been liquidated by institutional holders that won’t return to the bid for some time. As the June 30 mutual fund redemption deadline approaches, these are the stocks the funds will tend to be unloading in preparation to meet redemptions. Remember, June 30 is the first available redemption following the blood bath in March.

There’s enough talk on the blogosphere regarding Bear, and yes those that bought Puts last week made a killing, but I believe we have our emotional climax bottom in the financials. And behavior in many stocks that have been high on our sector list not only held up in this last shake to the downside, but a few even rallied on strong volume. Let’s bang em out quickly because any long ideas would be found in the same list I’ve been screaming BUY on.