The Hedgehog vs. The Fox

Isaiah Berlin's essay "The Hedgehog and the Fox" divides thinkers into two categories. Hedgehogs rely on a single defining idea to influence their decision making while foxes rely on multiple experiences and cannot define their thinking into one single idea. As investors, we are confronted by many different ideas and opportunities. This leads us to often act like the fox as a trading opportunity may be here today and then gone tomorrow. To rely on one single idea to consistently generate returns will lead to frustration. When a good trade becomes crowded, we must move on to our next idea.

At times, the market does allow us to behave like a hedgehog. When these opportunities arrive, we must take advantage. After all, I would rather trade a stock with which I am comfortable and knowledgeable than spend hours searching for the next big idea.

We now have such a trade. For the past three weeks I have discussed MasterCard (MA) in my weekly newsletter. The fundamentals of MA are well known and deteriorating. MA is a former market darling that has crashed to earth. When most felt the credit crisis was contained, MA was seen as a place to hide. By acting as a transaction processor, MA assumes virtually no credit risk and earns a fee each time their card is used. If consumer spending held, their business would continue to grow. However as the credit crisis has expanded beyond the banks and now threatens a deep, consumer-led recession, MA's core franchise is under attack. With predictions circulating of banks cutting credit lines, MA's growth will be curtailed and their earnings power will suffer.

The drop in price has resulted in a clearly defined channel that has held for over 4 months. As the market rallied last week, MA bounced off the lower end of the trading range, retested the top of the range and then pulled back. The result is a stock at the higher end of its trading range, that has set another lower high (its 4th lower high since September) and enjoyed a 26% one week move on declining volume. Knowing that volume should follow the trend, a stock that rises on declining volume should not be trusted.

Deteriorating fundamentals, a clear technical pattern, and unsustainable moves on declining volume combine to offer an excellent short sale candidate. MA remains a unique stock in a challenging market. Over the past three weeks, I have shorted the shares above $142, covered at $126 and now gone short above $139. With a clear technical pattern, all signs point to a drop in MA shares that should violate the recent intraday low of $115.

Comments

[cubanstockp...:]

great post, I havent seen MA feel the disruption yet that should be expected soon.
Drop to 100.00 probable.

2008 Dec 09 12:07 PM