Evaluating Pre-Summer Positions in This Schizophrenic Market

The U.S. stock market has been described as “painful” by many of our colleagues. The recent rally left many on the sidelines. The move up came because “things stopped getting worse at a faster rate” but now it may start to feel that the next stage of “things actually not getting worse and likely to improve” isn’t quite clear enough to support a further rally.

Unfortunately there is no way to predict the short and medium term moves in the market. We’d love to ignore them but no matter how narrow our stock selection process, they get caught up in the tide of market ebbs and flows.

As has been said for a long time, all one needs to understand is fear and greed and know which one is operating at the moment. But in this market they seem to be hand in hand and in the market every day. Witness the inflation debate. Most experts actually agree that there is no real evidence of inflation and cases can (and have been) made by GaveKal, Krugman and others that we will dodge this bullet. We may even do it in a fairly routine and predictable fashion.

All that reasoning doesn’t matter of course. We actually read a piece Wednesday from a sell-side firm (we will leave out their name to protect the innocent - there must be some there right?) that actually brought the hyperinflation of Nazi Germany into the argument. Seriously?!? Yes they did!

Now their piece goes on to say that their analysis suggests that we remain in a structural period of tame inflation and they don’t think that would change. But of course this shows up later in the piece, after the up front fear stoking comment about Nazi German hyperinflation.

This is what makes a market. That’s all fine and good but the schizophrenia in evidence makes it very hard to manage portfolios. It demands a daily analysis, affirmations and adjustments along with a healthy dose of risk management.

We are dealing with some pre-summer positions that will have to be closed or inoculated against losses. Palm (PALM) is launching the Pre this weekend and thankfully Mr. Mossberg has weighed in with a pretty positive review. He rightly points out that the applications are missing and just a few days later Apple (AAPL) will be updating their iPhone, which may kill off some Pre enthusiasm. Others have all given Pre a pretty positive review so the stock may continue to act well into the weekend. In the short term, however, it may well have run the course until more carriers come online and we see how the WebOS develops as a platform. It’s hard to have a reliable IV on Palm but $15 is reasonable at the high end.

Nvidia (NVDA) had a positive but muted reaction to the ION newsflow out of Computex this week. After hitting a high of $11.20 or so it has settled back to just above $10. Investors are still very worried about margins and remain very much in a “show me” state of thinking for the most part. However, the company has their analyst meeting on the 16th where we expect mostly more of the same from management but an incrementally positive reception from analysts who continue to “dig in” to the story more and more. IV on NVDA is $15.

The Apple story plays out just as it should and there are few surprises there. This is a massively over-covered stock to be sure so it doesn’t require much work beyond knowing where the IV belongs. Right now we are at $150 and are sticking with it until after the summer.

Emerging markets have had a great run. The group we bought (China, Brazil, Canada) is up 25% but should continue to do well (perhaps not as well) for the rest of the year so not much reason to reevaluate at this point.

Although our decision could change at any time, our plan is to move from 25% cash, 75% long and 20% short to 50%/50%/15% by the summer and keep a watchful eye on what still feels like an unsettled market.

Disclosure: Research 2.0 has positions in all the securities above that would be described as net long although some have options and other short components involved.

Comments

[mollytjm:]

Interesting article. The market is crazy, but one company,
Apple, is a great value buy and it will survive whatever happens with the other companies. Palm...well...they don't have the cash reserve and they're pretty much a one-trick-pony. No one innovates like Apple or as fast, so i can't see them letting someone else lead the pack on innovation. That just isn't their style and they have the $$$ to take on all comers now.
Long APPL

Jun 04 11:47 AM

[rsasa:]

I'm sure our neighbor to the north will be happy to know that they're an 'emerging market.' Who else is in the group with them, France and the UK?

Jun 04 12:42 PM

[Kris Tuttle:]

I meant no disrespect to the fine nation of Canada.

Beautiful country!

Jun 17 12:05 PM