When every possible conventional tool has been used to explain violent market vagaries, I try to find unconventional ones. Could be astrology. Today, it will be fortune cookies.
1) “The best way to succeed in life is to act on the advice you give to others." My first article on SA was titled the Start of Another Roller Coaster Ride. This was on June 20, at S&P 1278. I was 50% long, 40% short, 10% cash. Most of my longs did pretty well since, except for little Active Power (NASDAQ:ACPW) ($2.4, now $1.80) which caved in Wednesday on disappointing guidance. IMAX (NYSE:IMAX) ($29, now $21) too was a casualty, both on a Stifel downgrade on Monday, and Q2 Earnings toda. I doubled down at the open, at $20.40. My big winner was Nalco (NYSE:NLC) ($26) taken out by Ecolab at $57. And the jury is out on Veeco (NASDAQ:VECO) ($50, now $41). In the meantime, I had sensed the bottom at SP 1280 on June 28 and confirmed the test at 1300 on June 30. During the weekend of July 9-10, I labeled S&P 1353 of July 7 an exhaustion gap and the next week-end, at S&P 1316, I bet for 1280 before 1350. After reaching an intraday low of 1295 on July 19, with the euro-dollar futures decoupling from the market, I reversed that call and we went on to 1347 intraday on July 21. At that point, we were seeing big moves on earnings, akin to short covering, and I went with the trend as long as stocks would react well to news, regardless of the news itself. Two words of caution though – more than seasonal weakness in Europe and stay away from banks (click here).
2) "Do not mistake temptation with opportunity." This was temptation. The next day, Friday July 22, we stopped short of the previous intraday high. Some industrials had started to disappoint, with big down moves – Johnson Controls (NYSE:JCI) ($38), down 8%, Ingersoll Rand (NYSE:IR) ($38), down 10%. The budget deficit talks were shaping up as a bad revolving door version of “All in The Family”. And on Monday July 25, stocks were no longer reacting well to any news. Indeed, one concept that had seemed safe, Japan rebuilding, was shaken on Tuesday, when MMM (NYSE:MMM) ($88) went down 6% on its earnings release, shaving 30 points on the Dow, and blaming the weakness on Japan. Other industrials took their cue from MMM, amplified on Wednesday by an “unexpected” drop in durable goods orders and a weak Beige Book. Parker Hannifin (NYSE:PH) ($79.75), down 9% in three days on no company news, United Rentals (NYSE:URI) ($23.75), down 12% after a big earnings driven recovery of 22.5%. Indeed, it was not uncommon to see stocks down 4% to 5%. This is reminiscent of the May-June move - a number of issues have been temporarily patched since, like the European plague, but the Washington crowd is now running like chicken with their heads cut off. While the CBO’s projection for the 2012-2021 period has improved, with receipts of $39 trillion, more than the $35 trillion for the 2010-2020 period, it is still calling for a cumulative deficit of $7 trillion, and an increase of $8 trillion in debt held by the public. The problem is not the out-years, around 3.2% of GDP, It is 2011 (9.8%) and 2012 (7%).
3) “Two small jumps are sometimes better than one big leap." So, personally, I will continue to listen to Ben Bernanke, and not to either Reid or Obama. I prefer two small, less disruptive deals, with an immediate impact, than the Big Deal – unless Obama wants to repeal or postpone Obamacare on his own, which is probably why Barney Frank wants to legalize marijuana. If the country so decides in 2012, the Senate will become Republican and Obama may then be out. Even if he is not he will be a lame duck and Republicans will be in a position to revert the policies which are adding to the short term problems – something they cannot do now.
4) “It is better to have a hen tomorrow than an egg today." As I have said before, when markets show such short term dislocations, it is usually better to stay pat. One has a choice. Soros, which Dick Bove is trying to emulate, is 75% cash. He is probably right. In a down market, even good stocks go down, and the upside is murky, to say the least. Then there is the “I make money like poor people, I lose money like rich people” approach – the infamous hedge. I have often compared investing to a frustrating hunting game. This time I’ll use another frustrating game analogy, golf. Regardless of how bad your round is, there is always that last shot that brings you back. In my case, it was Sanmina (NASDAQ:SANM) ($11.30), up 27%, and Office Depot (NASDAQ:ODP) ($3.85), up 16% both on earnings. And while I am “hedged," I did initiate a position today on WesBanco at $19.90 (NASDAQ:WSBC) ($20.17) and PPG (NYSE:PPG) ($85.85).
5) “Good fortune awaits you at the end of the day." The question is, at the end of which day? At Thursday, July 28, at 14:30 EST, with S&P 500 at 1309, right smack in the middle of the consolidation range of July 12 to 17. At the time, I thought it would be resolved on the downside - I was right for a half-day. The configuration is the same today, with one difference: Q2 earnings are no longer a variable. We have one major short term driver left - the chickens in Washington. There are two scenarios. The first one, they agree before August 2. The smaller the package, the less disruption, and the markets could rebound. The second one, they continue to run around, under the principle floating around that Treasury has a bit more leeway than August 2. I doubt the markets would resist this type of headline news. I have no clue but here are my two cents. The Boehner bill is too small, hence the opposition. The Republicans probably would welcome a negative vote, which would confirm their mandate for a larger deficit reduction. The smoke and mirrors in Reid’s bill has already been uncovered. Since he is the only remnant of the Democrats’ majority leaders, I think he will compromise with Mitch McConell, with the help of Joe Robinette Biden (I can’t resist: Robinette is his middle name, and means faucet in French). As an aside, notice the big winner here: Nancy Pelosi. She must have lost her vocal chords, I cannot hear her anywhere. This is just the way the Democratic 2012 campaign wants it. She has to stay out of the fight if she wants to keep a chance. Net net, I reiterate: we should see 1280 before 1350. May be Congress wants to give us a real buying opportunity? One thing is for sure, the Washington chickens will quickly cave in should the Wall Street chickens enter the race.
6) “Invest, but never speculate." Right. Who believes in fortune cookies anyway? I will say one thing, though. If Japan was the reason for the some shortfalls, next quarter should show a big improvement. So when the overall market gives us a better clue, let’s not forget about those stocks which got trashed. The reverse is true for Europe. Q3 should be weaker than Q2. Lastly, identify the outperformers, especially those with lower volatility. In the face of Juniper’s drop (NYSE:JNPR) ($24), I am comfortable with my little Extreme Networks (NASDAQ:EXTR) ($3.45).
Disclosure: I am long ACPW, IMAX, VECO, SANM, WSBC, PPG, EXTR, ODP, SDS.