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What do you mean, we did not blow up today?

That’s right, we did not. Fast rewind to early July. We were still considering flirting with tops. On July 22, things actually looked pretty stable. The ECB had decided to fire its own bazooka and the market had rallied some 7% in a few days. I should have known better, here is my end quote at the time:

Now, on Europe and banks in general, let me be clear: I don’t trust them, period. As far as the ECB is concerned, being old enough to remember when it was created in 1998, one thing puzzles me. Its first president was the highly respected and stern Dutchman, Wim Duisenberg. Nothing wrong there. Its second president, Jean-Claude Trichet, before taking office, had to be cleared from charges regarding his supervision of the largest French bank, Credit Lyonnais, as it near collapsed in 2003. This took three years. Now we have Mario Draghi. Last I looked, he is governor of the Bank of Italy. And if the Goldman story is correct, he knew a lot about Greece at the wrong time. The fox in the henhouse?

On the Monday next, July 25, we started the quick and really dirty dive into the European abyss. Three short weeks later we were down 18% on the S&P 500 (SPX), from 1346 to 1101 intraday. I am not even talking about the high beta stocks or the banks, double that for some, and then some. Trust CNBC for having a weird sense of humor – their theme song was “Freefalling”… Accurate reporting indeed.

For some strange reason, like an overextended bungee cord, the market abruptly stopped to close at 1120 on August 8. On August 9, intraday, it reached a low of 1101 and a high of 1173, to close at 1121. On August 10, same thing: 1118 low, 1172 high, 1121 close. Bet these odds at the Roulette. On August 11, it opened at 1121 and closed at … 1172. There was no news really, so a retest was in “good conscience” order. We got it, picture perfect. On August 19, 22 and 23, we held the 1122 lows. You had to go back to your history book to find a reason why we consolidated in this area. The only explanation I have so far is the 50% retracement of the big October 2007 – March 2009 move. If you know better, let me know.

Then, as surely as Indiana Jones and the Bollinger Bands, we never looked back. On August 31, we hit 1231, for an intraday 12% move off the lows. This was it. Bernanke, Lagarde, and Trichet had spoken. Whatever they were saying was fine, we needed leaders, any leaders. Forget about Indiana Jones, we had the Wizards of Oz.

I definitively should have known better. 1231 was the intraday high alright, but we closed at 1219. The next day, September 1, we tried again. This is what we had been trained for. Fibonacci 1224, here we come! Whoops, we failed again. We closed at 1204, the low of the day. That was Thursday. On Friday, we got some weak economic news. Even though they were outdated, the whole thing was getting spooky, and while we were all waiting for some action, all we got was a big drop in the EuroDollar. It looked like the curtain was being pulled from the Wizards, and it was - there was nothing more they could do, at least so they said.

On Monday September 5, Europe melted down, 5% across the board. Even big “Joe” Ackerman, the European equivalent of Jamie Dimon, feared a repeat of 2008. He was not mincing words. With the Futures calling for a 4% or so down open, the odds were for a Black Tuesday. Recession, Banking crisis, no bullets left at the Fed or at the ECB (as if this one mattered anyway), a domino European default. I have more than thirty years of salt mine experience on Wall Street. I am telling you, this was it.

Well, it was not. Actually, not only we did not test the 1100-1120 area, the intraday low was 1140, a number without technical significance. The close at 1165 is kind of positive, above the 1163 25% Fibo level, but still meaningless given the volatility not only of the market but mainly of the news. We are at times when anything historical can happen. It can be a Black Swan, or a white one. At this point, the market sentiment seems to roll for Black and given my thoughts on Europe, I cannot disagree.

However, Tuesday’s action suggests the worst may be priced in. On Friday by the close I covered my longs and shorted the Euro. I undid these at the open Tuesday. I can’t help it, the stocks I own are so cheap it would take an enormous liquidity crisis to make them cheaper. So I'll stick with white, target 1270.

A number of my picks will have a high short term debt to cash ratio, and some long term debt which may look iffy - so cash flow generation is important, and is the bet. Here are two, in addition to those recently mentioned.

Woodward (WWD - $28.95): leader in fuel/energy optimization, $2Bn market, cap, $1.5Bn in sales, 16 x forward P/E, leveraged $400Mn in LT debt with $130Mn in CF.

United Rentals (URI - $15.70): leader in construction equipment rental, $1Bn market cap, $2.5Bn in sales, 10 x FPE; the iffy part here is the big use of cash flow in Q2 to buy $410Mn in equipment. This takes the net short term debt to $300Mn, with quarterly cash flow of around $250Mn.

Source: Tuesday's Market Action Suggests The Worst May Be Priced In