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The One Eyed Guide ( is Bob Small who: solo traveled to 25 countries by age 21, has a degree in Economics, an MBA from Columbia University in Marketing and Finance, has been a brand manager, was a licensed stock and options broker during the 87 crash, ran a $450... More
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  • Is Better Economic Reporting Killing the Market?
    In my previous article,5 Reasons Why This Market Still Has Upside Potential , I commented that the S&P500 had reached a PE of 26 based on 10 year average earns during the 1930 rally so there was significant upside (potentially 1350) in the market even though it is overvalued.  At that time I pulled off my leveraged market shorts to stay out of the way of any sudden break upwards as the baked in earnings surprises were revealed.
    All the news has been as positive as it could be with 80% of companies exceeding earning estimates and revenue losses coming in at only (!!!) -17.5% instead the   -24.8% that had been projected on October 1 (Thomson Reuters) but the market has gone down instead of up and technicians are worried that negative technical signals are forming.  The market drop instead of a gain so far today with GDP at 3.5% instead of 3.2%, positive Chicago PMI and positive (somewhat) consumer sentiment makes me think that the market is not going to move much higher even if earnings get better.
    A big difference from the Great Depression is that we have lots of economic reports that did not exist in 1930.  Many reports, such as GDP and Personal Income, started in 1929 so there was little history and trust in the reports so valuations continued upward until they reach very high levels.
    Today, most of the data out there supports the fact that the market is overvalued at current levels.  Even bulls seem to think that a 15% pullback is expected.
    Based on the inability of the market to go higher on what is really pretty good news, I am going aggressively short again.   I expect that the market will decline a bit more, stage a small rally to form a classic head and shoulders technical pattern and then head for the floor.  If this happens before xmas, it could get ugly as funds look to lock in profits. 

    Of course, it might start to go up fast but unless something unexpected happens I'm going to keep my positions on and ride out the "pain of the short".  There is a  lot more downside than upside from here.

    Disclosure:  Short Market
    Oct 30 12:52 PM | Link | Comment!
  • What do Earning Surprises Mean?
    From  CNBC:
    The blended earnings growth rate for the S&P 500 for Q3 2009, combining actual numbers for companies that have reported, and estimates for companies yet to report declined to -25.4% from -24.9% in the previous day.
    As of October 1st, the earnings growth rate was -24.7%. Of the 27 S&P 500 companies who have reported Q3, 78% beat estimates, 11% were in-line, and 11% were below estimates.  The blended earnings growth rate for the S&P 500 for Q3 2009 is currently at -25.4%. (Data provided by Thomson Reuters)
    ´╗┐This shows two things:
    1. Analysts change earnings estimates up to the day that earnings are released so skewed to the upside surprises are to be expected.
    2. Earnings estimates are getting more negative, down -0.5% in one day.
    More than likely, the market will react positively to the surprises which should come in for about 77% of companies based on the above and the 2nd quarter track record.

    Looking at Alcoa, the quality of what is happening is still poor as with the revised estimates Alcoa has a 27 forward PE.

    Based on all of this I am going to keep on my negative position but I think it is going to hurt a lot in the next few weeks.

    We'll see.

    Disclosure: RYDEX INVERSE NASDAQ 100 2X CL H
    Oct 08 11:02 AM | Link | Comment!
  • Is the Chicago PMI Report the Black Swan that Brings Down the Market?
    Today, the Chicago Purchasing Managers Index (PMI) came in at 46 instead of the expected 52 and the market tanked.  Economically, the importance of this is that 46 shows a continued contraction while 52 shows an expansion.
    Market psychology has more to do with the markets reaction than the poor economic outlook. 
    Both Minsky and Taleb pointed out that unexpected events can cause wild gyrations in the market. Minsky explained this as an adjustment by investors in future expectations that causes risky assets to suddenly be considered too highly valued.
    Many people, including myself, have considered the market (a very risky asset) overvalued for a while.  If the majority of investors suddenly decide that the recovery is not as strong as they thought and stock prices are therefore too high, we could see the market test new lows in short order.  History shows that a PE of 8 or lower needs to occur before a true bottom is in even when economic expansion is occurring.
    We'll see

    Disclosure: RYDEX INVERSE NASDAQ 100 2X CL H
    Sep 30 11:41 AM | Link | Comment!
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