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DARK HORSE HEDGE Update

|Includes: JOE, RAIL, Telecom Argentina S.A. (TEO)
DARK HORSE HEDGE Update

By Scott at Sabrient and Ilene at Phil’s Stock World 

“Stocks Retreat After Weak Jobs Report–AP” isn’t the headline we wanted as a country, but is the headline we anticipated at DHH.  The S&P 500 crossed the 200 day MA on Monday August 2, 2010, at 1114.  Once again, the hysteresis implemented by DHH looked for confirmation of the breakout to the LONG tilt before acting to tilt the L/S portfolio.  We are fundamentalist at heart and build our portfolio of positions looking for sound, growing, value stocks for long positions and quite the opposite for our short positions.  As discussed in prior publications of DHH we look to a few technical indicators to get momentum or direction guidance for the tilt but never with a blind eye to the key macroeconomic signals on the horizon.

Since the “breakout” on August 2, 2010, we have watched as the indexes spent 3 days to effectively trade 1 point higher on lower than average volume.  We believed that today’s jobs report would be the key number to either confirm the upward trend, or not.  The economists had forecasted that 65,000 jobs would be cut last month but in fact the report tells us that 131,000 jobs were cut, double the number forecasted. The Labor department also sharply revised lower the number of jobs provided by private employers in June. All of this data confirms, for now, that we want to maintain a BALANCED tilt in the DHH portfolio as the S&P 500 has retraced its steps and is trading below the 200 day MA again.

We had three companies in the DHH portfolio report quarterly results this week and the results were pretty much what we expected:

TEO beat forecasts on Wednesday with a net profit increase of 23%.   TEO is +20% since being added to the DHH portfolio on July 1, 2010 and continues to show strength in today’s weak market so we see no reason to do anything but hold onto the position.

JOE met the analyst estimates for “earnings” at -$.09/share and on the same day announced a lawsuit with Halliburton.  Nothing in the report changes our opinion of JOE as a decent short and again we will maintain our SHORT position in JOE.

RAIL actually lost less money than analysts estimated with -$.11 compared to a projected -$.17 loss. However, the stock is -10% in trading today.  At DHH we consider many aspects of a companies’ financial situation before recommending it for a long or short position.  RAIL has a particularly low score in quality of “earnings” which we believe is being born out in the price action today.  We remain comfortable with RAIL as a short.

Update: the market traded below the 200 day MA all day but closed just above it.  Late in the trading day consumer credit for June was released and was -$1.3 Billion versus and expected -$5.3 Billion which is a drag on the economy (lower consumer spending).  We will monitor trading action early next week to look for guidance on the tilt of the DHH portfolio.

Disclosure: none