Doug's Daily Diary -- Tuesday, 10/25/2011

Covering QQQ 4:11 p.m. EDT I am covering my QQQ short from yesterday now ( $57.10) - after an apparent miss by Amazon. Amazon represents 4.1% of the QQQ. Last Program Standing? 3:50 p.m. EDT A market imbalance is present on the sell side. For now, there is a market imbalance on the sell side, with about only $1 billion for sale. I'm Like Switzerland 3:40 p.m. EDT Neutral -- on the market, that is. I'm back to market-neutral now. Reality Bites 2:02 p.m. EDT Yesterday Netflix (NFLX), today First Solar (FSLR) is being taken out to the woodshed. (T. Rowe Price (TROW) and Waddell & Reed (WDR) are large shareholders). Short TROW, WDR Goldman Sachs on Rebalancing 1:37 p.m. EDT The firm's monthly pension outlook made some interesting observations on rebalancing. I have written a lot about the potentially powerful impact of a reallocation out of bonds into stocks. Today Goldman Sachs' monthly pension outlook has made some interesting observations on the rebalancing subject: As of close on Oct. 24th, Goldman's desk models estimate $28.80 billion of equity selling from pension rebalancers. For the month of October, equities outperformed fixed income, with the S&P 500 outperforming U.S. T-notes by 12.97%. (This resulted in monthly estimated rebalancing flow of $19.33 billion out of equities). Lastly, Goldman saw one trigger event on Oct. 10 which the firm estimates nets to $9.47 billion in equity selling. Richmond Fed Signals Contraction 1:21 p.m. EDT The Richmond Fed Manufacturing Index came in at -6.0 for October. The Richmond Fed Manufacturing Index signaled economic contraction in October, coming in at -6.0. Shipments, backlogs and new orders improved modestly but remain weak, while future expectations were strong. Below is a chart of the trend in this index. Richmond Fed Manufacturing Activity Sources: Federal Reserve Bank of Richmond and Boenning & Scattergood View Chart » Hold Ceradyne 12:06 p.m. EDT The stock is enjoying a big run. Ceradyne (CRDN) is enjoying a big run today, up 7% after its better-than-expected earnings report, despite a broadly lower stock market. I have received a number of emails regarding what to do with the stock in here. Answer: I would hold. Long CRDN Sallie Mae Gets Slammed 11:56 a.m. EDT The President will discuss student loan reform legislation. SLM Corporation (SLM) is getting crushed today. (I recently sold out, as I am fearful of a deterioration in student loan credit.) That said, tomorrow the President will discuss student loan reform legislation. Among the considerations are a 2% credit that may be used to consolidate a direct student loan and a forgiveness program for those debtors who live at or below poverty or are government workers. Stay tuned. Riddle Me This 11:11 a.m. EDT Why is the yield on the 10-year bond moving lower? If the domestic economy is so strong (as many of the bullish cabal contend), then why is the yield on the 10-year bond moving lower again? No Numbers With EFSF 11:00 a.m. EDT Rather, ranges/indications will be given. High above the Alps, my gnome is saying that there will be little in the way of specific numbers associated with the EFSF bailout fund. Rather, ranges/indications will be given. As I wrote earlier, tomorrow's meeting will likely live down to my expectations! Oil Vey 10:46 a.m. EDT Crude's price spike is a headwind. The rise in the price of crude oil is, once again, a headwind to growth. More on this in tomorrow morning's opening missive On the Radio 10:19 a.m. EDT Tune in tomorrow. Heads up: I will be on Bloomberg Radio with Tom Keene tomorrow at 9:00 a.m. EDT. MF Global Going Under? 9:57 a.m. EDT Stay tuned. Is MF Global (MF) going to be the next casualty of the European debt crisis? MF Global's share price chart speaks volumes about the problems over there, as they could be on the wrong side of the PIGS bonds and credit default swaps. Stay tuned on this one. T. Rowe Price Misses the Mark 9:51 a.m. EDT The shares are down by almost 9% this morning. T. Rowe Price (TROW) missed consensus, and assets under management were disappointing. The shares of this object of my disaffection are down by almost 9% this morning. Short TROW Ceradyne Beats 9:44 a.m. EDT The company handily beat analysts' expectation. A new long, Ceradyne (CRDN), had a large beat to expectations, as I suggested yesterday. Long CRDN No Meetings 9:36 a.m. EDT Reports suggest that eurozone finance ministers will not meet on Wednesday. There will be no eurozone finance minister meetings on Wednesday, according to news sources. It should be emphasized that the summit meeting is not canceled. But the fact that the finance meeting has been canceled suggests another delay. As I wrote previously today, I expect the European leaders to live down to expectations! As Grandma Koufax used to say to me sometimes, Dougie, you seem to have turned chicken salad into chicken scat! Europe Likely to Play Kick the Can 9:28 a.m. EDT The only question is how deep the 2012 recession will be in Europe. My view is that we will see some tentative signs of agreement over the next 24 hours regarding the eurozone debt crisis. My view is also that Europe will live down to expectations and that any announcement will simply be can-kicking in its approach. Austerity measures will exacerbate the current weakening of economic growth in Europe. The only question is how deep the 2012 recession will be in Europe. I would sell/short the news. Case-Shiller Sinks 9:24 a.m. EDT The decline was worse than expected and is only modestly above 2003 prices. The Case-Shiller home price index dropped by 0.05% in August (-3.8% year over year), The decline was worse than expected, represents the lowest level since early 2011 and is only modestly above 2003 prices. The residential real estate market will likely scrape along the bottom for a few more years regardless of HARP or any other government intervention aimed at clearing the unsold inventory. Starting Out Short 9:22 a.m. EDT I am slightly net short at the open. I begin the day in a slightly net short position. The Next Big Thing? 8:34 a.m. EDT I see four possibilities. What might be the next big thing the marketplace? I would offer four possibilities -- two themes relate to the possible resolution of the world's resource needs (in particular energy/water) and housing problems, one stands in front of a dominant theme (the social makeover in communications and networking), and the last is a macro play representing a mean-regression in one of the most overvalued asset classes (U.S. bonds). Resources (energy and water): The world is moving east. Rising demand, stemming from the continued industrialization in the developing world and the emergence of a middle class, places pressure on the supply of all resources. Besides energy (where there are plenty of candidates), I would look at the water sector -- PowerShares Water Resources Portfolio (PHO) and Guggenheim S&P Global Water Index ETF (CGW) are two ETFs that can give investors representation in an emerging imbalance between demand and supply for this important resource. Housing: The companies that stand best-positioned to find the solution to the massive overhang and shadow inventory of unsold homes will prosper mightily -- that is, those that maintain, remediate and bring to market for sale foreclosed properties. Anti-housing plays are in a growth-y area, with a long runway that will only get better in the years ahead. The only company I have been able to identify thus far is Altisource Portfolio Solutions (ASPS). As can you see from the chart, Altisource has been among the best-performing stocks extant. Altisource Portfolio Solutions Stock Chart by YCharts I originally mentioned this company in a Barron's interview at $13 a share; it's now at $37 a share. Because of the company's relationship with Ocwen Financial (OCN) -- it was spun out of Ocwen -- Altisource is uniquely positioned and has an insurmountable market lead against others that want to enter the field, as Ocwen has been on an acquisition binge. After the close on Monday, Ocwen announced its acquisition of Morgan Stanley's (MS) mortgage servicer, Saxon ($26.8 billion in assets). Social communications/networking: There will likely be a new company, similar to Facebook, or a company that sells unique devices, similar to Apple (AAPL), that changes the world. I have no clue what company it might be, nor does anyone else right now. Shorting U.S. bonds: The U.S. economy will ultimately come out of the current doldrums, and when it does, considering the latent demand that could be unleashed in durable and nondurable areas and for general spending, interest rates will spike -- maybe hard. Two Strikes 7:36 a.m. EDT Cummins and 3M miss consensus expectations and downwardly revise their outlooks. Break in: 3M (MMM) and Cummins (CMI) miss and guide lower, which is a blow to the self-sustaining domestic economic bulls. As I have written previously, the upcoming period will be uneven and choppy -- difficult for corporate managers to navigate. Recommended Viewing 7:05 a.m. EDT Run, don't walk to watch Bridgewater Associates' Ray Dalio's interview with Charlie Rose. Run, don't walk to watch, the brilliant Ray Dalio (chief of Bridgewater Associates, the world's largest hedge fund) and his interview last Friday night with Charlie Rose. The interview is sobering.

Doug's Daily Diary -- Tuesday, 10/25/2011

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