Doug's Daily Diary -- Friday, 11/11/2011

Ludicrous Forecast 2:59 p.m. EST We will see a trailing off. Gun to my head: We have seen the highs of the day, and the market trails off toward the end of the trading day. Hedging RIMM 2:44 p.m. EST I have sold calls against my Research In Motion long. Housekeeping item: I have sold calls against my Research In Motion (RIMM) long, neutralizing the common position. Long RIMM common; short RIMM calls Lynx Eyes Macro 1:22 p.m. EST Here is the lynx-eyed Peter Boockvar's (of Miller Tabak fame) summary of this week's macroeconomic events (have sold out of my long position in the name). Positives 1) Berlusconi goes and Italian Senate passes budget (awaits lower House) 2) The EFSF sells bonds to fund Irish bailout after last week's failure 3) ECB members stick to guns and say money printing not going to happen. They implicitly say to Italy you figure it out 4) Initial Jobless Claims fall to 390k, 10k less than expected and 4-week average falls to lowest since April 5) September exports rise to record high ... but can it last? 6) MBA said refis rose 12.1% and purchases were up 4.8% as mortgage rates fell 7) U.S. import prices unexpectedly fall by 0.6% month-over-month led by food and energy prices 8) China's CPI moderates to five month low but remains still high at 5.5% Negatives 1) Italian bond yields move higher again but close well off week's intraday highs. The third-largest bond market in the world is staring over the edge. French rising bond yields becoming big focus too 2) Will the ECB be left with no choice but to be like Ben? 3) US 10 yr and 30 yr Treasury auctions were weak, finally push back on historically low yields with inflation elevated and concerns with Super Duper Undercover Secret Committee? 4) Import prices from China rise .4% month over month, the most since April 5) India's Industrial Production in September rises at the slowest pace in 2 years 6) German Industrial Production in September falls a greater than expected 2.7% Nixed NYX 12:40 p.m. EST I have sold out of my long position in the name. Housekeeping item: I have sold my NYSE Euronext (NYX) long on strength today. Viacom's (VIA/VIA.B) decision to move its listing from the NYSE to Nasdaq spooked me. Besides I have a nice gain in the name. So Long? 12:36 p.m. EST A leading Apple analyst was on television, justifying the shares based on earnings three years out. On Fast Money Halftime Report just now, the leading Apple (AAPL) analyst -- I believe he was from Sanford Bernstein -- was justifying Apple's shares based on earnings three years out. Memo to all: When an analysts needs to justify weak share price performance based on 2014 forecasts, it usually pays not to immediately run (and not walk) toward the name. There are only a handful of professional investment managers (e.g., Berkshire's Buffett, hedge-hoggers such as Einhorn and Cooperman (who owns the shares)), who have a shareholder and investor base that have that sort of investment horizon. That said, if you have a three- to five-year time horizon, the stock is probably attractive, with the caveats that: the short-term fundamentals are not as secure as in the recent past; and technically, we still see that potential island top reversal that I cautioned about a few weeks ago. Buying GM on Weakness 12:18 p.m. EST The government is investigating the company's battery fire issues with its Volt model. General Motors (GM) is trading lower on news of a government investigation into a fire in the battery of the company's Volt unit. I am bidding for stock underneath. Long GM Recommended Reading (Part Deux) and Recommended Viewing 11:23 a.m. EST Run, don't walk, to read Noah Kass's latest 'Ask Noah' column on our flagship site. Everyone faces setbacks. Do not let them predict your future. Take on today's challenges with the knowledge that each new moment creates your future. -- Noah Kass Run, don't walk, to read Noah Kass's latest Ask Noah column on TheStreet, Feeling Inept After Failed Business Venture. And check out his interesting appearance on MSNBC's The Dylan Ratigan Show yesterday, talking about a tough economy bringing your family closer. Visit msnbc.com for breaking news, world news, and news about the economy Recommended Reading 11:11 a.m. EST Run, don't walk, to read Barron's Online's positive take on Microsoft. There was a positive column in Barron's Online yesterday on Microsoft (MSFT), making the case that Mister Softee's shares should get a lift from the next iteration of Windows. Long MSFT Industry Picks and Pans 10:53 a.m. EST My favorite industry long is the asset managers, and my favorite industry short is dental products. Favorite industry long: asset managers Favorite industry short: dental products Long BEN, TROW, WDR; short HSIC, PDCO Goldman to Cut Asian iPad Estimates? 10:43 a.m. EST My gnome is hearing something to that effect. High above the Alps, my much-maligned gnome is hearing that Goldman Sachs is cutting Asian iPad estimates at Apple (AAPL). They are catching up to the Street. Long GS Added to Three Longs 10:35 a.m. EST They are in the financial and automotive sectors. I added to SunTrust (STI), BMO Financial (BMO) and Ford (F) today. Long STI, BMO and F Confidence Boost 10:17 a.m. EST The University of Michigan's November confidence survey delivered the best reading in five months. The University of Michigan confidence survey for November came in at 64.2, which was well above October's 60.9 and expectations for a flat month-over-month reading of 60.9. It was also the best level in five months. Importantly, the outlook component rose substantially. Inflationary expectations were held in check. We have clearly recovered from the August scare. This is a plus for risk assets today. Adding to Lincoln Calls 10:06 a.m. EST This is a speculative play. I am adding to my speculative play in Lincoln National (LNC) calls now. Long LNC common and calls In Case You Missed It 9:50 a.m. EST I am now out of E*Trade. I wanted to repeat my post from late yesterday regarding E*Trade's (ETFC) announcement. After an analysis of its options, the company made the following conclusions: E*Trade Financial Corporation announced that its board has concluded the previously announced review of strategic alternatives. The strategic review began in early August and was designed to objectively review all strategic alternatives for the company, including a possible sale. With a primary focus on maximizing stockholder value, and consistent with the recommendation of Goldman Sachs & Co., the company's financial advisor, the board unanimously determined that the continued execution of the company's business plan is currently the best alternative for increasing stockholder value. In other words, E*Trade is not selling itself. I am now out of the stock. Favorite Long and Short 9:40 a.m. EST My favorite long is Franklin Resources, and my favorite short is Pitney Bowes. Favorite long: Franklin Resources (BEN). Favorite short: Pitney Bowes (PBI). Long BEN; short PBI The Road Taken 8:20 a.m. EST With sentiment being so sour, there are some sweet investment opportunities. Two roads diverged in a yellow wood, And sorry I could not travel both And be one traveler, long I stood And looked down one as far as I could To where it bent in the undergrowth... I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I I took the one less traveled by, And that has made all the difference. -- Robert Frost, The Road Not Taken Late yesterday, in Columnist Conversation, I had several exchanges with Dr. Bobby Marcin. The world, it seems, is almost universally bearish these days -- and is generally aligned with Bobby's views. We seem to be approaching the polar opposite in sentiment that was in place in the summer of 2007, when I was in a small minority -- that is, unequivocally bearish and all-in short based on concerns regarding the proliferation in derivatives, the speculation in the housing markets and the world's economy and stock markets. I was also in a small minority in March 2009, when the world as we know it seemed to be falling apart. The pendulum of the bullishness of 2007 had, at that time, morphed into fear that has rarely been seen in the past century. And that fear, paved the way for a generational low for the U.S. stock market, which I predicted on these pages and front and center on CNBC's The Kudlow Report and Fast Money in March 2009. Today the bearish cabal is increasingly ardent and confident. And why shouldn't they be, given the challenges that face our domestic and the world's economies? After all, the residue of the past cycle has now been manifested in the structural disequilibrium in the labor markets; the headwind of a massive unsold shadow inventory of homes for sale; the screwflation of the middle class; and, most importantly, the large fiscal imbalances at the local, state and federal level in the U.S. as well as the similar problems facing the eurozone. We have been in a post-Lehman-bankruptcy holding pattern for three years. The recent market volatility is embodied in the history of market and economic transformations, as we are in a highly interconnected, non-linear, dynamical system that typically oscillates wildly before changing state. Ultimately, we will settle into a new pattern -- hopefully it's a bullish one! -- but we will likely never return to the identical environment previously in place. We can't say for sure what the current volatility means. As an acquaintance wrote to me last night, we can't say for sure whether it signifies a coming collapse of the banking system. We can't say for sure that this signifies a historic rally in which the market will be up 20 straight years. We can't say for certain that Karl Marx was right and this is the beginning of the transition to worldwide communism and bliss. What we can say with confidence is that we will ultimately exit the post- Lehman holding pattern and that we are headed toward an unknown destination. So, I am confident in my lack of confidence, recognizing that it might take a while to find a new stability in the economic and stock market order. For all I know, the bears will be right -- and I recognize that the crowd usually outsmarts the remnants -- but what I am certain about is that the above negatives are well-known and, importantly, there is recognition that change (austerity and fiscal discipline) is what we need around the world. I also know that the unimaginable rarely happens (though it did occur in 2008-2009) and that, as unlikely as it appears today, history demonstrates that our world's leaders ultimately rise to the occasion during crisis. And, increasingly, those headwinds appear (as I have documented lately) to be in the process or have been completely discounted in today's below-average valuations. Below is an anecdote that highlights the unanimity of opinion (of a bearish kind) and the fact that individual and institutional (especially of a hedge-hogger kind) investors have derisked. I am a member of the board of trustees of a university and vice chairman of its investment committee, which supervises a $100 million endowment. Yesterday, I attended a two-hour investment committee with the asset management company to which we outsourced the manager search and management supervision. What was abundantly clear is that the selected managers are at record levels of defensiveness and their quarterly letters underscore their negativity. Not one of the 20 or so managers expressed optimism, and those that were net long almost seemed apologetic. In support of an overriding pessimistic outlook by most investors, my well-to-do friends who have money with hedge funds often send me the managers' quarterly letters, which today ring out with historically large cash or short positions. Not just a few of the managers have implemented tail-risk strategies (e.g., huge out-of-the-money puts, etc.) that position them for the next black swan event. I always try to test my views through thoughtful analysis, adopt scenario probabilities and valuation methodology, but there is a well-documented psychological tendency in investors to be overconfident in the correctness of their opinions. Too often, when we look at the investment world we see our own opinions. Whether bullish or bearish, a myopic and fixed view can be harmful to your financial health. The basic truth is that an investment view must be flexible and objective, as the investment mosaic and stock market outlook is complicated and always in motion. Perma-bulls are evolutionarily adapted to picking berries in an often lion-infested African savannah; the perma-bears are plagued by the opposite condition. History shows that (in investing and in life) pride always comes before the fall. Beware of both species as they are attention-getters, not money-makers, and it usually pays to graze somewhere in between the bulls and the bears. My investment methodology, expressed in a fair market value calculation for the S&P 500 in the Kass model portfolio construct, applies a probability of confidence multiplier to four economic and stock market scenarios, and that approach yields to my (always qualified!) conclusion that an attractive risk/reward ratio exists today for investors in the U.S. stock market. Color me more bullish (part deux!). In Line With Italy 7:54 a.m. EST Futures are up because the Italian Senate has passed the current budget package. The proximate cause of the rise in futures is that the Italian Senate has passed the current budget package. Tomorrow the lower house will vote on the budget. As a result, Italian bond yields are down quite a bit. In fact, the two-year note is 145 basis points lower than yesterday's high. If all goes well in Italy over the weekend, I expect the ECB to cut rates again shortly.

Doug's Daily Diary -- Friday, 11/11/2011

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