Wednesday, May 12, 2010

Has the Final Card Been Played?

Low and behold the UK and the EZ appear to have got the job done. At least there is now some official recognition of the problems the region faces. And much of these risks are now priced into the market. But its just a bridge into the fog - tough to see how the debt bomb can be worked off without a death spiral on one hand or a grinding austere existence on the other. The euro's look to have successfully kicked the debt ball further down the road (death spiral), much like we did last year, and the UK has gone Tory light (grinding austerity).

This week marks the final tool in the ECB tool kit. While they apparently plan to sterilize sovereign debt purchases with the sale of other debt securities so there is no net change in money supply, they may not have that option. I am moving to net short despite this sense, given the massive bounce over the past year, the major headwind of stagnant economies and the volatility inspired lack of conviction the market seems to be feeling in current prices.

In the context of the confidence game of sovereign debt and fiat currencies, the hopeful continuation of the" economic recovery" in the US and UK and the ever required bullishness of equity managers, we always have to a have a buy list. If the market can settle down in the next 2-3 weeks, the next rally will have me looking at the following trades: commodities, chips, and de-leveraging stories. Either way, it is becoming standard practice to have some long dated, way out of the money S&P puts as the Vix drops to the 20's. A little insurance and now you're a hedge fund.

The China all cash real estate bubble looks to continue for a while and while the Chinese stocks may continue to get hit, the commodity stocks could get goosed from here. The industrial cesspool that is the Gulf of Mexico should ensure for the next year or two a dramatically different approach to offshore drilling and that should help the ten year view that seems to be supporting oil prices.

Most chip companies are saying, the March quarter was unreal - lots of inventory restocking for sure, but you have to wonder after a decade of underinvestment in corporate and infrastructure technology, maybe demand will keep pumping and the survivors will see big leverage. IDTI looks to be transitioning to a high margin mixed signal business, DRAMs are going into mobile phoneputers, and ISSI, a $10 low end chip company says they will print 50c this quarter.

Anything in smart phones will work - it is the emerging market computer. I keep hearing positive things on RIMM due to the fact that it is optimized for messaging and that's what is used by the EM customers (accessing the internet is for the elites). Not sure what happens to their US market share. Clearly, Apple's earnings machine is about to hit on all cylinders but it's hard to pay this premium for a hardware company; is their moat that good? And the semi cap names should be able to get some traction if there really is a cycle coming - AMAT reports soon.

The banks will print another good quarter but have two major overhangs: first, if the government keeps investigating the group will have a tough time moving except for the regionals like BBT and KEY, and second, housing is still a problem. Lots of moving parts with housing - end of the government incentives, rates could be bottoming, lots of shadow inventory, and apparently a large group of underwater homeowners ready to throw the towel in. Another dip in housing prices could start the jingle mail game all over for a whole new group of homeowners that today are close to par but down another 10% they may just punt.

With 3.5% 10 year debt, little premium for junk ratings and a rebounding equity market, now is the time to de-leverage/raise capital. I am still holding BSX (red spots) and names like CPN, CHK, and COP seem interesting. Maybe not sexy, but interesting.

Finally, gold looks to making a breakout but I can't say I am convinced it will hold. If it does, that's bad news for most other markets as it suggests no one believes in the bailouts, the fiats are doomed and inflation is coming eventually. Its behavior might be a signal as to whether the market is willing to play into the current bailout, and there might just be another test for gold holders. The rumors are the only reason for the massive move is huge gold buying in Germany - given that nations history I'll believe anything. Either way, you still gotta hold it and keep buying on dips.


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