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The Firestorm
MeltUp- Could It Be Coming? |
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As I observed in Thursday's edition,
we could be coming to the beginning of the end of the Bear Market.
I believe there is still a lot of volatility ahead, but we could be close
to an extended period of upside bias.
Bernanke's recent moves to
create liquidity in the financial system have taken the market by surprise.
The problem: financial institutions have no liquidity, which means they
cannot finance transactions. They have no liquidity because their assets,
which they can normally loan against, have little or bookable value at
this time.
If the FED were to simply
pump liquidity into the system by printing money, the dollar would continue
to fall, oil and gold would continue to rise, and the world would be talking
inflation. Rather than print money, the FED has rather brilliantly
allowed these huge lending institutions to exchange their questionable
mortgage portfolios for US Treasuries, thereby shoring up their balance
sheets and putting them in position to get back into the transaction business.
Net result: the dollar was up 2% this past week, oil and gold got killed,
and the US Gov't is taking on some risk on behalf of the financial system.
It's what the FED is supposed to do.
I believe this creative move took
the market by surprise, and resulted in a strong rebound in the markets
this week, and a perception the recession could be short lived.
This brings up the possibility of
a potential "melt up" in the markets. Here's the situation-
the markets are like San Diego County in the Fall. After the long, hot
summer, the entire East County is blanketed with tinder dry brush. All
it takes is a hot East wind, known as a Santa Ana, and a spark, to get
all that fuel ignited and burning furiously.
The short interest in the stock market
right now is like that fuel. It has never been bigger thanks to last summers
rule change that allows shorting on any tick. In many public companies,
the short interest is 60% to 80% of the entire public float.
So, who has these short positions?
Who else- hedge fund managers. And, what is the month to month mantra for
hedge fund managers? Don't lose money. Any kind of short term set back
can effect their bonuses dramatically, and these guys generally don't have
a long term perspective, particularly on a short position.
If the market starts to "melt up",
these guys will be falling all over themselves to close out these trades
while they are still in the money. It's what pros refer to as a "crowded"
trade.
We're not ready to melt up quite
yet. There will still be volatility. When we are, short covering will start
in earnest, and then new long positions will make equities very crowded.
I can't wait.
The roller coaster should keep going
up and down, but we could be getting close to finally ending up higher
than where we started. When the melt up comes, it's going to be a good
one.
There is a megatrend out there- I
have written about this before, and rode the coattails of one stock to
huge gains in this arena twice in two years. The company eventually succumbed
to its own ineptitude, but at one time it was at least a triple for OTC
Journal subscribers (see Commerce Planet: OTC BB: CPNE).
I will have a new idea for you post
close on Monday. This company combines several different themes to create
a powerful home based business model. Unlike the last idea, this company
provides real value and staying power. It's a total unknown, but not for
long.
I am introducing this idea while
the stock is still very cheap and the company is about to embark on a major
transformation. I'm also providing a 10 minute video for you to clearly
understand the company. The last time I provided video, SPKL was
the subject. The stock ran from $.70 to $2 in six weeks,
at which point I suggested taking some of your money off the table.
While this company is in the business
of providing a home based business platform, it will have staying power.
They are not "selling the dream" as CPNE did- they are providing
a model with real value and long term staying power. It's a great idea.
I strongly recommend you make the
commitment to invest 20 minutes of your time Monday afternoon. 10 minutes
for the video, and 10 minutes to read the presentation. You might find
this a very compelling money making idea. The timing could be perfect as
interest in small stocks appears to be starting to materialize.
I've been watching and reading an
inordinate amount of financial media this past week as the volatile swings
in the market keep me riveted. I loved the commentary I heard from Art
Cashin, the most grizzled NYSE veteran of them all. He described the stock
market of this past week as one of the wildest roller coaster rides imaginable.
Some monster high speed ups and downs, but eventually we just end up back
where we started. It was certainly the longest short week I can remember.
About an hour before the close on
Friday, I took the liberty of betting the roller coaster would start back
down a hill next week, and bought 20 Lehman (NYSE: LEH) April 45
puts (LYH.PI) at $4 (total investment $8k). An absurd premium, but I don't
like to short individual stocks. I will short indexes, but the risk is
too great with individual stocks. The stock punished me by putting in a
strong finish, but I am convinced there is more bad news on the horizon
for holders of mortgage portfolios, and Lehman is rumored to be
rife with the darn things.
Last week was nothing but good news
followed by good news. I'm betting there's more bad news out there, and
LEH
will be the recipient of some portion of it. We'll see what happens next
week.
If LEH is ready to melt
up now, this will certainly be a losing trade. However, I'm willing
to bet there is more bad news coming to the financial sector. LEH
is rumored to be loaded with bad mortgage paper, and I'm betting there
will be some news in this arena next week.
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