understanding the psychology of behavior

Increased my market protection via 100 Jan SPY Puts.  Purchased puts on PG, and am waiting for JPM puts to go into place via my limit order. (The Vix is really oversold, and sitting on the 50SMA support. I am expecting a pop from current levels.)

The market is very overextended in the short-term, and expect a pull back for the very short-term, at least for a consolidation.

I still like the market for a Nov. or end of year rally, and I am just playing the consolidation here… not a major market break down.

(I stated early I expect the rally to be choppy. While volatility is going down, as I expect, a Vix in the 40s is still pretty high.) 

The market certainly was and is a scary place.  But some positives are emerging.  LIBOR came down significantly, and the VIX is showing a sign of collapse with its break from the 20SMA. 

This could mean the market rallies.  The extent of the rally, I do not know.  There is resistance all over the place, and if the market does rally it will be a choppy rally. Around 980-1010 there is resistance, along with the SMA resistance.  On top of that, the market will be approaching these points with a short-term really overbought position.

As far as action, I do think we rally toward the end of the year, or at least for November.  I kepted most of my exposure to the upside with MA calls, sold put and GE position.  But my PG and JPM I sold Jan calls against to capture profits.  (I will also be active in trading around those protected positions via calls/puts.)

A word of caution on playing puts.  The VIX is looking to ease, which means volatility will ease, hence the premiums, primarily in the Puts, will ease, which means the value of the Puts will decrease.  If you want to get into names like PG or JPM or MA or whatever, may want to look to sell just out of the money Nov. Puts (or at a strike you would not mind owning the stock).  Basically the trade is a reduction in option premium, but if the stock does decline below the strike be prepared to own it… so choose a strike price you are willing to buy the stock at. 

B-U-L-L-S-H-I-T.

The sell off was almost the same perfectly timed sell off we had the other day.  It was forced selling.

This sucks.  Markets are no fun anymore.  We just keep getting hit by forced selling.  The last 10 minutes of trading was such an obvious display.

There is really nothing we can do about it.  The market was holding its own for the better part of the day, but as usual, gains do not last longer than a few hours.

But the end of day, especially the last 10minutes is just something to awe.  Something triggered a massive, high volume, selling.

I do not know what to make of this, and I am not going to try to sound smart and explain it. 

(If anyone thinks this type of selling is due to ‘Recession Fears’, I will openly call them a moron. The market is not going down because we fear a recession… we are ALREADY in a nasty recession. period.)

IMO, too many people are expecting a capitulation bottom.  There are too many ‘talking heads’, too many people who think they know what they are talkiing about… myself included .

My entire premiss of purchasing stocks at this point is all due to severe dislocations in stock price verse very conservative values.

I am not waiting on some techincal indicator to dictate bottom. (Anyone who is should not be listened to… all technical indicators were blown out the window weeks ago.)

I think everyone who tried to pick a market bottom has been made a fool of in the past few weeks. Althought, to be fair, the market has not broken the 839 SP500 low yet. (For the record, I do not think it will, and no I will not wear a jester’s hat )

Much talk was given to the unwinding of the currency carry trade. So I plotted the FXY (Yen-to-Dollar) against the SP500 to try to observe a pattern. But there is none, with the exception of the past 2 months.

(Plotting the UUP over the past 3 months produces the same chart.)

What I find most intersting about this chart is that it indicates an inflection point. The divergence has become too severe, further supporting a market bottom. I say this because, this is not the first time we heard of the ‘carry trade’ unwinding. The unwinding has gotten some exposure last year. I guess what I am trying to say is that the carry trade has been unwinding well before this current attention, and should come to an end sooner rather than later.

If I were an ‘insider’ I would have some knowledge of the total number of unwinding that needs to take place, but because I am not I do not have a fundamental basis to say whether or not the thesis above is accurate. But I (and all of us) do have a fundamental basis to say whether or not equities at current levels justify purchase.

On the individial stock level, I am interested in GE, PG, BNI, NVDA, MA, PWR, JPM and PBR. All of these are established well run companies, and leaders in their field. I conducted a model analysis putting in reduced estimates (from already reduced analyst estimates) via the Diamond-Hill finacial model ‘valuator’, along with a common sense approach via assets. Below is the analysis. The numbers presented will be in order of… current EPS est., assumed 5yr growth rate, requested return, and terminal PE:

GE: 1.75, 6.8, 8.5, and 10.0 produces a target price of 25-26. Right from the get go we know GE will make more then 1.75 this year. In 5 yrs will it produce more than a 7% growth rate? And it historically holds a PE of 13-15. I drastically under cut estimates, yet GE is trading around 17-18. It is at the forefront of the Clean Tech/infrastructure spending.

PG: 4.20, 6.5, 8.0, and 13.6 produces a target price of 66. Commodity prices are down, directly and immediately benefiting their bottomline. Not to mention their products will be purchased whether or not there is a severe recession. Historically it trades at a much higher trailing PE, around 18-21. Even with really conservative estimates, and a pathetic growth rate, PG is trading around 58 below the conservative target price.

NVDA: 0.80, 5.0, 10.5 and 7.2 produces a traget price of 9-10. The PC indurstry is shifting to use more and more graphic chips, and NVDA is perfectly positioned. It has $3/share in cash, with asset price of about $5/share. Basically you are paying for the assets of NVDA at the moment, and zero… ZERO… earnings power.

MA: 8.18, 10.6, 8.5 and 14.6 produces a target price of 176. Cash to electronic payments is happening whether we like it or not, recession or no recession. MA is currently trading at a PE of around 15, but better understanding of the processing biz will take place next week w/ Visa reporting.

BNI: 5.64, 10.5, 9.5 and 13.1 produces a target price of 124. I know it is a transport and during a severe recession transports really feel it. However, current 2009 EPS estimates 6.97, and I accounted for 5.64 (a 20% reduction, while we are in the recession and after they beat estimate on thursday). The chart indicates around 75 may be seen again… but ‘who knows’?

PWR: 0.88, 10.6, 10.5 and 14.0 produces a target price of 17-18. During the last CC, management confirmed they can grow EPS at a 20% clip. A 20% growth would produce a target price of 25-26. With PWR, a conservative entry point, with conservative estimates, merits around a $14 entry.

JPM: 2.50, 5.0, 7.5 and 8.2 produces a target price of 42. With WaMu in their fold, JPM should produce greater EPS, probably north of $3/share next year. However, for the moment, JPM and other banks are held hostage to continued write-downs via defaults. Low 30s is not a bad entry, not at all.

PBR: 1.90, 5.8, 9.0 and 7.6 produces a target price of 25-26. Ignoring the fact that they control one of the largest reserves in the world, PBR is held hostage to oil prices. A good entry would be to wait for oil to hit 50 or so, however PBR’s chart indicates support at around 18.

We should be seeing market declines Monday morning (as usual ), but on these decline I will be a buyer. (I already purchased PG on Friday, own GE and am exposed to MA.) By the end of this week, probably Monday or Tuesday, I be entirely in stocks. I will pick up NVDA, JPM, and some BNI.

All these stocks are trading well below very conservative estimates, and I do not mind holding on to these stocks at current prices.

Remember, if this is armageddon… eventually, any asset will be worth nothing, even cash, but if it is not, better off investing in assets with a relatively higher rate of return.

Because I have no bearing as to what price to enter, and no real guage as to when there is a psychological low point (all indicators are thrown out the window after today), I am just waiting.

Obviously I am not selling anything.

Stocks still have value, and now is a great time to enter names. The macro economy will lead to hick up for a quarters or so, but quality companies will keep making money.

I have enough GE, from shares to Puts I sold… I’m done entering in GE… PS it is yielding around 7%.

MA… just waiting on it, i’m exposed enough to it.

PBR… wait for oil to hit 50… could see 18, although it is disturbingly cheap in the low 20s.

BNI… That $75 level is appealing.

PG… Falling commodity prices, reduces their costs and will benefit from it. Will be affected by the currency rise, but imo, not as much as the commodity price fall.

JPM… The bank that benefited to most from all this.

So… i guess stocks (as a piece of paper reflecting ownership in a viable cash producing company) has absolutely no value.

I am truly sick of this relentless selling.

To the sellers out there… please… please… just sell everything you plan on selling now. I mean NOW. I am tired of watching quality stocks of solid companies being traded like dog shit.

Please… just sell everything and get it over with. Dump it all. PLEASE.  Make the markets crash, again. PLEASE!

GE is at a 6.8% yield.  By the time the hegdies and pussy whipped mutual funds are done with it, GE will be trading at 10%.  For the record, GE at 1.75 eps (forward looking) with only 6% growth (for 5yrs) and an assumed PE of around 10, is worth about $25-26 a share… but its okay as many investors are willing to unload it at 18-19.

At the moment I am predominately cash heavy, but the MA options are really giving it to me where the sun don’t shine.

I thought the SP500 would have kept pushing toward the 1000-1050 level before a significant decline, like we saw today.

No real sugar coating this… multiple charts are still crappy, but we have individual stocks that are really really inexpensive. And not inexpensive in a earnings sense, but on an asset, free-cash-flow, and cash balance sense.

Look at NVDA, it has about $3 in cash, great cash flow, and the fundamentals of the PC biz going more toward graphic chips, yet it is trading around mid/high 6!?!

Lets me not even get into MA, approaching a 2008 PE of 15 when it was 136 today!?! (seriously)

Anyway, I thought it would be okay to play with options again seeing how the credit markets are slowly getting back to normal, but fear is still in the air. And will take a strong stomach to play with them… even though I did sell a 130 Nov MA Put today.

The only positive that I could see is the VIX hitting its upper end resistance, which would suggest the market moves up. (Hopefully for more than just an hour or two.) But too many companies are not providing guidance and assuming the worst, so analysts are assuming the worst going forward. (I mean you have AAPL just reporting their best quarter ever, and they have a low end guidance of 1.00 eps… bullshit.)

Today’s market decline is not because of poor earnings, or poor anticipated earnings. Stocks are still very inexpensive.

The market is declining because Argentine is about to default.