A rally? Did I suggest an imminent rally?

if you ever needed proof - you have it. I would make a lousy day trader.
Instead of a rally, we had a 300 point drop.

I thought a short rally would follow last week's crash a la a dead cat bounce. And that the hedge funds were done with their pruning.

What a day.
I am ok with the ETFC for now. They dropped in sympathy with the other financials, but ETFC has no more mortgage exposure, unlike the others. And recent evidence points to ETFC's ability to outperform stock brokerages like Schwab and Ameritrade. the question is whethe rtrading revenue will continue to grow. Well, if C and LEH go up in flames, ETrade may pick up the leavings.

TRID just blows me away. Still haven't decided what to do. take the loss and walk or wait for market sanity. I will wait this quarter earnings release for signs of design wins. If none, I have to walk.

TRID - Below Cash value

I honestly don't know what to do here. It is selling for below cash value - and that's a strong message from the market

MGM Downgraded

http://money.cnn.com/news/newsfeeds/articles/apwire/3c14c459b19ddc93b46f6c1adb9fe57f.htm

MGM Downgraded

http://money.cnn.com/news/newsfeeds/articles/apwire/3c14c459b19ddc93b46f6c1adb9fe57f.htm

Expect a brief rally

After the massive drops the last 2 weeks, this week will probably see the start of a brief rally as traders go bargain hunting and essentially take a breath.

A mixed bag of earnings releases will add to market gloom. Earnings will show decent returns for global companies but the guidance will be negative.

NKE Beats with Dollar Currency Upside

http://money.cnn.com/2008/06/25/news/companies/nike_earnings.ap/?postversion=2008062518

Nike sales grew 16% to $5.1B from $4.4B. Earnings grew ~14% (and EPS beat by $0.02 (2%)). From $438M to $490M

* US sales grew 4%

* Asia sales surged 39% to ~$828M from $595M.

* EU grew 19%

But the sales and earnings story is actually quite bad and bodes poorly for the future.

* Sales growth was only 8% after subtracting currency transaction gains.

* "Changes in currency exchange rates increased revenue by 7 percentage points for the quarter." Of the $700M growth, fully $350M was from currency gains

Earnings on a year-over-year basis fell nearly 40%:

* One-time earnings gain of $32M from a sale of Nike Bauer Hockey

* Lower tax rate added ~$15M

* $150M came from currency gains.

Let's revisit the issue of currency gains.

When the dollar weakens, overseas sales results look bigger in dollar terms. Last quarter, it was 15% cheaper than last year against the Euro. If Nike sells 25M shoes in China and Europe, they would have gotten $1B last year and $1.15B this year. In essence, Nike unit sales are virtually flat.

Nike will continue to enjoy this weakness until the end of the year.

For the next quarter, the dollar looks set to be ~13% cheaper than last year. (BTW, the $/Euro rate drop is similar to the $/Yuan rate drop, so the Euro rates are applicable.)

But look at the end of the year: the $ weakness falls to ~8%. In fact, we could even see some dollar strength, which would drive that 8% down. (Note: the dollar has been moving up the last 2 months and a weaker Europe will drive $ strength.)

A breakdown of this quarter's sales growth shows the following:

* 50% dollar weakness

* 25% US growth

* 25% Global growth

By Q4, two of the 3 growth factors disappear: no more dollar weakness and no more US growth (per Nike, they expect flat US growth). In fact, a pullback in US sales would negate any global growth.

I am forecasting a flat Q4. Analysts expect 10% Sales growth for the next 12 months. Meanwhile, I expect costs to increase. China has been increasing clothing prices. As reported by NKE this quarter,

* COGs rose from 29% to 33.1%

Flat sales and higher costs will mean falling EPS. (Note: NKE is forecast to have a lower EPS next quarter because they enjoyed a special tax gain last year)

CONCLUSION

Overpriced by ~15%

* PE is too high: NKE has a 15 forward P/E for 10% growth (and that is net $2B cash).

* EPS will probably drop from forecast $3.95 to $3.75

Current 15 P/E on $3.75 drives a $59 price. A lower P/E will drop it to $50.

Market see-saws

A big switch in investment tone is shaping up.
* Profit taking in Agriculture and Energy - They've had a big run
* Delayed dead-cat bounce

Oil prices dropped ~$4 a barrel today. Gas consumption looks to be lower than expected. However, I suspect that a key unstated factor is that the government slowed their re-filling of strategic reserves.

In any case, it's good for DUG and DSX, and bad for MUR.
BTW we have a $0.04 per share dividend on DSX.
MUR I'm not too worried about. They got alittle ahead of themselves and now they are consolidating. A dip below $90 and then I could see them move up to $100.

The puts are no longer as attractive and the Ultrashorts are getting whalloped.
-------------------
Wall Street is encouraged that things may be getting better: we have the combination of easing oil prices and a housing solution from Congress. Add in the threat of higher interest rates in the Fall, and Wall Street will think inflation is going to go away and the economy bought itself some breathing room.

In reality, things will just continue to get worse because it isn't about paying a little less for gas or being able to avoid foreclosure. People are getting fired and consumers have too much debt to buy more stuff. Consumer spending drives our economy, and it isn't coming back anytime soon to the levels that the leaders want.

Take oil, for example. Does a slightly lower oil price suddenly make the economy stronger? Not really.
For consumers, $4 oil or $3.50 oil doesn't really make for dramatic changes. A few dollars a month in gas is not why consumers are slowing their spending on durable goods like washing machines.
For producers, it will be at least 4 months before their energy related costs come down. And even then, the economy isn't going to roar back to life.

And the housing debacle. The dollar will shrivel in the face of an additional $300M spend on housing.

But the perception of improvement is reality for Wall Street and it could spark a rally, which would be bad for our short positions.

Market nervousness in action

The Fed meets today and I think the markets are nervous.
I see profit taking in agriculture and oil - the bubblier parts of the market.

We are going to maintain our short positions. AGN, VMC & HOG are very strong in the face of the sell-off - and I don't like to see that. We have large volume positions such that every $1 or $2 move down can throw off good returns. That's why I watch them like a hawk

Overall, our put positions are neutral right now: 2 are ahead, 2 are near cost basis, and 3 are behind. Only MGM and AGN are generating solid returns at thi stime, and AGN is on day watch (because they expire soon)
MGM - At $13.60, our Sept $50 puts are much higher than our cost (purchase = $3.4). This gain is wiped out by the NKE loss, which is too bad.
AGN - talk about resistant. The July $55s are selling for $3 (purchase = $2.10). The resistance is concerning and I'd hate to see them snap back, so I am going to put in an order to sell at $4. We'll see: I am watching daily
AN - back to purchase basis. They now look broken and every day more bad news about cars. The sooner they get to $10, the sooner we can unload our puts for ~$2 (purchase = $0.90)
VMC - Also resistant and the $50 puts are far out of the money. Nevertheless, we are close to purchase price (current = $3.1, purchase = $3.58). A 10% drop closer to $55 in the next 2 months would give us a chance to sell for close to $6.
ZLC - Who could be buying jewelry today? Our $15 puts are far away from today's ~$20 price, and the put sells for $1 (purchase = $1.85). ZLC depends on holiday season sales, so we may have to ride this one for a while.
HOG - Can't believe these guys won't drop, as if Motorcycle sales aren't suffering like cars and trucks. Our $30 puts are $1.65 (purchase = $3.20).
NKE

ETFC and TRID are very concerning. ETFC because (1) I did not write covered calls to further reduce the cost basis and (2) the absolute price drop is now ~ our cost basis. I think ETC is trading in sympathy with the other financial stocks, which are all trading down. But I am ok sticking with ETFC for another year because they are financially sound imho.

TRID is the mystery to me. They are trading at cash basis despite very tasty market growth and position.

Buying

MUR 100 shares @ 92.61
DSX 100 shares @31.42

US Gas consumption drops 2nd month in a row

http://www.reuters.com/article/marketsNews/idUSN1736453520080617

According to Mastercard
"U.S. retail gasoline demand year-to-date fell 1.96 percent from the same time last year as prices for the fuel rose above $4 per gallon, MasterCard Advisors said Tuesday.
'The regional year-over-year view shows all regions are consuming less gasoline when compared to a similar week in 2007," said Michael McNamara, vice president of MasterCard Advisors.'"

This is a 210K bpd drop. Couple this with increases in supply and likely drops in demand elsewhere, and we will see a 1M bpd gap again by Summer's end. Hence, we bought DUG.

"The four-week moving average for retail gasoline demand was also down 4.3 percent, the eighteenth consecutive week that it has shown a decrease"

US Gas consumption drops 2nd month in a row

http://www.reuters.com/article/marketsNews/idUSN1736453520080617

According to Mastercard
"U.S. retail gasoline demand year-to-date fell 1.96 percent from the same time last year as prices for the fuel rose above $4 per gallon, MasterCard Advisors said Tuesday.
'The regional year-over-year view shows all regions are consuming less gasoline when compared to a similar week in 2007," said Michael McNamara, vice president of MasterCard Advisors.'"

This is a 210K bpd drop. Couple this with increases in supply and likely drops in demand elsewhere, and we will see a 1M bpd gap again by Summer's end. Hence, we bought DUG.

"The four-week moving average for retail gasoline demand was also down 4.3 percent, the eighteenth consecutive week that it has shown a decrease"