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Exciting doesn't do it justice

Notice how every time we approach the end of the quarter, all hell breaks loose.

It's the manifestation of hedge funds and their investment behaviors at the end of the quarter:
1. Their profits are determined at quarter end
2. They place their bets before the end of the quarter (within a few weeks of quarter end, a company's business conditions can be relatively well sized up, especially if you spend time collecting insider info)

Another factor is lack of liquidity. Hedge funds thrive on leverage: they borrow form banks and investment banks. Lately, these financial entities are cash strapped, which means that funds are cash strapped.

Lastly, we have a commodity bubble blowing up starting in July. Copper, gold, oil - they went south. Quite a few funds were caught out and have had to sell to raise cash.

In essence, quarter end is setting off alarms and the funds are panicking as they struggle to meet deadlines. As if to prove the point, notice how the Fed's efforts to add liquidity to the market are sparking rallies. It's removing pressure on banks to preserve cash.

As frayed nerves are soothed by the Fed's ready cash, we will see a bounce. But it will be a short lived rally. Quarterly earnings are coming in. The markets will welcome anything short of negative growth, but mediocre growth will be the message.

My prediction:
A rally that will be boosted by options expiration tomorrow.
Then the markets will see-saw back and forth between elation that the government is in control and the reality that the economy is getting worse.
Capitulation by December as layoffs spread and companies can no longer hide the global recession (and seek to take the tax write-offs in 2008).

Meanwhile, it's also clear that the Fed and the Treasury are going to set up a japan-like entity to swallow the bad debt. That means that the time is definitely coming to buy financials.

I would like to add more QID in the rally coming up. Also, if I'm right and we are about to enter another trading channel, it's wise to not hold positions very long. We will probably bounce between 10,600 and 11,100 starting October. Similar to the 11,200~11,600 channel we just left.

Oracle beats - Thanks to the dollar exchange rate

http://biz.yahoo.com/ibd/080918/tech.html?.v=1

* Earnings beat expectations by 7% rising to $0.21 GAAP vs $0.16 last year
* Earnings rose 28% over last year to $1.08 B
* Sales rose 18% to $5.3B

Without a tax gain and the dollar exchange rate, the growth would have been negative.

1. Taxes are 1.2% lower this year versus last year. That generated $15M or $0.03 per share.

2. Exchange rates contributed another $0.05 EPS
- EU sales rose 20% to $1.9B. Of which $190M is from the US dollar being 10% weaker this quarter than last year.
- Asia Sales rose to ~$900M. Of which $90M (10%) is from dollar exchange rates

In fact, remove that dollar exchange rate gain and the Sales growth was a lackluster 11%.

The currency impact is so significant, that Oracle expects it to reduce sales growth by 3% next quarter. Why? Because the dollar is almost flat year over year.

They are forecasting ~10% growth next quarter after the currency issue is taken into account. And that includes the tax gain. So, in fact, Oracle is forecasting almost no growth next quarter.

It's hard to mistake the reality underlying the accounting one-offs. Business is flat at best. Which means it goes negative soon - probably Spring of next year.

More Pain on The Way

A 500 point drop and solidly below the psychologically critical threshold 11,000.

What's next?
The basic trend is down - corporate profits are slowing. The pace of fall will be driven a lot by the dollar & interest rates. The Fed would like to keep the economy ticking away with more interest rate cuts. And easing commodity prices give them much needed latitude to do just that.

A problem is that lower interest rates tend to weaken the dollar. That's a problem only insofar as the Fed needs other countries to buy Treasury notes. It's hard to entice buyers to stock up on even more eroding assets.

In fact, I suspect that Lehman Brothers was allowed to fail because China and others signalled that they wouldn't put up the money.

On the other hand, the volatility and expected market crash is driving a flight to quality - back to Treasuries.

In addition to the dollar question, the major issue now is a scramble for cash. Hedge funds in particular are net sellers of equities. This will push the markets down even further.

We are positioned awkwardly.
The positives - The Ultrashorts, QID and DUG
The mixed: ETFC dropped below $3, but I am not worried. This is a long term play.
The bad: MUR and the calls.

The calls could breakeven if one or two rally. BIG, for example.
But the Puts are the big problem. With 4 months until expiration, I am more than a little concerned. I am counting on this quarter to put some fear into retail stocks.
The puts aren't performing at all. I am amazed that HOG won't crash despite the obvious