Jared's Market Commentary - Come on Red, Just One More Time

The stock market had a pretty good week, finishing up over 2% despite no debt ceiling solution and a bombing in Europe. There is very strong upward momentum right now and although I feel like I'm pressing my luck, I continue to lean long. There's no doubt I'm having the "one more time" syndrome, trying to squeeze out another successful spin of the wheel before the whole market comes crashing down. Of course, if you believe the market is going higher for a while, the perceived risk is much lower. The skepticism of the market seems to be enough to keep it going higher for now, but I think this party is about to end. I am expecting (hoping) that we will see a really strong move in the market that will mark a top, likely to be fueled by some strong earnings next week (perhaps Netflix) and most definitely an announcement on a debt ceiling deal. Whatever ends up being the catalyst for a huge spike higher, it should be enough to fool everybody into leaning long, just in time for the market to crater and crush everybody. Of course, it's possible this market just tacks on another 10%, but right now I think that's the low probability bet. Corporate earnings have been hitting and while many companies are showing good results, there are ones like Caterpillar CAT earlier today that indicate things might be slowing down. Anybody can manipulate their numbers to beat by a few pennies each quarter; the proof is in what these companies say, and there's definitely a theme of "not as strong as you think." ...this is especially true since many people are banking on the second half of the year being much stronger than the first half. I don't think we're on the verge of an all-out recession, but I just don't see any catalyst for the economy to grow at any meaningful rate. So while I have proven my inability to pick stocks in the short-term, I figured I'd highlight a couple of ideas that I think have good long-term prospects and hopefully offer a little protection if the market goes down. First, is Molina MOH. This is a pure-play Medicaid company that is trading at less than 3.5x EBITDA (they just released the June quarter so this should be even lower). They are one of only a handful of pure-plays in the business and I have to believe at some point they will get bought by one of the bigs (they are small so it would be a "cheap" easy way for a major to get significant market presence quickly - the problem is that their asking price has historically been unreasonable). If they don't, Medicaid is going to grow significantly as a result of reform. There is also a huge shift by the states to move Medicaid to managed care, which means billions of dollars in new revenue opportunities over the next 2-3 years. The negative to the MOH is story is two-fold. First, it's "family run," which means they might be too stupid to sell and/or they could get in the way of their own success. Second, the company made an IT acquisition not too long ago that seems to be under performing and is also creating road blocks to entry into certain new markets. I think they can overcome both of those obstacles over time, so it's worth a look. Trust me when I say I believe in this story...no that's not an insider information statement, it just means I've done some homework in this area recently. Second, I'm going aggressive on the short side with Chipotle CMG, despite the fact that it's one of my favorite places to eat. This stock has been absolutely on fire over the last year and it really does appear that nothing can keep it down...and I think people are starting to believe that. The company had a soft earnings report this week and indicated that margins contracted a bit (I seem to remember saying that a while ago - input prices rising plus flat pricing). I heard a piece that said their customers would accept higher prices, but I'm not sure I believe this. Right now you can get a burrito for around $6.50, but when you throw in chips and a drink it's over $10. How much more would you pay for a fast-food style burrito and chips? So let's assume that margins stay somewhat constant for a while. The company is growing nicely, but this is factored into their growth...in fact, the company's price to earnings growth ratio is almost 2.5x, which is very expensive no matter how you slice it. Add in the fact that this company is going to start having slower growth soon and the part should end. At 26x EBITDA, it's a bit rich. To put it another way, the company is worth around $10 billion and generated total earnings of less than $200 million. Even if the company grew earnings at 25% a year for 5 years, it would only earn $600 million in that 5th year. Finally, if the market really starts going down due to a domestic slowdown, I would think this high-flyer comes down. Last, I am back on the silver train via the shady SLV or the ultra AGQ. There is less thought into this trade, as I just think it's had time to settle down, nobody believes in it, and it seems like it wants to rip higher again. Also, if the US defaults and the dollar tanks, it should be bullish for commodities (despite the fact that it should mean economic weakness). If we see a debt deal and the dollar gets stronger, silver should go up on the theory of economic strength and higher demand...so basically, good or bad news means higher silver. Yes, I realize that makes no sense, but it feels like that's what we're going to see. I also think the downside risk is maybe $4-5 with upside of at least twice as much. As for me, I am 90% long and 10% short over the weekend, with an added hedge that at worst will be neutral (long story). I am looking for a burst next week and plan to fully exit all long positions. As I said before, I feel like I'm pushing my luck, so I might end up selling early (nothing new there) and might step back for 5 seconds to evaluate before jumping in on the other side. Still, for whatever reason I feel a need to "call the top" of this market, which could prove to be painful in the end. Still, as an aggressive trader, these are the spots where the most money can be made (and lost...but we won't focus on that).