Bookkeeping: Bernanke Forces our Hand

Aside from a month or two in fall 1999 and perhaps parts of the QE1 rally I have not seen anything like this rally.  The NASDAQ is up about 20% in just over 2 months, and has only suffered one day of >1% loss in that entire time.  That is unnatural.   The S&P 500 is up 170 points in a row based on where the premarket is right now - that's astounding.  For all the talk of the bubble of 99-early 00, I can tell you from experience there were major whipsaws along the way.  Yes you'd make mad money in stocks for nonsense reasons but you'd give it back every so often.  I have said this before, but every few weeks you'd see stocks that were running in parabolic fashion retreat dramatically - giving back 10-15% in 2 sessions, always leaving you on your toes.  This market on the other hand -  which is computerized, devoid of human emotion, and backstopped by a Fed works very differently... when the selloffs do occur they are within the context of larger 7-9% type of corrections.   But when the market is trending up, there are simply no corrections within the uptrend.  

At this point, Bernanke has manipulated herded everyone beautifully.  I will be interested to see if the market can be stopped at 1220 but at each resistance point during this rally I say "the market should stall here" and when it does stall, all it takes is a premarket futures buying program and cheers of "QE2" or "POMO" and resistance is futile.  Each time I throw a bunch of long exposure on, I think to myself "this is the one that is going to blow up on me"... but nothing blows up on bulls.   When I think about what ended the 99-early 00 mania, it was tightening by the Fed.  Well as of yesterday the first inkling of tightening won't even be proposed until 2nd half 2011.  So we are setting up for a bubble that seems much broader than the ones the Fed created in the late 90s, and mid 00s (housing).  This one seems global in scope.

In the near term, it appears we have to return to a 1999 mentality when any level of thinking was penalized. That said, even during QE1 there were selloffs (think July 2009 and parts of fall 2009) so we're not headed straight to S&P 2000 unless the currency goes into freefall.  But for now, despite the "gap theory" of fills happening in 2-3 months, and parabolic moves in the "new nifty 50" stocks, we have to adjust short term as the S&P 500 is above one of the most important technical levels (the 200 week moving average).  Any move back below that level ... and or a break of the 13 day moving average.... and or a break of the 20 day moving average... would require another change in assessment.  The problem with bubbles is their foundation is based on falsehoods, faith based investing, and sand.   So reversals will be ugly along the way.  But for now there is unwavering faith in bubbles by the speculator class and we're stuck between a rock and a hard place.  I'm making adjustments from here with the belief I am somehow about to top tick this move - hence will have tight stops.

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First, I mentioned yesterday if the dollar broke low $76 area it could begin a new spiral down - it is in the upper $75s this morning.  Hence my hedge in the dollar (long) has to go.  I will sell Powershares DB US Dollar Bullish (UUP) on the open for a 2.5% loss.  This was my only real hedge the past 2 weeks, aside from cash.

On the long side, I am going to sell the remaining (tiny position) in Las Vegas Sands (LVS) to make room for new names - this is my 2nd longest held position (began early fall 2009) but I simply cannot chase a stock this far from support, even though everyone else is.  I have placed a limit order to purchase back shares if the 'gap' fills in the $41s, but otherwise I guess it's going to 70-80x forward PE ratios, as it is already sniffing 60.  As in 1999 valuations simply don't matter anymore.  The stock is approaching $51 in premarket, and is not even within a zip code of the 20 day moving average - this is parabolic. 

I am making some new  purchases - either new existing stocks or new positions.  These are stocks who have either reported lately, have decent charts but are not super extended like the "2010 Nifty Fifty" stocks that people buy up 5% each day.  Since I am buying under gunpoint from the Fed, I would rather be in stocks nearer to support (but still good fundamentals) so if something breaks the psychology I have very defined exit points.  I don't have anything like that in say a Las Vegas Sands or other such parabolic stocks. 

1) HDFC Bank (HDB) - this stock has been underperforming competitor ICICI as the valuation case is difficult.  On year end (which is next March) the stock is already trading at 30x forward PE.  But in a bubble environment I suppose we need to relax valuation metrics or miss the party.   Technically the stock looked in bad shape last week but has come back, so one can expand the position here but stop out if it breaks back below support.  That's my plan.  I'm adding 2% exposure this morning, with a stop loss a bit below the $175 area.

2) Acme Packet (APKT) - APKT is indicating $42 in the premarket, which would be a new breakout.  I am adding 1.8% exposure

3) Atheros Communications (ATHR) - I sold about half my ATHR earlier this week as it faced resistance at the 200 day SIMPLE moving average.  I said I'd buy back if the stock gets over that level ($32ish).   The stock is indicating an open over that level although the bid/ask is wide.  I'm adding a 1.5% exposure.

1) Restarting a 2% exposure in private equity player Blackstone Group (BX) - the GOP victories should help stall any legislation that hurt private equity.  And the stock looks to be beginning a breakout.  Premarket indications around $14.20.

2) First time position in TRW Automotive (TRW) - beginning a 2.5% stake as the company had a tremendous report yesterday. The stock jumped to $50 and then came back in to the $47s; in premarket we have mid $48s.  I'll do a separate piece on the stocks, but this will be my 3rd auto supplier and 4th auto stock - believe it or not.

3) Shoe retailer DSW (DSW) - another very good report yesterday, and I have no real retail exposure.  In a country where millions of households don't pay mortgages, and millions others are refinancing at historical low rates - all that extra money can go into consumption.  And if there is one thing American women desire, it is shoes.   Will do a write up on this name and Steve Madden (SHOO) who also had a good report but was not treated as well by the market post earnings.   This one is a bit extended so I am going to start with a miserly 1% exposure - premarket is mid to upper $35s.

4) Restarting Cummins (CMI) - after a poorly received report, the stock seems to have held the 50 day moving average as sellers exit, and this morning is indicating in the $93s.  I'd like to see new highs before feeling comfortable but this one of my favorite names so I started a 1.5% exposure this AM.



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Let me emphasize - I believe I am "performance chasing" and "late to the game".  Chasing like this is not my preferred method, nor does it make me comfortable.  My purchases will all be layered in with stop losses, and I am worrying about top ticking with this behavior.  But for now it is what it is.  I still have roughly 50% cash as a 'hedge'... 

Long DSW, TRW, BX, ATHR, APKT, HDB, CMI in fund; no personal position


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