Peter's Portfolio: Shorts and Longs

I am bleeding just a trickle from QQQQ and continue to watch SVA try to find a bottom. and watching that to maybe add to a new small position.

ARDI came in with decent earnings and got a nice little bounce. Will hold til technicals tell me otherwise.

Sitting on ARTX and ASTM

I was wrong about ARDI earnings. They come out this week, and I still see NOTHING in its price and volume action to suggest any strong upside surprise. So I have just sat tight.

Holding penny dogs ARTX and ASTM. Holding DSS and PHMD with decent technicals but no moves yet.

Bit for the third time on LVLT. One of these days, it is going to start heading to 10.

Still glad my CHIR options are for 2007. CPTCQ closed over 2 bucks for the week and poised to move.

Hedging Your Bets With Matt Davio: Scoooooterrrrrr!!!!

So we get another whipsaw special week with the end result lending it self to schizo behavior, basically every day we go down you buy, and when we go up you must sell! That's the mode we are in, no rhyme no reason. October known as the month of lows comes to a close on Monday and I still have no idea what has been resolved. Both Bears and Bulls have a strong stance. A time to play it tight and small in my opinion.

Frankly, I am tired of dripping market volatility and moves up or down for no rhyme or reason. That's the market we live in, take the profits they give you and move on to the next trade. Between the new Fed Director announcement and the indictments against the Bush admin, it was one none economic market moved by month end silliness.

This chart comes courtesy of Vanguard Funds. It shows the total value (NYSE, Nasdaq and Amex) as a percentage of GDP. Historically, the market has run into trouble when, after a long Bull run, it penetrated the average Market Value as a % of GDP to the upside. Mean reversion would be the rationale for some of the bigger Bear Markets following theses spikes (shaded areas).


   

The old talk of inverted yields continues to drive future potential problems with both bonds and stocks. Let's look at the next chart that further drives home a true danger in the future with the inverted yield curves.

At 4.57%, the yield on the 10-year Treasury note is at its highest point since the end of March and is nearing its 2005 closing high yield of 4.64%, which was set on March 22. There are many reasons for this latest selloff, some of which make it appear sustainable. This is in contrast to recent selloffs when yields above 4.50% for the 10-year were short-lived.

In fact, as I have been suggesting since July, it is looking increasingly likely that the 10-year's trading range is resetting from the placid 4.00% to 4.50% range that has prevailed for 2 1/2 years to 4.25% to 4.75% for now, and possibly higher later, if the market begins to price itself for a fed funds rate of 4.75% or more. The root cause of the selloff in Treasuries relates to the risks posed by the possibility of a 4.50% fed funds rate. A week ago, by the way, the market was priced for a roughly 50% chance that the fed funds rate would be raised to 4.50% at the Jan. 31 FOMC meeting. Now, however, the market is placing odds at closer to 80%. This is important because the funds rate essentially represents the floor on yields for Treasuries with maturities of greater than two years. Why?

Because investors are loath to invest in Treasuries when they yield less than the fed funds rate, primarily because the fed funds rate represents the cost of money to those who borrow money in the repo market to finance their inventories of Treasuries.

It is rare for coupon Treasuries (issues dated two-year and longer) to yield lower than that of the federal funds rate. In fact, for the two-year T-note, there have been only five occasions in 16 years when its yield dipped below the federal funds rate. On each occasion, the Federal Reserve lowered interest rates within six months, with most rate cuts occurring much sooner than that. Investors thus tolerated this so-called negative carry for short periods solely because they felt the Fed would soon lower the federal funds rate, thus reducing borrowing costs and restoring positive carry to their investments.

Here are nine other reasons for the weakness in Treasuries:

• European bonds are trading very poorly. In Germany, Italy, Spain, and the U.K., for example, yields on the 10-year notes in the respective countries have increased around 14 basis points in two days. One source of weakness was yesterday's German IFO survey, a gauge of business confidence. It unexpectedly reached a five-year high. Another source of weakness was inflation data in Germany, which saw greater-than-expected increases. More hawkish commentary from officials at the European Central Bank also have played a major role.
• Strong European economic news spurred a 1% decline in the dollar on Tuesday, which, along with a sharp rally in gold, is likely weighing upon Treasuries.
• An added reason for selling of dollar assets is the possibility of indictments of top officials within the Bush administration.
• AHBR, one of the top five mortgage lenders in Germany, is said by the Financial Times to be "close to failure." If it fails, it would be Germany's largest bank failure in 30 years. The worry in global bond markets is that in the event of a liquidation, the bank would sell large amounts of fixed-income securities.
• Hedge funds have been seen selling U.S. five-year and 10-year notes in large size. Commodity trading advisers have been prominent in the futures markets.
• There has been heavy selling of mortgage securities, which is the biggest segment of the bond market and thus exerts enormous influence over the market. As interest rates rise, the average duration (or maturity) of mortgages rises because both home sales and mortgage refinancing slows. This leaves the holder of mortgage-backed securities with more securities than expected (because a certain percentage of these securities were previously expected to be prepaid upon either a home sale or a refinancing), forcing the holder to either sell mortgage securities or Treasuries to hedge against a further rise in interest rates.
  
  Here's a quick example. Suppose a mortgage-securities investor held $1 million in mortgage-backed securities and expected that 30% of these, or $300,000 would be prepaid over the upcoming year owing to home sales (which close out existing mortgages) and refinancing activity. Suppose again that rising mortgage rates were to result in reduced home sales and mortgage refinancing activity and hence, only a 10% prepayment rate. This would leave the investor with $200,000 more securities than expected and thus perhaps more than is desirable. In this situation, the investor can either sell the $200,000 of mortgage securities or $200,000 of Treasuries to reduce his or her exposure to changes in interest rates. The investor could sell additional securities if he or she wants to guard against a further rise in interest rates.
• Tuesday's five-year TIPS auction went poorly, as measured by a low bid-to-cover ratio, higher-than-expected yield, and low numbers of indirect bids (end-user demand). The
  poor results have left the Street with distribution problems that are complicated today by the auction of $20 billion of two-year T-notes.
• Treasuries have been trending down but took a respite following deeply oversold conditions a week ago (RSIs reached 19.0). The selloff is resuming and will likely continue if the threat of a 4.5% fed funds rate becomes even more widely anticipated.
• The Bernanke appointment clears a major uncertainty but many uncertainties around the Fed remain.

These include the makeup of future policy statements (Greenspan writes the current ones); the ability to form a consensus despite wide disagreements (30% of FOMC meetings had disagreements with Greenspan's view but only 7% with official dissents); flexibility (a hallmark of Greenspan's); public speaking abilities (Bernanke's are good but not as strong); the need to relate to Wall Street and Main Street and avoid the trappings of academia; and the risk of a new inflation-targeting regime, which could well be adapted if President Bush selects two inflation-targeting proponents to fill the two vacant seats on the Board of Governors of the FOMC (there are seven governors, including the Fed Chair).
Moreover, Bernanke could well look to assert his inflation-fighting credibility early on, which makes it more likely that he might lean on the side of tightening credit, at least in the early going.