Stocks-Rider

Could someone please tell Countrywide and Ditech to stop their TV ads?

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Market Commentary

In a recent businessweek article, the 1920 Economist Knight was aptly referenced for his understanding of the difference between Risk, which the Markets know how to deal with, and Uncertainty, which the Markets don't - "Risk is what you face when you have a basic understanding of how things work but there's a degree of randomness or luck involved. Knightian uncertainty is when you're really just stumbling around in the dark."

I believe we are currently in the latter category. We are stumbling in the dark. It is not often that I have seen the media, be it the veterans in financial journalism or blogs like this one, so divided over the fate of market over the next two to three months. Parallels are being drawn to 98 drawdown and 87 crash. Some examples are here, and here. Speculations are being made on either side of actual fed fund rate reduction (the fed fund futures seem to be pricing in at least 50 basis points rate cut by the next FOMC meeting). Some examples are here, here and here.

Everything said and done, what do we need to know in terms of the market direction? My feel is last Thursday or Friday could not be picked as an absolute bottom. How many times have you seen a market stage a V-shaped recovery? The fact that we may revisit the bottoms or close to those levels is also bolstered by the degree of uncertainty as to what is exactly going on. Could we see a short term recovery period? Yes that is highly possible. Would it be sustainable? My answer would be no..not until we get back close to the bottom of last week.

At times like this, it makes sense to also keep an eye on the longer term trend. I would opine that the longer term still remains bullish. Besides I would consider it stupid to ignore a stance by Fed that pretty much says "we will take whatever actions necessary to keep the markets stable" (paraphrasing from here, here and here). Okay so the Fed may not be the best timers in terms of their actions but you at least know that they are not asleep. And that speaks volumes. There are two things you never bet against - the tape and the Feds. Bottomline - I will trade for short term in volatility and good stock picks. I will trade with a bullish intent for the long term.

If you need to understand more on the underpinnings of how the Fed is currently thinking without the interpretations of journalists, a new academic paper has been published on the Fed site on households becoming indebted relative to their assets. I am sure there are going to be lot of interpretations. To me, it seems to indicate Fed's inclination towards further rate cuts. Seems like one of their key objectives is to continue to keep access to credit, easy. Hmmmmm...

New Picks

This is my first pick. I am late to the party but hey I am here.

ANF Long - Abercombie reports earnings August 22nd. This is a very short term trade. I am betting that the earnings report will have a surprise to the upside. Fundamentally, ANF can't seem to stop doing the right things in expanding and honing at the same time, their core competencies in targeting the young demographics. You know what is really interesting about young teenagers? They are likely to spend more money on clothes than their parents. And it is NOT their money! So there is no remorse in buying. Positive vibrations, anyone? And nobody knows better to capitalize this simple fact than ANF. I don't mean to imply every teenager gets a generous allowance from their parents or that ANF is completely banking on reckless spending but then this psychology plays into ANF's hands especially when they are firing on rest of the cylinders so pretty well. For numbers, go to any financial site and you will be impressed. Two things that I would highlight here in favor of ANF are its extremely strong brand and the best profit margins in the Industry (currently at 12.52%). Not to mention a consistent revenue growth that has outpaced the industry average. Coming back to the short term, I believe there is a very good chance the earnings report this week may give a reasonable lift to the stock.

The Trade on ANF - I am buying 1000 shares of ANF. This forum only allows me to buy the stock and not trade in options. But outside the framework of this forum you can buy September calls with strike price of 70 at 9.60. You will possibly end up getting the same price if you put in your orders as soon as the day begins since the market action was flat to down towards the close for this stock yesterday.

Some Stray Thoughts
Okay I have to vent but I will keep it brief. Barron's has always been one of my favorite magazines. And yet reading the cover of this week's issue made me slightly queasy. To quickly summarize, it blasted Cramer (Jim Cramer of Mad Money, CNBC) and went all out to discredit his stock picking ability. Now I am not the biggest fan of Cramer and I agree sometime his picks can stink. But the man has wealth of knowledge and a wonderful insight into the workings of the street, how the hedge funds operate and provides sharp ideas on position and intermediate term trading. As for the picks, he in fact says not to buy them the next day or even a couple days after due to the fabled "Cramer bounce". He also tells you to do your homework. But lets go back to my quesiness. What bothered me was not that I feel very bad for Cramer but the fact that a publication that I put on pedestal in terms of credibility had to take a cheap shot when there was absolutely no need to. It was a cheap shot in more ways than one. To a certain extent Cramer may have deserved it because he underplays the role of timing in his stock picks. But he definitely doesn't deserve something like getting anointed with a dunce cap on the cover of a reputable financial publication. Allright I promised to keep this one brief so I will end my rant here. I will continue to be a big fan of Barrons though and I hope such pieces will be far and between.

(p.s. I maintain same blogs on my own personal blog site that also contains past posts and a complete open list of portfolio holdings with both stocks and options trade. If interested, feel free to check it out.)