Uncle John's Cabin

Short and Long Term INTEL-ligence

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Earnings are due from Intel in a few hours. Here's my take before they are released. (Disclosure - I own (INTC) in my personal portfolios for a long term investment.)

Basic Premise - Intel has great PC chips, chipsets and motherboards as well as great market share and penetration. They also have a very large overseas operation. Their biggest rival (AMD) is falling flat on their faces, especially after buying graphics chip maker ATI which they have yet to successfully realized any significant synergies. Intel is also heavily invested in flash memory chips. NAND chips are used for MP3 players, cell phones and very soon, solid state hard drives in quantity. To date, these chip prices have been very volatile and has been a drag on Intel's earnings. Times may change though if the solid state hard drive replace the disk based hard drives in the next few years. The use of these chips for this application will be exponentially larger. (The Mac AirBook has the option for one but it is still very expensive.) The NOR chip business on the other hand has been divested with a joint venture with STmicroelectronics which has been a tough business to compete in. Other marginal investments include other chips like Adam for low power, low cost mobile computing which may or may not be a hit as well as Wi-Max for bringing the internet over cell frequencies, again, yet to be determined on whether it becomes widespread or not.

Short Term - It's all about the margins and the comments. Intel's albatross has been it's vicious war with AMD with price cutting and killing it's profit margins for years. Add to that the glut and falling prices of flash memory and you get a picture that has a very dominant company that is very profitable, a veritable cash machine, and yet, struggles to keep margins high enough to make investors happy. Intel recently re-announced a cut in the expected margins this quarter from about 58% down to 54%.

Intel will also be looked at as an indicator of the economy as a whole. Slowing corporate and personal sales rates will hurt. This will most likely be taken to be an indicator on the economy as a whole. Bad news = bad index performance.

Like Cisco, if they open their mouths about the trend in the economy for the next 2 quarters, it will be bad news. Period. Cicsco did this twice and got hammered each time in the last 2 quarters dragging most of the rest of the tech sector with it. Intel will most likely do the same.

Here's the prediction - Intel will meet or slightly beat revenue numbers but will struggle with margins and will be lucky to meet its lowered 54% projection. Inventories may also be high. This is a highly cyclical business and the spring is not a good time for them. There is very little chance they will say anything good about the next quarter and the markets will react badly, taking tech down most but also affecting the S&P in general to the downside. Corporate purchasing does not typically occur at this time of year for high tech as they are currently doubtful about the rest of the year and saving their budgets at this time to see what happens in the 2nd and 3rd quarters for them.

Long(er) Term - Intel owns the market for PC and now Macs. As the economy recovers, it will sell lots of chips of all kinds. Their best new products are the low power fast laptop chips with desktop machines on the decline and laptop sales of all kinds on the rise. (Jobs was quoted as saying he could not make the AirBook without them.) As they increase production and drop in price, this will work well for Intel in the long run. I am perfectly happy to own this for my IRAs as is and may cost average down after earnings when the price drops. This is a 3-5 year play. A shorter play will be to buy after earnings, cheap, or even wait until early summer, June-ish to buy (INTC) and wait for the cycle to turn in the fall and winter when Intel typically does its best.

To this end, I have taken a large ultra short position on the NASDAQ using (QID) before earnings as well as increasing my shorts on the DJI (DXD) and the S&P 500 (SDS). I expect the markets to react badly this week on tech in general and the markets as a whole due to comments from Intel. My plan is to only hold (QID) for a week or two as other high tech companies will report as well and I don't expect good things from them either. I do this in the context of a 6 month game. For my real, long term positions, I will consider buying after earnings to cost average down or possibly wait until summer depending on how far Intel drops.

Even marginally good news will not help this company's earnings season. Be warned!

I guess we will see how close I am to being correct in the next few hours.

Good luck as always,
Uncle John

P.S. Please keep in mind, Uncle John's Intelligence is an oxymoron, like government intelligence, so take this with a grain of salt and don't rock the cradle for a longer term investment here. I hold this stock and love it despite it's seasonal performance because there is virtually no competition. The biggest problems are the high R&D costs which make margins so important and the commoditizing of parts of it's business like the NAND flash chip business. I'm looking for a great opportunity to cost average down either this week or somtime within the next 3 months.

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My 6 Step Program to Recovery

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In light of my recent abysmal performance, I decided to put my portfolio on a 6 step program. (No I couldn't come up with 10. Darn!)

Step 1: Discovering and admitting my mistakes. I believe I have accomplished step one with a previous post, "Losing My Religion (or Gambler's Ruin)". Hello, my name is Uncle John and I am an investor AND a trader.

Step 2: Accept my current position and improve from there. It makes little difference if I am up or down in a stock right now. Only work on what will happen in the future. Although its hard to forget I lost over 40K in the China shorts, I will hold it if I believe it will recover even some of that loss. At this point, I wrote my losses down to 0 and started over. It doesn't matter where I am, only where I am going.

Step 3: Finding some beliefs to work with. This got a little trickier and will be the key to my success. Here's a list of beliefs I either rediscovered or changed.

* Earnings - With the kickoff of AA reporting the other day, we have a 40 day window here to trade in. Expectations are very low and the price is built into most stocks. Any earnings miss could be bad. A number of warnings and misses will be worse. But, forward guidance will really be the key here. Any further guidance down will do some damage. I believe earnings will be bad and forward guidance will drag the market down, especially after the run up we had before the earnings kick-off last week. The stocks that had the biggest run ups (for no seemingly good reason) were financials and real estate/home builders. Expect these to go down hard again.

* Global infrastructure - I believe this play still works but China has the "only until the Olympics" syndrome which is breaking down now even before the games start. Commodity and material plays should work here when the S&P tanks. As Dennis Gartman says "Things that hurt when you drop them on your foot" is a good place to start. I will exclude corn from this theory as the crop reports didn't seem to help it.

* Theory on Oil and Nat Gas: Oil is trading in a channel between $100 and $110 a barrel. There is very little downside to oil at $100 but there is a possible breakout above $110. Nat gas works here as well as it is under its historic ratio of cost relative to oil. Historically, the ratio has been 7:1 for oil to nat gas and we are trading about 10:1 today. Either gas will rise or oil will fall.

*China - China was down almost 40% YTD but recovered to 30% down. This was only temporary as inflation, problems with the Olympics, political pressure (Tibet), shortages and the worst winter in 50 years will drive the market down again.

Step 4: Create a plan:

Earnings - Buy shorts on the market indices, the financials and real estate. Sell after a nice gain or before Wal-Mart reports, ending the earning season. If earnings and guidance start significantly turn against me, lighten up on the shorts.

Oil - with a price range to work with, sell the rips and buy the dips. Work through oil services companies mainly and not oil directly. This works well with the 7:1 vs. 10:1 ratios. Even if oil goes lower, nat gas still has a ways to go to make it back to it's historic ratio of 7:1. Drillers and services should work well in either case. If oil stay high or goes higher, drillers get the additional boost. I'm not sure I like the refiners here as they are being squeezed by the crack spreads.

Global infrastructure - Wait for steel to dip before buying. Add gold on dips to my buy list. As the market tanks, I believe gold will head back towards $1000 again. Materials like iron ore (RIO) should do well in a range. Possibly coal as well but I am worried about recent price concerns. (EDIT: Coal may be fine but I haven't quite figured out who produces what type of coal to be sure to get back in yet. Until I understand it, I stay out.)

China - Short after a run up and sell back shortly after any upturn.

Step 5: Start implementing my plan:

Earnings - I trimmed some positions in my shorts that I rode down but held them overall to take gains as the market falls. I also cost averaged down a few positions I thought would do better than others like financial shorts and China shorts.

Oil - I strengthened my position in (CHK) and bought back into (APA). I kept my (SLB) position and added (RIG).

Global infrastructure - Waiting for a dip in steel (X) and maybe (MT). Holding (RIO) and looking for more materials plays excluding aluminum. Possibly Freeport for copper and other minerals. Avoid the transports. Imports are down and creating a drag on even the high flying rails. Bought a small position in (CAT) before earnings. Bought a gold mining stock (AUY) after gold fell.

China - Hold on to those China shorts (FXP). I recently cost averaged down a bit.

Step 6: Adjust as necessary.

"Videbimus in Caelos." - sorry for the pig latin... /grin

My best to all,
Uncle John

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Oh! The Hypocrisy of it All or "An Inconvenient Truth"

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/rant on

I just read that class action lawsuits have been filed against the major oil refineries for adding ethanol to their gas since 2004 brought about in California by marine engine and boat owners. Typically, the fuel tanks on these boats are fiberglass which can be dissolved by the ethanol. Didn't we already know ethanol was corrosive? Anyone that watched CNBC, Fast Money or followed Jim Cramer did. I'm sure many other analysts, TV shows, newspapers and magazines did as well.

I just love that this starts in California, the environ-mental state. Weren't they a major part of the ethanol craze with the Gore backers to stop global warming? I'm going to say something crazy here, possibly even treasonable, but "An Inconvenient Truth" about "global warming" is that it is only a scientific theory at this time. It states that there is a possibility that the greenhouse gasses caused by burning fossil fuels is changing the global climate. This is an unproven theory folks! Al Gore and his supporters are claiming that this is scientific fact when it simply is not. I will not agree or disagree with this theory until actual scientists can prove it one way or the other. Until then, I am a skeptic.

This does not mean that I don't support efforts to stop polluting the planet and for conservation. I am completely for it. But, only when facts are used to determine policy and not an ex-politician turned Oscar winner with no formal expertise in anything but politics and law. In virtually every case, all energy usage has pros and cons including the fuels we use today. Wind farms kill birds. Solar actually could change climate adversely if used widely enough. (For all you non-scientific people out there, it is a scientific fact that all energy in conserved. This means that if you take the sun's energy and convert it into electricity, that same amount of sun power will not be used to heat up the earth. Imagine the extreme situation of covering the Gobi desert with solar panels. This would reduce the temp in that area drastically and would very likely affect global weather patterns.) Nuclear power... hmm, do I even need to mention anything other than 20 years ago, permits for these plants were stopped being issued due to the hazards or radiation? Now, its on "Big Al's" list of possible energy sources. Hyrdo-electric power? Those poor fish. Ethanol? Corrosive, expensive to create in terms of the energy and clean water used to make it and has the bonus side effect of raising the cost of food including grains and meat. There is no free lunch people. Everything has a side effect we don't like. Determining policy on fact instead of one-sided popularistic slide shows seems to be a better way. Examine the costs of both sides and determine the effects considered least harmful. Make up your own minds. Don't let a pretty slide show in the theater do it for you!

Remember, California is the same state that allows everyone to vote on anything (unlike a republic, which the US of A really is, not a true democracy) and ended up voting for Prop XX (I forget the number) that capped the price of electricity and then went through a major crisis when power companies refused to sell electricity at lower than cost? Even neighboring states would not help out those clever Californians who ended up with rolling brown-outs that reeked havoc on the silicon industry? The result of these actions? The governor was forced to resign by blaming him for their problem (due to the law they voted in, not the state congress, nor the governor) and they held a quick election with no time to prepare and now we have "The Governator" in charge of the state. (Sorry Arnold, nothing against you or the job you are doing that I know of, just how you got into power.)

OK, so how does this affect the markets? You have to remember that all the environmental causes have huge lobbies whose only job is to raise money using scare tactics then use that money to influence elections and votes in congress. (I wish they were public companies, I would buy them.) That's how we got the ethanol laws on the books despite virtually anyone "in the know" ever getting a chance to explain some of its more harmful effects. I'm still looking for a play here. Whatever the next "great cause" is will probably have a large effect on some companies. Certainly not in the timeframe of this game, but within the next few years I would expect a reduction in ethanol production to be on the law books. I don't want to be holding the bag on that one in 3 years. Solar will probably move up the list until someone realizes that if we covered the entire globe with solar panels, the earth would freeze. I don't see people figuring that one out for many years. Natural gas seems to be a good longer term play. It's available locally in North America, its clean burning and its relatively cheap compared to oil (compare BTUs per dollar.) But, we will have to open up some reserves to get to the gas and some prarie dogs might suffer. Nuclear is so far away, it takes over 10 years to build a plant once a permit is granted that I won't be looking for a play there for at least 5 years. Clean coal technologies seem to be here and now and when I find the right company there, I think that might be a good play. Any form of conservation should do well except when it is similar to those fancy new light bulbs that are one of the most toxic things we can put in the ground after they burn out.

Realistically, we probably have to trade some birds for power, some sunlight for solar, some habitats for natural gas, some radiation for coal (yes coal power plants actually leak more radiation then nuclear power plants) with some higher cost for cleaner burning coal and some nuclear waste for nuclear power. A mixture and balance that takes the best of technology and does the least amount of harm should be the way of the future, but only if rational two sided discussions are held that point out the pros and cons of each technology; not based on popularist tripe, slide shows or lobbyists.

Sorry this was more of a rant than an actual stock play. But it does seem important to me to consider rational two sided discussions on this topic. Just like owning (MO) or (PM) is profitable even if smoking is proven to be bad for health and generally considered to be bad in the long run economically, the next latest and greatest environmental craze should be profitable in the stock market as well, even if it makes no sense.

/rant off

Today I put my thinking cap on and realized it didn't work. The world is still crazy.
Uncle John

P.S. Sorry to any Californians out there. Nothing personal.

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Losing My Religion (or Gambler's Ruin)

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I have to rate my recent performance as spectacularly poor. There are a number of factors involved. I could say the market turned against me at the wrong times. I could say the market has acted irrationally in the face of bad news which I expected and got. I could say my ability to time the markets on short term swings has left me. But I won't. Everyone could say these things at one time or another.

A little background here first. I am suffering from chronic fatigue of some form (chronic fatigue syndrome or God only knows what???) From time to time, I have "setbacks" where my energy levels drop severely and I think more sluggishly then usual. This is the main reason I haven't posted much recently. When I get tired, I make bad choices, irrational decisions and tend to doubt myself or worse, not even remember my original strategies. OK, no pity party for me. Life is. You play the cards you are dealt. Also, I can say I certainly have been distracted (and worn out) by March Madness as well as watching the Cubs in their quest to win the World Series this year! (According to Time magazine, the Cubs will make it to the Series - but lose to the Tigers. The Time magazine curse worries me. Then again, maybe the curse will be that the Tigers lose the Series and the Cubs win!)

But there are times everyone does not have the time to pay attention to the market whether it be full time jobs, family issues, personal or health issues or whatever. What does that do to a short term trader strategy? At least in my case, it plays havoc with my positions. When I did not stay on top of my positions by keeping an eye on them constantly, I tended to chase the ups and ride the downs to my detriment. I didn't get in our out of positions quick enough and the next day/week/month found myself with a large losses. As I stated in my spotlight interview, I do not typically trade like this. Due to the restraints of the game, I thought though that I would try a "fast trading" strategy to see how I would do. I did well when I had time to watch the news and pay attention to the markets and was alert. When I got tired and didn't wake up until noon or woke up early and could not stay awake until the close, I missed a lot of action that I didn't want.

Also, I started getting the "too much information, running through my brain" (The Police reference) syndrome. When tired or when I didn't have the time to process this information, it made me turn around in the ring like a bull, raging so much that it couldn't see straight. The information was useless and I couldn't make sense of it because I didn't process it. This lead me astray from the bigger picture.

My big picture plays were infrastructure like steel, coal, nat gas. They were odd one off foreign investments like homebuilders in Brazil and Mexico in emerging markets. They were ag plays like seed, fertilizer and machinery. I started out well with these as well as shorting at appropriate times when any news was bad news. To a degree each of these plays worked while I stuck to them. Once the rating issues were fixed on the leader board I was one of the 25 that were above even.

Then, I started "losing my religion." (R.E.M. anyone?) When ag did a head fake and started dropping for a week, I thought the party was over and I sold for losses before letting it play out and giving it time to work (POT), (AGU). The same was true of my coal play (ACI) which was dumping even while steel was doing well and exports were up. I sold out of that as well. The scare in Brazil about peasants trashing Monsanto (MON) facilities made me worry as well as a general dip in the Brazilian overall markets. I sold my home builders (GFA) and (HMX) and more ag. Deere (DE) underperformed while I held it without giving it a chance to report earnings even once. I dumped it. When steel started losing ground I sold out for a small profit on (X) and did not buy back in.

I wish I had all these positions back. I guess there is time to still try to recover but I have lost about 10% in the last month. It will be difficult. When I lost faith in my overall themes, I looked at what the market trend "had been" and starting looking at the people at the top of the board. I bought gold right before it got hammered and sold for a loss. I started shorting everything thinking the March run up was due for a correction but I bought in so high, that even with the correction, I was due to lose some money. I considered jumping into the highly volatile solar plays thinking I could make a comeback. I was at the edge of "gambler's ruin" and probably still am.

When things start going badly in Vegas, many people try to double up to win their money back quickly even though it may have taken days to lose it. This is why most people not only come home with a loss, they typically lose every dollar they set aside to gamble with. In effect, these people are destined to lose every dollar they are willing to risk. The smarter people in this group set aside a set amount of money they are willing to lose. If it is small enough, they can still come home happy losing a couple hundred bucks from a vacation just as if they spent a couple hundred bucks on trinkets and tourist traps. That's fine if that is what you are willing to pay for entertainment. "Gambler's ruin" is when they get desperate and start using their ATM cards to reach for more money that they can't afford. The more they lose, the more desperate they get, the more money they lose until they've lost money they can't afford, or worse end up broke. Technically, gambler's ruin is more of a mathematical theory that ends up with a total loss. This is due to odds against (or house odds in the case of Vegas.) For example, if a game of chance has a 10% house edge, for every $100 wagered, you would expect to win $90 total. The problem is, the main assumption is that those winning dollars will never be rewagered. If people take that $90 and rewager it in the same game, they should win $81. Rinse and repeat to $72.90 etc until you reach 0.

Now, doubling down on a stock you believe in when it's down my just be cost averaging down. It's when you lose your belief in that stock, that's when you start heading towards ruin. Jumping at every bit of trivial news is a quick way to ruin. If the fundamental reasons you believe in a stock changed, then it may well be time to get out. But, if its a short term correction, losing your belief can cost a lot. You end up selling every dip and chasing every run. That's pretty much what I did in March. I got tired, lost focus, lost my beliefs, learned too much information only to find out that I was dumber than before. My performance shows it.

This is one reason I really sweat it out when I take a very short term position like shorting the financials in my real accounts. If something happens and I miss the move (busy, tired or whatever), I could take a very large real loss. Thankfully I don't do this often and can't sleep well when I do so I am very eager to get out, even if it means smaller gains. While I am happy with my performance in my real portfolios, so far, in this simulation, I won 1 month only to lose it all back and then some the second month. Hopefully, I can find a new set of beliefs. I need to reexamine them all. I may very well still like the plays I discussed earlier but with their current run up in price, I can hardly expect to get back in right away and make a profit.

Game on and here's to finding my religion again.

Good luck as always,
Uncle John

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Google and Microsoft Joint Venture code named "GooSoft"

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My inside sources at Microsoft have confirmed a new radical change in strategy at Microsoft and Google. The details I have are still vague and sketchy at this point (still only slightly better than "rumor stage") but expect an announcement by the end of the day or at the latest, by the end of the week. In a new joint venture called "GooSoft", the two formal archrivals will work cooperatively for the first time in history.

Google will now use a new "Open Source" version of the Windows Mobile SDK instead of their recently announced cell phone platform to create a new open platform for cell phone users to try to keep Apple's new iPhone at bay. This new open source OS will be available for download at freesourcecode.microsoft.com. In return, Microsoft will farm out it's search operations to Google in what they finally declared as a losing battle. This should help both companies focus on what each do best and allow them to tackle new challenges posed by Palm, Apple and Research in Motion all running on proprietary operating systems at this time.

According to my friends inside Microsoft, Steve Ballmer has just been waiting for Microsoft's CEO and primary shareholder Bill Gates to step down and has teamed up with Paul Allen, Microsoft's co-founder to wrest the control of the company from Gates who has been responsible for Microsoft's dismal performance of late by keeping the Windows source code proprietary. With Allen's support, Ballmer now has the votes necessary to reverse many of Gate's decisions and will start by opening of the Windows source code to any and all parties that are interested in helping improve the operating system.

In a company email sent to all employee's, Steve Ballmer replied to the question of why Microsoft was giving up its search engine business by farming it out to Google, Steve Ballmer supposedly wrote "We can't compete. We might as well team up with Google to ensure both companies survive the oncoming threat posed by the new social and videos networks by MySpace, FaceBook, YouTube as well as foreign competitors such as Biadu.com."

Also at stake is Microsoft's most profitable product, the Office desktop suite. Google, will reciprocate by dropping it internet based Google Office Suite and instead promote Microsoft's new internet Office Suite. This is a win win for both companies.

This is thought to be great news to Microsoft and Google shareholders who have both lost share value over the Yahoo debacle. One other possibility is that Microsoft, now teamed up with Google will abandon it's quest to buy Yahoo. There is no longer a need to waste the company's capital and stock on a Yahoo purchase and both companies will plan the demise and funeral for Yahoo. I figure with the $6 loss in stock value MS took when the Yahoo deal was announced, the new price target should climb to about $42. The price was for MSFT $36 when the takeover bid for Yahoo was announced. Google has also suffered severe declines in stock prices as Google has toppled from its 52 week high of $720 to its current trading range of $420 to $440. This reduction in threat from Microsoft while leaving Yahoo out in the cold should allow Google's stock to head back northwards to near $1000 per share within 6 months once the deal is announced.

Disclaimer: Please wait for the announcement of this deal as I cannot confirm the deal other then by checking with some friends at Microsft. I am sure there will be plenty of time to get in as today's lower prices so there is no rush. I have no contacts at Google to confirm or deny this deal yet from their side. I am not a professional financial adviser and do not represent any claims as such.

Happy trading and happy April 1st!
Uncle John

P.S. This article was completely fictitious (when I wrote it.)
P.P.S. Happy April Fool's Day!!!

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QOTW - Dancing on the Edge of a Knife with (GS)

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In response to the question of the week about Goldman Sachs:

I will agree (GS) looks to be the best of breed in the financial sector, certainly at least in the investment banking side. It was genius to short the sub-prime mess while selling the same product to others or is that called sleazy? Either way though, it didn't seem to be illegal. Their numbers were better than expected but hardly good. The bar had been lowered so much by reducing expectations, that it would really have been a disaster to have missed earnings. So far, their name has been untarnished, their trading desk seems to be doing well in this market and they have held their price better than most of their competitors. These all seem like good signs to me. But I don't think it is that simple.

Usually when one or more companies get dragged down, their entire sector goes down and trying to fight that trend is futile. This has been the case for GS to date. There are other good names here too like JPMorgan that just got a steal that could pay off in spades for year to come with the purchase of Bear Stearns (assuming there are no more legal complications from Bear Stearns shareholders that seemed determined not to take the offer.) GS should also pick up some business with the imminent closing of (BSC).

In a time when a rumor can cause a run on a bank or take them out, anyone invested in these companies are playing with fire. But, risk is where the profits are and if you can stomach it, these financials have been beaten down so badly that when the worm turns, they are due for a big run. To me, the questions are who and when? Who do we pick to invest in and when do we choose to do so?

There is an interesting fact to mention here. The investment banks and the commercial banks use two different accounting methods. The investment banks use a "market to market" approach that means they have to markdown (or up) their assets when similar assets are traded. This means the investment banks have to take the big write-downs faster than the commercial banks which use an accrual accounting method. The hidden writing on the wall here is that the commercial banks may not have shown the public how bad it is yet as their losses may still be hidden in accruals. The flip side of this argument is that the markdowns are too extreme and when the liquidity comes back and these assets can be priced better, there should be significant write ups. This would also mean the commercial banks accruals get reversed and the paper losses that he investment banks suffered may never happen to the same degree at all for them.

We are dancing on the edge of a knife here. If the commercial banks take a big hit as the accruals pile up, the investment banks like GS can still take a big hit as the entire sector goes down. It also seems that no bank is truly safe at this point in time. As Bugs Bunny used to say "Hare today, goon tomorrow." The Fed has proven it's willingness to preserve the banking system at virtually all costs (as I believe it is mandated to do) but that does not mean it will take pity on any bank that stands in the way of stability. Witness Bear Stearns and the Fed's participation to virtually take the bank down to prop up the system as a whole. Was BSC really only worth $2? I think most people know the answer is no. They were obviously worth more than that. (A moment of silence please to morn the non-executive employees of BSC and their retirement portfolios and careers.) But that was the number that was needed to make things happen so it became the target number. Technically, its not a $2 per share offer, it is a stock swap for JPMorgan shares and as JPMorgan goes up in value so does the offer but not by much considering it's low starting point. I also have to love the observation that Dylan Rattigan made that JPMorgan paid less for Bear Stearns then the Yankees paid for A-Rod! /grin

To wait until this clears up may mean missing a huge part of the recovery and run up. To jump in now may mean taking a big bundle of risk with a possible hefty return or loss. The general consensus on the street seems to be that it will take the financials to lead the way to a market recovery. Without them, the market will clearly either stagnate or continue it downward trends.

My personal risk tolerance does not lean me towards buying GS as these prices or at this point in time. Once the commercial banks report in the next few weeks and the rate cuts and Fed actions have been digested by the market, we could very well see a quick leg down for the financials again, especially if someone else gets into trouble. (Lehman Brothers?) Both Lehman and GS got a negative outlook and possible downgrade from S&P today. GS has also jumped almost 40 points in the last week and that probably was an over shoot.

If I were to buy into GS, it would be at a lower price point as it could very easily retest its 52 week low of $140. A price point of closer to $150-$155 and a few weeks of more earnings, especially the commercial banks with no more bad news (failures, runs, huge unexpected write downs etc...) would make it interesting but still, very risky with only the possibility of a high reward. My prediction is we will see Goldman Sachs back at the $150 range and some point next month and only then, based on the news could it be worth dipping a small toe into the water with maybe a quarter position and look for opportunities to buy dips over the next 3-6 months. Until then, the knife is way to sharp for me.

OK, time to get back to basketball and a weekend of beer, pizza and poker. (Hmmm, maybe I should by BUD instead.)

Good luck to all,
Uncle John

Disclaimer: I just bought a large short position with SKF at this time in the game. This is a big risk and I could get hammered on it. I bought in recently after the financial run up due to earnings from GS and others this week as well as the Fed and GSE actions and the short squeeze due to the options and futures expirations. The reason I believe the downside risk is still there is the very quick run up of the US banks, as well as the European bank situation. While I do not believe they are represented in the SKF, I do believe bad news from Europe will take the sector lower and I don't believe the European banks have been as aggressive taking write-downs and we will likely see some bad news from them within the next month.

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