BIDU HORROR SHOW

Welcome to the Baidu (BIDU) horror show. Those of you who bought the false rally on Tuesday are really hurting today. Hopefully, you had the sense to at least sell as the stock went up. The corrective bounce or dead cat bounce was expected and was a shorting opportunity, not a buying opportunity.

Let's forget about the past. Baidu is no longer a leading stock. Heck in a market correction, no stocks are leading, that is if you don't count the way down. As above chart shows, on a daily scale, you will notice that for the past two days, the stock sold off hard into the close only to show buying activity the last 30 minutes. Do not mistake this as a harbinger for a rally. It is a set up for further short. True, if you bought the close today, and if you sell quickly in the morning, the likelihood of a profit is there, but why chance it. (I am asking myself that question right now as well.)

Overall, Baidu failed and sliced through the $334 support level which now presents a formidable resistance. I believe Baidu may make a gallant attempt at $334 but will ultimately fail to hold that level. This means that it may also retest the lows of the day tomorrow at $315.57. It appears that the market makers will try to pin this around $320 tomorrow at OPEX.

If this stock breaks $315.57, look out! It will retest the $297 level.

Overall, horrible looking chart, unless you are a short. In that case, sweet dreams!

SPX 1450 Must Be Defended or Else...

Another tough day for the market today. The relentless selling has not lost steam. What is worse, the SPX has breached for the good part of the day, the support level at 1450. The only meager solace in this action is that SPX ended the day above 1451.15 on a last minute surge in buying. There is nothing bullish about this action. Furthermore, the bulls need to pray that this level of support holds, else we may retest the 1430 level, which, if broken, is considered a bear market signal.

Who are we kidding? All the leading momentum stocks have rolled over and are falling faster than a knife through hot butter. Google (GOOG), Bidu (BIDU), Research in Motion (RIMM), Apple (AAPL), and many more have fallen by the way side.

Don't listen to the so called market experts who are calling for a "Turkey Rally". As I said before, the turkey has already been killed and the carcass is rotting. This is not the time to be picking at the bottom, as we have not yet found any bottom support. Stay in cash or go short if you are inclined to do so, but under no circumstances listen to the market gurus such as Jim Cramer. They are all confused and scared.

SPX would be a great short if it stays below 1450 on heavy volume. I am currently flat today. I sold out of my BIDU short term puts but am holding the January 195 puts (190 contracts- which I will add to on any rally attempt tomorrow). I am expecting an early morning dead cat bounce which I have positioned 15 contracts of December $330 BIDU contract, which I will sell into strength.

In this market, watch the key support and resistance levels on the S&P 500 and trade accordingly. It is treacherous out there with a lot of head fakes and noise from the market pundits. Unless proven otherwise, assume that the Santa rally and the turkey rally is dead. Period. Don't fight the tape here. Cash is king.

Goldman Sachs the Next Shoe to Drop

For weeks now, Goldman Sachs (GS) has categorically denied that it will be writing down huge sums of bad debt related to subprime mortgage market. It is a fact that Goldman Sachs is exposed to one of the largest positions of the risky mortgage debt obligations or CDOs. Goldman has stated previously that it would stand behind its valuation of $50 billion dollars of risky mortgage debt obligations. Goldman continues to reaffirm that it has somehow avoided the disasters that its competitors have gotten themselves into.

A lead article on the marketwatch.com is helpful here: http://www.marketwatch.com/news/story/goldman-ceo-sees-no-big/story.aspx?guid=%7B4AF9FAF2%2DB0E2%2D4ACA%2D8134%2D5BBD5FCACFD6%7D

Also, please see Herb Greenberg's blog in response to this: http://blogs.marketwatch.com/greenberg/2007/11/goldmans-shorting-of-subprime/

I believe Goldman is not completely forthcoming about their exposure. Dick Bove from Punk Ziegel & Co stated that "The risk-management systems at this company appears to have been effective in allowing Goldman to avoid the worst of the write-downs that others are announcing." But how are they doing that? Are their risk management so good that Goldman's competitors are not privy to? Are they that much smarter than the rest? I don't think so. Do they have some algorithms of computerized mathetmatical formulation that is out of this world? This is in fact what Goldman is contending.

And now this. It's been shorting subprime to avoid losses. But how do you short something that has no clear cut intrinsic valuation or less than transparent pricing? Review what Herb Greenberg is saying in his blog. It makes no sense.

In the end, the truth will have to come out, and Goldman Sachs, like Countrywide Financial (CFC) before it, will have to pay the piper. For those who buy into the Goldman Sachs (GS) BS, they too will feel the pain that Countrywide share holders feel.

If Goldman Sachs is forced to be more transparent and that leads to more write downs, this market will fall into a frenzied free fall. They know that and are painting the rosiest picture it possibly can. That will be the next shoe to drop and it will affect this market in a dire way because all the hopes are being placed on the fact that we finally have some grasp of the magnitude of the subprime mortgage mess and that it is under control. I don't think it is possible for this naive assumption to last forever.

Once the truth comes out, look out.

This is Only a Snap Back Rally from Over Sold Condition

Before all of you get excited about today's rally, please realize that this is a technical event that was all too expected. One day doesn't resume the bullish rally. Please know the context of this rally: within a bearish down trend in all of the major indices. What today accomplished was to pull in the unsuspecting retail investors to buy while the institutions continue to dump their shares. Also, it took out the technically "oversold" market. Underneath all of this action, when you look at the SPX (Standard and Poor's 500 Index), there were 20 new highs and 180 new lows.

Look at the SPX today:

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What you will see is that the SPX has formed a head and shoulder a while back. But notice that the 200 SDMA stopped this advance dead on its track. Additionally, it couldn't reclaim the neck line of the head and shoulders fall. The volume was also slightly lesser than the previous day negating some of the effects here. The bottom line is that when you consider mid August when the index tried to rally, it did have a 3 day rally which pittered out severely to retest the lows and then some near the 1300 mark. Just be careful before you get overly exuberant.

On the NASDAQ:

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This weekly will also show you that today's action in the whole context of things was nothing more than a snap back relief rally that was purely technical. Only time will tell, but I am not yet excited about this chart. Again look at the MACD which still maintains the weekly death cross as well as the lack of volume in this advance.

Lastly look at BIDU, my favorite Momentum stock currently that can be traded to the upside and the downside. But clearly, while the $40+ point advance was breath taking, it merely reset the damage done to it yesterday. Even so, it clearly remains in a major down trend.

Bidu (BIDU) is my favorite stock. It is a high momentum stock that can give both on the way up and on the way down. It is a speculative stock and carries with it immense volatility and huge price fire power. What it did do today was to test the 50 SDMA and bounced hard from that area. The volume was merely average and the MACD still remains in a down trend. It couldn't break above the $355 resistance level, and tomorrow will be a key tell on what this stock will do. Again, I believe that today's action was technical more so than the character change of the market. No down trend goes in a straight line and I believe I will find that this stock will roll over from here within a few days and resume the down trend. That doesn't mean I am not taking advantage of the upside, which is great. I just adjusted my position size to 25 contracts of the December $330 contract and will "bail" on a moment's notice. But I will ride this out, though, I must admit, I felt like I should have liquidated this position today prior to close. A good short point would be to wait and see what it does to the overhead resistance line at or near $355 and if it retraces on strong volume, that would be a good time to short. Conversely, you can also try to short this when it breaches the support at $300. I think it will take a stab down there in short time.

Over all this market is treacherous and I do not think we are done going down. But I will not argue with the market and play the side of the strength whether that would be up or down. In the mean time, do not chalk today's action as some sort of confirming trend. IT IS NOT.

Sympathetic Selling in Asian Markets

Hold on to your hats folks, we are in for continued spread of fear and panic when US markets open in just over 13 hours. Nikkei is down 2.4% and the remainder of the Asian indices are following suit. Yen continues to gain on the dollar destroying the "Yen Carry Trade". Will the US market bounce or continue to go down parabolically as it had done the other way for the past 2 months? I continue to bet a market melt down. There is nothing that can stop the recent downward trend.

Ridiculous Jim Cramer comments on Cuomo

Here is the post from thestreet.com, where James Cramer pontificates on Cuomo's "inquisition" of Washington Mutual.



For one thing, Jim Cramer's contention that Cuomo should keep this growing subprime fraud under wraps is ridiculous but shows irrationality of Jim Cramer. Cuomo has the fiduciary responsibility and the obligation to bring "truth" and "justice" to the public. Additionally, if WaMU engaged in fradulent lending practices, then why shouldn't they be investigated, tried fairly, and then be brought to justice?

Cramer contends that it will adversely panic the market and cause unecessary loss of market capitalization in the stock market. That is the biggest balony I have ever heard. The stock market is going down because the investors have finally opened their eyes to the truth, something Cramer seems to not understand. Truth and integrity are lacking for Jim Cramer.

If WaMU has done something wrong, then a swift and expedient justice should be served. This market is going down for many reasons and WaMu is a small part of the bigger problem that has plagued this economy for a long time.

Cramer, please stop losing money for people who don't know any better and who actually think that you are a stock market guru.

HSBC set to write off $1 billion

HSBC is set to write down $1 billion additional in bad US subprime mortgage debts. This further feeds the growing concern among investors that the write offs by the major banks and investment banks were "low balled". In a continued signal affirming the growing credit crisis, more banks are coming forward with "revised" upward figures for bad debt write downs.

Some have speculated that write downs could reach $1 trillion, which at that time seemed ridiculous, but now, I am not quite sure.

In a separate note, Countrywide Financial (CFC) death rattle has begun. Yet, Mozillo continues to sell. I joke every day that when CFC announces bankruptcy plans, Mozillo will continue to sell down at the $.25 level. Disgusting!

Stock Market Crash is Imminent

Folks, the last 30 minutes of ugly action in the indices on Friday was not an aberration. It was institutional selling and in heavy doses. Too many factors are stacked against the stock market, US economy, and cash liquidity, that no amount of hope will pull us out of this. The past few months have been fueled by hope. Hope that the FED will somehow rescue the markets and the economy. It was fueled by the hope that we would not plunge into a recession that should have continued from the 2000. The false hope of artificial rate cuts by Greenspan and Bernake to spur us from the inevitable downward spiral from the dot com bubble and the 9/11 attacks have to be paid in pain and reckoning. In truth, there is no Shawshank redemption for us. We must now accept the pain and pay the Piper. It is overdue.

For too long, the market was content to ignore the danger signs hinting at disaster. I too played the "long" side from August to October 21, 2007. I am a momentum trader and trade on the side of strength. But I was ever watchful of the economy. I also erroneously called for FED to cut in late August because I believed that rate cuts would save this economy. But the realization that this was naive started back in March of 2007 when subprime fungus clearly began firing off warning signs.

Today, we are seeing "safe" financial institutions writing off billions of dollars in bad debt related to subprime exposure. But the ominous truth is that they are low balling the figures, just to stay afloat. But the dank cover of deception is no longer viable and institutions such as Wachovia, Merrill Lynch, B of A, and JP Morgan are fessing up.

No amount of FED intervention in the form of rate cuts will save us now. The investors have realized this sobering truth. It is apparent in the Nasdaq's 6.5% plunge this week. It is evident in Cisco's conference call that no one will escape this without battle scars. Tech was a safe haven for too much money chasing too few stocks. Witness the darlings Google, Bidu, Apple, Research in Motion, etc... coming down from stratospheric highs. I know, I was part of what drove up these stocks for the past two months. But I knew that it was temporary.

If anything, the FED will be forced to raise interest rates in the next meeting. He knows all too well, the fight in saving this economy is over. It is inflation that he will focus on. When the cost to lend money exceeds profits generated from doing it, the FED (which is a bank) will be forced to raise rates. The gesturing by the FED officials the past few weeks is not a coincidence. They are trying to ease the markets down. But because the market is a conglomeration of mass psychology, there will be no easing down. Only a swift and bitter correction awaits us, and I believe a crash is imminent.

I wrote in March regarding the shroud of lies that Countrywide Financial (CFC) was operating on. I knew that they were the harbinger of things to come. That no one is clean in this mess, all are to blame, including the consumers. But the day of reckoning is near. I do not have much hope for the near term future.

You can forget about the Santa Rally or the Turkey Rally. Santa is working at McDonald's this season to pay for his ever rising mortgage interest rates. The turkey was shot early this year by the angry stock market participants. Don't buy into buying the dips. They said this in 2000. If you listened to them then as they say so now, you will go broke. Go to cash.

Good luck. I am heavily short BIDU, AAPL, and will continue to short on any strength.

Market Trend Has Been Broken- Recession Ahead?

I believe the major indices have broken support and have rolled over. My prior posts regarding long positions should be avoided. I am now looking for entry points for shorting either the NDX, QQQQ, SPX with long dated puts. Also, the markets will not go down without dead cat bounces so a tight stops and periodic plays to the long side only as a day trade will be recommended.

If NASDAQ breaks 2720 support level, then this bull market is done and we will be in bear territory. Keep an eye on the Asian markets on Sunday and if they tank hard, it will reverberate into our markets on Monday. If you have losses on your positions in stocks, take them and go to cash. If you haven't tried to short the market before, don't. It is hard and it can back fire. If you must short, use long dated put options. But in this case, cash is king, respect the market. It is screaming for caution!

I am currently short Apple ahead of its earnings, Google, and plan on scaling into Amazon puts as well as QQQQ puts.

Be careful!

Market Correction Has Started

I hate market corrections. But, it is necessary. No meaningful uptrend has ever started without one.

I hear a lot of people blaming CNBC and the media for pumping the '87 crash as the main reason why we went down so much on Friday. But there were warning signs that this might happen along the way. Namely, the Dow and Nasdaq began to diverge with ominous but expected earnings report from the major banks including Citibank (C), Bank of America (BAC),and many investment banks continued to show erosion of earnings due to the credit crunch. The media tries hard to avoid using "subprime" these days. That word is like the plague so now, they use the word credit crunch.

No bull market can continue without the financials, transportation, and technology leading it. So the financials are in shambles with no recovery in the near horizon. The transportation segment is still alive and breathing but continued rise in energy costs will also put a damper in this segment. The only bright spot right now is the technology sector but even there, no amount of robust earnings from Yahoo, Google, and even EBAY has garnered much enthusiasm. In fact, Google retraced most of its gains on Friday on heavy volume into the close, a bearish sign.

We are in a precarious position. The dollar continues to go the way of the toilet paper, down the toilet. The sympathetic rise in oil to dollar decline is a huge concern. The continued erosion of the housing market and its related fall out from the subprime mess is now reverberating louder and louder.

The FED induced rally has now lost steam and it is forcing the investors to take a hard look at the reality of the situation. In truth, we are in a scary place. I fully expect the FED to cut at least 50 basis points when they meet on October 31 at the FOMC meeting. But will that be enough to help steer the economy in the right direction? The answer, sadly, is no.

With continued cut in interest rates, we run the risk of losing control of inflation and continued devaluation of the dollar. We are at a point of no return as the effect of FED induced stimulus will have positive and adverse effects. I for one at this point believe that the FED should continue to aggressively cut rates and worry about the inflation later once the economy has recovered (if it recovers). But at the same time, I grow ever skeptical that the FED is the answer. Perhaps there is no other way than to suffer stagflation to wash out the sins of our past ways.

Never the less, where we go from here nobody knows. It is scary. The media has run with the crash of '87 story. I don't know how Monday will unfold for the traders and investors. But one thing remains true. Thus far, earnings have been solid from the technology sector but that is it. The ominous warning from CAT probably doesn't help either. They put the odds of a recession at 50% but that's like saying the glass if half empty, it doesn't mean a thing.

I am out of Google and was fortunate to escape with a gain. I do have protective puts in place and plan to add more if Monday turns out ugly for a short term trade. But my cash position will allow me to aggressively buy for the reflexive dead cat bounce should the market pick up steam in its selling activity next week.

One thing to remember is that the market got way ahead of itself since breaking out in late August. We have gone parabolic since then and the correction that I anticipate will be sharp and swift. But the greener side of this story is that there will be fresh opportunities at the end.

My Three Picks for the Fall

Hi, I don't know if anyone is reading my blog anymore. If you are, I am sorry I couldn't post more often. But such is the case of an aspiring full time trader and a full time medical practice...sigh.

But I would like to put on record my three picks for the fall. My so called "Triple Play" and the rationale and where I expect the price to end up. As you all know, I trade options and this time around is no different. I am a high risk high reward type of trader and I like the odds of the "triple play".

My theory is to trade around earnings or events. In this case, I have selected Google, Under Armour, and Cisco to round out my triple play. The commonality is that these stocks, with the exception of Cisco is a fast mover that can move one way or the other rather quickly and violently.

1) Google: I have been long the November call options, pushing out from $590's to the current $650's. I have been long this stock since $545. Despite what you hear in the media regarding issues of how expensive Google is, when you consider its PEG ratio of just under 1.2, it is cheap. I believe the recent run up from its lows near $477 to the current $620.11 is not manipulation. It is valuation catching up to the intrinsic fair value of the stock. In that matter, it still has a bit to go with fair value being calculated to be $777 (no pun intended). Google should command a PEG of at least 1.5 but after earnings, I expect it to go to at least 1.3. Google, is a value play that has some ground to make up. I anticipate that it will hit at least $650 after earnings but may be able to hit $720. I am hedged with 200 contracts of October $620 puts to protect my downside.

2) Under Armour (UA): Go ahead, say what you like about UA. But truth is the retracement to the $60's from the $73 peak after last quarter's earnings really has left this stock in a good position for a robust move. Several things that are going against this stock, and I believe it is wrong, are that it is too expensive at PEG of 2.5, that retail is affected by the credit crunch, and the anemic price movement lately. But when you dig deeply, UA is in the seasonally strong quarter with many avenues to improve margins and sales. Additionally, UA is not a fad but gaining ground quickly on Nike. There is so much pessimism surrounding this stock that most of it is unjustified. Recent downgrade by UBS on weather concerns are nothing but laughable and ridiculous. With the short % above 25% of the float, if they can exceed earnings, we will be able to see at least $78 and possibly $88.

3) Cisco: One word. Weak dollar. With its robust exposure to the outside of USA market place and the world wide expansion of web content, this stock is poised to break out of the $33 range and finally make the transition to the $37 range by the end of the year. The earnings on November 6th will give credence to my theory.

Markets are getting choppy but who would expect anything less when we have virtually gone straight up since the August 25 break out? I think today's pull back is healthy and mostly related to the options expiration manipulation issues than the fundamental break down. The credit worries are nothing new and just presents a new found appreciation for the wall of worry. Is our market perfect? No. They never are, but it would be foolish to fight trend tooth and nail, lest you get toothless. But please protect and respect your capital with some hedging, just in case. You never know.

For Christ Sakes, Do Something Bernake!

Ben Bernake should have a new nickname. "Do Nothing" Bernake. Or perhaps, "Hide and Say Nothing" Bernake. While his contemporaries in the FED are speaking out louder than a British Fog Horn, namely Poole and Lacker, whose pontifications can lead to sharp drops in the wall street these days, the guy who is supposed to be in charge is notoriously out of the spot light.

It is all right that he hides, but what bothers me is that Bernake has lost all forms of credibility and continues to lose it as days go by. From his famous speech back in March that subprime is "largely contained" to his recent admission that things are drastically worse than feared, his tenacious focus on core inflation (or the lack of) continues to put this economy and the world's at an impasse and the danger of global recession, or worse, depression.

I used to side with Lacker and Poole back in March, when I felt that the FED needed to raise interest rates. But now, that window of opportunity has passed and would serve a sinister road map of global economic ruin. The "window" of opportunity to do something about inflation and put an end to unmitigated housing buildup despite evidence of growing inventory by home builders and "reset" the sins caused by greed in the housing market has passed and the only thing left now is gasping for a rate cut.

Fed's cut of the discount rate by 50 basis point is a testament that the FED is indeed, and rightfully, worried about credit liquidity crisis. Yet, the real focus that can do something to help this disasterous credit crisis, the fed funds rate, has been left alone. So, Bernake and Co wants to fight inflation yet, they have infused unprescedented 31 billion dollars, the most since 9/11, into the economy. This is not only inflationary but dangerous as the FED is printing money at an alarming rate. I do not see the logic, other than pure arrogance and stubborness of Bernake, by not wanting to lose face and cut the fed funds rate by 50 basis points. It is too late to save face for Bernake now. What he has done the past 3 weeks has set in motion of greater calamities to come.

What will Bernake say on Friday that would matter? He would probably say nothing. But you can bet your bottom dollars and your bottom line that he will "omit" quite conveniently, the word "inflation" from his speech. The inflation fight is lost. I do not see any reason to destroy the global economy and he is not at all a contemporary of Greenspan or his equal.

The question is, if he wants to kill the world economy, then please raise the interest rate 50 basis points and get done with it. We may forgive you in about 5 years. Otherwise, if he has any ounce of common sense left, though I figure he left that back at Princeton with his Nuvou Riche waste of space academics, he will admit that he was wrong, apologize, and take action.

Do something Bernake! It is one of very rare times that I actually agree with Jim Cramer! Way to Go!

Ignore the Noise! Market has bottomed on Friday 8/3/2007

As many of you are aware, the "Cramer Meltdown" on Friday 8/3/2007 was a good indication that we are near the bottom of this market correction which has gone on a hair above 4 weeks now. Technically, Dow followed through on strong volume on Monday, following a crescendo sell off on Friday in sympathy with continuing credit crunch (or perceived) and cowardly Bear Stearns blame on the credit markets being "worse in 22 years". I expected more from Bear Stearns than that type of a response, and in someways, I agree with Cramer that it was irresponsible of Bear to come out and proclaim that. Yet, that action was typical of the response you would expect to see on market bottoms. This current correction has been marred by the sudden and final realization by the Wall Street that perhaps the sub prime mortgage loan market is not self contained and that it may have ramifications to the other aspects of credit. Duh! But let me explain why it isn't as malignant as it may seem.

First, the market and Mr. Cramer himself believe that the stock market is severely reliant on "cheap" money for the continued bullish run. Nothing can be further from the truth. While the current rally may have been fueld in some parts by the unprescedented private equity firm buyouts, that constitutes less than 5% of all available liquidity and the involved companies in the private equity buy out binge are ill performing companies who became "cheap" enough to be bought out. When you consider high fliers like Chipotle (CMG), Apple (AAPL), Amazon (AMZN), Under Armour (UA), etc... these companies would never be taken private. So the issue about the freeze in private equity buy out really has no significant relevance other than fueling excitement and increasing propensity of the investors to throw more money into the market in concert. That's all.

Second, Cramer believes that there is financial "Armageddon" in the bond and credit issues right now. That type of short sighted view and hence pontification of such views on the national TV is purely irresponsible and quite possibly had the opposite effect than what he desired on Friday. I believe that there is much difficulty in the credit markets but again, it really is isolated to the subprime issues. People will still get the mortgages they need in the form of the traditional 5/1 ARMS, 30 year fixed, 15 year fixed loans, to those people who are worthy of getting such loans. Isn't loans supposed to be made to credit worthy individuals anyways? Additionally, what did "easy money" do for the housing industry other than a slap in the face rude awakening of people who took on more than they care to chew, housing investors who got too greedy, and creation of a bubble in the housing industry. I believe that those with good credit and with financial ability will continue to buy and the excess inventory of homes will be worked off, albeit painfully for some. As Cramer himself said, if you are making a good income and never dabbled in the risky loans for housing, you won't know what all the "noise" is about. Which brings me to the question of, why is Cramer so freaked out? I think last year, on his MAD MONEY show, he proclaimed that he was actively involved in real estate investment with his partners. Could it be that he is over leveraged in his private life with these same hybrid risky option ARM loans and may be at risk of losing a good portion of it? Makes me wonder. Will the "tightening" credit market impact retailers and consumers? Possibly. But I still believe that the current consumers are driven by the baby boomers who have enough cash that is disposable and will continue to fuel the retail segment and luxury items.

Third, the mainstream media, including Forbes among others, are joining the hype of the credit crunch. Economist also is questioning the end of the "go go days of easy credit". All of these things happen near the bottom. Also, did anyone realize that all things must come to an end? That we were due for a pull back and that every correction has a "dire" theme to it? I have never been through a correction that was benign and without much pain. This too shall pass and the last I remember it, Wall Street has a very short term memory. Remember Long Term Capital? How about the Asian Contagion? What about the housing bust of the early 90's? The list goes on and on. In conclusion, during the Long Term Capital crisis, they also proclaimed then that the liquidity crisis will crash the market. And, Cramer got his readers and investors out just when the market was ready to rebound. This time is no different.

MARKET MELTDOWN

More to follow. Things like this happen near the bottom of the market correction.

On Under Armour (UA)... Am I Crazy?

I am back from personal issues and will devote some significant time to my thoughts on the market and individual stocks.

I am currently focused on Under Armour (UA) as a play into earnings next Tuesday, July 31, 2007. Many poignant arguments made by the shorts have validity regarding Under Armour. For example, many "shorts" would be quick to point out that the stock cannot justify the high PE of 60+ especially when the analysts have this stock pegged to grow 25% year over year for the next five years. Additionally, many question the margin pressures eroding earnings due to competition from NIKE (NKE), ADDIAS, and PUMA. Furthermore, last quarter's earnings dampened excitement and confidence on the current management's ability to deliver high octane growth parameters to continue to justify the sky "high" valuations of this company. The company continues to burn money into advertisements and endorsement deals and many question this "up front" payment for future growth would be sustainable. Yet, the company has not signed on any "high power" athletes to any endorsement deals. Nike burst onto prominence as the preeminent sports apparel and footwear company when they were able to lock in endorsement deals with Michael Jordan (Air Jordan lineups), Tiger Woods, and catchy slogans as "...Just Do It". The management was able to deliver quite thrilling returns on investment to its shareholders and today continues to hold the reign as the "king" of sports apparel.

So, how can Under Armour (UA) compete with the likes of Nike (NKE)? What forms of competitive advantage does this company have to justify its high PE, stiff competition, and lack of strong endorsements from star athletes? And am I crazy to be bullish on the prospects of this stock?

I would like to take into consideration major points of "short" thesis on why this stock is "overvalued" and offer some correlary to their argument.

1. High PE is not Justifiable: Under Armour (UA) has a high price to earnings ratio, there is no denying that fact. When the average peers in this industry is trading at an average PE ratio of 19.9 with PEG average of 1.29 and UA is showing a PE of 64.07 and PEG of 2.47, certainly I would agree that Under Armour, Inc (UA) is not cheap by any stretch of the imagination. But at the same time, that is not the central thesis of this stock. It is and never will be a value play. Whereas Nike (NKE) is a mature business with market cap that is over 10X Under Armour's (UA) and Revenue that is 4X, Under Armour is a new company with an upstart competitive advantage in their fabric technology. The technology behind Under Armour's diverse product assortment for men, women and youth is complex, but the program for reaping the benefits is simple: wear HeatGear® when it's hot, ColdGear® when it's cold, and AllSeasonGear® between the extremes. These technologies are unlike any other fabrics currently offered by its competitors and it shows in the quick rate of adoption by professional, collegiate, semi-professional, and youth sports organizations. In short, UA has a technological innovation that is difficult to copy AND offers performance enhancement unlike any other offerings that are out in the market place today. Based on this technology, a high PE ratio can be justified, especially in a company that is nary 2 years old and is managed by a visionary leader Kevin Plank, who understands competitive sports (he was a former University of Maryland football player).

2. Shrinking Margins: This is perhaps the most recited quote from "shorts" regarding UA. Under Armour is not showing any margin contraction. it did have a one time hiccup last quarter, mostly due to high expenditures related to heavy advertisements and marketing initiatives. A one time hiccup is allowed and this company is still young and is feeling its way through the intense jungle of competition. It is winning in many fronts. One needs to just stop any school aged children or watch professional football, soccer, base ball, and collegiate sports to see the ubiquitous nature of this brand. There is a type of cult following by the athletic community. One only needs to try on one of the "over priced" pair of work out gear to realize, it really is different for the better. I doubt highly that the margins are shrinking and for those that are counting on continued down cycle of gross margins will be mistaken. One aspect that many seem to forget is that while UA is priced higher than its competitors, people will generally pay for quality, style, and performance. I believe that is the case here. So gross margin contraction should not be an issue.

3. Stiff Competition: Show me any industry that is without "stiff" competition and I will kiss your feet. The fact remains, is that UA has a distinct and unique product in their fabric construction that makes them favorable over the other brands offered by its competitors. I would also say that they have won the image wars between NIKE and Addidas as it has become a fashionable statement to wear Under Armour. They are performance enhancing and cool. I do not believe that UA is losing on this front.

4. Weakening Consumers: This is one area of concern especially with all the subprime fallouts and forecasts of doom and gloom. However, I do not believe that the American consumers are dead. I believe that the American consumers are savvy an will pay a little more for quality, comfort, and value. Under Armour does offer value in a sense that their apparel feel better. It is not like they are gigantically over priced either.

My take is that with short interest north of 40% currently and that the expectations have been diminished by previous quarter, I would lend caution to the wind to the shorts and say that it may not take much to generate a significant short squeeze come earnings time.

Long OVERDUE correction is at hand.

I have been away from blogging due to personal reasons and for those who have been checking, I will be back to devote time to this blog.

The market began its long awaited correction last Thursday after the bond yield finally began mattering to investors. The ten year treasury has now inched up to 5.25% in yield stirring fears of FED rate hikes and higher cost of borrowing.

I think this correction is healthy and much needed. While the action is swift and painful to many, the signs were there to raise cash during the past two weeks. The NASDAQ ironically was signalling the impending correction just like it had signaled the follow through day when it gave three distribution days in a row two weeks ago. Now the bears are in control of the market and my recommendation is to go to cash or hedge your long positions. I do not recommend buying puts or shorting the market because this correction is still within the context of a strong uptrend meaning that it may snap back and cause huge losses on the short side. Let the hysterics play out.

The bond yield issue is not a major issue. It is a byproduct of the market being frothy and over extended. I think a few more days like today will complete the correction that will refresh for the next leg up. Economically, the strong news is a welcome event and should be embraced as this shows that our economy is robust and healthy. Once the bond stops mattering, I believe the market will be ready to resume the next phase of the leg up. I believe we are in one of the strongest bull markets in a while. Stock valuation still remains compelling. A new dose of fear is good for this market because we will have a new wall of worry to climb.

good luck everyone!

Market is Going Parabolic!

We have just wrapped up an amazing May bull run that rivals many strong markets of the past. While for those who have embraced the momentum and stuck to disciplined trading are being rewarded, those who remained pessimistic on the markets and failed to change course when the trend turned up in mid March are either losing money due to short positions or are scratching their heads in disgust and bewilderment.

This is no time to get giddy and we are getting quite frothy up here. We are also entering the summer months which are usually quiet, subdued, and weak. The Chinese markets failed to rattle US investor's nerves last week. This market has been just unbelievable. I continue to hold reservations but continue to ride the momentum with one finger on the eject button. It is scary. But more often than not, feelings of worry and fear in trading have yielded good results for me in the past. It is times when I am confident, giddy, and fearless, I have lost money. There certainly is significant amount of the proverbial "wall of worry" in the coming weeks:

1. Bond yields have crept up.
2. Inflationary pressure appears contained but at the upper limits of FED comfort zone.
3. Summer plague on Wall Street.
4. Rising oil and gasoline prices.
5 Short term FED interest rate cut unlikely and possible rate cut in the future likely.
6. JFK Airport foiled terror attack.

This market is teflon for bad news and has been for quite some time now. Will it continue? I don't know but the trend is up. It is my friend.

Bear Trap Likely Today as Investors Reposition Holdings

If history is any indicator of future repeatable occurrences in the stock market, then yesterday's mini-selling should be about the only "pause" we will have in this bull run phase. Today should prove interesting as shorts are leaning too heavily since yesterday. It may have emboldened the shorts and that is always a bad thing.

Today, the exisiting home sales numbers are due. If it comes in below expectations, expect a market wide rally. Real estate is not out of the woods yet, and the New Home Sales data might be an abberation. If so, then we get the rate cut back on the table.

It should be a muted trading activity today ahead of the memorial day weekend.

Good luck and enjoy your mini vacation!

Note To Crocs Management: Enough selling!

I know management should be rewarded for a job well done. But greed has its limits and my patience on this. There has been a continuous stream of selling by the insiders since the blow out quarter. This company has historically had high insider selling activity since its IPO. Wouldn't it be great if the management can show some gumption and show the investors that they "believe" in the company's future like the investors?

I know the argument that I have always made is that the insider selling affords the company from doing additional public offering of their shares, but despite the insider optimism in the company, the amount of selling is bordering on ludicrous.

Note to CEO Snyder, take a cue from Meg Whitman of Ebay, she believes in her company and shown the shareholders that she does by selling minimal shares during her tenure. Do you also believe what you preach and put your money where your mouth is?

Crocs Will Need a Strong Day Tomorrow.

Look at the chart to the left, which is a daily chart of Crocs Inc. (CROX) You will notice that today's action violated the uptrend line and it remains to be seen if tomorrow's action will be able to reclaim that line. The pull back was with slightly higher volume than the prior day, indicating that the institutional selling was probably not a factor. However, it pays to remain vigilent. This type of action is never good but jumping too fast onto the short side of the trade is also not advised here. It could be setting up for a bear trap.

If you're short, you'd ideally like to see overwhelming rise of selling volume. But today's action was none the less painful to watch if you're long as the stock shed over 3%. But this is a momentum stock and follows the current market sentiment. The momentum line as you can see has taken it on the chin but despite today's big percentage decline, you will notice that it has held above support. If the stock fails to reclaim the uptrend line, it will likely fall to $72 where it will find support. I don't think that this support will hold and we may then be finding out that we are testing post gap support level, where there ought to be strong support at $64.82 level.

This market has had some stomach churning days that resembles sentiment change, only to roar back and slap the shorts straight across the face. The recent sell off is due to Greenspan's never relenting presence and renewed boisterious opinionation and reaction to housing and durable goods data that really is a lagging indicator. Much interesting tell will be the numbers related to existing home sales, which at this moment, I would like to think that it is still in bear mode. If that is the case, the numbers are below expectations, expect the market to rally and rally hard, probably on low pre-holiday volume which should add to the intensity. Historically, pre-memorial day market day ended in higher index numbers.

I expect no different tomorrow. I got "bold" and added 205 contracts of July $80 Crox calls today at "discount" prices. If my theory holds, I should make out like a bandit as Crox will run into the split date.