A Weak Week?

Note: This is published before the markets open for the week of 11/12.

The performance of the major indexes over the past week can be viewed two different ways.

As I have said before, predicting the market is nearly impossible and (overall, for a long term investor) generally fruitless. However, when writing a blog about the stock market, it's necessary and fun.

This past week, the Dow and S&P 500 both shed about 4%, while the NASDAQ endured an 8% haircut. (The majority of these losses came on Thursday and Friday, with some of the indexes and many individual stocks actually posting gains between Monday and Wednesday).

Many of the high-flying tech stocks (that I shorted in my fantasy portfolio; read my previous post) led the market downward.

• Google lost over 10%
• Research in Motion dropped over 20%
• Baidu.com dropped nearly $100 from its all-time high around $430 early in the week to $340 on Friday
• Chipotle Mexican Grill, on which I stated I had a bearish outlook, lost about $20 from $140 to $120
• Even the blue-chip Cisco lost 10% after reporting good (but not spectacular) earnings

Both the S&P 500 and Dow are both within a few percent of their mid-summer lows, with the NASDAQ a little farther away due to a bigger run-up in recent months.

Many professional analysts cite those summer lows as an important level of support. If indexes crash through those lows, look for new, much lower bottoms. But if the markets tap the barrier and bounce back, the bull market may be revitalized.



However, looking at it simply instead of technically, I see reason for weakness to persist in the markets.

Oil, though now off of its highs, is still in the mid-nineties per barrel. Gasoline and other distillate prices are now only starting to catch up to the rise of the price of oil, so watch for consumers to now finally be effected by $90+ oil.

The dollar is crashing. Though such terms haven't been used yet, and though I'm not an international monetary policy specialist, I'm comfortable using that term. After reaching parity with the dollar within just the past month or two, the Canadian dollar now trades around $1.05. When currencies are appreciating faster than markets (with 5% monthly changes of 10+% yearly changes), I think that the depreciation is becoming dire. The dollar is hitting new lows against the Euro on a daily basis. As the Fed continues to weaken the dollar through cutting rates, it's making the problem even worse.

Lastly, the subprime problem is far from resolved. Major banks and investment houses continue to write down their books for losses in securities. Major corporations like Bank of America, AIG, and Morgan Stanley are plummeting in value. Homebuilders, though recently pushed out of the spotlight, may still be in danger of going bankrupt. As the cost of imported goods starts and continues to rise, Americans won't have money to buy houses.

There are just too many logical reasons why the market could continue to go down, while there is little logic for an upside bounce. I own some puts in an ETF that tracks the S&P 500, and when they expire this week, I may buy an Ultrashort ETF. I could easily be proven wrong in the short or long term, as political, economic, corporate, and emotional conditions change, but I see no reason for the markets to immediately rebound in the context of today's environment.

SHORT!

I want capitalize on the current volatility.

Right now, my real-money portfolio is nearly 90% invested; I have some SPY puts, and then about 8 different stocks. I'm happy with all my positions right now, so I'm not really looking to actively trade that portfolio soon.

However, I just entered a trading competition sponsored by my university. Finally, I get to employ lots of risky strategies that I wouldn't do with my real money.

The competition opened today, and my first move was to short, short, short.

I shorted:
Apple
Bidu
AIG
Amazon.com
Google
RIMM
QQQQ
Petrochina
SPY
F

If the market continues to be sour (after the 3% loss on Nov. 7), the returns will be lucrative. All of the above stocks (except for the exchanges, F, and AIG) are high-growth momentum plays. If momentum stops, there's no telling where the floor will be.

Of course, I'm long stocks too (I'm about 1m more short than long in a $5m portfolio). I own:

BWLD
ANF
ATVI
TM
JAVA
and a few others that I'll update later.

Literally every stock, both long and short positions, fell today, but the shorted ones fell more, so I'm currently in the lead.... after the first day of trading.

As for my general take on the market:

It seems like there's a lot of reasons why there could be a correction now. The dollar is crashing, oil is still high, Morgan Stanley just wrote down $4B, WMU, Freddie Mac and Fannie Mae are under review for lending policies, and the market has just been strong lately.

Could the market rebound nicely tomorrow? Sure.
Could it fall 10% over the next two weeks? Believe it.

Predicting the market movement on a day-to-day basis is impossible and fruitless, so I cannot and will not say if the market will be up, down, or flat tomorrow.

But keep in mind that stocks like Apple, Google, and Baidu have P/Es that are 2 or more times higher than there rest of the market. When momentum runs out, it's a recipe for disaster stocks like those above. Google is itself a big enough entity to drag down the entire market; just keep an eye out for the potentially-dangerous situation that this can create.

Oil is Bubbling

As I alluded to in my longer posts about oil, I stated that there was some potential for some short-term upside, due to today's inventory report and pending Fed rate-cut decision.

I pointed out that when inventory reports were negative, they were dismissed as irrelevant, but when bullish, they were said to be the most important data ever. That was supported today; a slight decline in inventory popped oil up to a new record high.

Thankfully, I'm still holding my COP calls.

If the Fed cuts this afternoon, oil could go even higher.

It's a matter of momentum vs. fundamentals. As an investor that tries to trade on fundamentals, oil shouldn't be $94. However, just like in a stock like BIDU or CMG, momentum can, and will, push the price higher even when its illogical.

I think I'm going to hang tight in my COP calls position until after the Fed reports. I don't know when to exit... it's so hard to predict when people will realize that this price is ludicrous. Oil may very well hit $100 within a week, but I want to keep reaffirming that in 3 months, I think it'll be closer to $70.

People Love Ignoring Valuations: BWLD vs. CMG

The events of last night and today, concerning two stocks, literally baffle me.

The two stocks are Buffalo Wild Wings (BWLD) and Chipotle Mexican Grill (CMG).

Both companies reported earnings last night.

CMG came into earnings trading at a 80 trailing P/E and a 50+ forward P/E. Perfection is clearly already priced in. BWLD, on the other hand, traded at a much more modest 40 trailing, high-20s-forward P/E. It wasn't cheap, but it was clearly cheapER.

Chipotle reported numbers that were in-line with estimates. They had a mixed future outlook; they plan to open new stores internationally, but at the same time, existing store sales are expected to fall from 12% this past quarter, to "high single digits" for all of 2007, to "low to mid-single digits" for 2008.

Though the new stores will be a source of growth, a company cannot expand infinitely. Don't you think investors might be shaken by the bleak outlook for future same-store sales growth?

At the same time, Buffalo Wild Wings reported revenue that met the street's expectations, with earnings that were just two pennies lower. They, however, reiterated their forecast for next year: 15% unit growth, 20% revenue growth, and 25% earnings growth. (They had the same goals this year, and have met them thus far). There are some minor challenges, like gambling licenses in Las Vegas and higher prices due to bigger wings. However, the overall outlook was very promising without any glaring problem.


So how did Wall Street react to these two different reports? Logically, you'd expect BWLD to be flat, or even up, while CMG seems like it should be flat or down.

However, rationality is apparently dead amongst investors.


Buffalo Wild Wings dropped almost 30% at one point. Currently, it's trading down 20%.
Chipotle is UP $5, or 4%.

To me, this is literally insane. How do investors see any value in a company with a 55 forward P/E? Yes, the company is growing quickly, but it can't grow as quickly forever, and mature companies DON'T have P/Es of 55.

McDonalds has a forward P/E of 19. Yum Brands (KFC, Pizza Hut, Taco bell, and more) has a forward P/E of 21.

Buffalo Wild Wings is now trading at that same valuation - a 21 forward P/E. The company is supposed to grow at 25% - much better than YUM's 17%.

Chipotle has grown very quickly over the past, but is only predicted to grow at about the same 25% next year.



As a value oriented investor, I'm buying BWLD. I actually purchased some after-hours yesterday (because I thought at 15% decline after the non-awful numbers was a little dramatic), and I picked up some more today after it dropped a few more points.


I have no position in CMG, but I wouldn't be long right now. Who knows, maybe hysteria will pump CMG to 160 while BWLD hangs around 30 for the next month or two. But as a long-term value investor, I see value in Buffalo Wild Wings, and nothing but hype in Chipotle.

Helicopter Ben?

As an augmentation to my previous post, I'm going to outline the possibilities for the Fed's decision tomorrow, and the market's reaction.

In the past, Ben Bernanke, chairman of the Federal Open Market Committee, has been known as "Helicopter Ben." That nickname relates to an image of Ben hanging out of a helicopter, dumping out money over all the land. The ease of capital certainly can be a good thing, but is it needed now?

Our economy is growing strongly, and cutting rates just to try to ease the sub-prime woes is not necessarily helpful. Encouraging people to make risky investments because of bailouts will only promote economic irresponsibility, both in the stock market and in general spending.

At a time when the dollar is at multi-year lows against many major currencies, why cheapen it further? Yes, it does help exporters, but it also reduces the appeal of foreign investors, and as hundreds of billions of American dollars (and other wealth) are in the vaults of the Middle East, Asia, and Europe, we should pro-actively encourage reinvestment in America.

So what will the FOMC do tomorrow? I think they're going to cut rates .25%, simply to appease the market. Another .50% cut would be irresponsible, as the dollar would fall and oil would rise. Though keeping rates steady may be the ideal decision, the market has priced in a cut, and a non-action may have negative repercussions.

So, my extent of economic knowledge is a half-semester of Macro Economics, so take what I say with many grains of salt. But I think we'll see a small cut at 2:15 tomorrow.

A quarter-point cut will probably buoy the markets slightly; maybe we'll see a +100-200 point day on the Dow. If there's a bigger cut, maybe it will please the markets, but I think it would be a bad thing, and the reaction SHOULD be negative if such a drastic cut is made. If there's no action, the markets may be down a percent or two in the last two hours of trading, but the long term effects will probably be the most ideal.

Rubbing my Crystal Ball

There's some major (and minor) events in the next few days that I'm going to try to predict here.

First, since I've been following the stock (with no position) lately, I'll comment on Chipotle Mexican Grill (CMG), releasing earnings after the bell today:

I think they're going to meet current estimates, and possibly revise downward for the future. But even if they meet or slightly exceed, watch out for a negative reaction, as the stock has a 80 trailing and 50 forward P/E.



Oil was down over 3% today, a huge deal as it's been hitting new highs lately. Tomorrow's going to be a big day. Inventory reports come out in the morning, and the Fed will release the new funds rate at 2:15. If inventory shrinks and the Fed cuts, watch for today's losses to be wiped away. If inventory increases and the Fed keeps rates steady, watch out for further price declines. Read my previous article about the bubble in the current price of oil; the second scenario I outlined could be the catalyst for a major price correction. I'm looking to get out of my Conoco calls, and get into some Exxon or Chevron puts....

...because both Exxon and Chevron report earnings later this week, and they will probably disappoint, as Conoco, BP, and other companies have done thus far. Refining margins were terrible during the 3rd quarter, squeezing profits. A bad quarter and falling profits could mean a major drop in oil stocks, which have enjoyed 20+% price increases this year.

So, concerning oil, I think that the Fed cuts .25%, oil is flat after a flat inventory report, but begins to weaken during the winter season.. I think I'm going to get some long-term puts, and see how that works out for me.

Disclosure: Long Marathon Oil stock, Conoco Calls. Could become long puts at some time soon.

Oil Price: A Real Gusher

I'm actually taking a class on the history of oil right now; it's quite interesting.

But anyway, to the point:

In overnight electronic trading, oil is now putting up new record highs. As of the most recent quite while I'm writing this, it's over $93/barrel, up over $1 from its previous high.

(In the short term, this could be good for me... I currently own some ConocoPhillips calls, and on most otherwise-newsless days, the price of oil stocks will track the price of oil).

However, as I published earlier, I that there is no merit to these inflated prices. Just this weekend, Barrons published their own articles about how the price of oil is looking quite high. There are some tensions in the Middle East right now, but there's really no tangible reason for oil to be setting new daily highs.

One of the dumbest price-triggers of the previous week's run-up was the midweek inventory report that propped up the price 3%.

During the previous weeks, the reports had been bearish, as inventories grew. The bulls that spin the media wrote off the reports as unimportant, when considering the big picture.

Then, the first report that shows a decline in inventory sends the price skyrocking. It's really illogical and dumb.

That's why I'm trying to milk this bubble for all it is worth. I owned some Conoco puts going into earnings, and about $5 of negative price movement nearly tripled my options. As the stock appeared to be bottoming out (I did a good job predicting the bottom, within about $1) I switched to some calls, as the price of oil is now trending upwards.

So, as I said when oil was $10 cheaper, there's really no fundimental reason for oil to be this expensive. If you're an experienced trader/investor, maybe think about playing the swings, like I am. If you're a long term-oriented investor, I'd suggest getting into one of the oil companies with lower P/Es - like Conoco - or just sitting on the sidelines for a while. I truly believe that oil is quite overvalued, but there's no telling if, or when, people will come to their senses.

Barrons recommended avoiding Petrochina; It's P/E is in the 20s, versus about 8-11 for the big American companies. It's tempting to get into a hot, well-performing Chinese stock, but I'd recommend staying on the sidelines, too.