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Memory Bulls Get Gored

01-12-2015

After being higher overnight, the market was hit pretty hard in the early going before a bounce trimmed the losses to about 0.5% through midday, with the Dow a fair bit firmer. I'm not sure exactly what the catalyst was, but a couple of "favorites" preannounced and were splattered, one being Tiffany & Co., which just adds to the bad news that continues to emanate from the retail sector, and the other being SanDisk, which I was fortunate enough to get short last week, as I discussed (I also bought SNDK puts last Friday). I can't remember the last time I caught a preannouncement that timely.

Looks Like Micron Was a Pre-Preannouncement It is interesting to note that on Friday SanDisk acted quite well versus the market, and it looked like managing my short position might be a little more difficult than I had planned. The moral of that story is market action can obviously fake you out if you don't have strong convictions. This is why I can't own stocks generically. I know the entire financial market is a hall of mirrors distorted by the Fed's bond buying. Thus, I am more comfortable being short, even though it hasn't been a great environment for making money for the last six years (a brief moment last October notwithstanding). However, I do think it will be possible to make some selective short sales as we head into and through earnings season. Perhaps macro problems will also matter.

Turning back to the action, the rally attempt didn't get too far before the indices began to leak again. With an hour to go (when I had to leave), the market was about 1% lower. Away from stocks, green paper was stronger and oil got bashed for another 5%, as negative comments out of Saudi Arabia caused people to extrapolate the recent move and look for oil prices in the $30s to low $40s. Fixed income was higher, while gold gained 0.75% to silver's 0.5% (while the miners were quite strong).

"Are You Kidding Me?!?!" I know for financial market types the subject of deflation is taken as a given, yet in the real world I believe that inflation is the problem. I recently received a letter from my tennis club that began: "Your dues are going up. Inflation and the increasing cost of living dictate that the dues have to be increased." And in fact my dues have been raised 4.5%. The certitude with which that statement was made by the club's board struck me as a stark contrast with the confidence shown by financial market speculators who think we are experiencing deflation.

On a slightly related subject, at least in terms of negative developments, Friday's Wall Street Journal carried a story headlined, "Car Loans See Rises In Missed Payments." The article noted that, "More than 2.6 percent of car loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008 when such delinquencies ran above three percent…"

Borrowing From Peter to Borrow From Paul The article went on to state that, "More than 8.4 percent of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November." Thus, the weaker the credits, the "worser" the performance. I recently made an analogy between the break in the price of oil and the upcoming deterioration in the oil sector with the subprime crisis originating with first-payment defaults. Perhaps the early loan trouble in the car market will also add fuel to the credit-quality fire I expect to see in 2015.

Positions in stocks mentioned: short SNDK, long SNDK puts.