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December 21, 2005

Wishful Thinking

So many bulls are lamenting the market's stubbornness to go up in December that it is making for aggravating reading. There hasn't been a day since November that the financial press has lacked in calling for the "Santa Claus" rally. Financial writers would have us believe the market is oversold, despite the fact that we are 10% higher than two months ago and sitting near 4-year highs. Even today, ran a big headline, "Santa Makes An Appearance," which was posted just after mid-day with the major indices up less than 1%. Wishful thinking is dangerous in this business, yet it is prolific, and it traps many traders and wannabe investors.

Speaking of traps, one of the unfortunate aspects of shorting is exposure to extraneous events such as mergers. My trading model generated a short signal on Western Digital two days ago, but today's revelation that Seagate is purchasing Maxtor busted the short in a bad way. Even though WDC was not the target of the acquisition, its shares popped more than 18% in congruence with the news. Traders correctly interpret the merger to mean higher profits for the industry as a whole. With one less competitor, both Seagate and WDC will gain some pricing power, and WDC may even gain some market share in areas where Seagate and Maxtor overlap. If I were not pessimistic on the market's prospects as a whole, I would have already owned shares in the Seagate and WDC. They are on my short list of companies to purchase if and when we get the market decline I anticipate.

We also learned this morning that Kirk Kerkorian has dumped about 20% of his stake in GM. The bad news keeps piling up for the big auto maker. In April, Kerkorian offered to purchase millions of shares in the low $30s. Though his press release states this week's sales are only an effort to lock in a tax loss, his reversal likely holds a deeper meaning such as a loss of faith on his part in the company. It is a vote of confidence GM did not need to lose.

Looking to the after hours, we hear from Research in Motion today. I have no strong feeling about how their report will go or how it will interpreted. It seems the primary focus for shareholders these days is settling the NTP patent dispute. Any news from that front will have a bigger impact on RIMM's share price than today's earning announcement.

Disclosure: Long RIMM Puts


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