So where are we heading to?

The S&P 500 gets a little support today and closes at 1260 after nine losing days. Even though the market is up today, it does not mean that we can start to buy and wait for the position to surge. Today's rally only shows that investors feel uncertain about the economy and the employment data coming out on Friday. As I have covered in my previous post that we still need to be careful about the US economy even the US has avoided a default on Tuesday.
The compromise on the Capitol Hill does not change the fact that US has a large gap in its budget deficit. The economy is getting weak and I do not see any good reason for the job market to improve.
So what should we do now? From a pure technical point of view, we are still in a very bearish environment. The Double Top Pattern and a break out of the support line have told us that the market is still negative. Tomorrow's initial claim will likely to be disappointing and investors’ bearish mood will get confirmed.
Gold is still my biggest buy as we can see it makes new high every day. We can also put some value stock in our watch list, such as Google, Apple and Microsoft. These stocks have been brought down by the broad market and they will offer a good return once the market comes back.

Weekly Market Direction (0801)

The market rallies on the news that the two parties have reached a debt deal. This certainly gives investors a relief that the US will not default on Tuesday. However, before we get too optimistic, we need to understand that we are still facing a weak GDP for the second quarter, a high unemployment. The gold prices have showed us that investors are still a little bit skittish about the economy and the future of the US credit. Today's rally does not necessarily ensure a trend change. My suggestion would be to wait for a trend change and then get in.
Stocks that will perform well include GOOG, APPL, MCD, MOS.

US is doomed to default, may be not now, but someday in the future

The impasse of the US debt deal has driven the US stock lower today, with the NASDAQ down more than 2%. As the August deadline approaches, investors are worried that the US may not be able to borrow money legally and pay the bill on time. At this stage, I think our main concern should not only focus on whether US will be able to pay the bill this time but whether it can pay its bills in the future. Even if the politicians can reach an agreement before next Tuesday, I believe the US credit is affected.
A major problem of the US political system is that administrations, theoretically, only need to take care of this country for eight years and leave all the crap to the descendent .The US debt ceiling has been increasing constantly since the 70s and every government simply left the debt problem to the next one. Even the US is still the world’s strongest power with the highest GDP number, eventually; it will be dried up by all the interests incurred by these debts. The question will eventually turns out to be: who is the lucky president in office when this happens?
Investors like China and Japan will eventually lose confidence in the US’s ability to pay back the US treasury and choose to diversify its asset allocation. When that happens, US will be in deep trouble. The cost of borrowing will be higher. This means that US will pay more interest on every dollar it borrows. The debt burden increases with the interest and thus a vicious spiral continues.
The solution is simple but politicians are just too selfish to make it happen. The US needs a spending cut, an austerity package like the ones in Europe. However, the reality is that government is in office for a maximum of eight years, nobody would like to risk losing popularity by cutting the social benefits and increasing personal income taxes at the same time. So if that is the case, a US default will eventually happen and people will suffer, I mean everyone.
We all know that American’s living standards are largely based on borrowed money, so someday we will pay it back, in an almost cruel way.

What I am reading this week

1. Michael Burry Profiled: Bloomberg Risk Takers (Bloomberg)

2. Richard Branson Revealed: Bloomberg Game Changers (Bloomberg)

3. Forty-Five Years in Wall Street by W.D Gann

4. Howard Marks on the U.S. Debt Ceiling: Oaktree Capital Commentary (Market folly)

5. Confronting Antitrust Issues in a Giant Merger (Dealbook)

Weekly Market Direction 4/3-4/9

I apologize for not posting anything for the past couple of months. I have been very busy with my schoolwork this semester. We definitely see some positive economics indicators this month so far with the fourth quarter GDP growing at about 3% and the unemployment rate falling to its lowest in almost two years. As the riots in the middle east continues, we just saw the WTI jumped to $113, the highest in two years. There is a risk that the high oil prices will slow the recovery by pushing up the the inflation rate. However, I do not think it is going to happen in the near future. First of all, there is question on whether the high oil prices will sustain. We know that the supply of certain types of oil will be affected as a result of the recent political instability in the northern Africa. For example, the sweet oil produced by Libya. However, bear in mind that the Libya is just too small to be accounted for a major supplier of oil with a world market share about 2%. In addition, there is no evidence that the current situation is going to get worse. With the weapon embargo imposed on the country, Qaddafi is having really limited options to get arms to crack down the pro-Democrats. Eventually, he will be forced to negotiate or flee away. The oil prices will return to a more reasonable level in the next couple of months as people realize that Qaddafi is fighting a war that he is doomed to fail. The equity market is undergoing a big return after the bearish environment following by the recent devastating Japanese earthquake. The VIX dropped nearly 45% in just a few weeks. I am expecting the market to become a little bit more volatile in the next coming weeks as people are still waiting for more positive confirmation from the economy.

Dan Loeb's hedge fund firm Third Point LLC is out with its July Offshore fund portfolio (Marketfolly)

Taken from the Marketfolly
"Dan Loeb's hedge fund firm Third Point LLC is out with its July Offshore fund portfolio disclosure. For the month of July, the fund was up 3.2%. Year to date for 2010, the fund is up 13.7%. Third Point currently has an impressive 17.9% annualized return with a Sharpe Ratio of 1.25 and a correlation to the S&P 500 of 0.40. To learn to become a successful investor like this hedge fund manager, we'd obviously point you to Dan Loeb's recommended reading list.In their latest portfolio breakdown, we see some changes worth highlighting. Here's a look at Third Point's top five positions:1. Chrysler (multiple securities)2. Delphi Corp (multiple securities)3. CIT Group (multiple securities) 4. Dana Holding Corp (multiple securities) 5. Anadarko Petroleum (APC)Keep in mind that 'multiple securities' simply means that they own numerous positions across the capital structure in that specific company and this list takes into account their collective position. Right away there are two major portfolio changes to notify you about. Firstly, Dan Loeb has started a brand new position in Anadarko Petroleum (APC) because it did not appear when we examined Third Point's Q1 portfolio. They've started this position presumably as shares have tumbled due to APC's partial operating stake in the deepwater rig responsible for the oil spill in the Gulf of Mexico. While BP (BP) has taken the majority of the blame for the spill, Anadarko owned a 25% interest and thus bears some liability.This means that Loeb has joined the ranks of other prominent investors who have identified opportunity as a result of the Gulf oil spill. Just yesterday we highlighted Grey Owl Capital's purchase of Transocean (RIG). Prior to that, Whitney Tilson's T2 Partners bought BP (BP) as they feel the company will have no problem surviving. And although this next company was not directly involved in the spill, David Einhorn's Greenlight Capital purchased Ensco (ESV) as a result of the sector trading down.The second portfolio change to highlight is in Third Point's PHH Corp (PHH) position. In previous portfolio disclosures, Loeb's hedge fund has listed PHH as one of their top 5 holdings (they owned multiple PHH securities). This time around, however, PHH is not listed in their top 5 positions. This leaves a few scenarios in play: Third Point could have sold part or all of their stake in PHH, or they could have raised their stake in other positions ahead of PHH (for instance their new stake in Anadarko). There's no way to know which scenario is the case and this could only be a minor change, but we'll have to wait to verify. PHH shares traded up 11% yesterday as the company reiterated its full year earnings outlook. In terms of other recent portfolio activity, we've highlighted Third Point's stake in Emmis Communications (EMMSP).Let's next move to the top winners in their portfolio for July. These included their longs of Delphi (multiple securities), Atlas Pipeline (APL), Chrysler (multiple securities), Lyondell (LALLF), and an undisclosed short position. Of these stakes, you'll recall that Jamie Dinan of York Capital is bullish on Lyondell as well. Third Point's top losing positions for the month consisted of Gala Casino (multiple securities), SemCrude LP (multiple securities), Peregrine Metals (multiple securities) and two undisclosed short positions.Next, let's focus on their latest exposure levels. In equities, Third Point is long 43.8%, short -12.1%, leaving them net long to the tune of 31.7%. Their largest sector net longs are in Consumer at 8%, Financials at 8%, and Basic Materials at 6%. In credit, Third Point is 50.6% net long with their largest exposure coming from MBS at 19.1%. Their distressed exposure comes in at 16.4% and their Performing exposure at 15.1%. Third Point has significantly reduced their distressed exposure as they were previously 25.1% net long and now are only 16.4% net long. Lastly, in terms of geographic exposure, Dan Loeb's hedge fund is net long the Americas at 84%, net long Europe at 13% and net short Asia at -1%.

What I have read this week (July 26)

1 Should you buy energy stocks? (Fortune)

2 How Apple maintains explosive earnings growth (Fortune)


3 Paulson To Launch Retail Version Of Flagship In Europe (FINalternatives)

4 A Short History of Financial Euphoria by John Kenneth Galbraith

5 What Hedge Funds Are Seeing in the Current Market (at Seeking Alpha)