Home / BlueStar (page 13)


Recovering Large Cap Growth PM. How I invest my own money is nothing like how I had to play the insane benchmark game.


It is my contention that AMZN is a growth stock deceleration party and everyone is invited.  As a growth stock manager the key to winning is to avoid fading growth stocks.  I have previously articulated why I think this stock is a short.  Since then we have some new data to digest.  Lets go over the points:

1) The CFO announced his retirement:  a huge red flag for me and as a rule, when I was a PM, I would trim or sell on this news.  No one leaves a gig like this unless you don’t want to be around to clean up the mess.

2) Overall retail sales have deteriorated.

3) BABA is now a comp with actual profits.

4) They received a $2 billion line of credit from a bank a few months ago.  Cash flow issues around the corner?

5) GOOG lowered their cloud service pricing again a few weeks ago.  AWS is an awful commodity business that many seem to think has value.  Check out RAX chart.  AWS growth requires lots of capex and cash.

6) Their Fire Phone is a flop and likely burned a lot of cash as well.

7) The chart is telling you that something is very wrong.

8) My wife just ordered a bunk bed for $299.00 with two day free shipping to Hawaii.  How much does it cost to ship a bunk bed to Hawaii via an airplane? This is anecdotal but you get my point.

Bottom line:  I think we see cash flow problems and losses continue here as Bezos is stubborn and thinks investors will continue to give him a pass for profitless growth.  I am guessing Bezos has not been listening to the CFO and that is why the CFO is leaving.

I have purchased a very short term put as of today to express this view point.  The stock market has not been as kind to fundamental misses these days.  The company reports tomorrow night after the close.  This is typically a very strong seasonal time for this stock so I could be completely wrong.  Somehow I don’t think I will.

Comments »


The big question on everyone’s mind is when is the bounce?  I think we may have seen the start of it today with the reversal.  The IWM has outperformed three days in a row, we are due for a trading cycle low, and everyone’s special oscillators are showing positive divergences.  I don’t think we are crashing from this point.  I may be wrong and we crash or maybe we extend lower over a few more days.  However, I have studied crashes and you always get a multiple day bounce (5-10 trading days) that fails before you get a crash.  I have never seen an inverted v shaped top in stock markets.  I am expecting a bounce of more than a day or two this time around.  This market has been straight down basically since the top on September 19th.  I covered all my shorts today and I am now cash.  I am not going long because I believe we have entered a Bear market and the onus is the the Bulls to prove otherwise.

When the bounce fails and I expect it will, I am going to load up on the short side.  On this most recent down draft I did not use a lot of my precious capital. However, the next set up is when, as a bear, you should really strike because then we will have structural confirmation of the Bear market.  If we should go to a new high I am likely wrong but I will have protected myself by being in cash and not short.  I may also take targeted action on stock puts into earnings if I see a pattern of deteriorating fundamentals in the overall market.  I think we have already begun to see that pattern emerge with some of the reports I have seen lately (NFLX and MCHP come to mind).

I have been stalking this Bear since January when I went to all cash.  I took a stab in April and failed.  Now I find myself comfortably in the green for the year.  I believe the Bear is here and I intend to ride it.  I will become a Bull someday.  Just not anytime soon.  As I write this it is 3:00 AM EST and the futures are up.  Lets see if it holds.

Comments »


We took out the August 7th low today on the DJIA.  The Technical damage has been extensive.  We have what is called a Dow Theory Primary Bearish Trend Change in play.  The market continues to look for a bounce.  I am operating under the assumption The Top is in until the market goes to a new high or we get full confirmation of the top.  We hopefully get a bounce soon.  This is merely a suggestion but those who are long should lighten up into the rally.  Bears who missed this leg can position short into the rally.  Worst case is we get a very weak bounce and then crash.  My fear is that many people are offsides on this market correction and the margin clerks seem to be working their delicate evil behind the scenes.

I talk to many different market participants.  The level of incoming phone calls has increased because many know my bearish inclination.  Ridicule and laughter have turned into “Hey what are you thinking here?”  My answer: “Sell and raise cash into the counter trend rally!”

My goal in writing this blog since May 7th was not to be proven right but to hopefully help some people avoid big drawdowns.  I am a reluctant bear and would rather be picking stocks than talking about a looming bear market.  However, I have been humbled over my career and have learned to surf the market and take the waves presented to me.  I have been scared out of my mind to go long due to this QE induced levered advance built upon a foundation of sand.  The speed with which this market is descending is truly frightening.  I hope we don’t crash but I believe the possibility exists given the structure of this advance.  The 1929 analogue is actually more relevant today than it was when I wrote about it last week.  We appear to be on our way to point h having seen point f on October 2 and point g on October 6th.  Again in the graphs below 1929 is on the right and 2014 is on the left.  The 2014 graph is not updated from my last post but price has taken us below point b.  The advance out of the pending low is key into point i.  The shorter the advance before we fail the worse it is going to be on the other side.  Good luck everyone.  I am still short but I hope we bounce soon so that the rest of you can get on the right side of the trade if you think I may be on to something here.  A crash does not have to happen but at the very least it looks like the beginnings of our first meaningful correction in two years.





Comments »

MCHP Misses and Guides Lower: Tip of the Spear in Possible Global Slowdown!


Microchip technology pre-annouced a miss on revenues and guided lower last night.  Read the words of the CEO himself:

“We were disappointed with the level of business activity in the September quarter. The September quarter is usually a back-end weighted quarter because of a traditional weak August due to holidays in various parts of the world. The month of September is usually a strong month for our revenue after the summer holiday period. This time, the September sales did not materialize to our expectations. The revenue miss was led by China where the September quarter is traditionally the strongest. This time, sales in China, excluding ISSC, are expected to be down sequentially,” said Steve Sanghi, Microchip’s President and CEO.

Mr. Sanghi added, “Microchip often sees the turn of the industry ahead of others in the semiconductor industry. First, in contrast to many others in the industry, we report sales from distribution on a sell-through basis worldwide. We built a significant amount of inventory in the distribution channel in the September quarter. If, like many others in the industry, we recognized sales on a sell-in basis to our distributors, our sales would have been significantly higher for the September quarter. Second, Microchip does business with over 80,000 customers worldwide, most of whom are small and nimble and are able to adjust their demand in real time. We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.”

“While we are reducing our production levels in our wafer fabs and assembly and test facilities, we are continuing to ramp production on our new technologies where we have been capacity constrained. We believe that we will be able to catch up on the capacity constraints during the December quarter and lead times should return to normal. The December quarter is seasonally our weakest quarter of the year. During typical industry corrections, we have returned to sequential revenue growth after two quarters and we currently expect the same this time,” added Mr. Sanghi.

As a growth manager and a technology analyst MCHP was always one of the companies I paid attention to in order to figure out the health of the semi industry and the global economy.  Their products are literally in everything from autos to industrial parts and as you read above they have 80,000 customers.  So I would say they are a good read on the sector and global economy given their breadth of customers and sell through model.  The charts of semi conductor companys have rolled after a multi-year run and what I would call a blow off top.  You have ugly charts now confirmed by bad fundamentals.  These stocks are now shorts into strength.

Semi cycles also tend to correlate to the beginning and the end of economic swings.  In 2008 semis bottomed in November well before the 2009 low and demonstrated relative strength.  Now the stocks have rolled hard and company fundamentals are sloping down.  Clearly there is something ominous going on in the global economy.  Oil and commodities are collapsing and now semis are missing numbers.  All major global indices are rolling simultaneously and now we have proof that global demand is falling off rather quickly.  Many people keep talking about how good the economy is doing.  Microchip Technology would suggest otherwise: they are the tip of the spear.  The bullish arguments for stocks are slowly losing their luster.


Comments »

Remember the 1929 Stock Market Analogue From February……Well!


In February there was a chart floating around showing that the current stock market was running a 1929 analogue.  Tom DeMark the famous technical analyst drew attention to it and was very nervous.  He said we could crash soon.  Many people in the mainstream media dismissed this notion and they were right because we rallied to new highs.

It came to my attention this week, while talking to the smartest Quant/PM on the Street, that we are currently running a 94% correlation to the 1929 chart pattern.  Does it mean it will unfold?  No of course not!  However, I am already predisposed to the bearish side of thinking and believe that a crash is more likely than not due to the Frankenstein monetary manipulation, the lack of a meaningful correction in two years, the length of the current bull run (66 months which is 6 months longer than the previous record), the ending of QE and finally the excessive amounts of leverage involved in this advance.

I was so intrigued I shared this insight with my buddy Tim Wood.  Tim was intrigued as well and provided the above graphs.  1929 is on the left and todays market is on the right.  He does not do analogues but he found that there was an eerie pattern of trading cycle and half trading cycle lows and highs that look very similar to today.   They are denoted by the letters.  Granted the current cycle has more days in between highs and lows and the scaling is different but notice how both are occurring in the August- October time frame.  Certainly a better calendar fit than February.  We are likely at point f compared to 1929.  If the pattern were to unfold the current rally will fail within a short time period and proceed to point h which would be a 12% correction from point g.  That would be a standard garden variety correction which we have not seen in quite some time.  Regardless of this 1929 analogue this is what I was expecting to see unfold anyway.  My forecast is not based on this but it certainly does not hurt my case.  Will the rest of the 1929 pattern unfold? Well lets see what happens when/if we get to point h.  As a bear I would be happy with point h.  Do I think this pattern will complete?  I have no idea and I really hope it does not because that would be a huge bummer for the country.  However, the market does not care what I think and it will do what it will do.

The rally from this point is key for the bulls.  A failure here would most likely take us below the August 7th low in the Dow and all sorts of technical damage will have been done at that point.  I have noticed an increase in the volatility in the intraday moves and more damage in this correction than all the prior corrections.  Deflation is weighing on the market and today the Fed is trying to Jaw Bone the $Dollar down.  I sensed some fear in the Fed minutes today.  The $Dollar concerns them because they really can’t control it.  It is a sign of their failure to normalize policy without a disaster.

What is interesting about this analogue is that it seems more relevant today than in February.  The difference is the MSM is not really calling it out this time.  I would not recommend setting up trades based on this but it sure is creepy seeing this unfold.  All my friends that manage billions of dollars in equities are miserable and underperforming.  Good luck and be careful out there.  This market is shredding everyone.

Comments »

Update: Sucked Back In Short

We may bounce some more but I got sucked back into the short side again today after watching the action on the IWM.  I rolled my IWM put profit from last week into a lower strike and shorter expiration with more notional value.  I also initiated a short on AMZN and AAPL.

AMZN: Fundamentals have been deteriorating all year long.  AWS is bleeding money and Google just initiated another round of price cuts in their cloud business.  The CFO announced his retirement which is always a red flag for me and cash flow continues to go the wrong way.  The new phone is a disaster and they lowered the price to 99 cents which will add to the losses.  The 200 day MA has rolled and the company is under increased competition.  Some of my friends who run long only and are what I consider lead steers are gone from this name.  Numbers will continue to be cut as their growth rate decelerates.  If the market rolls this stock will not fare well.

AAPL:  Margins have peaked and we know that to be true because the new phone now bends which proves they are skimping on quality.  Plus you never want to own a tech stock after a product cycle release unless they are a secular growth company.  That moniker has passed AAPL by and they are now a replacement cycle company thus a trading stock.  Chart looks ready to roll to me and I expect some mean reversion back to the 200 day MA as the market sells off.

It is my contention we have possibly topped out and may be in a major corrective move.  I will cover if we go to new highs.  If this rally fails soon we will absolutely fall apart in my opinion.  Just when I thought I was out the market sucked me back in.  The market is a cruel mistress.

Comments »

DOW/US T-Bond Ratio: Triple Top Formation Is Ominous!





Dow Bond Ratio



The above chart is the Dow/US T-Bond Ratio since 1986 on a monthly basis.  It is simply the price of the Dow divided by the constant US T-Bond futures contract.  Prior to 2000 its was generally trending up and to the right.  Since then an interesting pattern has formed.  It looks like we have the makings of a triple top.  This ratio most recently peaked in December of 2013 (coincidently with the beginning of the QE tapering) and has been grinding sideways since.  Notice the blue line which measures the second derivative strength has rolled as well.  Essentially the Fed has been waging a battle against deflation since the popping of the tech bubble in 2000.  They fought that deflating bubble with low rates and blew a housing bubble.  The housing bubble popped in 2007 and the Fed decided to blow a new bubble with ZIRP and multiple QEs.  What is the new bubble they formed this time?  The everything asset bubble.  How does it end?  Very badly.

The chart is signaling that this bubble is coming to an end and stocks, which have been a huge beneficiary of the multiple QEs, will be a particularly huge train wreck.  Bonds bottomed in price on December 31 and have been essentially moving up all year long with about an 18% return YTD.  The Dow is up about 2.6% YTD.  At the beginning of the year conventional wisdom was that bonds would be awful because the Fed, which had been the biggest purchaser of treasuries, was stepping away.  Essentially a no brainer short.  What happened?  The ending of QE is very deflationary and there has been a very quiet distribution or lack of buying of risk assets which is showing up in this chart.  Capital is moving into Bonds and not into stocks/risk assets.  In deflationary periods US Bonds do very well.  This ratio essentially measures weather or not deflation is winning.  The chart certainly looks like it is getting ready to roll and that stocks will likely enter a bear market soon.  Commodities are already in bear market territory and warning of deflationary forces winning the battle.  The US Dollar is on a tear and it is also flashing warning signals.  This ratio however has been signaling warnings since January.

If the economy was actually improving Bond yields would be rising not falling.  QE ends in 4 weeks.  If you think that stocks can rise without QE because the economy is getting better I will take the other side of that trade all day long.  I will stick with the Bond guys.  They are always smarter than the stock guys.  How do I know that?  In the distant past I was an institutional Bond salesman and my clients were very smart and cautious.

I am looking to short this market again soon since covering on Thursday.  I can’t state this enough but we are in a very dangerous set-up right now in the stock market.  My biggest fear is we crash because of the excessive leverage in the system and the lack of a meaningful correction in the last two years to unwind sentiment.

I think owning stocks at this point in the cycle is actually quite insane given the Fed’s Frankenstein distortion of this market and the pending withdrawal of QE.  I believe we are about to experience a four year cycle decline which has averaged 34% since the inception of the DJIA.  Since this is, in my opinion, a secular bear market then we will likely take out the 2009 low.  So we are looking at a decline of somewhere between 34% and 70%.  Lots of my friends who manage billions are telling me that we likely get a Q4 rally because of seasonal tail winds and performance chasing.  So in case you were wondering that is consensus thinking.  People may look at my stock market prediction as insanity.  I get it.  It is hard to believe but since most people worship Janet Yellen and the Fed I choose to be insane.  Just as sure as the sun comes up in the morning and sets in the evening the stock market has experienced cycles.  2009 was dawn and 2014 is dusk.  The sun is setting very soon.





Comments »

The Counter Trend Rally Has Begun

Per my post on Monday I think we saw the beginning of the counter trend rally starting today or perhaps tomorrow.  I am expecting a rally of 5-10 trading days.  If we peak out within that time frame we will likely go much lower .  If we go to a new high I will need to reassess my bearish ways.  However I don’t think that will be the case.  Only time will tell.

Tactically I covered my IWM puts initiated at the beginning of the month into the close for the win and will look to put back on in a week or two.  I am all cash except for my small LVS short.  I am now nicely in the green for the year.  QE ends in 4 weeks.  The dollar and commodities are foretelling the commencement of a great deflation upon the world but things don’t go down or up in a straight line.  The rubber band has been stretched too far too quickly.  Look for a bounce in commodities and stocks and a reversal in the dollar.  However, beware that a new regime is emerging.  King Dollar is back and what has worked for the last 5 years will not work going forward.

Side note: Working on a long idea.  It will be a trade not an investment.  In the beginning of bear markets there are no investments.

Comments »

I Don’t Think We Are Crashing….Yet.

I am currently on a plane headed back to Maui.  I think it is very unlikely we crash from here. However, I think there is some more pain ahead.  The rally out of the next low is key.  If we fail to go to a new high and roll back over we have what is called a left translated cycle. We have not seen one of those in a long long time. It is at that point I go all in short.

On a side note there has been much in the way of technical voodoo that has lined up that I will share later.  I have been playing a higher degree timeframe than most of you. I believe a significant trend change is at hand.  No confirmation yet.  Good luck everyone.

Comments »

PIMCO, JANUS and Parabolic Structures

It is extremely ironic that Bill Gross is going to Janus.  In the DOT.COM bubble Janus was the poster child of Technology Growth stocks on steroids.  The assets of the company went from $50 billion in 1996 to $250 billion in 1999.  A 5 bagger in asset growth in 3 years.  Pimco’s asset growth went from $700 billion in 2008 to about $2 trillion in 2012.  Almost a 3 bagger in  asset growth in 4 years.  Both of their asset growth graphs look like the following:

This is what is known as a parabolic structure.  It is where price and time accelerate and the trend eventually has a blow off top and then price and time begin to commence down the other side of the slope and retrace much of the gains from the beginning of the move.    Janus lost about 50% of their assets by the time 2002 rolled around.  PIMCO is going to lose about $1 trillion in AUM.  Despite Bill’s departure the demise of PIMCO was already baked into the cake from their parabolic growth phase.  All parabolic structures eventually collapse and retrace their gains.  Bill’s departure will only accelerate the outflows in time hence I predict that PIMCO loses $1 trillion AUM in 1.5 to 2 years.  Janus and now PIMCO were the victims of momentum chasing top ticking asset allocators.  This represented 2x growth in assets over the last year or two for both firms in the blow off top phase.  The money comes in so fast that both firms ended up making the markets in their respective asset classes.  Performance is boosted by the self fulfilling prophecy of buying your book every day.  And then one day the flows stop.  They exhaust themselves.  Then performance begins to falter and the hot money flows begin to reverse.  What was once a virtuous cycle becomes a vicious cycle.  It does not help that the street sticks their proboscis into the victim and sucks as much blood out as they can.  The momentum money is really the problem because it is dumb and impatient.  They can’t handle under performance.  They run and they run very fast.  The very success of both these firms is their eventual undoing.

The problem is only exacerbated by finger pointing and personnel changes which cause more outflows.  My advice to PIMCO would be to not blame anyone for performance due to the outflows and leave the team you have on the field for the next several years.

Why should equity investors give a damn about this:

1) Liquidity is a disaster in fixed income right now.  As PIMCO liquidates it may cause dislocations in credit markets which will have knock on effects in equities and preferred stocks.

2) We are likely peaking for the credit cycle which will make the PIMCO liquidation very sloppy and disruptive to both already stressed debt and equity markets.  If you own levered companies that rely on the credit markets now would be a good time to blow them out of your portfolio.

3) The S&P, DOW, Nasdaq have all gone parabolic due to QE1, 2 and 3 which is ending in four weeks.  All parabolic structures end badly.

Bottom Line:  The largest fixed income asset manager in the world is going to liquidate $1 trillion over the next 18 to 24 months right as the street has all but turned out the lights on their fixed income desks due to Dodd/Frank.  In addition credit markets have likely peaked.  If you don’t think equities will be affected you are sorely mistaken.

Comments »