Morning Post

(My pic).

Conflicting information....One of the most difficult hurdles for the average investor is how to deal with conflicting information. Bear markets, bull markets, range-bound markets and the like are only clear in retrospect. 'Experts' cannot seem to agree on what type of market we are in.

My view on experts was forever changed by the ominous calls for a bear market 18 months ago (Fall 2006). Oh, there was plenty of technical and fundamental fodder for such calls. I believed it.

The private hell of bear markets occurs sector by sector. We saw the very first sector fall which was real estate investment trusts. Then housing, then banking. In the meantime, we saw the commodities and related stocks act like a newly birthed foal getting its legs up under it, walking about a bit, stumbling and few times, and then....new found confidence, strength and room to run were the recipe for prodigious profits. Oh, but not me--I was too concerned about the overall market. (Though I had identified this sector back in Spring of 2007--long before everyone else came to the band wagon!)

Over generalizing the "market" can lead to fallacious investor strategies. The market is a collection of stocks in a collection of sectors. Sector performance is relative to other sectors--so generalizing about airlines and banking (to name a few on opposite sides of the stock wheel) in the same breath would be a poor use of time. Rather, sector leadership and stock leadership within those sectors provide a better focus and eliminates unhelpful generalizations. However, having said that, when the banking sector--the lubricant for all economic growth--is facing headwinds of the magnitude we've not seen in my lifetime, that doesn't bode well for the overall economy. But it takes time for that realization to percolate through.

Here's a place, then, where there will be lots of conflicting information and generalization--but seeing the trees (sectors) apart from the forest (market) is important. BUT.....If there is a fire in the far corner of the forest (sectors breaking down) when you start to smell the wafting of that smoke that is blowing across the forest and permeating the air of your far-off sector, watching the exit would prove a good use of your time, but you can still continue to fish, nap and picnic for a little while.

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I have puts on ACGL for September. To my eye, it is putting in a whomping distribution top. Yesterday, I came across a news story about a stock screening tool that identified through its set parameters ACGL (good earnings growth, return on equity, low p/e etc). The writer concluded that they were likely a buy. P&C insurers are currently going through a couple headwinds. Headwind 1 is they are in a soft market. Headwind 2 is that they have lots of this investment crap on their balance sheets (though we've not seen much of the effects of that just yet).

In reading this article, I was reminded that using a narrow tool (stock screener) can be dangerous if it omits other considerations. ACGL authorized a large buyback--but to my eye it looks to be solely for the benefit of Warburg Pincus and other large shareholders to get out. Why would you want to put your hard-earned dollars in a sector/stock that (1) has lost pricing power; (2) has balance sheet risk; and (3) is technically undergoing distribution?

I recognized that I may be biased in my view given my position of being short of ACGL via puts. But those three items are three strikes in my book. My RNR call has come to partial fruition. I had JUN 50 puts on that. I closed them out for a loss of about 28%. I elected not to hold them after Friday as the time decay would probably be tough. The stock declined further, and I would have been okay...but that's hindsight. I have CB puts as well--that didn't work out at all.

Lest you think that I'm bearish I only have puts---I thought I would round out my shorts by having call positions on GE (SEP 35). Ask me how those are working out! Sigh.