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What Baidu and the Banks Mean to the Market


The bulls try to shoulder the load and find their footing.

You say you got a real solution well, you know
We'd all love to see the plan
You ask me for a contribution well, you know
We're doing what we can
- Revolution, The Beatles

I settled into my turret on this cold dark dreary Tuesday to find an anvil sitting in our midst; Baidu (BIDU), the operator of China's biggest internet search, forecast that fourth-quarter sales weren't quite up to snuff.

The net effect of the miss? Pffffft! $80, or 18%, sliced off the share price in one fell swoop. The stock will still be up 175% for the year if it opens at that level, mind you, but $80 is a hefty haircut no matter how you slice it.

This is the second master beta mess, following Research in Motion (RIMM) and it's blink-and-ya-missed-it 25% shave at the end of September, and it serves to remind investors of the trap doors we spoke of a few weeks ago. While most of corporate America met or exceeded analyst expectations thus far, a punishment of severe pain awaits those who miss their mark.

I'm not involved in Baidu and in the interest of full disclosure, the RIMM downside puts I carried in size -- with an eye towards the massive gap that exists between $58 and $48 -- expired in option cycle immediately preceding the deep dive. The Trading Gods have a vicious sense of humor but I suppose it could be worse; instead of missing a trap door, I could have fallen through one.

Watch the Right Ball

As fundamentals vie for our attention, I'm on guard for other metrics that could flank the tape.

Many market watchers have opined that the recent two-day slide is an alleviation of the overbought condition while others fingered the end of the homebuyer tax credit. While both could prove true, I would remind ye faithful that the initial move higher in March was chalked up as an alleviation of the oversold condition before the pendulum swung from fear to greed.

For my part, I'm keeping close tabs on the financials, including Lloyds (LYG) (potential $37 billion rights offering), ING (ING) (-20% as the European Union demands a break-up) and Capmark Financial, the lender owned by companies including Goldman Sachs (GS) and KKR & Co., as they carry $21 billion in debt into this next chapter of their story. Bank America (BAC) also earns a spot on our radar as chatter of a large offering swirls and it tests important support.

Again, the bovine relay race is dependent on passing the baton from the government-sponsored euphoria to corporate America before finally slapping it back in the paws of the public. We're seemingly in the middle of that now and we'll need to monitor psychology as more and more financials attempt to extricate themselves from the government grip. Sentiment -- faith in the system -- is paramount to this entire effort.

The dollar remains a critical proxy of deflation and a mainstay indicator of every and any asset class. While I hesitate to again mention this due to the pick-up by the popular press-and I hate running with a crowd-we've been all over this dynamic for many years with hopes of driving the point home. While both the greenback and asset classes can decline, I don't believe they can rally in sync for any sustainable stretch.

What's It All Mean?

This market has conditioned more people than a Pantene factory over the last several months. Buy the dip and leave the tip; sell the news and sing the blues. Rinse and repeat, over and over and over again.

Given the rampant run of the March lows, the heretofore 3% slippage from S&P 1100 may feel like a lot but in reality, it's a pimple on an elephant's arse. The next intuitive test will arrive when the S&P again probes the 50-day near 1050, where it snapped, crackled and popped after the jobs report in early October.

On this side of the screen, in addition to covering the remnants of my recent downside bet on Goldman, I picked at my Apple (AAPL) short into yesterday's close (added into the opening jig) and let out (read: sold) some S&P puts as a function of discipline. My long dollar position (UUP, added Friday) and the Nazz puts (I'm trading around the gamma, but not very well) remained constant but these positions can change on a dime, as chronicled in real-time on the Buzz & Banter.

With regards to the big picture, while anyone can postulate about what makes the market tick, the truth is nobody knows and the best we can do is fit the pieces together as we find our way. We're edging through a critical juncture in world financial history, one that will be studied by future generations, much like the Great Depression. This is an era, not an event, and it has nothing to do with the next five percent.

The chasm between perception and reality-the disconnect between what is and what the markets tell us will be-continues to widen, in my most humble opinion. While earnings tell an optimistic tale, the former middle class is caught between the lifestyles of the rich and a struggle to exist. I'm not one for hyperbole but I'll toss the phrase "populous revolution" on your radar, if not in a literal sense but as it relates to the growing mindset of an unsettled America.

That may not be this year's business-according to the credit markets, we've bought ourselves a few years-but psychology, much like the imbalances that brought this crisis to bear, is cumulative. Trade and prepare accordingly and be a part of the solution rather than contributing to the problem. Society is simply a sum of the parts and we've all got to do our part in effecting positive change if we hope to turn the tide.

Good luck today.


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Position in AAPL, S&P, NDX, UUP
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