MON.JUN. 9 THOUGHTS

The most popular question of the day on Friday asked that was heard around here was “If oil is up 10 dollars a barrel, why are oil stocks down?” The answer is amazingly simple: money managers are human and computer models are designed by humans. The average person who holds a diversified portfolio of stocks will watch the action; let’s say 4 out of 5 stocks in the portfolio are down and his other one is a winner (let’s say an oil stock to further drive home the point). Guess what the average person sells? Simple. The winner. Why? There is the greed factor in thinking that the losers will go up and second is the fear factor that the winner will go against him. Thus, the strongest stocks are always the last to fall in a broader declining market…but they do fall as well. On Black Monday in October 1987, only 21 NYSE stocks were up for the day…that means that everything was down. Using an analogy: let’s say that you build a gigantic sand castle on the beach near the water’s edge. The works. You have a fort in front with some little tiny castles, a fortress with a moat, and then in the back is the actual gigantic sand building. When the tides comes in, the first things to go will be the tiny protective sand castles and the moat will be swallowed up. But guess what? That castle is going down too- no matter how gallant and beautiful it is. It will take longer, but it will happen. It is the same principle here. In a bad equity environment, stocks get hit in every sector no matter what.

As for today, all you have to do is hark back to the blog column from late last week; hot money is changing day to day from stocks to commodities to sectors to who know’s where. Thus, the craziness will continue today based largely on LEH and the price of oil. Oil is down more than two dollars a barrel in the early going. LEH is issuing stock. And Oil is winning as futures are bid higher in the early going with weakness being shaken off in Europe as the bourses there are above the unchanged level.

LEH- issuing $6 billion of capital at what is believed to be 28 a share combined with a loss. The easiest trades will be to short the stock before 8AM; after that, it gets significantly trickier and the best advice is to stay away unless a major A-B-A2 setsu p, i.e. it opens at 30.50, sells off to 30, and comes back to 30.50 with the market rallying.

GS/MER/MS- if they open down and go positive, they are buys as they should be unaffected by the LEH news in the immediate-term.

XIDE- good earnings. If the stock gets negative, it is a short.

HON/BEAV- HON is selling a unit to BEAV. Both should be up; it is actually accretive to BEAV while HON raises capital. If either goes negative, it is a short.

VRTX- positive drug news over the weekend. If it opens at say 35, goes to 34.50 and rallies to 35, it is a buy. Same thing vice versa; if it opens at say 34.50, rallies to 35, and falls back to 34.50, it is a short.

AMLN- negative drug news- issued at 12PM on Saturday. Usually when a negative report comes out at a weird time, it is even worse than initially thought...it is likely a short below 28.

BID- issuing decent revenue guidance. Should open higher; it is a short at unch.

WMT/CPRT/IART- all on Cramer.

AAPL- watching for iPhone stuff. Stock higher in pre-open. Will be a short below unch especially before 8:30AM.

CIT - raising capital. Stock higher. it is likely an A-B-A2 depending on exactly where it opens.

RCH- going from AMEX to NASDAQ. It will likely be higher again. Ridiculous because this is not ews. if the barely opens higher, it is a short. Conversely, if it trades strong all day, put it on the watch list fortomorrow for the same trade.

Good luck today.