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Resilience or Complacency?

Monday, October 09, 2006 | 03:21 PM

NOTE: This Trading alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 10/9/2006 3:28 PM EDT;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

How is this for a weekend of news: Nuclear testing. Housing faltering. OPEC supply threats. BLS Data Revisions. Despite all this recent negative news, the markets were flat to up today.

When momentum is hot, none of this matters. No, it may not be rationale, but it is a very real phenomena, and is one of the primary reasons we are not yet short.

The economy continues to show signs of softening; Housing is not only fading, but accelerating downwards. Energy appears to be bottoming. And the mid-term election is looking to be a ugly Foley-driven affair. I am an Independent, but my working assumption is that if the G.O.P. loses control of the House (a 60% probability as I type this, according to Tradesports), the Democrats will open a series of investigations: On pre 9/11 warnings, missing WMD, the response to Katrina, and how the Medicaid Prescription Bill’s accounting was fudged.

Given all the structural issues facing the economy, as well as the political scenario a change in power would entail, I would expect this to be a less equity friendly than the prior Congress.

None of this will matter – until it suddenly does. While recent polls of economists put the odds of recession at less than 25 percent, it is worth remembering this little data point: Not one recession in the past 50 years was forecast in advance by a major poll of economic forecasters.

Not a single one.

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SPECIAL SITUATION STOCK: MicroIslet (MII)

Two significant items of note. At the Diabetes conference in September, the CEO announced they were in talks with "several Global Pharmas’ about funding the next round of research, expected to cost between $10 - 20 million dollars.

Since then, the Board of Director’s Chairman bought another 500,000 shares (On 09/30, he acquired 292,307 shares, and on 10/03, he acquired 228,880 shares). At the same time, the founder, and an independent board member both announced they would not stand for re-election. (You can see all of the SEC filings here).

My assumption is that, given the recnet conference announcement, present Board members may be creating openings for new Board members. I wouldn't give a small company 10 or 20 million dollars without demanding at least one seat, and I presume a large Pharma wouldn't either.

I would expect any announcement of who becomes the firm's new investor/partner/shareholder to have a very positive impact on the stock.

If you don’t own any MII, I am urging you right HERE AND NOW to pick up a few shares for yourselves.

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ADMIN:

When we switched to the dedicated server last weekend, we also slightly changed the address. The new server address is www.Ritholtz.com, not www.Ritholtz.com/site. I apologize for any confusion. I am told we should see easier log in/log out, and 99% uptime.

In response to a subscriber request: Yes, we can set up an archive of both the emails, as well as “What We Are Watching.” It will take some time, but its now on our list of TTD.

-Barry Ritholtz
October 9, 2006