It is funny at this point, shorting anything - only when sincerely bad news comes out can anything go down and even then it's for a few hours. Best Buy (BBY) is down today on disappointing spending by the consumer, but should be up by tomorrow. Capital One Financial (COF) had a rise in delinquencies; but not to worry - it was only down 4% and now that this bit of fundamental news is out of the way we can rally it back on ... well certainly not valuation. I do see estimates for 2010 have been raised from about 0.00 to 0.70, as I wrote in this week's summary for any remaining consumers who still carry debt in America the rates are jumping big time as these companies position ahead of new regulations in 2010. Greater than 50x estimates out more than a year is cheap in this market, so I am surprised the stock even bothered to falter for a few hours.

  • Capital One Financial Corp. said Tuesday that delinquencies on its U.S. credit cards rose in August, although defaults slowed, sending its shares tumbling nearly 5 percent.
  • The McLean, Va., company in a regulatory filing with the Securities and Exchange Commission said its annual net charge-off rate, or the percentage of loans the company believes won't be repaid compared to total loans, dropped to 9.32 percent in August from 9.83 percent in July. (that's an improvement)
  • The rate for loans at least 30 days delinquent worsened, however, for the second straight month. The delinquency rate rose to 5.09 percent last month from 4.83 percent in July. (this is more recent data and doesn't fit into the 2nd degree improvement story)
  • In Capital One's auto-loan unit, the charge-off rate in August rose to 4.31 percent from 4.26 percent in July. The delinquency rate climbed to 9.42 percent from 9.22 percent.

I dropped a quarter of my short exposure into this correction, we are down 20% on the stake but it only a 2% position, now down to about 1.5%. At this point we have to question what seismic event it will take for that gap under $24 to fill.

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Specific to Capital One I think all this delinquency data is now moot since this firm can borrow from the Fed at nearly nothing and push that money into buying US Treasuries for risk free gains, or letting consumers borrow it at 23%+. Even if the default rate is 25% (more than double from here) they should make money on a 20%+ spread on paying consumers. It's great to have the Federal Reserve making your business completely idiot proof to run.

The larger question if indeed US consumers matter anymore, is how will spending get back to the good ole days if easy credit is no longer available. Borrowing at 23-29% is very different than 0-12%. But these are not questions anyone is asking and since the government now is taking the place of consumers as the spending machine of the economy, I suppose US consumers behavior is a moot point. When in need, simply put your hand out ... and the government will fill it so you can go consume. Or pay back Capital One's debts.

As for the greater market as I stated once over S&P 1050, there really seems to be no resistance until 1100 so I have replaced those September SPY calls I got rid of late last week with 1 batch yesterday (October 105s), and one today (October 106s). Until proven otherwise S&P 1040 is the floor for now. I'm enjoying being complacent... it's sort of fun.

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I see now we are back to the pattern we had in March & April where you can buy S&P futures overnight when they are in the red and make a mint as the market surges to the green during the day. Almost like clockwork. I used to do a game when I wrote down S&P futures at midnight then checked at 9 AM and it almost created a gain (and a large one at that) March, and April - same thing past 2 sessions. I still wish someone who had access to the futures data could tell how much of the rally from March 6th was during normal market hours and how much has been during overnight when these futures are much more easily moved to the correct spot.

Short Capital One Financial in fund; no personal position

Long October SPY 105, 106 Calls in fund; long SPY 105 calls in personal account