ScalpTrader (SCALP)

Will jump right in with position updates:

Citigroup Capital XII 8.5% Fixed/Float Preferreds (C/prJ 25.95): Highlighted in Dec 19 report. Have picked up a $0.53 (or 2%) dividend payment and sitting on capital appreciation of about 3%. This is one of my largest positions. The common stock has performed extremely well over the past month, which has helped provide a bid to the Preferred. Also seeing general strength in Preferred stocks as investors become more comfortable owning Bank stocks. No plan to sell position anytime soon.

Zions Banc 9.50% Series C Non-Cumulative Perpetual Preferreds (ZB/prC 26.42). Highlighted in Dec 19 report. About 4% capital appreciation thus far. Will go ex-dividend at the end of February. Will consider adding to position if pulls back below $25.50 after going ex-dividend. Will need to evaluate market conditions and company trends at that time, but not expecting much to change between now and then.

Rentech Nitrogen Partners (RNF 25.00): Highlighted in Jan 13 report. RNF has run more than 5 pts, or 25% in just the three weeks since I featured it. This was my "yield with a kicker" play (13% yield and exposure to rising Agriculture prices via fertilizer), as I looked to take advantage of improving market and U.S.economic conditions. Have continued to see strong bid under Commodities-related stocks. However, stock has reached my price target. May look to re-establish a position on a major pullback, but I'm out of it for now.

KKR Financial Holdings LLC 8.375% Senior Notes (KFH 26.12): Highlighted in Jan 13 report. Have 4% capital appreciation from my entry price and 2.5% from price I featured it. Will go ex-dividend in less than two weeks. Strong run in Preferred stocks in the past few weeks makes strong yielders like this one that much more valuable. Will be hoping for pullback below $25.50 after issue goes ex-dividend to add to position.

Cosi Inc (COSI 0.93): Highlighted in Jan 13 report. Stock up 43% from the price I featured it. Price action aided by report of surprisingly strong comps (+2.6%) on Jan 26. Results suggest that interim CEO and co's Board of Directors kept their eye on operations while in the process of hiring a new CEO. Next goal is for stock to stabilize above $1.00 in order to avoid delisting. Saw a high volume advance to $1.00 on Feb 1. Stock remains within striking distance with price action and volume suggesting a good chance of getting back above $1.00. As I noted in the initial profile, this is a position I plan on sitting on for quarters if not years, unless there are signs that the new CEO is falling flat with a poor vision for turning around the company. So far, have liked what I've heard from Ms. Stutz in interviews. I added to the position last week in the $0.71 area following the strong comps report.

My only new position since our last update is a speculative Preferred stock -- GMX Resources (GMXR/prP 12.90 +4.15): I actually picked up this position Thursday morning and sold out of Friday morning (today) into the gap up for a more than 50% profit, so the position is no longer active. However, I am leaving the commentary (which I wrote Thursday, Feb 2) intact for educational purposes:

The GMX Resources Preferred is an extremely speculative position that I'd been researching Wednesday as part of my search for Preferreds of out-of-favor Natural Gas companies. With Nat Gas prices continuing to fall through the floor, seeing fear that smaller, high-cost producers will have difficulty servicing their debts. In fact, I think many of them go bankrupt over the next year or two. However, I've been looking for ones with enough cash to survive at least 12 months, which might provide sufficient time for Nat Gas to rebound to more profitable levels and help drive improved cash flow & industry sentiment. I was mixed on the GMXR story after my initial research. This is a Nat Gas explorer that is shuttering its gas production and shifting its focus to Oil drilling. Unfortunately, most of its Oil properties are unproven and the company purchased them over just the past year. Based on these factors, I decided to pass on buying the Preferred, which had fallen to distressed levels ($25 par Preferred fell below $6.00 on Wednesday, equating to a yield of 39%). However, after the close Wednesday, the company issued an Operational & Guidance update discussing its latest drilling results and announcing expense reductions that will keep co fully funded for 2012. This was big news, as it suggests that the Preferred will continue to be paid (at least, until something else changes, such as they start to run out of cash).

My estimate is that the expense cuts keep the Preferred safe for another two or three quarters, which will give the company a chance to a) ramp up its Oil production, b) turn back on some Nat Gas production should prices rebound, c) find additional financing. That said, it would not surprise me if this company failed to exist in two years, as the transition from a Natural Gas producer to an Oil player is fraught with risk. But, for now, GMXR says it is fully funded for the year, which makes the 33% dividend yield I was able to purchase the Preferred for look extremely attractive. I picked up the position at a $7.10 average price and have already seen a 29% gain on an intraday basis. My target for the position is the $10.00 area. I'm not suggesting that you buy the name down here, rather highlighting the strategy.

I've found the Preferred to be one of the best ways to play distressed positions. In fact, my largest position (that I've held for about 3 yrs) is a JP Morgan preferred that got flushed down to 50 cents on the dollar during the financial crisis that not only rebounded to par, but now trades at a 10% premium to par. In fact, there were a host of Bank Preferreds that fell to $2-5 during the crisis, that now trade back around $25 par value. When buying Preferreds, it's important to pay attention to the covenants. I read every prospectus before taking a position. For example, with the GMX Preferred two features I like are that 1) the Preferreds are cumulative, which means that the company owes you the interest payments even if they've been suspended for a period of time (this builds more value into the Preferred than a non-cumulative Preferred); 2) if the company suspends payments on this Preferred for four qtrs, the interest rate jumps from the 9.25% coupon (at $25 par value) to a penalty rate of 12%. As I'm writing this, Nat Gas is running almost 8% today, which is helping give a bid to GMX Resources common shares (GMXR 1.37 +0.43, +45%) and the Preferreds (GMXR/prP 8.88 +3.17, +55%). If Nat Gas continues to run, it's likely I'll hold onto this position beyond the $10 target price.(GMXR/prP surged to $12.00 in early trading. I waited for some volume to come in before I started selling, realizing at average exit price of approx. $10.80. Closed a little early, as security later saw intraday highs of $14.00).

Chart Trader (CHART)

We have two things going on right now in stocks that we haven't seen in years and years: low correlation ratios on many days (no longer 90% of stocks either up or down every day, inverse the dollar), and what I see as real "animal spirits" among investors (when people get excited about something, the crowd just runs over the shorts who try to stand in the way).

That puts us somewhere along the way toward completing a 'sentiment bull cycle' at some degree. The end stage will be when we see small buy-to-open options orders all stacked toward call buying at the retail level. We aren't there yet.

Liquidity:

A couple weeks ago, I noted that it was silly to sit in front of your screens trying to short when all four of the world's biggest central banks were expanding their balance sheets actively, and China was done tightening. Even though the correlation ratios have dropped a bit, this is still mostly about liquidity.

I think you still have to honor that idea.

Flat Squeeze?

In addition, even though survey data shows a complete lack of bears, we know a couple of important things that I want to point out in perhaps a different light than you are used to hearing:

1) Volume was notoriously lacking during the majority of the rally in January. And,

2) Asset managers piled into cash and cash equivalents, and retail investors redeemed funds from equity positions, both at a high clip during the fall of 2011.

Put those together, and you have a lot of PMs coming into February without enough equity exposure (given that their benchmarks are now +6% or so on the year, and cash is earning nothing; and the low volume on the advance suggests most of them didn't participate a whole lot).

The conclusion I draw is that, if the macro data improves a notch or two more, a lot of capital that has been 'waiting for a pullback' may start to panic and index itself for Wall Street job security (as large money managers do the equivalent of buying a lot of SPY to reduce their risk of ruin, in relative performance terms).

That suggests the possibility of a kind of blow-off move from here to the upside in equities.

Crude Oil:

At the same time, the trade I am currently most excited about doesn't make sense according to any of the above: I am strongly bearish Crude oil, perhaps even for something like a minor crash. In light of the 'liquidity' and 'Stocks flat squeeze' themes above, this idea seems impossible. But, no matter. That's what the tape is saying. I don't know what is going on for certain. Perhaps there was just too much event-related premium built in due to Middle East tension, and demand has simply withered as a result. I'm not sure. But I am short crude.

GrowthTrader (SETUPX)

The design and development of the new Emerging Value system is now behind us, and with the system now live, my team has turned its attention to earnings season and monitoring both Emerging Growth and Emerging Value names as they report. While this earnings season has tended towards the disappointing (lots of companies reporting smaller EPS beats and top-line misses), I have one observation so far that I think is worth passing along.

As I see it, the real action this earnings season has not been in growth stocks, but in value stocks. Granted, one quarter doesn't make a trend, but this is a departure from what we've seen pretty consistently since the March 2009 low, when every quarter new growth themes and leaders popped up on the Emerging Growth rankings with great regularity. Now, we're seeing the most surprising reports coming from value companies.

For example, when the Emerging Value system debuted on January 25, Seagate (STX) was ranked #1. This stock had already seen a good-sized rally in January (in addition to valuation metrics, EV also has a relative strength component to it), but despite that the stock was still very cheap according to multiple metrics. On top of that, STX also featured a nice dividend yield, an active share buyback program, and a lot of cash. When the company reported earnings on January 31, STX reported numbers and issued guidance that suggested that the company -- and the notoriously cyclical hard drive industry itself -- had definitively returned to growth. The stock has run 30% since being added to the EV rankings, but even at these higher prices STX offers reasonable multiples, rebounding growth, a nice dividend yield, and a supportive share buyback program. If you're a fund manager, how can you not own that?

There have been other, less spectacular examples of value stocks reporting surprisingly strong earnings this quarter: Computer Associates (CA), Teradyne (TER), Wesco (WCC), most Airlines, etc. Semiconductor companies in particular are almost all saying on their conference calls that the cycle is finally showing signs of turning in their favor.

The common theme here among these stocks is that these are generally highly cyclical and/or commodity-driven businesses that are suddenly reporting growth stock-like quarters, or at the very least much better visibility, as the economic cycle shows signs of finally turning from a headwind into a tailwind. In addition to this step-up in business activity, another common characteristic among these stocks is that most of them have aggressive share buybacks in place and have been raising their dividends. As such, it makes sense that money is flowing into companies that sport a combination of moderate valuations, cyclical tailwinds, good yields, and supportive share buybacks.

The question in my mind is whether this is just a temporary uptick in an otherwise frustratingly slow recovery, or a legitimate turn in the cycle. You don't have to be an economist to answer that question, because the price action in stocks should provide a pretty clear answer.

A lot of the standout value outperformers currently look ripe for some profit-taking, but we should know in a few weeks whether this trend has staying power or not.

Commodities Trader (COMDX)

Weakness in the dollar index since mid-January gave a boost to select commodities. In addition, the recent Chinese PMI data of 50.5 provides more evidence that China is looking at a soft landing, which adds support to the commodities space. Add to that the recently seen positive U.S. economic data and factory data in Europe and record U.S. January auto sales and price strength extends further in select commodities. One thing is clear, buyers of commodities still remain present.

The labor market has seen improvement recently with initial claims falling to levels not seen since 2008, but consumers still remain cautious as seen by the recent personal income data, which showed that despite a boost in personal income, the personal savings rate rose in December. This could weigh on the economic recovery since consumer spending makes up about 2/3 of U.S. economic demand. On the earnings front, about 2/3 of U.S. cos that have reported YTD have topped analyst expectations, which has helped support the recent rally in stocks.

Despite recent positive economic data, crude has been declining as a result of higher stockpiles, which just pushed crude down to a 6-week low, while gasoline consumption  fell to a 10-year low. Crude is more likely to see more downside this week than upside. Meanwhile, natural gas futures are about 14% lower since last Friday. The recent announcement by Chesapeake Energy that the co will slash production sent nat gas futures rallying, but when Exxon Mobil, the largest nat gas producer in the U.S., reported on Tuesday and said that it has no plans on cutting natural gas production, it's no wonder that nat gas continued to decline. Nat gas should see some life near-term following news that truck-maker Navistar announced that it will begin offering natural-gas-powered engines this year.

Overall, I'm still buying commodities and commodity-related names that I believe are in a near-term uptrend, following a pullback. I'm also shorting less fundamentally attractive names following rallies on broad-market strength. Areas I'm focusing include crude and nat gas, grains and ag stocks, platinum, liquefied nat gas plays, miners, coal names and oil tankers . I'm bullish on grains still (CORN, JJG and select related stocks like CF, CNH, DE), bullish on lng plays including LNG and GLNG and platinum (PPLT). On the other side, I'm still bearish on oil tanker names OSG and FRO and would short them on any strong broad-based rally.