Fed Lagnuage Problems, Short SBUX Position

Federal Reserve Language LetDown

I was only 1/2 right on the Fed's meeting today. Although I was right in expecting only a 25 basis point cut, I thought the Fed would issue language accompanying their statement that they stood vigilant and ready to do more - and quickly - if needed. Instead, they seemed to be more cautious than prepared, and this more than the lack of a 1/2 point cut weighed heavily on the market. Tomorrow may provide some more pressure to the market.

I believe however, that the Fed is going to have to ease more in early 2008, probably even at their January meeting. The question of course is what the market sentiment will be in the coming weeks. Look for pullbacks on strong companies to add positions to, but remain cautious about the price points you are willing to pay. There is still no confidence for a general market rally, and more defensive positions (medical, beverages, consumer goods) remain a smart place to ride out the uncertainty. The other opportunities are to look for stocks you can profit in from shorting.

Two Stocks To Consider Shorting, SBUX & MRVL

In fairness and full disclosure, I'm not an expert in taking short positions, which I believe are hard to pull off. But here are two stocks that I am watching closely: Starbucks (SBUX) and Marvel Technologies (MRVL). Both have also had increasing short positions growing, although neither one to extreme levels. But an increasing short position as the percent of float would be a cautios indicator to watch for any potential short squeeze. I continue to watch MRVL ($14.82, short interest 4.8%) and may short this stock if I see continued weakness. But I already have shorted SBUX ($21.89, short interest 3.7%) with 1/2 a position and am considering adding to it. Here's why.

In November, Starbucks reported that their store traffic fell at same-stores for the first time in their history. And they forecasted earnings for the current quarter below Wall Street's consensus estimates. That's bad news. Dropping sales, and downward guidance. SBUX has a strong institutional ownership - 62.3% of shares. Institutions wanting to unwind these positions, as many will want to do in the next week or two because of end-of-year window dressing, will create downward pricing pressure. The stock's chart shows why funds might want to clean SBUX off their holdings:


The stock is at a 52 week low, but there isn't anything exciting to point to for a quick pick-me-up. Goldman Sachs downgraded the stock yesterday, and McDonald's premium coffees have been successful and raised some questions about the sticking power of Starbuck's $5 cup of joe. If the economy cools and business travel falls, Starbucks will feel some impact since the company has prominent retail locations in major airports and close proximity to hotel chains.

Out of 26 analysts covering SBUX, there are still 6 rating the company a BUY and 3 a STRONG BUY. I think it is more likely for some of these 9 analysts to issue downgrades than any of the others issuing upgrades, providing more negative news.

All of this makes me think we haven't seen the bottom in SBUX and it's looking capable of turning south of $20. I will likely add to my short position on any short term strength the stock shows. Like all shorting strategies, these are risky positions to take only if you have the experience and portfolio to accept losses if the stock rallies and moves against you. But I for one am betting that's Starbuck's is turning into one cup of iced coffee.