Tuesday, August 18, 2009

Expansive China Faces Grass Root Resentment

China is using our dollars to go on a global shopping spree. It's been going on under the surface for many years - I saw a great ABC News report on this subject perhaps a year or so ago. The main focus was on China's impact on Africa where they are helping to develop the infrastructure of multiple countries rich in commodities, in return for easy long term access to said commodities. If you saunter over to Bloomberg you can see almost every 2nd or 3rd week a Chinese purchase (almost always of a commodity nature) in some country you only see during the Olympics opening ceremony. It is awesome to see our money going to work! Granted it's not for our future but theirs but we are a generous nation of debtors. What's the saying? America plans out year to year, Japan decade to decade, China century to century?

An interesting Reuters piece here on the resentment building from some of the actions China is embarking upon to secure its future ... we touched about this in the Australian - Chinese connection 2 months ago. [Jun 13, 2009: Australia in Perfect Position Aside China, But at a Cost?]

Since three state owned Chinese companies said they would buy stakes in Australia’s storied mining industry totaling $22 billion — as much as China’s entire investment here in the last three years — some of this nation’s 21.3 million people have reacted with aggrieved nationalism.

Opposition politicians have flogged the specter of an Australian future more or less as a giant open-pit mine in which the locals toil, but Beijing takes the profits.

suddenly, Australians are stepping back, realizing that their new best friend is someone they really do not know very well, much less trust. “The momentum has shifted from being broadly receptive to these deals to having a hard think at this,” said Alan DuPont, who heads the Center for International Security Studies at the University of Sydney. “This is not just about China and Australia. It’s about how the world sees China playing its role in the future as a great power.”

It looks like as China emerges as the 2nd global bully... err, gentle superpower - they are facing many of the same issues the U.S. has.
  • From Africa to Europe, the Middle East and the United States, China's drive to project its economic might abroad can sometimes breed fear and resentment. The risks are likely to grow as Beijing channels more of its foreign exchange reserves, which stood at $2.13 trillion at the end of June, into foreign investments.
This is an amazing statistic - they have already passed the US as the largest trading partner with Africa.
  • From having a handful of tiny investments abroad less than two decades ago, China has grown to the world's sixth-biggest foreign investor and overtook the United States as Africa's top trading partner last year.
  • That breath-taking rise has brought problems: allegations from emerging countries that China is stripping them of resources and suspicions in the developed world that obscure state interests lurk behind Chinese investments.
  • Where governments welcome Chinese investments for the boost they bring to their economies, a widely perceived Chinese tendency for Chinese firms to import their own workers has created tensions with job-seekers.
Now recall, the Chinese used to just be happy throwing all the money we send them for goods they create, back into our long term government debt. But as all people who have a long term interest in the ability of their debtors to pay them back one day... China is slowly but surely growing wary of the unsustainable policies of the U.S. They even drop some not so subtle hints from time to time... ahem. [Feb 13, 2009: FT.com - China to US: "We Hate You Guys"] Thus far while they have not dropped the amount of our debt that they purchase (with our own money mind you) they have been shortening the maturities they buy. Easier to flee the debt someday. [May 21, 2009: China Becoming More Picky About Debt]

China is growing more picky about which American debt it is willing to finance, is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America.

The other reason there is almost one universally agreed concept in the economic world. The path the US is headed on will demand much higher rates in the future as we become more and more of a risk. So even if the Chinese believe in us in the long run, there is not a good economic reason to lend us money at 30 year terms at the ridiculous rates the "market" is offering. I say that in quotes because the good ole Federal Reserve is manipulating rates lower than a true "market" because Americans cannot thrive without 5.2% mortgage rates.

... new data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States.

So there are many reasons not to buy long term US debt at this time (although the Federal Reserve is happy to!)... hence while China continues to receive tons of cash from us each month as 1 of 10 retail dollars in America funnels into Walmart, they need to find better uses for it than buying our debt. Hence the moves they have been making lately from opening up financial channels with Taiwan to buying commodity based capability the world over. While we use our money to get Americans to buy cars, TVs (Bush rebate 2008), houses, keep interest rates low, and bail out our financial oligarchs. Like two passing ships in the night...
  • The challenge of how to deal with such tensions will only be magnified as the global slowdown prompts Beijing to pump even more of its foreign exchange reserves overseas.
  • China used to be content to keep its surplus dollars in the bank or in U.S. government debt. But the financial crisis and subsequent downturn have, in some quarters, shaken faith in the strength of the dollar and U.S. Treasuries.
  • With China still needing to secure access to global resources, some Chinese policy-makers are talking about redirecting billions of dollars into overseas investment instead.
  • (Chinese investment) ... include aid with few strings attached, capital for infrastructure that Western donors will not fund and competition that drives down prices.
This is what I saw in the ABC special, I know I know - I should of been watching John and Kate makes Eight instead ...
  • A $9 billion minerals-for-infrastructure deal is presented by Congolese President Joseph Kabila as a cornerstone of his plan to rebuild the Democratic Republic of Congo after years of war. China will build roads, schools and hospitals in exchange for mining rights.
  • In Guinea's capital, Conakry, the Chinese government is building a 50,000-seat sports stadium as a gift.
So it's sort of like colonialism all over again but with investment to placate local officials and citizens. Actually it reminds me of a Twilight Zone episode where the aliens land, give us gifts that benefit us.... all while planning how they will eat us.
  • "We are very satisfied with our cooperation with China," said Denis Sassou-Nguesso, the president of Congo Republic on a visit to a hydro-electric dam being built by Chinese contractors.
  • But in some countries, it is the sheer size of the Chinese presence that causes tension. Russian officials estimated that last year there were 350,000 Chinese migrants living in the country's far eastern regions, many illegally. The native population, in an area almost 10 times the size of France, is just over 7 million.
  • Elsewhere, the fact that the lion's share of Chinese investments are from the state itself or state-controlled companies, is the source of friction.
  • China says its investors are forced to go into "frontier markets" because developed countries lock them out of more stable economies. As a result, they say, the risks they face are higher.
  • China has started to address the damage to its reputation as an overseas investor. Big firms have hired Western consultancy firms to give advice. Many are now seeking local partners, or favoring less high-profile indirect investments.

Stalking Semiconductor Short

The Semiconductor ETF (SMH) chart I posted this weekend really caught my attention; I do not look at this ETF every week so it was the first time I looked at it in maybe 3 weeks and I wanted to buy short exposure Sunday night the minute it posted on my computer screen. It was creamed for a nice 4% yesterday and has since rebounded a bit.... recall semiconductors are the one area that institutions will pile into each time they see a recovery on the horizon. One could argue the "recovery" thus far in semis is mostly inventory restocking; we won't know until we look back 6-9-12 months from now if its head fake or real (or the third option nowadays, China driven) But whichever, this sort of gap creates saliva on the lips... my downside target should be very obvious.

I am looking at a few ways to go short - the obvious and easy is short SMH ETF; incredibly there is also a 2x inverse ETF specifically against the Semi ETF: Ultrashort ProShares Semiconductor (SSG). However, the past two years have taught us the evils of 2x, 3x ETFs - unless the market or that subsector of the market is in free fall they usually only suck money out of your wallet. Ironically, SMH broke its 20 day moving average yesterday before making a half hearted (thus far) effort to rally back over, while SSG broke above its 20 day moving average before faltering today. So if semi's weaken in the coming days they should both technically confirm at about the same time. (please note TA on inverse ETFs is relatively useless)

A third option are puts which I believe will be how I approach it. I need something that has relatively high volume since the "simulator" I use, uses 10% of the real life volume for my purchases or sales. Which is why I like SPY - its very liquid. Buying options on anything else is much more of a chore. (remember, one arm tied behind back on some strategy) Therefore, the puts I am interested in October do not have enough volume for me to make a purchase. Hence I am stuck in the far more riskier September month (riskier than October because I have to be correct on both direction and time). The only one with a lot of volume today is September 25 puts - (SMHUE) bid 1.26/ask 1.27 as I type

Since I think the S&P will fill the "gap" at just under S&P 1000 I will probably make a purchase of these later in the afternoon (or tomorrow), hopefully with the market just a bit more higher than currently. 99.7 on SPY would be nice. So maybe at our post 3:30 PM daily feeding frenzy upward or in the early morning tomorrow.

Ironically my favorite stocks on the long side at this moment are semiconductor stocks, but in a very narrow subsector. Hewlett Packard (HPQ) reports tonight which should cause technology to spike - or not - after the bell. Generally they always do well on earning reports.

No position but stalking...

Bookkeeping: Selling Most AsiaInfo Holdings (ASIA) on 10%+ Spike

Scratching my head on AsiaInfo Holdings (ASIA) today - I bought a tranche yesterday in the $15.80s trying to build a long term position. It just spiked 10% for no reason I can find and ran into resistance, so I am going to sell most of the position... 10% in 1 session works for me. If you annualize that... err. Ok nevermind. Only a 1% stake however, leaving our 0.1% holding position - again I did not expect any sort of move like this hence we were building a long term position slowly. So back to square one.

It the stock breaks north of low $18s I want to be a buyer again (on strength) - the problem with ASIA right now is the fundamentals are fantastic but the chart is not. So for now I see a stock that has been beaten down and rallied into resistance. I want to use that to my benefit if the market hands me free money. Next ASIA needs to get back over the 50 day moving average. I'll add there (strength) or on the next Hulk Hogan leg drop (weakness). It is actually a low risk short at this moment around this price until it proves itself .. but I am juggling enough shorts at the moment.

Long AsiaInfo Holdings in fund; no personal position

Bookkeeping: Closing August 90 SPY Puts (SWGTL)

With my assumption of an oversold bounce here, and with options expiration this Friday I am getting ride of my August 90 puts while they still have a modicum of value,. They actually exploded up 90% yesterday (off a tiny base of course) [Jul 20: Bookkeeping - Buying Some August 90 SPY Puts (SWGTL)] but options have very heavy time decay as you get closer to the day they die, so unless we have a swan dive today or tomorrow I don't see them advancing much from here. I actually should of sold these 3:59 PM yesterday but I did not realize they actually had advanced in value so much yesterday... since S&P 900 (equivalent to SPY 90) is so far away I thought they would be dead money.

Again to repeat these long term put options are insurance policies; when I bought them I had almost no short exposure and since then the market went on a 5 week run of straight up they just withered on a vine. So effectively we paid for the insurance but got no benefit. Contrast that to the same strategy of a new batch we bought last Wednesday which already have paid off nicely. Some months the insurance pays off, some they do not but they allow us to have a leveraged short exposure, risking a set piece of money and not having to mess as much with the highly flawed 2x, 3x inverse ETFs. In this case we lost about $32K which when I bought them was about 3% of the portfolio and now is about 2.4%.

I bought these for $1.13 in mid July, and they are being sold here at about $0.05 for a hearty 96% loss. But $1200 is better than $0 which will be their fate on Friday barring a China like drop Wed-Fri. This will leave us only with the October 95s (puts) we bought last week as our "long term" short exposure. (recall we took 20% of that position off the table yesterday for a hefty profit, since they rallied 50% in 1 day and SPY filled its "gap" at 98 - I hope to rebuy that 20% exposure if the market rallies in the next day or two as I want my insurance fund "full up")

No position in August 90 SPY Puts

Bookkeeping: Stopped Out of Longtop Financial (LFT)

This was my 2nd attempt to buy Longtop Financial (LFT) and the 2nd time I was stopped out in a month. I don't think the level of volatility in this name fits with my style - it is better suited for a daytrader or someone who does not employ stops.

We bought this yesterday @ $27.25 - I placed that limit order when the stock was near $32 as that price point was near the 50 day moving average. I was surprised to see it fill yesterday but LFT imploded. As has been my game plan for the past 12 weeks I take many small losses, and don't let things get out of hand - we were punched out this morning at $26.44; about a 3% loss. The stake was only about 2%.... this wasn't a gung ho long :)

While I like this name the volatility of the day to day moves might not fit into our gameplan. I need less volatile merchandise that somewhat adheres to charts. Knowing Longtop it might rally 15% tomorrow after breaking support today - that is fine for daytraders but doesn't work for us.

No position

Easy Short Trade Has been Made

I am going to use the SPY ETF (the S&P 500 parallel in ETF world) for the chart below rather than the S&P 500... essentially you can slap a 0 on the end of each number and it will get you very close to the corresponding S&P 500 figure... i.e. SPY 98 = S&P 980. (not exactly but close)

I want to show the SPY because of the gap that filled yesterday at 98, which in my mind was the "easy trade" on the short side. Now that it has been filled, we are in a white noise area ... as we wrote in the weekend summary - a breakout north over intraday highs of the past few weeks (SPY 102 = S&P 1020) would get us positioned for a new leg up. On the other side of the equation a break below SPY 98 = S&P 980 would get us positioned for a new leg down. In between those 2 areas? White Noise area. A cursory bounce would be expected and now we will see if we "fill the gap" to the upside in the SPY 99s.

Common sense would indicate we have a larger correction coming, but common sense many times means little so as always one must be open to any possibility. To that end what I did yesterday was cut enough short exposure, while adding some long exposure to get back to a 1:1 (roughly) ratio in common stock, while still have my option exposure only on the short side. Hence I'm leaning short but not as heavily as I came into the week. Since I believe there is a great chance we are in a topping process I would like to see a rally into the gap so I can get back some of the shorts I cleared out yesterday at better prices (higher). I would also expand short exposure on a break of S&P 980 as that would indicate we have a great chance to S&P 950s.

Of course my assumption could be wrong and we just continue to chug along but I won't buy that thesis until we get north of S&P 1020. (SPY 102) Any analysis by the pundits on what the "market is telling you" between S&P 98 and 102 is nonsense right now. This is a technically driven market and the computers are waiting and watching. They will be jumping once we make a break either up or down, and until then the high frequency traders are happy to skim the money off the top while waiting.

Housing numbers today were (gasp) worse than expected for the first time in a while. What is that? Seasonality is starting to turn against housing as we enter fall? As I've been saying for a few weeks it is hard for me to put bull horns on considering the precepts of this rally: China and housing are correcting (in the former situation) and about to enter seasonally weak period (in the latter situation). Pushing marbles in on the long side here could gain in the short term, but I consider it a quite high risk proposition. I did buy a few names yesterday but mostly as a hedge since I entered the week only 10% long.

Gun to head, we rally to fill the gap to the upside and then flip around like a fish out of water for a while, and then retest S&P 980 later this week or next. The behavior there will be a good tell of where we are headed in the coming weeks. But don't read much into the fish flopping between S&P 980 and S&P 1020 - that is only something for the financial infotainment TeeVee folks to get all excited about. It means nothing other than to daytraders - if your perspective is more intermediate as ours is... white noise.

Bloomberg Opinion: Deflation Theory is Lemon We've All Been Sold

I don't often post full opinion pieces but I especially enjoyed this one on Bloomberg. In fact it sounds extremely familiar to what I wrote in May as (incredibly) economists are calling for the need for inflation; in fact 6% ... why? [May 20, 2009: Economists - US Needs More Inflation]

They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations.

It might also help the economy by
encouraging Americans to spend now rather than later when prices go up.

I found that thinking both scary and dangerous, especially the second sentence. Drive up inflation so American consumers - wounded as they are, many without work and relying on government safety net - will be forced to spend, which will self reinforce into an inflationary spiral? That's mainstream economic theory? Frightful.

I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

Just as with the "cult of celebrity CEO as all knowing and just so rare a breed compensation must be 100s of times the average peon"; I think Americans have been brainwashed by the deflation boogie man. If you speak a dogma long enough it appears to becomes some sort of "fact" - at least in the court of public opinion. As I opined in that May piece "light" deflation or flat prices are not bad. As long as prices fell more than wages did you could actually prosper with flat wages or slowly falling wages. And let us be sure that wages have flattened in the U.S. - I saw this mind numbing statistic in another Bloomberg piece.
  • Excluding the wealthiest 10 percent, the rest of the population got an average increase of $286 over that period (1973 to 2007), or about $8.41 annually, adjusted for inflation, Tax Notes said.
That should tell you all you want to know about "trickle down economics" - but let's not get started on a tangent. If the economists (and Fed) get their way, you will be been throwing people who have enjoyed $8 real annual gains in income (post inflation) into a world of higher inflation? To get them to spend right away rather than "do the wrong thing" and save? And you ask why we have had a debt bubble? Wages not increasing but decades of Alan Greenspan + Bernanke stoking prices because its "good for us".

This is what I wrote in May

Clap your hands together for our creditors - we are going to repay them with increasingly worthless dollars. Whose the sucker now creditors? I just love this article from Bloomberg - inflation is now good for you. Remember, in the big picture there is nothing inherently wrong with deflation as long as goods prices fall quicker than wages. Inflation on the other hand is a regressive tax on the lower parts of society and benefits those with assets... the value of their wealth increases (at least in nominal terms) and many of the wealthiest live off assets not income. So you can guess which camp (inflation v deflation) they live in. And we all know who controls the purse strings in America... trust me, it's not those that will be hit with an egregious regressive tax.

So you must ask yourself in WHOSE interest is inflation "good"? Certainly not savers. Certainly not consumers. The top argument against any form of deflation is people will hoard money and not spend - waiting for lower prices. Mr. Lynn makes an excellent point - we see that every day in electronics and we don't stop spending because of that. In fact one could argue that electronics is only 2nd to healthcare to what has shown the most growth in spending the past decade. But dogma rules - it is important for central banks to print more money, to make the paper in your wallet increasingly worthless (and your real adjusted salary go nowhere for 35 years!) otherwise... well... you know... very spooky things will happen!! Don't ask what they are - just be scared! *Boo!!!*

Here is the Bloomberg opinion piece - spot on in my book on the concepts while I don't agree that "economies in Europe are really recovering much at all" (recall GDP is highly flawed):

For much of the last year, central bankers, industrial leaders and politicians have been warning us about deflation. Falling prices, they tell us, will create another 1930s-style depression. The only answer is to print money furiously.

Now it turns out the theory is a lemon. Deflation is no threat at all.

It doesn’t prevent an economy from functioning, and it doesn’t stop it from recovering either. The evidence suggests a period of sustained deflation might be what indebted economies need to get them back on the right track.

U.K. Chancellor of the Exchequer Alistair Darling said in a speech earlier this year that the Bank of England must be “prepared to act” to prevent price deflation.

“We are very keen on avoiding deflationary risk” said European Central Bank President Jean-Claude Trichet in an interview this month. Much the same message has been pumped out around the world by economic leaders.

Nor have they been slow to put their freshly minted money where their mouth is. The Bank of England has embarked on a program of “quantitative easing,” or creating new money, to stave off the threat.

The trouble is, the theory doesn’t stack up. Deflation, after all, has already arrived.

Falling Prices

In the euro region, prices fell a record 0.7 percent in July from a year earlier, after declining 0.1 percent in June, according to the European Union’s statistics office. In Germany, Europe’s largest economy, consumer prices posted their first annual drop in more than 22 years in July. Wholesale prices plunged almost 11 percent.

So the “deflating” euro area is disappearing over an economic precipice, right? Not quite. It is leading the world out of recession. Figures released last week showed Germany and France were hauling the region out of the global decline -- both expanded 0.3 percent in the three months through June after four consecutive quarters of contraction.

Not much sign of the dangers of deflation there.

In reality, anyone with a sense of economic history would have been aware that the whole deflation story was oversold. In the U.K., the House of Commons Library publishes data on prices going back to 1750. From 1814 to 1914, prices rose a bit in some years, and dropped a bit in others, so there was no real change in the price level over the century.

Greatest Power

In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world:

Its relative decline only started once inflation took hold. Deflation didn’t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen.

Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasn’t true of any other historical period. There was, it said, “virtually no evidence” that deflation caused a depression.

Why should it? We are constantly told that deflation is bad because it makes consumers hold off from buying things, thinking they will be cheaper tomorrow. But that is just silly.

Two Impulses

Everyone knows that a computer or an iPod will be both better and cheaper in six months. And people really want one right now. Torn between those two impulses, plenty of shoppers go out and buy computers and music players. It is true in the electronics industry, and, once they get used to falling prices, it will be true for other industries as well.

Deflation may be bad for particular interest groups, which happen to be very powerful. It is bad for chief executives. It is easier to keep your profits rising in a mildly inflationary environment. You can just jack up your prices a bit, and you can often cut workers’ wages by stealth by holding wages steady.

The banking industry, which has come to rely on inflation to make highly leveraged loans sustainable, also dislikes deflation.

Likewise, it is bad for governments, which use inflation to reduce the value of their debts.

On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices. It is usually good for workers as well, as they can generally hold the value of their wages, even while prices fall.

There are winners and losers, just as there are from most economic developments. The important point is that the people who lose are more powerful than the people who gain. That might explain why we hear about the dangers of deflation, and not about its advantages. It still doesn’t make them right.

There is no threat from deflation. It may even be desirable if it encourages a balance between saving and consumption, and discourages governments and banks from taking on debt.

Monday, August 17, 2009

Fund Performance Period 8

As a reminder, if you are interested in this type of fund as a worthwhile consideration for future investment, please consider reading why this blog exists.
  1. [Jan 7, 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 26, 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
Or if you are just here for daily market / economic commentary or stock trades to follow on your own, consider supporting the blog via donation (paypal buttons can be found on the upper right margin of the blog)

For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)


I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year (Investopedia.com) as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence we're "starting over" in terms of performance with portfolio "B" as of early 2009. Detailed history on latter 2007 and 2008 can be found on the above mentioned tab.

Under the new tracking system, our eighth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

This period was extremely bullish for markets, with 18 of the 20 sessions either up or no loss on the S&P 500 above 0.5%. In fact of the 8 four week periods in 2009, it was the 2nd best outside of the massive oversold bounce from the March 6th lows. There was some minor weakness late in week 4 and it was another period where many heavily shorted stocks flew up higher - think REITs, Las Vegas casinos and the like. Earnings season heavily influenced the action as "better than expected" versus analysts guestimates goosed markets many days. In addition "early cycle" stocks enjoyed massive rallies - think industrials, housing and to some degree retail. Technology was strong in the early part of period 8 but stalled out late, whereas anything Chinese related exploded higher. Reflation was not the trade du jour but still put in a respectable performance since the US dollar was so weak.

For the 8th "four week" period we returned +18.5%, versus the market's +7.1%, so an out performance of +11.4%. On a cumulative basis we are now +38.5%, versus the Russell 1000's +8.7%, so an out performance of +29.8% for our "year to date" if you will. (thus far 32 weeks)

Please note we did not start on Jan 1st... so this is not an apples to apples "year to date" performance but obviously close.

We performed well in this period staying out of the way of major short exposure until week 3 of the period, while continuing to cull many winners (locking in profits) on the long side added to during the (ahem) correction of 7% earlier in the summer. Cash remained over 50% throughout aside from 1 day when we went long in an aggressive manner. We've now made up our underperformance period and then some. Our yearly goal of beating the index we track against by 15% has been reached again, and we're now at the highest level of outperformance versus the market since period 3. (29.8% now vs 27.6% then) Both absolute performance (making money) and relative performance (outperforming the market) were achieved in the period - which is always our favorite outcome. Frankly at this point, combining 2009 with what we achieved in 2007 and 2008, I'm sure we'd be the top ranked mutual fund in terms of performance since August 2007 when we began this journey.

*** Long/Short Discussion below

As I will continue to repeat, I believe the nature of the markets has changed. Getting the direction of the stock market correct is more than half the battle - we continue to be dominated by days where almost everything goes up (more recently) or down (rarely nowadays). Individual stock selection has taken a back seat to being in the right sector and/or having your stock owned by the flavor of the day ETF. It is a sad statement on the markets (notice almost every natural gas stock go up together regardless of individual prospects) but we can only observe and adjust to the new reality. Maybe it changes some day or maybe it continues - but this is what we have the past 2 years and it only seems to be more prevalent. Hence our constant focus on "index" directions which 3-4 years ago I could mostly care less about. Further, it seems most days all the action is in the first 20 minutes and last 30 minutes and the rest of the day is High Frequency Trading where computers bat stocks back and forth in very narrow ranges milking the system for profits before exiting by the close of the session. It's a strange new world.

In performance terms sometimes you make a lot of money in short periods of time; that was the case this period where almost all our gains were in the first 7 sessions and the last few of the period. The middle 10 days we were flat or slightly trailed the market. On the long side, MOST of our longer held positions were harvested for gains (in some cases too early) as the market continued to rally week after week - but we almost never catch the bottom or top, we try to grab most of the middle of the move. A lot of these positions were rebuilt or built up from scratch in the later June to early July period and we were able to let them go within 8 weeks at 20, 25, 30, 35% gains (in some cases these were sold just ahead of an earnings report). Some of the many examples this period: Gafisa, Perfect World, BHP Billiton, Skyworks Solutions, Allegiant Travel, Riverbed Technology, First American, Discover Financial, Wyndham Worldwide. But about half our net gain this month came on one trade of a breakout using a technique we are layering in from time to time using long SPY calls intraday. We had been looking for a double top "breakout" over the high S&P 950s as a sign to jump in aggressively long as this would be a "trigger" to technical traders everywhere... this happened July 23rd. [Mr Obvious: Looks Like It's a Breakout]

Once we broke that "double top" (early June and the past few days) we spoke about yesterday, the super computers rushed in (HAL9000) and the humans joined. I was using S&P 959 as my "breakout" point, and it appears that about 10 million other humans (and microchips) were as well.

Since the move over a double top is so powerful I actually put double the normal we've been doing "intraday" into S&P 500 (SPY) calls and that's our main weapon on the long side right now. They tend to act like firecrackers if you get the direction 'correct' and already have expanded from 16% of the portfolio to about 19%. For you option folks these are August 97 & 98s.

I am not going to be too greedy and will be back into cash by the end of the day (which to me is now 3:30 PM based on the crazy action in the last 30 minutes many days) if not sooner. On trend days I have a simple game plan, choose a moving average and don't sell until it breaks below

And by 3 PM we were out and back to cash [Bookkeeping - Getting Rid of this Morning's Calls], the market had blasted up 2% intraday from where we entered and 1/5th of our portfolio had gained in excess of 40%. Aggressive move? I don't think so... this was a trademark breakout and we said as long as the intraday trend line held we'd stick around; once it broke - we'd lock in gains. Holding that type of exposure overnight would strike me as "aggressive". So that 5 hours in that 1 trade was equivalent to the other 19 days with the rest of the portfolio. Can we do that every period? I'd love to - in fact I am hoping for one day on the downside of similar ilk in the weeks or months to come, but even if we can find 3-4 of those days a year we can help performance in a material way.

I'd like to point another thing that helped us - lesson #1 of investing: don't lost money. 2 major examples this month... we exited almost all of our Riverbed Technology with very nice profit ahead of an earnings report that the market used as an excuse to pummel the stock. We sold Ocwen Financial for very nice profit, immediately after they announced a good earnings but also a 25% dilution - which the market strangely did not react to at first. The stock plummeted shortly thereafter. We also exited our pure play Chinese exposure just ahead of when the Chinese market began to roll over (granted many US based Chinese stocks kept rallying as US investors ignored China - which is quite a feat to do when you own Chinese stocks!) So while those type of moves don't get the glory that was a few % of protected gains that we did not hand back to the market.

On the short side we were retrenched the first half of this period with 5%ish type of short exposure - waiting to see real signs of weakness or at least exhaustion before committing further. This was the lesson we learned from April and May where we gave up a ton of great performance in January and February trying to short REITs, financials, consumer discretionary in the face of a momentum based market. After the spanking we took in that episode, we did not repeat that fools errand this time. We pulled back our credit card shorts, any of the smallish short trades we tried - we had tight stops that almost immediately filled, so we took small losses. We put on some "half sized" short positions in a core group of names in the middle of this period anticipating adding to them on a further rally to average our cost. Aside from Wynn Resorts (WYNN) which was a tactical error on my part of going long or short ahead of earnings (a personal no no) this pretty much played out as expected. Our 3% exposure in put insurance bought the previous period pretty much lost all its value but that is to be expected in a period when the market doesn't even dream of correcting. But that's part and parcel of strategy - we made some very nice long gains with options and we'll occassionally take some losses. We finished the period with some unrealized losses in some short exposure balanced against a bevy of long gains we did lock in, and net short the last 6-7 days of the period.

[Jan 30, 2009: Fund Performance Period 1]
[Mar 2, 2009: Fund Performance Period 2]
[Mar 30, 2009: Fund Performance Period 3]
[Apr 27, 2009: Fund Performance Period 4]
[May 28, 2009: Fund Performance Period 5]
[Jun 21, 2009: Fund Performance Period 6]
[Jul 20, 2009: Fund Performance Period 7]

Economy Pushes Game Show Contestants to Play for Keeps

Just a fascinating article... and it made the little light bulb go over my head. If the government doesn't want to be accused of just handing out money (not that they seem to care about any accusations) simply sponsor hundreds of game shows. Via game shows we can transfer wealth from the future generations to the current. Much better than creating a climate that actually creates sustainable jobs.

Just another example of what is happening on "Main Street" - Pooring of America 101... via USA Today -
  • Game shows are a TV mainstay as old as the medium itself, with legions of wide-eyed fans auditioning on a lark. For most, winning a bundle of cash or a big-ticket luxury item was a pipe dream, not crucial to survival. But the recession, tight job market, depressed stock portfolios and mounting bills have prompted a growing pool of new game show hopefuls: unemployed white-collar professionals seeking quick-fix stimulus packages to keep afloat in turbulent times.
  • Eddie Lawhorn was angling for any kind of payoff when he took the hot seat on the popular trivia game show in a two-week prime-time run on ABC. Sunday night,he marched off Millionaire with a hug from host Regis Philbin and a pre-tax check for $50,000. "I'm incredibly happy," says Lawhorn, 51, who was laid off recently from his $83,000 computer programming job for a Huntsville, Ala., defense contractor — his fourth layoff since 1992. "At least we've got something to live on and survive for the next few months. The difference this will make is so incredible." Until Lawhorn won in Millionaire's two-week, 10th anniversary prime-time run, he was about to tap his 401(k) retirement account; scrimping to cover expenses no longer cut it. "The bills never stop," he says. "You use one credit card to pay off another."
  • "I'm amazed at the number of people who are unemployed or are worried about their future," Philbin said after the show's taping. "Even those who aren't out of work are feeling the effects of the economy. You can tell this money is important to people."
  • If gamers were economic barometers, Meredith Vieira, host of Millionaire's seven-season syndicated series, gauged shifting sentiment in 2008. "When you asked what they're playing for, it was no longer the dream vacation, beach house or car. They talked about holding on to their homes, the debt they're trying to get themselves out of, the child that would have to leave college," says Vieira, who co-hosts NBC's Today. "There's still a sense of real need, as opposed to want."
  • Those who actually make it are playing conservatively, willing to take home less than they could have won in sounder economic times, Philbin and other game show observers say. Stumped by a question worth $100,000, Lawhorn passed. A wrong answer would have dropped his payout to $25,000. "I would have been more aggressive if the money wasn't so desperately needed," he says.
  • "People are happy to walk away with $2,000, $8,000," Vieira says. "They're grateful for whatever they can get."
So who are these people? The ones who previously thought they'd be immune - I mean they are educated (we were told outsourcing only happens to blue collar folk and the "smart jobs" would stay here), experienced, and simply make too much in the "new and improved US economy". Oh yes, I am sure almost none work in the public sector ;)
  • Lawhorn has ample company among strapped contestants. "You see lots of people in their 50s and 60s; college graduates, people laid off after 20 years, or those who now realize they won't have enough to live on," says Bev Pomerantz, a casting producer since the early 1980s. Before the economy soured, Pomerantz says, few prospective contestants skewed older, college-educated and unemployed.
  • Catch 21 players can win a maximum of $50,000 — apparently enough of a draw these days to lure auditioners atypical of the "average Joes" who usually want on. Casting for a third season run of about 200 shows, "it's absolutely clear we are seeing a lot of professionals who have lost their jobs or are looking for a way to supplement income," says producer Scott Sternberg.
  • NBC's popular prime-time Deal or No Deal premieres its second season in daytime syndication Sept. 7. Up to 20% of prospective players at summer casting calls in Boston, Pittsburgh, New York and other East Coast cities said they were unemployed, says producer Neal Konstantini, vs. about 5% in 2008.
  • "We're a blue-collar show," he says. "The people auditioning now? Stock brokers who haven't worked for two years. Fortune 500 company vice presidents. Stay-at-home dads. It's strange how many times you hear the words 'laid off.' They're in a tough spot."
  • Wheel of Fortune's head of marketing, Lisa Dee, oversees the Wheelmobile motor home that rolls through two dozen cities each year on promotional and recruitment drives. Recent appearances in Phoenix, Miami and other cities drew up to 5,000 or more, a 20% increase over past visits. "The crowds blew us away," Dee says.
  • More than 100,000 people auditioned for NBC's top-rated summer series, America's Got Talent, which offers a $1 million grand prize. ...Morgan says many U.S. hopefuls were spurred by the economy. "Things have dried up for a lot of people doing acts for a living," he says. "For many bitten by the recession, we're the Last Chance Saloon."
Now if you are not familiar with "Are you Smarter than a 5th Grader" the title should tell you all you need to know. Literally you hope to not embarrass yourself for the chance for prize money.
  • Even 5th Grader, perhaps the only game with the potential to embarrass contestants more than Talent, is attracting upscale contestants. "We always tried to book successful people — doctors, bankers, lawyers — but they had money and they didn't want to look stupid on TV," says executive producer Barry Poznick.
  • Instead, the show has been deluged by prospects — laid-off teachers, idled airline pilots, wedding planners and others who in brighter times "wouldn't have given us the time of day," Poznick says. "We've had the pick of the litter. In this economic climate, there's less stigma."
Example... looks like full time game show contestant might be one of the fastest growing job sectors.
  • Actor Julie Sanford tried out for Catch 21 after losing her job as a Pilates instructor and Hollywood gigs dried up. Husband Doug works casting people for TV commercials, a business that also stalled. The couple still can't afford $700 a month in health insurance premiums and are trying to modify the loan on their home in Van Nuys, Calif. "I watched game shows but never ever pursued them," she says. "I'm looking at all kinds of possibilities — maybe other game shows."
  • Terri Pfahler, who was tapped for Millionaire's prime-time run, was laid off from her office administrator's job last March in Riverside, Calif. Husband Bob lost his district manager's job at Domino's Pizza in June as he recuperated from injuries in an accident that totaled his automobile. The couple have taken in a boarder, and Pfahler's mother has been helping with expenses. "We're thousands of dollars in debt," says Pfahler, 53. "Realistically, $25,000 would be enough to replace the car and pay medical bills. I just want our family to be able to breathe." Pfahler didn't make it into the money round. Before leaving New York, where Millionaire is taped, her husband was downloading forms seeking appearances on other game shows.
Green shoots. Green shoots. Just don't detach from the Matrix. Remember these people as you see long term unemployment claims drop.... it appears after some 70+ weeks of unemployment folks are heading to welfare [Jun 22, 2009: WSJ - Numbers on Welfare See Sharp Rise] , or the game show circuit.

Bookkeeping: Adding to Blackstone Group (BX)

Since I was going to do a separate entry on Blackstone Group (BX) anyhow, I thought I might as well break this purchase out on its own. We are going to begin to rebuild this position on a pullback to a light support level around $13.00. I am hoping to rebuild the lion's share of this name on a move down to the mid $11 or even better mid $10s. But for now we'll take it from a 0.1% stake to 1.1% and hope we lose money on this first batch so we can buy lower in the future. The volatility of this name has been immense and current valuation is very difficult with all the moving parts and associated companies they control within the empire. All I know is we left a lot on the table in this position the past 6 weeks - while we enjoyed the $8s to $11s (in 2 weeks), we would of enjoyed the $8s to $15s (in 4 weeks) a lot more!

Steve Schwarzman has been one busy fellow of late. Aside from doing a quite rare bond offering (for a PE firm anyhow), Blackstone is setting up a local currency private equity shop in China. So I suppose this is yet another way to play China via US channels. The bond offering is interesting considering BX already sits on an Apple-like $28 billion war chest. My only hope is this money actually goes for corporate activities and not simply to give handouts to management, as private equity firms are apt to do.

First the yuan based PE fund . Please note that the Masters of the Universe are also following suit... (last bullet point)
  • Private equity firm Blackstone Group LP (BX) plans to launch a 5-billion-yuan ($732 million) fund that will primarily invest in the city of Shanghai, the city said in a statement on Friday. The fund is the first local currency yuan fund to be launched by Blackstone and will mean the establishment of a wholly-owned China subsidiary for the giant private equity company.
  • Besides Blackstone, foreign early birds for such a move have included U.S. venture capital firm Sequoia Capital, which last year raised about 1 billion yuan for its first yuan-denominated venture capital fund to focus on small China deals.
  • Blackstone signed a memorandum of understanding with the Shanghai local government on the fund's creation during a signing ceremony on Friday.
  • The Financial Times, meanwhile, reports the private equity arm of Goldman Sachs(GS), in addition to Blackstone, is establishing an investment company in China to raise renminbi funds from local investors and take stakes in local companies with Chinese partners.
Next, the debt...
  • Blackstone Group LP (BX) sold $600 million 10-year senior bonds Thursday, in a deal that was the first for the company and rare for private equity firms. Since 1995, only $19.4 billion in corporate debt globally has been sold by 12 private equity firms, which include 3i, Allied Capital and American Capital Strategies, according to Dealogic.
  • The notes, issued through its subsidiary Blackstone Holdings Finance Co., yielded 6.73%, or 312.5 basis points over comparable Treasurys, a person familiar with the deal said.
  • Blackstone, the first major U.S. private equity firm to become publicly traded when it listed in June 2007, announced plans for the bond offering on Wednesday and said proceeds would be used for general corporate purposes. (that's so vague)
  • "This step of tapping the public debt markets is further a sign that Blackstone is drifting more towards the investment-banking model of debt issuance, only without the sales and trading," said James Lee, senior fixed-income analyst at Calvert Asset Management.
That last point is ironic considering a year ago at the time, that model was deemed "dead" and it only survived due to the US government stepping in to support Goldman and Morgan. Oh dear irony. As an investor we can only wish Blackstone Group also gets too big to fail so that if anything goes wrong down the road, fellow citizens can backstop the company. I say that only slightly tongue in cheek because that is the culture we have now told the titans of finance will be the landscape go forward.

[Aug 6, 2009: Blackstone Group Beats, But Already Ran into Earnings]
[May 7, 2009: Blackstone Group Narrows Loss]
[Mar 31, 2009: Bookkeeping - Starting Blackstone Group]

Long Blackstone Group in fund; no personal position

Prospecting AutoNation (AN)

Aside from valuation (19x forward) which apparently is no longer a valid reason to either not buy a stock or to sell one, I like the story of AutoNation (AN). Less competition is always a good thing - at least from a corporate standpoint. [Oct 1, 2008: Reuters - 1 in 5 Auto Dealers Could go Under by 2009] And if we do the "compartively it's cheap game" I suppose compared to some stocks being bought day after day on 50, 70, 90x FORWARD estimates it's cheap. But that game was popular in late 90s NASDAQ and it meant nothing other than we are happy to overpay for 1 stock relative to overpaying even more of another. The quandry here is what sort of multiple could this expand to? Are we willing to pay 28x for a car dealer? I guess since investors are willing to pay anything on most stocks nowadays, it's a rhetorcial.

Carmax (KMX) is another name I've been watching for the better part of 2 quarters and I appear to be the only one whose heart drops at valuation, now at mid 30x forward estimates. These are not trailing estimates - these are forward estimates.... i.e. if you are willing to pay 25x trailing earnings in general you should ask for a discount go forward. Unless you're a V shape consumer recovery person.

Some of the recent run in these stocks is from bringing in 2010 auto buyers into Q3 2009, but as we normalize our auto volumes from 9M area (down from 16M) to something in the 11-13M range they should benefit. I have a short list of CEO's who I really enjoy, and Mike Jackson is one of them. (p.s. I was very impressed with BHP Billiton's CEO on the CNBC video last week as well, first time I had heard him)

AutoNation has corrected after the cash for clunker surge and now sits just over the 50 day moving average. Despite an excellent report, sell the news was still the game. [Jul 31, 2009: AutoNation Solid Results - A Way to Pay Cash for Clunkers 1.0 and 2.0] This is a name I considered adding to the portfolio this morning as it bounced smartly. A very low risk entry could be had here with a stop out below the 50 day moving average. An analyst upgrade is helping to buttress the stock today:
  • Bank of America Merrill Lynch raised its estimate on AutoNation Inc. Monday, citing an increase in auto sales due to the "Cash for Clunkers" rebate program. Research analyst John Murphy upped his estimate on the nation's largest auto retailer to "Buy" from "Underperform," adding that the Fort Lauderdale, Fla.-based company, as well as other dealerships, stand to benefit from the program in the third and fourth quarters of the year.
  • The company's target price was also raised to $23 from $16.
  • "We believe that AutoNation is a high-quality name and that growth and cost savings potential justify our increased estimates," said Murphy in a research note. "In the short term we anticipate a confluence of factors that stand to benefit the dealers."
  • Murphy estimated that the clunkers program would lift the annualized selling rate by nearly 30 percent in the third quarter from the second quarter. But a "slight correction" is expected in vehicle sales during the fourth quarter.
  • Lower-than-expected inventory on dealer lots may also improve AutoNation's financial position, Murphy wrote, as demand for vehicles may lead to better pricing power and lower floorplan interest expenses.
  • Florida and California -- states hit hard by home foreclosures -- were previously a liability to AutoNation, but signs of economic stabilization in those states may give AutoNation an additional financial boost, Murphy said.

No position

Technical Issues with Investopedia.com

It appears, as best as I can tell that none of my morning orders went through. While the account value is changing properly no trades are executing. So all the previous orders are now sitting as open orders, and it looks like those won't be the prices I receive.

Since we moved over to this platform to track our performance via independent mechanism, this is the only the 2nd time we've had an issue of similar type (since early January 2009). One of the main reasons we left Marketocracy.com which was how we were tracking in 2007 and 2008 (and hence our performance is scattered in 2 places) was this would happen to me there almost on a monthly basis (most of the time it would be I could not log in for a few hours at a time, although there were bigger issues other times). Considering the fast moving markets of 2007 and 2008 you can imagine the consternation this created. Akin to managing money with one arm behind your back.

So unfortunately that's part and parcel with being a virtual fund manager - Investopedia has been a far sturdier platform but today is not one of the promising days. As if success in the market is not hard enough as it is. Until something starts happening we're down for the count on any more transactions. Will update if this gets fixed today.

EDIT 11:20 AM - ok it appears all the orders hit in 1 batch in the past 5 minute. Hopefully good to go from here.

Bookkeeping: Lots of Transactions

After being on slumber for the better part of a few weeks today will be a very busy today, I will put all transactions into this post. Here is my game plan - I think this selloff has legs but of course only Goldman Sachs knows. We mentioned SPY 98 as the first gap to fill. This "latched in" this morning. SPY 98 is about equivalent to S&P 500 980 ... not exactly but close. I think S&P 950s is a probability but you'd expect bulls to make a defense here. So I'm going to cover some short exposure and some of my limit buy orders I had outstanding on the long side hit here.

If the downturn continues we will scramble out of some of the new long exposure and add back short exposure... that is how I anticipate it working out but as always, we don't know.

Here are the litany of things I am doing


Covering Valueclick (VCLK) around $10.05 - all of it, nice quick profit of about 9% in 6-7 sessions with 4% of the fund. I will reshort on any decent bounce (+6-7%)

Selling 20% of my SPY October 95 Puts (SWGVQ), these are up 50% from the close Friday ($2 to $3) - we have 200 contracts, we are selling 40 of them. These are to be held over the longer term as insurance but on big down days they are worth locking in some profits. If we begin to break down and look headed to S&P 950s I will get them back, or on any cursory bounce. I'll sell another batch if and when S&P 950s hit. Obviously S&P 906 would be the place to sell the last batch. (cross fingers)

I'm taking a touch off Wynn Resorts (WYNN) for a 10% loss, down from a 20% type of loss middle of last week. This one was a mistake on my part since I did not realize earnings were the day after my short position so we're just looking to save face here and take manageable losses. Anything above that is icing on the cake.

Covered 20% of Caterpillar (CAT) for "flat", if market breaks down will get that exposure back later in the day or week.

Covered 50% of Riverbed Technology (RVBD) around $19.40 - will look to add back exposure on a bounce. Quick 5% profit locked in on half of the 4% exposure.


Limit order to buy Longtop Financial (LFT) down -13% today, hit.

Began position in E-House Financial (EJ) down -13% today

The above two if they begin to falter more I could be out of in an hour or two - these are not core positions at this time.

Added (still going slow) to a core position in AsiaInfo Holdings (ASIA) - we only had a starter stake (0.1% stake) so this would stand front and center rather on a watch list, but now its fallen quite a bit more so we are adding another batch. It is still not yet a 1% stake.

All of the above are Chinese names... I don't think China is done going down hence, I am almost assuredly early in making any purchases. Things are moving very quick today so I'll try to be as transparent as I can as quickly as possible.

(post in process and to be updated during day)

Earlier posts on some of the names mentioned above

[Aug 12, 2009: E-House Holdings (EJ) Benefitting from China Housing Bubble 2.0]
[Jun 12, 2009: Beginning Stake in Longtop Finanical]
[Aug 7, 2009: Niche Play on China Telecom - AsiaInfo Holdings]
[Aug 12, 2009: Bookkeeping - Buying Oct 95 SPY Puts]
[Aug 7, 2009: Bookkeeping - Short Valueclick]

Capital One Financial (COF) Delinquency Metrics Reverse Back Up

After a short respite, Capital One Financial's (COF) delinquency metrics degraded again. While the market treasts COF as if it is American Express (AXP) there is a difference between the two. Unfortunately this is a "student body left" environment where almost all companies in a sector are treated the same. Now it was not a huge jump but it shows "2nd derivative improvement" is not a keen theory among US consumers. The stock is down a whopping 2.7% off the news ... of course John Paulson disclosed a bigger stake in the name so that will help. Car loans weakened significantly. Canadian loans approaching US levels of deliquency? hmm

In the bigger picture - these credit card figures from COF represent middle America far more than Amex does.

Via Reuters
  • Capital One Financial Corp's (COF) U.S. credit-card defaults and delinquencies rose in July, as more Americans lost jobs and struggled to pay their debts.
  • The trend differs from American Express Co's comments earlier this month, when the largest U.S. credit-card company by sales announced defaults declined in July for a second straight month and said it saw the first signs of improvement in the industry in 18 months.
  • In a regulatory filing on Monday, Capital One said the annualized net charge-off rate for U.S. credit cards -- debts the company believes it will never collect -- increased to 9.83 percent in July from 9.73 percent in June.
  • Capital One, one of the largest issuers of Visa and MasterCard credit cards, said accounts at least 30 days delinquent -- an indicator of future loan losses -- inched up to 4.83 percent from 4.77 percent.
  • For U.S. auto loans, Capital One's charge-off rate rose to 4.26 percent in July from 3.89 percent in June, and the delinquency rate increased to 9.22 percent from 8.89 percent.
  • In international operations, including Canada and Britain, the charge-off rate went up to 9.76 percent in July from 9.26 percent in June, while the delinquency rate fell to 6.68 percent from 6.69 percent.
We'll see if the rest of the companies report similar numbers or if COF is an outlier in the group.
  • Earlier this month, rival card issuer American Express Co. said its rate of losses from credit card loans was slowing. The write-off rate on card balances fell to 9.2 percent in July from 10 percent during the second quarter, the company said.

Remember, American Express has reduced its outstanding credit much more aggressively than peers. [Apr 24: American Express Not too Shabby Earnings; It's Not Capital One Financial (COF) or Discover Financial (DFS)] Two different companies

The efforts earned AmEx some bad press for its hard-nosed tactics but enabled the company to reduce its U.S. credit-card receivables total (the denominator of the charge-off data) to $57.8 billion at the end of February from $65.9 billion at year-end 2007.

[Apr 15: Capital One (COF) Defaults Continue Their Upward March]

Short Capital One Financial in fund; no personal position

China Plunges 5.8% Overnight

As a University of Michigan alum let me state proudly how fantastic it is to know that the power of our consumer sentiment survey can affect markets worldwide - not only were we able to withstand the power of Larry Summers elevating the market in the US Friday, but we can even crunch Asian markets. (not to mention oil) Try topping that Buckeyes...

China plunged another 5.8% overnight adding to the 12% we've been waving the flag over the past few weeks. So let's see if US computers can pretend the rest of the world doesn't exist for yet another day. Somehow I doubt it although we'll always have the post 3:30 PM period to paint lipstick on the pig.
  • World stocks tumbled Monday as signs of weak U.S. consumer confidence aggravated doubts in the recovery's strength, overshadowing news that Japan's economy climbed out of its recession last quarter.
  • Shanghai's market led sharp declines across Asia, plummeting nearly 6 percent, as investors rushed to cash out following a recent run-up.
  • Hong Kong's Hang Seng dived 3.6 percent to 20,137.65.
  • Japan's Nikkei 225 stock average dropped 328.72 points, or 3.1 percent, to 10,268.61
  • South Korea's Kospi dropped 2.8 percent in 1,565.49 and India's Sensex was down 3 percent.
  • Worries about the pace of economy recovery in the U.S. were partly to blame after a key report showed Friday American consumer confidence was weaker than expected in early August. Coupled with disappointing retail sales data, the report gave investors more reason to fear growth in the world's largest economy will remain tepid for some time even once the recession technically ends.
I'll keep harping that the world relies on you - dear reader - spending as if you don't have a budget (mimicking government of course), and using your homes as piggy banks. You are 70% of our economy and the driver for world growth. The house ATM has now been replaced by the government ATM (you're welcome America!), but unlike the CNBC punditry (who were wrong the past 2 years and almost to a (wo)man completely missed the biggest crisis in our lifetimes) I think the US consumer has been forced to re-evaluate. I stress the word forced - if they could act like our government they would; unfortunately we do not have printing presses in our garages and attics. Generally I have found it useful to ignore those with awful track records, but I don't schedule programs for CNBC.

As always with the stock market, it doesn't matter until it matters and Wall Street is happy to go on its merry way in an alternative universe until a preponderance of evidence creates an avalanche of "barking up the wrong tree". As long as enough Americans lose their jobs so earnings expectations (lowered 2-3x already this year by many American companies) can be "beat" - everything is ok in the world. Who needs jobs when the government hands out money in new and innovative ways after all. Wall Street wishes (lusts?) for the US consumer to be back to the "good ole days" behavior... but only on Wall Street does wishing for something, rather than reality, provide profits. For a time at least. We'll see if the latest mirage has been exposed or if Larry orders large purchases (ahem - allegedly) of SPY calls post 3:30 PM again. If only our tax money could be going to buy Shanghai futures .... the Matrix would be fully functional.

Larry's weapon of choice does have a gap to fill at 98.

While I don't appear on CNBC, and hence have zero credibility (despite more accurate calls than 99.9% of their guests) - I did happen to run from China almost to the day the correction began [Jul 24: Bookkeeping - Selling China Exposure as Chinese Run In] and have continued to wave the flag to the few who were not transfixed by US high frequency trading creating "prosperity" [Aug 12, 2009: Shanghai Corrects 10%, America Shrugs it Off] Shanghai is now down 17% from the recent peak. Anyhow, time to tune in to CNBC on how the open is creating the buying opportunity of a lifetime. Wait a second, why am I tuning in when I already know the pre written storyline? Boo Yah!

The almost always trusty "when the retail investor gets frothy in euphoria, it is time to hit the exits" appears to work even in China. On the 24th of July I penned a piece [Jul 24: Bookkeeping - Selling China Exposure as Chinese Run In] focusing on the massive amount of new brokerage accounts being opened combined with the largest IPO being priced in 18 months.

Individual investors opened 484,799 stock accounts last week, data from the nation’s clearing house showed today, the most since the five days ended Jan. 25, 2008. “The prospect of making quick bucks in the stock market is luring retail investors,”

Last week Chinese investors opened even more accounts in near record levels - the figures are actually staggering; half a million a week for much of the past month.
  • Investors opened more than 660,000 accounts to trade stocks last week, data from the nation’s clearing house showed today, the second-highest amount since January 2008.
While I did not expect this to pay off so quickly, Shanghai fell 4.7% overnight and now is down 10% from the August 4th peak.

First, as I've been saying the past few days this market was the first to turn to lead the world up. Second, as we've been warning loan growth has been stoking asset values - as the Chinese finally admitted to [Jul 28, 2009: FT.com- Chinese Warn Over Asset Bubbles] yesterday we saw a huge plunge in bank loans in July versus June. In fact, I'd call it remarkable - one 30 day period 75% lower than the previous 30 day period.

Now, as the thesis was the Chinese would lead the world out of recession - which led in part to some of the early reasons for rallying during this 6 month stock market explosion higher, I find it curious that the drop in both the loans and the Chinese equity markets are getting little attention.

And as we stated last Friday, I surmised that the drop in the Baltic Dry Index which now is so tied to Chinese buying could potentially be a signal that loan growth dropped significantly. [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Precursor to Loan Growth Slowing?] Well, it continues its fall this week. Again, ignored.

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