Monday, October 19, 2009

David Einhorn's Speech at Value Investing Congress

David Einhorn is one of the brighter minds in the hedge fund field - and unlike Mr. Rajaratnam at Galleon, seems to actually do his own homework. Below is the full text of his speech at the Value Investing Congress today - I was eagerly waiting to see what he had to say. (hat tip to Zerohedge)

Regular FMMF readers will see Einhorn and a certain blog writer agree on many things. He talks about "short termism" - we've been discussing "kick the can" as American policy since day 1 of the blog. As we mentioned just weeks ago, we're not buying gold (silver) for inflation protection but to protect ourselves from the destructive behavior of the world's central bankers - most notably, America's.

Of course, gold should do very well if there is a sovereign debt default or currency crisis.

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar.....

... I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

The banks had the US taxpayer (via Federal Reserve) to bail them out... but who bails out the Federal Reserve? We'll send a query to Zimbabwe to find out.

It's relatively lengthy but how can you resist a speech where (as we often do) he quotes Colonel Jessup: "You Can't Handle the Truth!" Good bed time reading.
As always click "full screen" for an easier read:

Einhorn Vic 2009 Speech

David Rosenberg on CNBC

As we await the traditional Apple (AAPL) smashing of massively underestimated estimates - which we will be "surprised" by - followed by the "guide down for the next quarter estimates, so they can beat those by a country mile in 90 days" - which allows us to be "surprised" again in January 2010, we have a 7 minute video to watch.

David Rosenberg, who like many of his kind who are proposing rationale data points but who has been proven "wrong" by the freight train of Federal Reserve liquidity on CNBC this morning.

David Rosenberg, he is a very well known economist (some claim a relative perma bear) who made the move over from Merrill Lynch to a Canadian firm Gluskin Sheff, earlier this year. While having mostly missed this rally, much of what he says deals more with the long term structural issues we bring up - rather than any tactical short to mid term trading concepts.

Readers Opinions: Why Do Americans Seem to not Care about What the Banking Industry Has (and Continues) to Do?

I'd love to hear readers opinions on what they see from from friends, neighbors, and work associates in terms of this question: why is there so much apathy over the largest transfer of wealth from the public to a small cabal of society, our financial elite?

I read a ton of stories each and every day across the internet. I try to gauge what "the common" man is feeling by reading the comments sections - I see a lot of anger there. On liberal sites, on conservative sites, on whatever sites. But is this just a small sliver of society - the few who are reading & engaged? Maybe they do not represent the rest of society?

In Europe they shut down all public forms of transportation with strikes, and take to the streets in large protests for relatively minor things. In America, we've just seen the largest outright theft (in broad daylight) of national wealth and other than some screaming on a few select blogs and a cute Youtube video here or there [Sep 17: YouTube - Debtors Revolt Begins Now] it seems to not be an issue. I have people from other countries emailing me asking this same question - they are appalled. (and yes some of them are not even from socialist countries)

What is going on here? Why the lack of reaction?

Is it apathy?
It is lack of understanding of this generational theft?
Are we too lazy?
Is it a feeling of "I'm mad, but I have no idea what to do to change things?"
Are people too busy with their lives and trying to just get by day to day?
Is is the lack of 1 very easy target to focus on?
Am I making too much of this all? Is this just the "American way" and I need to understand its part of our culture?

Feel free to chime in, in the comments section of this post - I'd like to hear from the readers and see what is going on in your own world. Maybe I am in some parallel universe because I, for one, am utterly exasperated. The S&P 500 could go to 15,000 and it would not change my opinion of what has happened and continues to happen. It's irrelevant - a side show - to the basic premise of what the country was (is?) based on.

S&P 500 43% Gains Needed for All Time High; on Pace for New Highs in August 2010

The market is on a torrid pace. As we flirt with S&P 1100 and the money printing machines continue on overdrive to create prosperity for us all, we can now look in anticipation at new all time highs on the S&P 500. They are not that far off, and with the Fed certainly in no rush to raise interest rates (I do not see them raising rates for all of 2010, worst case scenario fourth quarter '10) we can now build the 1999 NASDAQ model. Back then? A constant flood of money by Alan Greenspan to combat the ill effects of (what was then too big to fail) Long Term Capital hedge fund blowing up, along with a pre-emptive strike against year 2k. Everyone buying stocks was a genius, those who sounded caution were made to look like fools for months on end. You didn't dare short or else you got run over by the central bank printing press.

These things should start to sound familiar - P-cubed (paper printing prosperity) is now the basis for American capitalism. [May 19, 2009: Paper Printing Prosperity Defined]

So the question is where are we in our parallel run a decade later? February 1999? September 1999? February 2000? I have no idea... if indeed the Fed does not raise rates until spring 2011, all that easy money has to go somewhere and we're really seeing it in action now. If we have 12-15 months of a Fed putting their head in the sand, we could still just be in the early stages of Bubble # ... well, I cannot keep track anymore, they now come every 3-4 years.

Let's look ahead... we only need to rally 43% to touch all time high in the S&P 500; I see an intraday high on October 11, 2007 of 1576, although the closing high was a few days earlier at 1565.

Excluding the hectic reversal off the lows of March 2009, and the ensuing rally in April - since May 2009 we've been roughly adding 3.5% a month to the S&P 500. Using 1st grade math / logic (both of which seem to dominate thinking nowadays) we'll reach new highs in the S&P 500 August 2010. Of course for any of you who have enjoyed bubbles in the past you know the ending move is always 'parabolic' in nature - stocks in the last weeks of 99 and early 00 were making the moves of summer 1999 look tame. Home prices in Las Vegas or condo sales in Miami in 2006 were making activity in 2004 look sleepy. So a 3.5% monthly move could be tame as we reach the peak in lemming behavior.

This scenario would also assume 18 straight up months in the stock markets - seems impossible no? Not to worry - with enough money printing we (together) can make the impossible happen. If we're really lucky gold will be $1500+, oil $130+, and food prices will have shot up again. I assume at that point food stamp usage (already up from 1 in 11 Americans in 2007 to 1 in 9 today) will perhaps reach 1 in 7. However that will be "prosperity" - don't let the doomsdayers dissuade you. Remember, valuation will mean nothing as the NASDAQ (from memory) hit well north of 50x estimates at its peak... the parallel to that ridiculous situation would be a nearly 4000 print on S&P 500.

Let us just hope that our fearless leaders do not even drop a single hint about taking away our free crack cocaine anytime in the next 9 months... or our goals might be stymied. They've been such generous hosts for a decade now so here is to hoping they continue their charity. New highs by August 2010 - let's do this Ben.

Bookkeeping: Stopped Out of Moody's (MCO) Short

Nothing like an insider trading scandal to rally a stock! At least in the new paradigm (well actually its no different than the old paradigm circa 1999 - just replace Alan flooding the world with dollars to Ben taking it up by a multiple of 50x)

Market makers found a way to run Moody's (MCO) to $25.28, of course taking our short stop loss limit out at $25.20... the stock is back down to $24.40 as I type. Either way, it's impossible to hold a short these days; we pecked at a few here or there but trying to run any sort of hedged strategy is laughable at this point. That was a quick and easy 8% loss. Right now with 3% short exposure we have to be at our lowest (that I can recall) since we began in August 2007.

Looking at the chart it appears my stop loss was placed incorrectly by about 10 cents (should of been a tad higher)... but really if you don't believe in technical analysis, could this chart prove to you any better the entire market is based on computers following PhD programmed rules... look at that run right to a moving average and then reversal... almost to the penny.

No position

Potash (POT) Breaks Out

As with gold 6 weeks ago, as with oil 2 days ago, now comes the liquidity chasing one of the few laggard areas... agriculture. Potash (POT) is breaking out in almost identical fashion to the other 2 commodities mentioned.

Last Thursday we saw a story that potash inventories declined for a 3rd consecutive month, although still at 142% above the 5 year average. However, by the time they get closer to average - these stocks most likely will have run a long way.
  • Potash Corp of Saskatchewan (POT) said on Thursday North American potash inventories declined for a third consecutive month, but inventories at the manufacturer level continue to remain well above average.
  • Potash inventories had risen steadily through the first-half of 2009, despite major production cuts, as farmers concerned by exorbitant pricing and hurt by the credit crunch had deferred fertilizer application.
  • In July, India signed contracts to import the bulk of its annual potash requirements at $460 a tonne, well below last year's contract price of more than $600 and the spot market price of $700 at the time.
  • The new Indian contract has brought some international buyers back into the market, but many buyers and distributors still remain on the sidelines and are waiting for Chinese importers to finalize their annual contract, as they believe that potash prices could fall further.
  • In a set of graphical data posted to its website, Potash Corp also indicated that potash spot market pricing was almost flat at just under $500 per tonne in September.
With a bevy of bad news in this sector 6+ quarters, sellers may finally be exhausted. Or it simply could be the chase of the underperformers as Ben Bernanke's money looks for the next thing to inflate. Can't tell anymore how much of these moves have to do with actual fundamentals and how much is so much paper currency chasing fixed amount of stock certificates. Let's keep an eye on what price the Chinese offer for potash; if its favorable it might set the stage for the next bull run in fertilizer. (still among our favorite long term themes). Earnings are Thursday and apparently no one has any fear going into the report since technicals are all that matter in this market.

For momentum based traders the Potash (POT) breakout is one they love to chase - let's see if Mosaic (MOS) joins its big brother. A move over $56 is what one would want to see here.

No position

Galleon Group's Top 10 Holdings

If one were to believe stocks could go down again for any sustainable period of time, and that the potential liability of insider trading charges against the head of a hedge fund could cause its investors to flee here is a list of the top 10 holdings of the Galleon Group as of June 30th. It's actually a very liquid list of names that almost any large cap oriented "growth" mutual fund would own; makes you wonder how Raj Rajaratnam was outperforming... err, well never mind on that point.

Stock Symbol Mkt Value
Ebay EBAY $116.1
Apple AAPL $78.3
Google GOOG $77.4
OSI Pharma OSIP $52.6
Bank of America BAC $42.9
JP Morgan JPM $41.9
Cisco Systems CSCO $38.6
SPDR Trust SPDR $34.4
Dell DELL $31.8
EMC EMC $29.6

The Sept 30th update on holdings won't be too far off, you can see all the fund's long positions per the last SEC update here. Since the top holdings ex OSIP are so large, if investors begin to liquidate during the current lockup (which apparently can happen with 45 days notice) you'd want to look at some of the smaller cap or medium cap names for potential weakness.

That assumes stocks still go down of course... has Galleon's September investor letter

Galleon - September Commentary

... and September "2009 exposure"

Galleon- September 2009 Exposure

h/t to Marketfolly

Now as you know when you turn on the light in that dingy New York City apartment, it generally is not just 1 cockroach that goes scurrying back under the fridge, so we'll see if there are any more sacrificial lambs roasted on the "we're actually going to attempt to try to do our job here at the SEC" bonfire.


p.s. talk about return on equity, aside from corporate lobbying which has the best ROI on the planet, check out one of the allegations against Galleon. For a mere $10,000 payoff to a Moody's analyst, the SEC alleges Raj and team made $4 million for insider information on a leveraged buyout of Hilton Hotels. A great investment, indeed.... Gordon G would be proud.

Now of course you know which (ahem) masters of the universe advise on almost all the deals on Wall Street. Surely with the countless people working on these large deals, no information passes from over the Chinese wall (from "deal makers" to "trading arms") as friends at these firms go out to lunch or to the strip bar. Testosterone heavy males whose only purpose in life is the pursuit of money and power simply would never cross that line, especially after the 4th vodka and tonic. Ahem. As with Bernie Madoff just understand some people (at a few select firms) are smarter than you - even though they trade behind the curtain of black boxes and no one asks questions about how it's done. They have secretive "processes" to make money, the regulators assure us its all kosher and anything over and above those facts is for them to know and you to never find out. Their consistent out performance in any type of market [Aug 5, 2009: Goldman Sachs Q2 Winning Percentage: 97%] is simply nearly super human skill (they employ only super humans), and has nothing to do with superior information flow. Right Gordon?

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 11

Year 3, Week 11 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 81.0% (v 72.4% last week)
23 long bias: 13.0% (v 22.2% last week)
4 short bias: 6.0% (v 5.4% last week)

27 positions (vs 31 last week)

Weekly thoughts
Not much to add this week that differs from previous week... earnings will dominate the schedule, although some housing numbers out this week should also impact markets. Companies will continue to beat analysts underwhelming estimates, starting with Apple (AAPL) Monday night - instead of reading how companies are doing year over year, we'll celebrate the fact analysts are clueless... and buy stocks at any valuation just because they beat a guestimate.

In other news the fully subsidized US economy continues - as predicted the minute the last stimulus plan passed (which I had predicted would be $500 B, but they even surprised me with the $787 B) the first signs of floating a new stimulus plan are surfacing although politicians assure us "we need time to let the current stimulus work". Hogwash. Noting the state I live in filled HALF its current year budget deficit with stimulus money, part of these federal monies are simply direct bailouts of state budgets. And next (fiscal) year is going to be worse for state budgets. So they will need to provide cover to do the exact same thing... after all it is only right that a good portion of our society gets to retire with full pension at age 56 while the rest in the private sector pay for it; many now without work. So we'll continue to layer on debts onto future generations to pay for structural misalignments we have now. The economy is so hampered it's now to the point we are passing annual stimulus plans... its a Ponzi scheme economy; as with all Ponzi's it will only end when the people down the line ask for their money (in our case either creditors or the youth of the nation who appear clueless that there is a bill coming "someday" - otherwise they would be rioting at the generational arbitrage).

As for the markets, in case you missed it the regulators (an evil word the past decade) actually decided to do their job late last week and swarmed into hedge fund land - which the financial industry must be screaming about because it stifles "financial innovation". Innovation such as potential insider trading. In this case its Galleon Group (once a top 10 hedge fund) and its founder Raj Rajartnam. But it goes far behind him to a whole informal network; many such networks of "informal information sharing" exist in the upper tranches of high finance - some straddling the sideline, and some firmly in the gray area.

The most valuable commodity I know of is information. - Gordon Gecko

You might think its pleasing that this was exposed but for each one out in the open you can only imagine the ones that will never be caught or exposed. When you are not fighting high frequency trading algorithms, or "trading huddles", or well placed government officials "sharing" information (allegedly) with their old firms, you are fighting networks of well placed people passing information to other people. It's the wild wild west - but the sheriff will put on the ocassional show to let us know the water is safe. That's what we have now.

I've said it a many times - while I'm relatively decent at this racket, that's all it really is - and it seems to have gotten much worse since I've delved into equities full time mid 90s. Caesars New York City is a massively unlevel playing field where the "house" has so many advantages it is not even funny. And in our system much of the house is intertwined with the federal government - a quite sick and twisted situation; in fact I'd label it disheartening. You can only imagine the trading opportunities that must be afforded to you when your people are placed all over government, helping to make decisions and national mandates. You think that Goldman upgrade of the housing sector last week was "by chance"? No, that's a home run indication from Washington DC Goldman alum that we're getting a new housing credit stimulus. You can extrapolate from there on how it works in other parts of the system.

As for fund positioning, I see futures surged from -4 late last night down to +6 up as I type this in the early morning - why not, that's par for the course for the past 7 months. So many nights you go to bed with futures flat to down, only to see them surge by market open. All happenstance I am sure. You cannot bet against the subsidized economy or market at this point as a government and central bank desperate to create an aura that everything is just fine, will do whatever is necessary to keep the mirage going. While I've cut back long positions to lock in profits in case we see some sort of dip (I know, laughable) to fill that gap at S&P 1075, it need not happen anytime soon - that could happen in 3 days or 8 weeks. If the market makes a new yearly high we'll just add some index exposure on the long side as that's how the computers who dominate daily trading are programmed. As for the short side, while we have "6%" exposure, half of that is in 1 position we put on late last week and we could be out of it within minutes of a gap up open. The huge cash position is going to be the main safety net until a major change in trend occurs, because shorts have been a fruitless adventure for a long time.

I believe in the rubber band theory both for the markets and myself... when things get to 1 extreme there is a reversion to the mean. That is now no longer applying to the market since we are quickly approaching the close of the 8th straight up month but typically things just don't go in 1 direction. Just imagine if the market can rally at the pace it has the past 7 months we will be at new highs by Valentine's Day; as if that whole credit crisis never really happened. Late spring we (I) had some of our worst performance in some 5 years for a good 10-12 week period (trying to short REITs, casinos, consumer discretionary) and now to offset that we've had a great run the past 16+ weeks... my worry is neither extreme is "typical" and hence I should be reverting to some mean - sooner or later. That means making some tactical or strategic errors. I'm overdue - so when it happens I don't want to have too much money at stake and ruin a good year. That explains my high cash more than anything at this point.

Outside of that there is not much new and interesting other than to see how high and far they can take oil now that its repeated gold's breakout. Since I am not part of the insider cabal that runs the Street and whispers to each other, we'll just have to watch and see. Just as with the dollar being crushed on a daily basis the question will become at what point does oil rising (or dollar falling) turn from a "great thing!" to a worry. Or do we simply await "Cash for Heating Oil" followed by "Cash for Gasoline" programs early next year... once more "fixing" the problem?

One last note - for newer readers, you'll see us cut back even further on any long positions as they are about to report earnings... 50/50 odds on if a stock will "beat" or not, are for riverboat gamblers; not for us. Most of our type of names report in the middle to latter part of earnings season so we won't have too many this week.

Sunday, October 18, 2009

Updated Position Sheet

Cash: 81.0% (v 72.4% last week)
Long: 13.0% (v 22.2%)
Short: 6.0% (v 5.4%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

*** Please note, I've added an options category for things I am holding longer than intraday.

(click to enlarge)

LONG (2 photo files)


Friday, October 16, 2009

Crude Oil Follows Gold in Technical Breakout

More signs of "success" as defined by the Federal Reserve.... after expansionary monetary policies drove gold out of a months long range in September, crude oil joined the party yesterday breaking out of a roughly 5 month range between $65 and $75. (save for 1 pitstop in July when the markets actually fell for more than 3 sessions)

The party continues today as the central bankers money continues to go into places of speculation because it is not needed in the real economy by a Western consumer, especially of the American kind, who is trying to somehow service all the debt they have already rung up through a multi decade binge.

We'll see how far HAL9000 and his merry band can take oil... looks just like gold did about a month ago. For those of us who were either not born, or too young to remember the late 70s or early 80s, looks like we are going to have a history lesson. Excluding the 12% mortgages of course!

This is actually the point I've been excitedly waiting for... gold and equities inflating just affect a a minority of society; the better off part at that. Once the Fed's policies start melting into things that actually affect the other 70% of Americans on a day to day basis? Good Times. Since Joe6Pack already stopped paying attention to what our leadership is doing, perhaps the only time the masses will ask questions is when they see gas surging back over $3 (do we hear $4? we can only hope) as the country is gripped with real mid teen % unemployment, and 20% unemployed + underemployment.

Gold prices. Check.
Equity prices. Check.
Oil prices. Check.

Now if we can only inflate food prices, I think the "Mission Accomplished" banner can be unfurled. Oops, I forgot about home prices... still working on that; probably going to need to get those mortgage rates on 30 years down below 4% to fix that issue Ben.

Remember, inflation - the most regressive tax in the world - is "a great thing", just ask those smart economists who apparently don't live on median income (or below). [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.

If you listen closely you can almost hear the politicians scurrying to get the oil executive CEOs up for a hearing on Capital Hill (are you guys free January 2010?), with fingers wagging at "what are you doing to the American people!" They really should look for those answers in the mirror, as well as that building with "Federal Reserve" stamped on its forehead.

British Humor: Banking with Bird and Fortune

If you are into satiric British humor, a clip for you courtesy of

mini 1 minute clip here

If it tickles your fancy, the rest can be found here.


If you missed this clip, these 2 fellas had a very famous video last year seen below. What is neat is they perform similar skits with slightly different "give and take" so each video you find on the internet is a bit different.

The Inverse Correlation of Stocks and the US Dollar in 1 Chart

We've been talking about this for months... effectively all the stock market (commodities as well) has become is "do the opposite of the dollar". Dollar sinks = buy anything (almost daily)... and vice versa (rarely). It doesn't work every day, but if something works 80% of the time in markets, it's akin to a gold mine. [Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever]

Courtesy of Clusterstock we have a chart to show this inverse correlation - the time line is relatively short, but you can see (if you are an American) reader as your purchasing power goes down, your stocks go up... you really don't win in real terms, but since most Americans only live in a nominal world they feel better about what is going on in the country. There is a silver lining to having a complete lack of financial education in our public school system (by design?)... it's much easier to deceive the masses on what "prosperity" is.

As one of our readers has been pointing out the past 48 hours in the comments section of our posts - now that we've "restreched" the rubber band back to the complete inverse of where it was nearly half a year ago, it will be interesting to see if we "snap back" ... or if the Federal Reserve has the power to completely break the rubber band.


Meanwhile, David Malpass tries to explain to those who cheer the dollar's demise as "helpful" to the US economy in the near term that this thinking is akin to all that dominates American solutions nowadays ... kick the can. Worry about the fire in the couch you are sitting on while ignoring the minor issue that the entire house is burning down. Forest. Trees.


Bookkeeping: Short Moody's (MCO)

Thanks to a reader for alerting me to this chart... Moody's (MCO ) is not something on my typical watch lists but it's been in the news a lot of late. There is a lot of headline risk here, and noted hedge fund manager David Einhorn is waging war against the name (the last prominent name he was against was Lehman Brothers). [May 28, 2009: David Einhorn v Warren Buffet on Moody's] Those are not really the reasons for the short here ... first, I need something to try to balance this portfolio out having been stopped out or liquidated many short positions the past few weeks, and second - a low risk entry on the chart.

We'll short here in the $23.20s; and stop out somewhere around $25 if and when. I really like setups like this when an oversold stock rallies right back into resistance. The stock has rallied 8 of the previous 9 sessions after a lot of bad headlines. Probability is, it just goes right back down... if not, we have an very identifiable area to take a moderate loss. Placing a 2.9% allocation on this trade.

Short Moody's in fund; no personal position

Bookkeeping: Restarting E-House Holdings (EJ) Post Spinoff

I was busy writing a post and didn't see E-House Holdings (EJ) fall right to support; should of had a limit order waiting there near $20.50. Instead we will pay up a bit here around $21.10 and get the position we sold off earlier in the week back. The position size is similar to what we let go, about a 1.5% allocation and as mentioned earlier today this is a very simple set up from a technical perspective - the 50 day moving average sits below us and we'll stop out a good portion of this position on any break below it.

This actually worked out pretty well for us in terms of lowering our cost basis, but it had nothing to do with strategy - just plain luck in this case.

EJ's spinoff - China Real Estate Information (CRIC) is off to a solid start this morning, up 13% as I type.
  • China Real Estate Information Corp (CRIC) shares started trading at $12.32, up 2.7 percent from the price in its initial public offering, and quickly jumped to $14.19, or up 18.25 percent, in their debut on Nasdaq.
  • The company, a Shanghai-based unit of real estate services company E-House China Holdings Ltd (EJ), raised $216 million in its IPO on Thursday after selling 18 million American depositary shares for $12 each, within the estimated range of $11.80 to $13.80.
  • Shanghai-based China Real Estate operates a database that held information on about 38,200 developments or buildings and 24,200 parcels of land for development in 56 cities in China as of June 30
Long E-House Holdings in fund; no personal position

Current S&P 500 "Gap" Might Fill Sooner Rather than Later

We mentioned yesterday the very prominent "gap" created in the S&P 500 chart; it sits around 1075. Usually these gaps on an index will fill within 2-5 weeks, but this one has a good chance to fill sooner. Of course some gaps take much longer to fill (we still have S&P 906, NASDAQ 1800 to take care of).

In the bigger picture we remain in a hefty uptrend and until we begin breaking down out of this "channel" and/or down below a key moving average (such as the 50 day) index short positions have to be quick and dirty. Current strategy is to sit on the largest cash position I can remember and try to deploy some if/when S&P 1075 hits. S&P 1080 is the level we broke out from ("double top breakout") so that also provides a line in the sand bulls want to defend. At this point we could fall all the way to S&P 1040 (rising by the day) and nothing has changed from a big picture perspective.

As for earnings, again no surprises anywhere... and the market now has built in some of this upside. Gold and silver the previous 2 sessions have not reacted as normal to dollar weakness which is a slight divergence - could just be resting after a dramatic run, but something to keep an eye on. Other than that, it's the same old same old - government is crafting multiple more stimulus and handouts (while not calling them stimulus) so we are a slave to those news items. And I see no change from the Federal Reserve for a very long time... easy money is the newAmerican ethos. So the question becomes at what point does this market begin to discount some end point of the "subsidized" economy of continuous government handouts and Federal Reserve backstop of the entire US economy. When Goldman finds out when the Fed will begin withdrawing stimulus, and the government is done throwing lifeline after lifeline to the economy - I'm sure they'll let the rest of us know. With elections coming in 13 months I expect a bevy of new handouts to win votes....

In the nearer term, most of our huge financial oligarchs have reported and now we move to the regional banks who do not have trading desks to support their degrading commercial banking arms. Citigroup (to a lesser degree), Goldman, and JPMorgan have simply been taking no prisoners in the fixed income parts of their business... massive growth. What has happened here is what we said would be the future last winter once it was clear Lehman would die, Goldman and Morgan would live, and Merrill was pushed inside Bank of America (recall Bear Stearns is now inside JPMorgan). Fewer oligarchs dividing up a growing pie. Not only that they are raising fees because there is less competition - it's almost as if this whole crisis was planned. That's the "Wall Street" economy but as you peruse these reports and listen to what is happening on the commercial side of banking i.e. the "Main Street" economy, it's very poor. Unfortunately for most of the banks that are going to be reporting in the next few weeks they have little to do with Wall Street and are more of the traditional type of banks... so it won't be such a pretty picture for them. As for all other sectors I don't know how many more weeks/months we can be surprised by the same news.

But as said above, until the technicals take a turn for the worse buy the dip will reign. Valuation is in many cases ridiculous but one could say that in June 1999 and miss out on countless 100%s of gains in some stocks ... lemmings will dance until the music stops. Or in the new paradigm, until the Federal Reserve is content it has destroyed the US dollar by flooding the world with fiat currency. What I read yesterday about Canada really struck me... a global race of quantitative easing as countries vie to protect their export markets scares the living daylights out of me. But I suppose even more fiat currency from every corner of the globe only pushes up stock prices right? Fixed amount of stock certificates chased by paper money of all colors and stripes...

Nominal versus real gains... keep those in mind; especially if you are reading this from the US or UK.

RF Micro Devices (RFMD) Hammered by Weak Nokia (NOK) and Large Option Bet

We have a good example this morning to showcase some technical analysis ... along with some chicanery.

I almost put shorts on Skyworks Solutions (SWKS) and RF Micro Devices (RFMD) early this week simply as a hedge since neither of these stocks has been able to make headway while the markets enjoyed a great run last week (of course continuing this week). We still maintain a small long holding in both but we've cut back position size in multiple iterations as they've broken support, and once more technical analysis has helped save us in the pocketbook.

Once their 50 day moving averages were broken we moved aside - we did a similar maneuver in Perfect World (PWRD) this week but in that case the stock simply reversed immediately back upward.

Nothing works all the time, but having a consistent strategy and being (mostly) robotic about executing on it, is something I've found to be key. (also to be fair, while Perfect World traded underneath the 50 day moving average intraday - triggering our judicious stop loss - it appears to have held on by a hair on a closing basis)


So that's the lesson on technical analysis - here is the lesson on "the game is rigged" aka why the small or naive investor has a 90%+ chance of being fleeced on a monthly basis. Options expiration for October is today... meaning if you place any new purchases in the options market this week you have to be done with your trade by today. That gives you almost no time (1-5 days in the option market is like a ticking time bomb). But "someone" was so confidant that RF Micro would blow up this week he was happy to buy 4900 October 5 puts on Wednesday. Meaning "he" had to be right within 2 days.
  • The stock closed Wednesday off 0.6% to $4.72, and one trader expects the shares to fall further by Friday's expiration..... show the purchase of 4,900 of the October 5 puts for 40 cents.

Of course you can see "he" just made a killing as the stock was slapped silly yesterday, on a flattish day for the market. Those bad boys rallied 30 cents Thursday - you can do the math from there. So as you can see - someone obviously had information about either Nokia or something else to so confidantely buy a slew of puts that only had 2 days of life left.

If the SEC were a viable organization they would investigate these things... and trust me folks, after about 10 years of following the option markets, this stuff happens ALL the time.

So conveniently Nokia (NOK) had a less than inspiring quarter and RF Micro Devices (as a supplier) took the brunt of it. Boo Yah "free and open markets" ... boo yah.
  • RF Micro Devices (RFMD) shares are getting roughed up by investors concerned that the troubles at Nokia (NOK) will overflow onto the company’s suppliers. And RF Micro may be the most vulnerable: in its most recent year the company received 52% of its revenue from the mobile phone giant. The news is also taking a toll on RF Micro rival Skyworks (SWKS).
While it's fair to associate RFMD with Nokia due to its heavy revenue concentration, its also fair to ask what "someone" knew Wednesday. It's also fair to suggest the SEC won't bother to ask these questions.

I'll be interested in seeing what RFMD does Monday after the pressure of this put play is done with.

Long RF Micro Devices, Skyworks in fund; no personal positions

China Real Estate Information (CRIC) IPO's Today; Will Re-enter E-House Holdings (EJ)

Thus far our "cautionary" sale of E-House Holdings (EJ) Wednesday has worked out as the stock has been weak since. I had thought the CRIC spin off it might be some sort of complicated structure but upon further research it just looks like a straight IPO.

We were unsure when its spin off of China Real Estate Information (CRIC) would take place but it appears today is the day.
  • (Oct 15) E-House China Holdings Ltd. fell the most this month in New York trading before its real estate information business unit starts trading in the Nasdaq stock market tomorrow.
  • E-House dropped for a fourth day, losing 3.5 percent to $21.49. China Real Estate Information Corp, created by the merger of E-House’s real-estate information business and Sina Corp.’s online real estate business, will offer 18 million American depositary receipts, according to the prospectus. The company may raise around $230 million based on the share offer price of $11.80 to $13.80, Goldman Sachs Group Inc. said.
  • There’s uncertainty of how much value will be assigned to CRIC,” said Jeff Papp, a senior analyst at Lisle, Illinois- based Oberweis Asset Management Inc., which manages $700 million, including Chinese stocks. “E-House will still hold a large chunk of CRIC so their value will be partially dependent on the value of CRIC.”
CRIC is interesting in and of itself with some massive revenue growth but very dependent on 1 customer which brings huge risk. (in 2008, $28 of $50M in revenue was with 1 customer)
  • In the six months ended June 30, China Real Estate profit grew to $11 million from $7.2 million in the same period in 2008. Sales rose nearly 62 percent to $31.2 million from $19.3 million
  • “The merger would create the largest online and offline real estate information and consulting services provider in China covering 56 cities,” Wendy Luo, a Beijing-based analyst, wrote in a note to clients. “E-House’s remaining business, mostly primary agency, is undervalued.”
So it's an interesting issue - is E-House worth more with CRIC inside the umbrella entity or outside floated to the public. In the very near term the answer is "less" based on how E-House is trading but that could just be uncertainty.

It will be interesting to see how China Real Estate Information fares today; if this IPO came in fall 2007 it would double overnight as anything Chinese was attracting lemmings by the bushel. Nowadays it would of been better served to be called China Real Estate Information and Green Battery to get the "sex appeal" factor: "ooohhh batteries, so old ... yet so new!" [Sep 24, 2009: A123 Systems (AONE) - Hype or Hope]

We hope to get back into E-House today after our 48 hour hiatus, and as long as it holds that 50 day moving average we're content to stay.

No position (stalking)

Thursday, October 15, 2009

Pledge Update October 2009

Latest pledge update below, first time we've breached 50% of the goal since last fall's crash [Jan 6, 2009: New "Pledge" Sheet - Obama Era 2.0] If recent pace continues, we will get to where we need to be in 3/4 of a year.

Here are the pertinent posts if you have not read through them
  1. The overall goal and why I'm aiming for $7 approx million [Jan 7: Reader "Pledges" Toward Mutual Fund Launch]
  2. Frequently Asked Questions [May 26: Frequently Asked Questions] Very important to read
  3. Why I need your state [May 23: Investment Pledges by State] Keep in mind a state's eligibility can be turned "on" overnight once we're up and running

Let me copy the same caveats for pledges as always:
  1. Assume a pledge amount that is firm based on a fund opening in "6 months"
  2. Assume at any point in 2009 the market may be down 30% from here
  3. Make your pledge based on liquid assets that are not currently in some high octane mutual fund that loses 40% when the market falls 30%, nor gains 50% when the market gains 40%. That money is not something that can be counted on with the volatility in this market.
Format: first name, last initial, pledged amount, and state you live in. To be clear, you are not sending me money that I'm going to hold until launch when you 'pledge' - you are simply making a verbal commitment: "when you are up and running, I have $X amount ready to invest". You can attach a comment to this post or as most people do, send me an email (my address is found on the upper right of the blog) with the above information. I'd prefer an email if possible.

Name Amount State/Country

Stockspeter 7,500 ???
Brian 5,000 ???
Heather 10,000 ???
Bob B 50,000 AR
Ed S 5,000 AZ
Alan N 15,000 AZ
Armour B 50,000 AZ
Dharminder M 100,000 AZ
Art H 50,000 CA
Benjamin W 5,000 CA
Dave K 100,000 CA
Greg B 15,000 CA
Kurt C 10,000 CA
Ron W 10,000 CA
Tom L 25,000 CA
Ted C 5,000 CA
Brian L 50,000 CA
Rich P 30,000 CA
Shannon V 5,000 CA
Sunil K 10,000 CA
Anatoly S 10,000 CA
Wesley W 20,000 CA
Burt B 10,000 CA
John L 5,000 CA
Alven Y 5,000 CA
Piyush M 5,000 CA
Paresh P 5,000 CA
Dinesh K 5,000 CA
Naresh P 5,000 CA
Jay S* 5,000 CA
Shang C 50,000 CA
Henry C 3,000 CA
Charles Y 100,000 CA
George 5,000 CA
Adam B 20,000 CO
Mark B* 25,000 D.C.
Vic C 10,000 FL
Wes T 10,000 FL
Ron* 100,000 FL (sailing)
Olivier N 10,000 FL
Bob H 3,500 FL
Chris I 20,000 FL
Patrick L 50,000 FL
Sandy S 50,000 GA
Mark L 2,500 IA
Ian J 5,000 ID
Jay S 10,000 IL
Ben 10,000 IN
Jake R 50,000 KS
Bill H 5,000 MA
Bruce W 2,500 MA
John B 20,000 MA
MB 20,000 MD
Raeann 10,000 MD
Mark 60,000 MI
Ralph B 25,000 MI
Scott L 7,500 MN
Tom S 20,000 MN
Scott L 5,000 MN
Marshall H 5,000 MO
Wolfgang S 7,500 MO
George L 10,000 NC
Brian C 5,000 NC
Colleen P 5,000 NC
Adam B 5,000 NJ
David B 50,000 NJ
Frank G 500,000 NJ
Henric B 25,000 NJ
Ryan T 7,500 NJ
B Shah 2,500 NJ
Rama R 4,000 NJ
Andrew 100,000 NV
Gary M 10,000 NY
Rob T 10,000 NY
Igor O* 375,000 NY
Jason N 30,000 NY
Tim C 20,000 NY
Atul R 5,000 NY
Rob #2 6,000 NY
Marc E 7,500 NY
Adam M 10,000 OH
Justin K 10,000 OH
Dilip K 5,000 OK
Bill G 10,000 PA
Jatinder M 10,000 PA
V.K.K. 20,000 PA
Bruce R 100,000 PA
Joe C 10,000 PA
Robert T 75,000 RI
Heidi H 25,000 RI
Doris S* 100,000 SC
Steve 100,000 SD
Dave S 20,000 TN
Matt S 10,000 TN
Joe P 10,000 TX
Doug M 40,000 TX
H.S. 2,500 TX
Ian* 50,000 TX
"Phong" 10,000 TX
Jason D 5,000 TX
AZ 10,000 TX
Glenn J 5,000 TX
Samba V 20,000 TX
Chair 15,000 VA
Lisa 5,000 VA
Zhong L 10,000 VA
Madhu I 25,000 VA
Brian D 50,000 VA
Kevin L* 125,000 VT
Ron 20,000 VT
Linda A 15,000 WA
Scott R 60,000 WA
Mike H 2,500 WA
Eric S 40,000 WA
Brian J 5,000 WI
Jason E 5,000 WI
Jason 10,000 WV
Stan T 10,000 Z-Canada
Steve L 10,000 Z-Canada
Brian M 5,000 Z-Canada
Anurag V 20,000 Z-Germany
Ken 50,000 Z-Hong Kong
S.E.H. 12,500 Z-Singapore
Tomaz K 20,000 Z-Slovenia
Ward P 2,500 Z-Sweden
KP 5,000 Z-UK
Nestor T 25,000 Z-Uruguay
Harsh N 5,000 Z-UAE

Total $3,741,500
Goal $7,000,000
% of Goal 53.5%

To Go $3,258,500

Performance Metrics Since August 2007

2009 YTD results here

I was working in another platform that did not allow individual shorting in 2007 and 2008 so I was handicapped in my strategy but you can see my "first year" results (Aug 2007 to July 2008) here. Short story: we beat the market by about 24% through July 2008 even with major handicaps to our strategy - i.e. only being able to employ HALF of it. Long time readers will know I called out many individual shorts that ended up falling 50-100% (Freddie Mac, Washington Mutual, Las Vegas casinos, restaurants, retailers, emerging markets, commercial real estate) yet we benefited not one bit from it - so I believe my 2007 and 2008 performance as solid as it was, is massively understated. In fact we tried to use Ultrashorts (since those were allowed in our old platform) as a hedge and even as the sectors fell 50%, we lost money on the Ultrashort ETFs - talk about insult to injury.

I compared myself to my peer groups in the mutual fund world during summer 2008 at various 1 month intervals, we generally were always in the top 10 (not top 10 percentile, but literally top 10 of all equity funds) and had some time as #1. Last time we looked was August 2008.

We left that old platform ( due to the reasons above, plus technical difficulties constantly encountered there fall 2008. So there is a "window" in my performance while I searched for something new I could use - we found in January 2009. That 3 month window was marked by sharp losses in October and then gains in November and December 2008 by the market - I was only posting trades on the website at the time but have no "track record" for those 3 months.

So unfortunately I don't have a 2+ year track record all in 1 place, nor employing my strategy fully during those 2+ years... only since Jan 2009 can I say it's been what I wanted to do, but this gives you a 40,000 point of view of what we've been up to. My estimate is even with the handicaps of not being able to short for the first 16 months, I'd still have the top ranked record among all equity funds since August 2007, and by a long shot. Of course this is only a simulator and actual results in real world would cause more drag to performance, and last but not least I have to give the tagline - past performance is no guarantee of future results. But that's my "resume".


To finish, while economic calls have no bearing on investment results, most of my big picture economic calls from 2007 - early 2009 are all listed for historical reference on my "Economic Forecast / Track Record" tab at the top of the page. I am also confidant that those calls were more accurate than 99.8% of the investment pundits who are celebrated on a daily basis.

The idea of the blog when I started it was to show my track record both on economic calls and investment results in a transparent basis, and hopefully excel. With that track record out in the open, I'd be exposed as a sham or not very quickly. Thus far I am content with what I have shown and the results achieved and if anyone has the time to read the 4500+ posts thus far - they can see for themselves. ;)

/End of Sales Job

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
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