Tuesday, November 3, 2009

Showdown at the Federal Reserve Corral

With apologies to Shakespeare, in 22 hours we have our answer...

To give them endless more free punch  OR to actually let the reckless teenagers of the market know that one day the central bank might actually act like an adult .... THAT is the question

The showdown between bulls and bears will commence at 2:15 PM tomorrow....

.... at which time we all act like lemmimgs herking and jerking the market around as if 2 words in a statement will change the destiny of the galaxy.  (perhaps even the universe)  We sit right below the 50 day moving average on the S&P 500 again.  All it will take is Father Ben Bernanke to bless his minions with promises of endlessly more free money for "an extended period" of time and we can post more bear hides to the wall.

Then after acting in a mindless manner for 105 minutes Wednesday afternoon, we will forget about that "all important" decision by mid day Thursday and repeat the whole exercise premarket Friday at 8:30 AM.  We will call this "investing".

Such is life in the computerized, HAL9000 driven casino stock market where long term means 8 minutes.

"I, Mark, do solemnly swear to follow PhD programmed algorithms in whatever direction they determine that 2 words in a Fed statement here or 28,000 jobs plus or minus there, shall deem us worthy to go.  I shall then chant "the market knows all" and "as long as the market goes up, all is right with the economy" as my dogma handbook says, while smiling for CNBC."

Nearly 600,000 Americans Walked Away from their Mortgage in 2008

Great news; I believe the number of mortgage "walk aways" is "better than expected" - now how do I buy stock on deadbeats? (DBDT?)  Look there was no problem buying these assets when all they did was go up; even better when one could serial refinance to live the "life we deserve", but nowhere in the contract did it say the house could go down in price.  Therefore, it's time (and our right) to walk away.  In 2007 and early 2008 we said this would be a big issue as masses of home owners became upside down.  In fact our prediction was eventually 1 in 4 homes would be underwater - we should be very close.  [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater] [Mar 9, 2009: One in Five Houses Underwater]   Frankly I have not checked lately because what's the problem?  Let the taxpayer take care of it - if not through direct bailout of the banks [May 29, 2009: In 1 Year US Taxpayers on Hook for More than $55,000 per Household], then certainly through much higher fees.  [May 29, 2009: USA Today - Banks Find Ways to Boost Fees]

Anything that it takes to get this conspicuous consumption economy going again (and stock market surging) is fine by me - even people who live "rent free" for a year in excellent housing accommodations... that they put nothing down in the first place to "own" before slipping away into the night - I'm all for it.  All that money not "wasted" paying for mortgages simply means more moolah to spend on other items which will help us drive the market up on "green shoot" retail spending reports. Just consider it another form of stimulus - the Homeowner Self Stimulus Act of 2007-2011.

Via USA Today:
  • The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it's not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.
  • "I'm walking away from my house," says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. "The bank can have it."  (that's six months of income to spend on shoes, jewelry, eating out, whatever is needed... multiply by a few million each year in some form of default... it soon adds up.  Better than a tax cut!)
  • What Sakson did is called a strategic default, or a voluntary foreclosure, and it's fast becoming a major challenge to the government's $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business — it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years
  • Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman. 
Now as we said a few days ago, with the government's new fangled $6500 handout to "move up" buyers, we are giving America's "future walkaways" an excellent chance to play the rest of us for fools.  If you can time it well, you can buy that new home for a price far below that underwater anchor around your ankle, collect $6500 at GO (smile for the camera), and then leave the anchor at the doorstep of your fellow taxpayer.  You win!  What's 100 points on a credit report if you were going to default in 6 months anyhow - you are in a shiny new home with a reasonable payment and your "mistake" is absorbed by the system, with $6500 fresh smackeroos to boot.  I know, I know - that sounds almost fraudulent - it could never happen. [Oct 22, 2009: First Time Homebuyer Fraud Called Disturbing]  Ahem.
  • While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson's predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.  
  • Because of the time and expense involved in completing a foreclosure, borrowers who decide to walk away often wind up staying in their homes for months after they stop paying their mortgage.
  • Janet Speer, 51, isn't happy to be walking away from her 200-year-old home in Royersford, Pa., but she doesn't feel ashamed. Speer says she was paying about $1,400 a month for her home, which was appraised at about $155,000.
  • Speer stopped paying on her mortgage in September 2008.  She is still living in the home and waiting to be foreclosed upon. 
So Ms. Speer is on month 14 of living "rent free!"  After all, the banks don't want these darn homes - they'd have to admit to actual losses; much better to "mark to myth" which was the rule change in March 2009 (right about when the stock market went on an epic rally) because banks are "in the clear."  I am sure Ms Speer's mortgage is fully marked up on some banks balance sheet... no losses to be seen.

Do you think Ms. Speer is stressed? Nah, those pesky banks don't even bother her anymore.  Heck she might be able to live there for another year or two... helping to contribute to the economy through spending on other items not called a "mortgage".
  • "I got letters and calls from the bank at first, but they stopped,
  • I would never have chosen to do this, but it's going to work out."

More ...
  • "It's increasingly a more important factor driving the foreclosure crisis," says Mark Zandi, of Moody's Economy.com. "As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn't make financial sense to hold on to their homes. That's going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time."
  • Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida.  From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.
  • The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they're able to pay the mortgage. "It's a very large number, and it's a very, very significant risk to the housing recovery," says Sanjiv Das, CEO of CitiMortgage....

Wow, that sounds awful... how could we ever bribe Americans not to walk away from their homes?  Aha, solution located!
  • ....adding that new government programs to curb strategic defaults may be needed.  (more! more! give deadbeats more of my cash - please take all of it, the whole piggy bank)
  • "A better way to do it may be an incentive to stay current for a period, and after two years of being current, they get a principal reduction," says Das.

Hmmm... as with all these
government programs, that sure will go down well to all those who have been responsible and paying their bills.  Oh I know.... I know... it's good for all of us, we "have to do it".  I learned all that dogma about 8 stimuli/handout/bailouts ago.  I can repeat it verbatim. 

Even more troubling it is the people with decent FICO scores who are more than willing to walk away as a financial decision... so this isn't your subprime folk.
  • The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50% more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay.
And it's spreading like H1N1! Pssst... found a way to get out of that mortgage payment... wanna know how?
  • There also appears to be a contagion effect. Borrowers who know someone who defaulted are 82% more likely to declare their intention to do so.

There used to be a time in this wonderful country where people took care of their debts, and it was shameful to walk away.  Neighbors would "talk"... now neighbors appear to share strategies on defaulting instead.  The more you see people doing it, the less the stigma and soon Bailout Nation melds with Deadbeat Nation.  Everyone's doing it, it's cool!
  • "The most disturbing aspect of this is that it's becoming acceptable to do," says Joel Naroff, an economist with Naroff Economic Advisors. "What does that mean down the road for housing and the economy if people are happy to walk away and destroy their credit? They're saying, 'Why pay a high amount if they can get something, even a rental, for less?' " 
Surely these people must suffer far more than  simply a  FICO score hit?
  • In most states, lenders can go after homeowners for past-due payments, but many fail to take such action when borrowers abandon their properties, because the legal costs are so high.
  • Short sales, in which lenders agree to the sale of a home for less than the balance of the mortgage, is an alternative to a strategic default. Many lenders are now encouraging them, but Zandi says that alternative may seem too time-consuming for borrowers who want to quickly get out from under their homes.

Who has time or wants the stress of a short sale?  My gosh, all this non payment of bills is far too much work!  Much easier to send jingle mail... 

Expect a lot more walkaways in 2009.  You get to live for free for apparently year(s), society doesn't frown on it, and banks don't even bother you anymore.  Ehh... you take a hit on the credit score - oh well.  I believe we call that a win-win-win.  With all these non payers in the system we can only ask why retail sales are not shooting through the roof.

Apple's (AAPL) iPhone Only Sells 5000 Units in 1st Week of China Sales

For those of you who took an economics course at some point in life, I am happy to report "price elasticity" is still alive and kicking.  It appears the $1000 price point for Apple's (AAPL) iPhone is a bit of an issue for the "middle class" of China, and this is for a phone without a service contract!
  • The price tag for a 32GB iPhone 3GS in mainland China: 6,999 yuan, or $1,024, which doesn't include the service contract.
This data will surely strike at the hearts of those who use 1st grade logic... "1.3 billion Chinese x 2 iPhones per household = nirvana".

Via Bloomberg:
  •  Apple's Chinese partner sold 5,000 iPhones in the country since last week’s debut, raising concern the handset’s price is undermining the U.S. company’s ability to gain customers in the world’s biggest phone market. 
  • China Unicom (Hong Kong) Ltd. President Lu Yimin told reporters in Hong Kong today demand has been “quite good” since the Chinese carrier began selling the iPhone, stripped of broadband-Internet capability, in stores on Oct. 30.  
  • Unicom’s iPhone plan “will be an interesting exercise in how to sell an inferior product at a higher price,” said Duncan Clark, chairman of BDA China, a Beijing-based consultant. 
  • Apple, based in Cupertino, California, had been expected to sell about 500,000 iPhones initially in China via Unicom, Barclays Plc analyst Ben Reitzes wrote in a report today. 
  • China had 719.8 million mobile-phone users at the end of September, after adding 9.3 million in the month, according to government data. 
  • Unlike iPhones available outside of mainland China, Unicom sells the handsets without so-called Wi-fi capability
  • “It is selling a ‘castrated’ version of iPhone at a higher-than-market price,” BOC International analyst Allan Ng, wrote in an Oct. 23 report. The carrier’s marketing was “incompetent,” according to Ng, who said demand was “lackluster.” 
  • The number of units sold in China is disappointing compared with other markets, according to Paul Wuh, a Hong Kong-based analyst at Samsung Securities Co. By comparison, Apple said it sold 270,000 iPhones in the 30 hours after the first model went on sale in the U.S. back in 2007.

But there is always a way around issues such as this... the black market:
  • Chinese consumers may buy 1 million iPhones from unofficial distributors this year, according to BDA estimates. IPhones sold through these outlets will have Wi-fi and cost less than those distributed by Unicom, according BDA. 

 No position

Bookkeeping: Buying Long Term Downside Protection with January Puts

I am going to repeat a strategy I've tried 3 times in the past half year, once successfully - twice not so much; that is to buy a long term put as "portfolio insurance".   If the market has a sizeable downdraft in the months to come the insurance pays off; it we just rally to S&P 1200 to close out the year, these will expire worthless or near to it.

With this morning's rally from deep in the red to "flat", I am going to allocate 1.5% of the fund to this put option; we're using January 2010 101 SPY Puts (SWGMW).  For reference the S&P is just under 1040. This won't be traded "around" unless there is a heavy swoon in the next few weeks.  Most likely we'll revisit it near Christmas.  These puts are a bit "out of the money" and to pay off well we'll need to see upper 900s on the S&P 500.  Any move to low to mid S&P 900s will generate a large % gain... as with all options, due to time decay, the sooner the better.  Again... just an insurance policy stashed at the bottom of the portfolio, so don't be alarmed if in two weeks these show a 50% loss.  I will sell these for a loss if we make new highs on the year, i.e. S&P over 1100.

Long Jan 2010 101 SPY Puts in fund; no personal position

Ugly Premarket Action

Another change in character - it has been ages since I can remember a premarket that was significantly in the red without any specific news items.  In fact we have 2 buyouts, which a month or two ago would have premarket screaming +1%.  Yesterday the bulls made a last minute save, as the break of S&P 1034 led us down to S&P 1030... usually that sort of break of a previous day's low would lead to a lot more downside but this is not your father's market.  We received a late day rally instead... .

So the line in the sand just got pushed down 4 points, from 1034 to 1030 (yesterday's low).  In premarket we look to be around S&P 1031... notwithstanding that strange buying yesterday, once we break to a new low the market should continue down.  But that was the idea yesterday as well ;)

The bottom line is you have to change your thinking right now... before dips were to be bought, now rallies are being sold.  Turn the charts upside down and pretend its a bull market... that is the easiest way to think about it.  Caution continues to be the game plan and if we break below S&P 1030 I'll put on some short term hedges predicting more downside action (didn't work that well yesterday), and we're still targeting S&P 1020.

Of course the dollar is strengthening so in our 1st grade logic market, all things not named the dollar must be sold. If not for the Fed meeting conclusion tomorrow and labor report Friday I'd be leaning relatively aggressively on the short side.  I just hate the random lemming like action around these type of events.

Current "box": 1030 on the bottom (down from 1034 yesterday), 1047 on the top - all white noise inside the box.

p.s. I know the "real economy" does not matter much to Wall Street, but Johnson & Johnson (JNJ) announced a new round of 7000 job cuts lagging indicators, and in Europe Nokia (NOK) announced 5700.  As we know, that just leaves these people more time to shop (or else the terrorists have won) with money handed out by a bankrupt government.  J&J's profits go up, we cheer as speculators, 7000 people go out of work... we all win here.  Green shoots. Our path to nirvana (a completely jobless economy where the only production is money printing) continues ;)
  • The cuts will shrink J&J’s workforce by 6 percent to 7 percent and save as much as $1.7 billion by 2011.... J&J rose 1.7 percent to $60.50 in trading before the opening of the New York Stock Exchange.

International Monetary Fund to Sell One Eighth of Gold (GLD) Stake to India

Rumors were China [Apr 25, 2009: China Begins Building Gold Reserves] was going to buy this stash of gold from the IMF; but it appears India "won".   This will drop the International Monetary Fund stake but still keep it at spot #3 in world's reserves, and send India screaming up the charts from 14th [Oct 13, 2009: Largest Gold Reserves by Country]  Gold fever is spreading across he globe as central banks go wild printing paper currency....

Via Reuters:
  • The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.8 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.
  • The sale, which surprised traders who expected China to be the leading buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock.
  • It also fueled speculation that other governments -- including Beijing -- may be ready to diversify their reserves even at near-record gold prices, helping soak up IMF supply that the fund may otherwise be forced to sell on the open market.
  • Although the IMF's plan to sell a share of its gold holdings in order to increase low-cost lending to poor countries had been flagged for a year before it was formally approved in September, both the speed of the deal and the buyer were a surprise.
  • Although India is the world's biggest consumer of gold, primarily in the form of jewellery and investment among its billion-plus people, its central bank had given few indications of being a front-runner in the move to diversify into bullion.
  • An IMF official said the sale was concluded at an average price of about $1,045 an ounce and that the transaction would be paid in hard currency and not in IMF Special Drawing Rights.
  • "The fact that they've sold the gold to India would suggest there's going to be fewer official sales by the IMF on the market. So that might be a positive theme for the gold price," said David Moore, commodities strategist at Commonwealth Bank of Australia.
  • The market's focus has now shifted to China, which has reportedly been in talks with the IMF about buying some of the fund's bullion as Beijing seeks to shift some of its more than $2 trillion in foreign exchange reserves away from the U.S. dollar.  "Now people may think China will buy the other half," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.
  • The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” 
  • “It’s more or less certain that government of India expects the U.S. dollar to weaken,” said Suresh Hundia, president of the Bombay Bullion Association Ltd., in an interview today. The purchase is “not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves.”

[Oct 29, 2009: Paul Tudor Jones 3rd Quarter Investor Letter - Another Gold Bug]
[Oct 8, 2009: Is Ben Bernanke Ruining Indian Weddings?]
[Sep 29, 2009: NYT - Out from India's Alleys, Gold Loans Gain Respect
[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]

Warren Buffet's Berkshire Hathaway (BRK.A) to Acquire Burlington Northern (BNI) ; Split B (BRK.B) Shares 50 to 1

A couple of interesting acquisitions in the past 24 hours; late yesterday a bid for Black & Decker (BDK) by Stanley Works (SWK) - apparently finalizing a 28 year courtship!
  • Stanley agreed to buy Black & Decker for about $3.5 billion in an all-stock transaction, creating a global tool maker worth about $8.4 billion.  The combined business, to be called Stanley Black & Decker, will own many names familiar to do-it-yourselfers, including the companies’ namesake lines, Stanley’s FatMax and Bostitch and Black & Decker’s DeWalt and Porter-Cable offerings. The two companies have little overlap in their products, with Stanley best known for hand tools and construction equipment and Black & Decker for power tools.
Unlike most deals nowadays which seem to be done for no other reason that the CEO can say "I added value!" to try to justify his/her pay, this one makes a lot of sense due to similar customer demographic, yet little overlap in product line. However, per the usual merger metrics, some job losses are certain to follow to offset "redundancy".
  • Executives said most of the savings will come from reducing corporate overhead and consolidating business units and manufacturing, distribution and purchasing. Black & Decker has 22,100 workers and Stanley has 18,200 employees.
  • The deal also represents a coming wave of consolidation in the industrial sector as companies try to cut additional costs as revenue remains flat. Both Stanley and Black & Decker have been hurt by the real estate crash, which has slowed new construction and spending on new equipment.


More interesting was Warren Buffet's outright acquisition of Burlington Northern (BNI) - Berkshire Hathaway already owned a good piece of the firm, but he wants the whole thing.  (both boards appear to have already approved the deal)  Makes a lot of senses since these railroads are mini oligarchs of their own; of course Warren wraps himself in the US flag in his public reasoning for the purchase... it has nothing to do with almost no competition and massive pricing power.  [Sep 3, 2009: Fortune - China's Amazing New Bullet Train, and America's Amazing Railroad Oligarchs] Also fascinating is the decision to split the B shares of Berkshire 50 to 1.
  • Warren Buffett's Berkshire Hathaway Inc (NYSE:BRK-A - News; NYSE:BRK-B - News) said it agreed to buy railroad Burlington Northern Santa Fe Corp (NYSE:BNI - News) in Buffett's biggest acquisition ever.
  • Berkshire says transaction is largest in its history and expects the deal to occur in the first quarter of 2010. 
  • In a statement, Buffett said railroads are key for the United States' future growth, and will only grow when the nation grows.  "...(I)t's an all-in wager on the economic future of the United States," Buffett said. "I love these bets."
  • Berkshire Hathaway Inc. already owns a stake of about 22 percent in Burlington Northern, and says it will pay $100 a share for the rest of the company. That is a 32 percent premium over Burlington's closing price on Monday.

As for the stock split, which Buffet always seemed too be against in the past...it appears to be due to the BNI acquisition.
  • Additionally, the Berkshire board approved 50-for-1 split of its  B shares.
  • “I’m not big on stock splits, but by having this split, it enables anybody as little as one share of BNSF to opt for the tax-free exchange,” said Buffett. “So the small shareholder can have the exactly the same availability that otherwise would only have been available to a big shareholder.”
[May 3, 2009: Berkshire Hathaway's Charlie Munger Says "Venal" Banks May Avoid Needed Reform]
[Feb 28, 2009: Warren Buffet's Berkshire Hathaway Letter 2008 Investor Letter]

No positions

Monday, November 2, 2009

Lack of Green Energy Manufacturing Capability in US Means 84% of Stimulus Goes to Foreign Firms

A quite fascinating read in the New York Times that is at the cross section of much of what is broken in America.  We've often states this focus on green energy as a "new dawn of jobs" is a bit over the top, considering Germany is about 15 years ahead of the US in "green tech" and Japan about a decade.  Even China is now revving ahead of us.... so how are we going to have a new wave of work in the US based on green energy again?   [Aug 25, 2009: UK Telegraph - China Powers Ahead as it Seizes the Green Energy Crown from Europe] [Aug 28, 2008: China to Subsidize Wind Turbines] [Jun 19, 2009: Reuters - Incentives Add Shine to China's Solar Drive]  As you can see, China for example (and Germany... and Japan) have heavily subsidized long range plans to go green, pretty much impossible to compete with on a global footprint if the home country refuses any similar form of subsidization.

However we are not allowed to have an industrial policy in the US because to do so would make us "socialist" - like those darn Germans.  Instead we'll let much of our manufacturing rinse away to cheaper locales because well, that's just how it works.  Except in Germany apparently.  The statistic that caught my eye in this story was due to this lack of manufacturing capability 84% of the money thus far allocated for "green" is going to foreign companies. 

The rest of the piece deals with a company we actually had a position in during parts of 2007 and 2008, A-Power Energy (APWR) and how they have won a contract to do wind energy ... in Texas.
  • News last week of the first major influx of Chinese capital and wind turbine manufacturing expertise into the renewable energy market in the United States — a 600-megawatt wind farm planned for the plains of west Texas — had many readers of the Green Inc. blog in a state of agitation.
  • The details of the deal known so far: Contingent on financing from Chinese commercial banks — and no small measure of funding from the U.S. economic stimulus package — A-Power Energy Generation Systems, a Nasdaq-listed company based in the Chinese industrial city of Shenyang, would provide 240 of its 2.5-megawatt wind turbines for a 36,000-acre, or 14,600-hectare, utility-scale wind farm in west Texas to be operated by Cielo Wind Power, a developer based in Austin.
  • The total cost of the project, which was brokered in part by the U.S. Renewable Energy Group, an American private equity company, was estimated at $1.5 billion.
Here is where it gets tricky - as they say devil in details
  • “This planned $1.5 billion investment in wind energy will spur tremendous growth in the renewable energy sector,” Mr. McGarr was quoted in a news release as saying, “and directly create hundreds of high-paying American jobs.” (rah! rah!
  • The devil, though — as many observers pointed out by the end of the week — is in the details. The group’s calculations last week put the number of American jobs at a little more than 300 — most of them temporary construction jobs, along with about 30 permanent positions once the wind farm is operating. Mr. McGarr told The Wall Street Journal that more than 2,000 Chinese jobs would be created by the deal. (oops)
  • That, along with the fact that the project was hoping to secure 30 percent, or $450 million, of its financing from U.S. stimulus funds, was enough to send tempers flaring.
Boo Yah! American stimulus - creating 300 temporary jobs in America, and 30 real ones... and 2000 in China.  Sort of symbolic really - considering the money for said stimulus was borrowed from China in the first place.  But don't let reality get in the way of trumpets blaring about "green tech" and "job creation!"

Interesting reader comments:
  • “I don’t understand why China is exporting wind energy to the U.S.,” wrote Mark from New York City. “Isn’t this exactly the kind of project a United States company could and should be doing?”  
  • Another reader — Drew from Boston — was more blunt: “Again, China is playing the West for a sucker,” he wrote. “We send them our engineering, they get the manufacturing work and experience.”  (but that doesn't explain the success of Spain and Germany in renewable energy, Drew
  •  “Why are U.S. stimulus funds being used to subsidize manufacturing jobs in China,” (because Americans won't do the work ....Germans will?  Or is it Spaniards?) wrote a reader at Green Inc., who pointed out that American officials had repeatedly warned that the United States could lose its competitive edge on renewable energy manufacturing to China.
  • “Thank you for killing the U.S. windmill industry,” wrote a reader from Chicago at Green Inc. “Thank-you, U.S. industrialists and financiers, for having us buy these things with financing and grants emanating from money borrowed from China.”

China obviously has no qualms with protectionism...Europeans have also complained strongly about this.
  • As Keith Bradsher wrote earlier this year in The New York Times, by establishing prohibitive quotas for homegrown solar and wind turbine equipment, and disqualifying bids from foreign companies on dubious grounds, the Chinese leadership has muscled out American and European manufacturers of clean energy seeking to gain a foothold in China’s burgeoning market for renewables. 

And it gets better than that in the bigger picture - when we look at more than 1 deal:
  • In a somewhat intriguing coincidence of timing, Mr. Choma and his colleagues published, on the same day the Chinese-American wind farm deal was unveiled, a detailed analysis of where stimulus money aimed at creating renewable energy projects and jobs in the United States was flowing.
  • By Mr. Choma’s reckoning, 84 percent of the $1.05 billion in clean-energy grants distributed by the government since Sept. 1 has gone to foreign renewable energy companies — specifically, wind companies. Through its American subsidiary, Iberdrola, a global manufacturer of wind turbines based in Spain, commanded most of that funding: $545 million
  • “We broke down some of the numbers and found out that the program funded 11 projects that installed 982 turbines,” Mr. Choma wrote in an e-mail message, “and 695 were built by foreign manufacturers.”
  • To some extent, this is hardly surprising. As Mr. Choma noted, the American clean energy manufacturing base — particularly its wind turbine production capability — is tiny compared with that of Europe.
Not to worry - there is still hope!  Only $1B down, and $21B more to go. Certainly by this time next year countless wind turbine mfg plants will have spread across the American heartland and instead of 84% of all monies going overseas, a far more palpable number... such as 82% of the remaining $21B will be a direct transfer from our grandchildren's future liabilities balance to foreign entities.  Boo yah!
  • And to be sure, the dispensation of the $22 billion in stimulus funding that is supposed to go toward renewable energy projects has only just begun.
And once more the key below.... as we hollow out manufacturing because that kind of work is too expensive in the US and is best left for cheap locales like... Germany.
  • And as Mr. Choma noted, when it comes to stimulating the economy, it is the manufacturing that matters. (here all this time I thought it was wasting trillions on pushing up home prices and getting people to daytrade their deed?) He points to a 2004 study from the Renewable Energy Policy Project, a research institute based in Washington. The institute found that for every 1,000 megawatts of installed wind capacity had the potential to generate as many as 4,300 jobs, of which about 3,000 are created at the manufacturing level.  (oh well, we still have our financial oligarchs who can help finance the clean energy deals and while it doesn't create a lot of jobs, it creates a lot of wealth for that tiny sliver of society - and that's the important thing.  Because then - per dogma -  that wealth will trickle on, err trickle down to the rest of the society... especially former workers in manufacturing now living the middle class dream as Walmart clerks)

Good News Sold, S&P Turned Back at 50 Day Moving Average

Definitely a different market character the past 2 weeks versus what we saw the previous months.  These type of "better than expected" economic reports used to crush shorts... while they were forced to cover this morning, we've since sold off and been rejected at the 50 day moving average. 

The next key point for bears will be creating a new low below those of Friday (1034).... but things certainly are very different.  I don't like the feel of this market at all, and I continue to preach extreme caution.   If this downward reversal holds up it will be the 4th in 8 sessions.  "Buy the dip" has burnt people quite a bit the past 2 weeks but they have recency bias and will continue to keep trying.  If S&P 1034 is broken, S&P 1020 should very much be in play.

We'll look to add some short exposure, nothing major, on a break to new lows if and when.  Otherwise we live in cash while this volatile market steals money from people's pockets.  I am also considering buying some long term put protection as we did 6-10 weeks ago (all of which expired nearly worthless) in case a much larger move ensues downward.  Almost did it this morning but still worried about all these news events later in the week.

EDIT 12:52 PM - and there she goes, new lows.

EDIT 2:00 PM - Epic battle here around S&P 1034.  

NYT: Are Chinese Video Game Makers a Threat to Western Operators?

An interesting blurb in the New York Times in one of the sectors still exhibiting relatively decent (non government) performance in the U.S. - video games.  Electronic Arts (ERTS) just seems to have lost its way - and judging by its stock, it seems to have missed the notice that we're in a new bull market.

Meanwhile Activision Blizzard (ATVI) took the reigns of leadership during this last console cycle - however the stock has fallen off a cliff of late, and really has been range bound.

Smaller players like Take Two (TTWO) and THQ (THQI) seem to rely on just 1 or 2 big hits (or busts) ... or face management issues.  So perhaps there is an opening for Chinese players to come into Western markets despite the very obvious cultural differences.

First a quick look at the domestic industry, per CBSMarketwatch:
  • Video game publishers are gearing up to report financial results for the September quarter starting next week, but the industry is facing even more pressure in the year-end period, which will have to produce a lot of sales to make up for a long slump earlier in the year.
  • Results for the quarter ended Sept. 30 are largely expected to be solid, given the release of strong titles such as "The Beatles: Rock Band," "Guitar Hero 5" and "Madden NFL." The quarter also benefitted from price reductions on game consoles.
  • However, sales in the industry are still down from last year. And analysts are growing more skeptical that a strong holiday season can help the year fully recover.
  • He (analyst) now expects sales of game software for the U.S. and Europe to be down 4% in 2009 from the previous year. He had previously predicted a 4% gain in sales for the period.
As we entered the don't call it a recession in latter 2007/early 2008 - I thought this niche of consumer discretionary would be among the least affected since gamers tend to be hard core and willing to give up a lot of other things.  Also $40 is a relatively cheap form of long lived entertainment.  I still think that to be true, but it appears the casual gamer has been hit harder than even I (being Mr. Dour) thought. [Apr 14, 2008: Stuff I've Been Negative on Since Fall 2007]
  • According to data from the NPD Group, game software sales in the U.S. were down 12% by the end of September compared to the same period last year.

So do we have an opportunity for an Eastern invasion by the Shanda Interactive's (SNDA), Perfect World's (PWRD), Changyou's (CYOU), Giant Interactive's (GA), and Netease.com's (NTES) of the world?  (full list of Chinese online gaming names via TickerSpy here)

Perhaps... via New York Times
  • Armed with cash from recent listings, Chinese online game makers are gearing up to play in Western markets, challenging the industry’s leaders, Electronic Arts and Activision Blizzard, on their home turf.  Having prospered at home, companies like Changyou and Shanda Games want to join China’s export machine by sending their wares abroad.
  • Changyou, which raised $120 million in a Nasdaq initial public offering in April, is in the final testing stage for a martial arts multiplayer online game, Dragon Oath, for the U.S. market. It plans to start selling the game at the end of 2009 or early 2010. The company began testing the game in Europe in August.
  • Many game players in the United States still prefer consoles like the Microsoft Xbox and the Sony PlayStation to online play.  However, analysts said a slow but sure shift toward online gaming, which allows for flexible formats and multiple players and can be played at Internet terminals and cellphones, is taking place and should benefit Chinese online game developers.
  • “The Western markets are changing; it is a console-driven market but I think M.M.O. games are the next wave,” said Atul Bagga, an analyst at the research company ThinkEquity, referring to what are known as massively multiplayer online games. “E.A. and Take Two Interactive are strong on the console side, but online gaming is a very different animal.”
Any of you who play World of Warcraft or have kids who do - know how multiplayer online games have taken off in certain niches.
  • With more than 50 million online players, China is expected to have more than 40 percent of the global market by 2011, according to Samsung Securities.
  • Where Asian game operators have a head start is in their microtransaction business model, whereby players get the game free but pay small fees each time they want an upgrade for their character, like a map or a weapon. This differs from the business model in the United States and Europe, which is subscription-based.  (not sure if that business model will go over in the States)
  • Analysts said Chinese computer game companies like Changyou and Perfect World have the operational expertise and business model to take on global rivals. In September, Shanda Interactive spun off its gaming unit, Shanda Games, to expand overseas.
  • The U.S. console market makes up about half of the global gaming market, with console software set to bring in an estimated $26 billion in revenue in 2009, according to Samsung Securities and UBS.
  • The online game sector is growing rapidly, with revenue expected to grow 21 percent to more than $13 billion in 2010, according to Samsung Securities.
  • South Korean game makers like Nexon and NCsoft have had success in overseas markets, but Chinese companies may find it tougher because of the competitive landscape, high entry costs and cultural baggage.
  • The issue with most Chinese gaming companies is that the games they have are very Asian-themed, so for the Western audience it is difficult for them to associate with,” said Mr. Bagga of ThinkEquity.  Unfamiliarity with Western gamers’ tastes is also a potential pitfall for the Chinese companies in that they will have to spend much more than they do in China to promote their products in those markets.
Long Perfect World in fund, no personal position

The Market with no Memory from Day to Day

What has been a tradition in this market where so many hair triggers are set to instantaneous computer exploitation of every incremental data point is a complete lack of memory from day to day.  A bad labor report nearly 4 weeks on a Friday ago was completely forgotten by the following Monday.  A "good" GDP report last Thursday was completely forgotten by Friday.  Whereas in the past you built a mosaic of the market over time, today's era of market has almost no sense of memory outside of the current 6.5 hour session.

ISM Manufacturing (only 12%ish of the economy mind you) came in better than expected and so did pending home sales and construction spending.  ISM Services (Wednesday) is the far more important report but people still seem to think the US economy is like it was in the 1960s/1970s with their focus on manufacturing.  Different importance in a few rust belt states....

As for why we are building out new construction when we have 18M empty homes, and countless extra commercial real estate is a question you have to ask your federal government.  Consider it the Japanese plan - build things to keep people working, even if there is no need.  [Feb 8, 2009: NYT - Japan's Big Works Stimulus is a Lesson]

Very difficult to apply techniques in such a news driven environment; at this point we are hovering right around the 50 day moving average again.  It just shows you have to take profits quickly in this environment because the entire landscape can change on 1 news report. We'll expect to herky jerk again Wednesday and Friday in similar fashion - guessing if its up or down is akin to placing your chips on red or black.

Conseco (CNO) - A Chance to Follow John Paulson with Less Hype?

I have been following insurer, Conseco (CNO) for a good 4 months as I looked over potential "home run" plays (or on the other hand, a strike out) and was surprised to see hedge fund megastar John Paulson swoop in for a 9.9% stake about 3 weeks ago.  I've been watching the name since, and it has given back all of the huge gain it experienced when news of the Paulson investment broke.  (filled the gap)  There is a nice entry point here, right above a key moving average - however the company reports Wednesday which will provide the normal hectic volatility so we're most likely going to sit and wait.

But as I look for new ideas this is high on my list, and now that the lemmings have been chased out of the stock - you can get it for the same price as before the Paulson news.  With nearly a dollar of potential earnings, a return to "normalized" valuation once bankruptcy is thought to be completely off the table could offer some great returns - then again some of the future steps to continue to offset bankruptcy might include more dilution!

Conseco, Inc., through its subsidiaries, engages in the development, marketing, and administration of supplemental health insurance, annuity, individual life insurance, and other insurance products for senior and middle-income markets in the United States. The company operates in three segments: Bankers Life, Colonial Penn, and Conseco Insurance Group.

Here is an article from the day the news broke and why it is an important development to keep the company out of bankruptcy.
  • Shares of insurer Conseco Inc. soared to a 12-month high Wednesday after it announced measures to significantly strengthen its balance sheet, including an $77.9 million investment from prominent hedge fund Paulson & Co.
  • While the moves will dilute existing shareholders they will allow Conseco to retire debt and could help offset credit losses, FBR Capital Markets analyst Randy Binner said in a note to investors Wednesday. He upgraded Conseco to "outperform" from "market price" and raised his target price to $9 from $4.
  • Analysts had said Conseco needed to find a solution to its $293 million in debt due in Sept. 2010, with one saying in April that the company might have to seek bankruptcy protection if unable to do so.
  • "The vote of confidence by a widely known and well-regarded firm -- here in the form of a long-term equity investment -- should send a positive message," wrote Fox-Pitt Kelton analyst Paul Sarran in a research note Wednesday.
  • On Tuesday night, Conseco announced a three-part plan to shore up its capital base.
  1. sell Paulson 16.4 million common shares and warrants to purchase 5 million additional shares for $77.9 million. That give Paulson a 9.9 percent stake in Conseco.
  2. sell $293 million in senior convertible debentures due 2016. The debt will be eligible to be converted into common stock after June 30, 2013. Paulson will buy up to $200 million of the debentures. This debt will be used to purchase existing debt.
  3. plan a potential stock offering that would net Conseco about $200 million.
With roughly a $1 B market cap, another equity offering of $200 million would be quite dilutive but even taking a 20% haircut to 2010 estimates leaves you with around 75 cents in EPS.   If you slap a 15 multiple on that you are talking a potential double digit stock price by the end of 2010.  As for the debt side of the table I won't pretend to hold a candle to Paulson's team, but if they saw enough to make an investment (including equity) it should be quite credible.

[Aug 12, 2009: John Paulson Makes Bank of America 2nd Largest Holding after Gold]

No position but watching closely

Sunday, November 1, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 13

Year 3, Week 13 Major Position Changes

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

Cash: 85.9% (v 86.5% last week)
21 long bias: 11.8% (v 10.5% last week)
3 short bias: 2.3% (v 3.5% last week)

24 positions (vs 23 last week)

Weekly thoughts
Last week we started our weekly summary off with "Call me Cash.... James Cash.".  This week? See last week.  We've properly exited the market as individual names have broken down one at a time, even as the larger indexes were holding up [Indexes Do not Tell Tale of Damage]... and then finally the indexes broke.   Now we have the potential for quite a sea change brewing; quite fascinating how quickly things can change.  Here is the chart we posted just 7 days ago:

Obviously we've broken through all the cute green arrows; and with that about 43 S&P points - or 4%.  About 7 sessions earlier came the first shot across the bow when the S&P gave up 1.5% in the last 45 minutes of trading - that was reversal #1.  This past Monday we suffered another reversal of similar stature but mid day instead of end of day  [Oct 26, 2009: Holy Weird Action Batman] but as the national ethos has become "buy the dip, any dip... or risk looking like a dip" we opined whether we would just experience another surreal 180 degree reversal back up after breaking support; a very rare occurrence until the past 3 months [Oct 26, 2009: A Real Breakdown or a Trap of the Bears? Do We Rally Sharply on Wednesday?]  To a market that has been so cruel to bears, finally the bulls experienced a series of "Punk'd!" moments.  But not before one last face wash to bears ... the sell off Wednesday, which took the S&P 500 below the 50 day moving average... which once again should of been bearish, was forgotten Thursday at 8:31 AM (GDP) as the market reversed in premarket and rallied all day.  Bears' shoulders sunk, and smug bulls said "here we go again".  But it was not to be, as we experienced yet another intraday reversal Friday that just built on itself - and we ended the week with yet another breakdown below the 50 day.  So here we are:

With such a quick selloff, one would expect some sort of buying pressure in the first half of the week.  If this indeed is something for bears to build on, that rally should be sold / shorted into and a real bear trend begins.  This would seem the probable path, but the news events of the week will make things much more difficult.  On the docket, a Fed meeting Wednesday and monthly labor report Friday. So we face more risk of 180 degree changes in directions that disrupt charts - just as we saw Thursday with GDP premarket  Not a time to be too cute.  Technically the "box" we're looking at is 1047/1048 on the top side (20 day moving average) and 1020 on the bottom.  A break of 1020 would indicate the first "lower low" on the charts in many moons, leading to the potential to turn bulls into turkeys.  11 months of the year - not an issue; in November however - not a great position to be in. *gobble gobble*

As for the Fed meeting, in a display of how silly the casino has become all eyes will be on 1 phrase. "extended period" as in, we are happy to provide free money to speculators and our banking oligarchy for an extended period - rather than anything shorter than an extended period.
  • But now senior officials are starting to mull changing the statement in a way that would soften this guidance.
  • Strictly speaking, the “extended period” guidance is not a commitment but a forecast: it spells out what the Fed expects to do based on current information, rather than what it will do in all circumstances.
  • ....policymakers worry that changing the “extended period” language could be misinterpreted as a signal that rate rises are imminent when they are not.
  • Another is that policymakers might retain the basic structure of its guidance but progressively water it down over time, as they did in 2003 and 2004. For instance, the Fed could start by moving back from “extended period” to the original phrase “some time”. The Fed is likely to prepare the ground for a statement change through speeches or testimony first.
As I've said many times, Bernanke is a history buff - he will over stimulate to a degree that makes Greenspan blush before pulling the plug too early.  Much of this nascent dollar jump is people believing there might be some sort of change in signal, with ideas that rates will tighten summer 2010.  My view is there are incredible structural (not cyclical) changes happening to the economy, overlaid with the a credit disaster and cyclical tsunami and easy money will be readily available for far longer than the consensus.  I still look for early 2011 until any rate hikes and even then I expect Greenspan like "easy money" for a long time so the US can create new bubbles that it will call "growth" and "job creation".  Without allowing the market to ever clear, we will continue down this same path over and over again with no one honest enough to talk about root causes.  Hence I believe the potential exists for a rally Wednesday circa 2:15 PM because the Fed bows to the markets and never wants to "upset it".  If language were to be changed one would see Fed minions telegraphing it in speeches in my opinion; we have not seen that so I'd be shocked to see those 2 words changed.  But again, it shows you how inane the "game" has become... going from extended period to some time might mean the difference between 5% on the S&P 500 and billions upon billions of market capitalization.

Of course we are still in the heart of earnings season, but all things will take a back seat to getting a clear signal that our central bank will provide a punch bowl for ever so longer, followed by Friday's (useless) labor report.  Everything else this week will just be details.  ISM Manufacturing , Construction Spending, and Pending Home Sals are out Monday morning; Factory Orders Tuesday, ISM Services Wednesday, and Consumer Credit Friday.  But the oxygen will be sucked out of the room by Fed & jobs.  Keep an eye on the dollar at all times as all the world has simply become an inverse dollar trade...

We will also be watching the charts in the areas we highlighted Thursday morning.  [What We've Done, What We're Doing, What We're Looking At]

As for the portfolio, per our over riding strategy we've exited position after position as they have broken key support levels - Wednesday morning was particularly telling in how many stocks we were stopped out of.  When an oversold bounce does occur, it will be tempting to think this is all over as stocks surge (surely many 8 to 10% in 1 session as we saw last Thursday) but unless your time frame is extremely short, that could be quite the trap.  So with key news events, a market which has suddenly turned far more volatile, and some key technical levels in all directions - only the most agile should be partaking heavily.  For most, it is better to understand this is a marathon and the direction of the next path will be far clearer in due time.  I will note all I hear on the internets (sic) is what a buying opportunity this is, and another 2-3% and we should be 'good to go' for the year end rally.  Perhaps it is just that easy but I rarely like to be hanging out with the consensus for too long.

For the portfolio we remain in another week of extreme cash, allowing ourselves to dance at the party on clear breaks in the chart, but we don't stay long.  With the 50 day moving average broken both on the indexes and individual stocks we'd be looking for some more core equity ideas on the short side - which we can easily stop out of if the market goes against us.  On the long side we are down to 5-6 material long positions which will be monitored to cull, if the market continues to degrade.  We said last Monday "the next 48 hours should be interesting", and I expect another week of fireworks - much of our capital will be snug under the mattress until things become more clear.  We continue to believe a mirage, Ponzi like economy has been brought to us by our generous leaders (political and central banker) but as always it does not matter until it matters.  I always get a kick when the same news that is ignored for months on end suddenly becomes "news worthy" and "a reason to sell" - I look forward to seeing another period like this in the not to distant future.

First Time Home Buyers and Investors Dominate the Housing Market

Via Calculated Risk blog, some examples of how dependent the market is on first time home buyers and investors.  Now that we have a new (and improved) tax credit of $6500 rolling through Congress to the "move up" buyers we'll see if government can incentivize that class to start daytrading homes as well.  The only issue is so many of them are underwater on their homes, [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater] [Mar 9, 2009: One in Five Houses Underwater]   so it is sort of difficult to buy a new house (even with government handing free money out) when you still have to deal with that unfortunate investment you made in your old one.   Unless, a new national fraud is institutionalized - that is (1) buy the new house with the taxpayer's money & "super cool FHA mortgages", and (2) then walk away from the old house / mortgage, once the new one is secured.  You take a hit on your credit report but oh well - you have a new house, at a much cheaper price, and the taxpayer can deal with the mess.  In about 5 years you are good to go as the default moves to the bottom of your credit report, and within 7 years.... all gone.  Let's see if we start hearing of rampant examples of this "strategy" by next spring.

Here are snippets from 3 of the hardest hit markets - we won't rehash what the housing market would look like without $1 Trillion+ of national treasure wasted by the central bank to push mortgage rates down below reality, and billions spent to pull in first time home buyers from 2010 and 2011 into 2009.

While housing prices are now far more affordable then they were just a few years ago, and the median has reached the upper end of where  I projected in 2007 (when almost all the cheerleaders pundits declared housing prices could not fall nationwide in America) [Dec 6, 2007: Analysis - What Should Median Housing Prices be Today?]  I am convinced the action of our leadership to keep prices elevated, will lead to yet another leg down.  Certainly it won't be so frenetic as we've just seen, because 30-40% drops from here would have prices back to 1980s levels, but unless we're going to permanently have a $8000 tax credit (therefore simply pushing the prices of all homes $8000 higher than they should be) and mortgages rates will never again see the light of >6%, we're living in a new mirage. Further, I expect a whole new supply of homes to come on to the market in about 3 years from new "buyers" using the FHA programs of "bad credit!? no problem! nothing down to boot!" financing we've now institutionalized ... Subprime Nation lives on.  [May 6, 2009: FHA - The Next Housing Bust]  [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance]  [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]

Again just try to imagine America with 6.25% thirty year mortgages and no federal handouts to buy homes. That could easily be the reality in about 30 months. 

Via Calculated Risk

Las Vegas:

In September, a popular form of financing used by first-time home buyers – government-insured FHA loans – accounted for 53.8 percent of all home purchases, up from 52 percent in August. Absentee buyers bought 40.4 percent of all Las Vegas–area homes last month – the highest figure for any month this decade. Absentee buyers are often investors, but could include second-home buyers and others who, for various reasons, indicate at the time of sale that the property tax bill will be sent to a different address.

Think about that for a moment - "investors" (as a % of all purchases) account for more purchases in Vegas than at the height of the bubble.  Combined, these 2 forms of purchase account for 94% of all purchases in the "recovering" Vegas market.


A popular form of financing used by first-time home buyers - government-insured FHA loans - accounted for 45.0 percent of all September purchases, while absentee buyers bought 29.7 percent of all homes last month, according to an analysis of public property records.

Again in Miami, these 2 forms of purchase account for 75% of all purchases.


First-time buyers and investors remained the market’s lifeblood. Last month 46.7 percent of all Phoenix-area buyers used government-insured FHA loans, a popular choice among first-time buyers, according to an analysis of public property records. Absentee buyers made up 38.5 percent of all purchases ...

Figures in Phoenix actually surpass Vegas!  95% of all purchases are due to these 2 type of buyers.   The "move up" buyer is nowhere to be found.

As Calculated Risk concludes

We are far from a healthy market ...

Updated Position Sheet

Cash: 85.9% (v 86.5% last week)
Long: 11.8% (v 10.5%)
Short: 2.3% (v 3.5%)

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 (1 photo file)


Bookkeeping: Bought BHP Billiton (BHP)

As I am reviewing trading history for the week, I missed a limit buy order that went off late Friday.  On Monday, we had sold just about all our BHP Billiton (BHP) [Oct 26, 2009: Bookkeeping - Sold Most of BHP Billiton (BHP) - Looking to Rebuy Soon] in the mid $72s anticipating some dollar strength to knock these commodity stocks down.

However, since we are SO overdue for at least a few day rally in the pig (with lipstick on) that is the US dollar I'll take almost all the rest off here, and see if we can get our cost basis lowered.  Commodity based stocks, in particular, would get trashed if the dollar rallies.

Specific to BHP there is a flagrant gap at $69ish where we'll get back part of our stake... and yet another at $65 which would be a nicer place to re-engage.  Caveat: BHP is a very 'gappy' stock, since it is Australian based and tends to gap open (up or down) often - so the gaps mean less in this chart than most.

The chart on Monday looked like this...

The stock literally moved the rest of the week as we called it on Monday; both gaps filled in succession so we bought per our playbook, first a smaller tranche and then a larger one.

Wednesday, as the market was in freefall we simply bought back our original stake in the $68s quickly lowering our cost basis, but we were still aiming for the gap at $65

Bought back the BHP Billiton (BHP) we sold earlier this week in the $72s for $68s - not a large purchase but just got us back what we sold, at a lower cost basis.  Placing a larger buy order at $65, just scaling in slowly.

That hit late Friday.  Doesn't mean BHP cannot continue going down.... if the dollar keeps running all commodities will be trashed but we were able to lock in gains, and swing around a position to rebuild it at a lower cost basis.  If it falls too much farther from here, we'll exit but from a lower cost basis and hence a smaller loss.   Like so many of the stocks in our watch lists and in our holdings, the 50 day moving average has been broken so potential for much larger drops in the stock price await.  We'll give this one a leash up to somewhere near $62; with a potential "double top" and Asia (BHP is Autralian based) surely to open ugly Monday, we might be out of this position quite quickly.. 

Position size after both purchases went from 0.1% to about a 1.4% exposure.

The chart now...

Long BHP Billiton in fund; no personal position

Saturday, October 31, 2009

Barron's: A Scare that Can Last Beyond Halloween (Technical Analysis)

Since technical analysis is more art than science, I rarely will post someone else's technical analysis but this Barron's piece follows in my footsteps - KISS technical analysis so I thought it was worthy to share.  Further, it corresponds with my thoughts that the markets could be in trouble in the intermediate term and now is a time for supreme caution.  We see some compelling trends - the NASDAQ breaking its trend line drawn from all the lows since March 2009; the "leading indicator" transport index forming a "double top" etc. 


On a related note - I've received a few emails asking about how to learn about technical analysis or what books to read.  I am sure there are some excellent references but essentially everything I've learned has been picked up in drips and drabs over the years from this place or that on the internet.  Certainly if you google technical analysis you can begin discovering many resources and my best advice to learn is just to read blogs and websites that utilize it.  Blogs were not around when I started investing (we had to walk to the computer uphill, both ways, in the snow, barefoot....) so it's a great avenue to learn that has not always been available.

I spent the first 5 or so years in equities completely oblivious to "TA" and when I look back now at how I used to invest it scares me to death.  "If only I knew what I did not know".  Then again we were all geniuses in 1999 so why did I need to bother to learn about "tea leaves".  I will also emphasize in college course terms I use Technical Analysis 101... there are countless "indicators" and many investors have incredibly sophisticated systems.  (TA 301, TA 401 courses)  That doesn't mean TA 301, or 401 is better - it just means there are many far more extensive methods than what I use.  There is also an entire class of traders out there (some institutional) who could care less what a company does, if it makes money, or any of those type of factors - all they use is the stock symbol and their charts.  We are a hybrid of fundamentals and technicals; there is a reason we buy these companies but if the charts go against us, we are not going to lose massive amounts of our capital to prove a fundamental point.  I read a lot of mutual fund manager interviews to see what the "competition" does, and I am aghast to see almost no one use technical analysis... frankly in a computer dominated market, I think its importance is growing by the week.  [Aug 24, 2009: John Hancock Technical Opportunities Fund Becomes 2nd Technical Analysis Based Mutual Fund to Launch]   The more tools on your tool belt... the better.

Technical analysts seek to identify price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary.

Technicians especially search for archetypal patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants or balance days.


On to the Barron's viewpoint:

(I) On Tuesday, the Nasdaq made two bearish moves. The first was a drop under last week's small trading range (see Chart 1). The more important was the drop under the rising trendline drawn from the March low. Indeed, it's time to look for a real correction once again.

To be sure, when a major trendline breaks, it does not always signal an imminent decline. Many times, the ensuing phase can be sideways as excesses built up during the rally are worked off. Therefore, we have to reign in the doom and gloom until a true declining trend emerges.

For now, however, the deterioration in market breadth is unmistakable. While the traditional measure of breadth, the advance -- decline line, has not yet broken down, many sectors are starting to turn south.

(II) Many consider the recent drop in the Dow Jones Transportation Average to be one of the more significant sector declines.  The transports index is now down over 8% from its peak set just last week (see Chart 2). But even more than the raw decline, chart watchers will notice a potential double top brewing.

A double top, sometimes called an "M" pattern due to its shape, suggests that the force of the rising trend has abated. If the index falls below support at the trough between the two highs, the pattern is completed and a sell signal is given.

For the Dow transports, that level is 3656. However, after the steep decline already in place, it would be no surprise to see a bounce before that happens. After all, one of the tenets of technical analysis is that support is presumed to hold unless proven otherwise.

But this is short-term thinking. The long-term chart shows that the twin peaks of the past few weeks occurred at a rather powerful resistance level near 4060. This price level supported major pullbacks in July 2006 and January 2008 and resisted the bounce of November 2008, so it has been important for several years.

(III) For the benchmark Standard & Poor's 500, another technical negative is visible (see Chart 3). Drawn from the important interim low set in July, a set of three trendlines called "fan lines" is evident. (Mark's note: "fan lines" is not something I use)  Evoking images of a folded paper fan, this pattern occurs when a trend is starting to gradually roll over.

The theory behind the pattern is that an early-rising trend is very steep and therefore unsustainable. The market dips below it, but rallies to a new high at a slower pace. This second line is then broken on the ensuing correction, but the market turns higher once again to set yet another new high.

Note that each rally halts at the previously broken trendline. When the third line in the set is broken to the downside the bulls finally give up and the market falls.

Similar to the transports, the S&P 500 is now sitting on support from its 50-day moving average. Short-term oversold conditions may prompt some opportunistic buying at these levels, if only to cover short positions.

But with the failure for the Nasdaq to advance in light of giant jumps higher in some of its major components, and with the deterioration in overall market breadth and the "fan lines" breakdown in the S&P 500, it does look as if the market is ready to pull back.

WSJ: ChiNext, China's Self Styled NASDAQ, Shines in Debut

If you are not familiar with the "closed" system of investment in China's multiple stock markets feel free to review this post [Oct 13, 2007: Shanghai the Mystical Land of Premium Valuations]  but it appears the Chinese have a new gambling hall... the ChiNext!  Need a new place to stick all that excess liquidity rolling around the world. [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market]

Via WSJ:
  •  ChiNext, China's Nasdaq-style stock market, opened with a roar as its initial batch of companies logged gains of as much as 210%, underscoring China's investors' appetite for new listings.  At the end of the day, the market capitalization of ChiNext as a whole stood at 140 billion yuan ($20.5 billion), more than double the 68.6 billion yuan total based on the firms' IPO prices. 
  • The explosive debut, which left the exchange's stocks trading at around 100 times earnings, comes as broader concerns that lower interest rates, huge fiscal stimulus and a growing appetite for risk amid improvements in the global economy are causing potentially dangerous asset bubbles across Asia. Property and stock markets in China and other countries have been rising quickly, and China has seen an increase in inflows of speculative "hot money."
  • Within hours of the trading start, all 28 ChiNext stocks had risen to the point where one after the other they were forced into temporary trading halts by the Shenzhen Stock Exchange, which hosts the upstart venue.
  • All the ChiNext stocks finished the day with robust gains, led by Chengdu Geeya Technology Co., a cable- and digital-TV equipment maker, which rose 210% to 35 yuan from its initial public offering price of 11.30 yuan. The other 27 stocks logged gains ranging from 76% to 195%.
  • The share gains fueled concerns that the exchange would mirror the performance that tends to define new listings in China: large initial gains followed by a brutal pullback. 
  • A Shanghai-based individual investor said he sold all his ChiNext-listed shares on Friday, on concerns the stocks' high valuations wouldn't be sustainable. "I had expected the stocks to rise," he said, "but I hadn't realized that they could rise that much."
  • ChiNext was set up as a fund-raising venue for small, innovation-driven firms, which were largely closed out of China's recent lending boom. 

[Sep 11, 2009: China Opens Door to Foreign Listings]
[Apr 3, 2008: NYT - To See a Stock Market Bubble Bursting, Look to Shanghai]
[Jan 28, 2008: Nikkei, NASDAQ, Homebuilders.... China Next?
[Nov 1, 2007: PetroChina the 1 Trillion Dollar Company? Is *this* the Top?]
[Sep 1, 2007: The Growing Bubble in the Shanghai Index]
[Aug 28, 2007: China "A" Shares Bubble]

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