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]

Fund My Mutual Fund's Most Popular - Last 60 Days

We always post our weekly most popular blog entries in the right margin so if you are curious in what is attracting the most interest, just sneak a peek there.  With quite a few new readers of late I though it would be convenient to list some of our more popular posts of the past 60 days.

"In case you missed it"... here are posts readers were most interested in

(I) "Pundit Related Posts"

  1. Julian Robertson: US 'May Face Armageddon' if China, Japan Don't Buy US Debt - here 
  2. Marc Faber Video, August 2009 - here (note: one of the best videos of "truthiness" I've ever seen)
  3. Paolo Pellegrini, Formerly of John Paulson's Hedge Fund on Bloomberg - here
  4. Doug Kass Interview at RealClearMarkets - here 
  5. Barton Biggs: Only Halfway Through Stock Market Rebound - here
  6. Kyle Bass Hayman Capital October Letter to Investors - here

(II) "Non Pundit Posts"

  1. Largest Gold Reserves by Country - here
  2. Citigroup in 2006: America a Modern Day Plutonomy - here
  3. Mutual Fund Investors Cling to Safety of Bonds, Missing Stock Rally - here 
  4. YouTube: Debtors Revolt Begins Now; Barney Frank Flummoxed by the Oligarchs - here
  5. A Real Breakdown or a Trap of the Bears? Do We Rally Sharply Wednesday? - here
  6. Do the Bottom 80% of Americans Stand a Chance? - here (note: this is our most popular post of all time)

Friday, October 30, 2009

Intraday Bounce at S&P 1034

Just an update... we fell to S&P 1034 earlier in the session - about 1:30 PM - this marked the low of the day... bounced... and now just hit S&P 1034 again 5 minutes ago. 

On an intraday chart we are either about to make a double bottom (bullish) or break to a new low (bearish.  No different than a normal chart we look at, except its INTRAday rather than INTERday.  Due to the nature of the frantic session, we're switching to a much shorter time frame to decide what to do in the closing hour.

[click to enlarge]


If S&P 1034 is the floor, I'll actually start covering / selling our puts because it could be a frantic move up on technical measures.  I don't think we'd go green but we could go well into the 1040s.  If 1034 breaks, we're heading to the S&P 1020s.

S&P 1034 is the line in the sand for these last 50 minutes.

I'll edit this post with any decisions.


EDIT 3:30 PM - covered TNA / sold all puts as S&P bounces to 1038; looks like a bounce off1034 for now

will rejoin short positions BELOW 1034 if and when ...otherwise wait til next week.  That's 4 S&P points away so good enough for us. Otherwise one can go long here for a quick trade as there is room to mid / upper 1040s -  but I am done for the day with my victory cigar. (virtual of course)   I'll be reshorting on any move to upper 1040s Monday and repeat the same thing we just pulled off with a clearly defined exit just over the 50 day.

Rough approximation of this afternoon's plunder below - both SPY puts sold, and TNA was covered. [this is not our exact tally since everything is 20 minutes delayed in terms of display]  (click to enlarge as always)

p.s. thanks to the readers who donated this week; glad to see you guys (and gal) making money.

I'll leave you with a note from Ken Wolff at posted today at 3:26 PM - this should sound familiar; I was saying this 18 months ago.

Ken Wolff
10/30/2009 3:26 PM EDT

This is one of the toughest trading markets I have seen in nearly 20 years of watching the market intensely, every day, tick by tick... I believe its because of the growth of hedge funds and program trading... Its really tough to stay on top of complex Algorithms... For a large part of this market, fundamental common sense is lacking...

With Apologies to Thin Lizzy....the Bears are Back in Town? (Halloween Edition)

As of 20 minutes ago Doug Kass was "layering into more long exposure with JPM and PNC (banks)"  I have readers telling me to cover.

We have some enormous intraday gains on these puts... for once I'm going to be greedy.  We'll be willing to give up all the gains up to say S&P 1049-1050.  If so, we'll just end the day where we began, which isn't a bad outcome either.

It really is a lonely existence being on the dark side of the market.  Oh well, I still have my friends below and together maybe we can beat Kass and Summers. 

"Did someone call us?"

Costco (COST) to Roll Out Food Stamps Nationwide; Unemployment Falls at State Level - as People Drop Out of Workforce

A couple of items from the "real economy" - we have not had much time to focus on that this week as we lather ourselves in Kool Aid of federal government/central bank fiat money and all the good it does for us chosen folk in the speculator class.

First, yesterday we spoke about the nonsense that is government reporting; it appears the "You can't handle the truth" mantra has taken over the past 20 years in data presentations.  Long time readers will know of countless stories we wrote on the subject of these mirage economic reports throughout 2007, 2008 and occasionally in 2009.  At some point it becomes self defeating so we just sort of smirk most of the time now, instead of wasting any breath explaining why this or that data point had been fudged.  [Oct 2, 2009: True September Unemployment in America Reaches 14%]  But as we celebrate the sub 14% 10% unemployment rate that is "not as bad" as the late 70s/early 80s, I thought this story was an excellent example of how our new paradigm of economic reporting does a great job of sweeping reality under the rug.  The headline was promising ... well at least the first half of the sentence: Metro Jobless Rates Fall ... as More Workers Drop Out"

Gosh darnit, I had a barrel of green shoots to toss in the air, until I read the entire headline.  For newer readers this headline might be confusing but anyone who has been around FMMF blog for a while knows how diabolically broken our employment calculations are in the country... yet the mainstream media dutifully reports them from rote.  Of course the mainstream media is owned by major corporations, whose lobbyists dollars are well in place to make sure the "status quo" remains... don't want to rile up those peasants with reality based information.  Specific to the US labor reports, one of a myriad of flaws is the small fact that if a person is not actively looking for work for 4 weeks, a magical thing happens.  They no longer are unemployed.  Apologists will mention they went back to school (despite a lack of evidence of surging rolls in our universities) or perhaps were birthing a child (difficult for men to do, at last check; nor verified by a surge in baby births).

The reality is there is a massive underclass of (at best) undercounted or (at worst) tossed to the side.  [Apr 2, 2008: The Underemployment Rate is Rising]  When the frustration of countless closed / slammed doors cause people to drop out of an active job search... boo yah, our unemployment rate falls!  Or of course, some of these people get hidden away in other nooks and crannies.  Our welfare rolls are surging [Jun 22, 2009: WSJ - Numbers on Welfare See Sharp Increase] and I've read at least 3 pieces the past month (never had time to post on blog) about how disability insurance claims are shooting through the roof.  What this means is otherwise (relatively) able bodied people who cannot find work, simply have given up the ghost and filed for long term disability insurance.  Of course that costs the taxpayers but on the plus side... our unemployment figures improve from that trend as well.  Green shoots!

Let's take a closer look at the AP story I cited above - just remember this data when you hear the headlines blaring about "unemployment rates falling" - devil is in the details.  We long ago predicted another jobless recovery due to structural issues in the US and so far so good... this is nothing but a paper (printing) "recovery".
  • The September unemployment rate fell in 223 of 380 metro areas, or about 59 percent. The jobless rate rose in 123 metro areas, and was unchanged in 34. (sounds great!) 
  • The unemployment rate fell in September in most metro areas for the second straight month, although that's largely because more people gave up on job searches than found new work. (must you ruin this story with details when I'm trying to celebrate?)   Once jobless workers stop looking for work, they are no longer counted in the unemployment rate.
  • "The job market is not recovering at all yet," said Jim Diffley, regional economist for IHS Global Insight. "We're looking at another jobless recovery."
  • Nationwide in September, 600,000 people looking for work threw in the towel, the Labor Department said earlier this month.
So you can extrapolate that data in September for months earlier this year, and months in the future.  Please feel free to add ALL those people back into the "under 10%" unemployment rate for a dash of reality.

One example at the state level
  • Several metro areas in Wisconsin illustrate the trend: the state's unemployment rate dropped to 7.7 percent from 8.4 percent in August. (green shoots for those of us who only read headlines!) Three of its cities saw significant improvement in their unemployment rates: Wausau, Eau Claire and Fond du Lac.  But the work force shrunk in all three cities, while the state lost about 21,000 jobs. (however, brown shoots for readers of FMMF - I'm sorry for you leading you outside of the Matrix)
Two more example with large metro areas:
  • In Denver, the unemployment rate fell to 7.1 percent from 7.4 percent in August. Yet the metro area of Denver-Aurora-Broomfield lost more than 6,000 jobs, the Labor Department report said.  A drop in its work force of 14,600 people, or about 1 percent, reduced the unemployment rate
  • Portland, Ore., also reported what appeared to be a large improvement in its unemployment rate, which fell to 10.9 percent from 11.6 percent in August. While the metro area of Portland-Vancouver-Beaverton did gain a small number of jobs, its work force also shrank by about 1 percent.
So you get the point.  Now everything above is reality - that is to discuss with your friends.  On Wall Street we will choose to only look at the headline and scream "green shoots" as the CNBC pom pom girls cheer us on.  K.I.S.S.: "Unemployment rate dropping = economy improving =  buy stocks!"


 Let's turn to another subject... when I began this blog in summer 2007 I was already speaking of the food stamp issue not much thereafter.  As we were celebrating a "thriving" economy (based on daytrading homes and a stock market at all time highs),  we noted 1 in 11 Americans were on food stamps.  Quite shabby for the "richest country on Earth"... but not to worry, we've addressed that issue and.... uhh... oh nevermind.  We've since shot up in 2.5 years to 1 in 9 Americans.  [Jun 8, 2009: 1 in 9 Americans on Food Stamps]  Shhhh... keep it a secret, we don't want the "socialists" in Europe to know about these things - keep showing them Hollywood movies so they think we all live like Bradgelina. ("Oh those Americans have a lovely time... what a lifestyle!")

While all the talk (then) was how this economy was a barn buster and creating great wealth, we quietly noted that if you googled "food bank" the story was not quite so pristine. As we wrote nearly 2 years ago (again, as the Wall Street punditry and politicians were in denial) [Jan 18: One Lonely Voice Agrees with Me on Food Inflation]

my friend, try to look at the big picture... its scary. Call your local food bank if you don't believe me, we are already seeing anecdotal stories of large drops in food donations - after all canned beans hold their value more than our disastrous dollar.
  1. Food Bank Shortage in TX
  2. Food Bank Shortage in MI
  3. Food Bank Shortage in NYC
  4. Food Bank Shortage in Washington DC
  5. Food Bank Shortage in Pittsburgh
  6. Food Bank Shortage in New Hampshire
  7. Food Bank Shortage in Minnestota
Folks, I could do every state if I wanted... you get the picture - go run a check via Google. And it's going to only get worst as the economy worsens.

We also have noted over the past year, Walmart saying they see a huge rush of grocery purchases around "pay periods" (whether that comes from actual work, unemployment checks, food stamp card debited, etc). In English this means people are literally living paycheck to paycheck, and cannot buy minor items... such as food, in part of that space between pay periods.  [Dec 26 2007: Target Shoppers Turning into Walmart Shoppers]
  • Food retailing consultant Bill Bishop, of Willard Bishop Consulting, said Costco's decision shows how pervasive the pressure on consumers has become. He said more and more grocers are seeing their sales peak and fall based on when assistance benefits are distributed.

But as we know in America, the system has been hijacked to serve the people who run the banks, not those who stand in the lines at the banks; food or otherwise.  So don't worry - we're taking care of the "banks" - at least the ones that are served by Ben Bernanke  [Feb 20, 2009: NYT - Newly Poor Swell Lines @ Food Banks Nationwide] [Nov 14, 2008: Wall Street Journal - A Run on (Food) Banks]  And if you dare raise your voice you (a) are a socialist and (b) do not understand American corporate socialism free market capitalism.

Anyhow, as our "recovery" rolls on, the situation on Main Street continues to .... evolve.  I am always looking for canaries in coal mines for nuggets of truth.  We like truth, although others call truth "pessimism".  This story on Costco (COST) - they who cater to the "upper middle class" or above - now rolling out food stamps nationwide certainly looked like a little birdie to us.  Certainly we must expect a "Cash for Whole Foods Market Shopping" stimulus coming out of Congress by early 2010, no?  Even Costco executives were shocked by the response....
  • Costco Wholesale Corp. said Wednesday that it will start accepting food stamps at its warehouse clubs nationwide after testing them at stores in New York.  It's a big about-face for a retailer that has catered to bargain-hunting but affluent shoppers, and it's a sign of the grim reality facing retailers and their customers. 
  • The number of Americans relying on government food subsidies to eat recently hit a record 36 million. 
  • Company officials said they had doubted many customers would use food stamps but it turned out new members said they were joining precisely because the company accepted the assistance program.
  • Because about half of Costco's customers are small businesses and the rest tend to be more affluent than shoppers at traditional grocery chains, Galanti said, executives had assumed there wouldn't be much response to it accepting food stamps but realized that assumption may have been wrong.   
  • "Certainly this economy was a wake-up call," Galanti recently told investors. "It is not just very low-end economic strata that are using these (who) typically don't have purchasing power."
  • Most users no longer receive stamps, but instead carry the value on a card that can be swiped at checkout much like a bank debit card. That makes it easier and more discrete for shoppers and speeds the checkout and reimbursement processes for retailers.

Now isn't is wonderful that our leaders are trying to do everything in their power to "reflate" the US economy, causing even higher prices for us all, as wages stagnate?  Clearly a sensible policy - rather than letting prices fall to a point where actual demand meets supply and "relatively affluent" shoppers at Costco are not forced into the food stamp program.   I know - I have some hair brained ideas.

In summary, I apologize bringing you these news items, after all it's a recovery [Dec 15, 2008: The Economic "Recovery"]  as deemed by the stock market (which knows all)  and our newly minted positive GDP figure! So after you read this entry, I'd ask you take the blue pill, quickly forget it ever happened, and collect $200 as you pass GO.  Of course that $200 shall come from government... [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]

Remember, all I am offering is the truth - nothing more.

[Sep 11, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated]

Bookkeeping: Added some Short Hedges

Obviously on this break of the 50 day I have added some puts against the indexes... I shorted a relatively smallish amount of TNA earlier in the day before this breakdown happened just as a hedge when I noticed how many of my stocks were weak.

This looks "scary" for the bulls.

EDIT 1:05 PM - unless we recapture the 50 day moving average I'll be holding all short positions with a target to S&P 1020.  I don't see any real support before that level.  After that the 200 day comes into play (990 and rising by the day).  If that breaks things will turn very ugly, and we'll look for a "gap fill" at S&P 906... obviously the latter two are long term targets - I'm just mentioning them WELL in advance; we'll take profits on hedges if we get these next 20 S&P points next week.

EDIT 1:30 PM - getting a lot of emails so let me just answer here.  I won't be covering barring a miracle.  And no I don't expect a 3:30 PM miracle.  I think this is shaping up as a give up the ghost session; I'd be shocked otherwise.   The evidence of the past 7 sessions points to that.   Back to radio silence ;)

EDIT 1:35 PM:  Boo.

Nice Reversal - Back to the 50 Day Moving Average We Go

Trick or Treat Bulls?!

I think this must be the 3rd intraday reversal to the downside in I believe 6 sessions; it started a week ago Thursday.  We've now returned to the 1047 level, and the 50 day.  Remember we said, anything between 1047 and 1070 was white noise to us... now it gets interesting if we crash through this same support twice in 3 sessions.

If this occurs it will be time to view things with our bear shades I said in the previous post this bounce seemed shady to me as many stocks in my watch lists have broken charts.  Every so often I get lucky ...

I remain cynical on this bounce due to so many individual breakdowns in charts.  Until that changes it's hard to believe in just another easy bounce.

Again, let's expect at least a quick defense of 1047 as our tax money is used to prop up the equity markets the free markets come to defend the 50 day moving average.  What happens after that first cursory bounce is the important thing.  But...the more times we attack a line like this, the higher probability the free market eventually wins.

Bookkeeping: Stopped Out 2/3rds of Atheros Communications (ATHR)

Well, I am a little frustrated here since somehow the market bounces / goes sideways but quite a few of our positions are now down below the 50 day moving average... that's an interesting divergence that marks this pullback different (thus far) than the previous three episode since July.

Atheros Communications (ATHR) despite beating estimates AND raising guidance last week [Oct 20, 2009: Atheros Communications Trounces Analysts Estimates; Increases Guidance], has now faltered - we added back to our position post earnings report, but now have to offer it back to the market at a small loss, and will cut our position by 2/3rds until we see relative strength return. 1/3rd was sold yesterday in the $25.20s and another 1/3rd this morning in the $25.60s.  This *was* our largest position at at almost a 3% stake.

Hmmm... "double top" clear as day on this one.

At this point I am a little confused at what stocks are supporting the market other than the typical, Apple, Google cohort since so many of the small and mid caps seem to be breaking down.  Intellectually these type of divergences should bode ill for the market since 20 big cap stocks cannot lug around the entire market ever upward.  Further, if companies that just beat AND raised guidance last week can't be leaders, you have to scratch your head.

I remain cynical on this bounce due to so many individual breakdowns in charts.  Until that changes it's hard to believe in just another easy bounce.

Long Atheros Communications in fund; no personal position

Hugh Hendry Resurfaces on CNBC October 2009

We haven't seen Hugh Hendry, hedge fund manager of Eclectica on CNBC since June.  His trading calls have been out of sync with the market during this rally but he weighs in with a series of interesting videos as we see below.  Since the market disagrees with him, he has mostly decided to be on the sidelines; but with a great 2008 under his belt he can afford to sit patiently rather than "risk chasing" to make up staggering losses from the previous year.

His opening salvo touches on a theme we've been repeating for about a year and a half... it's student body trading everyone.  Guessing the direction of the market is 80% of the battle - all correlated, all the time.  HAL9000 style.  I also agree with much of the discussion on volume (who can tell anymore what is going on with so much of it computer dominated) and how the retail investor (or those "with money") have been burned so badly with 2 crashes in a decade, they have largely given up on the equity culture and/or cannot afford to be part of it anymore since their nest eggs have been so damaged. [Feb 5, 2009: Mutual Funds Have Tough Decade]  Many have simply been going to the lowest risk part of the spectrum, mostl likely disgusted with this massive transfer of wealth they've experienced ....on the low man on the totem pole.  [Sep 16, 2009: Mutual Fund Investors Cling to Safety of Bonds, Missing Stock Rally]

Some text to go along; gold, agriculture, low volumes, the "wall of money", and the Chinese yuan are among topics discussed. Hugh of course is always more compelling in video that the written word.   He definitely has some contrary views.

  • Stocks and gold are crowded markets and there is a risk that everybody will want to exit at the same time, Hugh Hendry, chief investment officer at Eclectica, told CNBC.  "I think it's all one way, all one trade, there's no diversification. You're either in the market or you're not," Hendry, who is the second-largest investor in his fund, told "Squawk Box" in London.
  • "I won't jeopardize my capital even for a rally as big as it is today," he added.  Hendry, whose strategy has been to shun the stock market and invest in bonds, said his fund was flat.
  • The remarkable thing about the stock market is "the absence of volume associated with it," Hendry said.  Compared with previous rebounds in stocks from previous recessions, volume in this recovery from the March lows is 60 percent lower, according to Hendry.
  • "I don't believe there's a wall of money," he said. "The bulls will tell you you'd better get in because there's lots of people sitting on the sidelines. But they said that in 2007… they didn't come in, and I don't think they'll come in this time."
  • It is too early to say whether companies' earnings point to a "real" recovery or to a short upwards cycle followed by a downwards one, he said. "Clearly we're having an inventory restocking."
  • Gold is a very good safe haven but, like any other asset classes, only when it's a contentious area, Hendry said.  "I made for my funds 50 percent investing in gold back in 2003" but gold is now a crowded trade, he added. "It doesn't provide any kind of safe harbour for me right now so I'm not there," Hendry said.
  • American companies' earnings are better than expected partially because of the weakness of the currency, according to Hendry.  "The dollar is incredibly cheap. I think sterling is incredibly cheap. Therefore, as an American company your costs are down."
  • But the belief, shared by some analysts, that we are witnessing the beginning of a bull market, is misplaced, Hendry said.  He evoked the consequences of the burden of debt on Germany after the First World War, when France and Britain wanted it to pay war damages, saying "that legacy of debt squashed the vitality of the German and European economy."
  • Today, the various stimulus packages have also left behind a legacy of debt.  "I think we're in a generation where returns disappoint until we deleverage the economy," Hendry said.
  • China will continue to buy US Treasurys, as a way of ensuring their currency is stable, and the fact that the yuan is not freed from the dollar is creating strains on the European and Japanese economies, he said.  
  • "The Chinese are not diversifying the reserves. They cannot diversify, because were they not buying Treasurys…if they weren't buying dollars, their currency would rise."

[Jul 8, 2009: - Hugh Hendry-Thon]
[Jun 30, 2009: Print More Money to Avoid Bigger Slump]
[Jun 18, 2009: Hugh Hendry Eclectica Fund Letter to Investors]
[Apr 28, 2009: The Latest Hugh Hendry]
[Apr 16, 2009: Hugh Hendry, Citiwire Interview]
[Mar 20, 2009: Hugh Hendry of Eclectica Asset Management is Wickedly Good]

Las Vegas Sands (LVS) Earnings "Ok" but CEO Talk Supports Stock; Hong Kong IPO Approved

Las Vegas Sands (LVS) is our one truly speculative fare in the portfolio - after sitting on the precipice of potential default banks swooped in [Apr 22, 2009: Wynn Resorts, Las Vegas Sands Amend Credit Terms] and helped both LVS and MGM Mirage (MGM) live despite yawning debt loads.  Las Vegas casinos was actually a group I was targeting 2 years ago as one of our canary in the coal mines when CNBC pundits and government officials were denying a recession was possible - while we were saying the house ATM driven, conspicuous consumption era was about to hit the wall.  [Oct 3, 2007: A Top in Casino Names? Wynn and Las Vegas Sands]  Unfortunately at that time we could not short individual equities so we could only watch from afar as many of these names fell 90%+ versus October 07.

But now it's a new day and almost every large corporation is deemed too big to fail.  (Small business?  No one cares about you)  So we have to invest with the central planning commission government; amazingly banks who themselves were on the cliff of failing found it in their hearts to adjust loan terms to keep these big casinos alive. [Sep 3, 2009: Las Vegas Sands - Too Big to Fail?]  At this point we only have about a 1% exposure in LVS since  the day to day volatility is immense and the stock temporarily broke support.  This is not really a name you can have very good risk controls over since the daily fluctuations will ruin almost any strategy.  The chart is a bit misleading because after yesterday's 12% gains, the stock added quite a bit more in after hours once earnings came out mostly on the back of CEO Sheldon Adelson's comments about "bottoming" business activity.  The fact that CEO phrases like this are still moving stocks 10% at a time is... well, says a lot about the market nowadays. The stock is in the mid $16s in the after hours session.

Effectively owning Las Vegas Sands is almost like a long dated call option; unlike MGM which is opening its huge project in America (City Center), LVS's future lies in Asia both with a Macau property and a new casino in Singapore.  All things being equal (MGM actually has even more debt than LVS) I'd rather place my chips (pun intended) with the company whose future prospects lean to Asia. On that note we have word overnight that LVS has received approval to list its Macau unit in Hong Kong - should help them raise a ton of cash.
  • Las Vegas Sands (LVS) and China's Minsheng Banking Corp have won approval from the Hong Kong stock exchange for more than $6 billion in combined initial public offerings, sources said on Friday, as the companies try to cash in on an IPO window that may be slowly shutting.
  • Las Vegas Sands plans to raise $2 to $3 billion by listing the gaming company's Macau unit on the Hong Kong exchange, sources said.   Sands will kick off pre-marketing next week and start its marketing roadshow on Nov. 9, with a trading debut set for the end of November, according to sources with direct knowledge of the deal. 
  • The gaming and casino company run by Sheldon Adelson has struggled with a heavy debt load, and is looking to seize on an opportunity to have a publicly traded division in Hong Kong at a time when the IPO window is still open.

Back to earnings...

Via AP:
  • Casino operator Las Vegas Sands Corp. on Thursday reported a larger third-quarter loss as gambling markets continued to struggle, taxes increased and the company pressed ahead on developing a resort in Singapore.
  • The Las Vegas-based company led by billionaire Sheldon Adelson benefited from more gamblers visiting Macau, the Chinese gambling enclave, but was hurt in its home market of Las Vegas where bettors have stayed away from tables and rooms have been less profitable.
  • Las Vegas Sands posted a loss of $123 million, or 19 cents per share, for the three months ended Sept. 30. It said those results were hurt by increased income tax expenses, which cost the company $73.7 million. The results compared with a loss of $32.2 million, or 9 cents per share, a year earlier.
But as our readers know, to make the stock market cheap, we have to ignore many "expenses" since apparently they are imaginary.  So a 19 cent loss turns into a 3 cent gain, presto magic.
  • The company said its adjusted income -- which does not include many one-time items including the taxes, interest expenses or stock dividends -- totaled $20.1 million, a profit of 3 cents per share. That beat analyst expectations for losses of one penny per share, according to a Thomson Reuters poll.
  • Its revenue rose 3 percent to $1.14 billion from $1.11 billion during the same quarter last year, but came in slightly shy of analysts' $1.17 billion estimate.

The Las Vegas exposure continues to suck wind...
  • New casinos in Bethlehem, Pa., and Macau helped the company grow its overall gambling revenue more than $100 million to $908 million. But casino revenue at its Venetian and Palazzo resorts on the Las Vegas Strip fell to $99 million from $113.2 million a year earlier.
  • Sands' revenue fell in food and beverage, hotel rooms and retail, while the company's overall expenses rose slightly.
  • "It looks like they exceeded expectations in Macau, but they got destroyed in Las Vegas," said Susquehanna Financial analyst Robert LaFleur.

But never mind the numbers, the CEO provides happy talk and we can bid up the stock... 
  • Adelson told investors he was seeing strong signs that bad times might be turning around in Las Vegas because of a return of convention business and group bookings.  
  • "Just like night follows day and day follows night, there are peaks and valleys throughout the economic cycle and virtually everything in life," Adelson said. "There is no doubt whatsoever that the economy is returning and will return."
Who knew? Sheldon's a philosopher to boot....

Not as much "green shootery" coming from his peers...
  • Several large Las Vegas-based casino companies have reported this week that they are struggling as consumers remain conservative in their spending, especially on leisure and gambling.

  • Rob Goldstein, a Sands executive vice president in charge of operating its Las Vegas properties, said the company was gradually increasing its room rates and trying to avoid price cuts generally made to keep rooms filled.  
  • Rooms cost more than $170 on average during the quarter at the Venetian and Palazzo, though slightly more at the Palazzo. The rooms were just under 90 percent occupied for the quarte
  • ... rates for leisure travel are also beginning to firm, particularly on the weekends.  (obviously at some point supply finds demand - market discovery... hard to believe that still exists in America with what we see on a daily basis from our government and central bank)
  • The company said it is continuing to cut costs but already has made 90 percent of the cuts it plans; in all, the cuts are to save the company $500 million per year.

And the elephant in the room...
  • Sands also is working to lower its $11.76 billion in debt as of Sept. 30 by raising capital, selling noncore assets and cutting costs at its resorts.
[Sep 24, 2009: Starter Stake in Las Vegas Sands]
[Jul 31, 2009: Las Vegas Sands Disappoints Again]
[Feb 5, 2009: Jaw Dropping Action in Casinos]

Long Las Vegas Sands in fund; no personal position

Technical Issue for Email Subscribers

I've received a few emails this week from readers who receive content via email in regards to charts being overlaid on top of text.  The platform I write the blog on introduced a new editor which I switched over to this week, so this most likely would be the problem.  I am also not sure if this is an issue only in Internet Explorer or both IE and Firefox, I'll be able to tell tonight.

Unfortunately, Google bought which is the platform I use for the website, and their human technical support ranges from zilch to none.  Any issues are posted on a message board and that's about all you can do.

I've only heard from a handful of people so I don't know if this is widespread (email me if you are having that problem as well) but I will keep looking into the issue and if its more prevalent than just a few readers will look to switch back to the older editor this weekend.

Thursday, October 29, 2009

Bookkeeping: Closing Out First American (FAF) Post Earnings

First American (FAF), a title insurance firm (predominantly) reported earnings today and while they are very good on the quarter they are guiding for some softness go forward.  This is not a surprise since the threat of the end of Cash for Cul-de-Sacs plus seasonality (more homes sell in spring, summer than fall, winter) kick in.  I am not sure what the American people are thinking when they believed that there would not be more free handouts after the Nov 30th deadline - they could of read FMMF blog 6 months ago and known more free money from the heavens would be handed out.

Speaking of which... Let me add, just as I did after the first Cash for Cul-de-Sacs came out early this year, that as we now see version 2.0 rolling off the presses (which will run through next April)... that the Realtors Association will lobby for Cash for Cul-de-Sac 3.0 right around /February March 2010, saying that the housing market cannot run on its own and what loyal American politican would want to kill the economy by taking away realtors commissions buyers incentives?  So we'll certainly need version 3.0.  The politicians will say "yes sir thank you sir - please deposit your political contributions at the normal time and place", and we'll have yet another extension.  Boo yah fellow Americans.


Back to FAF - the chart is beginning to weaken, so we're going to exit this name which was a backdoor play on "housing recovery" and remind ourselves to load up on every form of housing related stock next March so we can cheer the labeling of green shoots that bulls will read into "improving" housing metrics that come in May - August 2010.  The same strong period every year...

As for the stock, we were stopped out this AM at $30.50 on the majority of the position , and the rest is heading to the exit over $31.  Despite owning this stock during 3 separate earnings reports it smashed analysts estimates,  [Jul 30, 2009: First American Profit Triples] [Apr 30, 2009: First American Beats by a Mile] we have not really prospered other than 1 big run.  Hence, we made a small amount over time but nothing that moved the needle.  Obviously we would of been better served to pile into AIG (AIG) since fundamentals mean little and "price action" is the thing.

We'll circle back at the end of winter as we position ourselves for the "shocking" news that May 2010 home sales are greater than April 2010, and that June 2010 will improve over May 2010 and so on and so forth.  Remember, act "surprised" and buy stocks. Kool Aid!

If you care, some color on FAF's earnings here.

No position

In Retrospect....

... keeping those SPY calls and that large batch of TNA ETF (3x long small caps) that we sold off at 3:35 PM yesterday would of been a massive win right about now.  However, you have to have a master plan and be rather systematic in your trading or else you have nothing.  You are flailing around with no structure and the house will soon have your money.  Been there, done that.  No system works all the time, and just be cognizant there is always a new opportunity around the corner and job one is to protect capital.  Missed opportunities are far less hurtful than missing capital.  Put another way - if your "mistakes" have you missing opportunities rather than taking hulking losses - you're on the correct path.

I often say, when you are new(er) to the markets you wake up each morning thinking "how can I make money?" ... when you've been at it for many years you wake up each morning thinking "how can I not lose money."  While a broad generalization - especially with the casino mentality many Americans seem to have, the latter thought process will serve one well over the LONG haul.  Maybe not in 2 hours, 2 weeks or 2 quarters.  But over 20 years... yes.  The best long term records are not built just on the big wins but sheltering against the big losses.  Take care of the downside, and the upside will take care of itself over the long haul.

If you ever doubt it, look at all these mutual funds gaining +30% Year to date (with financial media fawning over them!), and then look at their 2008 record.  Then calculate how much you need to gain to simply break even after a 40% loss... I'll do the homework for you: 66%.  The term drawdown is very key in hedge fund world, but appears to be nowhere in mutual fund world... it's important.

One reader asked in comments yesterday - why would you sell (those calls and ETF) when the market is so oversold?  Certainly I look like a rampant idiot to said reader today, trust me.  But my answer was essentially " I saw many markets 'oversold' in 2000, 2001, 2002, late 2007, 2008, early 2009 that only went on to become more and more oversold."  I don't like those labels ("oversold", "overbought") and try to not use them much at all on the blog - they mean little ... any of you who just lived through 2008 or Jan/Feb 2009 know what I mean.  As for today, we had a specific news event that changed the entire complexion at 8:30 AM today but those who gambled (and won) buying into the close yesterday afternoon took a large risk in my book.  It worked, so kudos there.  However it is akin to piling into a stock ahead of earnings - a binary outcome.  I'm not sure if at 8:29 AM the trade felt quite as good.

So as we discussed yesterday we watch yet another V shaped "buying panic" ... we're in a white noise area but heck within an hour or two might be back over S&P 1070, and off to the races to S&P 1200 by year end.  Or is it 1800... I can't recall.  Either way, we missed this first part (except with our core equity positions of course)... I so did want to wear a bear costume for Halloween.  Over 1070, we have to dust off (ok technically it's been in storage a whopping 4 days so there is no dust on them) the bull horns.

Seven more S&P points to go, and we're back above the 20 day and this was all a bad memory.  Yet another 45 degree angle rally after a selloff?  Was I only off by 1 day? [Do We Rally Sharply on Wednesday?]  Is it really that cut and dry?  Buy every dip is now a national ethos?  Market participants will play a pattern until it stops working... eventually it will break down, trap many people and cause severe losses.  But until them, be one with the lemming.

Paul Tudor Jones 3rd Quarter Investor Letter: Another Gold (GLD) Bug

Einhorn, Paulson... and now one of the legends of the hedge fund business Paul Tudor Jones... have all jumped on the gold bandwagon.  [May 16, 2009: John Paulson Continues to Pile Into Gold] [Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]  While perhaps a "crowded trade" watching all these great minds agree on this topic simply reinforces my thesis.... this rogue central bank will keep printing US dollars until the cows come home. (and once the cows are in the barn, they'll keep printing just to make sure).  And they are not the only one... it is a race to the bottom.  [Oct 13, 2009: UK Sterling Following US Dollar into Abyss]

Three of the world's largest economies  including the largest 2 know only 1 solution to their problems - paper printing prosperity. [May 19, 2009: Paper Printing Prosperity Defined]  As we've seen from Japan, this is an stupid excellent plan! [Sep 18, 2009: US Dollar Replaces Japanese Yen as "Carry Trade" Currency]

Well as speculators we can be happy ... all assets must go up as more fiat money is thrown in from every direction.  (just keep educating yourself on "nominal" v "real" gains as we slather ourselves in gains from our Etrade accounts)  If you are a consumer, or live in the bottom half of America where you have to contend with the prices that are manipulated ever upward... I'm sorry, the most regressive tax on Earth is a small price to pay to make sure the upper 0.2% have their cake.  Remember this is not some "backwards" country like India where the central banker actually has concerns about the bottom half. 
  • India’s central bank Governor Duvvuri Subbarao described inflation as a “regressive tax,” justifying his steps yesterday to start withdrawing the monetary stimulus as price pressures build. “As far as public policy is concerned, it has a commitment to insulate the poor from inflation - it’s the prime consideration for the Reserve Bank of India and the government.” 
Thankfully we're a progressive 1st world country who knows where to butter our bread... forget the peasants, make sure those with assets are fat and happy.   Our central banker has that mission in mind, and is working day and night to serve his constituents.(which are the banks, you know that right?)

Remember...inflation is good - deflation is bad... why?  Don't ask... just listen to the dogma. [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold]


As always, click full screen for an easier read - Jones' gold discussion starts in earnest on page 14.

Tudor Third-Quarter Letter                                                                                                                                                

Hat tip to ExpectedReturns & Dealbook.

[Sep 1, 2009: Paul Tudor Jones, Clarium Capital not Buying Green Shoot Theory]

Wyndham Worldwide (WYN) Beats, Raises Guidance

Wyndham Worldwide (WYN) reported Tuesday evening, we did not have time to discuss it yesterday due many other activities happening.  This hotel chain continues to be one of our best performers of the year and as I say in almost every update on the name ... it is STILL cheap.  As I'm looking at the chart now the action the past 48 hours allowed the stock to fill a gap, and I'm smacking myself in the head because I completely missed an opportunity to add.  Unlike many other names, the stock was able to fill a gap but stay over key moving averages...

A closer look at earnings:
  • Wyndham Worldwide Corp (WYN), which franchises more than 7,000 hotels, raised its 2009 earnings forecast on a brightening economy and said it was looking for opportunities to add more brands to its stable of hotels.
  • The company boosted its full-year EBITDA outlook by about 2 percent and forecast 2009 revenue and fourth-quarter results above analysts' estimates.
  • Wyndham also reported better-than-expected third-quarter profit.  (the company) reported third-quarter net income of $104 million, or 57 cents per share, down from $142 million, or 80 cents per share, a year earlier.  Excluding one-time items, it earned 58 cents per share. Analysts, on average, had expected 56 cents, according to Thomson Reuters I/B/E/S.
  • Revenue fell 17 percent to $1.02 billion, while expenses fell 18 percent.
  • Wyndham, which operates the Days Inn and Ramada hotels, said revenue per available room slumped 17 percent in the third quarter. (definitely a negative, but more than represented in the cheap stock price)
  • For the fourth quarter, it now expects earnings of 35 cents to 38 cents a share, above analysts' average estimate of 32 cents.
  • It expects full-year earnings before interest, taxation, depreciation and amortization (EBITDA) of $775 million to $825 million, up from a previous forecast of $760 million to $810 million. Analysts, on average, expect $782.12 million.
  • The company forecast 2009 revenue of $3.5 billion to $3.9 billion, compared with analysts' average estimate of $3.6 billion.
Still conservative on next year... Analysts actually show 2010 at $1.48 versus 2009's $1.77 so even being flat would be upside to analysts:
  • The company said 2010 earnings should be roughly in line with 2009 results

  • Mid-scale and economy hotel chains, like the ones Wyndham operates, have held up better than their luxury counterparts amid the downturn. But Holmes was cautious about calling a bottom.  "We can't call it a real uptick yet," he said in an interview with Reuters. "Obviously we're still seeing RevPAR (revenue per available room) declines."
  • Chief Executive Stephen Holmes said the company is looking to invest in its hotel group and said Wyndham could acquire more brands and add rooms, given current plentiful opportunities to buy distressed properties.  "We do believe there will be a significant restructuring of the lodging industry over the next 12 to 18 months," he said during a conference call with analysts. 
Zachs has a nice overview of the numbers here.


CEO Interview on CNBC yesterday
  • Wyndham Worldwide CEO Stephen P. Holmes is seeing stabilization in the travel industry and is transforming the firm to a fee-for-service business model to embrace the rebound, the executive told CNBC Wednesday.  Currently the company operates three major businesses — hotel, rental, and ownership exchange. 
  • Holmes says business travel is still not out of the woods. He sees a reduced amount in business traveling and the places workers travel. Leisure travel shows more sign of stabilization.
  • “The decline in occupancy is basically stabilized. You really need to see occupancy stabilization before you see rents go up.” Holmes said. “The rooms have to be filled before the hotel owner has the courage to raise the price.”

[Sep 29, 2009: Wyndham Worldwide and Sector Upgraded by Goldman Sachs]
[Jul 29, 2009: Wyndham Worldwide Solid: RevPAR Far Above Industry]
[May 1, 2009: Bookkeeping - Creating New Position in Wyndham Worldwide]
[May 1, 2009: A Stroll Through the Hotel Space]

Long Wyndham Worldwide in fund; no personal position

Bookkeeping: Selling Most of Fuel Systems Solutions (FSYS) on Spike

Isn't it funny how much the world changes in 2 minutes? Specifically between 8:29 AM and 8:31 AM.  The market was broken, and even after a material selloff was only bouncing along at +2 on the S&P in premarket.  This was below the 50 day moving average and things looked dire.  Then one economic number and the world changes.  I won't even get into the GDP figure, it's like the litany of other government report (CPI - inflation, Labor - employment) that are deeply flawed... not to mention the fact it will get revised multiple times in the months to come.  [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government] [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators] [Jun 10, 2008: PIMCO's Bill Gross on the Inflation Fantasy]  As long as we keep borrowing from the future to buy cars and homes for our people, heck we can have positive GDP for as long as the eye can see.  Mirages are cool like that.  Notwithstanding the fact these numbers will be revised in 30 and 60 days and almost every report during this recession recovery has been revised down ... i.e. give the market a better than expected number so it can rally, than quietly revise it down 30 days later when the market is on to the next thing.

(to see how screwed up GDP is for example, in quarter two, 2008 - during "Bush rebate" quarter, one part of our government said inflation was X%... that is the department that figures CPI, our official inflation.  However, the guys who generate GDP decided to ignore the department that figures out CPI and used their own inflation figure which was a fraction of X%.  Why?  Because by using a lower inflation figure they could bump up GDP.  We wrote an entire piece about that on the blog when I used to care about the complete farce that is government reporting. (garbage in, garbage out)  So instead of a negative GDP we had a positive GDP and the GOP could claim there was no recession on their watch - very important going into an election!   So in essence one part of our government does not even use the official figures from the other part because it doesn't make the numbers look pretty enough. And you want me to actually analyze these numbers?  It's a joke - I refuse.)

The Onion said it best: The Onion: Nation Ready to be Lied to About Economy Again

Or as Hugh Hendry says: "My notion was, you had Bernie Madoff doing US GDP accounting.


Anyhow, many of our smaller or foreign stocks are doing the exact opposite of what they did yesterday.  From -10% to +10%... easy as that.  I am going to do a very quick trade on a position we started yesterday and let me explain why.  I had a long standing limit buy order for Fuel Systems Solutions (FSYS) - when I put the price in some 6 weeks ago it was in a sensible place in the chart... but when it hit late yesterday, the stock was in a vulnerable spot.  Now of course all the world is benign again this morning so "buy buy buy" is the order of the day but the stock has rallied 10% (we're up 8.5% from our entry point) and is hanging around its 50 day moving average.

So from here if we're just going to repeat the pattern of the last 3 months and roar into year end, we'll want to be in this name of course.  But if we are just in a very oversold short term rally, the stock is still vulnerable.  Of course I don't know the future so I am employing this strategy - we have a quick and easy gain which I am going to lock in.  If Fuel Systems Solutions continues to recover and jumps back over the low to mid $35s WHILE the S&P 500 also breaks back north of 1070... this whole selloff was just a bad dream and away we go to the races.  If the stock stalls here, then we exited a very unusual entry point and can re-assess later.  I still like the stock fundamentally and will keep a 0.1% stake but we're taking the rest off here near $34 for a very nice gain in half a day.

Again, I'll file this one under better lucky than good.  The student body has run right today so any purchases yesterday look "genius" and any sells look "stupid".  

To repeat yesterday's mantra - whatever happens between S&P 1047 and 1070 is just a white noise area, the next major intermediate strategy for our time frame (not daytrading) will be on a move outside of this box.  But we can make some trades around the edge in the meantime.

Long Fuel System Solutions in fund; no personal position

Bookkeeping: Cutting AsiaInfo Holdings (ASIA) in Half on Earnings Spike

Sometimes it is better to be lucky than good - but always preferable to be both.

Mid month we cut back our position in AsiaInfo Holdings (ASIA) by half on a spike around $23.  Since then as the stock has fallen back we've made some small purchases, including one this week in the $20s to get our position size back up - nothing big enough in any one batch to mention.

Since I had just added to the position Tuesday, I did not have a stop loss in yesterday, so unlike quite a few other names yesterday we did not lower our exposure on a quick break of the 50 day moving average. Yesterday was so busy I also did not realize earnings for ASIA were out after the bell (usually I'll cut back a position ahead of earnings to reduce risk); so lo and behold I was scratching my head to see the stock up 15% this morning.  Obviously whatever they reported was good; I have not had time to dig into the numbers but I'm going to take this opportunity to repeat the trade from 2 weeks ago and cut half the stake ...again around $23.  Groundhog Day.

Technically, while I sold the stock (assuming the market holds up) should have potential to low $24s at which point its behavior will tell us more.

I'll edit this post later in the day with some color on earnings.  First glance analysts expected $69M in revenue, 29 cents in EPS.  Looks like they actually missed on revenue but hit the EPS figure.  More important is guidance - analysts were in for $62M in revenue with 20 cents EPS next quarter, while ASIA is now guiding $70-$72M in revenue and 28/29 cents in EPS.

[Aug 11, 2009: Bookkeeping - Beginning Placeholder Stake in AsiaInfo Holdings]
[Aug 7, 2009: Niche Play on China Telecom - AsiaInfo Holdings]

Long AsiaInfo Holdings in fund; no personal position

Bookkeeping: Starting Stake in Market Vectors Brazil Small-Cap (BRF)

Looks like we will begin the day with yet another gap up....while news driven, it will be interesting since it will take us back over the 50 day moving average.  In the longer term this just creates another gap to fill down the road...for now we get to see if the exact same pattern we pointed out Monday plays out; that is a 45 degree angle multi week rally after every selloff the past 3+ months.  With all the damage in individual charts we saw yesterday it would seem improbable but this entire market would be deemed improbable nowadays.

With the weakness in Brazil the past week, we are going to take this opportunity to begin a long term stake in Market Vectors Brazil Small-Cap (BRF).  We highlighted this name in the summer under $29  [Jun 2, 2009: Market Vectors Brazil Small Cap (BRF) - a New ETF for Exposure to Brazil]  It was a new ETF so we were not ready to jump in, but it has had a great run, and has enough volume on a daily basis to show others are interested in it as well.  Obviously if the dollar corrects in the weeks to come, foreign exchanges will take a hit blah blah blah.  But this just might be our favorite market on the planet right now, and with the stopping out of most of our only Brazilian position yesterday, it's a good place to begin a stake.  We'll start modestly with a 1% stake and if there is weakness in the coming months look to add - eventually I'd like to make this a large weighting in the fund.   I'd like to be a buyer in scale somewhere int he lower $30s if afforded the opportunity in the months to come.  I am not using any sort of technical analysis or "trading" it, we're wanting to build a core position here for the very long run.

For now, we'll get started in BRF with a buy at the open...

Long Market Vectors Brazil Small-Cap Fund in fund; no personal position

What We've Done; What We're Doing; What We're Looking At

A very hectic period here - we're in the heart of earnings season, the first real drama has hit the market since July, a concentration of trading activity not seen in many months has hit yesterday, and I'm trying to regurgitate as much as I can in a public outlet in close to real time.  Let's just say I slept well last night; but it's a new day.

I thought it would be useful to take a look at a broad array of things I am observing as we try to deconstruct the ever changing puzzle that is the market.

(1) First, let's be clear we have correlations among asset classes like never before.  This really started in the middle of 2008 and since then we've been in what I call "student body trading" - either everything is going down, or up.  I've said countless times, this is why we obsess with the market direction ... because 80% of your move is based on which way the market is going rather than what stock / ETF you are in.  And in the past half year, the added dimension is almost everything is a trade against the US dollar.  So what implication does that have?  It means individual charts lose some of their meaning as everything is hostage to the US dollar.  So let's start there...

 [by the way you can enlarge any chart by clicking on it]

As we can see we have a 4 day rally, with 3 of those being "spikey" in nature.  This is very overdue since our national peso has been beaten to a pulp for months on end.  The question is how sustained will the rally be?  The larger (eventual) question will be - when does this inverse dollar correlation ever end? [The Inverse Correlation Between Stocks and the Dollar in 1 Chart]  But we can't think that far ahead - the near term questions are, can this dollar get over $77 and if so, can it make a higher high for the first time in many months over $77.50. 

(2) Let's overlay the 2 main indexes - S&P 500 and NASDAQ; similar situations for both, in fact one could argue the NASDAQ ... after being a leader to the upside, has become the leader to the downside.

Both experienced a break of support, the 50 day moving average, yesterday.  Not fatal, as in July the S&P 500 for example spent 6 sessions below this support before a furious rally regained the level.  But until proven, old support becomes new resistance.  And we're looking for new "lower lows" on the S&P 500 that would be a break of 1020 and with the NASDAQ something in the 2030s.  Of course this would occur concurrent to (I assume) the dollar index breaking over $77.  Remember, it is all just 1 controlled algorithm trade by hundreds upon hundreds of billions of HAL9000 dollars.  If those levels break, then the bears appear to be in charge.

(3) Within NASDAQ I want to focus on the semiconductors and I've pulled this back out 1 extra month, to a 4 month chart for a very obvious reason.  While technology is a played up financial media sector, it really is just largely a cyclical story with a silicon component... not very different than industrials.  Just "sexier".  In anticipation of recovery institutional investors have run into "early cycle" stocks - that means semiconductors and industrials.  The question that has been hanging over everyone's head is how much of the "semiconductor recovery" is (a) just restocking after the world shut down (b) due to a few specific economies in Asia and (c) actual recovery demand.  If only an Asian dependent 6 month restocking story - that's quite bearish.  Bulls hope (c) will be the eventual answer, but if not the semiconductor ETF should lead the way down.  It's turned for the worse here.

So nothing happens in a vacuum.  If dollar rallies, S&P 500 / NASDAQ make new lower lows - the SMH ETF has a great chance to make a run and "fill the gap" around $21.75.

(4) Turning back to the dollar we've had 2 concurrent breakouts about 5 weeks apart - first in gold (September) then oil (October).  Gold broke out of a very long range, and once it cleared the low $1000s all the technicians on the Street bought in on the "breakout" along with the weak dollar play (or inflation is yet another reason).  Since gold has no real use other than a store of value I can buy those reasons. 

Oil on the other hand, was in a 5 month range between $65 and $75 and at the beginning of October broke out, and again - all the same technical oriented computers began buying in bulk.  Oil makes little sense to me; the world is awash in it and the largest consumer (hand raised) has a broken economy - but it's become just another trade on the weak dollar, and the "chart is good". 

With both gold and oil if you are bullish long term and not just a pure momentum trader who only knows "buy high, sell higher" trading, you want to buy on a pullback to where the base was first exploited to the upside - i.e. lower $1000s for gold (I'm using $1020) and $75 for oil.  The assumption being these are healthy corrections in a much larger move up ... or in the current situation, an implicit bet that the dollar will continue to be destroyed by our Federal Reserve.  So if we see these 2 commodities break back down into their old ranges (before the break outs) that is bearish for the commodities - bullish for the dollar - and by correlation bearish for everything else in the world.

(5) Let's look at our "leadership" stocks - I am going to pick 4.  In tech Apple (AAPL) and Google (GOOG), in financials Goldman Sachs (GS), and in commodities Freeport McMoran Copper & Gold (FCX) has become the "go to" stock for this round of "recovery / inflation / the dollar stinks" trade. 

Technology names?  Both filling gaps, especially obvious in Apple yesterday but just healthy pullbacks for now.

Goldman? Took a bad hit yesterday; broke support cleanly ... looks like a carbon copy of NASDAQ

Freeport? Still fine, just a much needed pullback - below $70 things start to get potentially dicey.

So we have not seen much capitulation if any in our "generals" - only Goldman and in that name, just yesterday..  If this is a just a moderate 5% type of pullback and we're about to reverse back up, these names need not take major hits.  But if we have a much deeper pullback, we'd expect to see some serious damage in this group. 

(6) Last, a quick look overseas - in case you missed it since that 2% tax Brazil put on foreign investors due to Ben Bernanke throwing US dollars around the world in a gleeful spree, [Oct 20, 2009: Ben Bernanke's Money Printing Parade Forces Brazil to Slap Tax on Outside Investors] the Brazilian market has taken some big hits; 4.5% yesterday alone.

We said Tuesday, India had been looking tired; it sits in a very similar spot to the US markets.

And China has been underperforming for a few months; recall there was a 20%+ correction a few months ago.

But again, all the world has become nothing more than a dollar trade... it is unfortunate this is what has become of things; but with volume dominated by countless machines trading with each other in fractions of a second, the rest of us have become bystanders..  So we have to sit idly by and see if the student body is going to run into the dollar, or out.  Any analysis deeper than that is currently fiction. For you readers old enough, just replace "Marsha, Marsha, Marsha" with "Dolla, Dolla, Dolla."

We'll see what the market does with this morning's GDP figure.  And how it affects the Marsha dollar.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012