Monday, December 28, 2009

Echelon (ELON) Breaks Over Resistance

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So many of these bullish moves I am seeing in charts are coming on below average volume - it truly is difficult to destruct long formed rules, and chase these names.  Echelon (ELON) is another candidate, from the "smart grid" subsector, I've been watching for a few months. Unlike the name we hold in the space - Echelon has seen revenue drop year over year (by 20%), but the stock runs on any Obama type electric grid stimulus talk - so revenue growth, or profitability is simply a sideshow in our current market.  Comments like this below are what get speculators juices flowing:


Last week the Department of Energy announced the allocation of its $3.4 billion in Smart Grid funding to about 100 projects nationwide. With projects expected to be complete within three years, and Duke Energy one of the larger recipients, Echelon should benefit directly from the U.S. stimulus package to the extent Duke accelerates its project.

After suffering for a few months, this unprofitable company has now put 6 straight positive sessions in a row together - capped off with today's move over and above the 50 day moving average.



All positives, and I should probably be a buyer here - however, volume during this entire move is slow.  We'll see if this shows up on technical traders screens tomorrow.

Echelon Corporation  is leading the worldwide transformation of the electricity grid into a smart, communicating energy network, connecting utilities to their customers, and providing customers with energy aware homes and businesses that react to conditions on the grid.  Echelon's NES System – the backbone for the smart grid – is used by utilities to replace existing stand-alone electricity meters with a network infrastructure that is open, inexpensive, reliable, and proven.  Echelon's LonWorks® Infrastructure products extend the smart grid, powering tens of millions of energy aware, everyday devices made by thousands of companies – connecting them to each other and the grid.

No position

Bookkeeping: Closing CNInsure (CISG) for Now

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Much like E-House Holdings (EJ), CNInsure (CISG) is a stock that appears to have all the right fundamentals, but speculators are too busy chasing the latest solar stock to care.  The stock has been been range bound for months on end.   Eventually I expect it to break out, but for now I am going to sell off the last tiny piece (0.1% exposure) and like EJ, watch it with 1 eye to reintroduce to the portfolio when it's building a sustainable move.  We sold most of what we had left about 6 weeks ago at just about the same price we see today.




For now, it simply jumps up and down (and around) the 50 day moving average, constantly causing head fakes for someone who prefer to buy breakouts.  With so many other names recently added, this is an obvious candidate to go on hiatus.

[Aug 27, 2009: CNinsure Report Solid but Many Acquisition Costs/Benefits Running Through Numbers]
[Aug 24, 2009: CNinsure - China's Version of Prudential?]



No position

Healthcare Interests Spend $600M to Sway Congress; Revolving Door Between Lobbyists and Congress in Full Tilt

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It was very nice to get away from the news for a period of a few days; truly, ignorance is bliss.  Unfortunately, I had to come back to reality.  As I am catching up, I am reading of the "Christmas Eve" surprise done by the US Treasury; which deserves it's own post for multiple factors.  But first let's look at the best investment for corporate America today.  Research & Development? Nah.  Investing in human capital? Nope.  Try lobbying - which has far and away the best ROI (Return on Investment) by what has to be a factor of 1000x. Why bother with any of the other things that used to be critical to running a corporation when simply running around with your hands out to accept the gifts from the US taxpayer can now become the central tenet for success?


Bloomberg: Health Interests Spend $600M to Sway Congress
  •  More than $600 million has been spent so far this year trying to influence U.S. lawmakers working to overhaul the health-care system, reports show.   The health industry spent $396 million through Sept. 30, more than any other industry and up 9 percent over the same period a year ago
  • Those numbers don’t include spending on lobbying by insurers such as the Blue Cross and Blue Shield Association and its member companies.  “The Blue Cross and Blue Shield companies represent 100 million people across the country in every zip code and have 80 years of experience in health care,” said Brett Lieberman, a spokesman for the Blue Cross and Blue Shield Association in Washington. “We’ve been working with members of Congress sharing that experience.”   (I love how these things are worded - usually they use the phrase "helping to educate" Congress people... but "sharing the experience" is even softer)
  • The Senate health legislation exempts some nonprofit health plans from a $70 billion tax on the insurance industry, including some Blue Cross plans in Alabama, Michigan and Pennsylvania.
  • The S&P index of six managed-care insurers has jumped 12 percent since Dec. 9, when Senate Democrats dropped a proposal for a government-run plan to compete with private insurers.
  • “The health-care industry has a full-court press on members of Congress,” said Representative Dennis Kucinich, an Ohio Democrat.
  • Another $200 million has been spent on television advertising for and against overhauling health care.
  • The Senate on Dec. 15 rejected an amendment to allow imports of cheaper drugs from Canada, (remember, Canadian drugs are a danger to Americans per dogma we've heard for 2 decades) a provision opposed by the pharmaceutical industry. Drugmakers earlier agreed to contribute $80 billion over 10 years in return for blocking other profit- endangering proposals
  • Pfizer’s trade group, the Pharmaceutical Research and Manufacturers Association, spent $19.9 million through September. That’s the third-highest amount behind the U.S. Chamber of Commerce and Irving, Texas-based Exxon Mobil Corp., and almost as much as the $20.2 million the group spent in 2008.
Those are some fun numbers, but it gets better; think about it - in this one industry alone there are 6 lobbyists for each breathing representative.  That is one industry - multiply that across all the competing special interests and you can imagine 40, 50, 60 lobbyists, working over each Congress folk.  With promises of jobs (wink wink) in the lobbyist profession post "public service", as long as they "play along".
  • There are 3,300 lobbyists registered to lobby on health care, Senate records show, six for each of the 535 members of the House and Senate.
Who are these people?  Well, hello.... the revolving door is spinning so fast one's eyes cannot focus.
  • More than 1,400 of those lobbying on health care formerly worked for Congress, the White House or federal agencies, including 55 former lawmakers.
  • Many of those lobbyists visited the White House to meet with President Barack Obama and top administration officials, according to visitor logs.
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Another look via the Chicago Tribune.
  • David Nexon had a big problem. An early version of national health care legislation contained a $40 billion tax aimed squarely at members of the medical device trade association he represents.  Nexon, a former adviser to the late Massachusetts Sen. Ted Kennedy, went to work. He marshaled 14 people like himself -- lobbyists who were once congressional aides, many of them from staffs of congressional leaders or committees that had a hand in crafting the health care overhaul.  When Senate Democrats unveiled their bill in mid-November, Nexon's handiwork was evident. The tax on device-makers was still large -- $20 billion -- but only half what it might have been without the efforts of Nexon and his fellow lobbyists.
  • Nexon's team is an illustration of how deeply the health care industry has embedded itself on Capitol Hill, using former aides of lawmakers and ex-lawmakers themselves.
  • At least 166 former aides from the nine congressional leadership offices and five committees involved in shaping health overhaul legislation -- along with at least 13 former lawmakers -- registered to represent at least 338 health care clients since the beginning of last year, according to the analysis.  The total of insider lobbyists jumps to 278 when non-health-care firms that reported lobbying on health issues are added in, the analysis found.
  • The largest insider lobbying cadre belongs to the Pharmaceutical Research and Manufacturers of America, or PhRMA, which employs at least 26 former congressional members and staffers, according to Medill/CRP research.
  • Two other drug interests, biotech firm Amgen Inc. and the Biotechnology Industry Organization trade group, with at least 24 and 16 insiders respectively, ranked second and fourth among reported hiring over the past two years of lawmakers' former staffers and members of committees considered in the analysis.
And why is this so effective? Aha, the lucrative post Congressional world ...
  • Part of the lobbying pressure on current members of Congress and staffers comes from the powerful lure of post-congressional job possibilities.  "There's always a worry they may be thinking about their future employment opportunities when dealing with these issues, particularly with health care, because the stakes are so high and the breadth of the issues -- pharmacies, hospitals, doctors," said Emory University political scientist Alan Abramowitz.
  • Lobbyists' earnings can dwarf congressional salaries, which currently top out at $174,000 annually for lawmakers and $156,000 for aides, though committee staff members can earn slightly more.
Tactics:
  • Health care lobbyists increase their effectiveness by strategically targeting their campaign contributions or the donations of the interests they represent, Edgar said.  Health industry contributions to congressional candidates have more than doubled so far this decade, rising to $127 million in the 2008 election cycle from $56 million in the 2000 election, with disproportionate sums going to the party in power and to members of committees that oversee health care, according to the Center for Responsive Politics.

[Sep 24, 2008: As Economy Gets Tough, Americans Begin to Cut out "Extras" - Like Healthcare]

Speaking of those drug companies, if you have not seen the 60 Minutes piece: "Under the Influence" on how Medicare Part D was passed... deep in the night, with threats and some people reduced to tears, it's a good video.

STEC (STEC) Up 10 Sessions in a Row

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A couple of readers have emailed me about STEC (STEC) which is now up 10 sessions in a row (i.e. 50% in that time frame!) and blowing through moving averages and now.... its early November gap [Nov 4, 2009: STEC Crashes 30% on EMC Inventory Warnings] as if they are do not exist.  No answers from this chair, this is simply one of those names full of the daytrader types and once momentum begins it is hard to kill. 



Barron's weighs in with some ideas.  I don't know the short interest but if people are trying to pile in on the short side assuming "this cannot continue" - well, that is exactly how these types of move DO continue.
  • So, what’s gotten into STEC (STEC) shares? The solid-state drive company’s shares are up today for the 10th session in a row; over that period the stock has gained more than 50%.
  • Last week, the stock picked up a Buy rating from Broadpoint Amtech analyst Dinesh Moorjani, who set a $23 price target. Moorjani noted that the stock was down dramatically from its highs earlier in the year on concerns about mounting competition in the enterprise SSD market. As recently as September, STEC was trading north of $40 a share; today the stock is up $1.47, or 9.3%, to $17.17.
  • Gordon Johnson, an analyst with Hapolaim Securities who made a prescient sell call on the stock back in October, calling STEC “the biggest short of all time,” today reports via e-mail that the stock may be getting a boost from takeover speculation. But does he believe that someone might acquire STEC? “No way,” he responds. “No one will buy STEC as everyone is developing their own technology. The higher this thing goes, the more one should be shorting. It’s only a matter of time for these guys.”
  • Aaron Rakers, an analyst at Stifel Nicolaus, writes in response to an inquiry that he likewise is skeptical about the possibility of an acquisition - and that competition remains a concern. “I understand the speculation, but I would not view that as likely here,” he writes. “Would likely see competition materialize before that becomes a dynamic to consider, in my opinion.”

Outside a few names like this, the market seems nearly comatose.

[Jul 16, 2009: STEC - Keeps on Tickin', Never Quittin']

No position

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 21

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Year 3, Week 21 Major Position Changes

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

Cash: 42.1% (v 78.4% last week)
28 long bias: 57.2% (v 18.9% last week)  [includes 1 option position]
2 short bias: 0.7% (v 2.7% last week) 

30 positions (vs 26 last week)

Weekly thoughts
A shortened holiday week was just exited, and ahead of us lies a shortened holiday week anew.  Thus far in 2009, "holiday spirit" has been on overdrive.  A week ago we wrote this:



Just as Thanksgiving week, Christmas week (to a lesser degree) is generally a time of good cheer and nonsense speculative stocks being run to the moon, (hello Chinese small caps - you too solar stocks!) as institutional managers are at home, and the retail daytrader takes over. 


Each session but one (7 out of 8) have been up Thanksgiving & Christmas weeks, and it took an event the size of Dubai to get that one loss Friday of Turkey week.  So despite 5 up days in a row coming into this week, with the constant "magic" happening in the premarket and first 15 minutes of each session, we should except continued good times - although we are sorely overdue for some pullback.  To preserve the new baseline of S&P 1120, one should expect the pullback to happen a bit higher ... gosh this all sounds so pre-ordained, as if scripted.... [2009 - One Strange Year]


Last week brought a spate of economic reports, some good - some bad (revised downward GDP, new home sales for example).  The good news was celebrated, the bad news was ignored.  Which is why I wrote last week:


Economic reports?  We'll have a few - but all anyone looks at anymore are charts...


It's all sort of become bemusing as the "free market" works its magic.  Maybe news will matter again sometimes in the new year.


Since actual fundamentals mean little - let us turn to the charts.  Starting with our main focus, the S&P 500 - we've been touting this huge base being built for many weeks.  Since almost all the base building has been over key moving averages one would suspect the move out of the "box" to be up rather than down, but there is no need to front run the move.   This should be quite a large move, I've been saying 7-9% (thumb in the air) and that would take us nicely to S&P 1200.  Which just so happens to be a number I am hearing from countless pundits.  Can it be that easy?  So obvious?  2009 will be market by constant "obvious" things following through - rather then the pattern many of us learned over the years - that is, the obvious has a bad habit of blowing up in your face.  Now, technicals seem to dominate everything else - and obvious patterns play out to a tee.  And it will continue, until one day it stops.


[click to enlarge]







As we said last week, until proven otherwise the new 'floor' is S&P 1120.  The old resistance (top of the box), becomes the new support.  Volume was pathetic (orange arrows) on the breakout, which would give great pause to anyone who has been in the market greater than 1-2 years.  But any veteran technicians who wish to have volume support their price movements, has been obliterated by the stock market of 2009.


The other reason this general area (S&P 1115, 1120) is so key is it marks the recapture of half the losses of October 2007 to March 2009.  While a meaningless statistic to you and I, the MBAs on Wall Street regard this as important, therefore as we all self reinforce random data points - it becomes important to everyone.  Thus a bullish point.  


Despite poor volume, we actually have even better breakouts in both the Russell 2000 (smaller caps) and NASDAQ.


[click to enlarge]












The NASDAQ is dominated by a few names, so if you can move those guys (see Apple action Thursday, see Google action last Wednesday) you can get the market where it "needs" to be, with relatively light firepower.  With a lot of institutional money all in these same few names (can we not expect a move in Amazon coming this week? Priceline?) there is a lot of motivation to make sure the key, big names are marked up for Dec 31st, 2009.  The action in the Russell 2000, is actually the most bullish - as these small caps have lagged much of the past few months; this broadening of the move up is important - albeit if coming in holiday trading which normally is chock full of moves in smaller companies.  That said, these are nice breakouts but quite overextended.  If we get another 3-4 days without any meaningful pullback going into year end, I'll be cutting exposure going into 2010 as even the hard core bulls would expecting some consolidation at that point.


As for economic data.... oops, we decided that was a moot point, not required to be analyzed by speculators, as of last week.  Well that shortens our weekly summary a bit; always a silver lining.  As for the portfolio, we went relatively "all in" Friday - even as we stand near the emergency exit (we have a permanent spot here).  While the volume is so very poor, we have a huge base built on the S&P 500, from which big moves usually ensue.  This is the first situation like this in 2+ years, so as we noted Friday - it's a worthwhile place to make a more concentrated stand.   If the S&P falls back below that 1120 level, we (and many others) will have some decisions to make.  


Some larger moves: (a) Restarted a position in Skyworks Solutions (SWKS) as stock appeared to break out of base - thus far the move has been , (b) after Human Genome Sciences (HGSI) appeared ready to break out of a long base, it did - and we bought, (c) sold half of Atheros Communications (ATHR) after a monster move took the stock back to August 2008 highs, we're ready to buy back on a break over that level (d) began a starter stake in DragonWave (DRWI), (e) sold almost all Braskem (BAK) after a two day, 9% move; identical situation to Atheros in terms of approaching a double top (f) restarted a position in Myriad Genetics (MYGN) - so far so good (g) sold our UUP Calls for a hefty gain in just over a month as the dollar ran into the 200 day moving average after a hectic move (h) went long on index positions first late Thursday, then again Friday. 


Charts to keep an eye on are the dollar (at resistance), gold/silver (at resistance - what breaks? the dollar? or gold/silver?) and for the portfolio as mentioned in the posts we sold, we are willing to add back to Atheros Communications (ATHR) if it can break over the August 2008 highs of mid $34s - thus far it was rejected as expected, and on Braskem (BAK) if it can get over recent highs near $17 - thus far it also was rejected.  But with a "melt up" on the horizon, the baby with bathwater situation would take everything up... we'll pounce if this happens.










To conclude the week, let's look at the one of the other sides of Ben Bernanke's plan to make "cash trash"... that is, his war on savers.  The same war Mr. Greenspan waged earlier in the decade - most focused on seniors.  Luckily for these men, they are outside the reach of voters, because this is one political block you don't want to mess with.  The headline itself is quite pathetic when you mull it: At Tiny Rates, Saving Money Costs Investors.

  • Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.
  • The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.
  • Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.
  • What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. 
If you have been reading 'Fund My Mutual Fund', what Mr. Gross says is certainly not something you should either be surprised by - nor, not understand.  We've been waving the flag on "throwing savers under the bus" mingled with the ability of financial institutions to now have no need to have business ability over that of a 3 year old ("turn the light on, make money - guaranteed by your friendly Federal Reserve) to make hay.  Of course their management groups will be bonuses to the heavens for such ability.  

I do take exception with this quote by Mr. Gross:
  • “It’s capitalism, I guess, but it’s not to be applauded.”
Uhhh.... not so much.  Corporate socialism?  I'll give you that. 

The rest of the NYT story is about seniors forced into buying stocks to get any return - exactly as Mr. Bernanke wishes.  Of course when the other shoe drops (which it will, some day) Mr. Bernanke will not be there to bailout these seniors - they are more than small enough to fail.  Watching history repeat itself, in such a short period of time, is... well, you can figure out the word that best applies to these "saviors" of our economy.

To conclude: buy stocks.... the seniors are.  Gun to head, and all.

Sunday, December 27, 2009

Updated Position Sheet

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Cash: 42.1% (v 78.4% last week)
Long: 57.2% (v 18.9%)
Short: 0.7% (v 2.7%)

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

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

(click to enlarge)

LONG (2 photo files)






SHORT





OPTIONS





Thursday, December 24, 2009

57% Long....

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I often have received emails this year on why I have so much cash.  Frankly, I've been underweight equities incorrectly since about early summer.  That said, I've been able to put out some large returns this year after some buffoonery (trying to short things) in late April through early June.... despite huge cash stakes.  It's been a very strange year, extremely technical in nature - and a lot of "interesting things" going on under the surface; things that this long time observer of markets finds extremely fishy.  I'm not the only one.

But let's not digress.  For the portfolio, we've been able to take advantage of the same pattern repeatedly this summer and fall - up until about 5-6 weeks ago.  That pattern is the simple "breakout" on the indexes... much of the time a double top breakout.  That is simply put, when the market returns to old highs, and then surpasses it.   Once the old high is surpassed, that is taken as bullish by the markets.  There were many of these opportunities in 2009 since the market has been cut at its knees in 2nd half 2008, and first quarter 2009.  Hence there were many "old highs" to surpass!   Therefore, despite being incorrect in being underweight equities, we were able to jump in and out of the market with both levered ETFs and near term option (SPY calls most of the time) plays to make great gains in short periods of time.  Many times, once an old "double top" was surpassed - the market shot like a cannon for the next 2-7%.  We've caught a few nice downside moves as well with these same instruments.  In retrospect just loading up on levered ETFs and 2010 SPY calls around July 2009 (rather than jumping in and out) would of been the best thing to do - but if only this crystal ball would tell me these things in advance.

Therefore, in the bigger picture, we have had a sort of nirvana situation at FMMF "model mutual fund" - at least in the hedge fund world - that is, risk adjusted return off the charts.  The ability to generate excess returns, while taking little risk (holding a lot of cash) is the holy grail in the hedge fund world.  Which is why I found the questions about my high cash positions a bit bemusing. :)  I suppose it's all about your frame of reference - generating good returns while sleeping well at night is a positive in my book.  A period like this might only come once a decade however - but this is what worked through most of 2009.  In 2010, it might take another strategy - but whatever works in the future, we'll attempt to adjust to.

With all that said, the past 2 months the market has stalled, trading sideways - and build a huge base.  Most of the moves lately have been overnight rather than during the day.  With the base building, and a potential big move to the upside, I've been making more purchases in individual equities (more positions, and larger exposures) since there is still good action in individual stocks, even as the overall index has gone nowhere.  As I hinted many times the past 3-4 weeks, I anticipate a very large move out of this base.  Unfortunately this move out of "the box" has come on a holiday week, with many stocks very overextended - even as the market as a whole is not.  With such lowly volume so it is hard to trust.   But much of this 2009 rally has been on poor volume.  While the 2009 price action has been textbook technical analysis, the volume has not been confirmed - it's like a rally on vapor.   RevShark at RealMoney.com said it perfectly this morning:


For the fourth day in a row, we have a holiday state of mind, and the market is set to gap up.

As we wrap up the year, it is fitting that we have this type of positive action. It has occurred quite often this year and consistently caught folks by surprise. We have had a number of streaks where we went up day after day and created great frustration for anyone who was looking for a top. Oversold technical conditions and V-shaped moves were irrelevant once the bulls had the ball and started running.

It has been a year where many of the more basic rules of technical analysis have not worked very well. Volume patterns in particular have been quite peculiar. Just like we've seen this week, we have consistently rallied on a pattern of declining volume. The conventional wisdom is that a strong rally should see increasing volume as institutions jump in to add exposure. For some reason, this market has been able to trend upward even as volume falters, and that has left many technicians on the sidelines.


And that's the state of affairs for many of us who have been watching the market for many years... it acts strange, it moves strange, it is strange.  But it keeps going up, even as old rules we have been using are ignored.  I have my theories why, but it is what it is. 

All throughout 2009, one must respect the price action - even if the volume does not confirm.  Until that pattern breaks, it continues.  I've been waiting many weeks to see if the resolution of this base was to the upside.   The base is so long (1.5 months) I've expected a 7-8-9% type of move once we left the box.  If the move will be to the upside, that would take us nicely from S&P 1120 to 1200. 

With that said, and using the caveat that I will change my mind if we break back down below S&P 1120, I'm pushing a lot more chips in and instead of the normal 5-15% allocation to index positions, I'm more heavily skewed in these instruments as support for the core equity positions.  (mostly in the ETFs for now)  Hence, with one week left to go in our 2009 performance metrics, we've drastically increased long exposure up to 57%.  (I'll spare you the normal Kool Aid man photo here)  If you are a contarian this maneuver might be a signal that the new bear market begins next week. ;)  Since we're only 3-4 S&P points above where the breakout point is, we can handle that risk in the near term; and quickly peel out of a good amount of exposure if things reverse downward.  If however this turns out to be the run for the roses, much of 2010's returns can be captured in the span of a few weeks.  Obviously we have no idea what the next day, or weeks will bring but the market is all about probability, and trying to place the odds in your favor - rather than 50/50.  This is as good of place as any to make this defined 'bet' of a large move, as this has been the first multi month, narrow base we've had to work with since 2007.

And with that have a good holiday, whatever you might be celebrating.



Gold (GLD) and Silver (SLV) Dead Cat Bounce into Resistance Levels

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As expected (I thought it might happen next week, but its come sooner than I thought) both Gold (GLD) ETF and Silver (SLV) ETF have worked off a steep decline, and now are in process of their cursory bounce into resistance levels.  [these are the ETFs and not the metal themselves, but they do a good job of tracking the actual metal prices]  As with the dollar, which rallied into resistance than fell back, it will be interesting to see which way the computers take these precious metals.







If this is part of a larger move down, both ETFs will face a stone wall and resume their near term move downward.  If the "strong dollar" move is over, and we simply experienced a very quick "this trade got far too crowded, hence a shake out was in order" moment, the metals should burst through resistance and we'll be back to the intermediate/longer term trends.  We should know in the coming week.

To have a margin of safety, we'd probably want to see the GLD ETF over $112 and SLV ETF over $17.50 to assume the bullish conditions are back.

Long Ultra Silver, Powershares DB Long Double Gold in fund; no personal position

California Asks Rest of Nation's Taxpayers to Help Pay for Its Unbalanced Budget

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I have not had time to post some recent data on the growing chasm between public and private worker pay in the US, but I still plan to do it as this is a theme we've been pounding the table on since blog inception in 07... [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]  Much like many of its people who have spent far more than they take in, the politicos at the state level act no different than the politicos at the federal level.  Spend what you have today, and never assume a rainy day in the future.  Since the state and city level budgets cannot be solved by more and more borrowing, there is only one ultimate solution.  Full subsidization by the federal government, who not only is running massive deficits of its own - but in the end game, will be the vessel for states to run deficits.  [May 5, 2009: Federal Aid Surpasses Sales Tax as Top Revenue Generator for States]  We are now officially at that point as some of the states have run out of accounting gimmicks to paper over deficits.

I tried to be generous in the title of this specific piece since it's the holiday season, but it really should be something akin to "private workers of country asked for bailout to subsidize early retirement and generous benefit packages for public workers of California."  Or "taxpayers in Idaho asked to pay for imbalances in California."  In LA alone, pension payment will be sucking up 1 in 3 (yes, you heard that right) of all revenues in half a decade.  Leaving the other 2/3rds for minor things like... running the 2nd largest city in the nation.  [Aug 11, 2009: LA Times - Amid Cost Cutting, Los Angeles City Pensions Continue to Soar]  These are the type of things the nation is being asked to subsidize via these "stimulus plans" and whatever the Governor is asking for now.


•"We should never, ever design a pension formula that provides more for a person when they retire than when they are working. It defies any common sense," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility, a nonprofit pension reform group headed by former GOP Assemblyman Keith Richman.

•"But that's what we're finding" in some school systems and public safety agencies, Fritz said.

...that the share of the city general fund receipts required by two large pension funds would jump from 15% this year to 33% in 2013-14.


I am aghast when we hear comments such as "there is nothing left to cut" ... no there is; simply putting public workers pay and benefits at par with what the private worker now gets would immediately cause massive surpluses at the state and municipal level.  But this is now the third rail of politics so rather than make such harsh decisions, we now are at the next step of the move to Banana Republic.  We've now had 2 stimulus plans (the spring 2009 and the coming "jobs plan" in early 2010) that are blank check handouts to state workers ... and now California is asking for $8B more in direct aid (aka "adjustments") OVER AND ABOVE what has already been transferred to them via "stimulus"..  I am not sure when the private sector employees of the country finally say "enough" but let us be sure, until they do - we'll continue down this path. 

I write this with no offense to readers in the public sector - this is just an untenable situation.  It's a ponzi scheme, plain and simple - some form of reality check must happen at the public level; we cannot run 2 parallel America's; one open to global wage arbitrage, evaporated pensions, et al and another completely protected from such realities. 


[Dec 4, 2009: Public Workers Continue to Live the Good Life in New Jersey]
[May 8, 2008: It Pays to be a Firefighter in Vallejo]
[May 7, 2008: Vallejo, California Votes for Bankruptcy]

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Bloomberg: Schwarzenegger Seeks Obama’s Help for Deficit Relief
  • California Governor Arnold Schwarzenegger, anticipating a $21 billion budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.
  • Instead of seeking one-time stimulus money or a bailout, (which the state has ALREADY received earlier in the year via the massive stimulus plan - and will receive AGAIN when the next 'jobs plan' hatches early next year) the most-populous state wants the U.S. to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.
  • The problem is that there are no easy solutions left,” (wrong - there are easy solutions - there are simply none that are popular; any solutions past the previous accounting gimmicks will require actual sacrifice) said Jean Ross, executive director of the California Budget Project, a Sacramento-based research group concentrating on issues facing the poor.
  • Schwarzenegger and lawmakers worked to close a record $60 billion gap from February through July with $32 billion in spending cuts, $12.5 billion of temporary tax increases, $8 billion of federal stimulus money and more than $6 billion of other one-time fixes.  ("temporary", "one-time", "stimulus" - all these assuming a return to 'good ole times' - kick the can policies at their best ... what happens if the 'new normal' is nothing like the good ole times?)
  • Schwarzenegger’s arsenal of one-time accounting maneuvers he and lawmakers have previously used to temporarily paper over parts of the gap -- such as accelerating income-tax collections -- has been mostly depleted, making efforts to erase the latest $21 billion deficit more difficult.
  • An accounting error means the state has to spend almost $1 billion more on schools than budgeted. Officials also underestimated the cost of health care for the poor by $900 million, and lawmakers failed to pass legislation to realize $1 billion less in anticipated prison spending.
  • Combined, the state faces a $6.3 billion gap in the current year and another $14.4 billion in the next. (depending on the assumptions for revenue of course)
  • The state was the biggest bond issuer this year, selling $36 billion of debt.
California is the largest and most obvious black hole, but it's effectively a nationwide problem.  If you are in Arizona you might want to head over to Mish Shedlock's site for today's post: 'Arizona Governor Jan Brewer: "We face a state fiscal crisis of unparalleled dimension'.  Actually if you are a reader from ANY state you now need to care about Arizona... because you are going to help bail them out... err, provide "stimulus".
  • Nationally, 35 states and Puerto Rico expect to have $56 billion less next year than they will need to pay for all of their programs.  (we've become so immune to large numbers as "300 Billion bailouts" are now no skin off our noses, but there was a time... 3 years ago ... that $56 billion would have been a huge number. Now we've become numb - just go borrow some more, or print it)
  • In Nevada, Arizona and New Jersey, the difference amounts to more than one-quarter of their budgets, the conference said. Funds from the $787 billion federal economic stimulus bill enacted in February run out at the end of next year. (which is why we will have YET ANOTHER "stimulus" in early 2011, after the early 2010 "jobs plan"... we have no stomach to restructure the states budgets, so federal money will flow in each year under the guise of stimulus - these are yearly backdoor bailouts)
Circling back to California - we've talked about the issues in Greece quite often the past month; where 1 in 4 workers is now a public sector employee.  In America, if you include healthcare and education (what I call pseudo public as they are heavily reliant on public funds), we are now at 1 in 3 of all employees relying on fellow citizens tax dollars.  And the share is growing rapidly by the year...




How is this going to work in the long run?  It won't - ask Greece.  Eventually there will be no blood left to squeeze from fellow citizens.  Think of where the states would be without direct federal aid the past year.
  • California’s general-obligation debt rating from Moody’s Investors Service is Baa1, the company’s eighth-highest investment grade, and A from Standard & Poor’s, the sixth- highest. By comparison, Greece, the poorest member of the 16- nation euro region, is rated two steps higher at A2 by Moody’s and two lower at BBB+ by S&P.
  • “California, which is more than three times bigger than Greece, is running out of money.”
So this simply continues the ongoing mosaic of America.  The federal government will continue to borrow to plug hole after hole.  At some point there will be more holes in the dam, then fingers.  Then we're going to see things that make the episode of 2007-2009 pale by comparison.  Until then, I expect everyone to fight for what is "rightfully theirs" since almost every decision in the country is made on a 2-4 year election cycle.  Prepare your wallets. [Dec 11, 2009: NYT - Many See the VAT Option as the Cure for DeficitsDon't forget - all the same accounting tricks working to "kick the can" are throughout the nation's public pension plans as well - that amount is still big enough to shock people who have become numb to large numbers. [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout]

[Apr 25, 2008: Shoes Beginning to Fall in the States]
[July 25, 2008: WSJ: States Slammed by Tax Shortfalls]

Like Clockwork

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Well it's almost 10 AM and you know what that means; another day the "mission accomplished" banner can be hoisted.  The overnight futures buying has us up our traditional 0.3% and now HAL9000 and his band of computers can trade back and forth the rest of the day.

This is an actual email I sent to a reader at 3 PM yesterday as I debated whether to stay in my index longs.


my assumption is they will stop me out later today then jack up the futures to 1123 or something tomorrow

It has now become so predictable, I can actually guess to the point where "they" will move the market ahead in the overnight session.  Again, this is not new - it's been going on for much of the year.

I am considering a strategy to only be long the market overnight - you get killed a few times like Dubai Friday - but other than that, you can milk 0.3-0.5% almost daily.  It doesn't matter if the economic news is good, bad (GDP revisions, new home sales this week), or benign.  The market will be bid up, as someone with an agenda cannot wait until 9:30 AM to buy stocks.

Like clockwork.

(our fellow "escaped the Matrix" blogger, Zerohedge posted similar findings yesterday - I've been complaining about it for much of the year; if I had historical futures data I would of done a comparison of how much the great rally of 2009 was in premarket versus during market hours myself.  I don't have a problem with the days we surged on positive Chinese data overnight, or Goldman Sachs "beating estimates" but so many days we had bad economic news, or no news and futures were up 0.3%, 0.4%, 0.6%.  Just funny)

Obviously we are back to our index longs... just shaking my head at what 'the market' has become.  A breakout is a breakout, no matter how it was "accomplished", and those in power know we're all chasing the carrot they have so perfectly created.  Until further notice, S&P 1120 will be the new floor.  We've cleared the 6 week box, and the path to S&P 1200 is predestined.  Apparently, literally.



IBD: Mercadolibre (MELI) - E-commerce Sales Soar as Latin America's Households Get Wired

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As I peruse our archives, I noticed I have not spoken about former fund holding Mercadolibre (MELI) once in year 2009; so with time running out on the year, we should sneak one in.  We last owned this name in 2008, but in a year like that - a high valuation foreign growth stock is not exactly a harbor of safety and it was difficult to make any money.  Our last sale of the name was August 2008 around $35; within 2 months the stock actually was down at $10. Much like Baidu.com (BIDU) in China, this is a dominant franchise in its region / niche - but never cheap.  Currently MELI sits at 73x forward 09 estimates - having traded both for many years, it's rare to see them every even at the 30-40x forward estimates range. 

[click to enlarge]



Investors Business Daily does their normal excellent, and easy to absorb, summary of the company.  Just as I said in 2007, and 2008 - I am blown away Ebay (EBAY) [who is a part owner] or even an Amazon.com (AMZN) has not come in and swooped the franchise up:
  • Marcos Galperin saw the future of Latin American retail while working on his MBA in 1999.  At the time, Galperin, a student at Stanford University Business School, viewed Latin America's retail scene as inefficient. Large shops were only in big cities.
  • The well-populated remote areas had no shopping centers. Galperin figured he could make it easier for consumers and retailers to access each other by launching an e-commerce marketplace.  After crafting a business plan, Galperin got a big break. A professor introduced him to John Muse, co-founder of the Hicks Muse private equity firm.  Galperin ran his plan by Muse, who quickly grabbed at the chance to invest in the idea.
  • Soon after, Galperin assembled a small team. They got together in a garage in Buenos Aires and launched MercadoLibre (MELI ) in August 1999.  "The company has grown strongly ever since," said Galperin, who's CEO.
  • Today, MercadoLibre is the largest e-commerce site in Latin America, where it has platforms in 12 countries, says Galperin.  Sales have soared from $85 million in 2007, the year it went public, to $137 million last year. Analysts peg 2009 sales at $180 million, says Galperin.
  • The company has enjoyed double-digit sales gains every quarter since going public.   Most recently, in the third quarter, sales climbed 26% vs. a year ago to $50.6 million. Profits jumped 69% to 22 cents a share.
  • "The adoption of the Internet in Latin America is behind that of the U.S. and other developed countries," said Craig-Hallum analyst Mark Argento. "MercadoLibre is in the high-growth phase of their business because the Latin American market is somewhat behind."  As Latin America plays catch-up, the region has enjoyed rapid growth in PC penetration and broadband and Internet usage, says Galperin.
  • The region's Internet penetration, he adds, has climbed to 30% from 3% in 1999.  Latin America has among the world's lowest broadband penetration rates, at just 5.8% at the end of the first quarter, according to broadband research firm point 15pic.  But broadband has grown fast to 24 million households in select Latin American countries in 2008 from 2 million in 2002, according to a MercadoLibre presentation.
  • The MercadoLibre marketplace lets businesses and consumers sell items in a fixed-price format a la Amazon.com (AMZN) or auction style like eBay (EBAY), which owns 18.42% of MercadoLibre.
  • It also offers an online payments feature called MercadoPago. (i.e. Paypal - the crown jewel of Ebay)
  • Galperin says 95% of transactions are done on a fixed price. A hefty 80% of goods transacted are new. Retailers account for a large share of total trading.   Retail sellers are small- and medium-size players based in Latin America.
  • MercadoLibre gives consumers an opportunity to buy goods that may not be available at other retailers in Latin America, he adds. A lot of products sold on the site are brought in from other countries.
  • Argento says MercadoLibre is well suited to the Latin American market.  "The online-marketplace model is more common in Latin America, where there's typically a lot of smaller mom and pop operators rather than big behemoth retailers," he said. "That's a reason why it works."
  • The site had 2.5 million sellers in 2008, 40,000 of which made a living doing business on MercadoLibre, says Galperin.
  • ... it now has more than 40 confirmed registered users, up 26% from last year. Gross merchandise volume, or the dollar value of all transactions, rose 34% vs. a year ago.  It also saw a 43% jump in items sold.
  • Brazil, which emerged from the recession sooner than any other Latin American country, accounts for 50% of MercadoLibre's business.  The remaining 50% is spread out among the other countries where it operates.
  • Less than 5% of retailing in Latin America is done online. So it has lots of room to expand.
[Nov 12, 2008: Mercadolibre with Good Earnings]
[Jul 19, 2008: Mercadolibre Up 15% on Termination of CEO Stock Sale]
[May 14, 2008: Mercadolibre Reports]
[Mar 31, 2008: Mercadolibre with 3PM Spike/Forbes Article]
[Mar 6, 2008: Cutting Mercadolibre in Half on Nice Earnings]

No position

WSJ: Recession Alters Migration Patterns in the U.S.

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One little discussed point we spoke of in 2008 was how the "underwater" effect would be an impediment to the normal patterns seen both in previous recessions and the following recoveries.  We harped on this last srping as well. [Apr 23, 2009: As More Homes Fall Underwater, Trapped Americans Cannot Migrate]


Migration around the U.S. slowed to a crawl last year, especially for this decade's boom towns, as a weak housing market and job insecurity forced many Americans to stay put. Demographers say the dropoff in migration, shown in Census data to be released Thursday, is among the sharpest since the Great Depression. It marks the end of what Brookings Institution demographer William Frey calls a "migration bubble."

Migration typically slows during recessions. But in past downturns, the slowdown has been more regional in scope, with workers fleeing weaker job markets for places where companies were still hiring. In the deep 1980s recession, for instance, laid-off auto workers fled the industrial Midwest for energy-rich states in the South with more plentiful jobs. What's unique this time is migration has slowed almost everywhere.
The bureau found that the number of people who changed residences declined to 35.2 million last year, the lowest number since 1962, when the nation had 120 million fewer people.


Moves between states plunged the most, to half the rate recorded at the beginning of this decade.


The U.S. citizen is generally a very flexible person, who is willing to move cross country, both by choice and necessity.  In the past recessions (minor or major), job seekers would move from areas of the country with a dearth of work to those holding up well.  That said, this has not been a normal recession - and the degree of job loss is close to unprecedented.  Hence, aside from Texas & Washington D.C., there have not been regional clusters of strength in major population areas.  The states/cities holding up best have been the type with lighter population (Nebraska, Dakotas, Wyoming, etc) - so even if people could move; there are only so many jobs in that size of economy.  As the great job purge of 2008-2009 finalizes, this situation in housing will have an impact on the traditional movement around America - and will place many more of those in underwater homes facing tough decisions.  Yet another reason we can expect strategic defaults to continue to surge.

As an aside, if you did not read this piece on the global migration trends we posted last summer - it has some very interesting factoids as well. [Jun
8, 2009: WSJ - Global Migration Reverses for 1st Time Since Great Depression]

 



WSJ: Recession Alters Migration Pattern in the U.S.
  • The recession has had a profound effect on migration patterns in the U.S., reversing the flow of people to former housing-boom states such as Florida and Nevada, the latest data from the Census Bureau show.
  • In the year ending July 1, 2009, Florida -- once the top draw for Americans in search of work and warmer climes -- lost more than 31,000 residents to other states.  Nevada lost nearly 4,000. The numbers are small compared with the states' populations, but they reflect a significant change in direction: In the year ending July 2006, Florida and Nevada attracted net inflows 141,448 and 41,640 people, respectively.
  • "The recession coupled with the mortgage meltdown stopped the dominant migration story of the last decade in its tracks," said William Frey, a demographer at the Brookings Institution, a Washington think tank. "The real question is when the Sunbelt states are going to be able to come back. These new numbers suggest no end in sight."
  • The census data provide the starkest illustration yet of a shift that began after the peak of the housing boom in 2006. Each year, the movement of people from states in the Northeast and Midwest such as New York, New Jersey and Michigan to job-producing states in the Sunbelt and West has lost momentum as house prices have fallen and jobs have disappeared.
  • The exception amid the Sunbelt states is Texas, which has managed to avoid much of the housing malaise and unemployment that have plagued other states. (keep in mind, Texas was one of the states - much like the other states in the middle of the country that never had a housing boom - hence no offsetting bust) In the year ending July 2009, Texas gained 143,423 more residents from other states than it lost, making it the nation's biggest draw for the fourth year in a row.
  • With no income tax and relatively inexpensive housing, Texas has attracted both entrepreneurs and large corporations. The bank Comerica Inc. moved its headquarters from Detroit to Dallas in late 2007, and BlackBerry-maker Research in Motion opened its U.S. headquarters in Texas soon thereafter. Surging energy prices in early 2008 helped the state's oil industry, and the state's large medical centers have provided stable employment.
  • Between July 2005 and July 2009, Texas added 648,600 nonfarm jobs, according to seasonally adjusted data from the Bureau of Labor Statistics. As of November, the Lone Star state's unemployment rate stood at 8%, well below the national average of 10%.
Circling back to my point above:
  • People's immobility could become an obstacle to the restructuring needed to sustain an economic recovery, as tighter credit and depressed prices make buying and selling homes a more daunting prospect. The flexibility of the labor market, underpinned by a relatively mobile population, has long been a crucial factor in the U.S. economy's resilience.
  • "A lot of people are stuck," said Steve Cochrane, an economist at Moody's Economy.com. "If someone loses a job and can't move to seek a job somewhere else, that can keep the unemployment rate high and also make it hard for employers to find the labor they want when they need it."
There are even some political implications...
  • As Americans' willingness or ability to move from one state to another wanes, other factors such as birth rates are having a bigger impact on states' relative populations -- a shift that has political implications. Minnesota's robust birth rate, for example, could prevent it from losing a representative when Congress reallocates seats next year, demographer Kenneth Johnson of the University of New Hampshire's Carsey Institute wrote in a report Wednesday. And Utah, which saw its population grow by more than 57,000 in the year ending July, thanks in large part to births, is likely to gain a congressional seat.
And as we discussed just yesterday:
  • The recession also appears to have tarnished the U.S.'s image as a beacon of opportunity. In the year ended July 2009, the country attracted about 855,000 more new immigrants from abroad than it sent to other countries. That is 14% less than the nine-year annual average.
  • "Fewer people are coming into the U.S. because they know jobs are down," said Mr. Frey, of Brookings. "Migrants from abroad are also sensitive to the economic ups and downs in the U.S."


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