Tuesday, January 26, 2010

Replay of Interview with Mad Hedge Fund Trader

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As mentioned last week, I was interviewed by the Mad Hedge Fund Trader; original broadcast was Saturday.  The audio file is now available and you can follow the link here to listen if interested.  This was taped the day after the Boston (Sorta) Tea Party 2.0 and it's quite amazing how quickly many things can change in just 5-6 days.

It's a four segment interview; think I started out slow in first 2 segments but closed well in the last 2.   30 minutes total.

PIMCO's Bill Gross: Invest in 'Less Levered' Countries

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This morning we had Jeremy Grantham's much read quarterly letter, and now we have Bill Gross' widely followed monthly letter.  In this month's missive, he essentially summarizes where we plan to be invested long for the next few decades - countries who act (relatively) fiscally responsible, with solid demographics, and either are modern commodity rich "Western" nations or developing countries who are akin to investing in the US in the 1950s, 1960s.  Old habits die hard and people still believe the fiscally irresponsible, borrow / spend developed economies are still the place to be... they are "safe". bah.

[click to enlarge any graphic]




*Norway is an extremely oil rich, "socialist" nation which runs public surplus - unfortunately except for 1-2 stocks in the US, there is no real way to get access to the country.  However, they might have the most stable currency in the world due to these reasons.


The only problem is EVERY country will be affected when the problems from the bloated ,irresponsible (developed) countries infect the entire world.  As we saw in latter 2008 and early 2009 there was no place to hide and ironically many of the more responsible countries were hit even harder than the irresponsible - since they are considered "developing".  Hence you can't confuse your long term views on these wonderful opportunities, with the pain that will surely be shared the world over the next time panic sets in (I expect the next generation of panic to be soverign debt - a bunch of dominos set to hit over the next decade - I'm not the only one)  [Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]  [Dec 10, 2009: Ken Rogoff (Videos) - Sovereign Debt Defaults Likely in Next Few Years]





Via Bloomberg:
  • Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said investors should seek “less levered” countries like China, India and Brazil that are “less easily prone to bubbling.”
  • Go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come,” Gross wrote in a monthly investment outlook published on Newport Beach, California-based Pimco’s Web site. “The old established G-7 and their look-alikes as they de-lever have lost their position as drivers of the global economy.”  (welcome to our world Bill!  You're still relatively early to the thesis - no worries)
  • Gross recommended that investors should look for “a savings-oriented economy, which would gradually evolve into a consumer-focused economy,” adding that miniature examples of China, India and Brazil would be excellent examples.
  • The U.K. is “a must to avoid,” Gross wrote in the commentary published today. “Its gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors.”   (the UK is the mini US - the only difference is the Brits seem to have *some* political will at fighting deficits whereas all we have is vague talk of "deficit fighting" that has been full of empty promises - while acting in complete opposite.)  [Dec 1, 2009: Morgan Stanley Lists UK Sovereign Debt / Currency as Potential "Fat Tail" Risks for 2010]
  • Among developed countries, Gross recommended Canada and Germany. “Given enough liquidity and current yields, I would prefer to invest money in Canada,” Gross wrote. “Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country.”  (both considered "socialist" by Americans - irony.  I would put in Australia as well - ahead of Germany.  Germany is going to be dealing with irresponsible brethern in the European Union over the next decade - a lot of very tough decisions)  “Germany is the safest, most liquid sovereign alternative,” Gross wrote. However, “its leadership and the EU’s potential stance toward the bailouts of Greece and Ireland must be watched. Think AIG and GMAC and you have a similar comparative predicament.”
  • In the firm’s investment outlook for 2010 released on Jan. 4, Pimco said it was cutting holdings of U.S. and U.K. debt as the two nations increase borrowing to record levels.

The full entry can be found here  (or read it below - click on "Fullscreen")




Bill Gross Marked Up

Bookkeeping: Closing Ctrip.com (CTRP)

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I never really had a chance to build up a position in Ctrip.com (CTRP).  This position was restarted after a long hiatus from the portfolio, mid November at split adjusted $33ish.  Just a starter stake at the time, 0.5% allocation.  I added extra exposure in dribs and drabs but nothing very substantive, then took some profits a few weeks later in early December when the stock jumped to split adjusted upper $38s - the stock went up 8 of the 9 sessions after we bought it.  Once we sold, the stock drifted down, so I bought in small increments a batch here, or a batch there but it never regained anything higher than a 0.6-0.7% exposure on the second go around.



Now the stock is back roughly where we bought it in November, but unlike then it's in a much less attractive spot on the chart.  Rather than being above the 20 and 50 day moving averages, it is below.  Frankly with the 20 day moving average just about to cross below the 50 day (a quite bearish development) this is the exact set up I'd normally short .....the next time the stock bounces.  I haven't shorted an individual equity in a while so I will in fact throw a limit short order just below $35 and see if it hits in the coming days.  But for today, we're selling out of the long exposure and completely closing the position - Chinese stocks continue to underperform.  I might start looking for similar short side setups as Ctrip.com, as I see quite a few names on my watch lists with an identical chart pattern and just need a nice 3-5% bounce to create very low risk entry points.  If the S&P can jump up to that 1110-1115 area we might get those oversold bounces in the individual equities.

On a sidenote, I am completely out of the S&P500 (SPY) puts we put on last week, and for now replaced them with calls to see if I can grab 8-10 S&P points of upside.  Positions can change at any time (i.e. falling back down below S&P 1100 would change my mind) but looking at the chart a run up into resistance would seem a probable move.

No position

Overview of Remaining Material Long Positions

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There have been a ton of changes in exposure the past 5 sessions as the market has really punished many names in the small and mid cap space.  We only have light exposure to "weak dollar / commodity" names but they too have bene traumatized the past week.  The S&P could have upside to about 1110 / 1115 and then we'll see how it acts from there but between 1085 and 1130 I consider it all white noise in the intermediate term.  Over S&P 1130 and I'll reconsider a bullish stance. 



If this bounce occurs in the index, so will a lot of the individual names that have been heavily damaged this past week, but as we said yesterday it *should* set them up to be shorts (not longs) as they run into resistance areas.



We've been flushed out of many names as they broke support.  Here are the few remaining long positions with a material affect on the portfolio - keeping a close eye on these but thus far they have held in there.  Two weeks ago I had about 25 stocks which looked in good shape, now just a handful - not much left to analyze at this point.

Potash (POT) - stop loss is in the high $107s area; just missed executing this morning.  The chart is not good, but has held up much better than coal, steel, copper and other such areas which have been trounced lately.



EnerNOC (ENOC) - bounced nicely off the 50 day moving average



Assured Guaranty (AGO) - was starting a nice breakout until the market broke down



DragonWave (DRWI) - retreated sharply the past week, and wicked volatility today, but thus far still holding in



**********************************************

Two names with lesser effect - one that we cut back ahead of earnings (ATHR) and one we just added to the portfolio (FFIV) - still look good.  Also both these names have just reported earnings so there is no "lemmings risk" for the next 3 months.





Wyndham, Worldwide (WYN) looks good but I sold higher (so far so good) and hope to rebuy at the "gap".  Thus far it has pulled back in non dramatic fashion to the 20 day moving average and continues to exhibit relative strength.




I am also interested in Seagate (STX) although we don't own it ...



Other than that, the pickings are relatively slim out there - at least in sectors I focus on. 

Long all names mentioned in fund except Seagate; no personal position

Bookkeeping: Cutting Back 80% of Skyworks Solutions (SWKS)

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And the hits keep coming; another name breaking below the 50 day moving average today - we're letting loose 80% of Skyworks Solutions (SWKS),around $13.50 - much of which we bought back just last week after a good earnings report that seemingly does not matter one iota.  All we can do is a make a list of the companies who are executing and wait until a better moment in the market to buy....




This sale pushes us down to under 20% long exposure overall in the fund.

Long Skyworks Solutions in fund; no personal position

Bookkeeping: Stopped Out of 55% of Rackspace Hosting (RAX)

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The market continues to take us out of position after position... a limit order to stop out of 55% of the position in Rackspace Hosting (RAX) executed this morning below our target of $20.40.  We continue to see stock after stock break below its 50 day moving average even as the indexes sort of hold up.... quickly running out of material long positions.



Long Rackspace Hosting in fund; no personal position

Senator Bunning on CNBC: Bernanke Aides Said Not to Bail out AIG

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You know you are in trouble when the 'eccentric' Jim Bunning is talking more sense than 95% of the Congressional body.  Perhaps with no need to face re-election he has been unleashed from the Matrix.

Below is a 9 minute video with a neat little bombshell at the end.  What I loved what the baiting by good ole reliable Joe Kernen, and how Bunning stopped him dead in his tracks; Kernen was at a loss of words there after the normal dogma spiel.  Also loved the fact Bunning pointed out almost anyone associated with Wall Street is falling over themselves to keep Bernanke exactly where he is... nice.







Jeremy Grantham GMO Q4 2009 Letter - January 2010

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One of the "must reads" distributed across all of Wall Street is Jeremy Grantham's quarterly letter; here is his latest entry.  As always, he is talking sense and starts the letter off with loud applause for Obama finally listening to Paul Volcker.  In his last letter he called out both American leadership - and its people; something most in the financial media (or any media) won't do...

[Click 'Fullscreen' for easier reading]



GMO January


hat tip ZeroHedge

Monday, January 25, 2010

Atheros Communications (ATHR) Crushes Estimates

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First glance at Atheros Communications' (ATHR) earnings report is stellar - but it doesn't matter since Apple (AAPL) is out tonight and the whole world revolves around this (most excellent) company.   ATHR down in after hours :) "sell the news"

Revenue $185.7M, EPS $0.64 (non-GAAP)

v

Analysts $174.7M, EPS $0.53 (non-GAAP)

Revenue up 19% sequentially, and 89% year over year

Gross margins up almost 2% versus previous quarter, and 1% year over year

Operating margins a fantastic 23.4% of revenue, v 19.4% previous quarter, and 7.6% a year ago.

Bellissimo.

No guidance in report

As I said earlier in the day, high expectations but they delivered.  If not for a shady market, we'd definitely get everything we sold the past 7 days back first thing tomorrow.  But right now stocks are a slave to the general market and babies are being tossed with bathwater.  We'll see how the next few days play out - fundamentally, we could not ask for more.

Long Atheros Communication in fund; no personal position

Bookkeeping: Cutting Back Braskem (BAK) by 2/3rds

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I am not seeing much recovery at all in our pool of stocks, which are focused overseas and "smaller to mid cap" - so perhaps whatever rally there is are in sectors we are not in like big cap pharma or whatnot.  Very few names in my watch lists are popping; instead there is a good mix of red and green despite a benign market today.  I have to continue to respect the individual charts and if I'm proven wrong will pay up to get back into stocks at "safer" places on the chart.  Otherwise I continue to liquidate long positions 1 by 1.

Brazilian chemical maker Braskem (BAK) is following "countryman" Gafisa (GFA) into purgatory and has broken support at the 50 day moving average.  Hence, we'll take 2/3rds of our exposure back at a 10% loss and protect the remaining capital.   If it continues down this path, we'll expunge the last portion...



The general index in Brazil - the Bovespa - also broke down late last week, breaking the 50 day moving average and making a new "lower low" versus mid December.... more warning signs, especially if these things do not reverse quickly.



We seem to be losing both China and Brazil as the stocks in these countries are under performing the past 2 weeks.... not good. So we lost the "momo" hedge fund tech stocks ex Apple last week even before the market crumbled, we seem to be losing the 2 hottest countries on Earth, but I suppose people will keep the faith as long as Ben Bernanke will print more money. 

The areas of worry - technically at least -  are starting to pile up from this chair.  However, any ounce of caution has been a fool's game for so long... so we'll see if I'm made a fool again.

Long Braskem in fund; no personal position

Bookkeeping: Cutting Back Telestone Technologies (TSTC) to Holding Position

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Very disappointing actionin Telestone Technologies (TSTC) - very.

Other than an auditor change last week, and the general market for Chinese stocks in the past 2 weeks I don't see an obvious reason for the continued weakness; perhaps a lot of "hot money" hands piled in - and as the stock reverses they are hitting the exit door en masse.  Either way we had already cut the position down to 1%ish as the stock weakened and kicked in some stop losses much higher.  Now that the stock has broken the 50 day, we have to remain disciplined no matter what the thought process on the fundamentals and slash to the bone.



The only question is whether to sell completely or keep a 0.1% stake.  I've decided on the latter only to make sure this name remains on the radar.  The irony would be if the company has a blowout earnings (as they've projected) and the stock pulls one of those +20% gains overnight, but that's part and parcel with the Wall Street game so we'll protect capital first and watch what happens.  There is a huge air pocket between the $16s and the 200 day moving average (near $10!)
We're selling this batch of 0.8% exposure for a horrific 23% loss, near $16.20.

Long Telestone Technologies in fund; no personal position

Mondays Continue to be Wonderful

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We noted in late November a strange pattern - Mondays were almost always up.  [Nov 20, 2009: What the Heck is Going on With Mondays Lately? Always Up]  Of the last 8 Mondays at that time, 7 were up, 1 was down with an average gain of 1.28%.  While not tracking it lately, anecdotally it seems the pattern had been continuing and BeSpoke Investment Group confirms it; here are the last 18 weeks.  Since our analysis in November, only 1 Monday has been down...for a whopping 0.25%.  You simply cannot lose on Mondays anymore.


 

So with that we'll be launching two mutual funds; the second which of which will be "The Monday Fund".  Buy index longs full tilt at 3:59 PM each Friday, sell 3:59 PM each Monday, vacation the other 6 days.  A winning strategy indeed. 

At a 0.83% return x 18 weeks such a strategy would of gained 15% over a third of a year, on pace for an annualized 45% return.  That is for 1 day of week's "work".... mmm, Kool Aid.

Compare that to the -0.54% return the other 4 days of the week, or over 18 weeks ... -10% over that time frame.  Suckers.

Current Technical Conundrum as Displayed in Chart of BHP Billiton (BHP)

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I thought it would be helpful to show the conundrum facing those who have a long history in the market, from a technical point of view - using an individual stock rather than the index.  However, let's be clear that the S&P 500 chart is not much different than this stock - BHP Billiton (BHP) or quite a few others.

As we wrote in the weekly summary, last week, and many times in 2009 - we have very strange V shaped bounces happening in repeated fashion, in places that make little sense. Seeing 1 of them a year, or every 18 months is normal, but we enjoyed V shaped bounces off quick selloffs, month after month after month.  Using technical analysis has had you either out of the market (or individual stocks) or shorting at exactly the wrong time.  I want to repeat the message I posted last week from one of my favorite "short term oriented" traders who puts it more eloquently than I do.

With the breakdown we've had over the last few days, you really have to be watching for a failed bounce that sets up shorts. Typically, the folks who are caught with too much inventory will be looking to cut back into a bounce, and that leads to another pullback. The problem is that last year it just didn't happen that way. Once we started to bounce, we just went straight back up without a pause. There were very few failed bounces, and that just killed the shorts.

Hence, those who used precedent and prudence were demolished in 2009 while those who play "balls to the wall" (excuse my french) ;) or frankly had little experience in markets and only know to "buy the dips", were having a field day.  I won't get into my (and others) theories on why we have seen such atypical relentless bounces (much of which occurred overnight rather than during normal market hours)  - if you've been reading for a month or two you know what grassy knoll we're speaking from.
 
The greater question is, what market are we in?  A repeat of 2009's atypical action?  Or something more like the historical precedent people who have experience in the market are used to?  I have no clue... but let's use BHP Billiton (BHP) as an example of what I am seeing in many charts. 
 
We have a stock that was doing fine, minding its own business up through the beginning of last week.  Then the stock experienced a sharp sell off - puncturing multiple support lines including the key 50 day moving average.  The drop has been quick, so we should expect a cursory oversold bounce.  That is what we have today.

[click to enlarge]
 

 
Now what?
 
If 2010 is just 2009 redux, BHP will simply ignore the 50 day moving average... which should be providing resistance (old support = new resistance) and go onto its merry way back to the $80s.
 
If 2010 is like any year other than 2009 (and perhaps a few months in 2003) this oversold bounce should be a perfect opportunity to sell long exposure and / or short the stock as it moves into a resistance area.  From which it should begin a new leg down.

This is exactly the setup we have on the S&P 500... and the same questions arise there.  Making the S&P 500 so much more dangerous is so much of our moves now come overnight as the "urgent buyer" sweeps in on an illiquid market to get those futures rollicking whenever there is a threat of the market breaking down.  [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market]  Which creates havoc in the charts.  If half your rally since March 2009 has been in overnight hours, what sort of market do you really have?

Anyhow - the textbook says to begin layering on shorts, as oversold bounces taken broken charts back to resistance.  In a fully free market - that's the very obvious thing to do... your gut says to do this.  However, the (not so) invisible hand scoffs at textbooks.  So our experience in this type of setup is moot and we're more like a blind mouse wondering what maze we've been dropped into.  When the market overwhelms the hand... it will get interesting; and make life much more easy as old rules will begin to have use again.

Bookkeeping: Cutting Back Atheros Communications (ATHR) Ahead of Earnings

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Atheros Communications (ATHR) reports tonight and I'm going to cut the position back to a 0.5% stake ahead of the knee jerk reaction.  I expect good things but at 30x earnings with high expectations and a market that has soured I have some extra reasons to be cautious.  As opposed to selling, one could always buy puts against their long equity position.

I've sold 65% of the remaining stake (we cut back a large portion of this position last week to protect our profits, as the stock broke the 20 day moving average) in the $34.20s.  The chart remains far superior to 90%+ of individual equities with a limited pullback despite the market carnage last week...



In a sideways or trending up market, I'd most likely jump right back into the stock tomorrow once the coast is clear, but this market has me cautious so we'll see what the environment is like... keep in mind Apple (AAPL) reports tonight as well and it will suck up all the oxygen in the room.

Atheros Communications is a global leader in innovative technologies for wireless and wired communications. Atheros combines its wireless and networking systems expertise with high-performance radio frequency (RF), mixed signal and digital semiconductor design skills to provide highly integrated chipsets that are manufactured on low-cost, standard complementary metal-oxide semiconductor (CMOS) processes. Atheros technology is used by a broad base of leading customers, including personal computer, networking equipment and consumer device manufacturers.

Long Atheros Communications in fund; no personal position

Existing Home Sales Experience Worse Monthly Plunge in 17 Years

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Similar to "Cash for Clunkers", "Cash for Cul de Sacs" drew in first time buyers in a rush to get of what was perceived as the last taxpayer largesse to buy homes.  Unfortunately, those people were not reading FMMF where they would have been able to see the prediction that Congress would continue to extend and expand said credit past the original deadline since we are a country addicted to free money.  Bribing citizens to purchase things by layering on debt to our grandchildren is now the national ethos.  Unfortunately, the populace somehow thought the tax program would actually go away.... and hence rushed to lock up homes in the fall.

Unfortunately, there was a giant sucking sound after everyone rushed in to October and November... and we now see the largest plunge in monthly sales in 40 years.  But no worries - the market sold off for 3 minutes until Goldman Sachs reassured clients that the April 2010 deadline for the extensions of tax credit is just another temporary stop, and there will be more handouts "for the middle class" (wink wink) as we get closer to the spring housing market and cries from Washington (i.e. lobbyists from the home builder sector) about how a new extension is needed to keep the recovery rolling.  And thus it will be.

More morphine please!

(keep in mind existing home sales are 90%+ of the market, hence this report is far more important than Wednesday's new home sales)

Via AP
  • Sales of previously occupied homes took the largest monthly drop in more than 40 years last month, plunging far deeper than expected after lawmakers gave buyers extended time to use a tax credit. 
  • The National Association of Realtors says sales fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million in December, from an unchanged pace of 6.54 million in November. Sales had been expected to fall by about 10 percent, according to economists surveyed by Thomson Reuters.
  • Buyers were no longer scrambling to qualify for a tax credit of up to $8,000 for first-time homeowners. It had been due to expire on Nov. 30, but Congress extended the deadline until April 30.  (until the next extension of course)
  • The share of homes sold to first-time buyers fell to 43 percent in December from 51 percent the prior month.... indicating the expected end of the tax credit played a role in the drop.
On the "plus side" with a few trillion dollars of Federal Reserve MBS purchases, and billions handed out in tax incentives the median price actually rose.  A small price to pay for "green shoots".  Sorry that was cost-benefit analysis; let me give you the media spin aka benefit-benefit analysis: median home prices rose 1.5% - awesome.
  • The median sales price was $178,300, up 1.5 percent from a year earlier
Affordability levels remain at record highs, which you'd think would not necessitate free money handouts left and right.  But with home ownership rates as a % of population still ABOVE the long term average, bringing in the marginal buyer requires more sacrifice from your grandchildren.  Please thank them once more for their continued assistance ....
  • For the year, existing home sales rose 4.9 percent to 5.16 million, the first gain in four years, from 4.91 million in 2008.
If one only took the time to calculate what cost (plus interest payments on all the new debt) it required to get that 5% year over year increase in home sales... it will be the most expensive 250,000 houses ever bought in the history of the U.S.

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 25

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Year 3, Week 25 Major Position Changes

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

Cash: 65.4% (v 48.3% last week)
23 long bias: 26.2% (v 50.4% last week)  
4 short bias: 8.4% (v 1.3% last week) [Includes 2 option positions]

27 positions (vs 28 last week)

Weekly thoughts
How quickly things change....



Difficult to remember this but last week was holiday shortened and as we do the first day of almost every week (usually Monday's, but in this case Tuesday) shot out of the cannon as the week opened.  The market hit a 16 month high on Tuesday on anticipation of a Scott Brown victory and a return to politicians accomplishing nothing without a super majority for the Dems.  However this was a classic sell the news reaction, and combined with (a) Chinese tightening (b) Greece fiscal situation sort of mattering again (c) some rhetoric out of the White House that they will actually listen to wise Paul Volcker and not let banks use their federally backstopped deposit bases as sources of funding for their speculation desks and (d) some fear that the Champion of Wall Street, Ben Bernanke might not be confirmed - the market sold off sharply in 3 days. 


There was actually much more damage in individual names than the indexes - although the indexes took some damage to long term trends as well.  But nothing like some of the stocks we are watching, many of which gave back 15-20%+ in a matter of days, while breaking multiple support areas on their charts.  Bottom line is we have to return to a more protective stance until market direction clears itself up ... the question ahead is do we return to markets of mid 90s to mid 00s, or do return to "V shaped" recovery markets of 2009 where every sell off not only led to zero consolidation but a neck snapping punishment for short sellers who assumed technical damage in the charts actually had some meaning. 


A quick overview of the S&P 500, with parallels in NASDAQ and Russell 2000 .... first a 3 month chart


[click to enlarge]







.... next a 6 month chart


[click to enlarge]







In last week's summary things were moving along nicely, with S&P 1150 the obvious ceiling that we had pointed out and S&P 1020/1030 as the floor; 1030 being levels we had sold off to in the previous week, and 1020 being the level we broke out of "the box".  All systems go Tuesday... Wednesday the market sold off on "sell the Brown news" but we remained in the range of 1030-1050 that we had enjoyed for most of 2010, and then the wheels came off Thursday, with the chassis damaged Friday.  Once the S&P broke below 1020, the "breakout" from the base had been negated, which led us to begin taking evasive measures in a flurry of activity.  Further last week we had pointed out 2 gaps, reminding not to forget about them.  That said, we had no inclination that either would be filled in a 4 day week, but sure enough S&P 1104 was filled Friday. 


Looking at the longer term chart (6 month) another issue arises altogether.  For the first time in a long time, the market has made a new "lower low"; that triggered when late December 2009 lows of S&P 1115 were penetrated (Friday).  Since July 2009 there has been no threat of a real market breakdown other than a "Halloween surprise" where bears were afforded hope for about 48 hours before having their souls crushed in the now common "V shaped" recoveries.  Please recall as we said then, as we said throughout 2009, and as we said last week - "V shaped" bounces used to be a rarity ... anyone using historical references has been obliterated by this rally and hence the fear of shorts today.  The main difference between what happened Friday and in October or any period since July 2009 is a lower low has been created, while concurrently the long term trend line (signified by the purple line above) has been breached.  If this is a market of mid 90s to 2007, that should mean something - and not something positive.  Traditionally you'd now sell into rallies, assuming the market will dead cat (oversold) bounce into the trend line it just broke - and then selling would resume.  However bears have been so burnt, and 2009 had been such an atypical year will we continue to throw away historical references and assume the "invisible hand" will continue to make all precedent mean little?  I certainly don't know but this is the question I will want to see resolved.  After an invariable cursory oversold bounce - how does the market react when it reaches that long term trend line?  If the "free market" rules again we should see a rejection and sell off.  If the "Larry Summers market" rules instead, we'll just have another V shaped recovery and last week's events were just a bad memory.... carry on.


Bigger picture - other than some intraday positioning on a strong trend day - we are not interested in "being bullish" until we see S&P 1130 regained.  On the downside I marked a very obvious support level of S&P 1085.  This was the bottom of the "box" (base) the market built over 6 weeks in November/December 2009.  If that level is broken, I expect the computers to go into overdrive - certainly the "gap" at S&P 1170 is then in play, as would the probability of a test of the 200 day moving average.   That's the overall game plan for the larger market - as I said above, as damaging as last week's events were for the indexes, a lot more carnage happened to the charts of individual equities.  Certainly we should expect a day or two of a large OVERSOLD bounce soon... one should not feel bad if they don't catch it because to catch it, would mean you took serious damage being "long and strong"... the people who will most benefit from that near certain bounce will be people who lost lots of money last week, and are simply making up some of those losses.  So the bounce will not be surprising, nor telling.  What happens after the bounce is what needs to be monitored. 


As we enter the week, the confirmation of Ben Bernanke looks more clear and Wall Street of course is joyous.  News reports say the business community applied pressure to the politicos over the weekend, everyone from Warren Buffet to General Electric's CEO Immelt - remember, it's Cramerica; for the corporation, by the corporation.  When corporations say jump (or else you won't see a political contribution), politicians jump!  So that's 1 less issue for Wall Street.  In an ironic bit of timing the FOMC meeting is this week, but it's a foregone conclusion that "free money" will be available for "an extended period of time", so it's just a matter of the dog and pony show.   Speaking of dog and ponies... the State of the Union will be this week, where our Presidents tell us of grand plans to help "the people"- which by the time their speech is over, lobbyists are already hard at work unraveling.  Expect nothing less this time around.   On the economic front a relatively busy week - 


Monday: Existing Home Sales.  I'd expect a continued hangover from the "first time homeowner credit" orgy, combined with weak seasonality.  
Tuesday:  Case-Shiller home prices and a consumer confidence report
Wednesday: New Home Sales - not nearly as important as Existing since it's only a small fraction of the home transactions in America.  FOMC meeting announcement in the afternoon will dominate although it will be more of the same.
Thursday: Durable Goods - always volatile, we learned more from the railroads last week than any of these sort of reports
Friday: GDP, Chicago PMI.  


Some words on GDP - Please don't get excited about it - a very flawed figure in its own right.  First, it's going to be a high number - perhaps 4%ish.  It will reflect very little as the "strength" in the US economy is 70% morphine, 20% Asia.  If you ever study how this report is actually put together, many things that contribute to positive GDP are near senseless.  That said, after such a huge drop in 2008-2009 GDP should be jumping to the tune of 6-8% in some of these "recovery quarters".  You remember what happened last quarter right?  A home tax credit, cash for clunker full GDP was reported as +3.5%.  This set Wall Street off in a tizzy on "great news".  Then it was revised down to 2.8% a month later.  Then a month later to 2.2%.... almost all of which was Cash for Clunkers.  Hence as we watch the lemmings react Friday to a number that is vapor, and will be revised 10x to Sunday is just a great psychology experiment and frankly a waste of time - but since lemmings affect us, we need to pay attention. 


Lost last week in all the drama was this is still the heart of earnings season ... will "sell the news" reactions continue?


As for the portfolio it was a very busy week - I am not going to go through the army of transactions.  Needless to say when the technical condition of the greater market changed, we took a lot of action to switch the portfolio around on a dime.  Many stocks were culled back as they broke support (or punted out of the portfolio entirely).  We raised cash.  We added some short exposure.  I have more short exposure than intended coming into the week, as I expected an oversold bounce early in the week, so we'll get back down to the exposure I want very early in the week, and then assess how the market acts as espoused above.   Big picture - below S&P 1085 we are going to have a bearish bent, over S&P 1130 we will have a bullish bent.  In between is simply white noise, and more appropriate for "fast money trading" types - we'll participate here and there but can make no conclusions in that 45 point range, so we won't get excited about anything that happens despite the wall to wall coverage of market analysis on any moves in that area.

Sunday, January 24, 2010

Updated Position Sheet

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Cash: 65.4% (v 48.3% last week)
Long: 26.2% (v 50.4%)
Short: 8.4% (v 1.3%)

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





NYT: Economic Stimulus a Mixed Bag for China

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Stories are starting to hit the mainstream media that echo what we were highlighting a year ago as everyone celebrated the Chinese stimulus package.  , [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]  Another example (back then) of benefit-benefit analysis... as long as some action makes the stock market go up (and solves the problem 6 inches ahead of our nose), we are content to only deal with the positives!  As for the costs, frankly we'll never know the true scope of damage done because of lack of transparency... but based on how many misallocations of capital have happened in the US the past decade, we can expect the same in China.  We are already seeing some of the costs - subsidized land and stock prices.  And surely they've overbuilt some industries as well....

  1. [Dec 31, 2009: BW - China Property Bubble May Lead to US Style Real Estate Slump]
  2. [Aug 13, 2009: WSJ - In China, Land Prices Fan Bubble Fears]
  3. [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market]
  4. [Aug 26, 2009: China Studies Curbs in Steel, Cement]

On the plus side, they did not have to go into debt to do this action, and were more than happy to use the money we send them each and every day.   And to give the Chinese credit their stimulus projects seemed to have 50x the effect ours did.  Their hybrid "central command capitalist" model does do a good job of disbursing monies quickly, if not efficiently.

If you didn't catch it earlier in the week, China told some of its larger banks to stop all lending until the end of the month.  As a global speculator audience who is now trained on easy money, any such moves cause serious unease.  Talk is now starting of when the Chinese central bank will begin to raise rates...


Via NYT:
  • Despite U.S. government prodding and wheedling and unprecedented taxpayer-financed bailouts, American banks have stuck to anemic lending policies over the past year, seeming more concerned with replenishing their bonus pools and reserves than helping to rekindle the economy.  As is often the case, things have played out differently in China.
  • Like other besieged governments, Beijing responded to the financial crisis in late 2008 with a major fiscal stimulus of 4 trillion renminbi, or $586 billion, over two years. Unlike many other governments, Beijing could also order — not just ask — Chinese banks to mount a parallel stimulus offensive in the form of a huge lending drive.  Fresh lending by Chinese banks in 2009 rose to nearly 10 trillion renminbi, about double the volume of the previous year.
  • While this has helped China to weather the economic storm in flamboyant style so far, it may yet prove costly. Not only does the government fear the inflationary potential of its stimulus measures, but there are also risks of destabilizing asset bubbles, industrial overcapacity and waste from duplicative investment projects.
  • For the banks themselves, the lending splurge threatens to undo significant progress made in recent years in reducing ratios of problem loans to total lending.  A decade ago, Chinese banks staggered under a load of bad debt, reported by the Bank of China at nearly 40 percent of their total lending in 1999. In 2000, the nonperforming loan rate for the major commercial banks in China stood at 29 percent, according to official statistics and in the view of many Western analysts who questioned Chinese accounting standards, it was probably far higher. Nonperforming loans are defined as those on which repayments are more than three months in arrears. 
  • The government vowed to bring the rate down to 15 percent by 2005, and by the end of 2007 it had dropped below 7 percent. One factor behind this reduction was the need for Chinese banks to attract investment from private and foreign sources.  This steep decline to single-digit levels would seem to tell a heroic tale of a banking system that solved its problems, but not all analysts take it at face value. Skeptics say the cleanup was largely based on sleight of hand, involving specially established asset management companies, speculative bonds and fuzzy government guarantees that together did little more than kick the problem down the road.  (apparently kicking the can is a global sport)
  • Even the least cynical analysts acknowledged that lower ratios partially reflected the dilution of bad loans in a vast sea of new lending, some of which would go bad but was still too recent to register as nonperforming.
  • Yet such doubts and qualifications notwithstanding, few deny that some degree of bad debt reduction was genuine and that overall loan quality among Chinese banks has improved from the worst of times.

That was then... we're more concerned about "now" and "future" - especially for a country in which it seems every stock market in the world is dependent on as a source of strength.  I thought this would be an issue for 2011-2012 but as with all things, it can begin to "matter" whenever the masses acknowledge the issue.... i.e. Greece did not go away but for a month now we have swept it under a rug.
  • Now, however, new concerns are emerging over the state of Chinese banks and their balance sheets. Zhou Xiaochuan, governor of the People’s Bank of China, the country’s central bank, spoke publicly of such worries in early January, and hinted at a lending slowdown.  Large credit flows, “will not only go against the objective of economic structural adjustment, but will also pose bank lending quality risks,” Mr. Zhou said in a magazine interview.
  • Mr. Zhou’s comments also included a mention of bank reserve ratio requirements as a policy tool, and on Jan. 12, the central bank duly announced an increase of 0.5 percentage point, to 16 percent, in the proportion of their deposits that Chinese banks must keep on reserve.
  • The increase was the first reserve ratio adjustment in China in about 14 months. Many analysts predict that total Chinese bank lending may pull back by about 20 percent, to no more than 8 trillion renminbi, this year.
  • According to Jing Ulrich, managing director of China equities in Hong Kong for JPMorgan, the first half of 2010 will experience continued but gradual policy tightening, with more emphasis on further administrative measures, rather than interest rate adjustments.
  • Ms. Ulrich also warned that the longstanding Chinese aim of lifting domestic consumption “has gained new urgency in the face of last year’s collapse in external demand.” She said that she expected the authorities to continue the consumption stimulus policies they adopted in 2009. These included encouragement for consumer finance companies, subsidies for private car owners who sell old vehicles to buy newer ones, and similar aid for large household appliances.
  • It is “almost inevitable” Mr. Pettis said, that the recent credit splurge would lead to more nonperforming loans, or NPLs, and the burden of recapitalizing banks might ultimately fall on households. Because substantial stakes in many Chinese banks are now held by private and foreign investors, the government may be reluctant either to give cash directly to banks or to buy their bad loans above true value. That, he said, left the option of giving banks a de facto subsidy by setting a wide spread between the rates they pay on deposits and the rates they charge for lending.  “Households are effectively being taxed with low interest rates on their deposits,” Mr Pettis said. (i.e. what is happening in the U.S. as the Fed strangles short term rates right near "zilch")

As the stock market whistles its way to nirvana (don't mind the graveyard), keep items like this on your radar.  They are out there - they will eventually matter - but you never know when a herd of bulls will take a moment to sniff the air for danger.  When they do, they tend to panic... but until then, they graze in ambivalence.  As we love to say "it doesn't matter... until it matters."

Is Ben Bernanke's Confirmation Threatened?

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Short answer - I highly doubt it.   Part of Friday's selloff was the fear of speculators that their Drug Dealer in Chief ("he drops paper dollars from helicopters faster than a speeding bullet") might possibly not be confirmed by the Senate.  Despite all the hand wringing I'd put the odds at 5% or less that Time's Person of the Year won't sit there and continue to monetize all the bad decisions of Congress, and the country at large.  Even if by some 1 in 20 chance something goes awry, who will be sitting in the wings?  Mr. Kohn - who is no different than Alan Greenspan and Ben Bernanke.  [Sep 12, 2009: Federal Reserve's Kohn: We Plan to Keep Throwing Kerosene on the Fire]  That is the part people do not get - this is an institutional issue and they will just keep putting in figure heads who all do the same deeds... every so often "they" screw up and put in a Paul Volcker type who is willing to cause pain to the American people in the near term so as to do the right thing in the long run - but that is the exception, not the rule.

So while the knee jerk reaction of a Bernanke loss by the speculator class would be outright panic (the screeching on CNBC as the babies lose their pacifiers and security blanket should be able to crack windows nationwide) the reality is the chances of any real change happening at the top of the Fed (i.e a return to Volcker) would border on slim to none - at least from this perch. 

p.s. whatever happens, Bernanke will be with us for a WHOLE decade - he has a 14 year term that lasts til 2020.

I was bemused to see this quote in the Wall Street Journal Friday by a Senator from Oregon - it seems like the message being shouted by a few of the "rogue bloggers" (hand raised) has finally hit the mainstream.  i.e. why do we celebrate a man who brought the matches to the arson scene, just because he pulled a few burnt victims out of the house?

"He did a good job with the fire hose this last year, but he certainly also–in his roles over the last eight years—he helped create the circumstances that set the house on fire," said Oregon Democrat Sen. Jeff Merkley, a Bernanke foe.

Remember this Fed head job is apparently not about being accurate or having any prescience in economic forecasts.. it's not about the fact you said Fannie and Freddie are just fine in early 2008.. it's not about the fact you did not believe housing prices could fall nationwide; it's not about the fact you denied a recession as we were heading full bore into one; it's not about the fact your institution's regulation was a farce (yet you want more regulatory power!), it's not about the fact you promised us that you would not bailout speculators at a Jackson Hole, Wyoming speech in 2007. 


It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. - Ben Bernanke, August 2007.

It's not about having a good track record is it?  It's all about your big firehose Ben -, and as long as you make all our problems go away with more paper money creation - you are Wall Street's hero. *We heart Ben* 

[5 minute video - email readers will need to come to site to view]





But other than that, he nailed it....(heckuva job Brownie 2.0???)

So never fear speculators of the country / world - the US saver will continue to be thrown under the bus so that you can borrow at nearly zilch and distort prices of all things, in an orgy of excess as we create a fake "wealth effect" to hide the structural problems of our damaged economy.  It's called paper printing prosperity [May 19, 2009: Paper Printing Prosperity Defined] and it seems to be the only playbook we have.  Any other path requires discipline, long term thinking, and sacrifice - not to mention competent leadership.... that is soooooo "Greatest Generation", who has time for it?  Just give me my morphine drip and make it all go away!

As investors, we have to be very aware of the celebration that will erupt on Wall Street when it becomes clear their man will be confirmed (please note Goldman Sachs will be notified by Senate staff approximately 24 hours before you will) - we can expect a joyous reaction to free and easy money for an "extended period of time".  (if Jim Cramer cries live on air, don't be alarmed - they are tears of joy) Bears - you have been put on alert...

The latest from the Wall Street Journal:
  • White House officials and a leading Republican senator on Sunday expressed confidence that Ben Bernanke would be confirmed for a second term as Federal Reserve chairman, despite expressions of opposition from a growing number of lawmakers.
  • Mr. Bernanke, a former Bush administration official whose term expires on Jan. 31, has come under fire from some lawmakers over the Fed's handling of the economic crisis. While many officials and economists view Mr. Bernanke as having played a key role in staving off another economic depression, he has become a lightning rod for public anger over the bailout of the banking system and the country's continued high unemployment rate.
  • Three White House officials said on Sunday morning talk shows that Mr. Bernanke had enough votes for another term.
  • The Senate's top Republican, Mitch McConnell of Kentucky, said on Sunday that he believed that Mr. Bernanke had enough votes to remain Fed chairman. "He's going to have bipartisan support in the Senate and I would anticipate he'd be confirmed." Mr. McConnell said on NBC's "Meet the Press".
  • Because four senators have put what's known as a "hold" on the nomination, it will take 60 votes to bring the Bernanke confirmation to the floor for a vote. Once that hurdle is cleared, it would take a majority to confirm him.

For the First Time, More Union Workers Work in Government versus Private Sector

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"Those darn union workers! They are killing private industry - industry after industry!"

Another batch of dogma down the tubes....

It is clear now with government wages substantially outpacing the private sector, along with (in general) far better benefit packages, the United States is on one of two paths, in reaction to globalization / loss of jobs / deflating of wages in the private sector.  Either (a) a resurgence of the union shall occur as "labor" lashes back against "capital", or (b) a serious backlash will happen against those who remain in unions - which according to this New York Times article, for the first time, is dominated not by the those in the private sector, but those in the public.  Keep in mind this is absolute number of people - we are not even talking % terms in which the discrepency is huge.  (see below for those numbers)

I am not sure which path we go down - with the worship of capital in this country, even by those who are being hammered relentlessly - my original thought that the U.S. would look more "Europanized" as labor scrambles to protect itself might not happen.  I will be very interested to watch how neighbor reacts to neighbor throughout the country, as one (in the private) sees the other (in the public) retiring early, with full benefits while the other is working as Home Depot as a greeter well into their 70s to make ends meet. It's already happening as we speak, but I don't think the masses "get it" yet.

The next few bailouts of state workers....err, stimulus... err, "job creation plans" should be an interesting tell on how the private sector worker is going to take this.  As will the tax increases that will be shrouded under the tired line of "we need to keep policemen and firemen on the job" (which is a great cover for almost every agent of government to receive the same protection)  Can you hear the VAT in your future?  Put your ear to the ground and listen closely... the first tremors are approaching [Dec 11, 2009: NYT - Many See the VAT Option as Cure for Deficits]  As we continue down this path of global wage arbitrage (private sector), if current trends persist... you ain't seen nothing yet in terms of wage/benefit discrepency.

I had promised to write about the new study on "wage discrepancy" between public v private in December but never got around to doing a blog entry... but if you did not hear the news, please see this USA Today story:  some enjoyable snippets, 1 out of every 5 government employee now makes at least $100K -- before benefits or OT.
  • The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.
  • Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted.
  • The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.
  • When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.
In summary:
  • The growth in six-figure salaries has pushed the average federal worker's pay to $71,206, compared with $40,331 in the private sector.
Again this is just salary - we are not even touching on the benefits.  Just keep that in mind as the next plea for taxpayer dollars is shouted out as a necessity (as backdoor bailouts for states)....which should arrive at this week's state of the union.  Why not a stimulus for small private business instead? 

*************************************
On the the New York Times story on unions:

  • For the first time in American history, a majority of union members are government workers rather than private-sector employees, theBureau of Labor Statistics announced on Friday.
  • In its annual report on union membership, the bureau undercut the longstanding notion that union members are overwhelmingly blue-collar factory workers. It found that membership fell so fast in the private sector in 2009 that the 7.9 million unionized public-sector workers easily outnumbered those in the private sector, where labor’s ranks shrank to 7.4 million, from 8.2 million in 2008.
  • "There has been steady growth among union members in the public sector, but I’m a little bit shocked to see that the lines have actually crossed,” said Randel K. Johnson, senior vice president for labor at the United States Chamber of Commerce.  (why be shocked?  in private you threaten to take work overseas, in private you gladly add more jobs ... after all it's just a few more mills... or a new metro park tax)
  • According to the labor bureau, 7.2 percent of private-sector workers were union members last year, down from 7.6 percent the previous year. That, labor historians said, was the lowest percentage of private-sector workers in unions since 1900.
  • Among government workers, union membership grew to 37.4 percent last year, from 36.8 percent in 2008.
Let us stop right there to let that sink in.  1 in 13 private sector workers is in a union.  1 in 3 public sector workers are.  I just want the people who listen to the fire tongue ramblings of a certain political party who speak up of the "evils of unions" on private industry ("they cost jobs") to realize how two faced their words are.   Should one not throw rocks at glass houses?

  • The overall unionization rate edged lower, to 12.3 percent last year from 12.4 percent in 2008.
  • Notwithstanding the recession, government employment grew last year, inching up 16,000, to 22,516,000, according to the bureau.  (recession? what recession?)
  • “At the same time the country is being squeezed, public-sector unions are a rising political force in the Democratic Party,” he said. “They depend on extra money for the public sector, and that puts the Democrats in a difficult position. In four big states — New York, New Jersey, Illinois and California — the public-sector unions have largely been untouched by the economic downturn. In those states, you have an impeding clash between the public-sector unions and the public at large.”
  • Assessing the drop in private-sector unionization, Paula B. Voos, a labor relations professor at Rutgers, said, “It’s a sad commentary on the ability of private-sector workers to unionize.”
The full BLS study is here - with some interesting snippets.  You might ask for example why Texas has such relatively low taxes versus other large states?  Please avoid your eyes...

Texas (the second largest state in terms of the number of wage and salary workers) had one-fourth as many union members as New York (the third largest), despite having 1.9 million more wage and salary employees.

[Jan 5, 2010: FT.com - US Public Pensions Face $2 Trillion Deficit]
[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]
[Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]


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