Friday, March 5, 2010

Shockingly, I Have Not Been Stopped Out of Any of the Shorts I Put on this Week

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The technical setups in these charts have thus far kept me from losing much on the short side - highlighting an advantage of shorting weak stocks rather than indexes that are currently on meth.  The Russell 2000 is on track for a 15% gain in a month (double the S&P 500 return in that time)... that's usually a good year's worth of returns.


With that said, I can see Magical Markup Monday across the bow, and I am almost guaranteed to be stopped out first thing Monday morning.  Will they have no shame and mark us up yet again in premarket after a huge week? 

I'll keep the flag posted for the few bears who still have a few tufts of hair remaining that have yet to be scalded off their body by the powers that be.  Monday morning, I shall take those stop losses with dignity....




On a serious note - the market has to go down at some point.  Right?  (someone call Larry Summers and ask)

Short all 3 names above for some crazy reason in fund; no personal position

WSJ: Facebook CEO in No Rush to "Friend" Wall Street

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As the last person under the age of 40 but over the age of 22 to not have a Facebook account, I have no particular affinity for the entity other than from an investing standpoint.  With Wall Street's salesmanship and the retail investor's love for anything they can touch, feel, and interact with each day, I contend that just as Visa (V) was IPO of the year in 2008 [Feb 4, 2008: Visa IPO Seeks Mastercard Riches]....  a Facebook IPO will rival the hype around Google (GOOG) earlier in the decade.  Even if Facebook does not make a red cent at this time (I don't know their profitability).  The question is does Mark Zuckerberg want to ascend from filthy rich to "Sergei & Larry" rich in 2010, 2011, or 2012?  I certainly hope it comes after I am up and running, because this is one IPO placement I want to have my hands all over.  Based on the story, there appears to be no rush.


Via WSJ:
  • Most everyone in Silicon Valley and on Wall Street agrees: The eventual IPO of social-networking site Facebook could make its founder the world's richest twenty-something.  Yet Chief Executive Mark Zuckerberg, now 25, seems intent on deferring that multibillion dollar payday.
  • He's huddled with executives like Intel CEO Paul Otellini and Oracle Corp. President Charles Phillips—the goal being to extract wisdom about how to better run his independent company. He set up a dual-class voting structure that would make him less beholden to any public shareholders. And last year, when staffers began itching for richer rewards, he devised a way for them to cash in some of their Facebook stock—without pushing the IPO button.
  • "We're going to go public eventually, because that's the contract that we have with our investors and our employees," Mr. Zuckerberg said during a recent interview. But, he added, "we are definitely in no rush."
  • At the same time, his delayed-gratification approach offers some insights into what a publicly traded Facebook might eventually look like. It also highlights some of the challenges Mr. Zuckerberg is apt to face in balancing public ownership with his zeal for tight creative and financial control.
  • Employees say he's a demanding boss—one who loves to engage in debate but isn't big on lavishing individual praise. According to one engineer, who wrote an internal memo called "Working with Zuck," it is unwise to "expect acknowledgment for your role in moving the discussion forward; getting the product right should be its own reward."
  • Mr. Zuckerberg fits into a long queue of tech barons with grand ambitions. Apple Inc. Chief Executive Steve Jobs in the early 1980s proclaimed that the Macintosh would revolutionize computing. Google Inc.'s founders boasted that its search engine would "organize all the world's information."  But unlike some of his predecessors, Mr. Zuckerberg doesn't need huge cash reserves to build factories, a global distribution system or even a massive marketing machine. "If you don't need that capital, then all the pressures are different, and the motivations [to go public] are not there in the same way," Mr. Zuckerberg says.
  • A micromanager, Mr. Zuckerberg has cut down on his meeting obligations and now delegates to senior-level staffers so that he can spend more time mulling Facebook's broader, strategic game plan. (Among other things, he's ruminated what the company would do if it had a trillion dollars at its disposal.) He still has the final word on most product decisions and readily abandons concepts a year or more in the making.
  • That luxury, of being light on one's corporate feet, is partly what he fears he may have to sacrifice with an initial public offering. Rather than nurture long-term goals, he worries that his staffers might become "focused on an announcement, and how that plays out and whether the stock price goes up," he says.
Sounds like he already knows the pressures of Wall Street.... remember, if you don't beat quarterly expectations by at least 2 pennies your stock is trash, can lose 20% of its value overnight and your company is headed for the graveyard ;)  Planning for things out 2 years?   Laughable... 90 days is an eternity on the Street.
  • Mr. Zuckerberg has passed up several opportunities to sell and make a killing. These include a $1 billion offer from Yahoo Inc. in 2006 and an overture from Microsoft Corp. that was worth a possible $8 billion or more, according to people familiar with the matter. Mr. Zuckerberg declines to comment on the talks, beyond saying: "It always sounds a lot more concrete than it actually is." 
  • By early 2008, Mr. Zuckerberg began to take steps to help prepare the company to go public. He expanded his management team, hiring Google executive Sheryl Sandberg as his No. 2 in March of that year. He sought new perspectives by inviting Netscape co-founder Marc Andreessen and Washington Post Co. Chairman Donald Graham to join his board. He kept voting control over their seats, however.
  • Any IPO timing is squarely in Mr. Zuckerberg's hands. He owns more than a quarter of Facebook's stock and controls votes for three of five board seats, say people familiar with the matter.
  • There's little pressure from Facebook's existing shareholders—mostly venture capitalists who say they are pleased with its positive growth trend. Facebook executives have discussed how revenues for 2010 could hit between $1.2 to $2 billion, say people familiar with the matter. In 2009, the company said it was generating positive cash flow, more than enough to pay its 1,200 employees and overhead.
  • Russian investors Digital Sky Technology bought roughly $100 million in shares from employees and invested $200 million directly, giving DST a 3.5% stake.   By opening the door to a single investor, he avoided increasing Facebook's shareholder base. The move also pacified employees, who splurged on new homes, cars and lavish vacations.
  • In February, Jim Breyer, a board member and an early Facebook investor, told a German audience of techies that Facebook wouldn't be going public in 2010.  Later that month, Mr. Zuckerberg, having grown weary of the topic, said in an interview, "As a practice, we aren't going to comment on it."

Bloomberg: Copper Demand is Now "Weak" in China, but No Worries - Goldman Sachs and JPMorgan are on the Scene

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We've been keeping a close eye on copper of late. [Feb 2, 2010: Trader Who Called 1996 Crash in Copper Says Prepare for Another - "Catastrophe" Awaits]   Funny thing, is despite rampant inventory build the earthquake in Chile (one of the world's largest producers of copper) allowed an opportunity for speculators to run in and ramp up the price Monday, even though the mines where copper is sourced were not near the earthquake zone, and were only offline for a day or two.  But don't let facts get in the way of a good speculative trading opportunity.

Indications from China are that its huge copper inventory build is slowing ....as we've documented [Feb 9, 2010: China Copper Imports to Halve]  And overnight we have some more confirmation of that as end demand is "weak" per the country's 2nd largest smelter.  That said, our commodities markets seem to have very little to do with supply and demand anymore... it's all about financial innovation and making sure traders on a few desks can game the system.  So perhaps copper can surge another 50% from here as the markets discount Chinese stockpiling,  European economic recovery, American house building surge errr... well we don't really need a reason in the new paradigm  When prices no longer are connected with what is happening on the ground - copper can go wherever Goldman needs it to go to ensure another quarter of 98% winning percentage. [Nov 4, 2009: Goldman Sachs Q3 Winning Percentage: 98.4%]

via Bloomberg:
  • Copper demand in China, the world’s largest consumer of the metal, is “weak” because of lackluster consumption from the power industry, Tongling Nonferrous Metals Group Co. said.
  • From what we learned from our customers, copper demand is now weak,” Chairman Wei Jianghong said today in an interview in Beijing. Tongling is the country’s second-largest copper smelter.  “About 60 percent of copper is used in the power industry, and our sales to wire-and-cable users reflected that demand is rather weak,” Wei said.
  • Demand “isn’t very strong,” Li Yihuang, chairman of bigger rival Jiangxi Copper Co., also said today.
  • Slowing demand in China may indicate stockpiles in the country may continue to climb after reaching the highest level in more than seven years in February.
  • Copper stockpiles jumped to 149,478 tons for the week ended Feb. 26, 28 percent more than the week ended Feb. 12, according to the Shanghai Futures Exchange.
Stockpiles up 28% versus 2 weeks ago?  7 year highs?  No worries! Pricing in markets - commodities or stocks - is not about old fashioned supply and demand anymore.  It's about central banks and government force feeding liquidity into the system and driving up asset prices via easy money speculation.  Boo Yah.
  • The demand is not very strong in the first place,” Jiangxi Copper Chairman Li said in Beijing while at the congress. “But a lot of people have long positions in the market, so I think in the first half of this year, copper prices will be good.”
Well as long as a "lot of people have long positions" who cares if there is a need for the red metal.  Just keep building warehouse to store it (our top 2 oligarchs, JP Morgan & Goldman Sachs have just bought a base metal warehouse company in fact a few weeks ago - I kid you not) and let's keep the party going...
  • Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.
If there is one thing that comforts me, it's our 2 investment banks controlling every facet of the commodities market, from trading to storage.  I am sure there will be no ill effects from this based on precedent in every other market they have touched ;)  [Jul 17, 2009: Jon Stewart - the Pyramid Economy, with Goldman Sachs as the Eye]    Look for a 'black swan' event in commodities circa 2017 ....

Rinse. Wash. Repeat.

Goldman Sachs (GS) VIP List of Top Hedge Fund Holdings

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Today is going to be Goldman Sachs (GS) day at FMMF - from their nearly perfect forecasting of monthly labor data (magically adjusting their figures 24 hours before it is released each month to "hit it on the nail"), to their new foray into buying warehouses so they can corner obtain more information about the base metal market (more on that later)... well let's just say it's important to track the company that the entire US economy now revolves around. There was hope in latter January that there would be actual regulation of the beast within our collective bellies [Jan 27, 2010: Bloomberg - Financial Oligarchs Completely Stunned by "Volcker Rules"] ..... and immediately the entire market was taken down upon release of the Volcker Rules as Goldman was actually surprised about something for the first time in a long time. (coincidence I am sure). Look the last thing you want to do is upset Goldman Sachs the market.  Hence, as some time has passed and the banking lobbyists have been able to rip to shreds any real financial reform educate lawmakers on how misguided this regulation is, we see Goldman is once more ramping.  Our world is back to it's rightful nirvana state.


As the bankster to the stars, Goldman has compiled a "VIP" (Very Important Positions) list of top hedge fund holdings... how many hedge funds (from a list of 487) own each stock below in their top 10 holdings.  Goldman focuses only on hedge funds who use fundamentals as their main basis of investing rather than technicals so keep that in mind. Without even looking at the list you can know Apple (AAPL), Google (GOOG), Amazon (AMZN), Visa (V) and Mastercard (MA) will be here - these are dominant names in almost any God fearing hedge fund nowadays. We've also pointed out Citigroup (C) has caught the attention of many hedge funds [Feb 17, 2010: Hedge Funds Pile into Citigroup] .. and why not, it's completely backstopped by the US taxpayer and the Federal Reserve will do everything in its power to make sure any bank can make mad money just be turning on the lights each morning... actually the lights are optional.   I was surprised Pfizer (PFE) was #2.


Marketfolly brings us the list, so that you to can invest like a hedgie. 

This basket of stocks returned 40% in 2009 versus 27% for the S&P 500. Goldman also notes that this list has, "outperformed the S&P 500 by 81 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.29." Quarterly turnover on this list is typically around 15 positions out of the 50.

Positions that hedgies added largely to in the fourth quarter include: Wells Fargo (WFC), Mead Johnson (MJN), Merck (MRK), Liberty Media (LSTZA), Amazon (AMZN), Apache (APA), IBM (IBM), Lear (LEA), Crown Castle (CCI), SBA Communications (SBAC), US Bancorp (USB), Anadarko Petroleum (APC), Target (TGT), American Tower (AMT), and Freeport McMoran (FCX).


•Apple (AAPL): 67 hedge funds hold it as a top ten holding

Pfizer (PFE): 45


•Bank of America (BAC): 37


•Google (GOOG): 37


•JPMorgan Chase (JPM): 36


•Microsoft (MSFT): 36


•Mastercard (MA): 29


•DirecTV (DTV): 27


•Wells Fargo (WFC): 27


•CVS Caremark (CVS): 24


•Citigroup (C): 23


•Hewlett Packard (HPQ): 23


•Monsanto (MON): 23


•Visa (V): 23


•Cisco Systems (CSCO): 21


•Walmart (WMT): 21


•Oracle (ORCL): 18


•Qualcomm (QCOM): 18


•Exxon Mobil (XOM): 18


•Ebay (EBAY): 17


For the other 30 names on the list, head over to marketfolly.com

His is (Way) Bigger than Yours.... One Day Trader's Office Setup

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Sometimes you wonder what set up the guy (gal) on the other side of the interwebs has for his/her trading desk.  You take it for granted that the institutional boyz have systems that would run circles around your cute little Pentium / Athlon processor, but you don't realize the horse power some people are hoarding in their home offices.

Now this... this... can make one feel inadequate.  While the setup is for a daytrader... and I am thinking there must be diminishing returns by the time you hit monitor #28, or perhaps #32, it still looks incredible... NASA control center like. 

(hat tip Seeking Alpha for the find)

Link here... and also finished product here & the office development here.

Before the photos here are some "specs"


Originally there was to be 60 monitors, a mix of 19s and 24s however, it changed a bit and there is now 40 24" monitors and another 20 monitors offsite for development.
There is six computers running all the monitors, each computer has a core i7 975, 24 gb of DDR 3 memory, two SLC SSDs in raid 0 and a large amount of nvidia NVS 420s as well as Nvidia 9800 GTs. 
This office is used for intraday trading and development.

(click to enlarge any photo)

Before.....



After....



Another wall full of monitors aka the "west wall"....



I guess this is where he watches his CNBC (plasma overhead) and the 4 screens where I assume he does the actual trading. (please note the old school thing on the desk... I believe it's called "pen and paper")



All this is run on only 6 computers...



And a 'few' cables to connect...


Shades of October 2007: SinoCoking Coal and Coke Chemical Industries (SCOK)

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So who had this one in their portfolio under $10, 2 weeks ago?  or under $5, 3 weeks ago?



It's starting to feel all October 2007 again with the speculative ramps in Chinese no names...

I'm starting to edge my way towards the chair section, with an eye towards the DJ....

S&P 500 Up 7% in 3 Weeks

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There used to be a saying that markets fall much faster than they rise.  Like many things the past year, historical trends such as that truism have been blown out of the water.  The S&P 500 is now up 7% in 3 weeks (Russell 2000 doing even better) and continues to steamroll anyone who stands in its way.  The 8% correction in late January to mid February?  Similary, it took 3 weeks. 


Our "ups" now happen as quickly as our "downs"... and yet again (a broken record) with little volume to show for it on the upswing.  You can see that on the bars at the bottom of the chart... the only days the liquidity flood can be contained (selloffs) are on heavy volume days.  Almost all lighter volume days mean sideways or upside action.  The beat goes on, another V shaped - light volume rally to mimic those of 2009.  Anyone using traditional technical analysis (use of volume) continues to look the fool.

Labor Data Pleases the Market - Gap Up it Will Be

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Interestingly the futures, after being flattish last night around 1 AM, were quite strong even in the 8 AM hour before the labor data was out.  This would not be unusual in that it's been the pattern for much of the past year, but ahead of data "no one knows" it sure was interesting.  Even more enlightening, I was under the impression the White House only knew of the data 24 hours in advance but apparently the goods producing portion of the report is known Monday.  So if you were the most highly connected investment bank on the planet, with hordes of your ex-employees employed throughout government.... well as Gordon Geeko says:'


The most valuable commodity I know of is information.

Either way we are set up for a nice 4 months or so ahead on the labor front.  As we've been saying for a few months, the public sector workforce (federal) is completely protected from job losses, and the state level is the beneficiary of stimuli after stimuli to offset loss of tax revenue.  The private sector has been bled out for a few years straight and I have been surprised to see the weekly claims burst back towards the 500K level the past 2-3 weeks since I did not think there was much blood left to squeeze from that stone.  So even without the census workers coming online, you'd expect after 2+ years of epic job losses, to start seeing some gains due to conditions listed above.  We can now expect 200-350K (maybe more?) type of gains in the next 3-4 months, with the census workers flooding in. (keep in mind the US needs 125,000 gains each month just to keep up with population growth)  The question now becomes when do all the people who have dropped out of the labor force the past few years (causing labor participation rates to fall to historical lows) return?
 
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As for today's data - with the caveat that this will all be revised 10x to Sunday in the next year - 36,000 jobs lost with a 9.7% unemployment rate.  If you measure this by standards we used pre early 1990s its roughly a 13.7% unemployment rate and if those discouraged workers start flooding back into the job market, you actually could see a dichotomy of job gains while the unemployment rate rises in the months to come.  Remember, in America if you give up, and have not been looking for a job for 4 weeks you are not considered unemployed...hence when all these people see all the job creation on the news, they will go start looking for jobs again.  Therefore, getting them back into the unemployment figures ...which is why the unemployment rate could actually rise even as there is net job creation.
 
The only data points we can take serious with all the government hocus pocus are hours worked, wages, and temporary workers.
 
Average workweek fell to 33.8 hours from 33.9 hours. That's negative but might be weather related.

Wages increased by 0.1%, below the 0.2% seen last month.  Certaintly would be preferred to be going the other way.
 
Temporary workers increased by 48,000; a bit off the pace of the past few months but perhaps weather slowed it down.  The bigger question (which we won't know until we look back in perhaps a year or two) is whether temporary work a new structural change in the US economy whereas "just in time" labor has become the new norm [Feb 16, 2010: USA Today - Use of Temps to Fill Jobs May No Longer Signal Permanent Hiring].... or if this is the more traditional increase in temp work we see at the beginning of each hiring cycle.
 
So all 3 of these items were worse than last month, but aside from wages could be blamed on weather.  The lack of wage growth was also seen in yesterday's productivity report which again surged nearly 6% while year over year labor unit costs dropped roughly 5%.  This doesn't bode well for US workers, but is great for US corporations. 
 
"Underemployment" jumped back to 16.8% from 16.5% ....the number of part- time workers for economic reasons climbed to 8.8 million in February from 8.3 million the previous month.

---------------------------------------------

In summary go forward, March should be a pretty huge number as any weather related losses from today's report will get pushed into the report 30 days from now.  Plus a load of census workers.  Then more census workers in the few months after that.  Public sector workers will continue to be protected via taxpayer money, and then we have to wait to see if the private sector can show gains late summer to next fall. (i.e. take the baton)  Weekly jobless claims need to fall closer to 400K a week to reflect real job growth in the private sector... which is why the ramp up the past few weeks has been quite confusing.  One would think there are very few people left to fire this many years into the job carnage.

As for the S&P 500, 1109 as the floor will now be moved up to 1125, with the same strategy... using that as a floor and being a buyer above.  After the morning gap, it will be interesting to see how the bulls act...  oh yes, Magical Monday lies around the corner.  Over S&P 1130 I see no real resistance until January highs on the S&P 500, and the Russell 2000 is already over 2010 highs.

Thursday, March 4, 2010

To Gap Up or Gap Down Tomorrow - That is the Question

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I am surprised by people standing on the sideline today because this number tomorrow has been talked down to such a degree, even a -50,000 is now going to seem like a huge victory in light of the "snow". (somehow Americans were able to shop in the snow, but not find jobs - convenient)   A positive number tomorrow morning?   Might see a +8% day on S&P 500 ;)



That said, they did a great job of taking the market to the very top of the range in the closing 30 minutes; like setting the tball on the tee for the 4 year old to hit tomorrow morning.   Over S&P 1125 I expect the computers to rush in again... on light volume of course.  Does anyone remember the last time we broke out on a technical basis and then reversed - i.e. TRAPPED giddy bulls intraday?  That used to happen in the good ole days, when you had to type on your computer ... uphill, both ways, barefoot, in the snow.  When EVERYONE knows the pattern, yet it still works over & over & over - it seems quite suspicious.  I keep waiting for the Charlie Brown moment where we all rush into the obvious trade and it reverses on us (Lucy snatches the football away), but it never seems to come anymore.  At least not to the bulls... Lucy has been laughing at the bears for a year straight.

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

As for tomorrow's report... while I find the whole labor reports completely flawed, [Oct 2, 2009: True September Unemployment in America Reaches Towards 14%; Our System is Broken]  market participants will do their normal lemming thing and treat the data as gospel.  Even if a year later there are revisions downward to the tune of 800K+ as has been the case the past 2 years.  [Feb 3, 2010: US to "Find" Extra 825,000 Unemployed this Friday after Birth/Death Model Revised] This is just the game.  The obsession with any 1 data point - especially such flawed ones, that get revised months (and years in some cases) after the fact, is just as annoying as the obsession with the headline figure from an earnings report - changing the value of a company in 20 seconds after a press releases, sometimes by the billions based on nothing more than a headline flashed across the screen.  Reading the actual press release or looking at an income statement?  That's so old school.  Now we have the new paradigm "investing".... Caesars New York City style.

The last point that will be funny is how for the next 3-4 months we will celebrate the headline number (which surely will be positive very soon, if not tomorrow) with the 1.3M* census workers joining the workforce. [spread over 4 months that is about 300K extra jobs added each month] Not much will be said about the temporary nature of their work, we'll just hear chirping about how the labor market is coming back strong.  Then mid fall to next winter when those census workers lose their jobs, we'll be told about how the census data is affecting the jobs data and how we should ignore it.

So to repeat... drink your Kool Aid.  Ignore census workers when they DECREASE the jobless numbers in the coming few months... but remember them when they ADD to the jobless numbers in 6-9 months.  Did I mention drink Kool Aid?



*do you realize they are hiring 4x as many census workers this time around than a decade ago?  Have Americans lost that much ability to fill in a form or count in just a decade?  Or is this just a convenient way to hide an extra unemployed 800K Americans for half a year?

U.S. Still Seems More Apt for Deflation in Near Term

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A nice quickie in the Wall Street Journal showing despite the massive monetary explosion created by the Federal Reserve, M2 (a measure of money) is flat lining.  Effectively what is happening is as quickly as money is being pushed into the system, a deflationary debt cycle is sapping it on the other end.  In layman's term, the Fed is trying to keep the bath tub full of water, by pouring new buckets of money inside of it, but all the holes at the bottom of the bathtub are just causing it to leak out. 

In a real world example of this deflationary debt destruction are all the strategic defaulters - the mortgages they took out 3, 4, 5 years ago for $X are now worth $Z.  The value of $Z is of course far less than $X so when they send in their jingle mail, the bank (theoretically) eats the losses between $X and $Z and into the ether goes that amount of money.  Of course the Fed has moved heaven and earth (and sacrificed the savers of the nation) so that banks can make up each mortgage loss by borrowing at nearly nothing and doing nothing more than buying US Treasuries [Apr 20, 2009: BB&T - A Better Way to Gauge How Banks Will Try to "Out Earn" Their Losses] - so incrementally week after week they are rebuilding their reserves on the backs of those who have "done the right thing".

So until "velocity" of money picks up - something we discussed in 2008 - all we have is a growing pot of money being pushed into the economy ... which seems to be concurrently being destroyed at an almost equal rate, and inflation still seems to be off in the distance somewhere.  Since there is little demand in the "real economy" (no velocity) [Feb 9, 2010: It's Not About Financing, It's About Lack of End Demand] what money is being created seems largely to be funneled into the Wall Street Economy (creating "prosperity") - which explains $80 oil even as the US (the largest user) grapples with inventory levels above the 5 year average, and most of Europe suffers from no growth.  From 2008:

 

I'll spare you the economic formulas but if you are interested, click here. Right now we have a problem of money flow - both the amount of "money" in the system, and the velocity of said money. In the simplest terms, just think of velocity as the amount of times money changes over. The higher the better. About 4-5 months ago both these areas (amount and velocity) were lacking. Capital was being destroyed in an over levered system; much of it unregulated in a "shadow banking system". For every 1 "actual dollar" in the system, 10-20-30x was "lent". Much of it was based on the housing bubble. So as the 1 actual dollar is destroyed, the capacity to lend 10-20-30x of that dollar is also destroyed - and your velocity of money crumbles. As we've outlined the past few months, our money supply is now going off the charts - the Federal Reserve has made it clear they will create money at any cost. They are going to do everything and anything in their power to liquidate the system, assuming I suppose that a currency crisis is a better outcome (or predicting no currency crisis will happen) than a financial crisis. It is very sad how we lurch from emergency to emergency in this country - but it is what it is.


The Federal Reserve balance sheet which used to consist of staid Treasury Bills was at $800Billionish last year, it is now approaching $2.3 Trillion and much of that is now the junk, I'm sorry - "the undervalued assets that once the market returns to normalcy will return to their rightful value- which will be MUCH higher" - that banks want to get rid of. It is now to the point the Federal Reserve will take it said "undervalued assets" off the books of hedge funds so our shadow banking system can re-emerge (the one that got us here in the first place) They are desperate and they will do anything.

So that's half the picture; the other is the even more tricky question of velocity. We are handing the banks (and other parts of the financial system) dollars by the wheelbarrow, but if they do not get circulated within the economy there are useless to everyone but banks. So we have one half the equation being force fed by the Fed/Treasury - the money supply will be ballooning - no matter the potential cost to the currency, and the other half of the equation is based on the belief that at some point so much money will be provided to said financial institutions that even the most risk averse will lend a portion. And we can begin anew. I won't even touch the long term questions this brings since we only deal with one crisis at a time.

Via WSJ
  • No amount of huffing and puffing can inflate a leaky balloon.   The Federal Reserve's balance sheet has swelled to record levels amid the credit crisis, prompting concern that sharp U.S. inflation is soon to follow. But in spite of the Fed's bulging balance sheet, the nation's money supply is barely growing. That makes the prospect of near-term inflation less likely
  • On Thursday afternoon, the Fed is due to release its latest weekly balance-sheet report, expected to show a small uptick from its prior $2.3 trillion level to a record high. To put that in perspective, the Fed's balance sheet was running around $800 billion before the credit crisis.  The Fed's holdings have soared over the past two years as policy makers opened a variety of emergency lending facilities, then embarked on a $1.25 trillion program to purchase mortgage-backed securities.
  • These holdings could create the potential for inflation down the road as they are deployed in the economy. But right now, the system has sprung a leak.
  • The nation's money stock, known as "M2," includes physical currency, bank deposits and households' money-market holdings. The money stock's growth, which historically averages around 5% a year, has stalled over the past 18 months since the credit crisis intensified in late 2008.
  • The money supply contracted outright during much of January and February compared with its level 13 weeks prior, a gauge economists use to help smooth out weekly volatility.   Paul Ashworth, senior U.S. economist at Capital Economics. "It's not a good sign of healthy economy."
  • The problem is twofold: the credit that serves as the lifeblood of the U.S. economy and helps create money is still in short supply, and demand for it is still weak. That raises the risk of deflation in the near term, not inflation.
Thankfully we are nothing like Japan.  Ahem.

Now for the good news for those of us in the speculator class....
  • The silver lining is these conditions also give the Fed more leeway to keep interest rates low for longer without stoking inflation
Boo Yah!

As I said in 2009, there is no way the Fed raises interest rates in 2010.  The system is too frail despite all the green shoots.  [Jun 3, 2009: A Country that Cannot Function Without Easy Money] They know it, despite their happy talk.  I am sure Bernanke stares at that money supply chart and wonders how many more quarters of helicopter drops of fiat money it's going to take.


More Short Candidates

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If I had more long exposure, I'd probably just grab a dart, pick 5 of the names below and toss 2% allocations into a basket of stocks since they all have quite similar set ups and very nice entry points with obvious stop loss areas that in many cases are only 1-2% higher.  But with so many stocks of interest from the long side so extended after this rally, and so far away from any support I don't want to chase those names. Hence it's difficult to expand the long side of the book... which would allow me to expand the short side and remain somewhat hedged. 

I mean cmon - are we just going to run stocks like Macy's up nonstop?  I understand a great many Americans no longer are paying their house notes and are living "rent free", so they have an extra $1200, $1500, $1700 each month to go shopping for clothes and other things they 'deserve', (best.stimulus.ever.) but this is getting obnoxious....



Among the candidates on the short side....









Last (and least) - if you are a momentum trader who chases stocks to the upside (like Macy's above) here is the complete opposite to the downside.  This one has to be due for an oversold bounce soon... but then again one would think Macy's is due for a pullback as well... but a body in motion seems to remain in motion in both cases.  8 days in a row down, and 11 of the past 12... while the overall market surges... ouch.


No positions

Bookkeeping: Adding More Individual Shorts

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It's times like these with the Russell 2000 up 15 of the past 17 sessions, and all intraday pullbacks lasting at most half an hour before buyers rush in when it feels like the market is incapable of going down.  Perhaps the powers that be will make it so, I don't know.  Even Goldman Sachs (GS) is now ramping up, over resistance which clearly means Paul Volcker and his rules have been shot through the heart by the lobbyists.

With that said, rather than betting against the index which in this era is a fool's game since 7 out of 10 morning's the market is marked up 0.3% to 0.4% (meaning you lose immediately) I will begin to focus more on individual names.  Index shorts can only work on heavy volume days since light volume in this era means the market goes up or sideways...

I am going add a few positions today purely for technical reasons... first up will be American Superconductor (AMSC) which is a stock we actually have held on the long side a few times including as recently as 2 weeks ago. I was fortunate to sell out of the position as it was stuck below the 200 day moving average, and not partaking in the party - just before it fell off a cliff.  It has now rebounded back to some early resistance which lets us in at a decent risk/reward entry point.    I will short with a 3% allocation around $30.50.  If the stock gets over $32.00 we'll cover, which would be a 5% loss.  I'd like to target something near $28 to the downside which would be an 8% gain.


Next, a 2% short allocation into Athenahealth (ATHN) which is suffering from some potential 'accounting issues' - the lawyers have pounded so perhaps the bad news is already in the stock.  But again for technical reasons ... the stock plunged a few days ago and has now rallied back to just under the 200 day moving average.  With an entry near $38.75, we can give ourselves some leeway and stop loss around $40ish which would be a 3% loss.  If the stock jumps back over the 200 day moving average - so be it, it will signify the stock has its advocates back.  Otherwise, it might suffer a bit under a cloud of uncertainty.


I'm looking for some other candidates as we speak.... here is one I wish I caught about 75 minutes ago.


Short AMSC, ATHN in fund; no personal position

(Video) Presidential Reunion for an Independent Consumer Financial Protection Agency

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If you have not caught this video, it is making the rounds of the internets (hat tip George W)

Funny?  Sort of.  But it's quite interesting that something so dry as creating a financial agency that protects consumers has hit the mainstream culture... (if you have not been keeping up with the news, the bank lobbyists politicos have decided to put the "independent" consumer financial protection agency within the banks protector & keeper - the Fed)

Still love that Dana Carvey as George Bush 41.

Warning: not G rated.




The video was directed by Ron Howard and features Will Ferrell as George W. Bush, Fred Armisen at Barack Obama, Darrell Hammond as Bill Clinton, Chevy Chase as Gerald Ford, Dan Aykroyd as Jimmy Carter, Dana Carvey as George H.W. Bush, and Jim Carrey as Ronald Reagan. Maya Rudolph plays Michelle Obama.

Hugh Hendry Continues to Doubt China

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There was once a time I had cornered the Hugh Hendry market in the financial blogosphere but in the past year and a half he has become quite the star, most likely for reasons that first attracted me to him.  Right or wrong, he is eloquent, witty and blunt - sort of crossing Simon Cowell with Dennis Miller. It's been nearly half a year since we last checked in with him, and 2009 was not quite so kind as 2008 was to his investments.  But as Keynes once said: "the desperate central bank printing press can remain irrational far longer than you can remain solvent".... or something like that.

Below (article from a few weeks ago) we have further thoughts on a theme Hendry advanced in 2009 [Apr 16, 2009: Hugh Hendry, Citiwire Interview], and others (like Jim Chanos) have jumped on board of late - that China has some major issues of its own, and the group think that tends to dominate investors once they latch onto a theory has now infected them when it comes to this country.  I too have raised concerns about what the eventual effects will be of a once in a lifetime amount of loan growth seen in 1st half 2009 in the country - both when the policies were really just getting off the ground [Feb 16 2009: Is China Pulling an Alan Greenspan?] and a few months later.  [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]   I still think, as professed last year, it might take until 2011-2013 before we see the malinvestment come home to roost. Perhaps this early identification of a problem that some of the 'best and brightest' in the investment field (with armies of CFAs and PhDs) are now coming around to, qualifies me to work for Chanos whose team came to the conclusion half a year after me? ;)   Nah, I don't have the right pedigree.... I'm just a hick who writes funny financial stories on the interwebs, in between staring at the wall while thinking of all the miracles happening across the global economy.

Anyhow, back to Hugh.  I always prefer my dose of Hendry in video over the written word, because it's just hard to do his type of 'snarky' on paper... but all we have are words for now.  Via the UK Telegraph:
  • Robert Prechter, the eminent American observer of social and economic trends, wryly contends that stock markets usually deceive those people who argue for outcomes based on seemingly logical causation.   Could our professional money managers' infatuation with China prove similarly unrewarding? China's economy is certainly on a tear; economic growth has averaged 9pc a year over the past 10 years, compared with a paltry 1.9pc for the British economy. Last year, despite the credit crunch, China posted a remarkable growth rate of 10.7pc against a British contraction of 3.2pc. This is impressive stuff.
  • The spell cast by a contemporary cult is undoubtedly hard to resist and some brave souls, willing no doubt to extrapolate present trends forward, are even proclaiming that China will usurp the United States as the world's largest economy. Goldman Sachs' chief global economist, Jim O'Neill, even taunts the naysayers, saying, "You either get it or you don't." Such is his conviction.
  • However, the composition of China's growth has undergone a potentially treacherous change: in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate.  Indeed, when measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.
  • What a turnaround: from an export juggernaut to a credit addict. Who would have thought it necessary back in 2001, the year everything all started to work out for China?  That was the year the Chinese gained entry into the World Trade Organisation. The ascension to the WTO also coincided with the American Federal Reserve's loose monetary policy response in the aftermath of the NASDAQ crash. Exports surged, especially to the US, and China's current account surplus increased from a modest 2pc of its economy to a monumental 11pc, all by 2007.
  • This appetite for cheap Chinese exports, which had at one point seemed insatiable, means that we in the West have come to owe our largest Asian trading partner quite a hefty sum of money. China has become the world's biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the spectre of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties.   (and what happened next Hugh? Oh goody - I love a good suspense novel)
  • Economics is a cruel master and in both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis. Never forget that in economics, first can become last.
  • The China bulls assure us that this time it is different. (It's always different this time - just ask CNBC) Yes, the banks are lending money at breakneck speed, but look at what they are doing with it!   [Nov 13, 2009: Ordos - China's Empty City]  They suggest a new era reminiscent of Protestant Capitalism. They want us to believe the atheist Chinese are prepared to work harder and defer their gratification for longer.
  • Undoubtedly, China's state planners have favoured investment over consumption. High-speed rail networks, first-class infrastructure projects and the urban migration of 55 million people every year are common explanations for the ability of the nimble Chinese to overcome the frailties of this global economy. But can too much of a good thing be bad for you? The goal of economic policy, after all, is to maximise households' wellbeing and consumption. Unfortunately, unlike in most countries, China's share of consumption within its economy has fallen relentlessly, reaching 35pc of GDP in 2008. Something isn't right.
  • The ancient ethical system of Confucius is silent on the subject of modernisation. There is no proverb counselling that "wise men not invest in over-capacity". Perhaps there should be: in China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.
  • Remember, it is one thing to create economic growth, but it is another thing to truly create wealth. If I commit to building a new commercial property in Shanghai I will undoubtedly contribute to GDP growth. However, if I have no tenants and the city already has a vacancy rate of 20pc, then I am probably destroying wealth. (bingo - perhaps Hendry could explain this to those in this country who are addicts to GDP as a measure of national health; one of the country's greatest dogma's in fact)
  • Adam Smith taught us that real wealth comes not from piles of gold or their modern-day equivalent, the foreign exchange reserves amassed from a profitless succession of current account surpluses.  Rather, Smith suggests that real wealth is founded on the skills and productivity of a country's citizens. This is the central concern regarding the sustainability of the Asian economic model. Power without profit can prove ephemeral. This is an axiom the Japanese are all too familiar with. We cannot say we have not been warned.
Even if Mr. Hendry is correct, as with all things in the markets it doesn't matter until it matters.  Just as "it was different this time" with those wacky internet stocks in 1999, and US real estate in 2005-2006 -  the reality behind those situations did not matter ... until they did.  Most likely when the all but the most ardent doubters of China are convinced, will the curtain be drawn back.  Until then... as the lavishly compensated former CEO of Citigroup, Chuck "no clawbacks here!" Prince advises... we dance.

Wednesday, March 3, 2010

Bookkeeping: Cutting 70% of F5 Networks (FFIV)

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One of the hardest things to do is to let your winners run.  I find it much harder to find sell points, than buy points - even after all these years of doing this.  One advantage of coming into the week relatively underweight long exposure is it put me in no rush to sell the individual equities I do own.  But with that said, I am starting to feel "piggish" when I see some of the charts of some of the stocks we have.

F5 Networks (FFIV) is one of those charts....



.... this name was highlighted Monday amongst the "runners" in the networking space.  [Mar 1, 2010: Fantastic Action in the Small to Mid Cap Networking Space]  And it hasn't stopped all week.  Surely it can keep running and I assume right now its beeping across thousands of daytrading momo type screens across Cramerica.  There is an entire style of investing that searches out for these charts, and just tries to buy high, and sell higher.  But that's not for me ... I am one of those selling at this point.  Enough is enough - I am going to lock in gains with 70% of the position and try to buy back on any moderate pullback.  I've sold 70% of the stake around $61.30; these shares were bought mostly in early February around $52, when the stock jumped back over the 50 day moving average.  It's only had 4 down days since then.

p.s. I just read the Russell 2000 is now up 14 of the past 16 sessions.  That's dramatic - even more dramatic, considering volume is pathetic once more :)

Long F5 Networks in fund; no personal position

Bookkeeping: Cutting Back DragonWave (DRWI)

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I cut some DragonWave (DRWI) yesterday as it broke below the 50 day moving average, and the stock continues to look sickly.  I am going to dump most of the rest of the position here in the $11.30s and take it down to a 0.1% stake to keep it on the radar.   This batch will be at a 9% loss, but entering today I only had about a 0.5% allocation.  The stock is now down 5 sessions in a row, and 8 of the past 9 - while the market has been up for almost all those days.   This action might indicate someone "in the know" (aka the "smartest people in the room") have info I don't have ... perhaps Clearwire contracts are being spread around to new entrants.



That said, someone like Ceragon Networks (CRNT) - one of DragonWave's competitors is not doing much either so we'll see.  Either way, the stock action calls for culling the position and watching for now.


Long DragonWave in fund; no personal position

Bookkeeping: Short Greenhill & Company (GHL)

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At this point it is difficult to short anything, and whatever is to be shorted cannot be on fundamental reasons since some of what I consider the most troubled sectors of the economy are the areas roaring the most.  So it is not like 2007 or 2008 where you can say "the consumer is shot" and go short Harley Davidson or a retailer, or las vegas casino at will.   Hence I will just be looking for weaker charts...

We have not done an individual short in an equity in a while, but Greenhill & Co (GHL) has a nice entry level, where if we are wrong we can exit with a smallish loss.  I am shorting a 4% allocation in the $76.40 area.  With the 200 day moving average just above at $77.30, I will use that as my stop loss and give HAL9000 a little area of buffer so as to not take my order away, and place the stop loss around $78.20.  This will limit our loss to 2.4%.


The chart tells the obvious story of why this is being shorted; in fact any stock that has not jumped over at least its 200 (or 50 day) moving averages in the past 2-3 weeks has to be questioned.   I actually like this company - we were long last year on this name but it's a technical call; hopefully we can revisit recent lows closer to $70, which would be a decent place to cover.

Short Greenhill & Co in fund; no personal position

Bookkeeping: Selling Remaining Index Long Positions

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After some thinking, I am going to sell the remaining 40% of my index longs (SPY March calls, and TNA) this morning - these were bought Monday morning.  I will look to rebuy on any moderate pullback (say 10 S&P points lower) or a breakout higher than yesterday's intraday high, i.e. over 1124.  This is just short term trading with a small allocation of the fund... I am hoping to reallocate more cash into individual stocks but since all my favorite names (either names we hold or names I want to begin positions in) are quite extended and being chased by the "momo crowd", I want to wait for a pullback to add to / begin positions.  So I'm tabled for now with those stocks since I don't like chasing things up so many % points in a row.

As long as S&P 1109 holds I shall remain a (pseudo) bull... just as the 20 day exponential moving average crossing below the 50 day was a negative early in February, we now have the opposite happening as of today - another net positive. 


This rally has been led by small caps, which is interesting... we are now back to January highs in the Russell 2000.  Another reason to think there should be some rest period.  This chart reminds me of a lot of individual stocks I am stalking, a vertical move of late.


As for Friday's labor report it is now discounted by everyone that any bad news will be weather related.  This might lead to a huge positive figure a month from now since all the weather related losses of February will be offset (i.e. added BACK to the report) PLUS all the census worker hiring.  Something to keep in mind 30 days from now.

Keep an Eye on Gold (GLD) and Silver (SLV) Here

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Reader Patrick sent me an email late last week that he thought silver was ready to run.  I wanted to see it jump over $16.50 to become more interested.  It traded over that level Monday intraday, and yesterday put on a nice 3.5% move.


While gold is not jumping quite as much, it is exhibiting some solid relative strength as well....



.... I find this strength in the precious metals especially compelling considering it is happening even as the US dollar rallies. 


Generally this has been an inverse relationship the past few years - but puts more strength behind the argument that precious metals are going to become a proxy versus fiat money, which is being created as if it's going out of style.  This is the main reason I am holding it, as I am unclear in a Western world deflationary environment whether the fears of inflation are (yet) founded.  While money supply is surging the velocity of money still stinks as end user demand for it remains pathetic.

Let's keep an eye on it, if these moves continue I'll most likely be adding to our gold and silver stakes... and unlike many instruments which now trade nowhere near support, both the metals are near support so if this assessment is wrong, we can quickly cut back.

EDIT 9:30 AM - I will be buying some Ultra Silver at the open, about 1% allocation - like that chart.

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

The Economist: World Trade Recovery in Progress, But Strength of Rebound Remains Uncertain

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Before Greece became famous for its massive debts, it was known mostly as the nexus of global shipping companies - at least in investment circles.  While there still appears to be a large oversupply of ships relative to demand, and apparently countless ships still sit unused off the shore of Singapore... we've come a long way from that moment when global trade sat in suspended animation as letters of credit were unable to be obtained.. [Oct 31, 2008: Credit Tsunami Swamps Trade] [Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]

Much more interesting in terms of telling the tale of the economy than the usually faulty government data, is information coming out of both the domestic and global transportation industry.  The Economist takes a look at the rebound at global trade - and prospects go forward.  The figures in the story highlight a trend we see in many economic figures - they have rebounded from the type of lows / drops almost never seen in modern economic history but still sit far below "normal".  And even doing that relied on historic government intervention.  The question go forward is what shape will demand take when the baton is supposedly passed from public spending to private:

  • IS THE glass half empty or half full for world trade? Figures released on March 1st by the Netherlands Bureau for Economic Policy Analysis (CPB), which maintains a close watch on global trade volumes, point to renewed vigour at the end of 2009. Trade volumes rose by 6%, quarter-on-quarter, in the final three months of the year.
  • But these figures also underline just how severely trade was affected by the global recession. The CPB reckons that volumes shrank by a staggering 13.2% during 2009. They have fallen in only two other years since 1961, when comprehensive data begin. But those declines—by 1.9% in 1975 and 0.9% in 1982—pale in comparison with last year’s huge drop.
  • Still, a revival is clearly under way. The volume of trade went up by 5% in December alone. Weak growth of 1.2% in October and 1.1% in November might have suggested that the recovery which began earlier in the year was faltering.
  • Unfortunately, it may be too early to be sanguine about a sustained recovery in trade and thus in the world economy. Figures from the World Bank, which track the value rather than the volume of trade, point to a deceleration in the final quarter, not the acceleration that the CPB’s data suggest. According to the bank, the value of exports from a sample of 56 countries making up the lion’s share of world trade continued to rise in the final quarter, but at a slower rate than in the third quarter.
  • December is typically a good month for global commerce because of holiday spending in many parts of the world. Strength in December is therefore by no means sure to have continued into the new year.
  • Looking ahead, it is not hard to see threats to trade’s recovery. Global demand is still being propped up by government intervention on an enormous scale. Its withdrawal, if mistimed, would pose fresh dangers for the global economy, and with it for trade. As Caroline Freund of the World Bank points out, “There is a risk of stagnation in 2010, as restocking is completed and effect of the stimulus on demand growth wanes. While the stimulus will continue to boost trade volumes in 2010, any growth effect will be much smaller.”
  • By the end of the year trade values had risen by almost 30% from their nadir last February. However, the World Bank’s economists point out that they were still 20% lower than before the crisis. They think they are 40% below where they would have been had the crisis never happened. World trade may be on the mend, but its recovery is far from complete.

Tuesday, March 2, 2010

2010 Fund Performance Period 2

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The mutual fund is now on schedule for a summer 2010 launch. If, after reading the blog content you might have an interest in participation, please consider reading why this blog exists.
  1. [Jan 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
  4. [November 2009: General Updates, Questions]

Or if you are just here for daily market / economic commentary or stock trades to follow on your own, consider supporting the blog via donation (paypal buttons can be found on the upper right margin of the blog)

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For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we moved to a new tracking system in 2009 (Investopedia.com) as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up.  Hence while the website and portfolio began in August 2007, we "began anew" in terms of performance with portfolio "B" as of early 2009.  Detailed history on latter 2007 and 2008, as well as 2009, [Jan 7, 2010: 2009 Final Performance Metrics]  can be found on the above mentioned tab.  For 2010 our second 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

Almost all the action in period 2 was in the first few weeks, as concerns about Greece first weighed on the market than melted away as talks of bailouts came to light in week 2.  The market - now conditioned to moral hazard - repeated the same feats as it did in 2008/2009 as bailout after bailout was announced or rumored... it celebrated.  Hence a 8%ish correction in mid January to early February was largely culled by the end of period 2.  Earnings season continued as did economic news but those mostly took a back seat to macro events.  There were no standout sectors as in most periods the past year - everything sort of moved together; the one standout was the US dollar of all things.  China continued tightening measures and emerging market indexes trailed US stocks. 


For the second "four week" period of 2010 the fund returned +8.7%, versus the market's +3.1%, so an outperformance of +5.6%.
On a cumulative basis the return is +18.1%, versus the Russell 1000's -0.7%, so an outperformance of +18.9% for the year to date. (thus far 8 weeks)

Period 2 achieved both absolute performance (making money) and relative performance (outperforming the market).  The yearly goal of beating the index by 15% has already been achieved so perhaps a time to shut down shop for the year and hit the beach until Jan 2011. 

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*** Long/Short Fund Discussion below

Overview:  Almost all gains this period came in the first half as we rode volatility first down and up - much of it came from index exposures as well as a well timed long US dollar trade.  Staying out of the way during the heavy selling was a key as we protected our capital, and hence did not have to make up losses for the rest of the period.  Most of our long exposure had been extinguished as stock after stock had broken their respective 50 day moving averages in the previous period so with a market in precarious position we mostly relied on index positions.   Once S&P 1085 was broken the 200 day moving average in the mid 1040s came into play - I did not expect it to happen as quickly as it did, but with our first -3% day in ages Thursday of week 1, it happened.  Fast.  From there it was mostly a rebond on bailout hopes, and then sideways action to finish the period.   Economic news was actually quite weak in week 4, but with Ben Bernanke reiterating 'easy money' in Congressional testimony Wed/Thu of that week, this was all the market needed to remain happy.

 
Please note on the right margin of the blog is an archive in which you can see all these events in chronological order, clicking on any link within the sentences below will take you to that transaction - a summary below:

Week 1: The fund was positioned 22.5% short, 12.5% long and 65% cash as the S&P 500 had broken a key support level of 1085 the previous week.  The 200 day moving average was down in the mid 1040s which was a "goal" to reach before lifting shorts.  Of course Monday of that week we bounced... you don't mess with Magical Mondays.  Another bounce came Wednesday but I wrote that conditions remained from a textbook rollover...which eventually happened.

  • On the Wednesday bounce, I cut back positions in Braskem (BAK), F5 Networks (FFIV), and Market Vectors Brazil Small Cap (BRF).  This left us only with 4 material long positions.
  • Thursday morning as we were just under resistance and I thought a rollover would still happen... as the market began to sell off I put 11% of the portfolio into put positions; that worked out nicely.  Thursday ended up being a -3% down day, the first one of those in a long time so we took profits  on 75% of the puts very late in the session.  Much of it was in the +40% gain range. 
  • Also Thursday I cut 2/3rds of Atheros Communications (ATHR) as it broke the 50 day moving average - that left us with only 3 material long positions.
  • Then DragonWave (DRWI) & EnerNOC (ENOC) broke support, taking us out of 60-66% of both positions, leaving us with 1 material long position.
  • Out last material long position Assured Guaranty (AGO) finally broke down Thursday afternoon so we were stopped out of a good portion of that position as well.
  • After locking in gains on hotel company Wyndham Worldwide (WYN) it finally fell to support and filled a gap Friday morning - so we bought back our exposure and more.
  • I had bought long dollar calls and ETF (UUP) the previous week, so with the calls up 36% in just 5 days, I sold 1/3rd of the UUP ETF calls to lock in gains as they did their job as a hedge.
  • Friday was another horror show, before a huge rally in the last hour as the major indexes all bounced off their 200 day moving average.  I did some intraday trading on the selloff, and luckily took the majority of profits abuot an hour before the reversal - mostly because I was feeling chock full of gains and did not want to be greedy.

Week 2: Having had all our major long positions taken away via stop losses (except for the Wyndham Worldwide added the previous Friday) our long exposure was low coming into this week, at only 8%.  But with the market having sold off so sharply and locking in our profits short exposure was also small at 9% - much of that being "long dollar".  Cash was immense at 83%.  The S&P 500 was now in a large range, between the 200 day and 50 day moving averages - almost a 55 point range.

  • I began a new stake in Seagate Technology (STX) which had impressively held up well during the previous week carnage and had a PE of 6.
  • Closed out a long term position in Priceline.com (PCLN) as it broke support, but mostly because it was not a position we had added to in a long time.  Within a few days it had another blowout quarter of course, but we would not of benefited much since it was such a small part of the portfolio.
At this point "guess the bailout" - a favorite of 2008 and 2009 was back in vogue so I was wary of short exposure since I knew speculators would rejoice.  I also thought it would hurt the dollar, and help the euro (even though it made little sense intellectually), so I took some more dollar exposure off the table in anticipation of a "bailout rumor".  And by Tuesday we had our whispers of bailout leaked.  The S&P 500 of course spiked and we were back to our old market of moral hazard again.
  • I added back to DragonWave (DRWI) as it went back above the 50 day moving average.
  • 2 of the positions we had been stopped out the previous week, F5 Networks (FFIV) and Atheros Communications (ATHR) were added back to as they regained their 50 day moving averages.

Week 3: Most of our short exposure remained "long dollars" so even as the market bounced it ended up working for us.  We entered the week 8% short (almost all "long dollar"), 14% long (some of the positions bought back after the bailouts surfaced in week 2, but still a lot of cash (78%) as the S&P 500 remained below the 50 day moving average.  Of course we had our now expected Monday morning mark up. Weak volume continued to dominate almost every upward day - a stark constrast to historical action. Since I was traveling the back half of the week, and the following week we curtailed activity versus normal.
  • The Wyndham Worldwide (WYN) we had bought in the panic in week 1 had bounced to (near) mid January highs so with a 10.5% gain in a week and half, we took half off the table.
  • American Superconductor (AMSC) was stuck below the 200 day moving average and had not bounced with much of the rest of the stock market, so we closed out the last 0.3% we had left.
  • Skyworks Solutions (SWKS) looked like it was in an early stage breakout so I began rebuilding the position.
By Thursday of the week, as all major indexes had recaptured their 50 day moving averages on yet another low volume "V" shaped bounce, I declared the correction over.   The NASDAQ and S&P 500 had not yet recaptured their simple moving averages but as far as exponential moving averages, the deed was done.


Week 4: With things looking better we had a much higher long bias coming into the week, 24%.  Short exposure was under 6% (again most of it being "long dollar") with 70% cash.

  • Since almost every stock I had added back (or in the case of Seagate Tech, bought from scratch) ad bounced in a V shape method, I took 30-50% off the table in each - ATHR, STX, FFIV, SWKS.  They were due to stall since most had detached from almost any sight of any moving average since the bounces had been so fast.  I also sold 80% of Rackspace Holdings (RAX) as it ran into resistance.
  • I closed Brazilian chemical producer, Braskem (BAK) as it seemed not to be rebounding with the pack.
  • Thursday morning as the market took a big hit on bad unemployment data, I got back the Seagate Technology (STX) [plus more] that I had taken profits on Monday morning.   For whatever magical reason the market rallied sharply late Thursday, to make almost all the pain go away.

[Feb 2, 2010: 2010 Fund Performance Period 1]
[Jan 7, 2010: 2009 Fund Performance - Final Edition]

For previous years please see tab 'Performance / Portfolio' (we were using other tracking mechanisms at the time)


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