Monday, May 17, 2010

You Can't Stop Monday, You Can Only Hope to Contain It

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Magical Monday was not going to go down like that. After a quite severe loss just a few hours ago, a quick 14 S&P points has pushed the index to -0.1%. Going green? Seemingly improbable but this would only add to the legend that is Monday.

Further, S&P 1130 has been regained.

EDIT 3:20 PM - wicked volatility, from 1135 back down to 1129 in just a few minutes.

EDIT 3:38 PM - and now right back to 1135. Some serious gyrations for a day that will close near 'unchanged'.

EDIT 3:50 PM - some of the losses the past few weeks in the commodity stocks are breathtaking. Many of these names have given up their entire 2010 move from February lows in the snap of a finger. Dead cat bounces are overdue there I would assume as Feb lows provide support - but really only a useful tactic for daytraders; it appears HAL9000 has left the building since China is trying to slow its economy. Without HAL behind you, it's difficult to build any long lasting positions. At this point some of these names can rally 10% and still be in horrid technical conditions.




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This Day in Broken Momentum Stocks: Priceline.com (PCLN)

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Despite seeing it hundreds of times, it is still breathtaking to see what happens when a momo stock - a stock that is teflon and can do nothing wrong, that simply rises day after day, week after week, where valuation means little - is abandoned. [Apr 29, 2010: When Momentum Stocks Attack: Green Mountain Roasters] [Feb 24, 2010: STEC - When Momo Stocks go Bad] A lot of money can be made on the way up, ignoring all warnings, and gleefully buying even more - but once the music stops the scramble for chairs in these stocks is a sight to behold.

Today's case study is Priceline.com (PCLN) one of our old holdings. More damning for the stock is this was not only a retail stock momo, but a hedge fund momentum stock - surfacing in the holding list of almost every major "growth" type of hedge fund. A disappointing earnings report (guidance) stunned the lemmings and once that 50 day moving average broke it was a straight line express down. Today, the 200 day moving average cracked and away she goes.



A very large European exposure is not going to help either - and this might be one theme we begin to see in the next 2-3 quarters; companies with large exposure to Europe (ash cloud, austerity, et al) provide some disappointing earnings reports/guidance.

Down here below $200, the stock is actually not a bad valuation with $11 in earnings power in 2010 (I'd assume $9-$10 worst case) but with every Tom, Dick, and Harry (and HAL) in Stamford, CT hitting 'sell, sell, sell' it is hard to stand in front of a freight train. The technical set up is also now a disaster so it's going to take time to turn this one around.

Netflix, Chipotle, Baidu et al - this is your future "one day". ;)

No position

Bookkeeping: Sold Last "Third" of SPY May 114 Puts

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With the S&P 500 "hanging around" 1120 I am going to sell the last third of my May 114 SPY puts for about 30% gains, which is not bad work for a 24 hour holding period (in market hours). While not a huge exposure (about 7.5% in total, 5% sold Friday) this SPY put position slapped on Friday once the market rolled over helped the fund to gains in both that session and today's.

With option expiration this Friday, I want to roll over into June contracts since the 'decay' in options accelerates sharply the closer we get. Hence if the S&P 500 breaks 1120 convincingly I will begin a new position in June puts.

The market seems somewhat oversold here, but then again there seems to be zero panic or even emotion to the selling.

No position

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Bookkeeping: More Stop Losses Hitting

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A few more stop losses triggered this morning: Lennar (LEN) and BorgWarner (BWA)

Lennar for half the remaining position (I had already taken some off the table earlier for profit) was set at $17.60s. These are being sold at a 3% loss.



BorgWarner, about 55% was sold at a stop loss of $38.70; about a 4% loss - it has dropped quite a bit more since.



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I also cut some 35% of SL Green Realty (SLG) not because support was broken but since I bought a "breakout" which is being crunched by a weak market.


I cut back ETFS Physical Palladium (PALL) by half



A few other names are sitting very close to places they will need to be cut.

Riverbed Technology (RVBD) [stop poised] and F5 Networks (FFIV) are now the only 2 remaining positions that have serious weight left to them. Everything else is 1% exposure or less.

Long all names mentioned in fund; no personal position

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Magical Mondays Under Threat

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Things are certainly different... the potential for a down Monday actually exists.

Once Friday's key level, S&P 1130 broke, the index dumped 10 S&P quite quickly. S&P 1125 did not put up much fight, so now at 1120.

Remember, the lows of 'flash crash' week Friday were below 1100.

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 41

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Year 3, Week 41 Major Position Changes

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

Cash: 75.0% (v 85.9% last week)
20 long bias: 18.2% (v 10.7% last week)
4 short bias: 6.8% (v 3.4% last week) [Includes 1 'long dollar' position; 1 option position]

24 positions (vs 17 last week)

Weekly thoughts
An interesting week just completed... the markets were actually well into the green for the week but almost all of it came in the 4% premarket gap Monday morning. Meaning anyone who was a buyer after 9:31 AM, in a general sense, became a loser by the end of the week. Further complicating things was after months upon months upon quarters upon quarters of obliterating any resistance in its way, major indexes actually acted as they did pre 2007 and the light volume rally faded and was rejected once it ran into headwinds on the charts. So will the old rules matter again? Or was the return to the old rules momentarily the actual headfake?

I am showing the simple moving averages rather than the normal exponential we use, since it has become more weighty the last week or so.

S&P 500



NASDAQ



Russell 2000



Similar stories in all 3, but let's focus on the S&P 500. Action late last week - with a break below the key level of January 2010 highs (S&P 1150), along with the multiple rejections at the 50 day moving average cast a more darker shadow on the market. S&P 1130 seemed to be some sort of support level late in the week but right now the index is in no man's land; it can very easily rise or fall 20 points and it won't matter much in terms of instructing us. Movement around S&P 1150+ or below 1100 will give us more interesting data, so we're facing another of these white noise areas. If technical resistance does begin to matter again - and it was not just a 1 week fluke - aggressive shorting on any bounce would be the obvious play, with targets of retests of either Friday's normal low or Thursday's 'flash crash' lows. It remains a no go to build intermediate term positions at this point.

Obviously the situation in Europe continues to dominate... talk about an oversold chart (and generally the most crowded hedge fund trade on the planet)


Eventually so many people are going to be on the same side of the boat it will tilt...even if the reasons for being on that side of boat are correct. The irony here is the weakness in the Euro should actually help exporters as their goods become cheaper for foreigners to buy; a benefit American companies have been enjoying for years as the dollar "Euro'd". But with a global arms race of fiat currency debasement, the ugly dollar is getting some stiff competition.

The Chinese stock market continues its freefall; on the way up everyone points to the green shoots of this "indicator" but on the way down I guess it doesn't matter. Until it does.

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Earnings season is effectively finished other than drips and drabs from here until early July. Economic news has been mostly ignored the past 3 weeks or so as headline risk from Europe dominates everything. One day I expect to be repeating the same words, simply replacing "Europe" with "Japan".... then at some point, I'll be replacing "Japan" with "UK"... and then the fecal matter truly hits the wall when I replace "UK" with "US". But knowing when any of this matters is the constant challenge in the decade ahead.

We have a light week ahead on the economic calendar with the majority of the news that matters inflation related. Of course, inflation has been 'adjusted away' in America via various government practices in reporting, and even if inflation came in at 25% I expect Ben to keep rates at zilch for an extended period of time. That said, the globe is combating sectors of deflation with inflation. Crude oil has fallen off a cliff here with prices all the way back to February 2010 levels - down 17% in a short period of time, so that helps stave off inflation worries. Steel, chemicals, plastics, and the like continue up.

Monday - Empire State Mfg, not that important
Tuesday - Housing Starts, Producer Price Index; the latter report is the one I've started to look closely at again similar to 2007 when margins became squeezed by the relentless rise in commodities.
Wednesday - Consumer Price Index; this has become one of the most "adjusted" figures in America ... to the point of near uselessness.
Thursday - Conference Board Leading Indicators, Philly Fed - not major reports.

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For the portfolio, I've made a concerted effort to diversify sectors since there were many weeks during the last run up my tech centric portfolio sat morbidly quiet. So we're adding a little industrial, a little more consumer discretionary, a little REIT, a little financial - but not in large quantities since the overall market is so unsettled. And with 'student body left' trading that has now dominated the market for 3 years, individual stories don't mean much if the market is working against you. That said, it was a busy weak of repositioning.

On the long side:
  • Monday, I began a position in ETFS Physical Palladium (PALL) since it had pulled back nicely to support.
  • I restarted a position in Intercontinental Exchange (ICE) as the stock looked ready to breakout. Might rescind this one soon.
  • Began a stake in auto supplier BorgWarner (BWA) as the stock filled a gap created by an excellent earnings report. I flipped a coin among quite a few names in the sector, this one is basically a proxy for the group.
  • I closed Discover Financial (DFS) and replaced it with Capital One Financial (COF) which at the time had a better chart formation; obviously very similar companies.
  • Wednesday, I bought some Wyndham Worldwide (WYN) and Riverbed Technology (RVBD) as they crossed back over their 50 day moving averages.
  • I started REIT SL Green (SLG) - very similar idea to BorgWarner; a good chart in a hot sector... the specific name has little meaning to me.
  • I started Tibco Software (TIBX) on a nice breakout - the very next day the stock exploded on volume but then sold off Friday with the market. While a "technology" name, it is software so a bit different from our normal fare.
  • Friday, I sold 20% of Ultra Silver (AGQ) simply as a function of locking in some profit in one of the hottest instruments in the land.
  • I cut back in Wyndham Worldwide (WYN) [which had just been increased Wednesday] as it fell right back below the 50 day moving average; likewise Quality Systems (QSII). I took 0.3-0.5% back from any number of other positions as well as the market broke 1150 on the S&P 500 and a break over 1174 (needed to get more comfortable with long exposure) faded.

On the short side (please note I consider 'long dollar' short since this has been a 'safety trade' for the markets in times of worry)
  • Monday, I sold 45% of Powershares DB US Dollar Bullish (UUP) which I have not touched for months. Of course with the Euro in freefall this continues upward but I am now worried of a 'snapback' action at some point as the moves are getting extreme. Could be tomorrow or could be in 3 months, who knows.
  • Friday, as S&P 1150 broke I threw on some short TNA ETF along with buying some puts later in the session. 2/3rds of the puts were sold same day for decent profit.

Sunday, May 16, 2010

Updated Position Sheet

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Cash: 75.0% (v 85.9% last week)
Long:
18.2% (v 10.7%)
Short:
6.8% (v 3.4%) [long US dollar positions are considered "short"]

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.

[click to enlarge]


LONG (2 photo files)

SHORT
OPTIONS


Friday, May 14, 2010

Bookkeeping: Sold Another 1/3rd of SPY May 114 Puts

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Following up on the strategy outlined earlier this afternoon, I sold the second "third" of SPY puts into the close to reduce weekend "headline" risk. S&P 1130 did hold. For now. Frankly, I don't know what can be announced this weekend but let it be known there is a 98 out of 100 chance they will gun futures for no good reason. One morning we are going to walk into a Monday morning and see -4% premarket to make up for all the nonsense Monday mornings we've had the past 9-10 months.

On a more serious note, Monday should open down in premarket since people see the emperors' have no clothes. * The rate of descent in the Euro is staggering. If anyone noticed China is at a 11 month low and loses 4 out of every 5 days - ironically it is being hurt because economic growth is so strong and they fear tightening. (if we only all had these problems) Closing at or near the lows of the days should NOT (I repeat, NOT) lead to premarket surging the next morning... only in this nonsense play land does it happen. Instead we should be watching the 'Fast Money' crew talking of Black Monday's.

Either way best case scenario we should retest last Friday's lows (that would be below S&P 1100) before any viable bounce - the only question is if it will be a straight line there or not. I feel zero panic in this market - it all seems so ho hum despite quite a horrific day. If you believe this was just a run of the mill -2% down day, wait until those mutual fund NAV's pop out around 5:30 PM; it's going to be ugly unless you own that utility fund.

I've chosen to keep my remaining 2/3rds TNA ETF short simply because it's a moderate hedge and even if we get our now traditional premarket markup Monday we are far enough down from where I entered that I will simply be giving up unrealized gains. Puts on the other hand can inflict much more pain (or pleasure). For today, pleasure enough to make all long side losses go poof.

[p.s. the markets were up for the week, rejoice - unless you remember almost all gains were Monday in premarket - notice a theme?]

*helicopters are not clothes

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Breadth Horrid

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For a -2.2% day the breadth is horrific. I have multitudes of watch lists with not 1 green name (that is not an inverse ETF). Granted the Russell 2000 is -3% so the action is worse than the large caps indicate but generally you still have 5 to 10% of your stocks up, unless it's one of those -4%+ days.

On my lists, all I can find green are:

AsiaInfo Holdings (ASIA) +8% (for reasons I cannot find)
Dr Reddy's Laboratories (RDY) +0.3%
Silver Wheaton (SLW) +1.3%
Ryland Group (RYL) flat
Delta Air (DAL) +4.1%
Gymboree (GYMB) +0.4%

and a few gold miners

That's it... hundreds of stocks out there on these lists, and not even 2 hands worth of fingers in the green. Astounding.

Dancing Along S&P 1130 for 3 Hours

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Remarkable how this market can go to a specific point and then stay range bound in a tight range for hours on end. Usually for the past year it's been a big move up in the opening moments of a session (due to premarket magic) and then sideways action for 5+ hours. Today we have a plunge and then going on 3 hours now kissing S&P 1130. If this level can hold, one would assume shorts cover and buyers come in late in the day. If not, it could be an ugly close.



With this current action I am going to adjust my strategy a bit for my short exposure. Earlier it was just "hold unless 1140 is broken" but since I have some nice profits, I am going to take 1/3rd off the table here in both the short TNA (a very modest position) and will sell 1/3rd of the SPY puts - both at solid profits with this batch. With the rest I'll either cover over 1136-1137 on any late day rally to lock in much smaller profits (down from 1140 I noted earlier) or if the market breaks down I'll make a decision in the closing 10 minutes on what to do (most likely I'd take another 1/3rd off, leaving only 1/3rd for weekend risk).

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$1 Trillion Doesn't Go as Far as it Used To

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As if this moment, $1 Trillion only is worth about 16 S&P points. Not a very good investment.

Oh well, there is always next Sunday. Maybe the $2 Trillion bailout can be announced to goose the market.

As with any good drug addict, the more hits he takes, the less effectiveness of the drugs.

Can you imagine the level of QE that's going to be necessary to "appease the market" circa 2015 for Japan and the UK? Or the US 2020ish? 10 Trillion? Or maybe do the full level of 1 year of GDP, the $14 trillion bailout.

Again, my idea of letting Greece, Spain, Portugal, Ireland, and Italy out of the EU and make them all U.S. bank holding companies while concurrently letting them lie about what is on their balance sheets, while the Fed hands them 0% money (so they can in turn buy our debt in a full Ponzi mania), really is what we should be doing. You, dear reader, are over there laughing at my idea but this is what we did for our financial oligarchs and it's worked like a charm. Pretend your debts are not really there, and take money from the US saver while diluting her savings - it can work for any entity: country or corporation.

Let's do this Ben.

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Monday's Gap Fills But Still Nowhere Near Retest of Lows

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We just filled Monday's gap as Friday's intraday high on the S&P 500 was 1135.13. While the charts say Monday's open was "1122" we all know there was a 4% move right off the open so the charts are somewhat deceiving. So we'll see if bulls make any sort of stand here - it is really no man's land other than a gap being filled.

That said, if this is any sort of typical situation it will call for a retest of recent lows. I don't know what recent lows "are" since Thursday's trading was so atypical. But excluding Thursday and going with Friday, the intraday low was 1094.15. The 200 day moving average is roughly 1110. Something in that range seems like a target if things deteriorate.

With Mondays the last 8 (is it up to 9?) months being an absolute rout for bulls over bears, the main question of the afternoon is will bears run for cover (get it? haha) anticipating the normal Monday follies. My gut says today will end badly, and a close on the lows should create a nasty Monday morning - but a nasty Monday would be so outside the box to be almost heretical.

I've thrown some downside hedges on (TNA, SPY puts) which I'll keep as long as S&P 1140 is not breached. (upward)

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Bookkeeping: Some Cutbacks

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These gyrations around moving averages tend to have me pushed in, and then flushed right back out so it's well expected. Around this time yesterday we were making advances on breaking north of the simple 50 day moving average; 24 hours later January 2010 highs are broken and it's a different landscape. Have to adjust - especially the names we jumped back into as they crossed "over" their 50 day moving averages... and now are reversing. Unfortunately it remains a student body left environment where individual stories mean little - (almost) everything is either going to be bought, or sold as HAL only knows this 1 trick.

Wyndham Worldwide (WYN) was build back up earlier this week just over $26; I am going to take the loss (about 5%) and cut it back by about 80% as it broke right back down.



Ditto - Quality Systems (QSII); taking 50% of position back to cash with sale around $61.50; offsets purchase at $63.40 earlier in week (loss of 3%)



I took about 0.3-0.5% off from a lot of lesser positions as well, but the amounts are not large enough to really break down 1 by 1. Essentially I am "getting smaller" below S&P 1150.

I also added a few stop losses to other positions added earlier this week, so if the market continues to wheeze we'll be adding to this list of cutbacks.

Long all stuff mentioned in fund; no personal position

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Bookkeeping: Selling 20% of Ultra Silver (AGQ)

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Nothing negative at all to report on the chart for Silver ETF (SLV) which is the underlying instrument for Ultra Silver (AGQ)... I am simply going to take 1/5th off here as a function of taking profits as they come. I continue to be a fan over the long run and since I am overweight silver v gold, silver will be sold. I am selling around $70.50.




From here, most likely every $2 or so on the ETF I'll sell increments, until a target of $80 if and when. At that point "parabolic" would be well entrenched. I'd like to rebuy $65 or lower.

Long Ultra Silver in fund; no personal position

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Near Term Game Plan

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What a wild ride the past few weeks. Just a week ago Wednesday as the S&P hovered around 1170 I mentioned we needed to mind the gaps - one gap being nearly 50 S&P points lower and the next nearly 100%. I thought this would be an event that would take weeks (4-6 perhaps) to play out ... instead it happened the very next session. Then after a shock and awe Sunday night US style bailout by the Europeans a 4%+ gain open occurred Monday morning , which mostly benefited those who piled in late Friday (in an ugly market). That sort of bounce after a swoon would usually take 3-5 sessions to play out. Instead it happened in 1. It's a market on hyper drive.

Since then we've had 3 successive days where the S&P has brushed along its 50 day (simple) moving average, and rejected each of those days. Two of those days created late day selloffs (Tue & Thu) - however those who have been in markets for a while are confused what playbook to use. In the old school playbook it made sense to expect a rollover after such a huge drop, a cursory dead cat bounce and rise into resistance. But anyone playing that book in the past 15 months has been run over as technical resistance has been nothing to a market on a liquidity high. So I assume many, like I, have been simply watching from the side rather than shorting into these bounces into the 50 day simple moving average because we have recency bias. And the past 15 months has meant that shorting would lead to being steamrolled as resistance has been nothing more than a squiggly line on a chart that means nothing.



Yesterday's close put us essentially back to near where we were a week ago Thursday morning. Still over January 2010 highs of S&P 1150 but seemingly in trouble otherwise. Will old school technicals play out and a "retest" of recent lows actually happen? Or is this a near term headfake as another "V" shape bounce plays out? Once more 1150 should be of great interest, and this morning's premarket has danced all around this figure. Last week the flood gates opened once 1150 broke as there was no real support for many points lower. This time around even if you toss away the Thursday low and instead use Friday's (1110) there is still 40 S&P points of space if 1150 cannot hold.

Yet all this could have been mitigated if the S&P could of closed over 1174ish yesterday, rather than reverse and falter. Quite interesting how 1-2 hours worth of movement can change the whole complexion.

In terms of game plan, 1150 is definitely the pivot point for the day... any dunking of the index below that 15 minutes into the day once the premarket games are over, will be an invitation to short. Above 1150 and into 1174 it remains a 'white noise' area where not much is told to us. Above 1174 bull horns (on little volume) can be waved.

As for the portfolio, I'll continue the same path that has saved us from major selloffs time and again - if a stock breaks the 50 day moving average we'll at least cut back to reduce exposure. If this means we have to continue to flutter in and out of stocks while the greater market is in a tizzy so be it.

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Interesting Action in Tibco Software (TIBX) Yesterday; Speculation after SAP (SAP) - Sybase (SY)?

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One of the names that withstood yesterday's late day selloff was Tibco Software (TIBX) which I added in the closing moments Tuesday. Please note the volume explosion - rather than the typical 2.8M shares trading we saw 10x that (28m!) trade Wednesday.


Interestingly, after the bell Tuesday it was announced that German software giant SAP (SAP) was bidding a 56% premium for Sybase (SY). One of my closings line in my Tibco purchase entry was:

With tech companies cash rich, this is the type of company always circling the water cooler as a potential take out candidate so there is always that potential icing on the cake.


Essentially Oracle (ORCL) and SAP (SAP) (throw some IBM in there too) have consolidated entire swathes of the software biz - frankly not sure why it has not reached a point of anti trust but it is what it is. It seems improbable that SAP will already be making another purchase after a $6B bid the previous day but the action in Tibco raises some eyebrows.

Looking at yesterday's intraday chart is also interesting - the stock was falling off with everything else than with about 90 minutes left in the session it did a U-turn, volume exploded and the stock V shaped up.


Apparently 212 put contracts were bought yesterday v 5565 calls, so someone could be speculating or it simply could be a case of self reinforcing action... computer A sees option activity, and buys options itself, which triggers computer B to rush into the stock which triggers... well you know how it goes.

Could be nothing, could be something.

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Via FT.com
  • “SAP has made no secret of wanting to do a meaningful deal, but not many would have guessed it would be Sybase. They need to strengthen their middleware offering, but instead they have bought a database vendor that competes in a market dominated by Oracle,” said Paul Guely, managing partner at Arma Partners, the technology advisory company.
  • SAP is thought to have considered a number of targets, including Tibco, the Nasdaq-listed company that provides “middleware,” or technology that connects applications. Some analysts say this might have been a better deal.

Long Tibco Software in fund; no personal position

Thursday, May 13, 2010

Little Mental Battles

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The little mental battles that face us each day such as: to chase or not to chase?

Titanium Metals (TIE) is the perfect stock looking to breakout here - excuse the lack of volume, as stocks can now rally 100s of percent without any volume expansion. (so we need to adjust to the new paradigm) The highs it has tested for months in the $17.40s are now being superseded.


Fundamentally, this is the stock you buy each time there is a Boeing (BA) expansion cycle - which we definitely do have. But if analysts are anywhere near correct for 2010 estimates, we are now talking almost 60x forward estimates. Meaning if analysts are wrong by a factor of 100% its still a 30x forward situation.

Apparently no price is too high.

Fundamentals v technicals. Little mental battles.

No position

A Simple Glance

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Looking at my preferred world of exponential moving averages we did close above the 50 day moving average on the S&P 500 yesterday. However, those in the simple class universe must also be taken care of and as the chart below shows 1173-1174ish is the key number when looking for the 50 day. To the downside 1150 (January 2010 highs) remains a good level of support.

[click to enlarge]


There are times one (exponential or simple) takes over versus the other and as you can see above, HAL9000 is respecting the simple moving average as that has been almost the exact intraday high each of the previous 2 sessions (to the penny!). So for now, simple matters more.

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Kyle Bass of Hayman Capital: The Pattern is Set - Betting the Bank on a Keynesian Free Lunch

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As with many destructive events, it is one thing to forecast them and quite another to put a firm timeline of any sort on their occurrence. Anyone warning of the tech bubble in mid 99 was made a fool off... if one dared bet against it with actual money- they were wiped out. Rinse, wash, repeat with housing not half a decade later. Knowing when something will suddenly 'matter' is a very difficult endeavor. For example, no one was talking Greece 12 months ago - then suddenly it became the center of the universe. On the other hand, people have been forecasting Japan's demise for a decade now and they just keep ticking along. (obviously Greece relied much more on foreign capital than Japan does so it's a bit of apples to oranges comparison).

Prominent hedge fund manager Kyle Bass of Hayman Advisors is one person who has not been shy about posting timetables of 'doom' [Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12] It will be interesting to see if his if his timetable is correct and let us not forget about the United Kingdom aka the mini U.S. Bass was apparently quite shocked by the nuclear option engaged by the ECB over the weekend, and posted a myriad of thoughts in an investment letter titled "The Pattern is Set - Betting the Bank on a Keynesian Free Lunch" sent out Tuesday.


Via Absolute Return-Alpha some excerpts:
  • With the avalanche of announcements over the weekend out of Europe and the IMF (and even the US Federal Reserve), I think it is important to communicate our views. The Lisbon Treaty explicitly prohibits direct monetization of fiscal deficits (i.e. printing money out of thin air in order to perpetuate deficit spending) because central bankers are (or I guess at least "were") aware it is the path to severe inflation or even hyperinflation.
  • Just as the Romans did time and time again, the EU has now decided to change from the rule of law to the rule of man when it suits them. With none of the sixteen members of the currency union forecasted to be in compliance with the Maastricht Treaty (the foundation on which the EMU is built) in 2010, today's actions further attempt to eliminate the natural policing role that markets play with respect to egregious economic behavior. It looks like there will be no consequences for fiscal profligacy... no negative implications for continuing to spend far beyond one’s means... there will be nothing but moral hazard for running massive deficits as member countries can now hold hostage the entire EU (as Greece has done).
  • The ECB’s monetary policy action simply adds to the moral hazard that was originally created on the fiscal side of the problem. The pattern is now set. This is exactly how very smart people meeting together in order to "solve" a debt crisis frequently (and now permanently, it appears) mistake a solvency crisis for a liquidity crisis. From now on, it seems everything will be deemed to be a liquidity crisis that will be met with more "bail-outs" and debt financed spending.
  • This will eventually break traction in a violent way and facilitate severe inflation or even hyperinflation. The one thing the EU taught us this weekend is that paper money will be worth less (maybe much less) in the future.
  • Germany weakened itself as it has now abandoned the core bargain of the Euro (which was that they would never be responsible for another country’s debt) by opting to be the largest guarantor of a new loan program that essentially makes European countries joint and severally liable for emergency funds for the worst fiscal offenders in the EU. It has begun a process of ceding its fiscal sovereignty to the over-indulgent countries. I still cannot believe Germany has done this. No wonder Merkel’s government is so unpopular.
  • We believe that there is a “Keynesian End” to the policy du jour that governments can solve all their fiscal and economic problems with more debt and more cross guarantees (aided and abetted by desperate central bankers). We at Hayman believe this theoretical endpoint is reached when debt service exceeds government revenues. Of course, any particular country has certain fixed expenses beyond debt service; therefore, the real endpoint occurs significantly in front of our definition.
  • Outside of Greece and “Club Med” countries, Japan will begin to grace the front pages of newspapers very shortly. Japan has already reached a point where its central government tax revenues are eclipsed by debt service and social security payments alone. Coupled with its debt and demography problems, the world's second largest economy is about to enter a real bond crisis.
  • Even in this somewhat utopian scenario, the Keynesian End arrives in many of the world's countries much sooner than is popularly believed.
  • The competitive devaluation will begin in full force (Mark's comment - it already has!) with Japan needing a weaker Yen to grow exports, the US needing a weaker dollar in order to double our exports (under the current Obama plan), and the EU really needing a weaker euro in order to grow their own exports.
  • This weekend, the EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors.
  • In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re-elected without a “sea change” in public opinion towards government spending and deficits.
  • We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation. We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years.

[Oct 5, 2009: Kyle Bass Hayman Capital October Letter to Investors]

Wednesday, May 12, 2010

Bookkeeping: Starting Tibco Software (TIBX)

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I am starting a 1.8% position in a new name to the website, Tibco Software (TIBX) as we have a nice combination of fundamental and technical promise in this company.

Technically, the stock broke to new yearly highs today and essentially (barring a market setback) this is exactly the type of 'breakout' one is looking for. The only fly in ointment is lack of volume expansion but that has not mattered in the new paradigm market of the past 15 months.



Fundamentally, the company is in decent sector ("business intelligence"), not a super fast grower but solid... reported decent enough earnings in late March, and has replaced an existing stock buyback program with a new $300M program. With a market cap of $2B this is a material buyback and unlike most companies who announce buybacks to stroke the market, but often do not follow through Tibco has a history of actually doing the purchases. No time frame was announced for the purchases however.
  • TIBCO Software Inc. (NASDAQ:TIBX - News) today announced that its Board of Directors has authorized a new share repurchase program pursuant to which the company may repurchase up to $300 million of its outstanding common stock. This program replaces the company's previous $300 million stock repurchase program, under which approximately $27 million was still remaining. The program does not obligate TIBCO to acquire any particular amount of common stock, and it may be modified or suspended at any time at TIBCO's discretion.

Last earnings report was decent, with EPS of 12 cents vs analysts 10, and a moderate beat on the top line. (up 17% year over year). Cash flow $40.5M, repurchased 3.5m shares. Analysts upped 2010 estimates from 62 cents to 65 after the report.

With tech companies cash rich, this is the type of company always circling the water cooler as a potential take out candidate so there is always that potential icing on the cake.

Overall this is a solid if not inspiring company, whose technical profile looks appealing after today's stock move. Except for the crazy action late last week, the stock has had fantastic relative strength, not falling below the 20 day moving average since February.

Long Tibco Software in fund; no personal position

Random Mini Bull Markets - Toys, Roofing Products, Audio Equipment

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Looking through a few hundred charts, it has been interesting to see which sectors the relative strength has been within. There are also some interesting sub niches in their own mini bull markets off the beaten path of the momo guys who live in Baidu, Chipotle, Netflix, and the like. Not sure what the mosaic this trio of companies is weaving even after I dug through the recent earnings reports... but my hunch is a lot more toys and audio equipment can be bought now that 7M American household don't bother to make their mortgage payment.

Hasbro (HAS)



Owens Corning (OC) [strength in commercial roofing rather than residential]



Dolby Labratories (DLB)


EDIT 3:10 PM - oops, I forgot how much more we can spend on our pets when we don't have to bother with a mortgage payment. Go Petsmart (PETM)



No positions

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[Video] Are the Losses of Fannie and Freddie Now "National Policy"?

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In this Yahoo Tech Ticker clip, Barry Ritholtz and Dean Baker discuss a concept I've advanced - effectively Fannie and Freddie (or as we call them around here, FanFredron) are being run for loss to create a false housing economy via subsidization. They do put forth an additional point that I have not harped on as much: one added benefit of this 'policy' is our financial oligarchs win.... again.

If we ever do get back to a world where the private sector is truly a part of financing the housing market it is going to be mighty interesting to see what true mortgage rates will settle at, now that 'strategic default' is part of the American lexicon. The higher risks involved will create an increase in costs to every future mortgage due to this exciting new fad. But with government now supporting some 95%+ of all financing this is an issue that won't face us for many years. Thankfully the government does not price in any risk and gleefully backs mortgages of almost any kind (still). Until some far in the future reform date, more below market rates offered by the 2 institutions that can gladly lose money forever - ponzi style.

(Amazing fact I heard the other day, Fannie Mae has lost more money the past 2 years than it made the previous 30 years. Chew on that for a moment before you move onto the next paragraph. Thankfully there is no such thing as a clawback in corporate America.)

6 minute video



The Senate on Tuesday rejected a Republican sponsored measure that would effectively cut off support to Fannie Mae and Freddie Mac in two years. The government-sponsored enterprises, now in conservatorship, have already cost the government about $145 billion.

And there's no limit to how much more they can ask for for the next two years!

Fannie Mae lost $11.5 billion in the first quarter while Freddie Mac lost more than $6.7 billion. After posting those massive losses, they asked for a combined additional sum of nearly $20 billion in government assistance.

"Are they losing money as a matter of policy or are they losing it as bad judgment?" asks Dean Baker, co-director of the Center for Economic and Policy Research, who calls the Fannie and Freddie the elephant in the bailout room.

Baker and Fusion IQ's Barry Ritholtz are convinced the government is effectively sponsoring a backdoor bailout of the banks via the GSEs. "This is a conscious, willful decision," says Ritholtz, author of The Big Picture blog and Bailout Nation. "Fannie And Freddie act as a conduit for taking all this junk off the banks' balance sheets."

And Congress is along for the ride, says Baker. "To some extent the wool's been pulled over their eyes but I'd just say it's willingly. They just don't want to deal with it right now," he notes. The fear is cutting off aid to Fannie and Freddie could kill the housing industry. In the first quarter, the government backed more than 96% of all residential mortgages.

Whatever the reason, taxpayers will continue to pay the price. Ritholtz estimates Freddie and Fannie could easily cost us $400 billion combined; judging by the continued carnage "maybe that's way on the low side?" he concedes.

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

[Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]

[Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer]

[Feb 1, 2010: 2 Graphs Showing Part of the Reason for the Christmas Eve Taxpayer Massacre]

[Feb 9, 2010: WSJ - No Exit in Sight for US as Fannie, Freddie Flail]


Bookkeeping: Starting SL Green Realty (SLG)

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I completely missed the REIT party this past year as I was still under the pretense that 'extend and pretend' was not a national pastime. In fact a year ago at this time I was busy getting blown up on shorts in the REIT space as these companies diluted their shareholders to the moon to raise capital. So my thesis was wrong, and commercial REITs have been among the best sectors out there. I laughed about 3 weeks ago as I saw a CNBC interview with one of these top commercial developers who is a guest host on CNBC every so often (can't remember his name) and he was asked if things were recovering in commercial real estate. He sort of gave a blank stare and said (paraphrase) "well we're living in a world of extend & pretend so I don't know what the market is." That pretty much sums it up perfectly.



We are in the new paradigm economy, where banks can pretend what they have on their balance sheet is true due to accounting change rules and there is no reason to mark to reality (i.e. take losses) as long as you don't take action against (home owner, commercial builder) etc. With the Fed funds rate at zilch for the foreseeable future the banks will keep raking in large profits and only when they can accept the losses does it appear they will take action. So rainbows for everyone it is.

EDIT 1:45 PM - found the video, Richard LeFrak (5 minutes) - key quote "We are seeing defaults, but very little action is being taken after the default" (translation: defaults no longer matter since banks and Treasury Dept think free markets are yucky)














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As I've been looking to get my fingers into more sectors for the next "melt up" leg in the stock market, I have been debating whether to keep it simple and just buy the REIT ETF as shown above (IYR) ....but have decided instead to just throw my lot with SL Green Realty (SLG) which is focused on office buildings; especially the NYC variety. (I would love to find a REIT that only does business around Washington D.C. - talk about recession proof). I won't bother to go into fundamentals as every REIT I reviewed as a potential candidate knocked my socks off in terms of valuation. I am simply going off the 1999 model (in stocks) or 2003-2006 (in housing) and realizing easy money from the Fed will distort any and all markets, so we know this ends badly but until then - we invest in a parallel universe. Too many paper currency units worldwide now chasing too few actual assets - economics 101 of supply and demand. So we'll repeat what we've just done the past decade. And at some point in the future an uproar will happen as it all comes tumbling down and Bernanke will be "The Fallen Maestro 2.0".

The best thing I can say about SL Green is it has a chart with a nice base, and looks like it just broke out over that base today. Hence, I'll pile in with just under a 2% allocation in the mid $67's. And that's as complicated as you can make it nowadays.



SL Green Realty Corp. is a self-administered and self-managed real estate investment trust, or REIT, that predominantly acquires, owns, repositions and manages Manhattan office properties. The Company is the only publicly held REIT that specializes in this niche. As of March 31, 2010, the Company owned interests in 30 New York City office properties totaling approximately 24,258,700 square feet, making it New York's largest office landlord.

Long SL Green Realty in fund; no personal position

Bookkeeping: Creeping Back into Stocks Jumping Back Over 50 Day Moving Average

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I am acting under the pretense that this 50 day moving average will be overwhelmed by the world's central bankers, along with the thought process I am still extremely highly exposed to cash so if I am wrong my exposure is not excessive. If the pattern of the past year or so holds true, the market will only go down on a human emotion news event, otherwise it can only grind up as computers "provide liquidity".

As stocks currently in the portfolio make it back over their respective 50 day moving averages I want to get back some exposure to them. At this point I am adding 1.2% exposure to both Wyndham Worldwide (WYN) and Riverbed Technology (RVBD) for identical reasons - seen in the charts. By entering here if for some reason the market tails off, we have stop loss areas right below and damage can be contained.



EDIT: I've added about 7% long exposure this week with purchases but still under 20%. If the S&P 500 closes over the 20 day moving average I'll look to become more aggressive on the long side as mentioned earlier in the week. Shorting remains only for the nimble and on an intraday basis unless human emotion is involved in a news event.

Long Wyndham Worldwide, Riverbed Technology in fund; no personal position

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Looks Familiar

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Maybe it was just a bad dream but I thought overnight futures were in the high S&P 1140s. Thankfully we have premarket.

The S&P 500 is essentially exactly where it was yesterday at this time... yesterday there was a quick burst over S&P 1165 to 1170 and one thought "here we go again" as the 'V' shape bounce was on. Then a (now rare) intraday reversal occurred. But here we are again... the 50 day moving average is now near 1167 and the 20 day has moved down from 1175 to 1173. So the spring is getting wound more tightly and it won't take much to have the index close above where it "needs" to be to get back to business as usual.



With all risk taken away by the Bernanke Forcefield it only seems a matter of time?

x

Tuesday, May 11, 2010

[Video] Smackdown - Steve Grasso v Michelle Caruso Cabrera on HFT

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Very little redeeming value in this 3 minute video other than pure entertainment, but really isn't that what all these triple digit infotainment channels are here for? For actual "boring" analysis in non confrontational manner please see Bloomberg.

Michelle strikes me as the type of person who has never been wrong on any issue in her life... just ask her. Obviously Grasso, as an employee of NYSE, is biased as well but if I am going to line up journalist versus person who lives, breathes (and dies) by markets - I'll go with the latter's opinion.

You can skip right to minute 1:20 for the festivities.













hat tip Zerohedge

[Video] 'Perma Bear' Bob Janjuah in the Flesh on Bloomberg

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Royal Bank of Scotland's "Perma Bear" Bob Janjuah seems to have made his first video appearance that I can find, today on Bloomberg. Like many 'bears' he is realistic facing an unprecedented liquidity tsunami by central bankers worldwide - but believes it will end in tears as these things are apt to do.

Obviously bullish on gold (target $1500), bearish on Euro (target par with dollar), S&P overvalued ("fair value" 850).

[Note to CNBC hosts... notice how the host asked questioned and listened without interrupting 6.3 seconds into an answer? Revolutionary]

10 minute video - email readers will need to come to site to view


Zachary Karabell: The World's Dollar Drug

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Another nice piece by Zachary Karabell who to most of us is simply a guy who shows up on CNBC from time to time and has some fantastical hair. Back in 2009 I highlighted another of his well written pieces [Oct 14, 2009: Zachary Karabell - Deficits and the Chinese Challenge]; today we have an op-ed piece in the Wall Street Journal outlining a theme we've been touching on for a few years now - how the United States will be the last to face the music due to the luxury of owning the world's reserve currency. But all it does is mask the rot underneath.

Via WSJ - The World's Dollar Drug:

Some excerpts....

  • For all the talk about the problems of Greece and their implications for the euro zone, there is another currency that presents equally profound problems: the U.S. dollar. is, as everyone knows, the world's reserve currency, and it widely seen as a boon and an anchor for the emerging global economic system. It The dollar is also the only thing standing between the United States and its own moment of reckoning, and that is not a good thing.
  • Bretton Woods obligated participating countries to determine their exchange rates and the value of their currencies in relation to the dollar, with gold as the underpinning. Then, in 1971, President Richard Nixon ushered in the era of fiat currency when he announced that the U.S. government would no longer allow foreign nations to redeem their U.S. dollars for gold.
  • Over the past decade, the relative position of the U.S. has shifted. It is no longer a creditor to the world but rather a large debtor. It is a net importer of manufactured goods.... Its national economy is the world's largest but is surpassed by the multinational euro-zone. And China's economy, while still perhaps not much more than a third the size of the U.S., is growing three to four times as rapidly and accumulating dollars at a torrid clip.
  • Yet the dollar remains the linchpin of the global system. The financial crisis brought global grumblings about the U.S. currency, about the toxicity of the U.S. financial system, and about the need and desire for an alternate global currency. The Chinese were vocal in their desire to find a new anchor, and the Europeans echoed the sentiment along with others. But words are easy. Even the Chinese, who have made moves toward pegging the yuan against a basket of currencies, still find that having tethered their system to the dollar they can't simply walk away because they would rather things were different.
  • The dollar's dominance has clear short-term benefits for the U.S. Unlike Greece or just about any other country, when the American federal government wants to take on additional debt it has the advantage of a world that must buy dollars. Because much of global trade is conducted in dollars, especially Chinese trade, governments and institutions throughout the world have little choice but to invest in U.S. assets. The U.S. government also has the ability to print that global reserve currency when dire straits demand it. That gives the U.S. considerable latitude to spend its way out of a crisis without confronting real structural challenges. The U.S. has been able to forestall deep reforms because it has the dollar.
  • But while the presence of the dollar keeps money flowing in and the system well-oiled, it no longer reflects the world's economic pecking order. For all the talk of currency manipulation by Beijing, it is equally true that China's peg to the dollar is currently propping up an otherwise shaky American economy. The Chinese have become the ultimate offshore bank for American capital, and there is no evidence they deploy it to less American benefit than Americans themselves do. The Chinese government invests conservatively in U.S. bonds, and spends heavily on a domestic economy that produces goods for American consumers.

Key key points here:
  • The U.S. government uses its dollars—and the ability to print them and borrow them—poorly. Large amounts of debt fund consumption of goods and health care. While today's needs are important, without sufficient investment those dollars will dissipate. You'd lend someone money to open a business or invent a new energy source, but not for dinner and a movie. Yet because of the dollar, America tends to get the money it wants. And so the dollar as an anchor of the global system forestalls fiscal crisis in the U.S. while allowing for gradual decay of the American economy.
  • This can go on for many years. The world needs a reserve currency to reduce costs and allow market players to assess value across different countries and economies. But that need for the dollar shouldn't be confused for American strength.
  • The ubiquity of the dollar allows Americans to believe that their country will automatically retain its rightful place as global economic leader. That's a dangerous dream, an economic opiate from which we would do well to wean ourselves.

S&P 500 Jumps to Brush Against 50 Day Moving Average

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S&P 1150, highlighted earlier this morning has proven to be an intraday launching pad for the S&P 500, with a 15 point jump as the index is now at 1165. This takes us to whiskers away from the 50 day moving average which as I wrote in the weekly summary was the top end of this massive range (1110 at the bottom, 1165 at the top).

The next 10 S&P points are very important to this set of eyes. If we break right through 1165 and then 1175, both the 50 and 20 day moving averages will be penetrated and that whole mess last week will once again just have been a dream... it never happened. ;)



Once more, this is being done on non impressive volume.... back to normal.

(aggressive traders can lean against the market here with very obvious stop out levels just above)

x

Bookkeeping: Closing Discover Financial Services (DFS), Replacing with Capital One Financial (COF)

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One problem with the markets the past 3 years has been it's been a 'student body left' environment where almost everything rises or falls together. Very little value add by picking individual equities as the market direction (or sector) is almost everything. This might not change in the near future with our high frequency trading, ETF dominated markets ... or might never change again - I don't know. However, when we do have some shakeout as we have just experienced this is the only time we really see clear demonstrations of relative strength and can see what stocks are in the strongest hands. When almost anything with a carbon footprint is going up (or down) as has been the case 95% of the time since 2007, we cannot see that.

The exceptions to that 95% of the time (such as we have right now) give you 2 options. You can buy the strongest (which I like to do) or buy those hit hardest (which has been a winning strategy the past 15 months as those names have surged the most). Frankly, if in 5 weeks we are experiencing yet another "V" shaped stock market it will be a moot point which route you go; almost every stock will be surging - and throwing a dart will be fine, as it has been since March 2009. But in case we ever return to a normal market where 40% of stocks go down, and 60% up (on the same day) - or vice versa, I will try to rotate into names showing the best strength.

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

This can be demonstrated in the credit card space - I bought some Discover Financial Services (DFS) mid April as 'strategic default' has spread like wildfire across Cramerica which bodes well for credit card issuers. All that extra money not being wasted to pay for housing, can go to shopping and paying down non mortgage debt. Further the Fed has issued a license to print money on the funding side - borrow at essentially 0% and lend at (look at your credit card statement).

Since this is a baby with the bathwater market, DFS was sold off with everything else and last Wednesday the majority of the position was sold off in a defensive measure for a 7% loss as the stock broke the 50 day moving average. Despite yesterday's surge the stock has not fully recovered so I am going to sell the remaining 0.7% exposure for a 9% loss in the $14.70s.



With those monies (plus a bit more) I will begin a position (1% allocation) in a peer with a stronger chart - Capital One Financial (COF) [a stock I was shorting a year ago at this time to terrible effect]. So I am getting the same sector exposure, but moving from a chart with some near term challenges (which will be erased with a V shaped bounce) to one that held up better in the selloff and is sitting above all key moving averages.


Now there are still challenges in this chart - as we have a down slope in intraday highs since peaking mid April but it's been a tough market since so I'll give it some benefit of the doubt.

I was actually quite surprised by the earning estimates when I perused COF - 2010 estimates jumped from $2.11 90 days ago to $3.58 as of this week. It must be good to be borrowing at 0% and lending at 17%. Not sure why DFS estimates won't show a similar surge until 2011.

Long Capital One Financial in fund; no personal position

Gold (GLD) Continues to Break Out, Silver (SLV) Breaches 2010 Highs

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[please note I am using the ETFs for gold and silver, rather than the actual metal contracts for 'real time' charting reasons]

Gold is not buying the ECB's claim that all its purchases of government bonds (what was considered the 'nuclear option') would be sterilized and hence not add to the money supply. In the much broader picture what gold is telling us is printing money is the only solution central bankers know (and will continue to know in the future)... and politicians are good with it. This *will* be how the massive shortfalls in U.S. public pensions will be solved, just as "stimulus" has been a backdoor bailout to the states who for the most part are out of control in their own spending. And it *will* be the crutch waiting for Medicare some day down the road. Just as it *will* be (now clearly stated) the crutch for Euro zone nations - many of which have no chance of growing out of their debt obligations.

Silver (SLV) just breached January 2010 highs and cleared a 'double top'....



Gold (GLD) on the other hand is on a serious breakout and has long since cleared highs of the year....


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As I do every so often let me show clearly how your purchasing power is being sapped away by our "solutions". While the US stock market looks "great" in US dollars, when viewed in terms of a form of currency that cannot be printed (gold) the story is far less impressive. This is the difference between 'nominal' and 'real' returns.... it is crucial to understand.


Don't be fooled by the 'strength' in the US dollar; since every major floating currency on earth (yen, euro, dollar, pound) now engages in the same stealth default measures its 'strength' is all relative.

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

Holding Pattern

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An interesting spot here, since we have slightly different stories in S&P 500 v NASDAQ. Recall last week, S&P 1150 was a key level - this represented January 2010 highs. Once that level was broken, all heck broke loose Thursday. In stand alone action, as long as the S&P 500 holds 1150 things should be ok, especially since (despite yesterday's gap up open) there is no "gap" to fill on its chart. So far so good today.



Of course, as noted yesterday it is difficult to build a bevy of intermediate positions until the 20 and 50 day moving averages are cleared... and one would expect some sort of retest of some sort of low (not sure which one due to Thursday's actions).

The NASDAQ is more problematic as its January highs were 2330s, which just so happens to be the bottom end of the gap created yesterday in its chart. So this is calling out for a fill. Similar to S&P 500 it will be difficult to feel security in any intermediate term positions until a move over the low 2400s.


So we have 2 stories that on one level are similar and on the other have a variance.

Hence a lot of sitting on hands for now since these type of areas are more useful for those whose timeframe is hours. All I did yesterday was replenish some long exposure lost Friday to get back from a 10%ish exposure to 15% exposure; still extremely low.

x

Monday, May 10, 2010

Bookkeeping: Beginning Stake in BorgWarner (BWA)

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I try not to make it a habit to buy stocks up 9% on a session, but obviously today is a 'special' day where that is the rule rather than the exception. BorgWarner (BWA) is an auto supplier who I have been eyeing for a while as the sector has been on fire. It has one of the best reputations in the space, and its sub sector has some secular growth to it in terms of fuel efficiency - whereas many other names are just pure cyclicals. That said, less well run or smaller suppliers probably offer more upside as they are more up speculators' alleys, but I'll go with the 'safer' choice as I reviewed about 5-6 options in the space.

The company reported stellar earnings 2 weeks ago, with a huge increase in guidance - gapped up over $44 and of course filled that gap quickly during last week's correction. So we actually have a chance to enter about 10% below it's "gap up" price (i.e. the same price it was before earnings), even though the stock is sharply up today.

In terms of the day's range the stock has the 50 day moving average as its floor, and below that $37 was where it bottomed last Thursday and Friday. I'm going to start with a 1.1% exposure and see how the stock moves in the days and weeks to come, as this is my first time ever owning the stock.



A look at the earnings report:
  • Auto parts maker BorgWarner Inc (BWA) boosted its 2010 earnings outlook after posting a stronger-than-expected quarterly profit, propelled by improving industry production and rising demand for fuel-saving components such as turbochargers.
  • BorgWarner raised its 2010 earnings forecast by about 50 percent to a range of $2.20 to $2.50 per share, above Wall Street's average estimate of $1.74. The company also forecast revenue growth of 28 percent to 32 percent in 2010, up from its earlier range of 15 percent to 19 percent. Analysts on average expect sales to increase 23 percent to $4.9 billion, according to Thomson Reuters I/B/E/S.
  • BorgWarner reported first-quarter net income of $76.2 million, or 63 cents per share, compared with a year-earlier loss of $7 million, or 6 cents per share. Excluding one-time items, BorgWarner earned 65 cents per share. On that basis, analysts on average had expected profit of 41 cents per share on sales of $1.2 billion.
  • Sales rose 57 percent to $1.29 billion.
  • BorgWarner's focus on components that can improve fuel economy and performance place it in a growth area of the auto industry, with carmakers aiming to meet stricter mileage and emissions standards over the next several years.
  • Analysts say BorgWarner is uniquely positioned to benefit from rising demand for more efficient gasoline engines and cleaner-burning diesel cars as automakers race to achieve the 42 percent increase in fuel efficiency mandated by the U.S. government for 2016.
Long BorgWarner in fund; no personal position


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