Tuesday, June 1, 2010

NYT: Michael Lewis Op-Ed on America's Financial Reform [plus audio interview]

The always interesting Michael Lewis put out his views on financial 'reform' that is working itself through the lobbyists errr.. lawmakers... hands.

So that it does not get lost later in the piece I am also including a radio interview Lewis did with a local NYC radio station discussing the reform, Goldman Sachs, and the defender in chief of Goldman Sachs... a man named Buffet. (17 minutes)


Link to NYTimes op-ed 'Shorting Reform' here:

To: Wall Street chief executives

From: Your man in Washington

Re: Embracing the status quo

Our earnings are robust, our compensation has returned to its naturally high levels and, as a result, we have very nearly regained our grip on the imaginations of the most ambitious students at the finest universities — and from that single fact many desirable outcomes follow.

Thus, we have almost fully recovered from what we have agreed to call The Great Misfortune. In the next few weeks, however, ill-informed senators will meet with ill-paid representatives to reconcile their ill-conceived financial reform bills. This process cannot and should not be stopped. The American people require at least the illusion of change. But it can be rendered harmless to our interests.

To this point, we have succeeded in keeping the public focused on the single issue that will have very little effect on how we do business: the quest to prevent taxpayer money from ever again being used to (as they put it) “bail out Wall Street.”

As we know, we never needed their money in the first place, and by the time we need it again, we’ll be long gone. If we can keep the public, and its putative representatives, fixated on the question of whether their bill does, or does not, ensure there will be no more bailouts, we may entirely avoid a discussion of our relationship to the broader society.

Working together as a team we have already suppressed debate on many dangerous ideas: that those of us deemed too big to fail are too big and should be broken up, for instance, or that credit default swaps and collateralized debt obligations and other financial inventions should simply be banned. We are now at leisure to address the few remaining threats to our way of life.


It goes happily from there :) (click here for rest of it)

[Mar 15, 2010: [Video] 60 Minutes- Michael Lewis, Inside the Collapse]
[Jun 14, 2009: Fareed Zakaria with Michael Lewis]
[Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn]

Dr. Reddy's Laboratories (RDY) Stock Continues to Impress

Since there are so very few Indian stocks trading on the U.S. exchanges, most of the well known names have been on my radar for years. One such example is Dr. Reddy's Laboratories (RDY) which I've had on various watch lists for years on end but never once bought. [Nov 9, 2009: Dr. Reddy's Laboratories Impressive on Both Fundamental and Technical Basis] As I am scanning to see what is performing on a day like today (where breadth is actually quite poor) this stock is shining. In fact it's at a 52 week high; I can find no particular news to drive it today and indeed its last earnings report a month ago was ok but no great shakes. It is well over 20x forward estimates and analysts actually dropped EPS for "2010" (year ends March 11) by 20 cents, from $1.57 to $1.37. But for whatever reason (perhaps the launch of quite a few drugs in the future) the market likes the name.

Established in 1984, Dr. Reddy's Laboratories (NYSE:RDY - News) is an emerging global pharmaceutical company with proven research capabilities. The Company is vertically integrated with a presence across the pharmaceutical value chain. It produces finished dosage forms, active pharmaceutical ingredients and biotechnology products and markets them globally, with focus on India, US, Europe and Russia. The Company conducts research in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infection.

While the close is more important than the intraday action as I type the stock looks to be breaking over early April 10 highs.

May's commentary on earnings report via Reuters:
  • India's Dr Reddy's Laboratories (RDY) lagged analyst expectations in quarterly profit, but expects the launch of more than a dozen new drugs in the United States to boost growth in this financial year.
  • "We are planning to launch 12 to 13 products this year in the United States, and some of them will be very significant," Prasad told Reuters in a telephone interview from the company's headquarters in southern city of Hyderabad.
  • Chief Executive G.V. Prasad said a pick-up in sales of omeprazole, a generic version of AstraZeneca's Prilosec, in the months ahead was also expected to underpin growth in the year that began on April 1.
  • The Indian generics business boom has lured Western drug makers that want to raise exposure in fast-growing emerging markets where a burgeoning middle class wants the assurance of cheap, safe drugs.
  • The New York-listed company reported a net profit of 1.7 billion rupees ($37 million) in the quarter to March, its fiscal fourth quarter, compared with a loss of 9.8 billion in the year-ago period.
  • Revenue fell 18 percent to 16.4 billion rupees, as sales in the United States, its biggest export market, nearly halved to 3.5 billion and European revenue declined by a third to 2.1 billion.


As for the greater market, it's just the same old momo names doing all the work - Apple (AAPL), Baidu (BIDU), VMWare (VMW), Chipotle (CMG), Netflix (NFLX) - boring really.

No position

China's Manufacturing Expansion Slows; Property Sales in Big Cities Plummet 70%

The world's best (last?) capitalists [centrally organized at that] are trying to thread a needle of popping a real estate bubble in major cities, while not sacrificing the general economy. Based on today's data from China (always taken with a grain of salt) they seem to be doing so... however with all the world now tied to China's voracious appetite for... well everything, when China slows down, the world has to worry. As China goes, so goes a potential double dip in the West.

Of course the Chinese market - amongst the weakest in the world in 2010 - has been telling us 'something' was happening for many months...

First the manufacturing data; there are 2 reports - one government and one not - both saying similar things: still expansionary but down from peak.
  • China’s manufacturing expanded at a slower pace than estimated in May, prompting stock declines across Asia on concern growth in the world’s third-largest economy may slow.
  • The Purchasing Managers' Index fell to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said, less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. A separate index released by HSBC Holdings Plc and Markit Economics fell to 52.7, the lowest level in a year.
  • HSBC’s survey, covering more than 400 manufacturing companies, is weighted more toward smaller, privately owned business than the government’s PMI, according to the bank. The manufacturing index, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.
  • “The fall in the headline PMI shown in the May surveys might be an early sign of a slowdown” in China, said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. It “may be exacerbated by euro-area weakness and recent measures from Beijing to rein in the property market.”
  • Premier Wen Jiabao said yesterday in Tokyo that the world needs to guard against the possibility of a second economic slump.
  • Restraining inflation expectations and keeping housing affordable are two of the government’s key goals after urban property prices jumped a record 12.8 percent in April from a year earlier.

On to the property market:
  • Property sales in Beijing, Shanghai and Shenzhen fell as much as 70 percent in May as developers delay sales following government tightening measures.
  • In China’s capital Beijing property signings slumped nearly 70 percent to 3,357 in May from April, the Shanghai Securities News reported, citing data from bjfdc.gov.cn. In Shanghai, the nation’s financial center, transactions may have dropped about 70 percent to 2,550 signings, the paper reported, and in the industrial city of Shenzhen, sales fell 62 percent.
  • China has restricted pre-sales by developers, curbed loans for third-home purchases, raised minimum mortgage rates and tightened down-payment requirements for second-home purchases.
  • China’s property market problems are worse than in the U.S. or U.K. before the financial crisis, the Financial Times said today, citing an interview with Li Daokui, a member of the Chinese central bank’s monetary policy committee. The country’s housing market problems combine a possible bubble with the risk of social discontent, he said.
  • Shi Weijian, an analyst at Jianghai Securities, said Shanghai’s government may announce a property tax as early as this month, which will likely be implemented at the end of the year. Shanghai home prices may fall between 25 percent and 30 percent from the introduction, he said.
Remember, according to the all knowing seer Alan Greenspan, bubbles are invisible things that Westerners have no hope of ever seeing. (even with very thick glasses) You can only fix the havoc of burst bubbles with a flood of easy money - so says the Maestro. Apparently, China does not believe in the Maestro and actually is attempting proactive measure - something the U.S. was all about 50 years ago.

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 43

Year 3, Week 43 Major Position Changes

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

Cash: 83.0% (v 84.5% last week)
18 long bias: 13.7% (v 13.5% last week)
3 short bias: 3.3% (v 2.0% last week) [Includes 1 'long dollar' position]

21 positions (vs 20 last week)

Weekly thoughts
A strange week to be sure - a very rare down Monday was followed by a plunge Tuesday morning to February 2010 lows in the S&P 1040s... this led to an intraday bounce of roughly 3%. Thursday also was a +3% day on nothing more than China refuting a report that it was reviewing European debt holdings. So in one week we had two intraday 3% moves; the one on Tuesday was at least "playable" as it happened during the day and we had massively oversold conditions, and a very clearly defined support level. The one Thursday was mostly done in premarket after a very bad previous day close (Wednesday) and hence not useful for anyone but daytraders. To close out the week, rather than the normal quiet, gleeful session we have before a holiday an actual selloff took place ... and a key support level of S&P 1094 was broken.

Not mentioned above is the very strange action in the market day to day - we are seeing vacuums both to the upside and downside which are dangerous to one's portfolio. A week ago there was a 1.5% move up in the last 17-18 minutes of the day and then last Friday the market was crunched to the tune of about 7 S&P points in the closing 4 minutes. Up or down - it is not a sign of a healthy market and seems to display a market without much depth to it. The other issue is every day except Friday we were waking up to +/- 1%+ moves in premarket which are simply impossible to deal with - the headline risk and knee jerk reactions are too much at this moment.

At this point it seems last week was an oversold bounce based on the action Thursday and Friday. Easy to say in retrospect - especially when bears are fearful that old technical analysis rules no longer work since they have been made a mockery of during the move up since March 2009. This time around they seem to actually be working as they used to. While the move up was strong (Tuesday and Thursday were about +6% combined) it simply took the S&P 500 to its 200 day moving average, which actually held this time around. Until this level is recaptured it is difficult to make a bevy of long side moves of intermediate term duration. Everything right now is just traders jumping in and out for hours at a time chasing an algorithm.

Currencies continue to dominate - last week I sold most of our remaining US dollar exposure thinking maybe we'd have 3-4-5 days of calm but perhaps not. While the dollar did pullback, it did not pullback much - so as I said when I sold our exposure, if the dollar breaks to a new high we'd get some exposure back.

Of course this would mean the Euro is most likely moving to new lows after it experienced an oversold bounce. I was hoping again for a 3-4-5 days of calm and for this currency to jump higher to perhaps short it.

Oversold reading overall still seem extreme - these are levels last seen in March 2009 but leads us unable to find many new ideas as so many stocks are broken and battered. Countless stocks I reviewed show stocks that broke support the past month, and simply used last week's rallies to jump back up to resistance ... these are charts to short, not go long. They are everywhere.


June is sort of an off month as earnings reports don't start back up in earnest until July and volume things out even more as vacation season starts for Wall Street. As for economic data all eyes are on Friday's job reports - with 400K census jobs coming in (according to estimates) the calls for job gains of 500-600K are prevalent. Recall last month well over 100,000 jobs were 'created' by the birth/death model (i.e. finger in the air guesswork) - which has been the case, more or less 10 of every 12 months even during the Great Recession. So why change now? This week's reports:

Tuesday - (a) ISM Manufacturing; this has been an area of strength for the U.S. economy as Asia (namely China) chugs along. Unfortunately in the new paradigm domestic economy, manufacturing is only 13% of output and 9% of jobs. Hence ISM Services, which gets much less attention should be the focus. (b) Construction Spending

Wednesday - Pending Home Sales

Thursday - (a) ISM Services; this has turned up to expansion the past few months; consensus is a reading just under 56. At this point other than jobs this is probably the most important report. (b) Factory Orders (c) Productivity & Costs

Friday - (a) Jobs.


For the portfolio there was little to do. I was mostly out of most major positions except for 2 - Tibco Software (TIBX) and F5 Networks (FFIV) and the early week selloff effectively had me cutting back these last 2 holdouts, which marked the short term bottom. The rest of the week I did some reconfiguring and cleaning up - mostly moving from weaker charts to stronger charts but not really changing my allocations much since the market was so volatile and was still below the 200 day moving average. The one positive of the current market is relative strength is obvious .. much more so when everything is rising up in one monolith.

On the long side:
  • Tuesday, as the market swooshed down I was taken out of larger positions in F5 Networks (FFIV) and Tibco Software (TIBX) as they finally broke support... F5 regained support by the end of the day as the market rallied from -3% to flat for the day. Both positions were pared back.
  • Intercontintental Exchange (ICE) was closed simply because I wanted to open spots for other positions in the fund; however the stock regained support by the end of the week as well showing some nice relative strength.
  • I began stakes in Polaris Industries (PII) and Valassis Communications (VCI) both on relative strength in their charts - the former name also announced they were moving hundreds of jobs to Mexico and away from America. What's not to love as a dog eat dog capitalist?
  • Thursday, I closed NetLogic Microsystems (NETL) as the stock had broken support and rallied into resistance. One of hundreds upon hundreds of similar charts, which scream short rather than long.
  • I replaced NETL with Chinese chip market Spreadtrum Communications (SPRD) - which probably has the strongest chart of any right now in the market. The only problem is it is overextended; hence just a starter stake.
  • Quality Systems (QSII) reported and missed, somehow the stock was only down 5% - but with the chart broken I decided to part ways and look to replace it with something else in the future.

On the short side:
  • Wednesday, I sold the majority of the remaining long dollar position in Powershares DB US Dollar Bullish (UUP).
  • Thursday on the swoosh up day, I attempted to short both Ross Stories (ROST) and Steve Madden (SHOO) - 2 retailers. I was stopped out of the Steve Madden position within hours for a minor loss.

Updated Position Sheet

Cash: 83.0% (v 84.5% last week)
13.7% (v 13.5%)
3.3% (v 2.0%) [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 (1 photo file)




Friday, May 28, 2010

So Much for a Quiet Holiday Session

For the first day in many days we woke up to a flattish premarket... at least not the +/- 1 to 2% nonsense we have been getting day after day. One would think we'd have a break from drama but no. With this break of S&P 1094 things turn more dicey again. Of course the close of the day is more important than the intraday action but really what was that fat thumb action at around 12:40 PM? Huge volume spike based on... ? Algo #892,311 saying to Algo #238,112: "011100011110100011!"

EDIT 2:35 PM - nevermind, it was not a fat finger - Spain was downgraded. Now all the suddenly people respect the assessment of the rating agencies... hah.

On the flip side it is encouraging to see the 200 day moving average - the strongest one of the bunch - actually mean something & not be sliced through as if it does not exist. It is almost a tease of days of old. If 1094 cannot hold that huge range from 1040 to 1094 is back into play. Well as long as we don't gap up Tuesday morning back over 1094!

EDIT 2:50 PM - ignore this post, right back to S&P 1095. Spain only mattered for 2 hours. Yawn.

I remain mostly in observation mode until the market stops rallying or cascading down 1% in 10-12 minute increments.


Bookkeeping: Closing Quality Systems (QSII) on Earnings Miss and Chart Degradation

We re-established a position in Quality Systems (QSII) in mid March [Mar 18, 2010: Restarting Quality Systems], but the recent selling pressure had us cutting back exposure; indeed we've cut it back sharply twice - first by 2/3rds in early May around $62.00, and then with what we had left another 50% was dropped May 14th around $61.50. The company reported this morning, and missed analysts estimates by 4 cents. Frankly I am shocked the stock was not pole axed; it is only down 5%.

Per Briefing.com:
  • Reports Q4 (Mar) earnings of $0.45 per share, $0.04 worse than the Thomson Reuters consensus of $0.49; revenues rose 19.3% year/year to $78.5 mln vs the $78.6 mln consensus. The fourth quarter results were negatively impacted by amortization of acquired intangibles and transaction costs related to the acquisition of Opus Healthcare Solutions. Also impacting the results were decreases in collections from the co's revenue cycle management division due to record snowfall across the East Coast and seasonality.

More than the miss, the chart has been hurt by the selloff (like many other stocks) but today's earnings report pushed it down below the 200 day moving average. With the same caveat I will use for any selling... (i.e. if the market goes on a V shaped bounce all sales will be seen as foolish) I am going to close the last of this position out today around $57.50 (about a 10.5%) loss. After all the selling earlier in the month, we only had a 0.5% exposure remaining so no big deal.

I'll continue to look for new names to redeploy into who have less headwinds in their charts.

Quality Systems, Inc. engages in the development and marketing of healthcare information systems in the United States. Its system automates various aspects of medical and dental practices, as well as networks of practices, such as physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. The company offers proprietary electronic medical records software and practice management systems.

No position


Riverbed Technology (RVBD) Rocked by Blue Coat Systems (BCSI) Guidance

Blue Coat Systems (BCSI) had a solid report last night but in a trend I am seeing in some other sectors (namely retailers) provided guidance that was below analysts estimates.
  • Security hardware and software maker Blue Coat Systems Inc. on Thursday posted a profit for the fiscal fourth-quarter, lifted by higher sales as companies resumed spending on technology after a lull during the recession. But the company's guidance missed Wall Street's expectations.
  • For the current fiscal first quarter, Blue Coat said it expects to earn 35 cents to 40 cents per share, excluding items, on revenue of $121 million to $126 million. Analysts were looking for 40 cents per share and $132.1 million in revenue.
The stock is down over 20% in early trading (seems like a massive over reaction to these eyes) and unfortunately Riverbed Technology (RVBD) which competes in 1 of Blue Coat's 2 sectors is taking collateral damage this morning to the tune of -7%. Riverbed actually had begun to push it's head over some resistance areas yesterday so today's action is a bummer.

In the larger scheme of things, the past few weeks have been a quiet time for earnings reports but the ones that have come through have been mixed. Easy comparisons of the past year are quickly fading and analysts who are always behind the ball have been busy skyrocketing expectations for the future. Eventually they will go too far and even though Wall Street has now became a game of analysts low balling estimates so their investment banking arms can win future business by making CEOs look good - eventually we are going to reach a point where companies are unable to get out far enough in front of estimates to please the masses. I could see this beginning in earnest in around Q4.


As for the market today, treat it like a holiday as most anyone who matters is probably already at the Hamptons... of course some of them left their computers behind to 'provide liquidity'. I will continue of the mantra that unless a large emotional event happens that brings in humans, the market will slog sideways or ever upward. We have a small divergence between 200 day exponential v simple moving averages with the former at S&P 1102 (which is where the S&P 500 was turned back this morning) and the latter at 1105. I am using S&P 1094 as my 'floor' for now which was the key level yesterday... as long as that holds it's just a care free Friday. I would be shocked by anything other than one of those days we trade in a 5-6 point S&P range for 6 hours straight while computers collect rebates for their role in churning the market.

Longer term the question remains - yet another V shaped bounce or do charts ever matter again? If we slice right through these 200 day moving averages as if they don't exist - it would be atypical but what hasn't been? Looking farther out into the future a lot of talk of some sort of resistance areas around S&P 1130 so if 1105 is broken to the upside today or next week, I'd expect a run to that level and then we'll assess. A week from now we have a big labor report which I assume all those long lost census jobs (which for some reason did not show up in earnest last month) appear.

Long Riverbed Technology in fund; no personal position


Congress Weighs Private Pension "Bailouts" (Just Don't Call it a Bailout)

Must be nice - no matter how underfunded your pension is or unrealistic the benefit is compared to those of the peon class who must deal with (mostly self funded) 401ks, Congress is willing to buy the votes with the taxpayers monies. If Congress is seriously willing to bailout PRIVATE pension plans one imagines it is going to be a slam dunk once the bills come due in the PUBLIC pension plans - a prediction I've long held.

Another in a long list of "turn your grandchild upside down and shake out his pockets" - no price is too much to buy votes. (in this case 10 million of 'em!) Plus the all important "business interests" are gleeful if they can pass the costs to the taxpayer, so more political contributions from their ilk. 3 years ago we'd be outraged... now it has all just become a big laugh aka "business as usual" in Cramerica.
  • U.S. lawmakers are laying the groundwork for a possible federal bailout of some faltering pension plans that are jointly run by companies and unions. The effort reflects a worrisome new problem in the nation's troubled retirement-savings system: the grim financial condition of such pension plans, known as multi-employer plans. They are common in the hotel, construction, trucking and other industries, and cover about 10 million workers, or almost one in four workers who have a private pension.
  • Many multi-employer plans are struggling after years of financial hits and relatively light regulation. In the past two years, almost 400 plans have announced they are in bad condition, according to lawmakers.
  • In response, some lawmakers are pushing a plan that would provide federal aid to a few of the ailing pension funds. But some conservatives and anti-union groups oppose the aid effort, arguing it could lead to a broader taxpayer bailout of the whole class of pensions, costing tens of billions of dollars. (don't even bother protesting - we already know it is inevitable in Bailout Nation)
  • A 2009 study from ratings firm Moody's Investors Service estimated that the country's largest multi-employer plans have long-term deficits of about $165 billion.
  • Legislation sponsored by Sen. Bob Casey (D., Pa.) would provide federal financial assistance to a few of the more troubled multi-employer plans, including a Teamsters Central States fund and another Teamsters pension plan in western Pennsylvania.
  • Mr. Casey said his approach is not a federal bailout. (uuuhhh) His bill would make a federal agency, the Pension Benefit Guaranty Corp., responsible for the longer-term costs, and would cost taxpayers an estimated $8 billion over the next decade. He said troubled plans taking advantage would have to pay the first five years' worth of retiree benefits themselves.
  • The Moody's study estimated that multi-employer plans in the construction industry are only about 60% funded, with long-term liabilities of $158 billion versus assets of $85.5 billion. In the transportation industry, including many Teamsters plans, the overall funded status was 58.6%.

Long time readers will know in all the pieces I've written on pensions the past 3 years, that the solution thus far has been to change the math. That fixes everything... or at least kicks the can - and what states, cities, private business has been doing for years. If there is not enough money, it's the fault of accounting. Looks like Congress agrees!
  • A separate provision moving through Congress would buy time for struggling private pension plans through accounting changes that would let them spread recent losses over longer periods. That provision is part of a bigger economic-relief package sitting in Congress.

Surprise, surprise - employers are thrilled with anything that shifts costs from them to the taxpayer!
  • Many employer groups are supporting lawmakers' efforts. A letter on Thursday from a wide array of employer groups, including the U.S. Chamber of Commerce and a number of construction and transportation groups, encouraged lawmakers to "continue to work…to find appropriate solutions.

The surreal life continues... and shall only grow from here.
  • A number of conservative groups, including the Alliance for Worker Freedom and the Competitive Enterprise Institute, wrote in a letter to lawmakers this week: "Using taxpayer funds to pay for private pensions would be a first" for the federal government.
There's been a lot of "firsts" the past 3 years... expect many more in the years to come.

Mutual Funds: It's All About the Stars

A fascinating read via CBSMarketwatch on how Morningstar's "stars" have come to dominate the industry. Being a mutual fund investor of one sort or another since the late 80s, this struck me - while I look at performance, the stars mean nothing to me. But it looks like in K.I.S.S. world, people want something easy and digestible and stars it is! The fund flows by stars really got to me, especially considering many fund flows are 'locked' into small subsets in 401k plans... which tells me if you exclude those funds within 401ks (in which case the investor is 'captured' and thus has fewer choices), the performance chasing is even greater outside 401k plans than the figures in this story.
  • Tim Courtney decided he'd had enough. In meeting after meeting earlier this year, he and his colleagues at Burns Advisory Group had recommended mutual funds to prospective clients, only to be hit with the same response almost every time: Why are you telling me to invest in a three-star rated fund?
  • That sums up the way many investors allocate money to funds -- look at products that have four- or five-star ratings from investment researcher Morningstar Inc., take that as a seal of quality, and hope for the best. Such decisions are perhaps even more common in volatile markets, when anxious investors view top-ranked funds as somehow better-equipped to handle adversity.
  • Five-star funds in particular seem to have their own allure. Even in 2008's brutal market, when the other star-rated funds saw net outflows ranging from $111 billion for three-star funds to $14 billion for four-star funds, five-star funds enjoyed $67.5 billion in net inflows. The trouble is that investors seem to forget that star ratings are backward-looking, based on a fund's past performance...
  • Courtney and his colleagues went back to Dec. 31, 1999 and studied the subsequent 10-year performance of five-star rated funds. What he found might convince investors to kick their star-rating habit. Of the 248 stock funds with five-star ratings at the start of the period, just four still kept that rank after 10 years. And the 218 domestic stock funds with the rating typically lagged their category averages over the period -- not just the benchmarks, but other mutual funds. (I will assume a lot of this is massive asset inflows which make keeping performance going very difficult) In other words, it's not just that five-star funds don't, on average, continue to lead their peers -- they actually do worse in subsequent years.

Some amazing statistics:
  • But Courtney's findings will have to go a long way before investors lose their starry eyes. Four- and five-star rated funds captured about 72% of the roughly $2 trillion of net inflows into all funds with star ratings over the decade through Dec. 31, 2009, according to Morningstar. Thirty percent went into three-star funds, while less than 1% went to two-star funds. The numbers add up to more than 100% because of net outflows from one-star funds.
  • There are valid reasons for inflows numbers, for instance the fact that some extremely good funds are four- and five-star rated. But the figures also suggest a strong element of performance-chasing -- returns that by definition are in the past and may not be repeated.
  • "Investors use the star ratings to the exclusion of other data," he said. "It's very frustrating."

Thursday, May 27, 2010

Bookkeeping: SHOO'd Away

Well I appreciate when my losses come quick. This morning's short against Steve Madden (SHOO) lasted all of 5 hrs as the market melts up into the close. I am stopped out for a 2.9% loss as the stock breaks over the 20 day moving average. There is a small gap to resolve below $33 but it certainly won't be a fate for today.

The market is going right to 1102 on the close as HAL9000 smiles at it's technical efficiency and marksmanship.

No position


Apple (AAPL) Passes Microsoft (MSFT) to Become Second Most Valuable Company in the US

A quite remarkable run by Apple (AAPL) - the most 'teflon' stock in the market today. Considering Apple might only be around due to a $150M investment by MSFT in 1997... well what can you say. Yesterday, it passed Microsoft (MSFT) in market capitalization to slide into the #2 spot amongst US based companies. (it passed Walmart not 3 months ago) All that is left is to surpass ExxonMobil (XOM) and the crown goes to Steve Jobs. One wonders where it ultimately tops out - the growth is still there; the stock has doubled in the past 52 weeks. A doubling in value from current levels takes it over $450B market cap range.

  • Since September 16, 1997, when Jobs returned as CEO and Apple shares traded at $5.49 per share, the stock has surged 4,346 percent and now trades at $244.11 per share. Over the last five years, Apple's stock has grown about 600 percent while Microsoft's managed a modest 5 percent growth.

  1. ExxonMobil: $287B
  2. Apple: $229B
  3. Microsoft $227B
  4. Walmart $190B

Market capitalization is calculated by multiplying the share price times the number of outstanding shares. It is often used as a public metric of a company's overall net worth.

No positions

S&P 1094 Breaks

After a few hours of sitting right near or at S&P 1094, we appear to be moving above it now. 1102 is the real key figure but you can almost hear the "don't fight the Fed", "the liquidity tsunami is overwhelming" talk now. For many many months on end it has been a market that simply churns upward only stopped by the times human emotion overwhelms the computers. When that happens selling overwhelms and we drop; otherwise 8 out of every 10 days it's the slow churn upward.

If we once more pull off a V shaped bounce and cut through these next major resistance areas as if they don't exist, I shall once again be slack jawed but no longer in awe. It is now par for the course and there is almost an inevitability about it. Frankly in about 40 S&P points all this will have been a bad memory and 40 pts can be taken care of in 1 or 2 premarkets.


Bookkeeping: Beginning Spreadtrum Communications (SPRD)

I don't normally buy stocks that are near parabolic but the valuation case for Spreadtrum Communications (SPRD) is compelling. Further it's in one of my favorite sectors - chips for wireless, so this can replace some of the tech stock exposure in the same space I've sold off in the past few weeks. The company deals both in baseband and RF semis; the latter being the same space as TriQuint (TQNT), Skyworks (SWKS) et al... but in China.

Spreadtrum Communications, Inc., a fabless semiconductor company, designs, develops, and markets baseband processor solutions for the mobile wireless communications market. It sells products directly to brand manufacturers, independent design houses, and original design manufacturers primarily in the People's Republic of China, Hong Kong, and Macau.

Website here.

That said, I'm hoping for some sort of pullback and the name is relatively new to me so I am going to start small - 0.5% exposure - to become familiar with how it acts. So I'll throw a starter position on and monitor from there. Being a Chinese stock I expect the typical wicked volatility but if analysts estimates of 91 cents are anywhere near correct we have a 9x forward PE ratio for a company whose revenue has jumped from $8M to $52M in a year. That estimate is up from 32 cents just 30 days ago but the range is massive ($0.54 to $1.17) so analysts are guessing wildly.

Technically? The best stock I can find right now. It even came back to fill the gap created from it's earnings surprise.

A look at last earnings report - full report here.
  • China's Spreadtrum Communications Inc., which makes chips for wireless phones, posted a first-quarter profit Monday, reversing a loss a year earlier as revenue grew more than six-fold.
  • The company earned $6.6 million, or 13 cents per American Depositary share, compared with a loss of $8.3 million, or 19 cents per share, in the same period a year earlier. Adjusted earnings were $8.7 million, or 17 cents per share, in the latest quarter.
  • Revenue jumped to $52.1 million from $8.2 million, beating the average forecast of $42 million.
  • The company said improvements to product quality and customer service helped it gain market share during the quarter.
  • For the second quarter, Spreadtrum is forecasting revenue of $65 million to $68 million. Analysts expected $44.4 million.

A compelling announcement from late March as well... a quite prominent PE firm named Silver Lake Partners made an investment.
This helps not only from a credibility level but potential management or industry expertise. It appears to be Silver Lake's first foray into China.
  • Spreadtrum Communications, Inc. (Nasdaq: SPRD; “Spreadtrum”), one of China's leading fabless semiconductor providers supporting both 2G and 3G wireless communications standards, and Silver Lake, one of the world’s preeminent technology investors, today jointly announced that Silver Lake has acquired a minority stake in the Shanghai-based company.
  • “We are very pleased to have Silver Lake become not only one of the largest shareholders of our company, but also an important strategic partner,” said Dr. Leo Li, President and CEO of Spreadtrum. “We believe that Silver Lake’s deep domain expertise and extensive industry network will benefit Spreadtrum significantly. We look forward to our partnership with Silver Lake as we enter our next phase of growth.”
  • Dr. Eric Chen, Managing Director at Silver Lake, said, “We believe Spreadtrum will be a key enabler of China’s home-grown 3G national wireless standard, representing the power of technological innovation in the Chinese economy.” He added, “The management team has put the company on a convincing growth trajectory and we are excited about Spreadtrum’s prospects as China becomes home to globally competitive fabless semiconductor players over the coming decade. We are committed to working with the company to seek transformative growth opportunities.”
  • .... pleased to announce this transaction as Silver Lake’s inaugural investment in a Chinese-based entity. We look forward to working closely with Spreadtrum to execute its growth strategy.”

Long Spreadtrum Communications. TriQuint Semi in fund; no personal position

Bookkeeping: Closing NetLogic Microsystems (NETL)

Same caveat as the previous post... if the market is about to embark on the V shape recovery to nirvana ANY sale made today will look foolish. That said, you have to go with probability and assume the atypical is not the new normal.

I am going to sell the remaining 0.5% exposure in NetLogic Microsystems (NETL) for a 6% loss as the stock broke support, and has now rallied back into resistance. This is a nice short set up at this moment, but all it takes is 1 gap up in a morning and the whole complexion of the chart changes to positive as the student body rushes in, afraid to be left behind by the next uber rally.

No position


Bookkeeping: Short Ross Stores (ROST), Steve Madden (SHOO)

With the constant gap up or downs to open each session it is nearly impossible to do anything overnight with the general indexes, so I'm going to make some attempts on the short side with individual equities. I actually got both these ideas from "RevShark" over at Realmoney.com - when I looked at the charts they are exactly what I typically short. But frankly there are about 500 other charts that look identical and if the market blasts through 1102 on the way to nirvana the individual name will mean nothing as you see on your screens today when almost every stock is green.

These are 2 retailers with almost identical set ups.

I am shorting about 2.2% exposure in Ross Stores (ROST) around $52.70; I will stop out just over yesterday's intraday high so $53.80 which will control any loss at 2%.

I am shorting about 2.8% exposure in Steve Madden (SHOO) around $33.40; I will stop out just over the 20 day moving average of $34.30 which will control any loss at 3%.

Again let me reiterate there are 100s of identical chart and these are textbook short set ups... stocks that have broken support and have rallied back to the level of the break. (frankly both have decent fundamentals as far as retailers go) But picking and choosing individual equities means very little nowadays as we continue "student body left" trading (everything must be bought, or everything must be sold) that has dominated markets since 2007. At this point it seems we are never going to go back to a 2 sided market where some stocks go up and some stocks go down based on individual merits. That's just not how HAL9000 works.

Short Steve Madden, Ross Stores in fund; no personal position

Back to S&P 1090

I am not sure what the significance of this 1090 level is other than it's where the market has topped out intraday 3 of the previous 4 sessions. S&P 1094 holds a bit more significance to me, but 1102 is the great line in the sand.

Higher up the chart we can see the 50 day moving average is falling by the day, it is now down to 1142 and the slope has turned from positive to negative for the first time a while (actually other than a few days in Feb 2010, the slope of the 50 day has been upward or flat since mid March 09). It is hard to be truly bullish until the S&P 500 jumps back over that level AND the slope flattens and then turns more upward. But I suppose all that will take is 3-4 more nice premarket moves, a few global backstops, a QE announcement by the ECB and presto magic. All problems kicked to 2012.

Again let me reiterate, "V" shaped bounces just are not typical but in the back of every bear's mind is how atypical the rally from March 2009 has been and how their use of technical analysis to short at key resistance levels has blown up in their face repeatedly as central banks wage war on fiat currency. Let us see how quickly things turn from fear to greed.


David Einhorn Op-Ed: Easy Money, Hard Truths

Hedge fund manager David Einhorn has fast become one of the up and coming stars in the financial world after his calling out of Lehman Brothers pre death spiral. But he was certainly an up and comer before that, and has now become one of the more widely watched investment gurus.

Einhorn has become a bit of a gold guru as he shares many of the same worries I do. [Oct 19, 2009: David Einhorn's Speech at Value Investing Congress]

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar.....

... I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

But most of all I appreciate his lack of political correctness and willing to speak the truth, or at least the version of the truth I share - the nonMatrix world. His co-authored op-ed back in 2009 on our financial oligarchy [Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn] should have been the framework for any serious financial reform in this country.

  1. The End of the Financial World as We Know It
  2. How to Repair a Broken Financial World


Today he had another fantastic piece of work in the New York Times, 'Easy Money, Hard Truths' which long time readers of FMMF will see overlays the concerns I've been outlining year after year. In this piece David believes the United States will not be able to kick the can to our grandkids... in fact, our generation will be the one paying for our non stop excesses. Again let's be clear - the United States, with the ability to print currency up the wazoo can never technically 'default'. It can just steal all your hard earned savings by devaluing each of those IOU's you carry around in your wallet and purse with headshots of Washington and Lincoln. Which is where we are headed.

Einhorn makes an EXCELLENT comparison of the federal government to our automotive companies cost structure - the very thing that led them to bankruptcy. [Jan 24, 2010: For the First Time, More Union Workers Work in Government versus Private Sector] As I have mulled the federal worker wage and benefits the past few years, I keep coming back to the out of whack labor costs (and job security - literally there have been job banks where 'unemployed' people are paid to sit in a room and play cards all day - getting paid - due to union contract) in the car companies as the closest parallel. This continued for years, until finally a "black swan" event caused reality to be imposed. Of course General Motors or Chrylser could not print money to kick the can down the road - which is a key difference.

I encourage you to read this entire piece - and pass it along. (click me to exit the Matrix)

A few clips:
  • Are you worried that we are passing our debt on to future generations? Well, you need not worry. Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.
  • According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market.
  • We have not seen the bills for bailing out Fannie Mae and Freddie Mac [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. [Nov 18, 2009: Toll Brothers CEO - "Yesterday's Subprime is Today's FHA"]
  • Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.
  • A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs.
  • How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.
  • Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
  • The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues
  1. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms?
  2. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?

  • It was once unthinkable that “risk-free” institutions could fail — so unthinkable that the chief executives of the companies that recently did fail probably didn’t realize when they crossed the line from highly creditworthy to eventually insolvent. Surely, had they seen the line, they would, to a man, have stopped on the solvent side. Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?
  • I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.
  • Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.

This is just the intro - there is 2 full pages after that of must read content.


[Jan 28, 2010: Senate Votes to Increase Debt Limit to $14.3 Trillion]
[Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]
[Dec 30, 2009: Eric Sprott Wonders if US Debt Scheme is Simply the Biggest Ponzi Scheme Ever]
[Aug 26, 2009: US Federal Budget in Pictures]
[Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]
[May 29, 2009: In 1 year, US Taxpayer on the Hook for $55,000 More per Household]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

Ignore Yesterday, it Never Happened - Meanwhile Europeans Making Hard Decisions, while Americans Layering on More Debt

Back to our regularly scheduled premarket rallies. Actually we were in this exact same spot 24 hours ago with a surge in premarket; groundhog day. Today's reasoning appears to be the Chinese saying they love European debt after all.
  • Stocks and U.S. futures surged and the euro snapped a three-day decline against the dollar as China said it remains a long-term investor in Europe, damping concerns that the region’s debt crisis will worsen.
As I've stated in multiple entries, the headline driven market is impossible to short overnight since you can be taken out and shot on a comment here or a rumor there. Technically the reversal yesterday should have been a great place to layer on shorts as the action was putrid... but anyone who did is being taken out by stretcher this AM. Volatility remains high and so much of the action is happening outside normal market hours - same old, same old.

Back to staring at S&P 1090, 1094, and 1102. Perhaps SuperGeithner can take off his cape for a moment & make an announcement via Europe tomorrow in U.S. premarket and goose this baby to where it "should" go.


In totally unrelated news let me go on a tangent. It appears without the ability to print money from thin air we are seeing multiple European countries in the past 6 weeks take action against their public sector workers ... it actually started with Ireland in 2009. Greece, Spain, Italy.. not to mention a lot of smaller Eastern European countries - many are finally coming to grips that without the ability to steal from their savers via devaluation they have to face reality. And these are the "socialists"!
  • Italian Premier Silvio Berlusconi said Wednesday that euro24 billion (nearly $30 billion) in budget cuts aimed largely at its bloated bureaucracy are essential to restore confidence in the euro and to stop Italy living beyond its means. Berlusconi said "this crisis is like no other," mandating significant and coordinated austerity measures.
  • "In this way, Italy's social spending has gone out of control and has transformed itself into subsidy spending. This irresponsible system worked as long as it was able to resort to devaluing currency, and as long as you could raise taxes," Berlusconi said. (again this is a "socialist" talking - not a Tea Party member)
  • The measures would trim Italy's deficit from 5.3 percent of economic output in 2009 to 2.7 percent by 2012 (U.S. is well over 10% as we speak and looking to add more with a new $200B measure of handouts working its way through Congress)
  • The strategy includes a three-year wage freeze for public workers and pay cuts for highly paid civil servants and Cabinet minister. (can you imagine this happening at the federal level in the U.S.?) Berlusconi said that public workers need to make the biggest sacrifices because of the job security they enjoy. (wow, an honest comment)

Meanwhile the "capitalists" of America are carrying on the kick the can policies - no need to make hard decisions when you can add debt to fix a debt problem. For example as of last night, those of you in Illinois who cannot make your pension payment? No problem - just borrow more; don't let minor things like balanced budgets get in your way when you can pay off the Visa card with a new Mastercard. The state House is on board!
  • Illinois is finally on its way to having a new budget. On Tuesday night the House approved a spending plan that relies heavily on borrowing and pushing off payment of many bills. It took several tries, but the House narrowly agreed to borrow to make a $4 billion payment to the state's 5 public pension systems. The Illinois House passed a similar plan with bipartisan support last year.
Boo yah... can kicked.

Why should readers in the other 49 states care about Illinois? Because eventually you will be bailing out the state's pension fund. It will be the "right thing to do" for your fellow American. [Jan 5, 2010: FT.com - US Public Pensions Face $2 Trillion Deficit]

Wednesday, May 26, 2010

Another Downside Reversal

Barring a miracle here in the last 25 minutes, this does not bode well. The only people who made money today were those who bought the close yesterday and dumped in morning's gains created by the now tired phony premarket - it remains a daytraders market and not a place for 'investing'.

On the economic news front, if you take out Boeing's (BA) impact on durable goods (a very volatile number) it was a quite poor report. So many people only look at headline figures nowadays it is quite pathetic. Yesterday's Case Shiller showed the 6 straight month of home price declines despite record affordability, record mortgage rates, and record handouts by government to get you to buy a home... all these steroids and we still can't stop the market from going from where it 'wants' to. Just wasted money thrown down the rabbit hole. Oh well, just more money to print in the future.

I think the bulls great hope was Superman Geithner could wave his magic wand over Europe and get them to do his bidding. Rumors of such action were rampant yesterday (Oh please Mr Trichet cut your rates to 0 and pledge to buy as much debt as necessary to stop reality from ever happening). Each day that does not happen, the bulls dab their eyes in tears that global moral hazard is not growing ever more. Backstop everything! Print currency! Save us from the reality of a few decades of excess debt by... piling on more debt! Just do it! The hilarity of it all is you can't really hold short positions overnight because you get the announcement as we saw that Sunday night 2 weeks ago and you're down 4% in an instant on the index by Bailout Universe.

Let's see what sort of random action we have in the closing 20 minutes, based on the past 3-4 sessions we could go +/- 1%... which leads to my earlier point. You cannot invest in this market - it's simply a game of algos and daytraders chasing HAL9000. What rhyme or reason can you put to a market that can move +1% in 15 minutes. Or goes up 87 out of 90 Mondays. Or is up in premarket 90 out of 100 days.

p.s. this is the 3rd session of the past 4 where S&P 1090 was a brick wall. Hence we are in a huge 50 point range (1040 to 1090) waiting for an ECB Fed like action ... or pouting/selling by "free market capitalists".


2010 Fund Performance Period 5

The mutual fund is now on schedule for a late summer.early fall 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)


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 fifth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

Period 5 was in stark contrast to periods 3 and 4 which were almost identical non stop low volume, low volatility rallies. Greece finally mattered and Europe was at the tip of tongue every day. The period marked the first 10% correction since the March 2009 low, and in fact was highlighted by a one day 10% intraday 'correction' (crash!). China continued to underperform and was joined by such bourses as Brazil. Commodities were crushed - oil for example fell some 20% in the period, copper even more. Fund performance was very good relative to the market as we were able to stay in the green despite some wicked volatility. As individual stocks broke down our cash position went up and long exposure reduced, and we were able to hedge intraday to make some gains on the short side with index positions. If not for a "suspicious" 1.5% rally in the closing 18 minutes of this period, performance would have been even better relative to market.

For the fifth "four week" period of 2010 the fund returned +2.4%, versus the market's -10.8%, so an outperformance of +13.2%.
On a cumulative basis in 2010 the return is +32.2%, versus the Russell 1000's -2.1%, so an outperformance of +34.2% for the year to date. (thus far 20 weeks)

Period 5 was a period of both absolute performance (making money) and relative performance (outperforming the market) - our favorite kind. The yearly goal of beating the index by 15% is on track.


*** Long/Short Fund Discussion below

Overview: The first part of this period was looking quite sickly as we continued recent under performance as exhibited in period 4. This was due to the market making 1 day directional changes in directions as volatility picked up - further these changes were right around key moving averages so we were whipsawed. However through week 2, the trend of the market began down and this caused many of our positions to be eliminated or shrunk. Hence by the time the real selling went off, we were in an extremely high cash position. This was offset by index position plays (puts and short TNA i.e. long TZA) used mostly intraday. Due to headline risk (i.e. one Monday when the Europeans announced their version of TARP the market gapped up 4%) it was difficult to hold short exposure overnight since one +4% day against an bevy of index puts will ruin your month if not quarter. Please note the "short" exposure listed below is what I carried over the weekend and understated what I had during the week since the risk of "Sunday night bailouts" puts the fear into any short. Hence some profits were left on the table but considering the massive volatility (a 10% intraday crash, plus a 4% premarket gap up not to mention numerous 1-3% moves) I am very happy with this period. In fact a +2% gain in a -10% market makes me much happier than a +12% gain in a +8% market.

Below is the chart for period 5:

Week 1: Entered the week: Cash 52%, Long 44%, Short 4%

Ironically I entered this week with the highest long exposure in a long while as I was exasperated by the "market that cannot go down". I was obviously a contrary indicator. Performance this week was actually poor as the market was showing the first signs of increased volatility and changing directions around a key moving average (20 day) so my exposure was being thrown off as I kept going with some index shorts when the market fell below this level or vice versa.

On the long side:
  • I had piled into some TNA ETF and SPY calls the previous Friday on a breakout over S&P 1214. That looked great as the typical Magical Monday seemed underway, but once S&P tagged 1220 it reversed. Since nothing major happened other than a modest pullback I kept the positions on. Tuesday started slightly down but the severe drop happened suddenly in a 45 minute stretch mid day. So it was time for damage control since I was badly positioned. After falling to as low as S&P 1190, we saw a bounce to 1198, where I dropped half my SPY calls for a loss. When the market failed to make a material move up after that, I sold the other half of the calls and the TNA ETF.
  • I was stopped out of 60% of Bucryus (BUCY) on a break of support - the stock continued weak the rest of the week, where I cut a bit more.
  • I added to Atheros Communications (ATHR) after it came down to fill a gap created on one of the best earnings reports of the past 3 weeks.
  • I sold some Skyworks Solutions (SWKS) ahead of earnings to be safe - no need, the company had a nice report and was up in a bad tape Friday.
  • I was stopped out of about half my Netlogic Microsystems (NETL) on an old limit order not well priced, as it reacted poorly to what I considered a good report. Just the random nature of markets to earning reports.
On the short side:

Week 2: Entered the week: Cash 68%, Long 25%, Short 7%.

Two words - FLASH CRASH! (or as told to us by CNBC promotional staff "Fat Finger"!) Thankfully early in the week many stocks were flashing danger signs and breaking down so our cash quickly rose and we were able to make some money on the short side intraday in this very volatile week. I was unfortunately stopped out of a very solid short exposure Wednesday AM, by a quick headfake or else profits would have been greater. Even if I had covered before the flash crash as Thursday was ugly pre flash.

On the long side:
  • Monday I closed the last of coal/mining related Alpha Natural Resources (ANR) and Bucyrus (BUCY) positions as the charts had rolled over late the previous week. Bucyrus actually went from breaking below its 50 day moving average late last week to breaking the 200 day last Friday. Ditto for ANR - ugly set ups but now they can gap up Monday on Euro party time.
  • Tuesday as the market had a big hit, some of our charts began to break down so I took action: Atheros Communication (ATHR) broke its 50 day, I cut the stake by 75%; took more profits (1/3rd of remaining position) in homebuilder Lennar (LEN) simply to lock them in, in case the market took them away; cut Riverbed Technology (RVBD) in half to lock in profits as there was a gap that looked like it needed to be filled; sold half of Skyworks Solutions (SWKS) to lock in profits as it had a similar "gap" situation as Riverbed.
  • Wednesday, as the market fell again - more stop losses. I closed completely out of L&L Energy (LLEN), 2/3rds of Discover Financial (DFS), and 2/3rds of Quality Systems (QSII).
  • Thursday morning, stopped out of 2/3rds of Indian bank HDFC Bank (HDB).
  • Restarted a smallish position in industrial name Cummins (CMI).
On the short side:
  • I assumed the Greece bailout was "in the market" and with the S&P 500 below the 20 day had some SPY puts on from late last week; those were stopped out for loss Monday as the S&P 500 broke back ABOVE the 20 day.
  • I tried another SPY put position (along with short TNA ETF) Wednesday - but a 20 minute splurge over 1172.50 which was my stop out area caused me to stop out... and of course the market promptly rolled over after spiking to 1176 for only a very short while. Another loss.
  • After the S&P 500 had broken January 2010 highs of 1150 and seemed to still be going down, I placed some small exposure into SPY puts in the 1130s, within 30 minutes the S&P 500 crashed and I sold at some level - no idea where but the position obviously paid off. Wish it had been bigger.

Week 3: Entered the week: Cash 86%, Long 11%, Short 3%.

After flash crash Thursday, and a nasty Friday where the market closed at the lows the market was greeted with Bailout Monday European version. A 4% gap up Monday AM was the highlight of the week. This caused the S&P 500 to bounce off the 200 day moving average almost right into the 50 day, where it stalled. The rest of the week was not as pleasant as more selling ensued. I did some buying to redeploy some of the cash in case this would be a "V shaped" bounce as it looked to be Monday, but still did not even reach 20% long exposure.

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 had not touched for months as the Euro was in freefall and I was worried of some snapback.
  • 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.

Week 4: Entered the week: Cash 75%, Long 18%, Short 7%.

This ended up being an ugly week with 4-5% losses across all major indexes; it would have been much worse if not for a magical 1.5% rally in the closing minutes of Friday's session. Early in the week more long positions were cut as they broke support. I also closed out some positions to realign the portfolio in a less tech heavy way. After numerous short side plays with the indexes, I had been looking to go long in the S&P 1060s for a trade, which was executed Friday morning to positive effect. It was not worth buying individual equities at that point because the action was so quick and building intermediate term positions was too onerous.

On the long side:
  • Monday, sold half of Lennar (LEN) and BorgWarner (BWA) for 3 and 4% losses respectively.
  • Tuesday, cut Skyworks Solutions (SWKS) by 2/3rds but didn't like the looks of the chart and said I'd most likely sell the last 0.3% in short order. Which I did the next day.
  • I had attempted to get back some Riverbed Technology (RVBD) the previous week when it began bouncing nicely but the market selloff caught this stock in its wake, so I was forced to sell 60% for a 4.5% loss.
  • Wednesday, added back to the Ultra Silver (AGQ) I had sold the previous week (20% of the position) 14% lower.
  • Closed hotel chain and long time holding Wyndham Worldwide (WYN). Chart was weakening severely.
  • Closed Netlogic Microsystems (NETL) - another chart situation and clearing out space for some potential buys in the future.
  • Friday I began to hedge long in the morning with TNA ETF in the lower S&P 1060s, I added more nearer to 1070 as well as intraday SPY calls. I sold one batch mid day and then the rest once S&P 1079 broke to make sure I locked in profit.

On the short side:
  • Too many "Short TNA" and "long SPY Put" positions for intraday action to mention; most were short term intraday to avoid overnight headline risk.


[Apr 28, 2010: 2010 Fund Performance Period 4]
[Apr 1, 2010: 2010 Fund Performance Period 3]
[Mar 2, 2010: 2010 Fund Performance Period 2]
[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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