Monday, July 12, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 49

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Year 3, Week 49 Major Position Changes

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

Cash: 70.6% (v 78.3% last week)
18 long bias: 27.8% (v 21.1% last week)
2 short bias: 1.5% (v 0.6% last week)

20 positions (vs 19 last week)

Weekly thoughts
The market turned in a relatively predictable performance last (holiday shortened) week as silicon and carbon footprinted creatures both decided to student body right once more, after student body left"ing" for 2 weeks.   Risk on; risk off.  Wax on; wax off.  Whatever you want to call it in the most highly correlated market (and increasingly so) we've ever seen.  While many of the gains came in last half hour salvos the charts don't care how it is done; they just register the movement - so we seem to be back to the post 3:15-3:30 PM rally days of old.  The market has been feasting on premarket magic for much of the past 9 months, so this change to the 3:30 PM rally bring back memories of summer/fall 2009.  The market where almost all the gains are in the premarket OR in the closing 30ish minutes have been hallmarks of the move from March 2009; rendering much of the rest of the day somewhat moot.

I submitted last week that a move to S&P 1040 should be the minimum and if the 'action' is good more good be in store, certainly there was room for a run all the way to S&P 1100"ish".  1070 was the only key rest stop in between.  Both 1040 and 1070 were captured by end of week.  I am going to show below 2 separate charts of the S&P 500, one with the exponential moving averages and one with the simple; in the past two months the simple moving averages have seemed to held more sway.




Long story short, if you are not a daytrader or someone trying to turn on a dime simply be aware that S&P "1094 to 1100" is the key area ahead.  If these levels are achieved, the next objective are mid June highs of S&P 1130.  The market has been making a series of lower highs so surpassing 1130 would be a key achievement; something to keep in mind if and when.  Certainly probability says the indexes are rejected at the stone wall of 50/200 day, but historical references have been failing often the past year and a half, so open to any possibility.

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Aside from the general market there are many items at critical junctures - many having accomplished their cursory dead cat bounce from oversold levels and now reaching some resistance areas.   I could post 100s of similar charts, but let's look at two key ETFs.  Remember in this day and age of HAL9000 every stock in an ETF is the same stock... with hedgies piling in and out of ETFs as their weapon of choice, every underlying stock will go up or down - hence feeding the student body left cheer.

This is a key week for financial company reporting with some big players hitting - XLF is fast approaching key resistance.  Make or break it time.


After being *the* darling of the stock market in Q1 2010 as the "playbook for recovery" was utilized by the institutional money, consumer discretionary was dropped like Cleveland in a Lebron James made for TV special.  It too sits at a make it or break it area.



Others instruments, we are stroking our virtual chin as we wonder what they are 'saying' (if anything).

"Doctor" copper - much like the instruments above (remember, we are all one big monolith nowadays) has rebounded from oversold levels and ... (broken record) is at make it or break it areas.


Gold broke down for the first time since March as it 'felt' like a hedge fund blew up - word has it John Paulson suffered $2 Billion of redemptions so maybe he had to do some selling? Who knows.  It rebounded late week and (yawn) make it or break it.  I still have a sinking feeling about that potential double top formation.


The Euro and dollar continued their "Trading Places" characters - some resting on both late last week but both seem to be resting before continuing their new roles.  If so, a lot of "Euro to par" folks are going to be feeling foolish - at least near term.  A move in the dollar index over 85 would be key for the bulls to get their footing back.  Remeber, these currencies are *not* supposed to move with this sort of velocity ... but just another risk asset for HAL9000 to "wax on, wax off" with.



10 year bond?  After falling below 3% recently - stirring up fears of deflation and/or a new recession on the horizon, it regained that level late in the week, but thus far is yet another dead cat bounce actor.



And one for fun - I think I read that the Baltic Dry Index (shipping rates) is down 30 days in a row.  Essentially BDI has been taken hostage by China' whims.  When they are hungry for commodities BDI runs and we all clap and cheer and sing songs of green shoots.  When they pull back, BDI falls and ... well people try not to talk about it because it might upset the bull case. Shhhhh!



Speaking of which, China has been unable to get out of its own way... so weak the relatively minor 20 day moving average is acting as a noose around the neck   At this point the 'sideways action' (while the rest of the world rallied) is not looking so bad in comparison.  Another (wait for it) oversold bounce.


Needless to say the (quote-unquote) easy trades are in.  Now we have a bevy of items approaching make it or break it levels, within a stock market that has no memory from day to day (bipolar) and ready to react to each major earnings report as if the world is either ending or green shoots are going to take over the world.   Should be a lot of "fun" in premarket this week.

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Economic reports pick up this week after a slow one last week.  Last week saw even more weaker than expected day (ISM Services being the key) but it shows you the market often does its thing and the reaction to news is almost an afterthought much of the time.  Thursday of this week, even excluding the weekly jobless claims, is especially full.  However, earnings reports in the premarkets and after the bell will cause as much, if not more, volatility.

Tuesday - International Trade
Wednesday -  Retail Sales (market will knee jerk to this one), Business Inventories
Thursday - Producer Price Index, Empire State Mfg, Industrial Production, Philly Fed
Friday - Consumer Price Index, Consumer Sentiment


Some key earnings reports for the week:

Monday - Alcoa (who cares, but as the first company each quarter market is obsessed with it as some sort of tell on the economy)  Instead market should care about CSX (railroad) not for "hitting earnings" but what they see in the economy.
Tuesday - Intel: nothing else matters
Wednesday - market will obsess over Texas Instruments; for a gauge of the higher end consumer & business consumer I'd interested in Marriott instead. 
Thursday - JPMorgan will make sure you know it's the alpha male oligarch; however I bet trading is going to be off a bit since Q2 was so volatile and fixed income which has been the bread and butter for a few quarters might be light too.  We'll see if expectations were brought down enough.  In other news, before Apple reinvented itself, Google was the thing.  As if our entire economy is based on internet searches and how many people in the top 15% can buy higher end computers and gadgets.  Again, I'll be more interested in what JBHunt (trucking) company has to say rather than if "Google beats the whisper number!!!"  But JBHunt does not make for interesting financial entertainment TeeVee.
Friday - big day for our oligarchs aka taxpayer backstopped tools of "free market capitalism" Bank of America and Citigroup.  The parent of financial infotainment TeeVee, which also has a big financial arm ... oh yeah I guess they still make things some things as well as a side business, General Electric also speaks.

As I've been saying for about a month now, this is yet another easy year over year comparison (the last "very easy one") and the whole game on Wall Street is for execs to promise low, and beat.  (Alcoa being the exception as their execs find a way to miss 99 out of every 100 quarters). Analysts are happy to go along so their firm can win investment banking business and we all clap along in awe as we are "shocked" at the earnings beats!  Oooh! Ahh!  You mean the CFO winked at your earnings model estimates as "ok" and then they beat said estimates by 4 cents, goodness - what are the chances?  Get the seals clapping on CNBC - more estimates bested! The more important nuggets in these reports have nothing to do with the headlines, but since everyone needs to put in 5500 trades within 1.2 seconds of the headline hitting Reuters, only old fashioned people like me actually read reports anymore.  I'm a dinosaur and I still consider 3 seconds to be "long term".  

As always the reaction to the data is more important than the data.  Especially with guidance this time around.  In the go forward quarters, year over year comparisons are going to start getting much tougher.

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Did you make it this far?  Gosh you might be an addict to FMMF; support groups forming.  I'm in hour 3 of writing this piece - boo yah.  All this information handed to you, at no charge.  Lucky duckies.

For the portfolio I had essentially lifted all shorts coming into the week but the market was in limbo under 1040.  I said I'd decide what to do (sell the long positions I had bought in the depths of despair last Thursday) when I saw how the market acted around 1040.  There was a naughty little reversal Tuesday, but the premarket magic and roaring day finally showed up Wednesday ... which was the day we made some serious hay with some intraday long index positions as well.   I did throw on a little short exposure later in the week but a pittance.  We're waiting to see some signals before making any serious next level moves; for now just riding the wave and taking profits along the way as we crest upward.

On the long side:
  • Tuesday, I cut Powershares DB Double Long Gold (DGP) exposure by half as the gold chart broke support for the first time since March.  I wanted to see how things developed.
  • Wednesday was big money day - as the market surpassed Tuesday's intraday highs in the mid 1040s I went in with some SPY calls and TNA ETF. My objective was S&P 1070; did not expect it to happen with 24 hours.  I took half off Thursday AM as the market jumped right from the open and said I'd sell the other half of these positions on any break of 1067ish - no questions asked.  That happened within an hour, and we booked substantial wins for renting our money for just 4-5 market hours.
  • I closed the position in Cummins (CMI) as the chart was still weak at the time and my position size was smallish; by Friday the chart improved but the stock remains largely range bound.
  • Thursday, sold 2/3rds of VMWare (VMW) for a quick 10% gain in a week.
  • Sold 90% of Las Vegas Sands (LVS) for a 8.5% gain in a week; my limit sell price just missed or else it would of been double digits.
  • Sold 40% of Netflix (NFLX) to lock in modest profits of 6.5% and lower my cost basis.
  • Friday, I cut 30% of largest individual position Acme Packet (APKT) for a 10% gain in 6 days.
  • With the S&P 500 over my pivot point of 1070, I decided to replace the exposure I had sold earlier in the week with an ETF that would be easy to get in and out of, so back to TNA ETF with a new position.
  • Late Friday, I added to Salesforce.com (CRM) and Akamai Technologies (AKAM) along with topping off with some more TNA ETF.

On the short side:
  • I shorted some Priceline.com (PCLN) and Amazon.com (AMZN) Thursday.  I covered the former the next day for a 2% since that was a "yes or no" trade - either it was going to cross key resistance or not.

Sunday, July 11, 2010

Updated Position Sheet

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Cash: 70.6% (v 78.3% last week)
Long:
27.8% (v 21.1%)
Short:
1.5% (v 0.6%))


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)



SHORT



OPTIONS

Friday, July 9, 2010

Bookkeeping: Adding to Salesforce.com (CRM) and Akamai Technologies (AKAM)

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I doubled up on Salesforce.com (CRM) as the stock has yet to really run and should be able to move to $98 if the S&P can add to gains in the first half of next week.   This is a trading position added to the core position - I'll let it go around $98 and go back down to just the core exposure of 1%.   $98 would be about 8% from here so any move over $96 would be acceptable for a quick in and out.   A good report by Intel (INTC) Tuesday night would help the whole tech space.



Akamai Technologies (AKAM) - same general theme, looking to see if we can get a quick move to $46. (about a 6% move from here)  Added a 2.2% allocation to my small 0.4% that was sitting out there.



These are your prototypical high beta, hedge fund dominated stocks... as long risk is "on" they should do fine.  Until risk is "off" of course.

I added more "TNA" (3% allocation on top of the earlier 4%) as well here since I like the "action" in the S&P 500.  Barring any strange moves by the silicon ("011010011100") in the closing hour we should close firmly in the upper subrange of 1070 to 1100.  The lack of "give back" the past 2 days, after the big move earlier this week is a net positive.  Larry Summers willing, we get one of those traditional gap up M&A, Mutual Fund, China Rocks, Magical Mondays.

(EDIT 3:30 PM - reader makes a good point in comments section that on the simple moving average S&P 1076 is a small form of resistance aka the 20 day moving average.  I tend to focus on exponential moving averages so sometimes forget to check the other series.  Does not change the larger theme that S&P 1070 is holding, which is all that matters to me; 1070 has been a massive pivot point for over 2 months now.)

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

Bookkeeping: Covering Priceline.com (PCLN) Short

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Priceline.com (PCLN) is showing some decent strength here, although the close is more important than the intraday price.  This is a 50/50 ball at this point - so not my type of odds.  Plus risk is "on" today as seen by the moves in commodity stocks; and Priceline is one of those hedge fund dominated stocks - risk on, risk off blah blah blah.  Since the stock does not seem to care about "resistance" at both the 50/200 day moving averages and the S&P 500 has a potential for an extra 20-25 points before hitting the next level the bears will show up, the stock could continue upward in the near term.  I just put this trade on 48 hours ago so I am going to quickly cut it for a 2% loss; it is actually a name like fundamentally so you are always torn when you have a short side set up on the technical side with a company whose business you like.  Remember, PCLN has massive business in Europe so any thought process that Europe is recovering or at least not falling off a cliff (which the Euro seems to be showing) would be a big benefit to this company.

Of course if the market begins a selloff next week, and the S&P 500 falls below 1070 and stays there, in the "student body left" environment, PCLN will fall right along with it.  Just too early to tell right now.


No position

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Marketwatch: Average Equity Mutual Fund Crumbles 10.7% in Q2

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Per Marketwatch it appears the second quarter was another typical performance for the crowd that for the most part appears to be nothing more than closed index funds.  [Feb 5, 2009: Mutual Funds Have Tough Decade]  But I suppose we should clap a little since the equity mutual fund class a whole was able to "beat" the S&P 500 by 0.7% (-10.7% v -11.4%).  I'll break out the bubbly.

Sadly, only 3 funds in the entire equity universe were able to stay in the black for Q2.  Gosh, sometimes I wish I were up and running right now ;)  Can you imagine the mention in the following story "some no name fund with almost no assets and a pathetic marketing budget was up 11% for the quarter.  Due to an inexperienced manager, high cash levels (you call that investing?), a dual focus on fundamentals & witchcraft (technical analysis), exotic strategies such as "shorting", and an inability to stay inside a Morningstar box we warn you to stay away.  Without teams of eager CFAs trained on textbooks doing grunt work, and lack of access to institutional research, surely this performance is an anomaly.  To top it off you'd be forced to pay short term taxes due to the frantic trading style and as we all know it is far better to lose 10% in 90 days, than to pay Uncle Sam a dime.  Please continue submitting your quarterly or monthly investments to the 'name' fund families that we know and trust."


  • The second quarter brought investors in U.S. stock funds face-to-face with some ruthless mean girls -- April, May and June -- and the meeting wasn't pretty.   June busted stock mutual-fund portfolios all over, May unleashed mayhem, and April, if it wasn't the cruelest month, came close to it. The benchmark Standard & Poor's 500-stock fell 11.4% in the quarter, including reinvested dividends.
  • Taken together, the three-month stretch slammed U.S. stock fund shareholders with their worst quarterly loss since December 2008. The average domestic stock fund tumbled 10.7% in the period through June 30.
  • Moreover, the dismal showing wiped out the gains fund investors enjoyed in the year's first three months. For the year through June, U.S. stock funds were down 5.4% on average.

Morningstar box time!
  • Large-cap stocks, with their global footprint and strong financial shape, were widely thought to have staying power in a downturn, but that proved not to be the case. Large-cap growth funds lost 12% in the quarter, while large-cap value counterparts shed 11.7%, as a stronger U.S. dollar, the eurozone debt crisis and concerns about the global economy weighed on stock prices.
  • More domestically rooted midcap and small-cap funds made a relatively better showing; midcap growth funds, for instance, fell 9.7%, and small-cap growth portfolios dropped 9.1%.

The few who actually protected capital for the quarter:
  • In fact, only a handful of retail-oriented U.S. stock funds finished the quarter in the black, according to Morningstar. These include midcap-growth focused Monteagle Informed Investor Growth Fund (MGGAX) up 2.7%, and two large-cap oriented offerings: Stadion Managed Portfolio Fund (ETFFX) which invests in exchange-traded funds and was up 0.5%, and Wasatch Heritage Value Fund (WAHVX) which eked out a 0.2% gain.

Speaking of names we "know and trust"
  • The biggest U.S. stock funds -- accounting for a good chunk of the money investors have committed to the market -- came unmoored.  Among actively managed giants, Dodge & Cox Stock Fund (DODGX) fell 13.7% and American Funds' Growth Fund of America (AGTHX) lost 11.7%.
Impressive work for 90 days.
  • "The frustrating back and forth market ... has been a trader's heaven and an investor's nightmare," wrote Paul Nolte, managing director at investment manager Dearborn Partners, in a research note to clients.
Adjust or die; it's HAL9000's world and we only live in it. 

Or I guess in the mutual fund world, don't adjust and keep receiving the flood of 401k monies since the same few mega fund families have cornered the market.

Bookkeeping: Jumping Back into Direxion Small Cap Bull 3x (TNA)

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Yesterday's stick save in the closing 45 minutes (another "vertical" move) was a big help to the bulls.  Rather than a rejection of S&P 1070 and some close in the lower 1060s the S&P 500 finished right at resistance, which allowed the market a nice area to open at today.  It is a very sleepy Friday and they say don't short a quiet market.  With the random movement every day in the closing 30 minutes I am not sure if that holds anymore but whatever the case we have made mince meat of both the 1040 and 1070 resistance areas.  They only held for 1 session before being sliced through.



Therefore, I'd consider the stretch objective of "1100" (in this case about 1094) to be very much in play.  Since I've sold some individual equity exposure the past day, I am going to replace that with Direxion Small Cap Bull 3x (TNA) - a more modest 4%ish exposure simply to keep the portfolio pointed long.   I'll be relatively aggressive with this and not sell it unless the S&P 500 breaks S&P 1066 or so.

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I've been hoping for a move to 1100"ish" (i.e. the top of the two month long range) to give us much lower risk short entry points so it seems quite plausible this is going to happen.  I have no idea if we are going to make minced meat out of 1094 just as we have 1040 and 1070 - anything is possible, but with the 2 most important moving averages standing together in 1 spot, it would seem like a much stronger wall.   If indeed 1094 is broken the next objective to the upside is the highs from mid June i.e. that 1 day that started the huge selloff when we hit 1130 and then reversed.

So a quite simple game plan from here - drink Kool Aid in great quantities for about another 20-25 S&P points. Take profits in individual equities as offered and selloff much of what was bought between S&P 1010 and 1025 as we approach 1100.  If it works out that perfectly, we should have a bevy of short opportunities as many broken charts should have run into resistance.  At that point we get our short knife out.

Once (when and if) we are at S&P 1094 we leave it into the hands of the market (or PPT).  We'll either be "wrong" (stopped out of the shorts and forced to scramble remount a long campaign) or be "right" (the market rolls over and our shorts make us money).   I don't have a clue what the outcome is - but we'll adjust whatever the case.

Long TNA in fund; no personal position

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Are We Setting Up for a Repeat of Summer 2009?

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There are some interesting similarities forming on the charts in summer 2010 and summer 2009.  Let's ignore the macro news items which are quite different (remember back then, if companies announced they had no plans to go out of business we were thankful).

Excluding the extreme snap back rally in March, in 2009 the market rallied tremendously in spring and early summer (April-mid June) tacking on some 200 S&P points (750 to 950 areas) [27%] before running into a brick wall called the 200 day moving average. After such a huge move from March, many (hands raised) thought this was the end of the rally.  In fact when I began buying late February 2009 I thought the eventual upside would be 900-950 but I thought it would take quarters for that to fulfill... not 3 months.

The 50 day moving average had never crossed back over the 200 day since we had suffered such massive losses in the market in late 2008 and early 2009, so once the S&P 500 was rejected at the 200 day... it easily fell below the 50 day as well.  By the 2nd week in July the market had given back some 80 S&P points or a drop just under 9%.  The market was in no man's land as there was no major support anywhere below.... we were at the cusp of a head and shoulders formation.  Then we came into earnings season and in back to back session Intel (INTC) and Goldman Sachs (GS) blew the doors off earnings (and Meredith Whitney went short term bullish on banks).  From there we effectively rallied for the rest of 2009!

Fast forward a year, the market again rallied tremendously in late winter and spring (Feb-April) tacking on some 170 S&P points (1050 to 1220) [16%] before running into a brick wall called the 200 week moving average.  Unlike in 2009 the 50 day was well above the 200 but has since crossed below... which is the now infamous 'death cross' formation that is on every financial website.  The selloff has been much sharper in 2010 then it was in 2009... about 16% versus 9%.  But again we are on the cusp of a head and shoulder formation (the neckline needs / needed to be broken in both cases).  And we now come into earnings season.



As I've written the past 3 weeks I still believe U.S. multinationals are going to do very well - rich in cash, rich in global labor arbitrage, light on workers after massive slashing, and drunk on government spending and central bank stimulus so their consumers benefit - they remain the masters of the universe.  So Q2 2010 earnings should be quite good... another quarter of countless "beats estimates" I am sure.  But guidance is going to be more tricky this time around.  In the past two weeks a bevy of smaller (not multinational) names have reported very good earnings but soggy guidance and been punished.   So it should be interesting on how this turns out.  Our biggest boys report in the first 3 weeks of the earnings period i.e. next week through end of July, and then the focus is mostly on smaller and foreign stocks.  

In fact, Intel (INTC) is right around the corner on the 13th.  Let's see if the market can pull off yet another miracle in 2010, or we behave in a more traditional manner.  One key difference other than a difference expectations year over year, is a tsunami of global government spending (especially that of a U.S. and Chinese kind) were flooding the world with fiat currency; whereas most of those bullets have now been shot.  All that is left is a world full of desperate central bankers shoving easy money down every crevice.

Bookkeeping: Selling 30% of Acme Packet (APKT)

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Acme Packet (APKT) was one of the positions we put on into the flush down a week ago Thursday; it took a while to get going but is adavancing nicely the past 3 sessions.  With about a 10% gain in 6 sessions I am going to cut our largest long position back by 30% to lock in some profits.



Specific to Acme itself, the next sale will hopefully be closer to the 52 week high from mid June.  If it clears that level it should be very positive but of course all stocks are hostage to the greater market nowadays.

My game plan remains the same here, continue to liquidate long exposure as the market goes higher, especially if/when the S&P 500 can run into the 50/200 day moving averages.  So I'll shed things here and there if/as we keep advancing.

If we have a summer 2010 V shaped bounce and blast through those key resistance areas we'll have to readjust and then get back some new long exposure at the time, but until proven otherwise I'll assume a more normal behavior.

Long Acme Packet in fund; no personal position

Thursday, July 8, 2010

Why Did this Selloff Stop at S&P 1009? Fibonacci Tells All

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Reader David from the Garden State sent me an email last week after the hard selloff Thursday, to make an interesting observation.  Those of you in the hard core technician group are familiar with Fibonacci - I've done a few posts on him in the past.   Fibonacci's Wikipedia page is as follows:

Leonardo of Pisa (c. 1170 – c. 1250), also known as Leonardo Pisano, Leonardo Bonacci, Leonardo Fibonacci, or, most commonly, simply Fibonacci, was an Italian mathematician, considered by some "the most talented mathematician of the Middle Ages".[1]

Fibonacci is best known to the modern world for:
(1) The spreading of the Hindu-Arabic numeral system in Europe, primarily through the publication in the early 13th century of his Book of Calculation, the Liber Abaci.
(2) A number sequence named after him known as the Fibonacci numbers, which he did not discover but used as an example in the Liber Abaci.


Long story short, as part of the voodoo of technical analysis there are 3 key numbers:
  1. 38.2%
  2. 50.0%
  3. 61.8%
When a rally pulls back to a Fibonacci level, the math is as follows.  Whatever the length of the rally, you take away either 38.2%, 50.0%, or 61.8% to see Fibonacci supports.

Look at what happened in the S&P 500 in this selloff from the April peak.  The rally in March 2009 began off infamous 666.  It peaked at 1220.  That is 554 points of gains.  38.2% of 554 = 211.  (this is the first retracement) Take 211 points from the 1220 peak and what do you get? 1009.

Where did the market bottom?  1010.

Coincidence or spooky Italian math being propagated by thousands of supercomputers trading at 1/4000th of a second?  You decide.

Here it is in chart form, you have to enlarge to see the figures because for some reason stockcharts.com decided it would be cool to make its Fibonacci numbers in light gray.

[click to enlarge]



If one assumes there is more downside to come, the 50% retracement comes in at S&P 943 which coincides nicely with my mid 900s target.   The 61.8% retracement would take us to S&P 878 which is a stretch target I am hearing from some of the most bearish folk i.e. mid 800s.   Hence, if we begin a new leg down and the ultimate bottom is not the Doug Kass 1010 but instead something within a point or two of one of these other figures I'll have to give mad respect to the Italian math stallion.

Now I don't want to depress you, especially if you are the typical long only account and/or your financial advisor is giving you the same advice as he has since the 2000 top... "buy the dip, every dip!".  On the other side of Fibonacci is perhaps a greater force.  We call him "Kool Aid man".  Kool Aid man's Wikipedia page is as follows.

Kool Aid Man (c. 1970 - current) also known as CNBC inspiration, is a 7 foot, 450 pound mound of pure bull.... err, pure bull excitement, considered by some "the coolest flavored drink mascot in history".

Kool Aid Man is best know to the modern world for:
(1) Spreading stories of nearly permanent good times on financial infotainment TeeVee punctuated by cries of "Oh Yeah!" (loosely translated to "Buy Stock!")
(2) Bursting through brick walls, causing terror amongst small children
(3) Creating moments of humor and joy on Fund My Mutual Fund blog



Always two sides to every trade; let's see who ultimately comes out on top.

Bookkeeping: Selling 40% of Netflix (NFLX)

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In retrospect I bought Netflix (NFLX) a bit too early in the correction so my cost basis ended up being too high.  First purchases were in the $117-$118s.  I did average down at $107.20 last Thursday during the melt down, since the stock held the 50 day moving average in previous sessions despite heavy selling in the broader market, and that latter purchase price point was the 'right one'.   Therefore my cost basis overall is $112s, a bit high for my liking - so I decided to sell about 40% of the position on the bounce this AM.  I still have a melded gain of about 6.5%; considering the market action since my first purchase that works for me.  


Go forward, if the market continues up I expect Netflix to be a star.  If this is it for the broader market move, I'd expect support at the 50 day for NFLX where I'll probably try one more long trade, but in the intermediate term if the market breaks old support this one will have to be cut down to size as I'd expect the 50 day to give way.

That does it for the day's trades I believe, barring any major moves in the index.  A lot of waxing off for me today. (risk on, risk off) Basically, this is all one big correlation trade but I threw some individual equities in there along with index plays. 

We're now in a 30 point range of 1040 to 1070 and what I consider again a "white noise" range (what happens in those 30 points is random and means nothing) better suited for daytraders; I'll let them fight it out with the computers until the market makes some signals on the next intermediate move (higher towards 1100 or back down below 1040)  No man's land for now.

Long Netflix in fund; no personal position 

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Bookkeeping: Selling 90% of Las Vegas Sands (LVS)

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I threw 1% into Las Vegas Sands (LVS) late last week on the flush down session Thursday.  The stock has rallied a solid 8.5% since so I am going to sell 90% of that stake and go back down to the minimal exposure I had going into last week.  I should have put more into the trade but then again very few people were buying anything that day so we'll take the gain and be happy about it.  The stock is now hitting some resistance areas, but this stock is so HAL9000 infected I don't dare short it.  It could be $20 or $27 in 3 days... we could rename it Quadruple Ultra S&P 500.

(as an aside I had a limit sell order at $23.70 I put on this stock last night which indeed was the exact high of the day today, this would have given me about a 10% gain, but there was not enough volume at that price point in the real world to trigger the trade in the model portfolio - bummer.  5 cents less and it would have been perfect.)



Long Las Vegas Sands in fund; no personal position

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Bookkeeping: Short Amazon.com (AMZN) and Priceline.com (PCLN)

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I have some high beta on the long side, and I am pairing it with some high beta on the short side now but I am starting small since the market has potential upside to 1095ish.   I am going to begin starter shorts in both Amazon.com (AMZN) and Priceline (PCLN); two companies I actually like fundamentally.   Right now they have broken charts but of course that can change in student body left trading overnight.

Amazon.com is coming into resistance - I debated shorting it yesterday but was hoping for a pop closer to $119... so far it has not come so I am going to start just under $117.  There is a huge gap objective down at $95 but either way I will be out of the way ahead of earnings.



Priceline.com is much more straightforward.  It is converging on both the 50 and 200 day moving averages.  Either it clears them or does not - easy as that.  I could be out of this one in minutes as I won't give it much leeway... maybe $5-$6 ...I'm shorting just under $200.



If these are rejected (which would coincide I assume with S&P 1070 being the top of this bounce in the S&P 500) I will add to the shorts.  If they begin to pop their head over resistance areas, I will be out - hence I am only throwing about 1% into each since I'd rather short stocks closer to S&P 1100.  

These are cautionary, small shorts just to get something on the other side of the book which I evacuated the past 2 weeks.  If the S&P 500 can gain 25 points more or so I'll be much more aggressive adding to the short side.

Short both names mentioned in fund; no personal position

Bookkeeping: Selling 2nd Half of Long Index Positions

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As mentioned about half an hour ago, I planned on selling the second half of my index longs on any move below 1067"ish" so with 1066 breaking now, I will be selling the 2nd half, no questions asked for quite large gains as well.  We gained a quick 23-27 S&P points in about 3 market hours on these trades which is excellent.

Next foray into these instruments will be a strong move over S&P 1070, (maybe 1073ish) using 1070ish as my stop out point but with 2 huge wins in just over a week I don't want to be greedy here and will let others take the harder trades.

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Bookkeeping: Selling 66% of VMWare (VMW)

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VMWare (VMW) had a "risk on" kind of day yesterday so rather than risk a solid gain turning into less of a gain I am going to sell 2/3rds here for a 12% gain.  This position was put on late last week with the intent to take some profits either at 1040ish or 1070ish depending on the market behavior and how much of a move VMW had.  It came much quicker than anticipated.



Long VMWare in fund; no personal position

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Good Morning Takes S&P 500 Right to 20 Day Moving Average, Within Reach of First Target - Taking Half of Index Long Positions Off

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Using the exponential moving average, the S&P 500 has popped right off in the opening 5 to S&P 1067 which is the 20 day moving average.   1070"ish" is here, and 1070 is right around the corner.  This is now the inflection point for many of the moves the past 2 months.  I would declare the 'easy trade' has been made and now things could get chippier as we look towards the 50/200 day moving averages as next resistance.



I'll be looking to roll off index long exposure bought yesterday [Jul 7, 2010: Bookkeeping - Adding Some Long Exposure]  in the low 1040s, with quite a profit.  This gives a big prey kill to the downside last week, and to the upside this week.  If I get one such trade in 4 weeks I am very content, so having 2 within one of our "periods" (4 weeks) is a major bonus.

Since our objective is not maximize profits at ANY risk, but maximize profits at LOWEST risk possible I will take half off the table of my 2 index positions (TNA and SPY calls) right here, and then sell the other half on any move below 1067"ish" to lock in my gains. 

The TNA exposure (7% of portfolio) has advanced about 7% (edit: about 9%) since the early afternoon purchase yesterday while the SPY calls (4% allocation) should be somewhere in the +70% range type of gain.  Will edit this once I get the final numbers.



If the market keeps going straight up through 1070 I'll have the other half to play with.  I will also begin to look at taking some individual equity exposure off - especially that bought below 1020.  A bit more patient with that stuff.

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Bloomberg: Hedge Funds "Frozen in Headlights" as Bipolar Market with 1:1 Correlation in All Things Not Named U.S. Treasuries Cause Confusion, Q2 Performance "Stinky"

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Even the hedge funds are shaken by HAL9000.  Which is ironic since some of the top hedge funds are HAL9000. (but a few of course are not) [May 18, 2010: NYT - Speedy New Traders Make Waves Far from Wall Street] [Aug 28, 2009: WSJ - Meet Getco, High Frequency Trade King]   But those that still employ humans without computer science PhDs and try to invest with methods like "asset allocation" or "fundamental analysis" or "top down analysis" or "stock picking" (haha, old fashioned) are suffering.  It's really quite simple - either [a] invest in U.S. Treasuries (risk off!) or [b] anything else in the world (risk on!).   [Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life]  And change your decision every morning based on the headlines and futures. Hello? It's 1st grade logic - who doesn't understand it. ;)   Also remember, anything over 1/4000th of a second is now considered 'long term'.

On a related note, one of the guys on "Fast Money" had some interesting analysis from a 3rd party firm I had never heard of.  99 stocks/ETFs make up 50% of all volume in the markets nowadays.  Chew on that for a moment. 

So HFT makes up something like 70% of the volume.... and 99 stocks/ETFs are half of all volume.  Which is just a confirmation of what long time readers will know I've marked as a 'changing nature' in the feel of the markets essentially from when this blog started in 07.  I've called it monolithic trading or 'student body left' trading for years - now it's becoming consensus and the statistics are bearing what I've sensed to be true. 

p.s. SPY ETF is now 10% of all volume each day.  Why bother with individual stocks anymore kids?  We're all SPY traders now...preferably traded at least 3000 times in a second if you have the hand eye coordination.

I, for one, look forward to the day when I am the only human still trading.  Maybe at *that point* (and not a minute before) we'll look around and ask what we have done to our casino market... meanwhile HAL9000 will tell us he is just providing liquidity and to stop the whining.  010111000011! (translation: Outdated humans!)

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Via Bloomberg:
  • Hedge-fund managers, Wall Street’s best compensated and supposedly smartest investors, are dazed and confused.  Reeling from the worst second-quarter performance in a decade, hedge funds have scaled back trading as they struggle to figure out where markets are headed amid sometimes vicious crosscurrents in stock, commodities and other markets, according to brokers and managers.  
  • There’s a degree of being frozen in the headlights, of not knowing what sectors to emphasize, of what securities to emphasize,” said Tim Ghriskey, chief investment officer of Solaris Asset Management LLC, a Bedford Hills, New York-based firm with $2 billion in hedge funds and conventional stock funds.  (answer: none of them - they almost all trade together)
  • “For many people, it’s a frustrating market given the high volatility and low volumes,” said Aaron Garvey, portfolio manager at MKP Capital Management LLC, a New York-based hedge fund overseeing $3.5 billion. “We are seeing strong opposing forces in the markets, which makes generating strong convictions difficult for the medium- and long-term.”  (again, long term is anything in excess of the blink of an eye)
  • Prime brokers such as Credit Suisse Group AG and JPMorgan Chase & Co. that service hedge funds report that managers are borrowing less money and are sitting on more cash.  “People are in cash for the most part and nobody’s really taking out any big bets,” said Blaze Tankersley, chief market strategist at Bay Crest Partners LLC, a brokerage firm in New York. “Nobody wants to take risk in either direction. It’s a weird time in the market.”  (can you blame them?  each day is completely inconsistent with the previous.  Large end of day selloffs are met with premarket futures upward magic the next morning, making no sense historically.  Or vice versa.  When all rules you learned for years upon decades no longer work - you are frozen in headlights.  Adjust or die humans - think like HAL or be eaten by his larvae
  • U.S. stock market trading last month had its steepest June decline in at least 13 years
  • “This is much more than a summer lull,” said Sam Hocking, global head of prime brokerage sales at BNP Paribas SA. “Given the uncertainty out there, many hedge funds have felt it wise to pull back and take risk off the table.”
  • Hedge funds declined 0.94% in June and 2.79% in the three months ended June, the worst second-quarter performance since 2000 when the industry lost 3.42%
  • “It’s all about capital preservation at the moment,” said Amit Shabi, a Paris-based partner at Bernheim Dreyfus & Co., which farms out client money to hedge funds.
  • Almost half of the 2,000 funds that make up the HFRI Fund Weighted Composite Index ended the first quarter of 2010 below their high-water mark, or peak net asset value, meaning they can’t charge investors performance fees.  (gonna be some peeved trophy wives in CT; mama needs some new Manolo Blahniks)

Now everyone is speaking my language... student body right trading is in the air everywhere.
  • There’s “a high degree of correlation among stocks, so it’s not the best environment for stock picking, or sector allocation,” said Solaris’s Ghriskey. “Investors are not moving money around between sectors, nor are they aggressively moving between fixed income and equities.”

Wednesday, July 7, 2010

Dow 10,000 Hats On

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3% gain secured.  I believe this to be the 5th such session since the selloff began in April.  This repeats the pattern of vicious rallies within the selloff.  Rinse. Wash. Repeat.

Risk on. Risk off.  Hats on.  Hats off.


Bookkeeping: Closing Cummins (CMI)

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Cummins (CMI) is a company with one of the weaker charts as people have fled industrials en masse lately.  It is sort of funny to see how the lemmings have run away from the groups they were running into in February - March and April 2010, especially consumer discretionary and industrials... these were bullet proof sectors as the recovery 'playbook' was being used by the institutional masses.  [Mar 7, 2010: CBSMarketwatch - Riding the Rally, How to Money in the Bull Market's 2nd Year]   The ETF for retail was at an all time high!! (Not 52 week, but ALL TIME)   [Apr 14, 2010: SPDR S&P Retail ETF (XRT) Approaching All Time High]   Now you can barely give away a retail stock or most of the global industrials.  Who knows what the mood will be in 3 days or 3 weeks, all depends on if HAL9000 thinks the future reads "01101001010" or "110101000110".




There could be more upside here in Cummins, especially if the S&P 500 moves to near 1100 as the entire market is one big correlation with the index but I have plenty of other names to capture index related moves, and I want to stick with the highest relative strengths in a very tough market to play from the long side.  So with that I am going use today's surge to sell the last 0.4% exposure in Cummins for a 5% loss.  Once it broke support it's just been sitting around at the bottom of the portfolio and not a name I wanted to pile back into as the chart is broken.  If, indeed, the bipolar market believes in 1 month that everything is well again in the world I expect the stock to be back in favor, and on 2011 estimates its cheap.  I still love the exposure to Chindia in this name and it will be back at some time into the portfolio. [Feb 11, 2009: WSJ - Cummins Engine Shifts Gears Amid Stall]  [Sep 23, 2007: Stock to Watch: Cummings Hitting on all Cylinders] 



No position

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Still Like the Long Side for At Least 15 S&P Handles

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At about a 2.5% rally we still have a chance for the 3% day, which we have seen at least 4 of during the multi month selloff.  Yesterday was a horrible headfake for the bulls, and I am sure many wanted to give up and sell off exposure when the action was so poor.  I was tempted myself.

Below in picture form I am showing why I still see at least 15 S&P points (upper 1060s, if not 1070) before I will be selling much of anything.  As I wrote earlier in the week in a perfect world we see a rally to the 50/200 day moving average area closer to 1100 where one could put on very low risk entries to the short side.  If the S&P 500 is able to burst right through that area then one would need to reassess but the intermediate term chart does not call for that.  So this is my general game plan and with the velocity of the market to both the up and downside it seems to be playing out over days rather than weeks.

[click to enlarge]


This simply continues the same subranges we have been talking about for months now.  The big range of 1040 to 1100, with 2 subranges: 1040 to 1070, and 1070 to 1100.  They have changed little since April.  I am more interested in the 'easy trade' in 1040s to 1070.  It gets more tricky in the second subrange.

In the longer run, even if this is the Doug Kass bottom of the year we should go back to test 1010 as to create a 'double bottom', so hopefully we can be nimble enough to dump longs, get back 'shorty', and then re-assess the big picture the next time we revisit S&P 1010.  If it holds, I'd then agree that has a good chance for bottom of the year.  If it breaks, we should be talking mid S&P 900s... at least.

NYT: India Expands Role as Drug Producer

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A nice overview in the New York Times on the growing drug industry in India; our recent purchase in Dr Reddy's Laboratories (RDY) gets a mention.    While a positive for the world and especially India, we read these stories week after week after month after month (years on end), and one needs to remember the effects for the U.S employment picture as more and more of the world's production moves away.   First goes production ("it's only low end work no American wants to do!") then high(er) end production, then goes much of the support operations (accounting for example), then the R&D (which is the stage we are currently in), and in the end you will have a hollowed out company with only the execs still in the U.S. (due to favorable tax structure and quality of life)  The same execs of course requesting tax cuts to "keep their business in the U.S." and armies of lobbyists to do their bidding ;)  Ah, progress!

It is difficult to have a service economy when you are moving to an end point in 20-30 years where you will make little outside of weapons, and movies.   In the nearer term it is just of one of thousands of stories that explains the structural unemployment situation we have and why the country is now dependent on a bloated healthcare system, bloated government and house churning as its main "industries". Of course the former 2 are bleeding the country from the inside with debt since its mostly just transfer payment from the dying private sector to the pseudo and pure public sectors.  But I digress! Go India.

  • Below an ancient hilltop temple to Kali, the Hindu goddess associated with destruction and change, Sun Pharmaceutical Industries churns out generic versions of cancer drugs and epilepsy medications bound for the United States.  Business is so brisk that Sun, with revenue of 41 billion rupees ($880 million) last year, predicts sales will grow 20 percent this year and is expanding its Halol factory. 
  • India's drug industry — on track to grow about 13 percent this year, to just over $24 billion — was once notorious for making cheap knockoffs of Western medicines and selling them in developing countries. But India, seasoned in the basics of medicine making, is now starting to take on a more mainstream role in the global drug industry, as a result of recent strengthening of patent law here and cost pressures on name-brand drug makers in the West
  • And while the Indian industry has had quality-control problems, it nonetheless benefits from growing wariness about the reliability of ingredients from that other historically low-cost drug provider — China. The United States is India’s top export customer for drugs
  • India is becoming a “base for manufacturing for the global market, said Ajay G. Piramal, the chairman of Piramal Healthcare, a drug maker based in Mumbai. Eventually, in Mr. Piramal’s perhaps overly optimistic forecast, only the very first and very last steps of the business — molecular drug discovery and marketing — will be run by the West’s global drug giants.  (good point, we'll still have marketing in the U.S. ... sales still needs to be done face to face.  Hence there will always be a market for attractive young(er) ladies to sit in offices of doctors to upsell their drugs)  It is not only Indian executives, though, who are bullish about the pharmaceuticals industry here. Analysts, research groups and consultants have been making similar predictions in recent months.
  • Daiichi Sankyo of Japan helped kick off the foreign drug push into India in 2008 by buying a stake in Ranbaxy Laboratories, this country’s biggest drug maker. Last year, among other deals, GlaxoSmithKline formed a partnership with Dr. Reddy’s Laboratories; Pfizer tied up with Claris Lifesciences; Sanofi-Aventis took control of Shantha Biotechnics, and Bristol-Myers Squibb opened a research center in India with Biocon. 
  • “There is a lot of good talent at a much lower price in India,” said Jim Worrell, the chief executive of Pharma Services Network, a Charlotte, N.C.-based consulting firm that is organizing tours of Indian factories for Western pharmaceutical executives who are considering outsourcing some of their business. “What I see happening now is manufacturing and even packaging and even formulation are moving to India,” Mr. Worrell said. 
  • The shift to pharmaceuticals is part of a subtle, broader shift in the Indian economy. Moving beyond less sophisticated, outsourced services like telephone call centers, India has been advancing up the business value chain, particularly in law and medical diagnostics. Now it is showing a flair for manufacturing, particularly in goods demanding high-skill production and superlow prices
  • While China is the undisputed low-cost maker of a multitude of consumer goods, India may have a rare edge in the drug industry. India’s long tradition of generics has fostered a robust educational system here for pharmaceutical scientists, as well as longer experience dealing with Western regulators
  • The next opportunities for India could come at the more sophisticated end of the drug making spectrum, including research and development for the world’s drug giants and even development of proprietary medicines.  (again, when they sent away the the manufacturing they said the high value jobs in R&D will never leave the U.S. - but frankly the global multinationals are doing what is best for their business... if they can get similar talent for far lower prices, there is no need to pay for U.S. wage structure)  “We can crack the problem of patented drug discovery in India at a much lower cost” than in the West.
  • At Piramal’s main laboratory in north Mumbai, about 300 scientists are researching new drugs aimed at inflammation, metabolic disorders and cancer. Mainly because of lower wages, if it costs big pharmaceutical companies “$1 billion to $1.5 billion to discover a new drug, we can do it in a tenth of the cost,” Mr. Piramal predicts.
  • G. V. Prasad, chief executive of Dr. Reddy’s Laboratories, said that Indian drug makers had the “ability to handle product development on a massive scale at a low cost.” Dr. Reddy’s original diabetes drug has completed Phase 3 clinical trials — the last step before seeking Food and Drug Administration approval — the farthest of any of its peers. 
  • The F.D.A., in response to India’s growing influence, has opened two offices in this country — in Delhi in early 2009 and another in Mumbai in June of last year. When fully staffed, the offices will have between them a dozen full-time employees, including inspectors and technical specialists, which is comparable to the F.D.A.’s presence in China.
  • Until recently, pharmaceuticals has been “an incredibly arrogant industry that has never outsourced,” said Sujay Shetty, an associate director with PricewaterhouseCoopers in Mumbai. But over the next several years, he predicts, “everything in the value chain will move to different parts of the world that are cheaper,” with India a major beneficiary.  

I cannot stress, that without an explosion of innovation that creates tens of millions of U.S. jobs, we have serious STRUCTURAL unemployment that will not go away.  It *is* different this time. 

    [Video] Doug Kass - Stocks Have Hit Bottom for the Year

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    Hedge fund maven Doug Kass reports stocks have hit a bottom for the year so set your phasers to "buy buy buy". 





    New York City is in the midst of a serious heat wave, but on Wall Street the stock market is on a major cold streak. Stocks are down 9 of the past 11 sessions. Even Tuesday's higher close was still well off the highs of the day.

    Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn't worried. In fact, he's bullish. "I think we've seen the lows of the year," he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. "The market's are traveling on a path of fear and share prices have significantly disconnected from fundamentals," he says.

    Kass predicts stocks will rise 10%-12% by year's end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to "moderate domestic economic expansion, not a double dip."

    Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we're currently experiencing.

    It may not be a V-shaped rally like that of 2009, but Kass says we've just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.

    Bookkeeping: Adding Some Long Index Exposure

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    Yesterday's downside reversal was quite a bad sign for the market, at least by historical standards.  Thankfully, the stock market no longer has memory from day to day and each day is its own situation (I say that tongue in cheek).  This morning we had a hallmark of the rally from March 2009 to April 2010, that is the negative S&P futures at 7 AM that turned into flat or gains by 9 AM.... a -5ish handle turned to flattish.  On no news.  That was a signal to me that maybe "we're back baby".... at least for a short time.

    We are now over yesterday's highs so for very short term purposes I am making long side index bets with TNA ETF and SPY calls.  My objective is a print near S&P 1070.   I am going to be relatively aggressive here since we have a lot of cash to play with - about a 7% allocation into TNA and 4% into SPY 104 July calls.  Downside "mental" stop is of course S&P 1040ish.

    As an aside small caps had a horror of a day yesterday, the Russell 2000 was actually down 1.5%ish as the other indexes showed green prints.  So hopefully they have some 'catching up' to do, which should benefit TNA.

    I always find it rare for the market to repeat itself 2 days in a row, which is why I have some confidance we will not see a downside reversal 2 days in a row.  Remember, these counter trend moves are swift and extreme.  We have had multiple +3% days during this downtrend since late April (I believe five 90%+ days) - it means nothing in the long run but it can make you some money.

    I am not bothering much with individual names here because I am still short side oriented (even though I have almost zero short exposure) in the intermediate term.  I want to be in... and out... on this trade.  Much of my new long exposure was bought in S&P 1010 to 1020 range and as I said then I'd either sell that up at 1040 or assessing how the market was acting at that time, at the next level up which I think is 1070.  The stretch target for this move is 1100ish but I will leave that for the more nimble than I.  I plan to be selling there, and begin a course for the short side up there.

    If the market can jump over 1100 then I will consider this a chink in the armor of the shorts and re-assess.  But that is longer term planning.  For now, I drink Kool Aid...you know what time it is.



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    Tuesday, July 6, 2010

    Turkey - Where East Meets West, and Prospects are Improving

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    Last week, we took a drive by of 2 Asian countries whose stock markets were outperforming, India & Indonesia.  We also looked at some regional economies in Latin America that were holding up very well - namely, Peru & Chile. (Brazil goes without saying)  Today, we'll look at a country which was once considered the crossroads of the world, Turkey. (although in those times it was obviously not named Turkey).

    Some quick and dirty facts - Turkey is the world's 37th largest country by land mass, about 1/3rd the size of Mexico; but the 18th largest by population at over 72 million people.   That's 7M more than France, 10M more than the UK and more than double Canada.  It's also a young demographic as the stories below will highlight.  GDP is similar to population, ranking it around 17 in the world at about $615B, about half that of India.  Much like Indonesia, political turmoil has been an issue for outside investors .... but specific to Turkey the large question go forward is continued secular government or a shift away.

    It is not an easy place for U.S. investors to get to.  An ETF introduced in 2008, iShares MSCI Turkey (TUR) has about half a billion in assets and trades about 250,000 shares a day with a 0.65% expense ratio.  


    Product information for this instrument can be found here; unfortunately it is extremely financial heavy at the top with 4 of the top 5 holdings being financials; these 4 names are over 1/3rd of the entire ETF's holdings.  The other of the top 5 holding is Turkcell (TKC) - a regional based telecom - which is the only Turkey based stock I can find listed in the U.S.


    The country caught my eye in an April BusinessWeek piece which I never had time to bring to the site; a reader also mentioned it in comments last week.  The New York Times also had a piece yesterday and I am going to highlight a 3rd piece by a Seeking Alpha contributor below.   Some snippets from each:

    1) BusinessWeekTurkey's Moment
    • This kind of political turmoil long made Turkey radioactive as far as the financial markets were concerned. So what are investors, including foreigners, doing now? They're buying Turkish stocks and bonds in record amounts. The Istanbul Stock Exchange index hit an all-time high on Apr. 9, capping a 52-week run that has seen stocks double in value.
    • Stoking investors' enthusiasm is the conviction that Turkey's economic fundamentals have improved so much in the past eight years that political strife won't stop the forward momentum. "This is an economy with a deep manufacturing base and a large middle class," says Murat Köprülü, the Turkish-born chairman of Multilateral Funding International in New York, which manages about $120 million of emerging-market assets. "[Turkey] is going to pick itself up again after a political crisis and show growth."
    • Credit for this transformation goes to Erdogan and his deputy prime minister, Ali Babacan, who is a graduate of Northwestern's Kellogg School of Management. Erdogan's Justice & Development Party was elected with a strong majority in 2002. Speculative trading by Turkish banks in government bonds and the Turkish lira had triggered a financial crisis.
    • Erdogan and Babacan used their majority and capitalized on the sense of emergency to ram through numerous reforms. They reined in government spending, sold $30 billion worth of state-owned companies, strengthened financial regulatory agencies, and tightened capital reserve requirements for banks.  "It was bitter medicine," recalls Ziya Akkurt, chief executive of Akbank, one of Turkey's largest banks.
    • The medicine worked. Turkey had a prosperous decade as rates came down and banks started to lend after a period in which there was precious little lending. Foreign capital from Ford (F), Vodafone, General Electric (GE), and other multinationals poured in to build manufacturing in autos, appliances, and information technology. Trade with Europe and the Mideast boomed; exports have tripled since 2002, to $102 billion.
    • The real test of Turkey's financial strength came last year, as the global crisis tipped the world into recession. The country's gross domestic product contracted almost 5%, a painful adjustment. But the lira did not crash as it once did in dire circumstances. Instead the currency has held close to 1.50 per dollar since October 2008, even as the central bank has slashed interest rates by more than half, to a record low of 6.5%.
    • The cost of insuring against a default on Turkish debt has plunged in the past 12 months, to 160 basis points from more than 340 a year ago. Six EU member countries, including Turkey's neighbors Greece and Bulgaria, are more likely to default.
    • Turkish businesses are now preparing for a strong year. GDP increased at an annualized rate of 6% in the fourth quarter of 2009, lagging behind only China among the Group of 20 nations.
    • More than a quarter of Turkey's 72.6 million people are under 15 years of age, while just 6% are over 65. Turkey is younger than China, where 19% are under 15.
    • For all its advances under Erdogan, the Turkish economy still has soft spots. Prices increased 9.6% in March compared with a 5.1% rise last year, prompting some economists to question whether Turkey has solved its long-term tendency to inflation, which was 39% in 2002.  This inflationary bent is all the more worrisome given that unemployment remains high at 14%. If the recovery really takes off and more workers are hired and wages rise, Turkey could find itself struggling with bad inflation again.
    • The other soft spot, despite the market's tendency to shrug it off, is politics. Erdogan's battles with his adversaries aren't over. Nor is the big question of Turkish politics settled: Whether Turkey should preserve its strictly secular traditions or follow the pious Erdogan and embrace Islam more closely
    2) NYT: Turning East, Turkey Asserts Economic Power
    • Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.
    • Turkey’s economic renaissance — last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China....
    • In June, Turkish exports grew by 13% compared with the previous year, with much of the demand coming from countries on Turkey’s border or close to it, like Iraq, Iran and Russia. With their immature manufacturing bases, they are eager buyers of Turkish cookies, automobiles and flat-screen televisions.
    • It is an astonishing transformation for an economy that just 10 years ago had a budget deficit of 16% of gross domestic product and inflation of 72%.  So complete has this evolution been that Turkey is now closer to fulfilling the criteria for adopting the euro — if it ever does get into the European Union — than most of the troubled economies already in the euro zone. It is well under the 60% ceiling on government debt (49% of G.D.P.) and could well get its annual budget deficit below the 3% benchmark next year. That leaves the reduction of inflation, now running at 8 percent, as the only remaining major policy goal.

    3) Seeking AlphaTurkey's Economic Prospects - As Good as It Gets?
    • In the short term, the Euro area crisis, Turkey’s soaring current account deficit, and domestic politics pose the biggest risks. In the longer term, Turkey must address a low savings rate and weak education system if it hopes to catch up to the fastest-growing emerging markets.
    • The other major long term constraint on growth is education. To improve labor force participation—currently about 50 % overall and less than 25% for women, compared with 71 and 63 %, respectively, in the EU—reform of and greater investment in the education system is needed. Turkey has largely reached quantitative targets in schooling, especially among boys; girls are lagging behind but catching up. On the other hand, the average quality of education is miserably low. The Program for International Student Assessment places Turkey second-to-last among OECD countries.

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