Saturday, July 31, 2010

Goldman Sachs (GS) Projects Material Weakening in July's ISM Reports

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It will be interesting to see if Goldman Sachs nails this one.  Outside of the monthly employment reports, the ISM reports (Manufacturing and Services) have served to become the most important reports on domestic economic activity.  As I've written many times the market still seems to focus much more on ISM Manufacturing as if we are still living in 1977 (Mfg is now only 13% of US economic output and 9% of employment) whereas I focus much more on ISM Services, as services is the dominant 'output' in the new paradigm US economy.   Ironically even as the country de-emphasizes manufacturing, due to Asian demand and inventory restocking the manufacturing figures have been the much stronger of the two the past 15 months, with the service data really only kicking it into gear the past 3-4 months.

While Asia is still rolling, much of the inventory restocking looks to be completing, hence new inventory build is going to focus much more on end demand.  Which ex-Asia is not exactly booming.  ISM Manufacturing is released Monday 10 AM, and Services Wednesday 10 AM.  Outside of the Chinese ISM which will be released Sunday night, these should be the big market moving events of the week until Friday's employment report.  Whatever happens, it is like buying ahead of an earnings report - bipolar risk and just pure gambling to try to guess which way it goes.  Let's see if Goldman's proprietary outlook is accurate; if so it could portend a rough week.

(please note any figure over 50 is still expansionary but to truly add to job growth we need to be churning far above 50)

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

From BusinessInsider

The next U.S. ISM manufacturing and services reports, to be released by the Institute for Supply Management this Monday, could be pretty ugly, says Goldman.
How do they know? They've built their own 'GSAI' indicator that shares much of the same data that goes into the ISM release, and thus provides a potential early warning:
Goldman's Jan Hatzius:
The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in JuneThis decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009.
...
Most of the movement in the GSAI this month is attributed to significant declines in the sales and new orders indices, which fell 12.3 and 9.7 points respectively. The new orders index is now at its lowest level since July of last year. In this context, July’s slight increase in the inventories index may not be a good sign as it suggests production may have moved ahead of demand at a time when orders may be flagging. The gap between the new orders and inventories indices, which provides a rough leading guide to future strength in industrial output in ISM-style surveys, is the narrowest it has been since May of 2009.
Chart
The only reminder here is that their indicator remains in growth territory, indicating continued economic expansion, but just of a far slower nature.



Friday, July 30, 2010

BorgWarner (BWA) Beats, Raises - Auto Supplier Base Continues to Look Interesting

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The auto supplier base is a huge ecosystem from large to small; most of the public companies are the larger firms who have some good economies of scale.  In my post about the potential General Motors IPO [Jun 16, 2010: What to Expect from a General Motors IPO], I mentioned how before the implosion of 2008 the unions had truly made some sea changes in their contracts both in terms of truly being able to fire people (rather than putting them in a room and paying them 90% of their wages), as well as a 2 tier pay system (new hires being paid just over what the average Walmart worker now gets).  These companies have very levered models so with the dramatic cost cuts both now and those that should be rolling onto the books the next 5-10 years as the old guard retires, these companies are all quite interesting.  (The supplier base already went to much lower wages in the blue collar far in advance of the Big 3 since competition is so much more cuththroat).  

In a parallel sense the auto industry of 5-10 years ago was a lot like our local, state, and federal government is today - bloated and not adjusted to the new world order.  . [Jan 24, 2010: For the First Time, More Union Workers Work in Government versus Private Sector]  Since government can be run as a money losing operation (at least at federal level, and to some degree at the local level as federal government hands taxpayer money out as "stimulus") for apparently an infinite amount of years, we are still not seeing any true reform or adjustment in the public sphere.  Certainly not when compared has happened in the auto sector where a wrenching period of adjustment has been happening not just the past 3 years, but the past 10 (ask a multitude of Midwest towns)

Hence these auto companies can now be profitable even with smaller revenue levels due to a far smaller labor base, with many employees paid far less than 5, 10 years ago....and many names in the sector are also benefiting from huge growth overseas in emerging markets.  That should be a familiar theme by now across many industries - the main difference is other reasons i.e. global wage arbitrage (i.e. outsourcing) -  is causing the lower labor costs in non automotive.  Once again all these development are not so great for the American consumer or former middle class (many of which won't be able to ever buy a new cars at their new wages) but as the "cold hearted speculator class" who only cares about profits no matter what expense to a society (which is the hat we are forced to wear as a fund manager), believe it or not even at current levels of annual auto volume (which is about 70-75% of peak!) these companies are pumping out profits.  We own BorgWarner (BWA) which reported today but many names that reported (including Ford) in this sector the past week have put up some impressive figures.  See Tenneco (TEN) for an example.




BWA is now approaching a retest of 52 week highs; I don't have a huge position due to earnings and taking some profits earlier in the month, but if I had a larger position what I would do is take another round of profits here and then buy back if the stock can show enough strength to clear the old high.  Otherwise, buying on a pullback to support works.  Since my position is not very big I am just going to keep what I have and add once I see how the stock and the general market acts in the weeks ahead.

Obviously despite the ability to mint money at far lower volumes than in the past, this industry is still cyclical and if the next leg of the Great Recession is a deep dive, these companies will suffer but I think instead we are just going to have years of malaise (the "square root" economy rather than V's, W's, U's)- until/when fears of sovereign debt levels strike at one of the big 3: Japan, UK, USA.

A quick look at earnings and the 11 cent beat.
  • Auto parts maker BorgWarner Inc (BWA) posted stronger-than-expected quarterly earnings on Friday and raised its full-year earnings forecast due to stronger vehicle production in North America, Europe and China.
  • BorgWarner, which produces turbochargers, transmission components and other parts, said it expects its growth to outpace the market overall and for company record earnings for the year.
  • The auto parts maker reported net income of $82.8 million, or 68 cents per share, in the second quarter, compared with a net loss of $35.9 million, or a loss of 31 cents per share, a year earlier.  Excluding nonrecurring items, BorgWarner earned 78 cents per share.
  • Sales rose to $1.42 billion in the quarter from $916.2 million a year earlier. (+55%) BorgWarner said it expected sales to rise 32 percent to 35 percent in 2010 from last year.
  • Analysts on average expected it to earn 67 cents per share on that basis, according to Thomson Reuters I/B/E/S.
  • A "volume shift in Europe toward vehicles with higher BorgWarner content, including diesels, also boosted results," Chief Executive Timothy Manganello said in a statement.
Guidance up substantially:
  • BorgWarner raised its 2010 earnings forecast to a range of $2.60 per share to $2.80 per share, from a prior forecast for $2.20 to $2.50 per share.
  • Analysts expect $2.42 per share.

[May 10, 2010: Beginning Stake in BorgWarner]
[Jun 15, 2010: Morgan Stanley & UBS Upgrade Auto Sector; Including BorgWarner]

Long BorgWarner in fund; no personal position

Steve Madden (SHOO) Young Women's Shoes Apparently Nearly Recession Proof

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My favorite stocks are companies who have a solid growth component combined with a positive technical condition.  Steve Madden (SHOO) is a name that has impressed me quite a bit during the past year and a half, as it would often - like J Crew (JCG) - stand out amongst the consumer discretionary crowd in terms of fundamentals.  Despite that I was short the name (for technical reasons) for a day or three before being stopped out in late May.   However, now both the fundamentals and technicals are aligned quite nicely, although the stock looks to be quite overbought in the very near term.


The company reported yesterday morning, and continues to impress with a 13 cent beat on EPS and mid 30% growth rates in revenue.  If they can expand their footwear brand into a full line of clothing (always a risk) there could be even more growth potential for a much longer period of time.  Looks like accessories already made up 16% of sales this quarter. At 16x forward estimates for 2010 it is not cheap but not necessarily expensive considering the growth rate.

Via Reuters:
  • A fast-growing accessories and men's business helped Steve Madden (SHOO) top market expectations in the second quarter, and the shoemaker said it was seeing a lot of potential for growth outside footwear
  • Steve Madden's solid quarterly results prompted it to raise its 2010 outlook for the second time this year  The company, which primarily sells to 12- to 25-year-old girls, said it now expects 2010 earnings of between $2.45 and $2.55 a share, up from an earlier view of $2.30 to $2.40 a shareThe company also raised its full-year view on sales growth to 22% to 24%, from 17% to 19% forecast earlier.
  • For the second quarter, the company reported earnings of 70 cents a share, up from 44 cents a share, a year earlier.   The company, whose lines include flagship brand Steve Madden, Stevies and Candies, saw sales jump 36% to $158.7 million during the quarter.
  • Analysts were expecting the shoe maker to earn 57 cents a share, on revenue of $144.4 million in the quarter.  
  • Net sales at Steve Madden's wholesale unit grew 46.5% to $129.2 million, during the quarter.
  • Operating margin reached 20.2% of sales in the second quarter of 2010, compared with operating margin of 16.6% in the same period of 2009. 
  • The company's wholesale accessories business grew 79% to $25 million during the second quarter ended June 30, driven by strong sales of its hand bags and private label belts, Chief Executive Edward Rosenfeld said on a conference call with analysts.   The segment got a major fillip from Steve Madden's acquisitions of Madden Zone last year and Big Buddha hand bags in February this year, he added.
  • "We are also bullish about the prospects of our licensing business," Rosenfeld said, adding that the company would launch a new category of "special occasion dresses" to be sold for $90 to $200 at 50 of Macy's top dress stores in the spring of 2011. 
No position

Research in Motion (RIMM) to Introduce BlackPad, an iPad Competitor; Might Finally be Turning Things Around

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Research in Motion (RIMM) intrigues me.  For a growth-y stock it is very cheap (just over 10x 2010 earnings), but is being priced as if Apple (AAPL) is just toying with it before killing it.  Unfortunately, technology wise RIMM has been behind the times as it lacked that "touchy feely, squeeze the screen" functionality that all the kids (and apparently parents) love on their phone screens.  But they are finally coming out with one of those (Blackberry 9800).. not just to compete with with iPhone but the upper end Android phones like the Droids from Motorola (MOT).  While offering solid products, the company has lacked the sex appeal seem from Apple and Google O/S based product.  And today, a shot out of left field; RIMM has plans for an iPad competitor this November.  It will be interesting to see how it stacks up (especially where they price it versus iPad) but if these new RIMM products begin to take off, maybe the market will begin to see that RIMM is going to hold its own over the long run. 

Technically the stock has been in the desert for many moons; ever since that gap down in October 2009 it has struggled (other than a 30 day period in March 2010).  But it is showing some signs of life here - too early to make a definitive call but time to keep an eye on it, as long as the greater market can stay benign.


Via Bloomberg:
  • Research In Motion Ltd., maker of the BlackBerry smartphone, plans to introduce a tablet computer in November to compete with Apple Inc’s iPad, according to two people familiar with the company’s plans.
  • The device will have roughly the same dimensions as the iPad, which has a 9.7-inch diagonal screen, ....the device will include Wi-Fi and Bluetooth wireless technology that will allow people to use their BlackBerry smartphones to connect to the Internet, the two people said.
  • Apple, based in Cupertino, California, last month said it sold 3 million iPad tablet computers in 80 days after they debuted in the U.S.
  • “They can’t wait for a second generation of devices from Apple or they’ll fall too far behind,” said Ashok Kumar, an analyst with Rodman & Renshaw Inc. in New York.
  • RIM plans to call the tablet Blackpad, according to one of the people familiar with the company’s plans. RIM, based in Waterloo, Ontario, acquired the Internet rights to blackpad.com this month, according to the Whois database of domain names.
  • The company is hosting an event in New York Aug. 3 at which it will debut its BlackBerry 9800 slider phone, according to one person familiar with its plans. The device will feature a full touchscreen like Apple’s iPhone and a slideout Qwerty keyboard to allow for easy e-mail typing, the person said.
  • The company plans to use the phone to regain the market share it has lost recently to its U.S. rival. RIM’s share of the smartphone market fell to 19.4 percent of global shipments in the first quarter from 20.9 percent a year earlier, according to researcher IDC, based in Framingham, Massachusetts. Apple claimed 16.1 percent of the smartphone market, up from 10.9 percent a year earlier.

Expect tablets to get very crowded very soon...
  • Korea’s LG Electronics Inc. said this month it plans to introduce a tablet computer in the fourth quarter that runs on Google Inc.’s Android software.
  • Microsoft Corp. Chief Executive Officer Steve Ballmer said yesterday the software company plans to increase its focus on tablets.
  • Hewlett-Packard Co., the world’s biggest personal-computer maker, said it plans to produce a tablet device that runs on Microsoft’s Windows operating system.



 
 
No position

[Video] Jim Rogers call CNBC a Public Relations Agency... on CNBC

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And this is why one just have to love Jim Rogers.  He says things many others won't because they will lose their punditry platform to upsell their firm.  Luckily he is way past that stage.

I said it was PR Anna; they got the stocks up.  That's the whole purpose of PR.  Make the stocks go higher. That's what CNBC and many many PR agencies are all about.  

Other than his exact quote (in response to the European stress tests) which was funny in its own right, the reaction by the anchor in the red dress (minute 4:15) was bemusing but the expression on Jim's face when she said


Jim Rogers, that is very cheeky of you. You know we're not talking up (unintelligible) here on CNBC. We're just reporting the news!


is downright laugh out loud material.  Ironically that was said in the best 17 year old head cheerleader voice possible.  The indoctrination they must have for new hires upon employment at CNBC must be intense because I truly believe these people think they are reporting the news rather than being infotainment financial TV aka one big advertisement for Wall Street.

Watching Jim guffaw after her remark was epic.  Of course they immediately cut to commercial to regroup!



hat tip Black Swan Insights

Bookkeeping: Covering iShares Barclays 20+ Year Treasury Bond (TLT)

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I am closing the last smallish piece of a long held short on iShares Barclays 20+ Year Treasury Bond (TLT).  I, and many others, through yields would increase this year, as the mounting debt load in America finally caused the bond vigilantes to demand higher rates.  And/or inflationary pressures mounted.  Instead we're seeing bonds of all maturities - 2 years, 10 years, 30 years see their yields crushed, some at record levels despite an epic bout of deficit spending and debt acquisition.  There is one other country that "enjoyed" such a situation, and it starts with J and rhymes with Napan.  

From an economists point of view it's all fascinating to see how this ends up, since there are many variables that separate the 2 countries (Americans are spendthrifts, Japanese are savers; much of America's bonds are in hands of foreigners, almost all Japanese debt is in hands of their citizens and banks) - but as a citizen the "message" the bond market is sending is all a bit depressing.  The only real positive I suppose is we might get to an era where 30 year mortgages are going to be handed out at 3.75%.   But with 5 year CDs paying 0.75% annual.

Believe it or not, while intellectually I want to be correct on things I see out in the future economically, as a citizen of the country I hope I am very wrong.  Just as I did back in late 07. [Dec 4, 2007: First Half 2008 Predictions]  Unfortunately I was correct... if anything even my abject pessimism at the time was not negative enough.

So with that I am crying uncle on this short, a position I've held this January 2009.  I've had a few wins in this name along the way in terms of trades, but just as many losses so over time there has been little value here.  This last batch is small (0.6% exposure), but will exit at a 14% loss.




No position

Federal Reserve's James Bullard Raises Specter of Deflation & Quantitative Easing 2.0

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Looking at the closing prices of the indexes yesterday only, you'd have thought it to be a relatively tame session.  However, there was an intense level of volatility with a morning surge, followed by a dramatic drop... leading to a "V" shaped bounce in the afternoon before a closing minutes fade.  It appears much of this was in reaction to Federal Reserve President (St Louis) James Bullard's comments on the potential for deflation to hit the U.S.  Those wondering why the 10 year bond is struggling to keep its head above a 3% rate can point to one of two things (or both) - the next leg of the Great Recession, or future deflation.

These comments and the discussion on how to combat it - another round of quantitative easing - are being couched by the mainstream media as 1 rogue member talking a bit out of turn.  But generally in the Bernanke Fed (unlike the monarchy of the Greenspan Fed), specific members lay the groundwork well ahead of time (sort of like scouts) for the greater body.  While I don't think deflation is being taken completely seriously, I do think QE 2.0 is.  We saw another such leak to the Wall Street Journal about 3-4 weeks ago... I would not be surprised to see the next leg of desperation post election i.e. first half 2011.

I have come to the view the past 12-18 months, that deflation (or at least disinflation) is going to be near impossible to avoid (and in fact necessary) as the dichotomy between flattening wages (in the private sector) and government policy to support out of whack inflation in certain sectors (healthcare, university education) is causing an inability to spend ability in other sectors.   This is currently being hidden to a degree by massive fiscal stimulus, including 1 in 5.5 of every dollar of income in America now being a transfer payment from federal government.  Not to mention a large swathe of the population living in homes they are not making payments on for 18, 24, 30 months.  Without a new housing bubble created (to allow house ATMs to become widespread) a bout of deflation seems more and more likely by the day, at least in sectors the government is not subsidizing - and ironically making the situation worse, when they think they are 'helping'.  

Time to get the "We're Not Japan" pom poms out.

Via AP:
  • Debate is intensifying at the Federal Reserve over how best to cope with a weakening recovery, with momentum growing for a concrete plan to prevent a backslide into recession.  That came into view Thursday as James Bullard, president of the Federal Reserve Bank of St. Louis, offered a specific proposal. He said the Fed should revive a crisis-era program to buy government debt if the country seems headed toward a bout with deflation.
  • Fed Chairman Ben Bernanke has yet to endorse precise steps, only saying that the Fed is ready to act if needed. He has mentioned possibilities, while committing to none.
  • Bullard, a voting member this year on the Fed's main policy-setting committee, worries that the United States could tip into a Japanese-like bout of deflation if the economy weakens. Deflation is a widespread and prolonged drop in prices of goods, values of homes and stocks, and in wages.
  • For now, Bullard thinks the deflation risk is still low. But the danger could grow.
  • Bernanke told lawmakers on Capitol Hill last week that the Fed policymakers had several options if the economy worsens.  They could cut to zero the interest rate paid to banks on money parked at the Fed. They could also provide more information about how long it will keep interest rates at record lows. And the Fed chief left the door open to relaunching programs to buy mortgage securities or government debt, the latter which Bullard says should be considered.
  • Last year, the Fed bought up to $300 billion worth of Treasury securities. It marked an unconventional move to pull the country out of its worst recession since the 1930s. At that time, the initiative sparked controversy from critics on Capitol Hill and elsewhere that the Fed was basically printing money to pay for rising budget deficits and debt.
  • In a paper released Thursday, Bullard also argued that the Fed's pledge to hold rates at record lows for an "extended period" is a "double-edged sword." The pledge could make investors, businesses and ordinary people think inflation could be heading lower, which could aggravate the risk of deflation.

Video of Bullard explaining his thoughts on CNBC this morning [13 minutes] - email readers will need to come to site to view this:




Bookkeeping: Closing Akamai Technologies (AKAM), Selling 2/3rds of Acme Packet (APKT), Shorting some TNA

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Well after a week or two of student body left, it appears we are back to student body right. (wax on, wax off)  Next week?  It could be left and right.  We have Chinese PMI overnight so we'll certainly gap up or down based on that figure on the open Monday, then domestic PMI figures, then the employment reports Friday.  I expect the lemmings to get a big workout, but who knows in which direction.  The major US multinationals are finishing up their reporting so we're now going to be be focused back on economics.

Due to the student body changing directions the chance of Akamai Technologies (AKAM) recapturing its 50 day moving average is slim.   I cut the position in half yesterday to reduce exposure, and as with Netflix wanted to give it another day or three to see if it could quickly recpature old support.  There will be no chance with today's opening action, barring a late day stick save so I am going to be pre-emptive and dump the last smallish position (about 0.6%) exposure for about a 12-13% loss (based on premarket), depending on what price I get this morning.  After this sort of damage it is going to take a while for the stock to build a new base from which to create an intermediate term run (surely there will be dead cat bounces along the way) - but it's 'dead to me' for a while.



Acme Packet (APKT) - just a tactical error due to a busy week.  It is weaker in premarket than it was in after hours, trading in the $27s.  This is below the level I want to see held, so I am doing the exact same policy as with Akamai and Netflix; chop the position upon a break of support - give it a little rope with the remaining position, if it cannot save itself, the rest will go soon.  Gun to head, I suspect it will act like AKAM and NFLX and hence sustain more damage and not bounce back immediately, but I'll give it some leeway with a much smaller exposure in case I am wrong.


As to the S&P 500, the 50 and 200 day moving averages around 1093/1094 will be broken by this morning's action... so with that condition met, along with S&P 1100 broken it is back to a neutral/negative stance.  Up until now, the action has been more benign on this pullback.  I've taken on some short TNA to get some extra hedges on (in the real world I'd use "long TZA").  Downside targets come back into play and the recent levels of 1070 and 1060 are the first obvious ones. 



A break over (first) S&P 1093/1094 and (second) S&P 1100 would negate this more negative stance, which again could happen on a gap up Monday morning due to Chinese PMI (or a stick save today).  I'll get rid of my short TNA if this happens.  EDIT 10 AM - I will be covering the TNA short as the S&P 500 regained 1093/1094... I want to be short on the index only if the S&P stays below 1092 or so.  Stick save engaged.

This market has no memory from day to day and each day's reports are treated as if there has been no news the day before or week before. Which is why time frames over 1 day are difficult.  Long story short, it's very choppy, and not a place to have large exposure strewn on in either direction.

Today's GDP figure means little to me... our economy is weakening sharply and this has been obvious from data the past 6-8 weeks.  2.4% is only near consensus because economists have dropped GDP expectations sharply from a month or two ago when it was 3-4%.  Otherwise today would have been a huge miss.  And showing how useless forward looking estimates are by economists.


I cannot reiterate often enough that after a huge swoon as we saw in 2008-2009 in GDP we should be printing +6% GDP quarters... not be clapping at 2.5% or 3.1% chock full of government spending. 

PMI and employment - those are the ones that are going to be the shaker and movers; so expect next week to be hectic.

x

Rovi (ROVI) With a Quite Large Beat on EPS

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Rovi (ROVI) actually rallied in after hours after a quite large beat on EPS yesterday evening, but that does not make it correct to have held such a position size going into earnings.  If I had reviewed the earnings reports list yesterday, this one would have been cut back just as any other stock and then we could get back in at much lower risk, after the fact.  Every so often you are going to have a stock run away from you by going this route, but at least you don't get Vistaprinted.

With that said, I will say I am happy I did not get hit with 2 bullets today but just one ... I can tell this stock is completely off the radar of the momo crowd because no one (AP, Reuters) wrote a story about it, and a whopping 2 people had a comment on Yahoo message boards post earnings.   I am good with that. 

Technically, after what seemed to be a new breakout Monday (not so much), the stock has been reversing the past 3 days working off an overbought condition and settling right at its 20 day on the close Thursday.  Conditions remain favorable as long as the stock holds its multi month breakout over $40.  Which is also where the 50 day moving average has risen to in the past few days.  As always the stock will be dominated by the overall market, so if the S&P 500 starts falling apart, the chances of Rovi standing up are slim... and vice versa.



Analysts were in for $129.5M revenue and $0.46 EPS for the quarter.  

This company puts out one of the shortest earnings report in terms of prose that I have seen.

Via ROVI's earnings release:
  • Rovi Corporation (Nasdaq:ROVI - News) announced today that it had second quarter 2010 revenues of $134.8 million, compared to $119.5 million for the second quarter of 2009. (+12.8% year over year)
  • Adjusted Pro Forma Income Per Common Share for the second quarter of 2010 was $0.55, compared to $0.38 for the second quarter of 2009. 
  • "We completed another excellent quarter, growing revenue by 13% in Q2 2010, when compared to Q2 2009, and growing our profit by even more during the same period," said Fred Amoroso, President and CEO of Rovi. "In addition, we achieved a number of important business objectives, including winning additional business for TotalGuide, expanding our licensing program, growing advertising revenues, and continuing to retire debt."

Guidance
  • "Given the strength of our performance in the first half of 2010, we are raising our estimates for annual Adjusted Pro Forma Income Per Common Share to a range of $1.90 to $2.10," added James Budge, Chief Financial Officer of Rovi.
[Jul 15, 2010: Bookkeeping - Beginning Rovi]

Long Rovi in fund; no personal position

Acme Packet (APKT) Punishes Investors

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This one's gonna sting; 2nd day in a row I did not check the schedule of earning reports due to a very busy schedule, and unlike Akamai Technologies (AKAM) I actually have some decent sized exposure to Acme Packet (APKT).  Tiny silver lining is it's a good reminder of the reasons why I have been cutting back almost every position going into earnings.



Going into the day I have a 9% unrealized gain in the stock which shall vanish, and then some I am sure.  From there exactly the same situation as Netflix and Akamai (this is starting to be a pattern)... if (when) it breaks the 50 day moving average ($28.50s) I have to cut it back sharply.  And if it does not regain that level soon, we'll most likely cut bait and revisit it later in the year.  But the prognosis for today is PAIN.  Time for damage control. (note to readers - never try to launch a mutual fund during earnings season)

The report was very good, but revenue guidance was not raised ENOUGH and with these type of companies you have to keep raising the bar.  EPS guidance on the other hand, actually went up quite a lot, so it is quite a hammering for doing nothing wrong except not raising guidance enough versus analysts.  They actually did raise revenue versus their own forecast ($214-$218M versus $204-$208M).  All in all an overreaction but that the market price is the market price, and today it will be substantially lower.

Via Reuters:

  • Acme Packet Inc's (APKT) quarterly results narrowly topped Wall Street expectations, but the company gave a weak revenue outlook for the yearThe company, which makes session border controllers that are used to connect networks operated by service providers and enterprise customers, was down 13% at $28.15 in trading after the bell.
  • For the second quarter, the company earned $9.7 million, or 14 cents a share, compared with a profit of $1.7 million, or 3 cents a share, in the year-ago period. Excluding items, it earned 18 cents a shareRevenue rose 62% to $53.3 million.  
  • Analysts were expecting earnings of 17 cents per share, on revenue of $52.5 million
  • Acme Packet forecast 2010 revenue of $214 million to $218 million, the lower end of which is in line with analysts' view of $214.4 million.   The company expects full-year 2010 adjusted profit view of 72 cents a share to 74 cents a share, above Street view of 68 cents.

Long Acme Packet in fund; no personal position

Thursday, July 29, 2010

Pledge Update July 2010

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Rather than the normal full blown pledge update I'll be doing a hybrid discussing  total status plus individual state status. As we get closer to launch (Oct-Nov 2010), and knowing some readers have been here for years (and others just eventually drift away), I asked yesterday for a 're re-confirmation' (for some readers this is the 3rd confirmation) of pledges focusing on the $25K+ group.  This group is roughly 125 investors with another 225 investors in <$25K group. (about 350 people in total)  After an unhealthy amount of emails in a 24 hour period, the reconfirmed pledges for the group targeted yesterday is about $5.4M.  Still working through it to catch people who don't come to the site every day but the follow through rate for those 125 people is in excess of 75%.

To gain accuracy, I've removed a handful (4 to be specific) of the larger legacy (older) pledges which have not been responsive of late to email [perhaps AWOL] so that my grand totals are more realistic to the coming reality.  This money is replaced by pledges that have come in the last 30-45 days.  So the new grand total of pledges is $10.2M, of which I confirmed $5.4M yesterday.

That leaves $4.8M, of which I will assume a 50% follow through rate (obviously one hopes it is much higher).... i.e. $2.4M when the time actually comes.

Together $5.4M confirmed past 24 hours plus the $2.4M if the remaining 200 some investors come through at a 50% rate will get us near to $8M.  So the $7M threshold that has been the multi year goal looks pretty darn good.  With a few more months before actual launch I am hoping another $1M or so of new pledges also comes in, creating even more buffer.  So these figures below are 'best case' with 100% follow through. (not going to happen)

Total $10,199,200
Goal $7,000,000
% of Goal 145.7%



To Go ($3,199,200)


For detail person by person, I have a tab along the top of the page called 'Fund FAQ/Pledges' so you can review it there, if interested.  I won't cut and paste it all into this post today.

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

Now onto the state discussion; each state has an annual fee to operate as a mutual fund.  Without investors there is no reason to open in that state.  I have placed a rough estimate of $40-$45K in pledges to open in that state and break even.  If your state is not "open" it's not much of an issue - a state's status can be changed same day or next day at the latest.  Therefore, I've put all U.S. investors into 3 buckets

  1. States that will be open before launch
  2. States depending on 1-2 large investors (MN, NV being the exclusions - these two are near or above $50K but still depend on a few people)
  3. States with some activity but not yet near the threshold
[Foreign investors obviously not affected]

Since the last update in May, quite a few states have moved up into bucket 1 so here is the new status:

Bucket 1 (23 states):  AZ, CA, CO, CT, D.C., FL, IL, MA, MD, MI, MO, NC, NJ, NY, OH, OR, PA, SC, TN, TX, VA, WA, WI

Bucket 2 (12 states): AR, GA, IN, KS, MN, MT, NV, OK, RI, SD, UT, VT

Bucket 3 (8 states): AK, DE, IA, ID, KY, NH*, NM, WV

[NH - special situation]


Again, once a state gets the required amount of money, the lights can be turned on within hours so please don't view it as a deterrent.  If all goes well, we should be launched in 35 states within a month, which is quite amazing really.  Lots of small independent funds open in 3-4 states to begin.

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

Everything below is boilerplate from older posts.

  1. The overall goal and why I'm aiming for $7 approx million [Jan 7, 2008: Reader "Pledges" Toward Mutual Fund Launch]
  2. Frequently Asked Questions [May 26, 2008: Frequently Asked Questions] Very important to read
  3. Why I need your state [May 23, 2008: Investment Pledges by State] Keep in mind a state's eligibility can be turned "on" overnight once we're up and running
  4. Most recent updates (this November) [Nov 4, 2009: General Updates]
  5. Our story in Barron's [A New Kind of Fund Manager]

Caveats for pledges as always:

  1. Assume a pledge amount that is firm based on a fund opening in October-November 2010.
  2. Assume at any point in 2010 the market may be down 30% from here
  3. Make your pledge based on liquid assets that are not currently in some high octane mutual fund that loses 40% when the market falls 30%, nor gains 50% when the market gains 40%. That money is not something that can be counted on in a volatile market.
  4. Please have whatever monies are pledged to the fund, in money market or equivalent as of July 2010 so it is not at risk in the market.

Format for fund pledge: first name, last initial, pledged amount, and state you live in. To be clear, you are not sending me money that I'm going to hold until launch when you 'pledge' - you are simply making a verbal commitment: "when you are up and running, I have $X amount ready to invest". I prefer an email (my email address is found on the upper right of the blog) with the above information.

It Could be Worse - You Got Vistaprinted! (VPRT)

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The market has turned very choppy as we encounter many multiple cross winds on the charts - you have 1100 as a line in the sand, with S&P 1093/1094 being the exponential 50/200 day moving averages below... but 1113, the 200 day simple moving average above... and then a Fibonacci level up there at 1128, and June intraday highs of 1130.  It's not like it was 3-4 weeks ago when there was 'easy money' to be made in grand moves up and down.  Hence I'm staying smaller and puttering around the edges waiting for easier intermediate term trades.

While the index is relatively benign there is some serious damage going on in quite a few names; my watchlists have some gaping wounds showing in them.  I'm going to start with a sleepy stock, Colgate (CL) which usually is going to move 6-7% in a year, spitting out dividends and boring you to death.  Not today... it appears a couple of company's in the "consumer NON discretionary" are raising fears of pricing pressure.  Translation = deflation potential among America's consumers as weak incomes are causing trade downs and trade "outs".  What Colgate usually does in 4-5 months it is doing in 1 session alone. This would be akin to a high beta name like Baidu moving 35% in a session.


Some smaller tech outside of Akamai Tech (AKAM) is getting bludgeoned - Vistaprint (VPRT) [epic!], Nvidia (NVDA), AsiaInfo Holdings (ASIA), Tandem (TNDM).  VPRT does not get much press but during much of 2009 and early 2010 this was an under the radar momo play.






Nvidia would be worse if not for the fact its been going straight down for 3 months.


Even an ag name - Bunge (BG)


Healthcare a safe haven?  Not always. Covance (CVD)




So as one scans potential damage in a portfolio ... it could always be worse. (unless of course you are an unlucky soul who has a large position in any of these)  This type of movement is also showing the penalties remain very high for playing the "earnings gamble"; the ability to lose 25-40% overnight is just not worth the "big score!"

Bookkeeping: Covering Energizer (ENR) Short

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If you recall Energizer (ENR) was an 'accidental' short as it was an outstanding short limit order placed quite a bit lower but triggered almost exactly at $60.00 on a gap up.  Since this is not the type of chart I like to short, I was thinking about covering it yesterday for a small gain but decided to wait to see how it acts in a more negative tape.

Well as they say... it keeps going... and going... and going.

Not much of a hedge as it is actually up in a -1% market.  I was hoping for at least a drop to the 200 day moving average... not so much.


So I will cover this for "flat" as the S&P 500 sits above multiple support lines in exponential moving average world in the 1093/1094 area.  If those break, than perhaps ENR will break down but obviously this stock has moved into favor after its earning report.

No position

x

That Was a Strange Open

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I scratch my head on days like today when the market surges right out of the box on bad economic news ...

So far the early buyers have not been rewarded. 

Yesterday the S&P 500 fell to 1103 at the low, and right now we're below 1102.  This is a key 13 point area between 1100 and 1113 as mentioned yesterday.

We have a case of quite different stories in the 'exponential' versus 'simple' moving averages.

EMA - we broke over multiple key resistance areas and are consolidating, but in decent shape.


SMA - rejected again at the 200 day?



Making things trickier is we have a few reports next week where the market is going to react violently in knee jerk reaction (ISM reports and monthly employment reports).  Even being a bear on the U.S. economy I have been a bit shocked by how quickly some of these economic measures are dropping the past 60 days and that's with the fiscal stimulus still going strong (only halfway through the $787B handout).

Further confusing...10 year below 3% again (bad).  Copper doing well (good).  But silver - which also is used in industrial expansion is weak (bad).  China rebounding (good)... Brazil on fire up 8 days in a row (good).  Multinational earnings very good but almost done, with domestic heavy companies set to take over earnings season next (bad).

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

I don't take much stock in "consumer sentiment" but it's been horrid all through the recovery as "Main Street" (excluding the upper tier and some of the public sector) lives in a different reality than "Wall Street>  Amazing statistic of the day from David Rosenberg... traditionally during economic expansion (which supposedly we are going through) consumer sentiment is about 100, and in economic contraction it's in the 70s.

Where have we been lately?  In the 50s.

Green shoots.  As long as you are not Joe 6Pack.

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

EDIT 11:30 by the time it took me to write this and post the charts, we've broken S&P 1100.  Should get interesting here.

Bookkeeping: Restarting NetLogic Microsystems (NETL)

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I'll edit this piece with information on last night's earnings from NetLogic Microsystems (NETL) a bit later in the day but it is being trashed on some amazing growth numbers.  I will give this one a chance because the thrashing is only taking it down to support rather than through support (thus far).  If it gets a lost worse later in the day or support is broken in the next few days I will be right back out.   So far the 50 day moving average has held.


I'll begin with a 1.7% type of position.  A break of $29 will most likely have me headed for the hills.

(edit 11:40 AM)

Via Investors Business Daily:
  • Fast-growing NetLogic Microsystems (NETL), whose chips help gear keep up with the Internet's exploding growth, continues to grow, but not as fast as some investors had hoped.  Late Wednesday, the company reported that its second-quarter sales skyrocketed 192% to $95 million from $32.5 million in the year-ago quarter. Problem is, analysts had expected $95.1 million. That slight miss was too much for investors worried about the pace of the global economy's recovery, and NetLogic shares were down about 2% after hours. (seriously now... that is $100,000 of a 'miss' on a $95M base - talk about silly)
  • Still, NetLogic said per-share profit minus special items more than doubled to 38 cents, far above the 32 cents analysts expected. And its guidance also topped views.
  • "They are the leader in their space (network processors)," said Betsy Van Hees, a Wedbush Securities analyst who rates the stock outperform, or buy. "They own the network search market."
  • NetLogic sells chips that run the routers and switches that power the Internet. Cisco is NetLogic's largest customer, accounting for some 30% of its sales.
  • "The network was already on its knees before these new devices came out," he said. "There has been an incredible proliferation of apps, hundreds of thousands. All of this is exploding exponentially. But the (network) products to deliver on this are not growing fast enough."
  • "Multicore is a rising tide," said Kumar, an analyst with Rodman & Renshaw. "From a technology perspective, NetLogic is way ahead of its competitors, and it's a fairly embryonic opportunity."  But Kumar also says the stock is "priced to perfection," and he rates it market perform, or hold.
  • Fewer than 10% of all network processors today are multicore, Jankov says, but the number will surpass 50% in five to 10 years.

Guidance:
  • The company expects per-share profit minus items of 36 cents this quarter on sales of $99.75 million. The consensus of analysts polled by Thomson Reuters was 33 cents and $97.7 million.
  • The Mountain View, Calif., company also upped its forecast for 2010 sales to $383 million. In April, NetLogic had forecast $377 million. It posted 2009 sales of $175 million.

NetLogic Microsystems, Inc., a fabless semiconductor company, engages in the design, development, and sale of processors and integrated circuits. The company offers multi-core processors, knowledge-based processors, 10/40/100 Gigabit Ethernet physical layer devices, network search engines, and embedded processors to develop systems used in the Internet infrastructure, including the enterprise, datacenter, metro, edge, access, and core networking markets

Long NetLogic Microsystems in fund; no personal position

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Bookkeeping: Cutting Akamai Technologies (AKAM) in Half

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The position is not large but I am going to do my normal process of cutting back a position as it breaks support and then waiting to see what to do with the last batch.  Currently, the look of Akamai Technologies (AKAM) is worse than it was last night in after hours as the stock is down 10%, double the situation of last evening at the end of the AH session.  Identical to Netflix (NFLX) we've cut exposure, the stock is having its bipolar earnings reaction as everyone over reacts, and then we have to see a recovery very quickly or we will be out and instead will return later after the chart repairs itself.   Sometimes you see a very quick rebound intraday (think Amazon last week) but more often than not once the momo boys get hit, they run and don't come back for quite a while.  That's my gut feel with AKAM but I'll give it to either Friday or Monday.



For today, I cut back the modest position (1.2%ish after today's selloff) in half, and the other half will hold in waiting for 24-48 "market hours".

p.s. I am seeing the same reaction in Netlogic MicroSystems (NETL) - which I thought had a better report than AKAM.  Ouch.

Long Akamai Technologies in fund; no personal position

x

Las Vegas Sands (LVS) Wins Bets in Asia in Q2

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Stop me if you've heard this one before: an American company who has booming revenue in Asia while domestic operations report yet another quarter of "meh" (aka the 17th month in a row of 'green shoots').  Las Vegas Sands (LVS) is yet another one, as we see in yesterday morning's report.  (full report here)  The stock had a very good session in a neutral to poor tape.  With Macau in full tilt, and the newer operations in Singapore ramping up, it looks like more of the same in the quarters to come.

American company?  After the transformation the past decade, only in theory.
  • Sands operates the popular Venetian and Palazzo casinos in Las Vegas as well as casinos in the Chinese gambling enclave of Macau, in Singapore and in Bethlehem, Pa. Nearly 80% of its revenue came from Asian business.
After buying a trading position in this name off the lows 3-4 weeks ago below S&P 1020 I have traded out of the majority of the position for a quick 9% gain but the stock has kept running, while I've been staring at a measly 100 shares waiting a stronger pullback to redploy.




Marketwatch (and AP) discusses earnings:
  • Booming business in Macau helped Las Vegas Sands dramatically narrow its second quarter loss and far exceed Wall Street expectations, the casino operator said Wednesday. 
  • The company lost just $4.7 million, or about 1 cent a share, on the period, vs. a loss of $222 million, or 34 cents a share, in the same quarter of 2009. On an adjusted basis, excluding charges, the company would have earned 17 cents a share, up from a penny a share.  The average estimate of analysts had been for Sands to earn 9 cents a share on revenue of $1.58 billion.
  • Revenue came in at a record $1.59 billion, an increase of 50.6% that was fueled by heavy play at its Macau operations and the opening of the new Marina Bay property in Singapore.
  • Chris Woronka of Deutsche Bank reiterated his buy rating on Sands following the results.   "Particularly encouraging was the margin result at Marina Bay Sands during its first partial quarter of operations," he wrote. "This should boost investor confidence in what some had viewed to be lofty long-term earnings expectations at the property."
  • Analyst Joseph Greff of J.P. Morgan said the company's performance beat very high expectations and was especially strong in Singapore, where the Marina Bay Sands casino opened in April. Sands reported $216.4 million in revenue there, including $190.8 million from gambling.  "These are pretty strong results for a property that was only open 65 days in the quarter, without a lot of non-gaming amenities," Greff told investors.
  • The Singapore hotel was nearly 55% occupied at an average room rate of $226 per night. (translation - just wait until it can get 80%+ occupied)

2 years ago Las Vegas Sands was facing an onerous debt load, and doubts about its ability to exist as a going conern drove the stock to near zilch.  Now the story has changed dramatically as the banks gave it massive leeway (casinos are too big to fail after all). [Apr 22, 2009: Wynn Resorts, Las Vegas Sands Amend Credit Terms]   Still a lot of debt but most has been pushed quite far out.  [Sep 3, 2009: Las Vegas Sands - Too Big to Fail?]
  • Sands said it had $3.69 billion in unrestricted cash and short-term investments as of June 30.  The company reported long-term debt of $10.4 billion, with $90.2 million due in 2010 and $1 billion due in 2011.

[May 7, 2010: Las Vegas Sands Narrows Loss]
[Feb 24, 2010:  First Phase of Singapore Casino for Las Vegas Sands to Launch in April]
[Nov 9, 2009: Las Vegas Sands Sets Hong Kong Macau IPO Range of $2.5B to $3.3B]



Long Las Vegas Sands in funds; no personal position

Akamai Technologies (AKAM) - Good Results in Q2, but High Expectations and Slight Guidedown

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Yesterday was a very busy day so I did not catch up on which companies were reporting until late into the night.  I tend to cull all positions going into earnings but Akamai Technologies (AKAM) was only a 1.3% exposure, so at that weighting I'm not sure I would have done much to the position.  Much like Netflix (NFLX) I found the report quite good, but with high valuation and a stock full of renters rather than owners, expectations got too high and the stock is punished.  In this case AKAM fell about 9% early in after hours trading last night but rallied later in the evening to fall 5%.  Looking at the chart, we see support right around where it closed the AH session at just under $42.  To avoid the Netflix fate we do not want to see more than 1-2 days of closes below this 50 day moving average.



If indeed it can hold this level AND the S&P 500 holds 1100 (because almost all stocks now move in monolith) a good buying opportunity may present itself.  If it cannot hold this level and the S&P 500 breaks 1100 than the student body will run left and most likely, near term hope will be lost.  Simple as that.

I would not read too much into the "guide down" as I expect this is the typical game of set the bar low, so ti can be beat and we can all clap like seals that the company 'beat expectations' (that it set) in 90 days.


Via Reuters:

  • Akamai Technologies Inc's (AKAM) business outlook disappointed investors who expected greater profit from the growing popularity of online entertainment, sending the shares down 5% after-hours on Wednesday.  Higher costs also worried some analysts, although the company said the investment was crucial to support growing demand for online entertainment like high-definition movie downloads and real-time streaming of sports events. (this is the push pull between the Street's demands that a company only look at its business in 90 day periods and run a business to "the estimates" versus any company who makes longer term investments which might hurt near term profits but actyally benefit the company in the long run
  • Second-quarter net profit rose to $38 million from $36 million a year earlier. Earnings excluding special items was 34 cents a share, matching expectationsQuarterly revenue rose 20% from a year earlier to $245 million, it said. That was also roughly in line with the average analyst forecast of $243 million.
  • Akamai, which helps media companies deliver online entertainment by navigating less-congested routes over the Web, said it expects earnings in the current quarter, excluding items, to be about 32 cents to 34 cents.  Analysts on average expected profit excluding items of 34 cents.
  • The company also raised its capital spending forecast for the full year to 17% of revenue from a previous range of 13 to 16%, after reporting higher costs in the second quarter.
  • Some analysts said the sell-off was overdone considering second-quarter results were solid, albeit in line with expectations. 
  • "They were a little higher than expected on expenses and capex. But we're also getting into this situation where dreams are always better than reality. We've seen this with other companies that have reported this quarter, where no matter how good the numbers, people are selling on the news," said Donna Jaegers, analyst at D.A. Davidson & Co.  "I would expect the shares to bounce back tomorrow," she said. "I thought the second-quarter numbers were very, very strong."
  • It also said pricing had stabilized, soothing concerns that increasing competition from rivals like Limelight Networks Inc (LLNW) and Level 3 Communications Inc (LVLT) could hurt its profitability.  (this concern has been hanging over the head of AKAM for a good decade - we even wrote about it in 2007!)  [Oct 5, 2007: News Flow Just Never Gets Better for Akamai Technologies]
"Telecom giant Level 3 Communications is looking to boost its position in the content delivery network (CDN) industry by undercutting competitors."

The above quote was from 2007, not 2010.  It will be the same quote used in 2013.

Long Akamai Technologies in fund; no personal position

Wednesday, July 28, 2010

REPOST Fund My Mutual Fund - The Apprentice

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This is a repost from last week.  Currently I have about 9-10 candidates which is a great start.  My thought process is to get this first group up in a model contest between 'early' August and Dec 31st, 2010 and see if any weed themselves out and/or I can review for a 5 month period to see if their strategy is truly scale-able.  Just a repost so anyone who might of missed it last week can determine if this is of interest to them.  A few items based on feedback

  1. Per one of the questions from reader there is NO OBLIGATION at the end of said contest to take "the job" (if there is a job).  But obviously that is the end goal. 
  2. Also - you don't need to 'prove' anything to me with your background; I am getting that feel from some of the emails I received from contestants.  I only care about end results - that's the whole point, find non traditional talent.  If you have a BA in Art History, have worked only in art galleries but can beat the S&P 500 by 4-6% annual over the course of time, that's all that matters to me.   If you have a CFA designation, work at a hedge fund but struggle - well, this is a bottom line business.  So I do not care about your background other than you have experience in the market in some form (the only education that matters) and your own success.  Then you need to prove it out in the open with people watching.
  3. If you have an existing Covestor or Kaching account that is even better since it's real money, don't bother with the 'contest' - I'll review what you are doing there over the course of next few years.  If those services were up and running when I first got started I would have used them rather than starting something from scratch, although they also have their own limitations (specifically option strategies)
  4. If all my plans work out I plan on repeating this in multiple iterations to find new non traditional talent.  So this time around will have the least amount of publicity hence the easiest to 'win'.  Next time around it will be coming from an established fund family, etc.
  5. I edited item #2 below (new part is bold) to better outline my thoughts; more than any duration I want to see how people do in up, down, and sideway markets. 
Thanks.

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A reader came up with an excellent proposal in email yesterday that I thought was worth sharing, as it could potentially kill 2 birds with 1 stone. 

First, if fund #1 enjoys success and creates a viable long term business my long term goal is to create a boutique fund family which would consist of multiple funds using various strategies, run by people not much unlike me in that they might have a talent and passion but not the 'pedigree' nor traditional upbringing into the mutual fund world.   They would employ their own strategies but the whole theme of the family would be to have hedged techniques in which the manager could protect assets during downturns (if not make money from the downturns) - but the specifics for each fund would be up to manager's strategy.  In fact my hope would be to find multiple people better at this than me... if all my employees made me look like the worst manager of the group I'd be tickled.

Second, I have a website with a "brand" built through much blood, sweat, and lack of sleep.  What to do with it aside from mothball it in the future?

The reader's proposal gave me a potential solution for both issues. He offered that since I was looking for potential fund managers "down the road", the website could be a sort of platform for an "apprentice" program if you will.  Essentially create the same ideals as I began with - an open, transparent arena for a cadre of new managers to showcase their skills for an audience and over a similar time frame (say 3 years) let them compete amongst each other.  After perhaps 12 months, and 24 months the worst would be culled until the strongest are left and based on returns, strategy, and scalability have one or multiple candidates standing at the end who have proven their ability in a structure everyone can have followed.  This/these candidate(s) would be natural fits for the next evolution of mutual funds for the boutique firm.

Of course the devil is in the details and much must be developed from this skeleton of an idea, but judging from some emails I've received over the years I know there are quite a few people who have a similar dream, but due to the obvious roadblocks have not pursued this course.

What I would propose is today I have shared this idea.  I would like to gauge in the next week if there is an interest by a decent amount of people.  If I only get 2-3 responses the idea is probably moot.  If I get 10 responses or 30 responses, than there are different ways to approach this.  So let me leave this nugget of an idea on the screen for readers to mull, but let me list some stringent requirements so this does not turn into a free for all that does not encourage the ultimate goal.
  1. First and foremost, you want to do this as a career.  Not only want, but will do it as a career if offered in 3 years time.  That means quitting your job of course. There is nothing more important because if you waste 3 years running a virtual portfolio and then do not wish this for a career path, it's just been an exercise in being flamboyant.  Of course there is no guarantee - this would be dependent on fund #1 (mine) being successful but being the manager of my "2nd" fund would be the ultimate carrot; if this is not your goal please do not participate.
  2. You will need to be willing to keep at it for nothing other than fame for aprox 2-3 years - this is about the time I think it will take to weed out whose techniques will work - maybe its 2 years, maybe its 4 years but it is certainly not 12 months.  I think 30-36 months would be a good time frame, but it will depend on the market - I'm looking for different market environments to see how your techniques work.  For example if I started this in March 2009 and ended it in April 2010 when the market went straight up, there is no value add in seeing how your skill set works in down markets.  So rather than an exact amount of months, it will largely depend on various markets.
  3. You must have a technique that hedges... long time readers will know my complaints with the mutual fund industry.  First and foremost it disrespects capital as a whole with its "cash is trash, long is the only way".  I don't care what your system is and I prefer it be not much like mine in fact (easier to differentiate down the road when marketed) - but it must offer some protection to the downside.  Let me repeat that does not mean you need to make boffo bucks, just lose less than the market as much as possible.
  4. You must have a technique that can scale.  If you are an awesome daytrader who can put up 1000% annual returns trading 3 stocks that you hold for 8 minutes at a time, it won't work.  But HAL9000 would probably love to interview you.   You need to demonstrate something that I determine can work in a $200M fund, this is what I have been trying to do with my own strategy I've had with FMMF.  I ran a quite different system for my own account (I generally would only hold 4-7 stocks) but you need to have some diversification (say 20 positions) and hold positions for a time length of greater than say more than 5 days on average.  Otherwise you are just a good trader but perhaps not a mutual fund manager.
  5. I don't ask that anyone put in nearly the amount of work I have the past 3 years... I am a loopy guy who had to start from scratch with a crazy idea to an audience of one in 2007.  You would have a massive head start over what I was facing.  That said, whatever form the future website would take you'd have to explain on a weekly basis your general strategy so readers can follow you (and I can follow your thought process to determine if it makes sense to what I am looking for).  This might mean 4-6+ posts a week.  (I have been doing 35-50 posts a week)  The posts need not be during the day if you cannot manage it, as I respect the fact people need to do their normal jobs - but end of day summaries of what you did (if anything) to keep readers updated are a must.   If you are a manager who has a strategy of holding positions for 2 years than I suppose you would have it much easier than active traders.

Those are my first thoughts on how I think it would work.  The website would need to be redesigned which is another challenge but I envision (in a perfect world) 6 to 10 people with their own 'tabs' and their own virtual portfolios competing with each other, out in front of the world.  The Apprentices.  Over time some will be weeded out ("you're fired) based on their results, and if all goes well at the end 2, 3, 4 will be viable candidates to hear "you're hired".

If this idea catches on, I'd like to start the competition Jan 1, 2011.  If I get a lot of interest we'd need to cull the field to something manageable and I have an idea on how to do that but will cross that bridge if it's an actual problem needed to be dealt with.   If only 2 people are interested than I suppose it's a moot idea, but I thought the proposal was worth advancing.  So mull it over during the next week and if you are the person or knows someone who has had this dream, shoot me an email of interest (email address is in top right of the page) and I'll assess over the next week if this is a tangible idea based on feedback.

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Americans Do Least Amount of Cash Out Refinances in a Decade

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Interesting headline - I wonder if this represents a "new attitude" towards debt OR the fact so many Americans are now underwater they no longer can do cash out refinancing to support their spending habits.  Gun to head, I think it's a little of both.  Whatever the reason, this is a long term positive but a near term blow to consumerism in Cramerica (70% of the economy) since cash out refinance was a hallmark of the 'boom' mid decade since wages in the private sector are faltering, inflation adjusted.

Then again, 7M households are not even bothering to make a payment on their house at all while living "mortgage free", so have graduated from old school house ATM spending (2003-2007) to the new and improved paradigm (2009-2014?).  [Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]


Via Bloomberg:
  • Americans in the second quarter tapped the smallest amount of home equity in a decade, showing households are focused on repairing tattered finances.   Owners took out $8.3 billion while refinancing prime home loans as borrowing costs dropped from April through June, down from $8.4 billion in the previous three months and the least in 10 years, according to a report today by McLean, Virginia-based Freddie Mac.
  • Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.
  • Instead of extracting cash to binge on everything from cars to vacations as in previous recoveries, owners are refinancing to improve terms and reduce mortgage payments. The mending of household balance sheets means consumers will be in a better position to join the recovery once employment picks up. (I am waiting with baited breath on this employment pick up)
  • The average rate on a 30-year fixed mortgage fell to a 4.56% in the week ended July 22, the lowest since Freddie Mac, the second-biggest buyer of U.S. mortgages after Fannie Mae, began keeping records in 1971  (just amazing for a 30 year)

This statistic says it all: 88% v 27%... even the Obamas were serial cash out refinancers back in the "day":
  • So-called cash-out loans, in which borrowers increase their loan amounts by at least 5 percent, accounted for 27% of all refinanced loans in the three months to June, capping the lowest three-quarter share on record.  Cash-out refinances peaked at 88% in mid 2006.
  • “Five years ago you had people liquidating equity to finance debt-fueled consumption. Now, refinancing gives them breathing room.”

Thankfully the Obamas got some free housing with the husband's new job, an increase in pay, and some pretty sweeet benefits.  Most other people who enjoyed "the game" unfortunately, have a different reality today.  Hence it is up to the savers of America to bail them out - patriotic duty and all.
  • Acording to Cook County property records, the Obama’s purchased a condo on South East View Park in Chicago in 1999. They took out a 30 year adjustable rate mortgage of $159,250 with an initial rate of 6.6% on April 6, 1999.
  • One month later on May 7, 1999, they took out a line of credit for $20,750
  • On September 25, 2002, they refinanced their condo with a $210,000 30 year mortgage. This means they took out at least $60,000 of equity from their home.
  • But that was not enough. On May 3, 2004, they took out another line of credit for $100,000 with a variable interest rate.
  • Tax returns for 2004 reveal $14,395 in mortgage deductions. If we assume an effective interest rate of 6%, then they owed about $240,000 on a home they purchased for about $159,250.

All the cool kids were living beyond their means... aka the golden age of Cramerica. 


[Jun 15, 2010: Default, not Thrift Pares U.S. Debt]

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