Tuesday, August 24, 2010

The Quest for Yield and Where All that Money Central Banks Provide is Going

With capital now almost without limit in terms of national boundaries, and central banks cranking out cheap money to their customers (the banks), one keeps asking where all the money is going.  It is quite simple - bonds of all types... we focus on US Treasuries and their incredible rally (taking yields on 10 years from 4% to sub 2.6% since April 2010) but high yield corporates are flying, higher rates corporates are flying, German 10 years acting like U.S. 10 years, and emerging market bonds?  Forgettaboutit.

Sadly, some of these '2nd world' countries run much more fiscally sane policies than we do, so what was once 'risky' is now in many ways more 'safe'.  Granted, the next time there is a true panic I expect emerging markets (and even their bonds) to take a hit as the algorithms shut off and 'sell everything not named US Treasury' takes over, but you can see where all this easy money is going.   On top of this appreciation seen below, you actually receive some yield on your money (4.5-5.5%), unlike many developed markets.

Two for the road

iShares JP Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB)

EMB has 64 holdings and a 0.60% expense ratio. The top country weightings are Brazil, Turkey, Mexico, Philippines, Indonesia, Venezuela and Colombia.

PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY)

PCY has 55 holdings and a o.50% expense ratio. Top countries include Uruguay, El Salvador, Russia, Turkey, Colombia, Indonesia and Poland.

No position

Bookkeeping: S&P 1056 Recaptured, Covered Another Round of Index Shorts & A Bit Long

As expected, it was widely thought today's housing figures would be very bad.  What was surprising was how bad they were - but even then, after the initial knee jerk reaction it was a "sell the rumor, buy the news" moment as we are short term oversold.  When everyone is expecting something it is hard to 'react to it' - just as this Friday we are all expecting a bad GDP revision.  That doesn't mean the economy is good or the news is benign - it just means the market already has reacted.

Just as we had about a week and a half ago we now have an upside gap to fill... as I said then, these typically fill fast unlike downside gaps.  That one took 3 days to 'fill'.

I am moving fast here, but I covered much of my index shorts - 1 batch this morning first thing as I said in premarket I would if it looks like we'd open near S&P 1056-1058, and another on this break over 1056 - both quite profitable (13-14 S&P points) and a good hedge that was only held for a few hours to create some gains to offset losses on the long side of the book.   This trade took a few attempts for it to finally come to fruition but finally the payoff.

I am going to keep very small positions on my book of short TNA/BGU unless S&P 1070 is recaptured at which point I'll blow them out.  But for now I am hoping for a recapture of this morning's gap in the next day or three, to rebuild the short index positions nearer to 1070.

In the meantime, I actually am long these 2 ETFs (for a trade) as long as we hold 1056 on S&P 500. (modest positions)  I'll stop out on a break of 1055ish.

We have some clearly defined levels now on the S&P 500, versus being in a lot of white noise areas that we've been stuck in for many weeks so the trade set ups are much more distinct and clear here.  Going to try to take advantage.

If you are confused
Below 1056 = press short
Above 1070 = long (for a trade)
Between 1056 and 1070 = trading... longish on the low end of that range, then sell and go short at the top end of that range - for now my target is the gap created this morning @ 1067.

Intermediate term remains bearish, but nothing in a straight line.

Perfect world ---> we bounce to 1067, I dump the index longs, and reverse immediately going short the instruments.  With a stop loss over 1070.

I am also fine with being stopped out below 1056 on my temporary long index players and going short (again) on a break of that level.

EDIT 1:50 PM - I am selling the TNA/BGU positions (long) for losses here as the market is flopping around with no clear direction.  I was hoping for more of a sustained bounce.  Might still come later in the day but I have little conviction in direction. 

Long/short TNA, BGU in fund; no personal position


Existing Home Sales Plunge 27% Year over Year, Run Rate Below 4M Annualized Despite Prime Season

Let me preface this piece by saying "green shoots".

Existing home sales (which account for 90% of all transactions and hence far more important than tomorrow's new home sales) plunged to a sub 4M annualized rate, despite July traditionally being one of the best month's of the year for real estate.  The year over year drop was 27.2%.  This despite record low mortgage rates in mid 4% range and a governmental subprime lender who is now handing out 3.5% down FHA loans to almost anyone (they do not have a minimum FICO score requirement).
  • The pace of existing home sales is the slowest since comparable records began in 1999. Purchases of single-family homes were the lowest since May 1995. (of course this does not adjust for population growth)

Inventory also popped dramatically since July's sales were so putrid:
  • The number of previously owned homes on the market rose 2.5 percent to 3.98 million. At the current sales pace, it would take 12.5 months to sell those houses, the highest since at least 1999 and compared with 8.9 months in June. The months’ supply of single-family homes at 11.9 months was the highest since 1983, the NAR said.

Many are confused why housing has not surged with these sort of interest rates.  We now have record affordability (you can buy much more house at 4.6% versus 6.6% mortgages) - so where are the sales?  I think the answer is clear - so few Americans that are not already home owners, have enough savings to actually be able to generate even a 3.5% down payment.  Only when the government stepped in and created a 'tax credit' - that was morphed by many states into a de facto 'down payment replacement' were we able to create the marginal buyer.   That's because when we create bubbles as we did in 2004-2007, we already brought forward all the organic buyers that should have been appearing in 2009-2010.  Therefore, with a dearth of demand we "needed" (per government belief) to create new buyers and the only way to bring the 2011-2013 vintage of buyer forward a few years was to hand them taxpayer money in an almost no risk proposition (to them).

This is the same game that GM, Ford, and Chrylser did for a decade.  How did that turn out again?

Long time readers will know the litany of issues; I've written about it in exhaustive manner..  The tax 'credit' (it was supposed to be credited on a tax return) was turned into a de facto "down payment replacement" by many states, and hence many who have no skin in the game now are new home owners on the backs of the taxpayers.  (everyone on Wall Street applauded because it made home sales figures jump!)  In due time I expect many of these people to default in 2012-2014.  They have been handed a risk free poker piece in fact... they used the taxpayers money in lieu of down payment and get to live in a home and 'try it out'.  If there is some big boom in prices they win.  If home prices fall, they walk in 'strategic default' ... and get to live 'rent free' in said home (because truly they are renters, the term home ownership for what has been pulled off the past year is a joke) for 18-30 months before the banks get around to kicking them out.  Of course by then the Congress and administration will try more desperate measures to keep people in homes so they most likely will be handed more tax money because 'the banks tricked them' into a mortgage.*  This is the new America.  Instead of stopping the bleeding and returning to some form of health in a few years from now, after the 2004-2007 vintage of home buyer went through the process, we have kicked the can down the road and created a new generation who we'll be paying for in the next cycle.  Rinse. Wash. Repeat.

*of course all this taxpayer money given away to those "duped by the banks into buying homes they could not afford" is failing at a rate of 50%. [Mar 26, 2010: Half of US Home Modifications Default - Again [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble]    And the latest data as of last week shows that half the people in HAMP have dropped out - most cannot prove their income.  There is a reason it's called a liar loan - but I hope you enjoyed the taxpayer's money in the meantime.

As I wrote in piece after piece after piece in latter 2008 through this year... just try to imagine how bad the housing market would be with normal rates (say 6-6.5%), normal lender requirements for down payment (say 5%), and no bribery from government to buy homes.  It is truly astonishing what numbers we see now considering the population growth.

I believe this is where I say "2nd derivative non improvement".

 [Jun 3, 2009: A Country that Cannot Function Without Easy Money
[Apr 9, 2010: 1.2 Million Households Lost in Great Recession - Through 2008]
[Apr 8, 2008: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces

Bookkeeping: Adding Back to Polypore International (PPO)

Everything I just stated for BorgWarner (BWA) I am repeating in Polypore International (PPO).  I actually dumped the majority of the remaining position the exact same day I did BWA.  However in this case, the stock continued to rally and got into the $29s so my sale near $27 was not as well timed.  Either way, I had locked in a 15% gain at the time, and now can repurchase at some discount as the "gap" is close to filling.  I'll take a stab here and hopefully in a market selloff can layer in a new round of purchases lower.  This is a modest purchase today of under 1% exposure.

Long Polypore International in fund; no personal position

Bookkeeping: Rebuilding BorgWarner (BWA)

Let me preface this piece by saying I don't expect to make money in the near term on today's purchase, I am simply rebuilding some of the long exposure I cut back the past 3 weeks.  It's not a "short term trade".

BorgWarner (BWA) is a position I sold almost all stock in, on August 6th in the upper $46s.  The timing was quite good as the stock topped out the next trading session.  At the time I wrote:

BorgWarner (BWA) has had a big run, relative to the type of stock it is (staid).  I am going to sell the majority of what I have left (keeping a holding position of 0.1%) and try to buy back lower (hopefully below $44).  I am locking in roughly a 19% gain.

So that time has come, and we are under $44 on the name, as the stock approaches its 50 day moving average. Of course I will throw the caveat out as I do with any stock in this HFT, EFT dominated world - if the S&P500 is headed to 1010, this purchase will quickly show losses and support will be meaningless since the entire market is a derivative of S&P500.  Hence, as I stated above it is not a 'fast money' trade of any sort.  That same disclaimer will go for any purchase I do in the next 40-50 S&P points (down) if 1010 is the end game.  Simply will be holding my nose and buying some of the stronger companies along the way, picking here and there.

I made 2 purchases today, one an outstanding limit order and then a market order; together I should come in somewhere in the $43.50ish area as an average cost, so we were able to (a) sell - lock in our 19% gain - and (b) effectively relaunch the position at a 7% discount to where it was sold.

Looks like the housing data was putrid, as our country reliant reliant on government handouts, suffers the shakes without the bosom of Uncle Sam to suckle on.  .

Long BorgWarner in fund; no personal position


A Fibonacci Morning

(please see previous post for the Fibonacci chart I am referencing)

Based on premarket action S&P 500 futures have been in a range of 1057-1058ish which takes the index to the 1056 level noted yesterday as the next Fibonacci level (the 61.8% retracement).  I've noticed Fibonacci has been 'working' a lot more the past year; I assume the algo's are really in tune with it, and why not.  They are completely based on math, so respecting a mathematical formula would seem true to form.

Now that the S&P 500 is firmly below 1070 I plan to not completely exit the index ETF shorts I put on yesterday until/when the market reaches a far more oversold level.  Looking ahead there should be support at this 1056 area today... and then below that we have mid June lows in the lower 1040s, and then the all important 1010.  Remember, we have been in a huge range of S&P 1010 to 1220 for almost a year now - so until proven otherwise one would want to buy at the bottom of the range.  If we plunge through it, then all bets are off as the downside would be substantial and Hindenberg Omen might come true.   If all that plays out over the next 2-8 weeks, that would also coincide with the worst month of the year for stocks (September) and the month of crashes (October).   But I'd expect a massive defense by the powers that be at 1010 if and when we get there.

As for today's business, I'll take partial profits (i.e. cover) these ETF shorts if it looks like we are going to open near to 1056.  Not only is this near term support, but housing data comes out at 10 AM.  I expect it to be a horror show (where is the Jim Cramer housing recovery?) -  but then again, everyone else expect it to be horrible too.  So it would have to be especially pungent to surprise the market.   A break below 1056 would be a sign to add back to any shorts covered.

In terms of "generals", the main guy who dominates NASDAQ, Apple (AAPL), looks to be rolling over.

Eventually before this move down is over I'd like to see some pain in Priceline.com (PCLN), Netflix (NFLX), F5 Networks (FFIV), Las Vegas Sands (LVS) and Salesforce.com (CRM) [we own all 5] and a handful of other names which have taken the mantle of leadership.  The generals are always the last to go, and thus far these names have barely absorbed an ounce of pain despite 60+ lost S&P points the past few weeks.

Whatever the case, remember that the sharpest rallies come within the context of down moves so Jack must be nimble & quick (especially in this bipolar market with no memory).  If you are neither nimble or quick it's a time to be on the sidelines lavishing in your cash.

Long all names mentioned excluding Apple in fund; no personal position

Monday, August 23, 2010

Bookkeeping: Try Try.... Try Again; S&P 1070 is Stubborn - Trying Another Pass at Index Shorts

This S&P 1070 level is stubborn but the more times you hit a level - either to the upside or downside, the more it weakens.  Eventually it breaks. I feel like I am doing this trade over and over (because I have!) but once more let's try the short of TNA/BGU combo.  Did not work Friday, and with existing homes data tomorrow we have risk of whipsaw but I'll give it another whirl.

We have a mini Fibonacci level here at 1070 as a 50% retracement of the July low to August high move.... for those who practice the dark arts here is why S&P 1070 has been so stubborn.

[click to enlarge]

Amazingly the 61.8% retracement lines up perfectly with that low in July (1056) to boot so is an obvious next level of support.

[Aug 4, 2010: Amazing Fibonacci]

Short TNA/BGU in fund; no personal position

Small Investors Continue to Flee Stock Market and Rush into Bonds

The "equity culture" of America seems to be taking a substantial hit after the twin bear markets of the past decade.  [Feb 5, 2009: Mutual Funds Have Tough Decade]  Aside from the obvious performance issues of the 'lost decade' I do believe quite a few other factors come into play.  First, many Americans in the private sector are falling behind on an inflation adjusted wage basis - some studies now show that many Americans make less relative to inflation than they did in the 1970s.  Hence less people as a proportion of society can save/invest since the middle class is being eroded and is busy 'surviving'.  Without the "house ATM" which masked the loss of purchasing power, people are stuck with their wages only - I spoke about this a lot in 2007, 2008.  Second, those with the most money are moving to an older age demographic and naturally will become more conservative so you have an allocation change.  Third (and fourth), and these are more anecdotal from conversations and a lot of reading of comments, I believe many now see the stock market as a rigged game where those in the know or who control the mechanisms almost always win,  [Nov 4, 2009: Goldman Sachs Q3 Winning Percentage: 98.4%] while the little guy is bilked [Apr 9, 2010: Muriel Siebert: American "Public Does Not have Faith in the Marketplace"] .... and frankly many people cannot take the risk anymore.  Those who should be prime investors in their late 40s to early 60s have suffered two devastating losses the past 10 years and even if they have the interest, they cannot afford the risk.  They will now be happy with simply seeing their hard earned money protected rather than being risked by the nonsensical stock market which was sold to them as a 'great investment' as long as you 'hold for the long run'.  Considering most people will only be investing for 25-35 years of their lives, 10 years is 'long run' to them and they now view this spiel as incorrect.

So the larger picture is a new generation of suckers needs to be born, who have not been burned by Wall Street and then the next era of wealth transfer from the many to the few can continue!  Another solution is offering products to Main Street that the wealthy have been offered and that is beginning finally to occur. In the height of the equity culture (1983-mid 2000) the stock market almost always went up over time, and everyone was a genius. "Long only" was the way to go - now with a market that is not going in 1 direction, more sophisticated products are necessary [June 11, 2010: CBSMarketwatch - More Investors Turn to Flexible Mutual Funds]

We spoke about the allocation switch happening a year ago so it is nothing new [Sep 16, 2009: Mutual Fund Investors Cling to Safety of Bonds, Missing Stock Rally] - what should scare the equity industry is that despite the huge rally off March 2009 lows there has been NO correlated inflows from America's burned investor base.  And for those of you on grassy knolls, one must question how exactly this stock market has been rallying with so much equity being pulled out.  [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market]  It should be pretty obvious since both Ben Bernanke and Mervyn King (not to mention good ole Greenspan) have stated an increase in the 'wealth effect' is essentially a goal, since it is a huge stimulus.  Or if not government in some form, I guess the laws of supply and demand in Economics 101 has been broken - that is (a) lower supply of money into equity markets, with (b) fixed (or increasing) supply of stock = (c)  higher prices.  That was not in any of my textbooks but I guess in the Matrix, we have new paradigm math.  Anything to keep the facade going.

Two stories today on this change in culture in America.  Please keep in mind when they throw stats at you that 40-50%+ whatever are investors in America, many of those people have $1200 in an IRA or $2100 in a 401k at work (that they will generally cash out when they leave the job).  It is dogma to say "half of America is part gung ho on stocks!"   [Mar 9, 2010: Nearly Half of Americans Have Less than $10K for Retirement, a Quarter Less than $1K   Hence the concentration of real investors is probably nearer to 25-30% ... which is a lot like the consumption metrics in Cramerica - completely driven by the upper quintile as the lower 75% fade away.  Since Japan's 2 lost decades has brought its population who invest in their market down to 6%, there could be much more downside as more people lose faith.

Bloomberg:  Investors Shake Up Fund Industry with Record Bond Love Affair (story here)
NYT:  In Striking Shift, Small Investors Flee Stock Market (story here)

Some excerpts:
  • Retail investors in the U.S., burned by two market crashes in a decade, have shunned stocks for the longest stretch in more than 23 years, upsetting the balance of power in the $10.5 trillion mutual-fund industry.
  • Bond funds attracted more money than their equity counterparts in 30 straight months through June, according to the Investment Company Institute, a Washington-based trade group. Preliminary data show the trend continued in July, matching the streak posted by bonds from 1984 through 1987.  “Retail investors are still shocked by what has happened in the past two years.”
  • Bond funds attracted $559 billion industrywide in the 30 months through June, according to ICI. Investors pulled $209.4 billion from domestic equity funds and $24.4 billion from funds that buy non-U.S. stocks.  (yet the market was able to rally some 80% at peak?  I believe that is called 'magic')
  • From September 1984 through March 1987, a 31-month stretch, bond funds took in more money than stock funds, ICI data show, even as the S&P 500 Index rose 75 percent. Many U.S. investors were not yet comfortable owning stocks in the mid-1980s.
  • “In contrast to today, bonds also offered pretty good returns back then,” he said in a telephone interview.  The 10-year U.S. Treasury note had an average yield of 9.3 percent in that period, according to data compiled by Bloomberg. The 10-year note yields less than 3 percent now.

  • Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.  Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to theInvestment Company Institute, the mutual fund industry trade group.  Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
  • One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.
  • After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.  “At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.
  • The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.  It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.
  • To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.  Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.
  • The flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.
  • On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.

Now about that new generation of 'suckers' for Wall Street to fleece? Looks like they are not very interested.
  • According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.

Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 3

Year 4, Week 3 Major Position Changes

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

Cash: 80.2% (v 72.7% last week)
19 long bias: 17.7% (v 23.2% last week)
1 short bias: 2.1% (v 4.1% last week)

20 positions (vs 23 last week)

Weekly thoughts
Last week was a period of volatility but the market really did not go anywhere.  We had our typical Monday morning surge, this time due to a hostile takeover bid of Potash (POT) by BHP Billiton (BHP) taking the market off a freefall cliff at S&P 1070.  There was an unresolved gap to the upside at S&P 1088.50 hence I was thinking there would be some rally but it went about 12 points farther than I thought.  The rally Tue/Wed led to S&P 1100 where the bulls were rejected.  A horrible weekly jobless claims and negative Philly Fed report packed a 1-2 punch to the gut Thursday, taking the market right back to said support at 1070.  Friday, many (hand raised) were head faked by the break of this technical level... only to see an 'urgent buyer' show up out of the blue to rally the market late in the day.  So to end the week we sat right at the cliff edge of 1070 .... and lo and behold this morning we had (wait for it) our typical Monday morning surge.  But today it has been sold off thus far.

This chart conditions warrants caution.  While a bounce of 15-20 S&P points can happen (as we saw last week) it means nothing in the bigger picture.  It simply makes difficult for bears and bulls alike.  No serious intermediate moves can be made until we break out of this range but things look bearish on an intermediate basis.  But as stated a few sentences ago, the market never makes it easy and hectic rallies out of the blue make the bear position hurtful at times.

In terms of supporting markets - China & copper (and indeed many emerging markets) remain "ok"; this decoupling 2.0 theory i.e. the new emerging world power's can trade amongst themselves even with the largest economies being weak (Europe, U.S., Japan).  That was a theory in early 2008 as well until it imploded.   Semiconductors had their dead cat bounce as anticipated last week as seen in SMH ETGF, and again are rolling over, the financial ETF (XLF) looks 'Lost in Space', and bonds continued to shower up with yields fast approaching the lows of 2009.  With too much liquidity offered by central banks in a delevering economy with slack demand, much of the money that was gushing into equity markets last year has gone into bonds of all type in 2010, especially since April - emerging market debt, U.S. debt, German debt, Japanese debt.  I suppose that is one way to keep a Ponzi going...


Last week was a quiet one for economic reports; this week it picks up a bit but with housing completely lost despite being 'high season' and unemployment claims jumping substantially higher the past 3 weeks, there is not much to look forward to.

Tuesday: Existing Home Sales - this makes up 90% of transactions; unlike a year ago when the pundits were crying "housing recovery!" the data has been pathetic this summer, as we've attempted to repeat the ploy of 2004-2007, that is give almost anyone with a heartbeat a mortgage.  This time we've eliminated the middle man and simply made FHA our national subprime lender. (can you believe these guys do not even have a minimum credit score?)  Main hope for bulls is the number is awful but less awful than expected.

Wednesday: New Home Sales (less important than existing but we'll get the same knee jerk reaction), and the always volatile Durable Goods.

Thursday: Weekly Jobless Claims which have not attracted much more attention than they used to.

Friday: Q2 GDP revision and Consumer Sentiment.   First pass on this number was 2.4% but like almost all government reports in this era, it will be revised down after the fact (once we rally the stock market on the initial false data).  This number has a lot of issues with it to start but let's be clear, if even the government with all its massaging cannot make 3%+ GDP figures appear out of thin air we're in trouble.  Based on all the weak economic data the past month or two, analysts have moved down expectations from the original 2.4% to 1.3-1.5%.  So I guess we can rally on the "better than expected" 1.7% because that's the game we're playing.

The main thing the bulls have to hope for each week now is that the news is bad, but not as bad as expectation -that's a pretty pathetic investment thesis but it worked for much of early to mid 2009.  The main difference is the economy was being flooded with historic stimulus and moving off an obliteration from the Lehman/Fannie/Freddie/AIG era.  We are still being flooded with steroids but the patient has now become less responsive to the drugs as even 4.4% mortgage rates cannot drive a housing market, due to lack of savings in the country and inability to put even 3.5% down for many Americans.  Since there has been no serious post recession bounce (i.e. based on how awful GDP was in 2008-early 2009, we should have seen 5-7% type of GDP for at least a year even without massive stimulus), we are starting this next 'leg' down from a much lower level of economic activity hence I don't expect huge implosions - simply a long period of struggle.



I continued to 'de-risk' this week but the action remains difficult.  The market looked poised to break down Monday - but instead we got a rally.  That rally took the S&P 500 back over the 50 day simple moving average... but was rejected at 1100.  The the index imploded Thursday on 2 bad news reports.  Friday the market broke support but instead... rallied!  It has been a difficult, range bound market for many weeks now and remains so.  Rather than pressing trades its best to tread water, trade lightly on the edge, and wait for a more lasting move where making money will be much easier.   The two big movers for the week for the portfolio were Potash (POT) and Salesforce.com (CRM).

Specific actions:

On the long side:

  • Monday morning we were greeted with good news - BHP Billiton (BHP) made an unsolicited bid for fund holding Potash (POT).  While I thought Potash could run more over time, the big surge was enough for me and I closed out the position securing a nice gain but wishing of course our position size was larger. 
  • Nextflix (NFLX) continued an intense run so after taking some profits on it last week, I sold almost all shares Monday in the upper $130s as the stock was immensely overbought.  Within 48 hours I was able to buy back our shares (plus some) for a 9% discount as NFLX fell to the 10 day moving average - despite two days of rallying in the broader market. 
  • Riverbed Technology (RVBD) was bought on a limit order the previous Thursday; it had rallied close to 10% in just a few sessions so I took half off the table simply to lock in gains since the overall market was in weak position and the bounce had come so fast in this name. 
  • Thursday, I cut Salesforce.com (CRM) by 2/3rds ahead of earnings.  The report was good, but the market reaction was unusual to me - the stock skyrocketed Friday, at which point I sold almost all remaining shares.  I believe this had to be a short squeeze since the results were not "super". 
  • Friday, I closed Cirrus Logic (CRUS) as the stock had been acting weak and broke a key support, took a 12% loss. 

On the short side:
  • Tuesday as the market ran towards 1100, I was stopped out of a short of Gentiva Health Services (GTIV) for a 3% loss.  I replaced the name with Henry Schein (HSIC) - however that was stopped out the next day for a 1.5% loss. 
  • As the S&P 500 ran into resistance near 1100 I put on a modest 2% short on TNA ETF. I closed this out Thursday morning for a quit profit after poor weekly jobless claims figures, as the S&P 500 fell back to the support/resistance of the 50 day simple moving average near 1088.
  • After the Philly Fed report hit later Thursday morning, I put the TNA short back on plus some BGU (still modest sizes at 2%+2% = 4%) under S&P 1080, hoping to see 1070 or lower.  The market did fall to 1070 but I was torn on whether this would be the break or we'd bounce yet again.  Of course the index bounced and I took profits as the market was rebounding so the gains were small.
  • Friday, I tried the same trade as Thursday as the S&P 500 broke key support at S&P 1070 - shorting with both BGU and TNA - instead the market did a U turn and rallied right back for no apparent reason, and I covered for losses. 

Sunday, August 22, 2010

Updated Position Sheet

Cash: 80.2% (v 72.7% last week) 
17.7% (v 23.2%) 
2.1% (v 4.1%) 

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on thewebsite. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier. 

[click to enlarge]

LONG (1 photo file)




Friday, August 20, 2010

Paolo Pellegrini of PSQR Capital Returning Clients Money

The right hand man to John Paulson, Paolo Pellegrini [Oct 2, 2009: Paolo Pellegrini on Bloomberg]  who struck out on his own just a few years ago, is showing outside investors the door from his hedge fund.  This is the second high profile exit of the week - albeit this is sort of a quasi exit.  Checking the scoreboard this week:

HAL9000: 2
Humans: 0

I am wondering if the frustration of a market that has the logic of a first grader, where "long term" means "tomorrow", where individual fundamental stories mean almost nothing versus what ETF the stock is in, and thinking is looked down upon as every asset trades in lockstep in almost perfect correlation as computers whirl and buzz generating 70% of the volume in a market vacated by carbon life based objects, is causing some of the issue.  [Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life]   Certainly trying to create trades that would work for longer than 3 hours has become useless when each and every market (commodities, currencies, equities) is 95% based on guessing which way the S&P 500 is going to trade each day.  [Aug 5, 2010: Hedge Fund Strategies Finding 2010 Difficult]  Pellegrini is not even a 'buy and hold' type - he is a very active trader whose positions apparently average 1 week in length... but that's an eternity for HAL9000 who is back to 100% cash each night, ready to move the entire market en masse one way or the other each morning in the 'student body left' trading symphony.  [July 8, 2010: Hedge Funds "Frozen in Headlights" as BiPolar Market with 1:1 Correlation in All Things Not Named U.S. Treasuries Causes Confusion

Ironically, as we just saw videos by Celente (I edited the piece to add the new 3rd video), Pellegrini is another guy who in the October piece cited above was not afraid to tell it like it is, and speak about what a broken system we have created.

For history sake - Pellegrini made 40% in 2008, 62% in 2009, and -11% YTD in 2010.  The end (for now). Maybe he'll come back as a quant fund and just smoke cigars 6.5 hours a day, while the computers do all the work.  HAL's master plan to exterminate these nasty inefficient humans seems to be going according to plan.

[click to enlarge]

Via Bloomberg:

  • Paolo Pellegrini, the former Paulson & Co. executive who helped that firm make more than $3 billion with bets on a U.S. housing crash, plans to return money to outside investors in his hedge fund after losing about 11 percent this year, according to a person with direct knowledge of the decision.
  • Pellegrini will continue to manage his own money, and he may reopen the fund to outside clients in the future, the person said.
  • Pellegrini, 53, started his hedge fund after helping billionaire John Paulson engineer a bet against subprime mortgages that catapulted their hedge funds to gains of as much as 590 percent in 2007. At PSQR, he runs a macro hedge fund, which seeks to profit from broad economic trends by trading stocks, commodities and currencies, and holds his trades for an average of a week.
  • PSQR won’t charge fees to clients until he recoups losses, the person said. 
  • Pellegrini, who was born in Italy and has a Harvard Business School MBA, told clients that he decided to stop managing their money because of the “additional work” required due to his bearish outlook on the economy, AR Magazine said, citing an investor letter.

[Video] Gerard Celente - The Anti Kool Aid

I first saw Gerard Celente on one of those Fox Business shows when the network was new and I was exploring what it was offering.  (as an aside Fox Business debut pretty much marked the top in the S&P 500!)  A quirky fellow... but I found many of his views intersected with mine. I went to go look at his website after the interview and I was pretty impressed with his old calls.  Quite a bit of is social rather than just pure economics so being a student of humankind, I find his broader talking points quite fascinating.  He is not afraid to say things that makes Americans uncomfortable - and hopefully makes them think if they are open minded about the society we have created.  You will recognize many similar themes to what has been seen in these web pages the past 3+ years.  Long time readers will recall the coming "pooring of America" I often cited back in the early days of the website as the U.S is broken into an elite 'capital owner' class and "everyone else".   [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]   Corporations are now "people" (per the Supreme Court), lobbyists rule the land (and create the rules), and almost every major industry in America is an oligarchy as 'anti trust' is something found only in textbooks.  It's not just banks, let's be clear. Of course if you dare talk about wealth and income disparity or power concentration, you are immediately called a socialist (or worse... a "European"!) and the conversation ends.  But of course it is spoken about (in quiet whispers) in the halls of our investment banks.  [Sep 7, 2009: Citigroup 2006 - America, A Modern Day Plutonomy]

Since Celente makes my views look like Kool Aid Drinker in Chief, I hesitated to post some of his interviews until they were in a business format.  CNBC would never have a charlatan like this on their prestigious channel, so we had to wait for Yahoo Tech Ticker to do an interview with him - that happened early this year.  It was his normal 'happy' stuff. [Jan 12, 2010: Trend Forecaster Gerard Celente on Yahoo Tech Ticker]

As they say in the movies... he's baaaaaaack.  (p.s. sweet suit Celente!)

 If nothing else and you completely disagree - much like Howard Davidowitz, he is very entertaining.

(I) And Now We're Headed for the Greatest Depression

The fake "recovery" was nice while it lasted, says famous apocalyptic forecaster Gerald Celente, founder of the Trends Research Institute. But now the fun's over, and we're headed for what Celente describes as the "Greatest Depression."
Specifically, the always startling Celente says the country is headed for rising unemployment, poverty, and violent class warfare as the government efforts to keep the economy going begin to fail.
The crux of the problem, Celente argues, is that the middle class has been wiped out. America used to be a land of opportunity for all, where hard-working people could build their own small businesses in their own communities and live prosperous and fulfilling lives. But now a collusion of state and corporate interests that Celente describes as "fascism" have conspired to help only the biggest companies and the richest Americans. This has put a shocking amount of the country's wealth in the hands of a privileged few and left the rest of the country to subsist on chicken-feed wages and low job satisfaction as Wal-Mart "associates" -- or worse.
The answer, Celente says, is to bring back the laws that prevented huge companies from getting so big and powerful, and put some opportunity back in the hands of ordinary people.  But doing that is going to take a while.  And in the meantime, we're headed for trouble.

(II) America Won the Cold War But Now is Turning into USSR

There's a lot of talk these days about America being an empire in decline. Gerald Celente, director of the Trends Research Institute, goes a step further, arguing America is following a similar path as the former Soviet Union.
"While the many glaring differences between the two political systems have been exhaustively publicized - especially in the U.S. - the glaring similarities [go] unnoticed," Celente writes in The Trends Journal, which he publishes.
In the accompanying video, Celente describes some of these similarities, including:
A rotten political system: He compares politicians (Democrats and Republicans alike) to "Mafioso" and says campaign contributions are really thinly disguised "bribes and payoffs."
Crony capitalism: Like in the USSR of old, Celente laments that so much of America's wealth (93%) is controlled by such a small group small portion of its population (10%). Owing to that concentration of wealth, the government makes policies designed to reward "the bigs" at the expense of average citizens (see: Bailouts, banks).
Military-industrial complex: The USSR went bankrupt fighting the cold war and Celente fears the U.S. is "squandering its greater but still finite resources on a gargantuan defense budget, fighting unwinnable hot wars and feeding an insatiable military stationed on hundreds of bases worldwide."
As with many observers, Celente thinks America will suffer the same fate in Afghanistan as the USSR, the British Empire, Alexander the Great and all others who've ventured into the "graveyard of empires."
The irony, of course, is that while America defeated Soviet Communism and won the Cold War, perhaps our greatest threat today comes from China and its booming state-controlled economy.

(III) 'Too Big to Fail' is Killing the Middle Class

August has been a hot bed of merger & acquisition activity.  M&A activity is generally viewed as a good sign for the market and economy.
To the contrary, says Gerald Celente, director of the Trends Research Institute. “This country went from a nation of Main Street, mom and pop businesses to Wall Street and 'too big to fails',” he tells Tech Ticker in this clip. ("Not only were they 'too big to fail,' they were 'too big to jail'," he says of Wall Street execs.)
Deregulation and bailouts favor the country’s largest corporations, at the expense of small business, Celente believes. “They’re squeezing out everybody else." Policies like these have created the widest wealth gap in the industrialized world, he says; “10% of the nation controls 93% of the assets."
Former IMF Chief economist Simon Johnson makes a similar point in his book, 13 Bankers. In it, Johnson claims, six banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) control 60% of America’s gross national product.
The only way to turn the tide, says Celente, is to “put back what was in place that worked,” like the Glass-Steagall Act and the Sherman Antitrust Act, which exists in name only. “That’s what stopped the robber barons from raping the country.”
Celente is confident more regulation on the largest companies will help entrepreneurs, which in turn strengthening a fading middle class – the backbone of our society. “America becomes strong again when the middle builds big again,” he says.
Unfortunately, Celente sees the trend going in the opposite direction. “The merger of state and corporate powers, let’s calls a spade a spade. It’s fascism.”

Bookkeeping: Index Hedges Short (again)

In retrospect should have just kept my index shorts on from yesterday.  With the S&P 500 finally breaking out of this day long range, and slicing through 1066 I will add the same 2 instruments I had yesterday (TNA/BGU) short but make the position sizes bigger this time, instead of 2% each more like 4%.

I am debating the first foray into SPY options (puts of course) in about 6 weeks as well... I'm rusty.

Initial downside target is S&P 1056ish.  Bulls need a close back over 1070 to set up any chance at "Magical Mondays".

I am very surprised at today's action as I thought the market would do little with no economic news.  Instead we sold off because Asia/Europe sold off... which are weak due to the action in the U.S. yesterday.  That is so circular as to make little sense.

Further in the strange zone, about 2/3rds of my long positions are in the green today thus far.

EDIT 2:45 PM - I am covering both instruments again as the S&P now crosses 1071.  Obviously my trading of these ETFs this week has been horrid.  When you break to new lows for the day you are not supposed to rebound and go right back up - but we did, and the trade was wrong.

Short TNA/BGU in fund; no personal position


Bookkeeping: Selling Most of Remaining Salesforce.com (CRM)

I will confess to not understanding the big move today in Salesforce.com (CRM) - I have to assume it's some sort of short squeeze because the results did not strike me as super impressive.  Due to the big gain today (+13.5%), plus a smaller size position after cutting 2/3rds of it yesterday I am going to sell all but a cursory position and then see if I can rebuy in the future on a pullback near today's gap.   If not, other fish to fry.  If the overall market were in a better technical condition I might have considered adding to it and riding the "momo" trade but not at this point.  I assume if the S&P falls to 1010 in the coming weeks I'll be able to rebuy some of these best of breed at levels they were before their earning reports.

Long Salesforce.com in fund; no personal position


Bookkeeping: Closing Cirrus Logic (CRUS)

With the market in precarious position there is no room for stocks who don't have the best relative strength.  Cirrus Logic (CRUS) has been weakening the past 8-9 sessions and then was kicked in the groin by an analyst downgrade yesterday.  With the stock breaking below the 50 day moving average, it is time to depart and I'll take a 12% loss on a 1.3% exposure.  Not sure if I will be back in this one as it's basically an Apple proxy play.

With the S&P 500 breaking 1070, I'll have to consider getting back those index shorts again - I was too antsy about an end of day stick save since we've been trained to see them come out of the blue so often the past year and a half.  It's like seeing ghosts that might not even be there.

If 1070 can not be recaptured soon, I'd be looking for downside targets of 1040 (lows of May and June) and then eventually 1010.

No position


Potash (POT) CEO Set to Receive Nearly Half a Billion if Buyout by BHP Billiton (BHP) Goes Through

It's good to be a CEO of a public corporation.  A nearly half a billion golden parachute on top of compensation for the previous 10 years.... that's the type of wealth that can take care of about 5-7 generations after you kick the bucket.

Via Bloomberg:

  • Potash Corp. of Saskatchewan Inc. Chief Executive Officer Bill Doyle stands to receive $445.4 million for his stock and options if BHP Billiton Ltd. succeeds with its hostile takeover offer.
  • Doyle, 60, held 3.43 million shares and options as of Feb. 19, according to a company filing. The CEO would also get termination payments should he leave following a change in the company’s control. If that had happened on the last business day of 2009, he would have received a $28.1 million payment, the filing shows.
  • I think we can safely say the payout would be the biggest we’ve ever seen,” Paul Hodgson, a Portland, Maine-based senior research associate at The Corporate Library, an independent research firm. “There have been some substantial payouts, but most are much smaller.”
  • Former Exxon Mobil Corp. CEO Lee Raymond got a $351 million payout, the biggest to date, when he stepped down in 2005, according to figures compiled by The Corporate Library, which rates companies based on corporate governance and executive pay. Ex-Pfizer Inc. CEO Hank McKinnell’s payout was the second- highest at $213 million after he was forced out in 2006, the data show.
  • Doyle, a graduate of Georgetown University in Washington D.C., became CEO in 1999 after 12 years in other management roles at the company, according to Potash Corp.’s website.
No position

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