Tuesday, August 31, 2010

Bookkeeping: Covering Burger King (BKC) Short

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Burger King (BKC) is about 15 cents away from my target area to cover, so I am going to go ahead and do it here and snatch by 3.5% gain.  At the time I put this short on last Thursday, I had just a tiny amount of index short exposure because the market was reaching oversold levels and I did not want to be in front of a snap back rally.  Now that this has been worked off to some degree, I transitioned back to some modest index exposure and this is the 1 of the 3 short positions that has reached my initial target so I am essentially swapping out one form of short exposure with another.



BKC can certainly drop below $16.40s range (an area of support on its downdrafts during August) but it most likely will require a drop through S&P 1040 to happen, so for now I will just play the range it has been in.   This was a 2.5% exposure.  I will reshort if it gets back up to $17.25+ but right now I find that a doubtful probability.

No position


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Bookkeeping: Closing Monsanto (MON)

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This is not a market to hold weaklings in;  I will only partake in the highest of relative strength at this moment.  If you show vulnerability you are going to be kicked to the curb.  Such is the case with Monsanto (MON) after the company tightening guidance today.  The stock has been acting weak the past few days, breaking below (but still hovering near) key support last week - but today's news did the trick.   I had already cut the position in half August 12th once the broader market began to break down, and did some very light culling last week just to reduce risk, so all I had remaining was about a 1.4% exposure which will be all going today (at 8% loss, most of it coming due to today's action).  I had gains on the earlier position size that I sold so all in all - probably a wash since we restarted the position mid July.



  • Monsanto Co., the world's largest seed company, said Tuesday it expects full year earnings at the low end of its previous expected range and is cutting up to 700 more jobs.
  • The St. Louis company expects ongoing earnings, which excludes some items, between $2.40 per share and $2.45 per share for the fiscal year that ends Tuesday.  The previous expected range was $2.40 to $2.60 per share. Analysts polled by Thomson Financial, who tend to leave out one-time gains and losses from their estimates, on average predict a profit of $2.49 per share.
  • The job cuts will lead to $90 million in severance and benefit costs, $60 million in facility closure expenses and $30 million in asset write-downs.

No position


x

Bookkeeping: Taking More Profits on Riverbed Technology (RVBD)

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Since being reintroduced into the portfolio August 12th on a limit order when Riverbed Technology (RVBD) filled its "gap", the stock has been on fire.  It is acting as if the S&P 500 is up 5-7% for the month of August, rather than down by that amount.  Within 48 hours of purchase I had a 8% gain on my purchase so I quickly took profits thinking with the market in trouble, the gains could evaporate.  Instead it has lived in a vacuum.  Now the stock is up 23% from where I bought just a few short weeks ago, so I am going to cut the position by half again.   Technically there is no reason to sell, as a very bullish 'flag' formation is apparent.  But I am going to take my profits and I'll let the rest ride from here - if the S&P 500 were in more attractive condition I'd most likely be adding to the position rather than subtracting.



Long Riverbed Technology in fund; no personal position

Bookkeeping: Buying Portfolio Insurance with Small SPY Put Exposure

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As mentioned in the previous post I am going to buy a small form of portfolio insurance via a longer date put position.  The size will be small (a tad over 1% exposure) and this is an either or proposition, either it will be headed to zero or should be a big winner.  The third outcome is "meh" but that would only occur if the market stays in this spot for about 7 weeks.

I bought a batch of October SPY 104 puts, with intention of providing insurance if S&P 1040 breaks.  I'll most likely sell on a retest of S&P 1010 if and when as I expect the powers that be to defend that level.  That doesn't mean 1010 will hold either if we get there but I'd expect some bounce there even if there is more downside later in the year.

If the market rallies from here these puts will expire worthless (or near to it) so I risk 1% of performance for the year; with over 50% to spare that's fine for purposes of this trade.

I will reiterate what i said last week - the more times you test the level the more it weakens.  Eventually you break through (almost always) but those levels will be defended.  We saw that at S&P 1070, and now we see it at 1040; it will take a reaction to economic news to break these levels most likely since the defense of these levels will be urgent in the normal ebb & flow. To go along with this option position I increased by short exposure on TNA/BGU in very modest proportion with this bounce to S&P 1048-1050ish.  This has nothing to do with the action today, and everything to do with the economic reports the rest of the week, along with the technical setup.



Chicago PMI this morning is showing the same pattern as just about every other economic report than past 75 days... even when it's "matching expectations" it is degrading fast.  Without ever increasing government support of epic proportion the domestic economy is eroding quickly.

 Chicago PMI: 56.7 vs. 57.6 expected, 62.3 prior. Employment 55.5 vs. 56.6 prior. New orders 55.0 vs. 64.6 prior. 

Long Oct SPY 104 puts in fund - short TNA/BGU; no personal position

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Friday Appears to be 1 Day Wonder

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Showing how even when markets are mostly in 1 direction they remain difficult to make money in, Friday's dead cat bounce in retrospect did little other than scald bears who were pressing.  As I review the news flow and time stamps Friday, it seemed very strange to see such a strong rally based on (a) a negative reaction to Ben Bernanke's comments initially [the market sold off post 10 AM] and (b) Intel's pre-announcement on earnings.  Being a cynic and knowing a lot of the "important people" in the capital market had representatives in Jackson Hole, the decision for the Japanese to leave early and talk of an emergency "action" was probably the real reason "those in the know" decided to cover shorts and get flat for the rest of the day, allowing bulls to take the baton.  Pure speculation on my part, I admit but since information is everything and a small select group of oligarchy have their ears in all the right places, I believe this could have been the driver Friday (aside from an oversold market!).

The emergency action did come, as Japan's central bank and government did a 1-2 combo to create stimulus # 21,925 in the 20 year battle against malaise (ever get the feeling we'll be talking about the U.S. in these terms in 2020?) but while it caused a knee jerk reaction of +1.8% in Japan (down from a 3% rally), speculators worldwide were not pleased with the scope of the stimulation.  Without a big enough pacifier in their mouth they threw a temper tantrum and away we went.  Effectively all of Friday's "good action" disappeared yesterday and we're right back to where we started, staring at S&P 1040, with some scalded bear hides (from Friday's action) to add to scalded bull hides (from Monday's action) as Mother Market is the main winner.

From yeterday morning:

  • The Japanese central bank unveiled a new six-month low-interest loan program to financial institutions. Combined with an existing three-month funds-supplying operation worth 20 trillion yen ($236 billion), banks will now have access to a total of 30 trillion yen ($355 billion).
  • The central bank's move, which disappointed investors and analysts hoping for bolder action, was followed several hours later by Prime Minister Naoto Kan's plans for a new economic stimulus package worth 920 billion yen ($10.9 billion). Those steps were also criticized as inadequate.
  • The new stimulus package includes more help for jobseekers, such as enhanced career counseling at universities and an internship program for new graduates. To bolster consumption, the government hopes to extend incentives including a popular "eco-point" program aimed at encouraging purchases of energy-efficient home appliances.
  • The Nikkei 225 stock average rose more than 3% following news of the emergency meeting but pared gains to finish up 1.8%.
  • Richard Jerram, head of Asian economics at Macquarie Securities, described the Bank of Japan's decision as a "helpless, hopeless policy." The government's modest stimulus appears similarly pointless, he said.  "There seems to be a sense of fatalism," Jerram said in a report Monday. "The BOJ continues to play the same old game of making incremental, but ultimately meaningless policy change, in response to political pressure."

This morning, after 24 hours to reflect, the Nikkei was hammered.

As for that bond market selloff?  It lasted 1 whole day.



Aside from the sideshow in Japan and the speculators full on dependence on the suckling of government/central bank teats worldwide, I am growing increasingly concerned about this week's data points.  As I said yesterday I do believe the potential exists for the first contraction in private payrolls (excluding the fantasy birth death model that the government tells us has created millions of small business jobs during the recession) in many months Friday, and the ISM figures in the U.S. and purchasing managers data in China also hold a great possibility of disappointing.  Last month a Chinese PMI figure near flatline was considered "cool" because it meant Goldilocks China had arrived; I don't think outright contraction (a distinct possibility) will be viewed as such - we'll know in 13 hours.

To that end I am considering a small insurance ploy in the portfolio - buying some longer dated SPY puts (perhaps October or December) with a very small portion of the portfolio - they would either expire at worthless or explode higher if this S&P 1040 level breaks and we revisit S&P 1010 (or lower) as the Ides of September approach.  Yesterday's volume was incredibly low and despite the 'pessimism' in the market, I think people are complacent as the high octane, beta generals refuse to sell off.  [Aug 27, 2010: Need to See Pain in These Names - the Generals]  Whatever the case, high levels of cash remain sensible from this set of eyes.

Monday, August 30, 2010

[Video] Bruce Berkowitz of Fairhome Fund (FAIRX) Interviewed on Consuelo Mack WealthTrack

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Fresh of his manager of the decade knighting by Morningstar, Bruce Berkowitz has started to catch the attention of the masses.  We've been fans for a while despite diametric opposite approaches.  [Feb 3, 2009: Fairholme Funds 2008 Report] Always one to invest different than the herd, Berkowitz's recent purchases are very interesting because they are so financially oriented, and (let's be blunt) so "government backstopped" - namely Citigroup (C) and a massive position in AIG (AIG).  The Citigroup position is not so surprising - in a world where so much of the world's assets are going into fewer and fewer hands the mega hedge funds have fewer options of the type of stocks they can buy that can move the needle.   [Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]  Hence, many of Queen Elizabeth sized hedgies  [Mar 8, 2010: List of Largest Global Hedge Funds]  have piled into Citigroup, content the downside risk is limited because the U.S. government stands behind it (oops, officially they do not stand behind Citigroup but "wink wink" they do)  [Feb 17, 2009: Hedge Funds Pile into Citigroup; as does Bruce Berkowitz of Fairholme Funds]  The AIG investment however, while along the same lines, is a path far less traveled by fellow investors.  Whatever the eventual resolution, another thing that puts Berkowitz in the minority is his holding periods.  In a market that has turned 'long term' into meaning 'next week', Berkowitz seems to have been delivered from the 1970s with his very long term time frames.

Below is a video with Berkowitz with Consuelo Mack of WealthTrack; email readers will need to come to site to view.








hat tip to Investment Postcards

[Jan 31, 2010: Bruce Berkowitz of Fairholme Funds Slashes Pfizer Stake, Exits Boeing and Northrop Grumman; Add to Berkshire Hathaway]

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

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Year 4, Week 4 Major Position Changes

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

Cash: 71.0% (v 80.2% last week)
20 long bias: 20.7% (v 17.7% last week)
5 short bias: 8.3% (v 2.1% last week)

25 positions (vs 20 last week)

Weekly thought
A rally Friday in the face of an Intel warning saved face for U.S. markets .  While both the indexes and many individual stocks were oversold, it certainly was a stiking reversal in the action after an early morning selloff, and negative reaction to the first blush to Bernanke's speech.  But generally once the rubber band is pulled back too far, it has to snap back - and more than equities the move in bonds was prone to a snap back, and with all computers trained on this relationship, once bonds showed any faint sign of life, the rush into equities was on.  So the question from here, since we live in one huge correlated trade, rather than any form of markets nowadays is how far can the bond move go, because equities should move in inverse.  Already in 1 session of dramatic reversal, the US 10 year treasury nears resistance.



As for the S&P 500, a cool 25 points was tacked on from the intraday low of S&P 1040, relieving some of the oversold pressure.  S&P 1057 held as resistance for much of the day but a late afternoon push through 1060 had buyers rush in (and bears cover ahead of the weekend) taking the index to 1065.  There is a small upside gap at 1067 that still needs to be filled, so I'd assume this happens soon.   However, bigger picture all we are doing is going back and forth in a wide range, benefiting no one but traders.  The current levels of importance remain the same:



1010
1040
1057
1070
1085ish (the 50 day simple moving average which was a key level of support, now resistance)

After ignoring the domestic selloff for a few weeks, the Chinese market finally began to show signs of rolling over again.  Their purchasing managers index data Tuesday evening our time, should be a key driver for the week.  On the other hand, copper is still holding in well.  An interesting divergence.

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

Economic data is important this week and then will take a hiatus in the coming weeks as secondary & housing reports take the baton in early to mid September.  I would expect gap ups or down on the indexes both Wednesday and Friday mornings as we get PMI reports and the monthly employment data, not to mention Chinese/European industrial data the first day of the month.  These are impossible to game - essentially an "earnings report" type of atmosphere but for the entire stock market, not one stock.  I do believe there is a chance that private payrolls in America went negative in July; and if not for the birth death model I'd say it is almost guaranteed but with the typical 100K+ of phantom jobs added to this piece of 'art work' who knows what the exact number will be.  But let us be clear, if its 50K or 75K that is not even keeping up with population growth so the stagnant economy shows no sign of recovery in labor data.  Tuesday morning should also be volatile.

Monday: Personal Income and Outlays (premarket)
Tuesday: Case-Shiller Housing Prices (premarket), Chicago PMI, Consumer Confidence
Wednesday: ISM Manufacturing (consensus 53, down from 55.5 in June), also European mfg indexes and overnight Tuesday China purchasing manager indexes.  Construction spending.
Thursday: Weekly claims (premarket), Productivity & Costs (premarket), Factory Orders
Friday: Monthly job reports (consensus -80K including census workers let go), and ISM Services (consensus 53, down from 54.3 in June)

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

Portfolio

I am making selective buys here or there when stocks I like finally come in but frankly many of the stock we own are 'generals' who have been mostly teflon during this selloff. [Need to See Pain in these Names - the Generals]  I don't really trust a move down to be complete until the generals take at least a day or three of serious pain, and thus far some of these names have not even seen 1 harsh day despite a serious selloff the past 2.5 weeks.   Bigger picture, with the indexes below all key moving averages any purchases are still knife catching in general and the building of intermediate term positions remains problematic.  It feels like almost everyone in the market right long is just a flipper - trying to catch a turn, get their quick trade, and then get out.  Certainly not a great environment for 'investing'.   As I added a bit of long exposure (about 3%) I made a trade on the short side once S&P 1070 was broken, but the farther we pulled the rubber band away the more sensible it became to switch to some individual equities on the short side rather than a heavy emphasis on indexes.   That helped save the bacon Friday, but now that the rubber band had snapped back to some degree, index positions are more attractive of an option for hedging.

On the long side:

  • Tuesday as the market continued to selloff, I began to rebuild a position in auto supplier BorgWarner (BWA) which had been sold off for good profits.  The stock came back down to the 50 day moving average, allowing us a sensible place to purchase. 
  • Polypore International (PPO) similarly fell back down to the 50 day moving average, letting us have a chance to begin to rebuild a position we had sold higher to lock in profits. 
  • Once the S&P 500 fell to 1056, I tried some index plays (TNA/BGU) long hoping for a quick oversold bounce - when this did not happen I quickly sold out for a small loss. 
  • Wednesday, I started another auto supplier position - one of the most impressive earning reports of the previous period, Magna International (MGA) as it fell back to near its 50 day moving average. 


On the short side:

  • As I tried the previous week (unsuccessfully) once S&P 1070 broke Monday, I put some index short positions on (TNA/BGU) with a target of S&P 1056.  This was all based on Fibonacci levels - a move from the 50% retracement to 61.8%.  It worked to perfection as I covered most the next day in the mid 1050s.  I kept some very small positions as placeholders.
  • Wednesday I covered a short in Global Payments (GPN) for a nearly useless 1.5% gain.  This was supposed to be one of my hedges for a market selloff; the selloff came but this specific stock did not give up much of the ghost. 
  • Thursday, with the market quite extended to the downside I decided to focus on individual stocks with poor charts - which led me to a basket of Toll Brothers (TOL), Burger King (BKC), and Symantec (SYMC) - utilizing a 7.5% exposure in total.

Sunday, August 29, 2010

Updated Position Sheet

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Cash: 71.0% (v 80.2% last week) 
Long:
20.7% (v 17.7%) 
Short:
8.3% (v 2.1%) 


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)



SHORT 






OPTIONS


N/A

Friday, August 27, 2010

IBD: F5 Networks (FFIV) Leads in Key Cloud Market

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As I circled through the leading stock charts last night I was struck how narrow the relative strength is.  The only subsector in tech that has any life is "anything that touches cloud computing".  While I believe in the concept, and I own multiple names in it, I am a bit bemused that stocks like Riverbed Tech (RVBD) and F5 Networks (FFIV) have suddenly become "cloud" plays - I've owned both, on and off, for many years and they are 'networking' stocks.  But attach the tag 'cloud' and I guess your valuation can double.  Even an old dog like Citrix Systems (CTXS) -  now has reinvented itself as a cloud play and lo and behold I saw it among the leadership stocks.  Eventually - maybe in 6 months, or 36 months - this valuation premium is going to drop out of these names, as Wall Street loves to find a story and then go to the extreme.  That does not mean cloud computing is not real or a decisive driver, but one needs to worry when the love affair starts to reach 'stalker' levels... which is what we can now see in this subset of 10-12 names.

With that said Investor's Business Daily does its normal excellent "easy enough for anyone to understand" write up, this time on F5 Networks (FFIV) so worth sharing - even as fundamentals have taken a back seat to staring at squiggly lines on charts.  I have taken profits on almost the entire position, and am waiting for a more opportune entry point to rebuild the stake.  Hopefully that gap can fill which would be a nice place to return in size.



  • F5 Networks (FFIV) has become one of cloud computing's biggest beneficiaries, revving up earnings and widening its lead over bigger rivals by helping make network-delivered software faster and more reliable.   F5's products help customers balance workloads among servers in data centers while screening network traffic and encrypting data.
  • The Seattle-based company dominates an obscure but crucial $1-billion market for application delivery controllers, and that lead has driven up its stock price by 64% this year to an all-time high around $87 per share.
  • Application delivery controllers, or ADCs, are hardware appliances that connect to corporate networks. Resembling pizza boxes, the devices come with built-in software that analyzes network traffic to help applications delivered over networks run better and more securely.
  • ADCs have become more vital due to the rise of cloud computing, a trend that offers software and other computing resources via remote data centers rather than from expensive on-site systems. Mobile devices are boosting data traffic as well, says F5 CEO John McAdam.  "There is much more complexity in the network and in the movement of network traffic, so we're gluing the whole thing together within the data center," McAdam said. "You could say we're the glue that holds the data center together."
  • In the January-to-March period, F5's sales from ADCs grew 12.5% over the prior quarter to $126.4 million, according to Gartner. In that same period, second-ranked Cisco Systems' (CSCO) sales from ADCs shrank 8.6% to $64 million. The market's third-largest vendor, Citrix Systems (CTXS), saw ADC sales fall 15% to $30.4 million.
  • F5 is gaining ground because it has the market's only products that can analyze network traffic without bogging it down, according to Brian Marshall of Gleacher & Co.  "That's key, because slowing the data throughput decreases the overall efficiency of the network," Marshall said.
  • F5's operating profit margins are around 34%, and its gross margins of 81% are "the envy of the industry," Marshall says.
  • F5 plans to roll out a range of new products in the coming 12 months to further extend its technology lead, McAdam says. Promising roll-outs include additions to its TMOS (traffic management operating system) platform and the latest Viprion model of ADC, which has a flexible chassis design that lets users easily increase capacity by adding more hardware 'blades.'
  • But how long can F5 dominate?  Cisco, Citrix and another market rival, Radware (RDWR), are all attempting to lure customers away with lower-cost ADCs. F5's will have a tough time maintaining its high gross margins, analyst Marshall contends.  A weak global economy could also drag down spending on data center upgrades over the next six to 12 months.

Long F5 Networks in fund; no personal position

Nice to See You Again S&P 1040

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Here we are again, S&P 1040.  The nonsense rebound to a poor GDP figure that was 'better than expected' only lasted an hour or so.  As always, the more time you test a level, the more prone it is to eventually breaking.  I do expect 1040 to eventually break.  We can use that level as a pivot, being short below and stopping out on a move back above.  Whatever happens intraday, the close of course is more important.  Below 1040 we have no tangible support until 1010.  If it appears we will close below 1040 late in the day or early next week, I might bring out some SPY put options for the first time in a long time to generate some extra alpha. The problem is, 1-2 more days like this and we're at extreme oversold levels so I'd actually prefer a bounce first.



One side note - I have been saying the past few days to expect Chinese PMI overnight Sunday, that is wrong.  For some reason I was thinking Monday was the 1st of the month but it's actually Wednesday so Chinese PMI should come Tuesday evening.

EDIT 10:27 AM - nevermind then, Ben Bernanke came from Mount Olympus and apparently said good words that added 10 S&P points. 

Q2 GDP Revision Down to 1.6%; Reaction to Data Identical to Yesterday's Unemployment Claims

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The very problematic Q2 GDP revision downward from 2.4% to 1.6% is receiving an identical reaction to weekly claims yesterday.  The estimates / expectation had been so lowballed that anything north of 1.25% can now be considered "good news" and a knee jerk reaction of "whew!" buying came come in.  Which is fine for the next hour but when you take a step back and look at what has been accomplished with a few trillion of national treasure thrown at the economy via Federal government and Federal Reserve, all we had were 2 quarters of GDP in excess of 3%, now bracketed by 1.6% quarters (of course the Q2 GDP still has another revision to go).

Via Bloomberg:

  • The U.S. economy grew at a 1.6% annual rate in the second quarter, less than previously calculated, as companies reined in inventories and the trade deficit widened.  Economists projected a 1.4% rate of growth in the second quarter.  The economy grew at a 3.7% pace in the first quarter.
  • Mark Zandi, chief economist at Moody’s Analytics Inc. this week said the likelihood of the economy slipping back into a recession is now 33 percent, up from a 20 percent chance 12 weeks ago. New York University economist and forecaster Nouriel Roubini, who predicted the financial crisis, said the odds of a return to recession at 40 percent.

I cannot stress how poor this is... historically after the deepest of drops the rebounds have been stellar only from a "return to mean" aspect.  That is, if the economy contracts 6%, it has often rebounded 8% - and that is with a fraction of the assistance offered by the powers that be, versus the current episode.  This time around we had a reading over 3% for one quarter, and a reading over 5% another quarter.  And we're back to square one.  Speaking of squares I think that is a viable word for the shape of the rebound: 'square root'.

I continue to believe this was all just one big 'Great Recession', only interrupted by never seen before levels of interference.  If those powers had done double the level of intervention, our GDP figures would have surged even higher - and Wall Street probably would have rallied the markets even farther.  But we'd be saddled with ever more debt as the cost to the benefit of these few quarters of 'green shoots'.  Go forward the patient has now become dependent on drugs and is building up tolerance.  To put it in plain English, we "bought" 2 quarters of good GDP figures for a few trillion bucks.

I once kidded that someday the Fed would be targeting 3.5% mortgage rates as a solution; I now no longer consider it kidding.  I see 30 years hit 4.36% this past week.  If GDP figures go sub 1% (which I expect) in the coming 2 quarters, and potentially negative in 2011, the bond market could rally even further on an organic basis... and with new rounds of QE surely to follow, that will just add fuel to the fire.  So what many are calling a bond bubble today could be labeled with 'you ain't seen nothing yet' if my forecasts come true.  The bad news is savers of America will be trashed even further than they have in the past few years; while the debtors will receive more gifts.  [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]

As for markets we remain in the range between S&P 1040 and 1057, waiting on the magic wand to begin waving from Jackson Hole, Wyoming at 10 AM EST.

Need to See Pain in these Names - the Generals

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Each time the market goes through a material selloff, I always like to bring out charts of "the generals" i.e. the leaders of the recent move.  These are usually names I try to focus on, in the long side of the portfolio as their relative strength is among the best.  Most are either the last vestiges of secular growth (either domestic, international or some combination) in America in a very stagnant era - hence get sometimes spectacular valuations, or are special situations.  Until recently, Apple (AAPL) was the most prominent general but has fallen by the wayside already.



With the serial bottom callers out in force as of late last week, I remain unconvinced until I see real pain in the new generals.  Does it *have* to happen?  No.  But when people truly give up the ghost and we have a washout selloff, babies get thrown out with the bathwater and it's a great contrary sign.  These are some of the names we should be looking to if/when that moment comes. (in order of market cap)

[click to enlarge any chart]



 








Aside from this group the only sectors really working at this time are utilities, precious metal miners, any bond ETFs of every shape, flavor, and smell.

Long all names mentioned excluding Apple, Citrix Systems, Netsuite in fund; no personal position

Thursday, August 26, 2010

WSJ: 'Hidenburg Omen' Creater Sticks to Guns

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If you are an avid reader of financial blogs, surely you have come across the "Hidenburg Omen" splattered amongst many web pages these past few weeks.  I have not touched on it because frankly I never heard of it until 3 weeks ago (same for 99% of those in the market), and it (to me at least) is sort of data set dressing to create a conclusion.  I could find every major crash and then find 5-8 things that were consistent before all of them (but also before many benign periods) and then put a cool name to it, and wave it around and scare people, but what's the point?.  "Before every crash there is at least 1 U.S. Congressman with first name John.  Further, there is always a named hurricane in the previous August, and snow has fallen in Wisconsin by Nov 13th of that year.  Always! Then we crash!*"

*Granted when those conditions hold we don't crash 80% of the time.

To that end I agree with Ritholtz's comments.  Further it has many false positives - i.e. 75% of the time.  That said, if we crash soon this gentleman in the WSJ story below will be a "Roubini" like force of nature and a new financial celebrity.  (or for you old timers, the anti Abby Joseph Cohen)  Ironically, with the S&P 500 not far from the "line in the sand" at S&P 1010... if that level breaks, Mr. Miekka may get his date with destiny.

I found the story interesting simply because it talks more about the guy who found the patterns, and his background...


  •  Jim Miekka has never worked on Wall Street and doesn't hold any financial degrees. But he has suddenly developed a cult-like following among some investors.  The 50-year-old newsletter writer is in big demand these days because of a technical market indicator he devised to predict stock-market crashes. Dubbed "the Hindenburg Omen" after the 1937 disaster of a German passenger airship, the indicator has been the buzz of talk shows, blogs and news articles after developing a following on trading floors from New York to London.
  • The Dow Jones Industrial Average has dropped 2.5% since the indicator was triggered the first of three times on Aug. 12. The market action has turned Mr. Miekka, a blind former high-school physics teacher, into a reluctant celebrity.
  • "I guess it feels good to be famous," Mr. Miekka says from his home in Surry, Maine. "But at the same time I wonder how the indicator is going to work in the future with all this attention."
  • Mr. Miekka devised the indicator using a formula that parses data including 52-week stock levels and moving averages of the New York Stock Exchange. Other criteria include a rising 10-week NYSE moving average and a negative technical indicator that measures market fluctuations. All these gauges must occur simultaneously on the same day to trigger the Hindenburg Omen. 
  • To some, it sounds like little more than hocus-pocus. Wall Street traders are skeptical, considering that the indicator has been triggered many times since Mr. Miekka devised it in 1995 without an ensuing major market selloff. Indeed, significant stock-market declines have followed the indicator just 25% of the time.
  • Barry Ritholtz, chief executive of Fusion IQ, an online quantitative-research firm, says the Hindenburg Omen is a backward-looking indicator that doesn't consider causation. He labels it "recession porn," contending that investors are attracted to negative commentary and conspiracy theories during skittish markets.
  • Mr. Miekka brushes off such concerns. He warns that the trio of Hindenburg Omen appearances this month doesn't bode well, especially since a cluster of occurrences tends to lead to more significant declines. He said it is possible the market could drop 20% from the first sighting two weeks ago.  "It's like a funnel cloud," Mr. Miekka says. "You don't get a storm with every funnel cloud, but now that we're seeing several funnel clouds, I definitely think I want to stay in the storm cellar." 
  • Despite the publicity surrounding the Hindenburg Omen, his obscure investment newsletter, which has just 100 subscribers, hasn't fared quite as well.  He says: "I've gotten maybe five or seven inquiries and one subscriber."

Bernanke Can't Win Tomorrow

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I have a big issue with an entire $14T economy and whatever market capitalization stock market all relying on the speeches and words of one man as if he is Zeus.  Based on Bernanke's stellar track record of forecasting  [Jul 29, 2009: Mises.Org - the "Ben Bernanke is Wrong" Video] people should not put one grain of salt into what he sees coming in the future, but we still look to some omnipresent idols especially in times of distress; that is just human nature.  So Ben shall come down from Mount Olympus, deliver us his wisdom and then go back doing what omnipresent beings do.





To "save us from reality" people are hoping for some great action or hints embedded in Bernanke's Jackson Hole speech tomorrow.  While pathetic that this is what it has come down to (earnings anyone? company fundamentals? growth prospects? an economy left to its own devices?) almost all the trading nowadays is based on hopes for government intervention or Fed intervention and has been since late 2007.  It was not always like this but if you have entered the stock market the past 2-3 years, you'd think it was normal for us to be hanging on these actions as if the world depended on it.

Further, what can Ben say tomorrow?  He is between a rock and a hard place.  What does "the market" want?

A) If he says everything is fine, and it's business as usual with no need for further helicopter drops - the market will whine and cry about not getting a handout of free money.

-or-

B) If he says he is ready with helicopter bags of even more money, and he is willing and glad to hand it to everyone who asks - the market will whine and cry about what bad news does the Fed know that we don't know to make them so desperate? Why is Ben so panicked he is handing us money again?

Damned if he does, damned if he doesn't.  Good luck with the speech Zeus.


Bookkeeping: Short Symantec (SYMC), Burger King (BKC), Toll Brothers (TOL)

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My non index shorts have not been much of a help the past few weeks - I've either been stopped out for quick 1-3% losses, or my gains have been of a similar nature.  I am intermediate term bearish until/unless the S&P 500 can regain a lot of lost ground, but am hesitant to do much with the indexes here except on an intraday basis AFTER the morning knee jerk reaction to the data series we will have coming our way.  Hence shorting bad individual charts remains preferable - just need to find some that will work this time around.  Time to try a new basket; I am putting 2.5% allocations into the following 3:

Symantec (SYMC) is choice #1 - it has spiked with the Intel purchase of competitor McAfee.  Five of the past six session it has snuffled up to that 50 day moving average, so there is a clearly defined area to stop out from.



Any company private equity has larded with debt as it raids for cash is a pleasure to short.  (one of the most eye opening stories about how Wall Street is all about enriching the few at the expense of the many was this BusinessWeek article from 2006 - I encourage all readers to read to see how private equity is doing a good job at helping to ruin America - or this one from the NYTimes)  But I digress! This is only a technical short. I will make an attempt at Burger King (BKC) which has struggled with the 50 day moving average the past few months.  A move over yesterday's highs will be a good place to stop out.



Homebuilders have rallied sharply the past two days on the exact same logic as the weekly jobless claims. i.e. "it can't get worse than this!"  Which might be true to a degree - the type of housing figures we have seen the past 48 hours are once in a generation bad.  That was also the logic in 2007, 2008, and 2009.  So now I suppose they can rally on "2nd derivative improvement".  I don't buy it.  Toll Brothers (TOL) welcome to the jungle.  My stop out should be obvious - a move over the 50 day which has been the ceiling for many months.  Biggest risk in housing stocks go forward in my opinion is the government in its desperation will roll out yet ANOTHER tax credit.  I expect one in 2011 actually but if the Dems do one ahead of the November elections they will be hammered.



So there we have a 7.5% allocation short in those 3 names, all at low risk areas with stop losses in a close range. Now we'll wait to knee jerk react to all the economic news coming in the next 6 days.  Don't forget Ben Bernanke waves his magic wand tomorrow as well.

Short all names mentioned in fund; no personal position

Reaction to Weekly Claims Almost Laughable

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If this morning's knee jerk reaction was not so predictable it would be laughable.  Last week when claims hit 500,000 (and last afternoon!) I wrote there was a bright side.  Once bad news accelerates, when it falls back to a level that is still awful but "less bad" we can buy the market in glee while cheering "second derivative improvement".  Even though the number we are buying as we yell "whew! not so bad" is recessionary.  My only surprise is the rally sputtered out...

Here is the Wall Street game.

4 weeks ago - jobless claims 470K.  That's not good.
3 weeks ago - jobless claims 480k.  Getting worse.
2 weeks ago - jobless claims 480k.  Uh oh.
Last week - jobless claims 500k.  Yikes!
This week - jobless claims 473k.  Great news!

[keeping in mind any reading over 450K is awful, and a real recovery should bring this number below 400K - which has not happened once during the entire government sponsored 'rebound' in the economy]

I am using jobless claims but you can replace it with any economic data series and you see the same laughable behavior. The normal perma bulls are out this morning saying the coast is clear.

S&P 1057 is one of the key levels and we remain stuck on it so far today after the initial spurt of buying on "good news".   I was hoping to see that upside gap filled at 1067 due to the 'happy happy joy joy' number this morning.  Putting on an index trade that lasts more than a day is near impossible with the herky jerky reactions to all the economic data we have coming our way.  Prepare for the same nonsense tomorrow with Q2 GDP revision.  I remain worried about Sunday night and the Chinese PMI figures - if China goes the 'decoupling theory' takes a big hit.

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[Video] Cramer Nation Introduced to Polypore International (PPO)

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Never a great thing when the Cramer lemmings are showcased a stock that was doing just fine under the radar, but thankfully this mention came during a market selloff so hopefully they all forget about it by end of week.  Jim is kind enough to find this stock for us... a name "probably none of you have heard of".  Thanks sir.

[May 20, 2010: Polypore International - Derivative Play on Electronic Battery Growth]
[Aug 5, 2010: Polypore International with Impressive Beat]







When Polypore International first caught Cramer’s eye, popping onto the 52-week high list last week, he thought it might make for a good takeover target, much like Millipore was for Merck KGA. But after some research he realized the stock should offer much more than just that.

Polypore [PPO  27.26    1.04  (+3.97%)   ] is a high-tech filtration company, making filtration materials in everything from old-fashioned lead acid batteries to the newer lithium-ion kind. It also makes membranes used to add or remove various gasses from liquids, as in water filtration, beverage carbonation, semiconductor manufacturing, pharmaceutical purification and even controlling gas levels at power plants. There’s also a medical business, where Polypore’s membranes help to remove toxins from blood during dialysis and aid in oxygenation for heart surgery patients.

What do all these segments have in common?

“They’re all oligopolies [with] high barriers to entry,” Cramer said, “which mean Polypore has serious pricing power, doesn’t have to worry that much about competition.”

There’s growth here, too. Polypore’s lead acid battery segment saw its revenues climb 22% in the most recent quarter, and sales from Asia are growing at a 20% clip. In lithium-ion batteries, sales soared 57% last quarter, with new demand on the way for electric vehicles. Polypore’s batter is in the Apple  iPad, too, and that business is supposed to double to $80 million next year. The company is also watching its desalination market grow 20% to 25% a year, while pharma is expanding at 7% to 10%.

This is how Polypore blew away the numbers last quarter, reporting a 9-cent earnings beat on revenues that increased 27%. No wonder it’s on the 52-week high list. Luckily for investors, though, the stock has pulled back $3 from its high, giving investors an entry point.



Long Polypore International in fund; no personal position

Wednesday, August 25, 2010

Bookkeeping: Covering Global Payments (GPN) Short Out of Boredom

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I figured Global Payments (GPN) had low beta, but this is ridiculous.  Despite a big swoon in the markets my "hedge" has been effectively useless the past week and a half.  I am walking home with a massive 1.5% gain.  While the chart is still poor and the setup "good" for a breakdown, the volatility in this stock is non existent so I am going to cover and attempt to find something which will actually provide some benefit during downturns.  This was my first foray with the stock long or short - I assume it will be my last.



I was looking/hoping for something with action more like this so I'd actually have a true hedge helping me out:



Don't forget there is still an upside gap at S&P 1067 we need filled.  It actually would be funny if weekly claims fell to 485K and we celebrated that with a gap up tomorrow.  Four weeks ago that number would have been considered awful.  But anything below last week's 500K can now be called "2nd derivative improvement".  Or maybe we can use the revision of GDP down to 1.6% as an excuse - still pathetic but better than worse case estimates of 1.3%.  Another alternative is Bernanke's left eyebrow twitching during his Jackson Hole speech, and obvious sign to markets QE2 is coming and it will be huge.  Any excuse will do. ;)

As I wrote earlier today we are in between some very obvious technical levels - look at those computers take the market right from 1040 to 1057, almost to the decimal point.

No position


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Reversals in US Bonds and Yen Provide Some Minor Relief

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With the entire stock market now one computerized trade, the 'US bonds/Japanese Yen' safety trade reversed after some huge runs, providing some relief to equities.   Throughout 2008 and 2009, and indeed even during the European debt crisis in early 2010 the US dollar was the safe haven in currencies (almost all major world currencies are representative of poor structural economies so buying among the Euro, Yen, or Dollar is just picking amongst the ugliest swan).  Remember all those months you did not have to do anything other than stare at a US dollar chart?  Each time it rallied you had to sell any risk asset and vice versa - the true dumbing down of investing in the computerized, highly correlated age.

However with the U.S. economic situation deteriorating dramatically the past 90 days, it appears the Japanese Yen has replaced the dollar as the 'safety trade' this time around.  The fact the U.S. is comparing unfavorably to Japan says just about all you need to know about our country.  The yen is actually at 15 year highs to the dollar - ironically hurting Japanese exporters (Japan cannot catch a break).

So with the intraday reversals in these 2 names, the algos can go buy equities and our "monolithic market" where every instrument is just a S&P 500 derivative continues on.  These charts need a breather, especially the U.S. Treasuries, although the move in the yen - considering its a currency - is 'break neck' in relation to how currencies usually move.



No positions

S&P 500 Bounces off mid June Lows - Expect Much Bipolar Action in the Next Week

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This market is acting incredibly technical - a big help for those of us awed and confused by the liquidity fed rally of 2009 where TA became almost useless.  This morning the S&P 500 bounced smartly off the mid June lows which was the only real support between "here" and S&P 1010 aka the ultimate support.

So we have many nicely defined levels and the fast money crowd is going to flip in and out between those obvious numbers.

S&P 1010, 1040, 1057, 1070 are the key ones for now.  A break of 1040 should lead to a revisit of 1010 at which point I am going to want to be leaning much more heavily long for at least a trade.  If S&P 1010 is broken, things could get very dark but one must assume there will be at least an initial bounce the first few times we hit this level as those in the know, realize this is such an important level to hold.



Today we had more rotten economic news but the key is the market reaction.  Eventually we will begin to price in bad news in specific niches.  Many people who drank Kool Aid and performed on financial infotainment TeeVee still had hopes for housing 4-5 months ago as they do not do cost benefit analysis.  They see bounces in economic figures (benefits) but do not ask what the costs are (record affordability, government bribery to get people to buy homes, Fed manipulation of interest rates).  Now many of these people seem to have given up the ghost on housing.  Which is actually a net positive from an investment standpoint.  These same folk were chirping "V" shaped recovery not 120 days ago... so we still have a lot of work to break them in other parts of the economy ex-housing.

A big back breaker would be any serious slowdown in China.  Last month's PMI was poor, but it was actually bought aggressively (confusing me) as speculators went to the Larry Kudlow assessment of "Goldilocks China" (not too hot, not too cold).  But with the potential for outright contraction coming on Sunday night's reading, that could be a back breaker.  We'll see.

Aside from that we have weekly jobless claims tomorrow, a poor GDP revision (already expected by the market) Friday, Ben Bernanke speaking from Jackson Hole waving his magic wand, and next week some doozies: Chinese and US PMIs (not to mention the Europeans), and the monthly jobs report which has a real chance of outright contraction even with the government 'creating' 100K+ birth/death model jobs.  I expect volatility to be intense as the bipolar market reacts to each report as if either (a) butterflies and unicorns awaits or (b) end of days nears.  Hence it remains impossible to build any real intermediate term positions as almost anyone in the market nowadays is just a short term flipper not willing to risk holding due to all the uncertainty.   Things should be much more clear a week from Friday and with the potential for the one country which led the world's rebound reporting negative PMI along with a possible contraction in monthly US employment for the first time in a few quarters - we might be seeing what the market has been working on "discounting" since late April 2010.

All that said the S&P 500 has dropped 80 straight points since Bernanke offered us QE Lite, and as always bounces within a downtrend are among the most vicious - so any one of these economic data points could lead to one of our traditional premarket gap ups of 2%.

p.s. One of my favorite quotes from Mr. (I did not see it coming!) Bernanke came from his Jackson Hole speech in 2007.  Sadly it was one the things Bernanke actually was correct on... not that he listened to himself!  He has been doing the exact opposite for 3 years in a row.  Read it and laugh quietly to yourself.

In August 2007, as financial markets began to crumble under the weight of bad mortgage loans, Chairman Ben Bernanke told the Federal Reserve's annual gathering at Jackson Hole, Wyo., that it wasn't the central bank's responsibility — "nor would it be appropriate" — to protect lenders and investors from poor decisions.

Bookkeeping: Starting Magna International (MGA)

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I've had a limit order on Magna International (MGA) at $74.00 which just missed this morning, so I am going ahead with a market order in the upper $74s to get a 1.1% stake started in this auto supplier.  This will be the 2nd name in the space we own, and I continue to be very impressed at the profitability of some of these suppliers in a wretched auto market.  If auto sales can rebound from the 11-12M annual range back to 13-14M (peak was well over 16M) profits are going to do things no one ever expected.  That said, I am not calling for any huge rebound in auto sales; but with all the cost cutting companies like Magna are reporting fantastic earnings even at this very poor annual run rate of auto sales.  Even in the continuing Great Recession auto sales should still stay around 10M at trough.

Magna is still heavily European and North American reliant which is a curse and opportunity - bad for now, but lots of opportunity for the future.

Technically the stock has pulled back to near the 50 day moving average for only the 2nd time since the early July bottom.  Same caveat as always - if the market implodes down to S&P 1010 (or lower) all purchases look stupid, stock will break support etc etc.



Magna had one of the most impressive earning reports out of any company this quarter.back in early August. (full report here)  The average content increase is quite impressive.

  • Magna International Inc. swung to a second-quarter profit as sales jumped 63% on the back of a surge in North American vehicle production.  The Canadian auto-parts maker also boosted its quarterly dividend to 30 cents a share from 18 cents, citing continued profitability in an improving auto market.
  • Magna, which last quarter also unveiled a share-restructuring proposal that would end founder Frank Stronach's voting control, earned $293 million, or $2.59 a share, on sales of $6.05 billion in its latest quarter. A year ago, Magna lost $205 million, or $1.83 a share, on sales of $3.71 billion.
  • Analysts polled by FactSet had been expecting earnings of $1.42 a share on sales of $5.4 billion.
  • On a conference call, Magna co-Chief Executive Don Walker said the strong results reflect in part the company's efforts to "restructure, right size and otherwise reduce costs across the organization." (read cut jobs, cut jobs, and cut jobs)
  • For 2010, Magna raised its sales projection by $1 billion to a range of $22 billion to $23 billion, based on light-vehicle production of about 11.5 million units in North America and about 12 million units in Europe.
  • The company noted that in the second quarter, North American vehicle production rose 75% and North American average dollar content per vehicle was up 27%. European vehicle production volumes rose 13%, with average dollar content per vehicle up 8%.
  • Company executives said the bulk of sales are still generated in Magna's key North American and Western European markets, but it will continue to invest in Asia, Russia and South America to diversify its business, which will be a "short-term negative" for margins.


They are also doing a complete reboot of their ownership structure as the founder is cashing out for huge bucks.  Now unlike most compensation packages where the public corporate CEO is just a big babysitter and his/her existence has little impact on the company while feeding at the trough of the public stockholder, I begrudge this guy nothing - he created the company.  As investors this is a more normal share structure so should help to bring more institutional ownership.

  • A Canadian court on Tuesday approved a plan by the auto parts giant Magna International to pay Frank Stronach, its founder, nearly $1 billion in exchange for giving up control.  The ruling paves the way for Magna to end the dual-class share structure that had left control in the hands of Mr. Stronach, who came to Canada from Austria when he was 21 with only a couple of hundred dollars in his pocket.
  • Mr. Stronach, 77, will get $863 million worth of stock under the deal. He will give up his controlling class B shares in return for 7.5 percent of the company’s class A shares.  He also gets $300 million in cash, control of a new joint venture between himself and Magna for electric car parts, and four years of lucrative consulting fees.


Magna International designs, develops and manufactures technologically advanced automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; hybrid and electric vehicles/systems; as well as complete vehicle engineering and assembly. We have approximately 76,000 employees in 242 manufacturing operations and 76 product development, engineering and sales centres in 25 countries.

Long Magna International in fund; no personal position


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