Bookkeeping: Long Direxion Large Cap Bull 3x (BGU)

While I'm normally a TNA man, the current 'decoupling' action we are seeing should favor large(r), international type companies over those facing the U.S. consumer.*  Again, there are exceptions, especially those smaller companies which sell into larger corporates.  It's always a crap shoot knowing which of these ETFs will do better on a day to day basis, but instead of TNA I am going to go long some BGU as some sort of spike around 2:45 PM sent the S&P in a straight line from 1112 to 1116, breaking through resistance like swiss cheese.  I assume this was the Fed agreeing to Goldman's terms on what will happen next Tuesday**

Whatever the case, that spike turned the technical condition from potentially troubling to "labor data? what labor data?".  Over S&P 1115 I don't want to be too bearish, so I believe I will get jiggy with it until Tuesday 2:10 PM or so.  We are slaves to the 'technical action' as whomever did that spike an hour ago, surely knows.

Fast Money traders from across the land shall talk tonight about the "impressive action" in spite of the economic news, and swig big jugs of Kool Aid (it's an iPhone app) as they point to Monday morning premarket markups in our future.  I shall hope to partake in my own small way.

I'll add a 3.25% allocation of BGU and sing songs of S&P 1128.

* unless such consumer works in the public sector, which is about to be handed another $26 billion of taxpayer money to preserve their rightful place at the top of the socioeconomic food chain.
**pure speculation and scuttlebutt

Long BGU in fund; no personal position


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Comparing Job Losses in Post WW2 Recessions

I've posted this chart from Calculated Risk a few times on the website, but might as well update it for newer readers as the 'recovery' continues  (cursory green shoot chant here).

[click to enlarge]

I do like the dotted line showing job growth ex-census, nice touch to showcase the 'bounce' that really is not.

The problem with these charts is they are U.S. centric.  A "global chart" would show a far different shape - in fact "V shape"!  Jobs are being created, but in a global marketplace many of those that 30-40 years ago would be created in Indiana, Florida, California or Pennsylvania are now being created in Western China or Southern India.  Foxconn alone has 800,000 employees - mull that for a moment as you consider that one company employes 1/10th of the nearly 8M jobs lost in the US in this recession:

• Foxconn is the largest manufacturer of electronics and computer components worldwide and mainly manufactures on contract to other companies. Among other things, Foxconn produces the Mac mini, the iPod, theiPad, and the iPhone for Apple Inc.; Intel-branded motherboards for Intel Corp.; various orders for American computer manufacturers Dell andHewlett-Packard; the PlayStation 2 and PlayStation 3 for Sony; the Wii for Nintendo; the Xbox 360 for Microsoft; cellular phones for Motorolaand Nokia; the Amazon Kindle; and Cisco equipment.
  

So if this was 1972 rather than 2010 Tom and Joe would be making these super cool products and making a living wage.  Instead Tom and Joe are praying for a new housing bubble so they can build houses no one needs, and/or scouring Walmart in hopes of being a greeter or cashier.  Then, if the ivory tower textbooks are right, in 40 years the Asian middle class will demand products from the U.S.  (of course no one asks what products they will actually need from us, considering most of it is already sourced in Asia) ;)  The textbook never fails those in academia so don't ask any questions beyond that.  It will all work out - just give it 4 decades.  Whatever the case, this is not the type of work we want in America anymore; it's old school and below us as a people.  Everyone will be a high achiever, get that liberal arts degree, and do service work & avoid getting dirt under fingernails.  The new bell curve of utopia.

Again, as the speculator class we love this chart, in fact 90% unemployment would be much better than 9% because that means corporations are running REALLY lean.  (if only we applied these same concepts to the government).   I mean if you can cut 40,000 workers just imagine if you cut 400,000 - profits galore for the remaining 4% who could afford stocks.  I am taking it to the extreme but you catch the drift.

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

On a related note, saw a great quote in BusinessWeek for another reason (if you will) of why job gains in recoveries have been taking longer and longer... in an article titled "Machines Don't Get Paid Overtime".  While a controversial theory (I do agree with it) it does shine the light on *our* most recent iteration of capitalism corporate socialism.  Labor is disposable, capital is everything - no need for a balance between the two.

So as long one's core beliefs are that maximizing corporate profits, with capital owned by the top sliver of a society will lead to "trickle down" benefits for the masses, the U.S. is executing the game plan set into motion a few decades ago to perfection, and as a whole the society is far better off.   To disagree apparently means you are a socialist of the highest order... if not communist. ;)  As we apparently all were in this country in the 1950s and 1960s when this tenant of 'shareholder value maximization above every other aspect of society' was not the ideal and people had a middle class living on 1 wage.  Communists!

• The stock market plays a role, too, says Sinai. By 1990 the doctrine of maximizing shareholder value had gained wide acceptance at publicly traded companies in the U.S., and executive compensation was by then firmly linked to boosting the stock price. "Stocks always respond positively when head count is permanently reduced," says Sinai, "because profits are then expected to come in higher. We are the only country where the mantra of maximizing shareholder value is so intense." 
• Until these pay incentives are changed, and until U.S. workers become less expensive, high unemployment could be a chronic problem.
  

These are the type of conversations we should be having as a nation, but will be impossible to ever have as immediately extremists from both sides will latch onto the subject and it's end of conversation.  You are either a marxist or capitalist, no middle ground can be allowed.

Bookkeeping: Short Whirlpool (WHR), Global Payments (GPN), Gentiva Health Services (GTIV), Covering TNA

It could go either way in the intermediate term so without a clear signal I am going to add a few more hedges to the short side.  It looks like that 1106.44 gap won't fill today unless we get our patented HFT bum rush in the last 10-20 minutes, so I am going to cover my TNA.  I made a quick 3.5% down from about 4.5% I had at the worst of the selloff.The shorts here are completely technical, unlike the longs which are a hybrid of fundamental and technical.

Whirlpool (WHR) was a stock I attempted to short last year as I tried to fight Ben Bernanke's QE1, so perhaps this is ironic I am trying again.  I am starting small with only a 0.9% exposure as the stock breaks below the 200 day moving average for the third major break in the past 45 days.  It has been trending down for a few months, and the 20 day moving average has been a good place to short the past 6 weeks.  That is currently up in the $87s, so while I am establishing a foothold I want to short more either on (a) a rally back to the 20 day or (b) a new low below $82.  For now I am only allocating 0.9% this way - the stop out would be a break over the 20 day.

Global Payments (GPN) miffed on earnings, but unlike most stocks I've been following rebounded immediately.  It has now rallied back to its 20 day moving average, where it has been hanging around this week.  That level is currently $38.14, and just a dollar higher we have the 50 day moving average which should provide another level of resistance.  While familiar with the company this is the first time trading it long or short, so always a bit hesitant to go hog wild until you 'feel' how the stock acts day to day while owning it.  I will begin with a 2% exposure, and a stop loss will trigger if the stock jumps over the 50 day moving average by a decent amount.  Say $39.40ish.

Gentiva Health Services (GTIV) - quite a similar chart to GPN, so I'll short with a 2% exposure here as well, and cover with maybe a 3.5% stop loss.

In the "scratch my head" category I have had a limit order to short Vulcan Materials (VMC) at $48.00 for many weeks, and it did not hit back in late July despite touching that level.  Perhaps there was not enough volume to trigger the trade, but this would have been an excellent hedge.  Unfortunate.

In the "darn it" category, I had a short on Ross Stores (ROST) out about a month ago, and it turned against me, stopping me out.   Once I covered I did not look back until today.  Unfortunate.

Short Whirlpool, Global Payments, Gentiva Health Services in fund; no personal position


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Matt Taibbi in Rolling Stone: Wall Street's Big Win

It is unfortunate that most of the truth telling about the financial industry in prose is either done in blogs or a guy who writes in a music magazine, but the MSM more or less appears bought and paid for.  Matt Taibbi is back, explaining in a manner only he can, why nothing has really changed despite "financial reform".  While not perfect in all assessments (in my opinion) his pieces are directionally correct and explain what is hidden in musty closets and dark corners, far more than you get in any mainstream publication.   His "vampire squid on the face of humanity" piece about Goldman Sachs gets all the publicity but his piece in March 2009 is the true masterpiece.  In fact, it has so much 'truthiness' I cannot find it anymore in the Rolling Stone archives.  Cue the grassy knoll.

Sold older Taibbi links

• [May 3, 2010: Matt Taibbi - The Feds v Goldman Sachs]
• [Apr 6, 2010: Matt Taibbi - Looting Main Street]
• [Dec 11, 2009: Matt Taibbi - Obama's Big Sellout]
• [Jun 2009: Goldman Sachs, the Wall Street Bubble Mafia] 
• [March 2009: Matt Taibbi - The Big Takeover] (Rolling Stone link no longer works! error 404)  [alternative location here]

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

Via Rolling Stone:

• Cue the credits: the era of financial thuggery is officially over. Three hellish years of panic, all done and gone – the mass bankruptcies, midnight bailouts, shotgun mergers of dying megabanks, high-stakes SEC investigations, all capped by a legislative orgy in which industry lobbyists hurled more than $600 million at Congress. 
• Obama's speech introducing the massive law brimmed with celebratory finality. He threw around lofty phrases like "never again" and "no more." He proclaimed the end of unfair credit-card-rate hikes and issued a fatwa on abusive mortgage practices and the shady loans that helped fuel the debt bubble. The message was clear: The sheriff was padlocking the Wall Street casino, and the government was taking decisive steps to unfuck our hopelessly broken economy.
• But is the nightmare really over, or is this just another Inception-style trick ending? 
• But Dodd-Frank was neither an FDR-style, paradigm-shifting reform, nor a historic assault on free enterprise. What it was, ultimately, was a cop-out, a Band-Aid on a severed artery. If it marks the end of anything at all, it represents the end of the best opportunity we had to do something real about the criminal hijacking of America's financial-services industry. During the yearlong legislative battle that forged this bill, Congress took a long, hard look at the shape of the modern American economy – and then decided that it didn't have the stones to wipe out our country's one ­dependably thriving profit center: theft.
• It's not that there's nothing good in the bill. In fact, there are many good things in it, even some historic things.  
• All of this is great, but taken together, these reforms fail to address even a tenth of the real problem. Worse: They fail to even define what the real problem is. 
• Over a long year of feverish lobbying and brutally intense backroom negotiations, a group of D.C. insiders fought over a single question: Just how much of the truth about the financial crisis should we share with the public? Do we admit that control over the economy in the past dec ade was ceded to a small group of rapacious criminals who to this day are engaged in a mind- numbing campaign of theft on a global scale? Or do we pretend that, minus a few bumps in the road that have mostly been smoothed out, the clean-hands capitalism of Adam Smith still rules the day in America? In other words, do people need to know the real version, in all its majestic whorebotchery, or can we get away with some bulls*** cover story?   In passing Dodd-Frank, they went with the cover story.

So with an intro like that, you can assume the rest of the piece is worth a gander. 

So Much for the Useless Prediction of the Week

Hmm, I am going to be "wrong" about my prediction but not in a bad way.  Rather than taking until next Tuesday it looks like my "gap fill" prediction is going to happen within an hour of when I made it.  Needless to say, my short TNA is working out nicely - I only wish I put on more than 4%.

So technically this is going to be a 'daytrade' as I anticipate selling somewhere in the S&P 500 1106s (or hopefully below area) but the position was put on with a price target, not a time target.  Hopefully the trapped dip buyers run to the exits and get us to S&P 1102s.

I don't know if there is any catalyst for the selloff other than countless stocks are sitting at egregious levels, nowhere near support and the whole basis of buying stocks at this point is "Ben Bernanke will print more money so I can't lose".  Granted, that reasoning worked wonders for a good 13 months in 2009-2010 but even the Federal Reserve backstopped free market needs a breather from time to time.

p.s. if you keeping track at home, 1106.44 is the 'gap fill' point, I won't cover until I see the white of its eyes.

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Bookkeeping: Selling Majority of Remaining BorgWarner (BWA), Priceline.com (PCLN), Polypore International (PPO)

I've added some long exposure here in the past 48 hours, so to balance that I am going to cull some other names.

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.

Priceline.com (PCLN) goes without saying, what a surge.  I don't see that gap filling this quarter - it will take a disappointing earnings report sometimes 2-3 quarters out, and/or a huge drop in the market for this event to happen.  That said, I am going to sell the majority of what remains in a VERY STRONG chart and keep 0.1%.  Let me emphasize as a stand alone company this chart should not be sold; I am however thinking holistically within a portfolio of positions... I've added other equities so to keep my long exposure at X% I want to sell some winners.  I'm booking about a 35% gain here.

Polypore International (PPO) looks like it has a much better chance of 'filling the gap' soon, unlike Priceline.com.  I am again selling almost the entire position (leaving 0.1%) with intention to buy back if/when that gap fills.  If it does not happen I have other stocks to deal with on the long side.  I am hoping to buy back around mid $24s if and when.  Securing a 15% gain here.

On a temporary basis I am going to have more individual positions than I normally carry for 2 reasons.  I am sitting on 4-5 stocks with 0.1% allocations that I have taken profits on, but don't want to 'exit' since I'd like to buy them back, and I tend to lose track of stocks unless they are staring back at me in the portfolio each day.  Second, I have "one" commodity position made up of a 4 stock basket - I am treating that as 1 position.

Again if you are a "momentum guy" you will scoff at selling any of these stocks, but to each their own (strategy).

Long all names mentioned in fund; no personal position


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Bookkeeping: Short Some TNA as a Hedge Plus Worthless Prediction of the Week

Every so often I like to get all "Doug Kass-like" and make a prediction.  I spy a little gap in the S&P 500 chart from Monday morning's gap up; it is in the upper 1106 level.

I do solemnly predict that next Tuesday post 2:15 PM the 4 year old toddlers that make up the market will whine in unison when 'easy money' is not immediately handed out and the selloff that ensues will fill that gap.

If this prediction does not happen, this post never happened.

However, I feel naked without some shorts on so as a hedge I am throwing some short TNA on the barbeque, about a 4% allocation.  This is both to benefit if my prediction is correct and because I don't like having zilch on the short side of the ledger. (note: in the real world I'd just go long TZA)

I would like to see a break of 1114, and push down to close to 1103 to at least shake up the bulls a bit from their now "bullet proof" status (backstopped by their belief in all things Bernanke)  You can still make a bull case as long as 1100 holds and the market bounces.

While the market has become all one large correlation I am wondering if there will ever be a separation between companies that rely on American consumers (which you want to short) and companies that are in America but rely on Asians (which you want to be long).  If so large(r) caps should outperform and small(er) caps should underperform - I am generalizing of course, there are exceptions.  But from 40,000 point of view companies which are smaller tend to be more domestically oriented.  This would be far too logical for a market that now runs on 1st grade logic ("risk on mommy!" "waaah! Uncle Ben did not give me what I wanted!"), but I'd love to see it.

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Bookkeeping: Restarting Netflix (NFLX) and Gold (GLD) Exposure

"No worries man."

Perhaps my vision that bad news = good news is coming true after all.  Whatever the case investors were eager to buy the dip in anticipation that the Fed and government will 'save the day' I am sure.  Because it's been working like a charm so far.

Whatever the reason the "action" is good, so I want to get back some names I sold off on breaks of support the past few weeks but are showing recovery.

I highlighted Netflix (NFLX) earlier this week in another piece, and said it looked poised to potentially move back over resistance.  Which it is doing a nice job of today - I thought the reaction to earnings was nonsense but had to respect the technicals at the time.  I was hoping for a move down to $90 to make a purchase but that is not happening; so instead I will restart the position with a 1.6% exposure on the break back over the 50 day moving average. (the 20 day happens to be in the same place)

It looks like gold is reacting once more to the anticipation of the Bernanke printing presses so I will rejoin my Powershares DB Double Gold Long (DGP) with a 1.7% exposure.  Same thought process as Netflix in fact, technically.  (chart is for gold since that is the underlying equity)

For both of these I will have a relatively short leash and if they break below the levels they just broke out of, I will be back out.

I was thinking about buying some index positions on the 'dip' but instead will just wait for a clear move over S&P 1132 or so (if and when) since I've been smacked around in the churn lately.  Instead will just concentrate on individual equities/ETFs until we get out of this 1115-1130 vortex.

Long both names mentioned in fund; no personal position


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Job Numbers "Meh", Federal Reserve Meeting Now Raises Risk

I won't spend much time on these job figures... they all are starting to sound very familiar as we show very little progress in creating employment in the country.  People are going to try to find gems in temporary employment (which is supposedly a leading indicator but has failed this time around as corporations now are replacing full time employees with temps), the work week, hours worked, blah blah.

When you take a step back we are in terrible shape in employment - after such a sharp drop off in 2008-2009 we should be adding 250-400K jobs a month at this point, if this was any sort of real domestic recovery.  We are not... to debate 32,000 jobs versus 112,000 is really a moot point, especially when we know the government is 'creating' (via the birth death model) tens if thousands of jobs each month in "businesses too small to measure" even as small business is suffering the worst in the country.  Not to mention most of these data points we react to as if gospel, are getting revised down after the fact, as we saw yet again today with the government looking under a rock and discovering they missed 100,000 job losses from June (oops)..  So let's now waste much time here - the labor force participation remains at historical lows, and we are in serious trouble on the employment front but as I've said many times... less workers = more profits for corporations so as 'cold hearted speculators' there is a silver lining.  Especially if it means more "free and easy money!" headed our way.

p.s. anyone celebrating the 'growth' of 36,000 manufacturing jobs needs to remember the auto companies did not shut down in July as they usually do so seasonality is completely off - the same issue we highlighted on weekly claims.  (21K of theses +36K jobs were in auto)

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

What does it mean for the market and the Fed?  Short term the S&P 500 has two support levels to watch, the 200 day simple moving average of 1114 and then below that 1100.  A break below 1100 would change the complexion of the game once more, but until we get there shorting remains a daytrader's game.

So far the initial reaction in premarket to bad news is negative - I thought it could go either way.  I wanted to see if the market acted well to 'bad news' i.e. the worse the news the more happy speculators will be that free money via Ben Bernanke is headed their way.  But I guess there is still much Kool Aid in the system with people believing the job creation machine is 'right around the corner' because that's what the text books say should happen.

More important now is the Fed meeting.  I've ignored these meetings for many months in a row because they have become non events.  Everyone knows the language of easy money for 'an extended period' won't change and aside from an adjective changed in paragraph 3, sentence 5 there is nothing to review.  However, the stakes are changing.  The "market" is now begging for more quantitative easing so it can take Ben's easy money and go run up risk assets.  As long as the "market" gets money handed to them so they can profit, the economy can go pound sand.  The "market" seems to think QE is going to happen next week.  I would be shocked if this is so.  You might get some language changes but Bernanke does not seem yet to be at the stage to go the full monty and I'd be surprised if it happened before the elections.

So unlike many other meetings over the past year, there could be a divergence between market expectation versus what the Fed is ready to deliver.  Hence the tail risk from next Tuesday's announcement is something to monitor... for the first time in a long while.  If the "market" wants its pacifier and Ben does not hand it to them immediately the "market" tends to throw a temper tantrum.

PIMCO's Mohamed El-Erian Bumps Deflation Risk in U.S. Up to 25%

Patiently waiting to act in knee jerk reaction with the rest of lemmings in 15 minutes...

One of the more astute minds in the economic / financial community is PIMCO's Mohamed El-Erian.  With deflation all the rage the past 4-6 weeks, along with fears that we're heading to our Japan-like zen (please note you can read the phrase "We are Japan" on this blog  well over 2 years ago) we'll just add this to the pile.  It seems the bond market is sending similar signals... if not deflation, at least disinflation.

Via Bloomberg:

• The U.S. faces a 25 percent chance of deflation and a double-dip recession, according to Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund. <
• “I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” said El-Erian, 51. U.S. unemployment will probably stay unusually high, he told reporters today in Tokyo.
• Companies are accumulating cash and individuals are saving, making it tougher to counter deflation, El-Erian said. That reduction in private-sector spending makes government policies to stimulate the economy less effective, he said
  
• A mix of the lowest U.S. inflation rate in four decades and concern that the global recovery will falter is boosting Treasuries, sending two-year yields to a record low this week.
  

I was actually mulling this the past few days, as I think about our desperate Fed and the action in wheat.  Here is a nightmare scenario...

Step 1 - Fed sees pathetic economy and deflation risk, and floods system with more fiat currency.  

Step 2 - With weak end demand for said money and lack of credit worthy borrowers, the money continues to go into capital markets just as it did in 2009.

Step 3 - This causes commodities to rise, which Wall Street traditionally uses as a sign of inflation.  But in this case it is just Ben Bernanke handing money bags out to the oligarchs to speculate.  US. dollar weakens, speculator class continues to pile into commodities as a hedge.

Step 4 - Higher commodity prices cause pain to corporate profits via input costs - causing them even less incentive to hire, and of course pain to end consumers who need to pay more for food & energy - which weakens the economy.

Repeat step 1

It could be a very circular death spiral with the Fed actually causing much of the pain, rather than letting the market heal itself.

• "On the road to deflation, which is what the United States is on today ... policy becomes less effective," said Mohamed El-Erian, chief executive of Pacific Investment Management Co.
  
• Referring to the one-in-four odds he assigns to the deflation scenario, he said: "If you wonder how meaningful 25% is, ask yourself the following question: If I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?"
  

[Video] Hedge Fund Strategies Finding 2010 Difficult; Deflation is the New "Thing"

As I have repeated in many posts over the past few months it is near impossible to have intermediate term positions (by that I mean things that can be held 2-6 months).  Instead it's just become a rapid fire trader's market.... we had an incredible period that ended about 3 weeks ago where the market moved up, then down, then up again (each iteration about 8-9%, and each move came within 2 week periods), all within a 6-7 week span.  The market has no memory from day to day, almost every data point is treated as an inflection point between 'good times' and 'end of days', and combined with the low volume (which traditionally meant moves are not be trusted) along with historically high correlation  [Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life]  it is no surprise many techniques that traditionally work are suffering.

With computertized trading potentially up to 70% of all volume - and HFT much of that (HFT going to 100% cash at the end of every session), along with a class of trader in their 20s/30s who apparently was fed Ritalin along with their corn flakes as children, I've had to adjust significantly myself.  I don't like this type of market, but as Rumsfeld would say, you trade the market you have, not the one you want.  It is no surprise to see in many stories in major financial publications you hear about hedge fund after hedge fund ratcheting down exposure and staying 'smaller' than usual. [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]  Who can blame them when 8-10 weeks ago all was great in Cramerica, and inflation was the fear - and 2 months later, economic data is sagging and the hot money has moved to deflation.

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

Some good discussion on this topic via Yahoo Tech Ticker... in the latter video some discussion about how investors are trying to adjust to the potential of deflation, something American investors have not had to deal with for some 70 years.



2010 has been filled with uncertainty and volatility; after some peaks and valleys, stocks are just about where they started in January. Even after a 10% gain in the last month, the Dow is only up about 2% year to date.

That’s making it difficult for individuals and the pros, even those with the best online MBA, to make money. “It’s a tough summer,” says Wall Street Journal senior writer Gregory Zuckerman. The lack of direction on the economy is wrecking havoc on hedge fund strategies, he tells Henry in this clip.

Through the first half of the year, hedge funds are only up about 1%. “They can’t figure out right now a really good trade,” says the author of The Greatest Trade Ever..  Hedge fund manager Philip Falcone is a prime example.  After a 46% gain last year and a 116% return in 2007, his Harbinger Funds are suffering as of late.  “As of July 15, Falcone's Harbinger Capital Partners Offshore Fund I was down 10.7%, ranking the New York-based fund manager one of the industry's 20 worst performers, according to HSBC,” Reuters reports.

It’s times like these that have many investors waiting it out on the sidelines.

Ironically, one of the most bullish managers around is John Paulson, the man made famous for making billions by betting on the housing collapse. He owns large stakes in banks such as Bank of America and Citigroup, and has told investors he expects the real estate market to bounce back 3-5% in 2010 and 8-12% in 2011. (Update: Recent market volatility has prompted Paulson to rein in his horns a bit. The $3 billion Paulson & Co. Recovery fund, launched in 2008, has decreased its net exposure from 140% to 107% in recent weeks, The FT reports, citing a letter from Paulson to clients.)

Meanwhile, as mentioned in a previous segment, other hedge fund giants are betting on deflation. David Tepper, who raked in $4 billion in 2009 by getting bullish at the bottom of the market, is not as sanguine about stocks. He has a large position in high-yield debt.

As discussed here, the talk on Wall Street has shifted from the threat of inflation to fears of deflation. Gregory Zuckerman, senior writer for The Wall Street Journal says many of the top hedge fund managers, a.k.a the ‘smart money’, are, “preparing for potential deflation.”

Zuckerman says the mindset has changed as the economy has lost steam while rising deficits make it less likely lawmakers will add stimulus or the Fed will drop money out of helicopters.

Even if those in the deflation camp are right, profiting on the trend is not easy. “Frankly, a lot of investors don’t know how to prepare for it,” says Zuckerman. “Even the top guys are flummoxed right now.”

Bill Gross, the founder of PIMCO, is playing the trend by buying Treasuries. David Tepper, the founder of Appaloosa Management, who made $4 billion in 2009 after buying bank stocks near the lows, likes junk bonds. Tepper has about 50% of his money in high-yield corporate bonds. Another popular trade is to own stable, dividend-yielding stocks.

A better than expected economic turn and we may be kissing the deflation theory good-bye, Zuckerman tells Henry in the accompanying clip. Even the 'smart money' investors preparing for deflation "are concerned that it may not happen," he says. 

Russia Bans Wheat Exports for Remainder of 2010

It's starting to smell a lot like late 07, early 08.  The agriculture stocks are moving in part of the continued parabolic move in wheat.  Not 3 weeks ago when I first highlighted it this index was at 20ish [July 16, 2010: Get Your Wheat On], Tuesday it had run to $24 [Aug 3, 2010: Wheat Continues to Surge as Russian Droughts Drive Prices] and now 48 hours later we're talking $27s!

Via WSJ:

• Wheat futures prices soared Thursday to their highest levels in two years after Russia said it would ban grain exports due to a severe drought, a move that heightens concerns about global supplies of the grain and the possible impact on food prices.   U.S. wheat futures have gained nearly 85% from a nine-month low in June.
• The export ban by Russia, a major producer and supplier to other countries, comes after several weeks of deteriorating prospects for the Russian wheat crop. Market participants had speculated in recent days that an export ban was likely, but the full effect of such a possibility clearly hadn't been priced in. 
• The ban, which affects wheat, corn, barley, rye and flour, is set to run from Aug. 15 until the end of the year, according to a spokesman for Russian Prime Minister Vladimir Putin. Traders with existing contracts may ship only through Aug. 15.
• While most market participants don't foresee the kinds of problems that sparked food riots in 2008, the dramatic increase in prices and the uncertainty over future supplies of the grain have forced buyers and sellers to recalibrate their plans. 
• The ban is "a big deal" because the former Soviet Union has emerged as a major exporter on the world market, said Jerry Gidel, analyst at North America Risk Management Services, a brokerage in Chicago.
• Ukraine, another major exporter, also has canceled several wheat export contracts due to lack of supply from farmers and other issues, trading executives said. The news heightened fears about tightening supplies because export restrictions in the former Soviet Union helped shove prices to record high prices in early 2008.

 Ironically, the move in wheat is helping other grains:

• The wheat supply concerns are spurring price increases for other grains too. September corn futures in Chicago hit a seven-month high, rising 6.2% to $4.25 a bushel. Corn and wheat are linked because both grains are used for animal feed. When wheat locks up at the exchange-imposed limit, traders who want to buy grain futures will likely look to CBOT corn and soybeans.

This should pressure margins for almost all companies who deal in wheat, especially if they have not hedged their purchase agreements, as the ability to pass on price increases to the end consumer is poor.   To repeat what I wrote in those earlier posts, the easier 2nd derivative plays are the fertilizer stocks although if this continues names like Bunge (BG), Deere (DE), Archer Daniel Midland (ADM) will be all over the hedgies screens.  While the wheat move is breath taking, when commodities reverse it is jaw dropping.

Should be a very good year for America's wheat producers.



No positions

Monsanto (MON) Ups Dividend

Monsanto (MON) seems to reacting quite nicely to what I perceive as a very modest increase in the dividend.

• Monsanto Co. said Wednesday its board of directors approved increasing the company's quarterly dividened to 28 cents per share from 26.5 cents per share.  The world's biggest seed maker will pay the dividend on Oct. 29 to shareholders of record on Oct. 8. Chief Financial Officer Carl Casale said dividends are a key element of Monsanto's approach to using its strong cash position to benefit shareholders.
  

Either way, as our largest position, I am happy with the move since I need something to move out of this quicksand I am now in.  As mentioned earlier this week when I added to the position, I'll be taking profits [if and when] in mid $64s range - if the stock can clear that area with ease, we'll be right back in.  If the market remains benign this move by MON to that level looks like a no brainer, but as you should know by now with almost every stock in the market now one algo correlation trade, we are mostly hostage to the the greater indexes as almost every stock (outside of company specific news) is a proxy of it.

Got milk seed?

Long Monsanto in fund; no personal position


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Polypore International (PPO) With an Impressive Beat on Q2 Earnings

So far this earnings season we've had 3 stars in terms of reaction to earnings - F5 Networks (FFIV), Priceline.com (PCLN), and as of yesterday evening Polypore International (PPO).  The latter stock is becoming to 2010 what Wyndham Worldwide (WYN) was to the portfolio in 2009; a tucked out of the corner stock not dominated by HFT / EFT trading that has excellent appreciation for a core position, along with being a nice stock to trade.  Not bad for a company I had never heard of coming into the year.

The last 48 hours has shown the downside of not 'betting' on earnings reports, just as last week showed the upside; I cut position sizes in Priceline.com and Polypore International by significant amounts going into earnings, so I've left some opportunities on the table for appreciation.  But the upside is not taking any big hits during earnings season and keeping capital near all time highs - there is no perfect system that only gives you upside without the risk.  Now we have to figure out where to chase the stocks we got out of, because short of full scale market rout stocks that tend to act like this right after an earnings report tend to do very well the next 90 days.

Specific to Polypore, the company came in at 33 cents versus the 24 cent estimate.  I am not sure how much they beat on revenues since there is no news report on this quiet company.  The reason we bought (a secular growth story within a rather staid company):  energy storage, namely a below the radar lithium battery play - continue to bear fruit.  [May 20, 2010: Polypore International - Derivative Play on Electronic Battery Growth]

Full report here.

• Sales were $150.1 million, an increase of $31.9 million, or 27%, compared with the prior-year period. Excluding the effect of foreign currency translation, sales increased 29%.
  
• Adjusted Net Income and Adjusted EPS were $15.2 million and $0.33 per diluted share, compared with $5.2 million and $0.12 per diluted share in the prior-year period. Net income was $15.9 million and $0.34 per diluted share.
  
• Robert B. Toth, President and Chief Executive Officer, said, "We're pleased with the ongoing robust growth during the quarter, and we're continuing to experience positive trends in all of our businesses. The demand drivers remain solid and the investments we have made and continue to make across our businesses--namely in Electric Drive Vehicles, healthcare and expansion in Asia--position us well for long term growth."
  
• In the quarter, sales for the Energy Storage segment were $107.5 million, an increase of $25.2 million, or 31%, compared with the prior-year period.  Lithium battery separator sales were $32.6 million, an increase of $11.9 million, or 57%. The increase reflected economic improvement in consumer electronics, as well as continued application proliferation and new product launches, including emerging Electric Drive Vehicles ("EDVs").
  

[July 1, 2010: Beginning Polypore International]

Long Polypore International, Priceline.com, F5 Networks in fund; no personal position

Mercadolibre (MELI) Shakes Off Negative Earnings Reaction

The nearly completely random reactions to earning reports continues...

Last night Mercadolibre (MELI) posted decent numbers, beating analysts estimates on EPS by 2 cents and on revenue by a whisker.  I thought the stock would get hammered as I've had other companies do much better and lose 8-15% instantly this earnings period.   And those companies had much lower valuations than MELI's 60x forward.   Instead it was only down 4-5% in after hours.  This morning, it was initially weaker and fell to the 50 day moving average before bouncing strongly and now is nearing flat on the day.  I missed the move down to add to the position, however looking at the chart I wish it had come down to just below $56 to "fill the gap" from early July and then bounced.

Either way it seems to have survived the lemmings, and now we have one less issue to worry about for the next 90 days. (full report here)  Much like EBAY, their version of "Paypal" continues to be the jewel of the portfolio, with huge growth metrics.  (it is now up to almost 1/3rd of total revenues)

• For the quarter, the Latin American e-commerce company posted revenue of $52.5 million and profits of 26 cents a share, edging the Street at $52.1 million and 24 cents.
  
• MercadoLibre reported consolidated net revenues for the three months ended June 30, 2010 of $52.5 million, representing 28.4% year-over-year growth in U.S. dollars and 38.5% year-over-year growth in local currencies. 
• In local currencies, Marketplace revenue grew 37.3% year-over-year while Payments revenue grew 42.5% year-over-year. In U.S. dollars, Marketplace revenue grew 19.9% to $37.2 million in the second quarter of 2010 from $31.0 million in the second quarter of 2009. 
• In U.S. dollars, Payments revenue grew 54.9% to $15.3 million from $9.9 million in the prior year period.
  
• Items sold on MercadoLibre grew 33.7% to 9.2 million while total Payments transactions going through MercadoPago grew 91.2% to 1.3 million when compared to the second quarter of 2009.
  
• The second quarter 2010 gross profit margin was 78.3% compared to 79.0% for the second quarter of 2009. The slight decrease in gross profit margin was the result of higher growth in our lower margin Payments business, which grew to 29.2% of net revenues in the second quarter of 2010 from 24.2% in the prior year period.
  

[Jun 25, 2010: Restarting Mercadolibre]

[Dec 24, 2009: IBD Mercadolibre- E-Commerce Sales Soar as Latin American Households Get Wired]
[Mar 31, 2008: Mercadolibre with 3PM Spike & Forbes Article] 

Long Mercadolibre in fund; no personal position

Bookkeeping: Closing Direxion Bullish Small Cap 3x (TNA) Ahead of Labor Data

I continue to feel like I am in quicksand these past 3-4 weeks.  The market is making herky jerky moves but much of it happens on specific days in premarket and in an opening salvo of buy orders in the first 30 minutes of the day; if you are not positioned for it overnight you get little benefit.  I read Monday or Tuesday of this week that the market had been down 4 of the previous 5 sessions (at the time) yet the S&P 500 was up 1% in that time frame... that more or less explains the current nature of the market.  To make money on the indexes this week you had to be locked and loaded long coming into a slew of data Monday morning.  Outside of that day, we've had 3 days of "meh".

Thus far the bulls continue to hold the ball as the all important S&P 1114 area is holding well.  Tomorrow is a lot like an earnings report day, except for the entire market due to the labor data.  I frankly don't even know what the market wants now that we've passed the "good news is better for the market stage" and into the "we miss our free money from Ben" stage now that Quantitative Easing 1 has been over for quite a few months.  Does the market want labor market improvement tomorrow, which reduces the chances of QE2 (or at least pushes it out further down the road?), or does the market want more bad news so cheap and easy money is handed to the speculator class in droves to "improve the economy:"?  I'm sure really bad news would spook the market immediately but with some reflection it might make the Wall Street class giddy knowing the next round of gifts is all but assured.

With that and with the choppy nature of things, I am selling the TNA I bought early in the week on the break over S&P 1120.  With this type of instrument you need some sort of sustained move, preferably in short order, and this has not happened.  Tomorrow's headline risk can cause the market to drop (or jump) 10-20 S&P points very easily but now we have a short term bipolar reaction which is like flipping a coin, and I don't want to face that with a levered ETF.  So I will sell this bugger for a 2% loss.

At this point I want to see the S&P 500 well over 1132 to jump back in; that could easily be premarket tomorrow at 8:31 AM.  Or not.

No position


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Amazing Fibonacci

You don't think technical analysis has stolen the reigns from fundamentals?  I just plotted the October 2007 peak versus the March 2009 lows, and all the Fibonacci levels (for more about this fella go here); my precision in the chart is not perfect but you can see what has happened the past 3-4 months has been all about Fibonacci.

[click to enlarge]

Look where we peaked in May, the 61.8% retracement of the entire drop from Oct 07-Mar 09
Look where we bottomed last month, the 38.2% retracement of the same move
And look where we are hanging around now (which was also the June intraday high level before the 17% selloff), the 50% retracement

It's one thing to try to retrofit data to fit your charts, but this is just a simple measure of the bear market move since Oct 07, and the key Fibonacci levels. The way it fits like a glove is startling to say the least.

I think all technical analysis self reinforcing... it only works because people believe it works.  And the more people who believe it, the more it works.  Why the 200 day moving average means something, but the 134 day moving average means nothing is because we place an emphasis on the former figure; otherwise it is meaningless  This data above tells me a lot of silicon (and some carbon based life forms) are putting a lot of emphasis on Mr. Fibo.

In the intermediate term (multi month) we now have a clearly defined range marked by the April highs and June lows.  In Fibonacci language we are ping ponging between the 38.2% retracement and the 61.8% retracement... and currently sit smack dab in the middle clinging to the 50% retracement.  Any move in the coming quarters outside of this range would be extremely meaningful.  Until then it is really all about churn.

Bookkeeping: Restarting Amazon.com (AMZN)

Amazon.com (AMZN) now has a chart that looks like Priceline's about 3 weeks ago - it went from prospective short that was butting up against resistance, to prospective long.  I am going to take this trade and allocate 2% into the stock for obvious technical reasons.

Long Amazon.com, Priceline.com in fund; no personal position


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Bookkeeping: Adding Back to Acme Packet (APKT) & VMWare (VMW) Today, Covered Amazon.com (AMZN) Yesterday

Just realized my Amazon.com (AMZN) short hit its cover limit order yesterday at $122.25.  Hence my only short is gone - the stock actually held in there quite well as a hedge despite the market rallying, until finally the dam burst late yesterday... today we see what happens when a stock breaks over a key resistance.

Unlike Akamai Tech (AKAM) and Netflix (NFLX), Acme Packet (APKT) has been able to regain key moving averages quickly after earnings.   I still don't understand the selloff for what was a tremendous report along with a big increase in guidance but it is what it is.  I have added back a 1.75% exposure into the name now that the technical condition is much better.

Netflix is actually almost about to break over its resistance levels a few weeks after its earnings punishment... might take the S&P 500 to break free of 1130 to get NFLX where it needs to go.

I cut back the position in VMWare (VMW) a while back to almost zilch, locking in profits.  Since then it has only stayed steady and now appears to be making a "double top" breakout, so I am layering back in with a 1.5% allocation for the day.

Still waiting on S&P 500 to break over 2 levels, 1128 (which is a Fibonacci retracement) and then the obvious 1130/1131 level which would be the first new higher high since April.  But then again every piece of silicon and carbon on Wall Street is also looking at the same levels.

Long Acme Packet, VMWare in fund; no personal position


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Which is The Hottest Equity Market on Earth the Last Month?

Spain.

Despite the 20% unemployment rate.

Mostly because it was among the hardest hit due to the European crisis.  Nothing a trillion dollar backstop, a central bank buying government bonds, and a wonderful public relations job banking stress test cannot fix.

Now I wonder if there is a historical World Cup winning country indicator...

Via Bespoke blog [click to enlarge]

Priceline.com (PCLN) Rides Foreign Markets for Huge Earnings Beat

While William Shatner gets all the press (and why not?) perhaps many people do not realize Priceline.com (PCLN) gets a huge portion of revenue overseas, especially in Europe.  It seems (wait for it) foreign strength combined with cost cutting ("expense control") buoyed yet another domestic company.  The stock is surging 17% in after hours and scraping against yearly highs at the $270 range - we've cut our position size ahead of earnings so this is the flip side of missing out on big selloffs post earnings.

Full report here.

Per Briefing.com:

4:10PM Priceline.com beats by $0.44, beats on revs; guides Q3 EPS above consensus, revs above consensus (PCLN) 230.67 +3.29 :

Reports Q2 (Jun) earnings of $3.09 per share, excluding non-recurring items, $0.44 better than the Thomson Reuters consensus of $2.65; revenues rose 27.1% year/year to $767.4 mln vs the $733 mln consensus. Gross booking were $3.4 bln, up 43% y/y. 

Co issues upside guidance for Q3, sees EPS of $4.78-4.98 vs. $4.18 Thomson Reuters consensus; sees Q3 revs growth of 29-34% y/y (~$941-978 mln) vs. $863.28 mln Thomson Reuters consensus. For Q3 sees y/y increase in total gross travel bookings of ~33% - 38% (approx $3.6-3.75 bln); y/y increase in international gross travel bookings of ~46% - 51% compared to 59.5% in Q2; y/y increase in domestic gross travel bookings of approximately 13% compared to 19% in Q2.


Via Reuters:

• Online travel agency Priceline on Tuesday posted quarterly profit above analyst forecasts as bookings jumped 43%, led by international bookings and hotel reservations as the industry recovers from a downturn.  "The stronger international growth, combined with better expense management, led to the strong upside," said Aaron Kessler, an analyst at Thinkequity.  "The guidance looks pretty strong as well," he said.
  
• International bookings rose 63.6% to $321.8 million. The company said global hotel reservations increased by 48%.
  

[Feb 23, 2010: IBD - Could Priceline.com and Expedia Hit Headwinds?]
[Feb 18, 2010: Priceline.com - Another Stellar Earnings Report]
[Nov 10, 2009: Priceline.com Hits an Earnings Home Run]
[Aug 10, 2009: Priceline.com - Recession Recsmession! Continued Impressive Results]
[May 14, 2009: Priceline.com in Investors Business Daily]
[May 11, 2009: Priceline.com Continues to Execute Well]
[Feb 19, 2009: Priceline.com Impresses on Earnings]
[Aug 6, 2008: Priceline.com - Down 17% on Good Earnings?]
[May 8, 2008: 2 Earnings Reports of Note: AIG (AIG) and Priceline (PCLN)]

Long Priceline.com in fund; no personal position

Action Very Constructive All Things Considered

There were some weak earnings in some larger companies more tied to the U.S. consumer this morning, along with a slew of disappointing economic data.  While it caused a minor selloff to S&P 1117, the key 1114 level held (200 day moving average - simple) and we've cleared 1120 as of this writing.   When the market ignores bad news that is constructive.  I also am advancing the cause that we might be back to 2009 thinking where bad news = good news.  Bad news - more easy money policies from the Fed and to Wall Street that matters more than the economy.  That would take us back to the "heads you win, tails you still win" market of summer 2009 through spring 2010.  I am still looking for this (long awaited) clearance of S&P 1130 to get fully on board with Kool Aid cooler in hand.

That thesis of bad news = good news was true in China overnight, as I was scratching my head why the weak PMI news was greeted so happily.  Apparently the Wall Street logic is the weaker data from China means the government will back off on the tightening policies they have advanced to burst a real estate bubble.   So they have now bestowed the Larry Kudlow "Goldilocks" theme circa US 2005-2007 to China.  5 men (and a baby) will be able to control the 2nd largest economy on Earth and softly guide it wherever they need in near perfect formation.  How convenient.  And these are "free market" advocates who populate Wall Street?

So in a perverse way the Chinese market has been hammered the past 3 months as economic data was "too good" (leading to inflation fears).  Now that the data is weaker, that is better.  While I understand it, I sort of laugh a little inside.

Either way we have jam packed data in the week ahead - ISM Services Wednesday, employment data Friday and now the Fed meeting where instead of telling us the exact same thing they might be changing the language to get even EASIER... this of course in relation the easiest levels of monetary policy in our lives.  (p.s. where are all those folks who told me 7-8 months ago that the big uptick in temporary workers ALWAYS presages big employment gains?  It *is* different this time comrade)  Oh wait, time to roll out the 17th month of "it's a lagging indicator" excuse.  [Feb 16, 2010: USA Today - Use of Temps to Fill Jobs May No Longer Signal Permanent Hiring].

In relation to the market, I want to see how the market reacts to more bad news - in the past few weeks, the bad news has been ignored or embraced.  Today as well.  Hence, I'd like to see a bad report Friday with employment to see if the reaction is aggressive buying after the knee jerk reaction.  If so, we are all back on the Ben Bernanke train of (even more) free money as far as the eye can see.  And we should expect the dollar short trade to be back on.

Caption: Bernanke thinks I am toilet paper.

If this is green shoots, I'd hate to see brown.  But as we saw in 2009 through early 2010 when the Fed shoots a trillion+ into the banks, who use it to buy Treasuries and risk assets (since there is little end demand in the 'real economy'), you don't want to fight it.  I tried for 6 weeks in spring/early summer 2009 and I got Bernanke'd.

Wheat Continues to Surge as Russian Droughts Drive Prices

Two and a half weeks ago I mentioned that wheat was flying [July 16, 2010: Get Your Wheat On]  This subindex below was priced at just over $20.  Yesterday it was actually making a run for $25, and well into the $24s, tacking on another 20% in just the past few weeks.

[click to enlarge]

I listed some ETFs that would benefit in the July piece but in theory as prices for crops go up, farmers should be willing to open up the pocketbooks for fertilizer, so that's an easier second derivative play on this move.  Aside from the devastation in Russia, it appears there are even issues in Canada.

• Wheat prices opened August with another big jump, hitting a 2-year high Monday as worsening weather conditions ravaged Russia's grain crops.  Wheat prices soared 42% in July, the biggest monthly gain in at least 51 years, as a severe Russian drought destroyed one-fifth of Russia's wheat crop. Fires are now raging in the fields of the world's No. 3 wheat exporter, hurting more crops and increasing expectations that Russia will have to curb or even stop its exports.>
  
• Estimates from Russian grain growers' unions and economists range from a 30 to 44% drop in exports this year from 2009.
  
• Canada, another major exporter of wheat, expects the lowest wheat yields since 2002 because of crops that were destroyed by heavy rains or left unplanted.  That is great news for American farmers, who expect a strong yield from U.S. wheat crops. They will likely sell more of their wheat for higher prices to meet the shortfall from abroad.
  
• Expectations for an increasingly smaller world stockpiles of wheat helped push prices for September delivery up 31.75 cents, or 4.8%, to settle at $6.93 Monday. It's the highest wheat close since September 2008.
  
• Prices earlier Monday touched above $7 a bushel for the first time since September 2008, which was the tail end of a record-busting run-up in commodity prices that began in spring of 2007. Wheat prices topped out at an all-time high above $13 a bushel in February 2008.  [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators]
  
• If the huge rally in market prices continues in August, U.S. shoppers could pay 5 to 10% more for products made of wheat at the grocery store starting in fall.

Unlike the 2007-2008 run up caused by levered investment banks and hedgies, this one actually seems to have basis in fact.  But perhaps with QE2, Bernanke can help these same 2 groups make 'mad money' by driving the price back to "super cool" 2008 levels.

As an aside, one of the most recession proof areas of the country is the farm growing Midwest -  Nebraska has the 3rd lowest unemployment rate in the country at 4.8%, following North Dakota's 3.6% and South Dakota's 4.5%.  So if you can't live in the ring around Washington D.C. where the federal spending spigot is creating a taxpayer funded boom, go (mid)west young man.

Bookkeeping: Cutting Back Polypore International (PPO) By 2/3rds Ahead of Earnings

I sold 1/3rd of Polypore International (PPO) to lock in profits within a hair of its 52 week high a week ago today.  The very next day it fell 9% from where I sold so I bought that exposure back (plus some).  However thus far there has been no bounce.  I was hoping to see something soon knowing I'd have to cut back ahead of earnings.

With earnings out tomorrow, I'm selling this position down by 2/3rds and as long as the earnings report does no harm to the chart, will be looking to buy back after the release.  This will temporarily drop it from a 2% exposure to roughly 0.6%.

Long Polypore International in fund; no personal position


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