Tuesday, September 14, 2010

Bookkeeping: Short Caterpillar (CAT)

Look... I could say the same thing the other 820,129 financial blogs are saying right now... go long gold, gold miners, and silver - it's money in the bank.  You can't lose.  It's a 99.7% guarantee.  But what fun would that be???

Instead let's go George Costanza and short Caterpillar (CAT).  Can China say anything else that pleases us even more in the next few days or weeks?  They have created the perfect centrally controlled economy (just trust them!) - they have 10%+ GDP growth, with little inflation, 4% unemployment at all times (even when shedding tens of millions of jobs) and in 4 short months of pressure fixed a real estate bubble in their largest cities.  Whew! Further, every American multinational will benefit from their perfection; while continuing to shed U.S. labor of course.  I think that good news is in every stock within 6 degrees China, after these past 10-11 days.

Plus, technically the stock has stalled at old highs.  Maybe.  Or it could be a resting point before the double top breakout at which point other bloggers can say "I told you, buy more gold!".  In a perfect world, CAT would go down there and fill the gap at $66.  But that would assume the stock market can fall for more than 8 minutes which has proven to be impossible.... and listening to CNBC will forever be impossible go forward (Dow 10,000 hats retired permanently).  As long as Obama cuts taxes for the top 2% of course... otherwise the market will drop 95% (source: Kudlow).

So as I sit on the deserted island talking to the volleyball, it told me to short Caterpillar.  I never go against said volleyball... otherwise it will put out my camp fire when I am sleeping.

I started with a 1.5% short just under $72.  Go ahead and buy the gold miners ETF (yawn).

Short Caterpillar in fund; no personal position


Bookkeeping: Sold 25% of Gafisa (GFA)

I love feeling like a genius.  Almost any stock I buy, I can create a win.

After the market took the leadership stocks straight up in the first 4-5 days of this rally, I went on the lookout for some names that had been left behind.  One was Gafisa (GFA) so I restarted a position in the Brazilian homebuilder as it was just beginning to breakout.  To repeat in retrospect, I should have just piled into the same 20-25 leadership stocks that apparently every other human on Earth wants to be in the past 2 weeks.  Sometimes you outsmart yourself.

It's been slow and steady going until finally the past 3 days the stock has caught the bug.... it's up 7% from entry so I am going to take a quarter off the table.  Normally, I'd take more off with the extended nature of this market but I am still hoping for a gap up euphoria type of blow off top that takes the market over 1130 and causes every last holdout to go long the market.  So I can sell more into that if and when.  The stock is approaching the early August highs; should hit them tomorrow on the premarket mark up ;)

I've heard today that once S&P 1130 breaks we're going straight to 1150 from at least 4-5 different sources. Is the market going to do exactly what everyone expects?  We'll soon find out.  I do feel like Tom Hanks on that deserted island, talking to my volleyball... "look at me, I'm the only one on Earth betting against the market!"

Long Gafisa in fund; no personal position


Edward Pinto: Subprime 2.0 is Coming Soon to a Suburb Near You

Former chief credit officer at Fannie Mae (from 87 to 89, before things really got out of control, so I'll cut him some slack) Edward Pinto posted an editorial on Bloomberg last week, with some interesting tidbits.  While I disagree with his thesis that ALL of the blame was on Congress for weakening standards - and none was with regulators or the private sector (in my view, the whole daisy chain is to blame) - it's still a good overview of what happened, and why we are on the path to repeating it as we struggle to find new buyers to keep the Ponzi going.  This all goes hand in hand with so many of the other mega trends happening in the country - fewer and fewer actually have the ability (or chose not to) have savings, so to keep the gravy train going, easier and easier credit and bigger and bigger handouts had to be done both in the auto and housing markets.

One takeaway that was new to me, was that as part of the Dodd-Frank Bill neither an adequate down payment NOR a good credit history were deemed necessary to include in the criteria to indicate a lower risk of default as regulators are to seek (in the future) a "qualified residential mortgage".

Sit on that for a moment.

Why would something so nonsensical be omitted?  Well, this way Fannie and Freddie can purchase "qualified" residential mortgages en masse.  After all, they have the stamp of approval!

I also did not realize that even after the extension thru 2012 of unlimited liability to the U.S. taxpayer (done in the still of the night on Christmas Eve 2009), [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer]  we are still on the hook for MORE even AFTER 2012.

The statistics on "less than 3% down" mortgages also awed me:
  1. 1990: 1 in 200 homes had down payment of 3% or lower
  2. 2003: 1 in 7
  3. 2006: 1 in 3

I did heartily applaud his solution to this nonsense - put all congressional pension assets into funds backed by the high risk loans mandated by federal housing legislation.  It would be amazing to watch the rats scurry to actually change over to risk based lending rather than a repeat of "have a heartbeat, get a loan".

3 minute video on Bloomberg

Snippets from op-ed below:

  • On the second anniversary of the bailouts of Fannie Mae and Freddie Mac, it’s now obvious that weak lending standards, serving the political interest of affordable housing for all, were the main reason for the nation’s mortgage meltdown.  But the government just can’t permit lending to anyone and everyone; it must insist on prudent judgment about who will repay and who will default. Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into trouble -- surprise! -- but too much irresponsible lending also creates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk.
  • The same mistake occurred in 1929, when any investor could buy stocks on margin with as little as 10 percent down. Small wonder that after the crash the U.S. government instituted a margin requirement of 50 percent down.  Congress should apply the same principle to housing purchases, increasing the amount a buyer must put down and other safeguards to assure prudent lending. Congress refuses to do this. Why? Giving citizens cheap, easy housing is a great way to win votes, no matter what horrific repercussions ensue.
  • From 1993 onward, regulators worked with weakened lending policies as mandated by Congress. These policies systematically dismantled a housing-finance system based on the common sense principles of adequate down payments, good credit, and an ability to handle the mortgage debt.  Substituted was a scam of liberalized lending standards that turned out to be no standards at all.
  • In 1990, one in 200 home-purchase loans (all government insured) had a down payment of less than or equal to 3 percent. By 2003, one in seven home buyers had such a low down payment, and by 2006 about one in three put no money down.
  • The Dodd- Frank Bill, signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage.  This was no oversight. Republican Senator Robert Corker and others proposed an amendment that would have added both a minimum down-payment requirement and consideration of credit history along with the establishment by regulators of a “prudent underwriting” standard. This amendment was defeated.

So where has that taken us?
  • In early September 2010, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, following requirements set out in 2008 by Congress, finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout.

Of course we can tie this all together - since neither down payment NOR credit history is part of a qualified loan, *poof magic* the loans approved now that don't take those into consideration are 'not risky'.

  • Of course, FHFA Director Edward DeMarco notes that Fannie and Freddie aren’t to undertake risky lending to meet these goals. As has already been noted, Congress doesn’t consider low down payments and poor credit as indicative of risky lending. How convenient.
  • The Federal Housing Administration, in its actuarial study released late last year, projected that it will return to an average FICO credit score of 635 by 2013. This signals the FHA’s intention to return to subprime lending. Once again, Dodd-Frank supports this policy change.
635? Meaning half of these taxpayer backstopped (because there is almost no private market anymore) mortgages will fall below FICO 635?  Heck there is not even that much of the population that is below 635!  (maybe 20%?)  What this policy means with the average at 635 is almost any American with a heartbeat can get a government backed loan... and since 3.5% down is usurious - as we saw last week, the 0% down is coming back.  So let's review: little to nothing down loans, to people of almost any credit score... hmm... somewhere I remember that sort of story playing out.  Can't... quite... put... finger.... on... it.

This all sounds like a recipe for success!  Because as we saw above credit history, per Dodd Frank, has nothing to do with making a low risk mortgage (or any kind of) loan, does it?  

It would be laughable if not so absurd, but its business as usual for the self interested attorneys running the land in D.C.  Whatever the cost to the public... as long as it buys votes for self preservation.  These things used to upset me when I was more idealistic, but if it still upsets you - you apparently do not understand what government is now here to do.  Whenever I feel an inkling of anger I now simply just re-attach to the Matrix and have Kool Aid injected into the veins while I the music repeats to me "it's all good... go forth and shop".

This next part, regarding post 2012 obligations, was new to me:
  • On Christmas Eve in 2009, the Treasury Department announced new terms to the bailouts of Fannie and Freddie. Starting on Jan. 1, 2013, the terms of the bailout agreement provide for a continuing obligation to provide about $274 billion in capital to Fannie and Freddie. This amount is in addition to the unlimited sums that are available between now and Dec. 31, 2012.
Based on the current policy, it looks like we're going to need the post 2012 funds.

I did like the solution by Pinto and I think it should apply to EVERYTHING in U.S. policy... i.e. Congress should have the median healthcare plan that the average American has, Congress should have the median retirement plan, Congress should have their assets invested into the gosh awful policy they inflict on us.
  • Here’s my proposal to bring Congress’s penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have a feeling that things would change fast.

Bookkeeping: Reshorting Texas Instruments (TXN)

In a way that mechanical mistake late yesterday worked out for me, because my stop loss in the short of Texas Instruments (TXN) would have triggered today at a higher price than where I sold "at market" late yesterday.  I am going to stay stubborn on this name because its a relatively low beta name and while hard to believe, the stock market must go down again.  We are starting to see extremely silly things now... I see oil stocks up while airline stocks are up at the same time.  That makes zero sense... it is arbitrary buying when people are performance chasing.  Panic buying from the same folks who did not want to touch a stock with Jim Cramer's 10 foot pole 2 weeks ago.

I don't have a stop loss in place but we are right below the 200 day simple moving average of roughly $24.70.  I put a 3.4% short on.   At minimum that gap is going to fill when the market actually goes down for more than 8 minutes.

(just fyi - I sold those SPY calls and edited that entry, as the trade did not go as I planned, we never really broke to new highs for the day)

Short Texas Instruments; no personal position


Goldman Sachs Speculates QE2 Could Begin in November

What a fairy tale the bulls have going for them... the economy is improving... the data is "fine"... fine enough to buy stocks of course, but not so fine that the Fed won't be forced to come in and support the entire economy with a new flurry of quantitative easing.  (fancy talk for buying up U.S. debt and diluting the U.S. dollar).  You truly can have it both ways... the new paradigm goldilocks economy.

It appears the selloff this morning, aside from being a perfect technical bounce of S&P 1116 (remember I said yesterday as long as resistance turned support at 1116 held, bulls have complete control) was aided by a Goldman Sachs note that the Fed could begin QE2 as soon as November.  This fits perfectly with my mosaic that this is all a big symphony orchestra of steroid injection, [Nov 18, 2009: Our Economy is on Steroids]  but to avoid political pitfalls it would happen post election.  Not that the economy needs steroids because it's fine on its own (look at the stock market after all).  While I've said the QE2 ponzi would happen post election I think it might be an early 2011 event because the Fed has said between the lines they'd need to see significant weakening in the economy.  Right now the economy is more like a staggering drunk (ex multinationals) coming out of the bar at 2 AM... i.e. the square root recovery.  And apparently the past 2 weeks of economic data has signaled everything is fine (ahem).  But then again, I am not the 4th arm of government like Goldman Sachs, so if they say it's likely to begin in November... it is likely to be November.

If you are new to the website, Quantitative Easing is going to do very little for the real economy... the banks are flush with reserves sitting at the Fed; there is no lack of monies to lend out which would be a somewhat useful reason for QE... not the lies they are putting out now.  The problem is lack of end demand by a broken economy.  Period.  [Feb 9, 2010: It's Not about a Lack of Financing, It's About Lack of End Demand]   QE is just a handout to capital markets to try to goose valuations of anything that moves as the 'wealth effect' is the true goal here.  Greenspan said as much a month or so ago when he said an increase in asset values is better than any stimulation that can come out of Washington.  There is no huge demand for loans as the real economy is dealing with the after effects of a few decades of debt accumulation.  You can't force people to take on more debt - even if you hand the banks another 50 trillion.  The Fed (and fed govt) has been unsuccessful in reinflating the housing bubble which is the broadest wealth effect lever... hence it will go back to the 1999 playbook as it has been trying to do (and did a great job of in 2009), and flood capital markets with U.S. pesos (formerly known as dollars).  Hence, most of these rewards will be extremely top heavy in the top 2% (maybe to offset their loss of tax breaks hah) and some trickle down to the top 10-20% which actually have some decent exposure to capital markets.  Everyone else?  Well...go shop because you won't get diddly for your savings.

Via WSJ:
  • The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc.  We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced,” Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around $1.0 trillion to kick-start the economy.
  • To fight the financial crisis in 2008 and 2009, the Fed bought $1.7 trillion in mainly mortgage-backed securities, a move that helped to keep mortgage and other long-term borrowing rates low. That program ended in March. But with the recovery slowing, the Fed said Aug. 10 that it would reinvest the proceeds of mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking. The question now is whether the central bank will start a new program of asset purchases that would increase the size of its $2.0 trillion balance sheet further.
  • Goldman Sachs expects this to happen soon given the weakness in the U.S. economy as a result of lower business inventory accumulation and a fading fiscal stimulus. The bank expects the U.S. unemployment rate to creep back up to 10% by early 2011 from 9.6% in August and to stay around that level for most of the year.

Hatzius is actually one of the most respected guys and combining brains with the access of information the boys at Goldman has, everyone gives their thoughts much more weight than anyone else.  Here is what he had to say on CNBC yesterday - pretty much a carbon copy of what I've been saying.  Inventory rebuild finishing up, and government stimulus slowing... those are the 2 things (outside of exports to Asia) that have led to the economy bump the past 4-5 quarters.

6 minute video

Bookkeeping: Bought October 113 SPY Calls [Sold]

Putting my theory to my test, and seeing if the "pain trade" means more upside I am buying a modest 3.5%ish index position via SPY calls.  September's expire at end of week so I am going with October so I don't have decay killing me.  My thesis is once we clear the highs of the day 1130 will be a slam dunk.  We have not had a reversal day in ages so it would be atypical to have one...it seems like computerized trading - once it has its mind set does not change directions.  Hence once we get going to new intraday highs the momentum should be up yet again.

I might sell these by end of day if 1130 is broken with conviction today as finally the bears should throw in the towel.  At that point, I'd be interested in being more aggressive on the short side... (I was hoping for a gap up this morning in fact but it was not to be had).  As always these index purchases with SPY calls or puts are very short term oriented plays to hopefully add some frosting to the performance cake.  I have done very little the past 8-10 weeks as the market has been a choppy place if misdirection and confusion.

For now that is my story and I'm sticking to it.

EDIT 1:20 PM - I sold these calls as the market did not break over S&P 1126 as I had hoped.  Nothing easy.

Long SPY 113 October calls in fund; no personal position


Bookkeeping: Restarting Thoratec (THOR)

Thoratec (THOR) is an old medical device name we last held June 2009.  Because my long exposure has been sold off heavily the past 3-4 sessions, I am going to take a bit of a flier here as the name has blown through key resistance levels on huge volume.  Already at 11:15 AM it has done 1M shares which is the normal daily total.  I can't find any news so this would signal to me, "someone knows something".  I will restart with a 1.4% exposure today and if the company can hold these supports, I'd be willing to add as this stock - unlike so many others - is not overbought as it has done little during the September rally.   I am very curious as to what is driving the name today.

Technically, either this is the start of something good, or this is a quick game of chicken in which the computers pulled a fast one to pull in people like me, waiting for such a stock to show signs of life.  If its the latter case, we'll reverse back down shortly and this trade will be 'bad'.

Fundamentally, the company reported a very nice quarter in late July but in the nonsense world of Wall Street, it guided to a $380M - $385M revenue year versus analysts $387M.  For that $2M-$7M "miss" the company dropped from $42 to $35 instantly and went on to have a terrible 6 weeks, plunging to as low as $32.  Which pretty much exemplifies why CEOs manage to the quarter rather than to the long run...

(from late July)
  • Heart device maker Thoratec Corp. said Thursday its second-quarter profit surged on strong demand for its HeartMate II heart pump.  The company also issued full-year estimates for revenue and earnings that fell short of Wall Street expectations, and that sent shares tumbling down more than 14 percent in aftermarket trading.
  • Thoratec said net income rose to about $16 million, or 27 cents a share.  Excluding one-time items, adjusted earnings amounted to $22.4 million, or 34 cents a share, compared with $11.6 million, or 19 cents a share, the company said.  Analysts surveyed by Thomson Reuters were expecting a profit of 32 cents a share.
  • Revenue jumped 37 percent to $95.1 million from $69.2 million a year earlier. Analysts forecast an average revenue of $95.3 million.
  • Thoratec expects adjusted earnings per share to range between $1.19 and $1.23, reflecting increased operating leverage. Analysts predict income of $1.23 per share.
  • The company said fiscal year 2010 revenue from continuing operations will range from $380 million to $385 million, below the $386.9 million forecast by analysts.

[Dec 16, 2009: WSJ -Thoratec: Giving a Heart a Hand]
[May 8, 2009: Thoratec Executes Well in Healthcare Space]
[Feb 19, 2009: Thoratec Acquires Heartware]
[Feb 6, 2009: Thoratec Beats; Market Yawns]
[Dec 5, 2008: Thoratec with Positive Data]
[Oct 30, 2008: Thoratec Smashes Earnings; Somehow Guides Up]
[Aug 4, 2008: One for the Radar - Thoratec]

Long Thoratec in fund; no personal position

Bookkeeping: Adding Back to Cleveland Cliffs (CLF)

The market is a freight train right now - all news is good news, and days there is no news the market also goes up.  It seems very likely that we are going to levitate to S&P 1130 no matter what at this point because the computers have deemed it so.

It is nearly impossible to buy anything since it is so extended... hence the rare pullback of even 5% in a stock is considered a gift.   I am going to get back the Cleveland Cliffs (CLF) I sold last week (at $67) here on a pullback to the 20 day moving average near $64.  There is a gap at $62 that needs to be filled as well, but since the stock market will be up 23 of the 24 days of September (apparently) one has to grasp at any entry points.   I just threw back a 1% allocation and if it drops to $62 will throw on another 1%.

  • Cliffs Natural Resources Inc. (CLF US) fell the most in the S&P 500, sinking 4.8 percent to $64.28. The largest iron-ore producer in North America said it now expects total 2010 coal sales of 3.9 million tons. Revenue per ton will be $115 to $120, a decrease from an earlier forecast of $140 to $145.

Normally you'd shun a stock after news like above, but in the 'risk on', 'risk off' market CLF will just go back with every other commodity stock tomorrow and trade en masse... if the S&P 500 is down, CLF will be sold and vice versa.  Fundamental news only matters for a few hours and then every stock once more is married to the ETF and what the algorithms are buying or selling that day.


On that note, if the S&P 500 hits 1130 and breaks through it without a moment of consolidation I expect that to be a trap for bulls.  Reason being at that point every short will throw up their hands in disgust and cave in as "the market just won't sell off no matter what".  Then there will be no one left to squeeze in this epic 10-11 day move.   I'd feel much more comfortable with a move over the top end of the range after some consolidation but as I read the blogosphere and financial sites everyone is looking for a pullback - hence the most pain would be inflicted on the masses by a continued upward movement.  Since *everyone* (silicon or carbon based life forms) is looking to "buy once we break the range" hence my belief that it could be a trap.

This move is very atypical and reminiscent of the rallies we saw in March 09 thru April 10 - i.e. the "V shaped rallies on no volume".  May, June, July were much more normal and historical in how the market acted and hence much easier to trade since your historical playbook actually meant something.  Now we are back to things we rarely see.  As the S&P 500 turns green for now, we have only 1 down day the entire month.  Complacency building among market participants as "it's so easy being long" again.

Long Cleveland Cliffs in fund; no personal position

[Video] Tibco Software (TIBX) on CNBC Fast Money Half Time Show

A lot of our portfolio names are starting to get attention.  A few weeks ago the CEO of F5 Networks was highlighted, last week I saw Acme Packet CEO show up, and yesterday Tibco Software's (TIBX) CEO made an appearance.  I actually prefer my names to be out of the spotlight of the 'retail crowd' to avoid the 'momo' crowd but judging from the charts, the institutional momo crowd has many of our names firmly in hand.  Which is going to make them much more dangerous type of stocks to hold into earnings in October as expectations are going through the roof.  It's one thing if the name is Salesforce.com which is already well know, but when Tibco (who almost no one has heard of) starts getting pumped by Wall Street, it starts raising yellow and red flags.

4 minute video

[Jun 25, 2010: Tibco Software Reports Solid Beat, Raised Guidance]
[May 12, 2010: Bookkeeping - Starting Tibco Software]

Long Tibco Software, F5 Networks, Salesforce.com, Acme Packet in fund; no personal position

Bookkeeping: Covered Texas Instruments (TXN) Short in Error

After the bell I realized I lost my Texas Instruments (TXN) short in error.  Yesterday I shorted a 2nd half of the position that I had covered for a gain the previous Friday.  This brought my cost basis up to around $24.15.  Unfortunately rather than putting a stop loss to cover at $24.60 I put a limit order in to cover at that price and obviously it was sold... in the $24.40s.  Not a huge dollar loss or anything but just putting it out there for transparency sake since I might go right back to shorting it.

Tale of 2 cities in exponential v simple - need to remind myself to look at both

Based on the action today and if the stock remains below this $23.60 level I'll consider restarting the position.

No position


Monday, September 13, 2010

Bookkeeping: Sold a Good Part of Spreadtrum Communications (SPRD)

"Captain... it's froth! Surrounding us.  We'll need hyper speed to reach escape velocity!  Only the cloud can save us... anything cloud is our savior."

My gosh... Friday I bought some Spreadtrum Communications (SPRD) as it came back to support near $11.  Threw on a $12.20 sell limit order today just for kicks... and it has executed.   Darnit, I knew I should of put half the fund's assets into SPRD last week ;) ...  oh well, gained 10% in 1 market day on what I had.  Not going to turn that down... that annualizes to... err 2500%.

Ah this brings back memories of 1999 when you could do this trade 8 out of every 10 days.... I was a genius back then... pure genius.  Then I got 2000'd!

It feels like a feeding frenzy in the same 30-35 names or so right now...anything 6 degree of cloud by decree must go up 3-5% every day.

Let me remind readers I am turning myself into a cloud... I want to value myself at 4x more than I did yesterday.


Long Spreadtrum Communications in fund; no personal position


BW: What's China's Real Inflation Rate? (What's China Real Anything?)

Today is a good day to address this topic because the U.S. gapped up in part on overnight news (this weekend) from China that was (wait for it) "better than expected".  I am quite bemused by all the attention to Chinese statistics - they seem to be more important to the U.S. stock market, than U.S. statistics for much of the past 18 months.  Countless new Americans in poverty? Who cares - iron ore is up, so China is buying.  Completely neutered housing market whenever handouts from government disappear?  Doesn't matter, Chinese imports rose +1% more thane expected.  Etc etc.

While I understand the focus as China is now the world's driver, it is a bit laughable for other reasons.   We see in the U.S. how government has been massaging data over the years to make everything sunnier side up [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators].  [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government] [May 22, 2008: Bill Gross - Inflation Underplayed by Governmentand that is with relatively transparent statistics (so we can catch the changes).... and if there is one world government better at mass propaganda to keep the sheeple in line than ours, it's the Chinese.   Yet stock traders take everything released in the dead of the night as gospel.  Outside of electricity usage (which also is a great tell in the US of A) [Nov 22, 2009: Natural Gas Down 12% This Month; True Indicator of State of Economy] I would consider almost everything suspect and prone to exaggeration - especially in a country where provincial leaders will say whatever must be said to central command to please.  [Aug 5, 2009: China's Provincial Growth Figures Far Overstated versus National Figures].   Somehow a country that grows "10%" every quarter (almost without fail) never sees inflation deviate much from "2.5-3.5%".  That's a nice trick.  In a related note, a unicorn was just sighted on the Great Wall.  But as speculators we stay attached to the Matrix and clap at the unicorn because China says it is there.  China also happens to be one of the only countries not to disclose how they even compute inflation... that's a plan for the U.S. government to try to mimic.

I am not implying China is not growing, nor has many interesting prospects nor offers much more growth the U.S.... but frankly I (nor most people) have much of an idea of what the truth is on the ground other than at the company specific level via the companies that trade on U.S. markets.  But when an entire stock market (globally it seems) is waiting for China to report a figure of X and they report X+1 and we all celebrate as if the Cubbies won the World Series... well it just reinforces some of the farce that is the stock market game.


Speaking to inflation specifically here is a solid piece by BusinessWeek.  The last sentence of the story pretty much describes all you need to know.
  • Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree living in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are both up more than 20 percent. Willy Lin has cut back on serving free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetable prices climb. "The workers suffer," he says. "Everybody is crying." 
  • Officially, China's consumer price inflation topped out at 3.3 percent in July from the year before—a 21-month high.   At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, announced that the inflationary threat was "overhyped."
  • Many consumers, investors, analysts, and academics disagree. "There has been a jump in prices that isn't reflected in the numbers," says Chinese Academy of Social Sciences economist Yu Yongding, who formerly served as an adviser to China's central bank. Michael Pettis, a finance professor at Peking University, wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register inflation of only a few percentage points. (I believe it's due to the influx of unicorns... and mermaids
  • Another sign of rising prices: Multinationals in China expect to hike wages an average of 8.4 percent this year, according to human resources consultant Hewitt Associates (HEW). Ordinary Chinese, meanwhile don't see the steep jumps in their housing, education, and medical expenses reflected in the official stats. "Inflation could well be 6 percent now for most people in China," says Pettis.
  • If the doubters are right, then the government has a serious inflation problem that it either hasn't figured out how to measure or has chosen to ignore. Other vital Chinese statistics—such as retail sales and unemployment—have also been murky. (murky... a very kind word
  • Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs calls an "oddity." (unicorns are also oddities, but as long as Chinese government officials say they are there - let's buy stocks)  . 
  • Also at issue: rising apartment and rental costs that eat up more of Chinese budgets.   For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment has just increased more than 20 percent, to $338.  Hundreds of millions of rural Chinese keep moving to urban coastal areas, pushing up rents and food prices.
  • The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in cities, has risen from around $10 in 2008 to about twice that today, says Zoe Wang, a 29-year-old strategy consultant from Shanghai. "Unfortunately, my salary didn't double," she says. Official figures record only a 0.4 percent rise in recreation and education costs this year. (Another oddity: China does not separate these two categories in its figures).
  • Says 54-year-old Beijing retiree Wei Mingxiang, as she shops in Beijing's Rundeli vegetable market: "Prices have gone up too far. My entire monthly pension of $147 is spent on food." One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.
  • Others wonder whether the historic aversion of China's rulers to the political risks of inflation creates pressures to keep official figures low. Similar pressures help explain how official unemployment targets of just over 4 percent were met in 2008 and 2009, when China's factories laid off tens of millions of workers, say economists.  (must be the Chinese birth death model!!)
  • "The government has made it quite clear" what its inflation target is for 2010, blogged Tsinghua University management professor Patrick Chovanec on Aug. 12. "A whole parade of official sources have issued statements over the past few weeks predicting—with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck—that inflation will come in right at 3 percent this year."

China wants yearly inflation at 3%... hence it will be.  China wants yearly  GDP at 10%.  Presto magic.  Extrapolate to all other government figures at will... and buy stocks based on the Chinese goldilocks miracle.*

*unicorns not included

    Bookkeeping: Adding to iShares Barclays 20+ Year Bond (TLT)

    I like the action here in bond land... the equity market is ignoring it thus far.  So far TLT is holding its 50 day very well and has reversed nicely intraday.  I am using TLT as a very soft hedge, it's relatively slow moving so if I am wrong the pain won't be intense.  I added another 1.3% exposure to the 2% I began with Friday.

    Long iShares Barclays 20+ Year Bond in fund; no personal position


    Bookkeeping: Reshorting Texas Instruments (TXN) that was Covered Friday

    Friday, I covered half of the Texas Instruments (TXN) position around $23.33 to lock in a very quick 2.5% gain.  In retrospect that was an excellent trade as the stock bottomed out 8 cents later and has rallied about a dollar in under a day.  The stock has jumped over the 200 day moving average and is at the same level that stopped it a week ago, the 50 day moving average.  Hence I can reshort the half position I took off (about 1.7% exposure) with a very obvious stop loss area not far away.

    I am reshorting in the $24.30s area and will exit the entire position on a move over $24.60.  Otherwise I hope - if the market will ever go down again - to ride this down for a second profit within a week.   My cost basis should rise to $24.15 or so.

    The market, after gapping and running over the 50 day simple moving average is now using it as intraday support - so S&P 1116 is the key level.  As long as that holds bulls still have the edge.  Ironically, due to a bevy of profit taking the past 3 sessions, I am net short for the first time in a long time... even as bulls dominate.

    Short Texas Instruments in fund; no personal position


    Bookkeeping: Selling Last Tranche of Amazon.com (AMZN)

    We are now reaching "egregious" on the overbought scale for many of the leadership stocks.  For example in terms of relative strength, Amazon.com (AMZN) has not been this overbought since the silly holiday season of Nov/Dec 2009 ... when light volume Thanksgiving and Christmas trading leads to much nonsense.

    I've sold Amazon.com in 3 tranches, with today being the last at just under 1% exposure... I will retain a 0.1% stake.

    If they gap the market up tomorrow on whatever premarket economic report, I'll begin shorting aggressively as I am seeing "egregious" in quite a few spots now.

    Long Amazon.com in fund; no personal position


    Bookkeeping: Selling Almost All Remaining HDFC Bank (HDB)

    Indian financial HDFC Bank (HDB) is now our oldest holding as I have never sold it out of the portfolio since switching to Investopedia.com for tracking purposes in Jan 2009.   That said, I sometimes neglect it and have not touched it since June as its valuation has been extreme.  It is now at 30x FORWARD PE ... for a bank.  Yes a dominant bank in a fast growing country but still...

    Whatever the case, I am using today's jump to sell almost all remaining shares; keeping only 0.1% exposure.  I guess I'll try to buy back at a bargain price of say 27x forward PE.

    Long HDFC Bank in fund; no personal position


    S&P 500 Up 7.9% in 9 Sessions

    I remember writing a very similar headline a few months ago as the student body was running at almost exactly the same pace.  7.9% in 9 sessions annualizes over 250 market day to about 225%.  I assume at some point we'll have another down day in September... if one is not taking any chips off the table here they are being greedy.  The one thing that never ceases to amaze me is how quickly fear turns to greed and vice versa in the market... never gets old, even after all these years.

    Zoom zoom

    We now have 2 distinct gaps to deal with in the chart, one from this morning at S&P 1110.9, and one created between Sept 2nd and 3rd at 1090.10.

    Bookkeeping: Stopped Out of Monsanto (MON) Short

    I have 24 equity positions in the long/short book - each and every one is up.  So it looks like yet another 90% day... heck maybe 95% for good measure.  Once more this market no longer is about what you own, just being long or short at the right time.... the individual names mean little as the PhDs whirl and buzz with their algo's.  Even VMWare (VMW) which was trashed over the weekend in Barrons' is up... apparently silicon code does not read Barron's.

    I'm reading on some sites that the past two weeks have turned into more of a stock picker's market... sorry I don't see it.  Not one bit.  Almost every day 21-22 of my positions have all gone in the exact same direction.

    The stop on my Monsanto short @ $57.52 triggered this morning.  The low of the day is $57.80 as the stock gapped up, so my loss will be in excess of the 3% I was trying to lock myself into.   Indeed it looks like I was handed an awful price in the mid $58s.

    Long VMWare in fund; no personal position


    Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 6

    Year 4, Week 6 Major Position Changes

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

    Cash: 66.7% (v 71.4% last week)
    22 long bias: 19.4% (v 28.3% last week)
    8 short bias: 13.9% (v 0.3% last week)  [Note: Long bond and volatility positions considered 'short']

    30 positions (vs 26 last week)

    Weekly thought
    It has become something of a running joke on how Monday's and especially Monday mornings have been the bedrock of this rally from March 2009.   So many times we've woken up to S&P futures up 0.7%, 0.9%, 1.1% before the week begins ... without data in front of me I would not be surprised if 50% of the rally (in terms of points) from March 09 has been on Mondays, with half of that in premarket futures.  Much easier to get the stock market to where it 'needs to be' in the thin futures market.   This has become so predictable last Friday I wrote:

    While this week was atypical we almost always start the week with a morning rally so we'll assume there is a gap up Monday and that should take us near S&P 1115... or it might happen this afternoon since everyone knows we surge Monday morning seemingly 90% of the Mondays since March 09. 

    Lo and behold, S&P futures 1115 @ 6 AM Monday morning.  Like clockwork.

    So we'll keep it simple this week since every asset on Earth is now a computerized derivative of the S&P 500.  We are looking at 2 levels as outlined last week... 1115 and 1130.   We've been in a nearly half year range of S&P 1040 to 1130 with only small exception.  So either we are nearing the top end of our range or we are going to break through this very lengthy consolidation period.

    The index is not quite overbought yet despite being up every single day of September except last Tuesday.  However, the leading stocks are now extremely overbought, and as of Thursday-Friday of last week showing their first signs of fatigue.  So after "mark up" Monday morning I will be curious if they can keep running on fumes as many have risen 20-25% in under 2 weeks without relent.

    The inverse of the S&P 500 at this point (per algorithmic rule) is the Treasury market.  Last week in the weekly summary we said we'd like to see the 10 year make a run at its 50 day moving average around 2.82%, which should coincide with the main bond ETF (TLT) filling a gap at 102.  After a headfake Tuesday (again the only losing day of the month) this ended up playing out.

    And that's really all there is to a simplistic, 1st grade logic market where all assets are almost perfectly correlated.  No need to complicate it past that.


    Last week was extremely quiet on the news front, as we have dead space ahead of earnings season and a vacuum of economic data.  This week, it picks up a bit but still not a bevy of the big name economic reports - the market most likely will key on Tuesday's Retail Sales, Wednesday's Industrial production, Thursday's Philly Fed, and perhaps Consumer Sentiment on Friday.  Thursday's weekly jobless claims now seem a moot point unless they rise over 500,000 or fall below 450,000... investors now seem very comfortable with recessionary job loss totals each week because "it's not getting worse".  The inflation data don't seem to matter much because whatever the figures - the Fed will be keeping rates at low levels forever and ever.  They promise.

    Tuesday: Retail Sales (premarket), Business Inventories (10 AM) - retail sales might get a binary reaction in premarket
    Wednesday:  Empire State manufacturing and Industrial Production (premarket) - the latter might influence the premarket
    Thursday - Weekly claims, Producer Prices (premarket) and Philly Fed (10 AM)
    Friday - Consumer Prices (premarket), Consumer Sentiment (9:55 AM)



    I spent the week getting more hedged the higher the index went up.  Many of my leadership stocks are now extremely overbought but people keep piling into them chasing and chasing.  What one could not give away 2 weeks ago people now are stampeding on each other to buy - oh humans.  Speaking of binary outcomes we have one approaching - either the market is going to peter out and begin a new leg down as we approach S&P 1130, or off to the races we go on a new breakout.   Earnings season begins in about 3 weeks so that is going to be a catalyst as well as monthly employment data, ISM reports, and overseas manufacturing in about 2 weeks.  Between now and then, the computers are in complete control and we'll go where they want us to go.  One thing we are seeing is some relatively well known companies guide down - which is a new thing; thus far it's been ignored.

    For the portfolio I put on some ancillary type hedges (volatility, and long bonds) so if the market breaks out to highs I won't be hurt as much as a direct bet against the S&P 500.  Now that we are in the top 10-15% of the 5-6 months range I've been adding individual equity shorts in weak charts.  However if the student body left takes us over S&P 1135ish I'd expect to have to cover a lot of merchandise, bring out my Kool Aid, an join the party.  It seems illogical that could happen without a rest first, since we've been straight up for nearly 2 weeks, but the low volume straight up rallies were the hallmark of March 09 - April 10 so we'll see if the computers (and the 'urgent buyer' in premarket) can pull it off again.

    [Please note in portfolio view, my long volatility and long bond purchases are viewed as 'long' but in terms of market behavior I consider the 'shorts' or at least 'hedges']

    On the long side:

    • Wednesday, I bought back decent sized exposure in the 2 auto suppliers as we had a typical 90% day, and these were the only 2 stocks in the portfolio down.  The sector was downgraded, so I got back some Magna International (MGA) and BorgWarner (BWA) that I had sold off for profits at higher levels. 
    • As gold retested old highs, I cut back Powershares DB Double Long Gold (DGP) to lock in profits. 
    • Thursday, I sold some modest sized index longs (TNA) as the S&P 500 rallied on the weekly jobless claims number and rallied to S&P 1110. 
    • Thursday, I took a sledge hammer to some names as they had reached extreme overbought levels - mostly these were 'the generals': Acme Packet (APKT), Netflix (NFLX), Tibco Software (TIBX), Riverbed Technology (RVBD), Cleveland Cliffs (CLF), and Amazon.com (AMZN)
    • I closed a position in Titanium Metals (TIE) which I had just started the previous week as it had not been participating in the rally 
    • Friday, I added back a very modest amount of Spreadtrum Communications (SPRD) as it finally fell to some minor support. 

    On the short side:

    • Tuesday, I shorted Monsanto (MON) as it had broken support the previous week, and had rallied back into its support/resistance area of the 50 day moving average. 
    • Thursday, I shorted Texas Instruments (TXN) as the semiconductor group had been lagging.  I was fortunate in the stock narrowed guidance a few hours after I shorted, and I was able to take a quick 2.5% profit on half the position Friday. 
    • For some higher beta exposure, I shorted NASDAQ OMX (NDAQ) and Intuitive Surgical (ISRG)
    • I began positions in iPath S&P 500 VIX (VXX) and iShares Barclays 20+ Year Treasury Bond (TLT)

    A special shout out for the 2nd year in a row to our friends in Indiana, for nothing else than being on our schedule.  Even in the worst of football seasons, we always have an almost guaranteed win against Notre Dame.   If only Purdue was this easy to beat...

    Sunday, September 12, 2010

    Updated Position Sheet

    Cash: 66.7% (v 71.4% last week) 
    19.4% (v 28.3%) 
    13.9% (v 0.3%) 

    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)




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