Monday, October 11, 2010

[Video] 60 Minutes: HAL9000

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Not a ton of new ground in this 60 Minutes piece if you have been following the HFT trend the past few years, but probably a good overview for the typical 60 Minutes viewer who is not exposed to the financial markets day in and day out.    Joe Saluzzi [Jun 18, 2009: Joe Saluzzi Comments on HAL9000]  gets a lot of face time here.  What was amazing is not one soul in the HFT community (ok, they found one) would grant an interview, even the exchanges like BATS or DirectEdge.   Once again the oft used excuse of "we provide liquidity" is why we should be happy our orders are front run - of course they provide liquidity, except when liquidity is really needed i.e. May 6th.

[13 minute video]





It may surprise you to learn that most of the stock trades in the U.S. are no longer being made by human beings, but by robot computers capable of buying and selling thousands of different securities in the time it takes you to blink an eye.

These supercomputers - which actually decide which stocks to buy and sell - are operating on highly secret instructions programmed into them by math wizards who may or may not know anything about the value of the companies that are being traded.

It's known as "high frequency trading," a phenomenon that's swept over much of Wall Street in the past few years and played a supporting role in the mini market crash last spring that saw the Dow Jones Industrial Average plunge 600 points in 15 minutes.

Most people outside of the industry know very little, if anything, about it. But the Securities and Exchange Commission and members of Congress have begun asking some tough questions about its usefulness, potential dangers, and suspicions that some people may be using computers to manipulate the market.

[Feb 12, 2010: [Video] Scott Patterson Tells Us the History of HAL9000 in "The Quants"]
[Dec 3, 2009: Geeks Trump Alpha Males as High Frequency Trading Takes Over]
[Sep 4, 2009: Meet Optiver, High Frequency Trading Friend in Oil]
[Aug 28, 2009: WSJ - Meet Getco, High Frequency Trade King]
[Oct 1, 2009: High Frequency Trading on 'The Daily Show']
 [Aug 6, 2008: Cramer - Quants and their Machines]

International Business Machines (IBM)

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Just remarkable to see a $175B solid - but slow growth - company break out like this.   Since the DJIA is price weighted unlike any other index, the higher the stock price the more impact... and IBM has the most effect on the average of the 30 components - by a long shot.  Rather than a 3.33% impact, it is nearly 10%.  (for comparison, a stock many consider a reflection of the entire U.S. economy - General Electric - only has a 1.2% weighting due to its low stock price).

This stock is unstoppable right now and I continue to catch myself saying "wow" "can't believe it" "amazing" etc.



No position

Bookkeeping: Stopped Out of OpenTable (OPEN) Short

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Again, shorting right now is only for those who enjoy kamikazee - which apparently I do.  I have been stopped out of a short of OpenTable (OPEN) for a 2.8% loss.



One might ask - why do you not have conviction in your trades... why don't you stick with them longer if they don't work out in the beginning.  Sometimes that works - but I'd rather take many small losses than start taking big ones.  For example - here is a company I was shorting 4 weeks ago - if I had "stuck with my conviction" I'd be in extreme pain.  



Making up a host of 2-3-4% losses is much more doable than making up a host of 8-20% losses.  Right now I am simply living to fight another day as the environment is toxic for anyone who believes in outright shorting or even hedging.  Sometimes the market is favorable to your strategy, sometimes it is not - right now "definitely not" would be the answer.

No positions


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Bookkeeping: Starting Kinder Morgan Energy Partners (KMP)

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I am going the low(er) risk route into the energy space with one of the country's largest master limited partnerships (MLPs), Kinder Morgan Energy Partners (KMP).  The valuation seems extreme to me, but it pays a yield of 6.3% in a world where Bernanke has destroyed all safe havens for yield.

Technically, after basing for the entire months of August and September, it has caught a bid as traders dump much of the hot technology stocks post quarter end window dressing and have moved into energy related stocks.  This is not a fast money type of stock, so I've started with a 3.1% exposure.  As long as it holds the 50 day moving average - I'll stick with the stock.




Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America.

Long Kinder Morgan Energy Partners in fund; no personal position


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Bookkeeping: Closing iPath S&P 500 VIX (VXX)

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Each time I buy something new, or take a loss in a short my thought process is this is the move that finally the market will observe and then reverse.  I have been saying that for 3 weeks now however, and have been wrong each time.  So here is another in the litany.

I am closing the horrendous iPath S&P 500 VIX (VXX) position; normally I keep my losses contained but I let this one reach 17%.  There is no worry in the market, absolute complacency so the VIX is falling, and this instrument does awful in that environment.



No position


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Bookkeeping: Long Whirlpool (WHR) and China Automotive Systems (CAAS)

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Why not?

Both stocks cleared recent resistance and the stock market can only go up; I threw a 1.5% allocation into both.

Long Whirlpool, China Automotive Systems in fund; no personal position


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Bookkeeping: Stop Losses Triggered in Shorts of Whirlpool (WHR) and China Automotive Systems (CAAS)

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At this point shorting anything is just a mundane act of folly.  You put your trade on, you put your stop loss on, and you expect your stop loss to hit within 24-72 hours.

Whirlpool (WHR) broke over last week's highs, triggering a stop loss




Chinese Automotive Systems (CAAS) broke over the 200 day moving average, triggering a stop loss.

And away we go.

No positions


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Sunday, October 10, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 10

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Year 4, Week 10 Major Position Changes

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

Cash: 62.5% (v 62.6% last week)
16 long bias: 19.1% (v 25.2% last week)
11 short bias: 18.4% (v 12.1% last week)  [Note: Long bond, long dollar, and volatility positions considered 'short']

27 positions (vs 25 last week)

Weekly thoughts
"The market can only go up."  Week 6 of the quantitative easing rally concludes; the S&P has tacked on 125 straight points as the dollar is bludgeoned on a daily basis. 

This continues up....



.... while this continues down....




Until the psychology that the Fed has all the answers ends, the parade of buying any risk asset priced in dollars continues, no matter the news.  Eventually it ends, we don't know when or how.

Any further analysis would be a disservice to the drivers of the market, and your intelligence.

A few weeks ago I listed S&P 1170 as a 'peak' level for Fibonacci retracement levels to work, in terms of filling the S&P 1090 gap.  If the market blows through that level (which is also May 2010 highs) than Fibo is going to be useless this time around, and the talk turns to yearly highs of S&P 1220 as there is no real resistance between 1170 and 1220.  A move to 1220 without pit stop would be a remarkable 180 point S&P move off of 1040 aka +17% without a rest.

[click to enlarge]


Of course the further we move from 1090, the larger the fall will eventually be to fill the gaps at 1090 and 1110.

The percent of S&P 500 stocks now over their 50 day moving average has hit 90% in the past week - an extreme overbought condition last seen in March/April when the Kool Aid of "V shaped recovery" was prevalent.  Now, no one has visions of V shaped recoveries... no one cares.  They only care about free money that will be pushed into risk assets, and the concurrent debasement of the currency.





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

There will be economic data released this week, but it will not matter.  Good news will be cheered (QE anyways), bad news will be cheered (more QE).

Tuesday: FOMC Minutes (2 PM)
Wednesday:  Import/Export Prices (Premarket)
Thursday: International Trade (Premarket), Weekly Jobless claims (Premarket), PPI (Premarket) - only thing of interest is to see if PPI starts to rise as easy money from central banks starts to feed into the supply chain.
Friday: Bernanke speaks (8:15 AM), Consumer Price Index (Premarket), Retail Sales (Premarket), Empire State Mfg (Premarket),  Consumer Sentiment (9:55 AM), Business Inventories (10 AM) - Bernanke promising QE should supersede anything else released this morning.

Earnings season begins in earnest - the front end of earnings season is dominated by U.S. global multinationals who will benefit from the weaker dollar, a crushed domestic labor force, outsourced labor - rising input prices will only begin to hurt at the margin 1-2 quarters out but for most the top cost is labor, which has been taken care of nicely during the recession.  The question marks are banks, which have missed most of the rally - and if heightened expectations for guidance can be met, on the back of a non stop rally for 6 weeks.   While individual blowups are to be expected - as we have seen the past 3-4 weeks; they have mattered little as the road kill is left on the side of the road, and the rest of the market goes up due to QE expectations.

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

Portfolio 

Coming into the week ISM Services and monthly labor data were the 2 key economic data points - but in retrospect none of it really mattered.  The drumbeat of QE heightened and the dollar was punished - everything else was a sideshow.

In the portfolio analyst actions hurt us with 2 names being downgraded and taking serious hits.  Further, a warning by "cloud" (not really) player Equinix damaged the group.  While we sold off much of our exposure in the group during the run up, there were a few names we took hits.  Strangely, quite a few names we held broke through support levels but the greater market just continued up.  We did make some money buying the 'breakout' on ISM Services data (as S&P 500 cleared 1150), but that was largely reversed the next day due to the 'cloud' damage.  Long exposure was reduced mostly due to stop losses being hit.  I did add some short exposure but frankly at this point it is like running your head into the wall - each time you put one on, you expect to be stopped out shortly with a 3-4% loss.

On the long side:
  • Monday, took 1/3rd off of Las Vegas Sands (LVS) position after a 10-11% gain in 2 weeks on a sizeable trading position. 
  • Took a good chunk of Gafisa (GFA) off the table, after a 15% run the past month.
  • Tuesday, on the ISM release and a clear of technical resistance at 1150, TNA ETF and SPY Calls were bought for 'breakout' reasons (short term); at end of day 1/3rd of the SPY Calls were sold for roughly 35% profit.  The next day I sold the rest of the long exposure for much smaller profits as the market sold off.
  • Wednesday, an analyst downgraded Maidenform Brands (MFB) which acted like a stock in very weak hands, a tremendous selloff occurred, causing us to stop out as the 50 day moving average was punctured.
  • The "cloud computing" selloff had VMWare (VMW) break through key support, so this name was closed out.
  • A good size batch of Salesforce.com (CRM) was bought late last week at $111s area; with the "cloud computing" selloff, our stop loss of $107.50 was triggered so all the exposure bought last week, went right back out the window.
  • Thursday morning, bought back some exposure in F5 Networks (FFIV) and Riverbed Technology (RVBD) as they had come in with the 'cloud' plays - unfortunately the next morning Goldman downgraded FFIV causing pain, causing us to cut back until we saw if the name could recapture support quickly.
  • Cut back 75% of Acme Packet (APKT) as the cloud / momo plays continued to suffer Thursday morning.
  • Thursday, sold the majority of the remainder of Gafisa (GFA) (to lock in a 17% gain) and 1/3rd of Polypore International (PPO) - locking in a 21% gain.
  • Similar to a few other names this week, Mercadolibre (MELI) broke through some support levels - so the position was closed.
  • Sold 25% of Magna International (MGA) as the stock has run nicely the past 3 weeks.
  • Went long SPY Calls Friday afternoon as the market was impervious to selling off, and Monday morning melt up awaited

On the short side:
  • Tuesday, a short on Whirlpool (WHR) was stopped out at 5% loss.   Reshorted it Thursday, as the stock fell back below resistance.
  • Shorted 3 technically weak charts Thursday - Prudential Financial (PRU), Shanda Interactive (SNDA), and China Automotive Systems (CAAS).
  • Shorted OpenTable (OPEN).

Updated Position Sheet

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Cash: 62.5% (v 62.6% last week) 
Long:
19.1% (v 25.2%) 
Short:
18.4% (v 12.1%) 


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

[click to enlarge]


LONG (1 photo file)




SHORT




OPTIONS




Saturday, October 9, 2010

[Video] CNBC's Tim Seymour & Team: The Prospects of Indonesia

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While early on the Indonesia case, my refusal to chase the ETF I highlighted a long time ago has cost dearly.  This has been one of the (if not THE) hottest market on the planet the past year and a half.  The dips are quick and violent but never seem to come to an area I have a limit order waiting so instead of Indonesian exposure, I have empty hands.  (I missed on a limit order in May 2010 by about 50 cents)   From when first highlighted in May 09, ETF IDX has rallied 175%!  However, at this point, the country is probably getting expensive as developed world's central banker's money had flooded in - so we'll see how this ends.  Eventually these developing markets suffer some sharp corrections, but the next time around I'll be waiting.  I've renamed BRIC to iBRIC, as Indonesia definitely appears to deserve similar billing as the 4 horsemen.

As an aside, there is now a 2nd Indonesian ETF, this from iShares (symbol EIDO) so now 2 viable options to invest - I have not done a compare and contrast yet but both have similar expense ratios of under 0.7%.




7 minute video







[May 22, 2009: Indonesia: A Must Own Emerging Market]
[Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election]  
[Aug 10, 2009: Indonesia Expands at Fastest Pace in Southeast Asia]
[Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
[Aug 8, 2010: NYT: After Years of Inefficiency, Indonesia Emerges as an Economic Model]

No positions


[Video] Should the U.S. be Classified as an Emerging Market for Investment Purposes?

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An interesting debate on CNBC on whether the U.S. should now be classified as an emerging market for investment purposes?  While easy to laugh it off, the country is exhibiting many of the risk factors traditionally correlated with developing markets.  For example:

  1. Out of control debts
  2. Crony capitalism socialism whatever-ism
  3. Decision making at the government level dominates all facts of economy & markets
  4. Dysfunctional government
  5. Growing chasm between rich and poor
  6. Dysfunctional financing - a Treasury which issues debt, and a central bank which buys it
If I gave you those risk factors and did not say which country it applied to, the majority of people would say "that's an emerging market"...

This is an important discussion because generally due to atypical risk factors, emerging markets have been priced at a discount to more stable developed markets.  As I look at the risk factors above I see none of them improving as we look out 5, 10, 15 years - in fact, based on the path we are going they all could be accelerating in the coming decade(s).   Hence the U.S. market may lose (or may have already lost) the premium it once enjoyed in valuation.

Now on the flip side the U.S. does have going for it the biggest advantage in the globe - the reserve currency.  This allows the country to do things no one else can get away with.  Further, it still has what is considered a solid judicial system (while 'enjoying' 80% of the attorneys that live on the globe), and thus far has been able to separate its armed forces from government.   But those are really the only remaining factors that the U.S. still has in it's favor to not classify it as an emerging market. 

5 minute video




Friday, October 8, 2010

You are Now Entering the Parabolic Zone

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Warp Speed 7.  Phasers set to stun destroy bears.


I wonder if in a market where the central command has guaranteed gains, the VIX can go to zero.  Looks like we're going to find out.

In case you are interested, 60 Minutes will be running a segment this Sunday on HAL9000.  Should be interesting to see how they present it.  Maybe with Dow 11,000 breached and Dow 15,000 guaranteed implicitly the retail crowd can be brought back to the risk less stock market.  All that money that used to go to mortgage payments needs to go somewhere, and it all can't be mani/pedi, cruises, new clothes, and the like.


TRADER SAYS HE HAS NEVER HAD A LOSING WEEK USING SUPER COMPUTERS TO MAKE THOUSANDS OF STOCK TRADES IN LESS THAN A SECOND - "60 MINUTES" SUNDAY


Steve Kroft Gets a Rare Look Inside the Secretive World of "High-Frequency Trading," a Controversial Method that the SEC is Scrutinizing


New Jersey stock trader Manoj Narang says his firm has never had a losing week because his super computers are fast enough to capitalize on split-second opportunities in the market.   Narang and other traders are using a legal but controversial technique called "high-frequency trading."   It played a role in a 15-minute, 600-point market meltdown last spring now known as the "Mini Market Crash." Steve Kroft talks to Narang in a rare chance to see such a business up close. He also speaks to SEC Chair Mary Schapiro - who has high frequency trading in her regulatory sights - and others for a 60 MINUTES report to be broadcast  Sunday, Oct. 10 (7:00-8:00PM, ET/PT) on the CBS Television Network.


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USDA Estimate Cut in Corn Yield Sends Agriculture Stocks Flying

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What a tremendous move today in the agriculture space... amazing what a 4% estimated cut in corn production will do for you.   Considering this is within the margin for error... and considering this will still be the 3rd largest corn production year on record... and largest soybean year the moves are remarkable.  (I find myself saying that a lot lately).  Right now any outlier news that can be used as an excuse to drive up any soft or hard commodity is creating parabolic moves.

  • The USDA says its corn estimate has a margin of error of 5.4 percent and soybeans 4 percent.


Via Reuters:

  • The U.S. corn crop is likely to be far smaller than expected as late summer heat reduced yields across the Corn Belt, and the corn stockpile will shrink to less than a four-week supply by next fall, a government report said on Friday.
  • In a shock to markets, the U.S. Agriculture Department cut its estimate of the corn crop by 4 percent and soybeans by 2 percent based on conditions Oct. 1. Its forecast of crop size and a bare-bones level of season-ending stocks were well below analysts' expectations and sent grain prices soaring in Chicago.
  • At the Chicago Board of Trade, corn, soybean and wheat futures each rose by the maximum permitted daily amount. Corn for December delivery zoomed 30 cents to $5.28-1/4 a bushel, December soybeans rocketed 70 cents to $11.35 a bushel, and wheat shot up 60 cents to $7.19-1/4.
  • Fertilizer shares also rose, with analyst Edlain Rodriguez of Broadpoint Glecher saying farmers will need nutrients to expand corn production.
  • Despite the slump, the corn crop would be the third-largest on record. The soybean crop would still would be the biggest on record.

You have multiple fertilizer stocks (IPI, MOS, CF) up 10%ish... you have equipment makers (AGCO, CNH) up 10%ish...everything must go.  (up)

No positions

72,000 Deceased and 17,000 Prisoners Received Stimulus Payouts

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I believe it will be difficult for either the deceased or the prisoner population to stimulate the economy via shopping, but really what is $22.3 million among friends?  It's a rounding error ON a rounding error.

American prisoners are living a good life, 3 square meals a day, stimulus checks, homebuyer tax credits... the minute they walk out the door the taxpayer has provided them with spending money for the mall, and a nice chunk of change towards their first home.  [Jun 24, 2010: Federal Home Buyer Tax Credit Malfeasance Includes 1295 Inmates]  And they call us a cruel society?

I can understand some small proportion of prisoners receiving the checks because of time lag (i.e. someone could be free when the calculation of who will get checks was formed, but in prison by the time the check is mailed) but I wonder who cashed the 50% of these dead person checks that were never returned... oh well it's only $9 million of taxpayer largesse; walking around money.


Via AP:
  • More than 89,000 stimulus payments of $250 each went to people who were either dead or in prison, a government investigator says in a new report.  The payments, which were part of last year's massive economic recovery package, were meant to increase consumer spending to help stimulate the economy.
  • But about $18 million went to nearly 72,000 people who were dead, according to the report by the Social Security Administration's inspector general. The report estimates that a little more than half of those payments were returned.
  • An additional $4.3 million went to more than 17,000 prison inmates, the report said. Most of the inmates, it turns out, were eligible to get the payments because they were newly incarcerated and had been receiving Social Security before they were locked up. (fair enough)
  • In all, the $250 payments were sent to about 52 million people who receive either Social Security or Supplemental Security Income, at a cost of about $13 billion.   People were eligible for payments if they were getting benefits during any one of the three months before the law was passed in February 2009.>
  • Dead people were ineligible to get the payments. But, the report said, there is no provision in the law to recover payments incorrectly sent to dead people.


What expensive lesson did the government learn from this exercise?
  • The inspector general's report said that if similar payments are authorized in the future, prison inmates should be ineligible and the government should be able to recover payments made to dead people.
Alex, I'll take Common Sense for $22.3 million.

Bookkeeping: Going Index Long Again via SPY Calls

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Not much is working of late except these index long positions - as we appear poised to make a break for new highs this afternoon I am going to buy some SPY 117 November calls.  My initial target is S&P 1170 but that is really not that far away.  Assuming a Monday morning gap up I don't know the upside in this market anymore.  It is relentless and since economic news means nothing, earning warnings mean nothing, data of any sort mean nothing - I don't know what causes a selloff at this point.  There will be something, but unless a counter rally develops in the dollar the bears have nothing right now.  I am learning just as you are - as I have not experienced a market where the Fed has effectively pledged to push it up - not implicitly, but explicitly.

I am not even going to bother with TNA/BGU at this point - just calls.

This move upward is so far away from the S&P 500 gaps it's going to be a barn burner once things turn around.

Long SPY 117 calls in fund; no personal position


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WSJ: Bank of America Stops Foreclosures in All States

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Wall Street Journal is reporting Bank of America is halting foreclosures in all states, up from 23 states.  This is a potential game changer.  The mortgage market is basically controlled by "the big 3" JP Morgan, Bank of America, and Wells Fargo after the mass of consolidations and BAC's purchase of Countrywide.  JPM was in on the "23 state" halt as well, so political pressure will rise on them to join BAC in all 50.  No idea why Wells Fargo is not involved - maybe they did not do the robocop fast track foreclosure review.

PNC Financial, a regional bank just below the big behemoths also just announced a halt in the original 23 states.

I am not kidding when I say this is going to be a boon to consumer spending if the moratorium is long lasting.  I see multiple Attorney General's in the 27 states not included saying they want halts in their states as well.  Due to the political season I can see all 50 states being halted through elections at minimum.  If you are pandering for votes, a call for a national moratorium is "risk free" populism.  Perhaps this is a reason the market is spiking (as if it needs a reason)



Bank of America is placing a moratorium on all foreclosure proceedings and sales across the U.S. amid political pressure on U.S. banks to examine foreclosure-documentation problems.


The nation's largest bank by assets is the first financial institution to stop all foreclosure actions amid revelations that the banking industry had used "robo-signers," people who sign hundreds of documents a day without reviewing their contents, when foreclosing on homes. Bank of America, J.P. Morgan Chase, and Ally Financial Inc. last week postponed foreclosures in 23 states where a court's approval is required to foreclosure on a home.


The decision by Bank of America to extend its postponement to all 50 states takes effect Saturday. The bank doesn't intend to lift the moratorium until its assessment of all documentation is complete, a spokesman said.


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Next Round of Buyers Come in over S&P 1164

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Just as the market stalled intraday at S&P 1150 for 7 of 11 sessions, the past 3 days we've been stuck in the 1162-1163 level like clockwork:

Tuesday: 1162.76
Wednesday: 1162.33
Thursday: 1163.87



The pattern in this market is to reach a level - base there, hold it - and then jump and rally over.  Most of the jumps have been happening in premarket rather than during the market hours so we'll see if it requires the Monday morning mark up to get over S&P 1164, but if it comes today expect a rash of buyers to show up once we clear.   I guess S&P 1170 is very much in play after all, it just was not in a straight line.

Buying every dip in non stop fashion, remains an unbeatable strategy.  I admit I am in awe.... 125 straight S&P points without a break just does not seem natural.

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Bookkeeping: Selling 25% of Magna International (MGA)

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The best stocks to trade of late in terms of "sensible moves, in a non frantic matter" have been the auto suppliers.  They go down to support - hang out a while, then rally ... you can take profits... a few weeks later they fall back to support, you buy and rinse, wash, repeat.  Since daytraders don't care about this group and neither do the HFT machines (because the stocks are not in ETFs) they seem to be in much stronger hands and act like the stock market of old.  Hence I am enjoying the way they move very much as it makes sense to me.

Magna International (MGA) bounced off support a few weeks ago in the $78s, where I added a good sized position.  With the stock scraping $85 I am going to cut back the position by 25%.    From here we have to see how the stock acts at $86 to determine how much more it can run.

Since early August MGA has done 3 such cycles of retrace & rally - each time hitting the 50 day and creating awesome non frantic trades.



Long Magna International in fund; no personal position


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Bookkeeping: Forced to Cut Back F5 Networks (FFIV)

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Whereas F5 Networks (FFIV) fell to its 50 day moving average yesterday and bounced, this morning's downgraded has dealt a seeming death blow to the chart.  Analysts have been unleashing terror on our holdings this week.  I had a very small position going into yesterday but bought some on the open, which is now being punished.   In the first 40 minutes the stock has been between $91 and $93s area... so to be cautious I am going to lock in a loss on about 2/3rds of the newly formed exposure and observe from there.  If the stock breaks below $90 I will be out of the rest, and this stock turns into a great candidate to short (especially if the broader market can suffer a breakdown) as there is a yawning gap in the upper $70s.



But one step at a time - first reduce exposure.  Next step is to exit completely if there is a further degradation in price.  I cut 2/3rds of the overall position which is essentially everything I added yesterday.

As always, I am amazed at the power of analysts to influence prices.

In a broader sense - its a tough time on the long side because all the stocks I like had an epic run in September and are prone to what has happened the past 3-4 days.  People (the computers?) are rotating in lower growth areas now since they are trying to find anything that has not had a rocket rally the past 6 weeks.  I don't like those areas as much since I am a growth type of investor.   So either I have to stand aside, or chase after the current in flavor stocks, which are being bid up mostly for reasons that have little to do with growth prospects and simply finding the last few areas that have not been inflated.  With that said, when people are chasing after low growth sectors in the "what is left to run up?" game, that usually signals we are close to the end of a move... traditionally.  I cannot speak to the "Fed is intent to inflate everything" environment, as it is a new ball game.  Until the dollar rallies, we are sort of in limbo.

Long F5 Networks in fund; no personal position

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No Recession in High(er) End Retail

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This rally has taken everything up, so it is difficult to discern what is up on its own merits, and what is up due to the tidal wave of liquidity.  However, as American society becomes more bifurcated one theme if you are a very long term investor who wants to remain involved with domestic names is to focus on the very low end of the American consumer, or the high end.  The middle is being eviscerated.  [Sep 7, 2009: Citigroup 2006 - America, A Modern Day Plutonomy]   As many of the former middle class are forced downward in lifestyle the companies who cater to them have seen their stocks make very nice runs the past few years.  However, little known is the majority of discretionary income spending in America is now in the upper 20%.  So when we talk 'wealth effect' of the stock market for example, it is concentrated in a smallish sliver of society but for macro economic data that is ok, because that is the same sliver where the marginal spending dollar is concentrated.

As the stock market increases this income strata feels wealthier, and along with that the strategic default stimulus you have 2 levers helping many in this group.  With the recently announced foreclosure moratorium, these 2 factors could make for a very good Christmas for the 'upper end' retail space.  Specifically on the strategic default end, this has been on "ongoing" stimulus for at least 18 months... so to create incremental stimulus of millions of households not paying their mortgages we need a booster.  [Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]    That booster would either be far more people doing strategic defaults, OR those doing strategic defaults having much longer time frames that they don't pay their mortgage.  The foreclosure moratorium will speak to latter point... whereas before many people were on their 19th, 20th, 21st month of not paying a mortgage (saving them $1300, $1500, $1700 a month of which they can go spend) but knowing their time to actually leave the home and have to finally pay for a roof over their head was coming soon; now this has been extended.  Perhaps they get another 6 months, 12 months, 18 months - who knows how long.  Remember, the benefit of strategic default to a household ends only when the sheriff shows up and actually escorts people outside of the home - until that moment, it is all gravy.  Whatever the case, it certainly will be through the holidays (recall the past few years the banks have had foreclosure moratoriums around Christmas), so if nothing else there is 3+ months of "living free"... not just in the high end but certainly at the Kohl's and JCPenney level.  Which is why Christmas sales will be elevated over where they would be otherwise at all levels.

Granted, both these levers (Fed pumping up asset values & families sitting in homes they are not making payments on)  are based on 'ponzi scheme' type of situations but this is what it has come down to in America... "it is what it is".  The stocks in the space seem to be reacting very well - a sampling:







No positions

Goldman Sachs Moves F5 Networks (FFIV) to Sell

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Uh oh, it looks like the analysts - being the momentum chasers they are - have turned on cloud computing stocks*.  As long as they were going up non stop, not a peep.  The minute they show weakness, it's time to talk about reality.

*I don't consider F5 Networks to be a cloud stock, although the Street has deemed it as such; it is a networking company in the arena of a Cisco Networks.

Goldman is out with a rare sell.  In Wall Street parlance even "neutral" / "hold" means sell (which was the old rating) so this analyst has obviously missed the train on FFIV.  She now has taken the rating from (translated Wall Street lingo) "sell" to (translated) "I mean it, sell"!

The stock is down 5% in premarket and could soon threaten support; if it breaks decisively below that 50 day it turns from a bullish/neutral setup to bearish.  Like so many stocks it only has miles of 'vapor' as support once it breaks through these important levels, due to the 'straight up' run.  It is not even in the same zip code as the 200 day moving average.



Via Barron's:

  • Goldman Sachs analyst Simona Jankowski this morning cut her rating on F5 Networks (FFIV) to Sell from Neutral. Her target on the stock is $80, well below yesterday’s close at $98.98.
  • Jankowski notes that the stock is up 84% year to date, “largely drive by multiple expansion,” along with a 24% increase in Street estimates. She notes that FFIV now has a P/E of 32x - 25x on an option-adjusted basis - “which we think represents a view of the stock as a key cloud vendor with a significant M&A premium.
  • But Jankowski adds that her analysis suggests that 85% of the company’s growth comes from server refresh and share gains, rather than cloud build-outs. Her conclusion: “this puts its growth trajectory in 2011, and thus multiple, at risk.”

That last point is so important - every stock now with even 10% of their business having to do with the cloud has now been christened "a cloud play:, and their PE multiple has expanded like mad.  It is nonsense - but fighting nonsense while the bulls are in a fervor only creates losses for your P&L.   As always, facts on the ground only matter when they matter.   In a few days (weeks? months?) this will be forgotten and F5 will be talked up as a wonderful cloud company, that hundreds of companies are clamoring to buy.  I am not disparaging the stock - I've been around it on and off for a decade... I am just bemused by the "cloud" fanaticism; in truth there are realistically 4-5 'cloud' stocks - everything else being run up in the group is just for speculative convenience.

p.s. it looks like today the hot money has moved from the cloud to fertilizers - every day, a new theme.

Long F5 Networks in fund; no personal position


September Jobs Data

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As a speculator all you need to know in 30 seconds.

The dollar was up early in the morning... that created pressure on gold, and equities which were down relatively substantially.

Federal Reserve member Bullard hinted that QE2 was not guaranteed in November... indeed it may get pushed way off into.... December.  Or not.  Whatever the case, even the 1% chance free money would not rain down on the speculator class immediately caused hand wringing.

The employment data came out at 8:30 AM ... it was (insert Charlie Brown's teachers voice here)

The dollar was hit, gold reversed from down moderately to up moderately.  Stocks erased almost all losses.

The end.

(for those who still actually care about data points: hours worked were flat, wages were flat, the unemployment rate talked about on the TeeVee is 9.6%, U-6 spiked from 16.7% to 17.1%, and the birth death model only created 11k jobs... but don't worry, for the 24th? 26th? month in a row employment is a "lagging indicator".  Plus that spike in temporary jobs over a year ago surely means a surge in full time employment... any month now.  The "models" say so, and who doesn't trust the models?)

The only chart that matters anymore - the dollar is swimming beautifully along the lower bollinger band, and remains dramatically oversold.


Thursday, October 7, 2010

The Dollar to S&P 500 Relationship

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What an utter joke.

Market share? Company prospects? P/E ratio? P/S ratio? Debt?  Revenue?  Heck, even technical analysis?  Useless.  Tell me where the dollar is and I'll do the opposite!

Here is the intraday chart of dollar vs S&P 500.  The STOOPID market (IQ 8 required) in visual form.



That is one day; here it is over the past month... as an American your perfect correlation as a stock speculator; you make 6% on the S&P 500, but you lose 6% as your dollar is crushed. You "win"... as long as you are oblivious.

[click to enlarge]


Does the Jobs Data Matter Tomorrow Morning?

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Some sites are writing bears are not pressing due to the jobs number tomorrow.  To which I answer other than the technical reasons of we went to S&P 1151 and that's all you can ask for as a bear nowadays (a few hours of selling) - why does the number matter anymore?  Why does any economic data point matter at this point in fact? 

Let's say a miracle happens and 400,000 jobs are created.  Or a horror show occurs and 400,000 jobs are lost.  Who cares?  Bernanke's intelligence arm has found weapons of mass destruction and we're going in guns a blazin with QE either way.  So why does tomorrow matter?  Especially if you have been buying hand over fist due to Bernanke protecting you with his bazooka. 

Sure we can play the "wooo hoo beat by XXX" better than expected nonsense and gap the market up 1% in premarket tomorrow but it's inconsequential in the big picture.   Same with a "miss" - if you are on the QE bandwagon you just shrug your shoulders, say oh well, and buy - Ben has it taken care of.  No one of late is buying on the old fashioned reasons such as economic recovery.  V shaped recovery is so 2009; now the marginal buyer arrives each day on the basis of a rigged centrally commanded market.  That won't change tomorrow morning.

We're getting QE, and until the psychology changes from "I'm so pleased to get QE" to "what is so broken in the economy that we're addicted to QE?" the drivers remains the same and everything else is just details.  So the only question from here is when does the QE2 meme lose its power to continually drive the market up.  Our faith in our feckless Fed leaders has led to so many great outcomes the past 2 decades, it is great to watch the rats in the maze repeat the same behavior over and over whether Alan or Ben is behind the curtain.... oh lemmings humans.

So for the bears the story is dire in the near term (unless psychology changes overnight)... just as 1131 was defended as the urgent buyer came in to make sure it did not fall, so is 1150 currently.  Tomorrow is Friday and you know what that means - we're one trading session away from Magical Mondays.  There was a syntax error this past Monday as the rare selloff occurred so that needs to be addressed this coming Monday.  Surely with their new CEO in place Hewlett Packard can buy someone over the weekend, and with cloud computing stocks now down 14% on average (after running 300%) they are 'bargains'.

p.s. I almost bowled over laughing as I read over an AP writer discussing yesterday's ADP report.  "Thus far this year ADP has been understating the official government data by 75,000 jobs a month."  Hmmm... apparently said AP writer has never heard of the boon in small business across America throughout the recession (and recovery) via the birth/death model.  Even in the depths of the recession circa fall 2008 to spring 2009, our government statistician office pledged small business was faithfully creating ~100K jobs / month ... even in construction.  (seriously)  In fact, strangely the entire job growth year to date in 2010 will rhyme quite famously with the total growth of birth/death model jobs in 2010 - imagine that.  I'm sure at year end it will be the same. (chomp chomp, blue pill)

ADP says small business lost 14,000 jobs.  Government will say countless new small businesses sprung up in September (too small to count so we'll make it up) creating anywhere from 80-130K jobs.  Boo yah.
  • Small businesses, defined as those with fewer than 50 employees, dropped a total of 14,000 jobs in the month.

The only thing of interest tomorrow is to see if this NY Post story has any legs and a surge of government workers shows up out of the blue [Sep 19, 2010: Are Poll Workers Being Used to Inflate Jobs Total?]
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Bookkeeping: Short OpenTable (OPEN)

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Short in $61.90s; cover just under $57.50 - Larry Summers willing.  Shorting 2.4% exposure.



High beta stocks continue to take a beating; I continue to believe this is a canary in a coal mine (have I used that term enough the past 48 hours?)

The bulls POMO Master Brian Sack still have the ball over S&P 1150 but I see less chairs around and more fattened bulls, high on QE fumes, trying to find one by the hour.  We are back to the STOOPID market that has been dominant for much of the past few years - now the algorithm is "inverse dollar".  Dollar rallied a bit today, therefore everything must be sold.  The opposite of almost every day of September.  There is not 1 dollar bull left in the world - creating a good environment soon for it to rally for more than 3 hours.

Pulling out my Doug Kass hat, we are destined for fireworks sooner rather than later.  Complacency is overbought.  Further, if current pace continues in oil prices, many Americans will be frozen stiff as they enjoy their 'staycations' (since $3.50 gasoline is going to be an issue) in about 3 months, especially in the northeast where heating oil rather than nat gas is still prevalent.  On the plus side, I suppose that would reduce weekly unemployment claims; always a silver lining.

Remember, $3.50 gas and $125 oil will be 'success' in the world of Ben Bernanke.  To the frozen former middle class?  Not so much.

p.s. speaking of restaurants, as the economic recovery expands and blossoms, food stamp usage just hit a new record.  However, I only post about it when it reaches new "super cool" levels ... the next will be 1 in 7 Americans on food stamps.  [Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps]  Not quite there but in the past 11 months we are getting very close  [fingers crossed!]  I expect sometime in early 2011 we will have reached the next level and we can then begin the journey to 1 in 6.  Of course due to the "wealth effect" the Fed is engineering, all these people need to do is put their food stamp debit cards into their Etrade account and buy some Netflix stock and they too can join the new path to American prosperity. 40 acres, a mule, and Netflix stock - everyone wins.

Short OpenTable in fund; no personal position

Bookkeeping: Closing Mercadolibre (MELI)

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Since I still have a small profit (versus a much larger one just a week ago) I did not even realize the damage done to Mercadolibre (MELI) in the past week.  I guess as long as Apple (AAPL) goes up the NASDAQ will hold up, but we are seeing some quite serious damage under the surface since Oct 1st and the quarter end 'window dressing' is over.  This stock is now identical to VMWare (VMW) and Maidenform Brands (MFB) in that we have a busted chart - of course in a continued melt up the stock can rally, but now faces a lot more resistance as any rallies will be considered dead cat bounces in these eyes, until proven otherwise.  Fine for the daytrader section of the market, but for intermediate term holding trading types - we now have issues.



Since this has broken down, I am forced to close out the last 1% exposure with a 1% gain.  The stock is now in no man's land on the chart.  Some support at $62, but resistance at $68.

Very curious to see so many stocks on my watch lists taking such body blows the past week, but the index flat.  The past few days was a rotation into energy, today its retailers - not groups I have much exposure to, so definitely out of step with the quick movements in and out of sectors by HAL9000 right now.

No position


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Bookkeeping: Short Prudential Financial (PRU), Shanda International (SNDA), China Automotive Systems (CAAS)

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I am rebuilding some individual short positions - almost all of these have been failures for 6 weeks in a row on the non stop melt up.   These are completely for technical reasons.  If we gap up tomorrow morning on 'better than expected' labor data - especially if we hit S&P 1170 - I'll be shorting against the index.  (I'll be curious to see if government jobs spike due to that NYPost story I noted recently re: poll workers having to file with IRS for first time ever)  But for now just individual stocks.

One thing I am noticing as I screened for names is how little volume is in so many of these mid cap stocks - everything in this market is so dependent on the ETFs or a narrow group of momo names, a lot of these stocks that even 12, 24, 36 months ago were full of retail traders seemingly have been abandoned.   In 2007 these Chinese stocks (I picked two popular ones) used to be full of retail traders... you can truly see the fleeing of the stock market by the individual when you scan through so many of these names with little participation.  They now are lucky to get a few hundred thousand shares a day traded.  Now I see why everyone is crowded in the same ole names like Netflix and Apple - there is so little liquidity everywhere else. I had a few other candidates for this entry, but had to abandon them because they are barely trading anymore.

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Prudential Financial (PRU) broke support a week ago, and now has rallied back to resistance.  This is either a 'break over' or not trade with obvious stop loss.  Shorting 2% just under $54.



Chinese gaming stock Shanda Interactive (SNDA) has rallied back to its 50 day moving average - that is my pivot point.  Shorting 2% allocation around $39.30.  A move over $40.25 or so, and I'll be out.


China Automotive Systems (CAAS) - identical to Prudential - it will either break over resistance or not.  2% allocation, with stop over the green line.




Short all names mentioned but Netflix, Apple in fund; no personal position

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Bookkeeping: Selling Majority of Remaining Gafisa (GFA), and One Third Polypore International (PPO)

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I am going to sell almost all of the remaining Gafisa (GFA) [about 1% allocation) as the stock has run quite far and might have created a top.  More so that the stock the general market is an issue for me, and I want to lock in more gains and get into more cash - seeing multiple stocks I either own, owned, or on my watch list fall 15-20% in 2 sessions strikes me as a warning signal on the broader market.

I have a limit purchase order to buy at the 'gap' - more aggressive traders could short, and cover at the gap but since I am befuddled by the way the market currently behaves I am going the conservative route.  I'll retain a 0.1% exposure so I don't lose track of the name.  This sale will lock in about a 17% gain.


I am selling 1/3rd of Polypore International (PPO) for similar reasons.  This will lock in a 21% gain.



Long Gafisa, Polypore International in fund; no personal position


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Bookkeeping: Short Whirlpool (WHR)

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I am try trying again with a short of Whirlpool (WHR) - I was stopped out on that break over the 200 day but thus far it looks like a head fake.  The computers took the price right over that key level to shake out all the stops and then took the stock back down.   I am shorting a 2.4% exposure near mid $81s.  Now that the game is obvious, a stop loss can be placed over the intraday highs of the past 2 days (around $83.70), rather than just above the 200 day moving average.   Frankly if my "berth" for the stop loss had been just a tad wider the last time around, I would have been ok in retrospect.



Short Whirlpool in fund; no personal position


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Bookkeeping: Cutting Back Acme Packet (APKT) by 75%

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I only had a 1.7% type of position in Acme Packet (APKT) but going back to the theme of canary in coal mines, the leadership stocks continue to take some serious damage.  Acme is breaking support intraday (the close is more important than the current action but....) so I am going to take a cautionary stance and cut back the position by 3/4ths.  If there is no quick rebound the rest will go soon as (like many stocks) there are only acres and acres of vapor before any real support.



I'll be taking a 9% loss on the exposure let go today.

In a broader sense the leadership stocks in cloud/networking are taking another early hammering.

Long Acme Packet in fund; no personal position


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Bookkeeping: Buying F5 Networks (FFIV) and Riverbed Technology (RVBD) on the Open

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The ability for the market to ignore the carnage in the leadership group of the 'cloud' yesterday was something to behold.  We remain in freight train status, as speculators simply shifted into the energy/oil complex and kept the train rolling.  There is a lot of damage done in some of the cloud charts and I am not yet convinced yesterday won't be looked back at a turning point but I definitely could be wrong.  Generally when your leadership stocks take such a hit, it is a canary in a coal mine... but I am going off historical reference; not a "Fed is manipulating prices upward" environment.

I was stopped out of a lot of exposure yesterday, so I am going to focus on some of the names whose charts sustained less damage.  With that I am putting about 1.5% into both Riverbed Technology (RVBD) and F5 Networks (FFIV).




I don't like the valuations at all, but am trying to keep some long exposure going so as to not completely miss all the gains the market is sure will continue with the Bernanke put in place.  Frankly at this point with the S&P 500 up 120+ straight points, all purchases are with reluctance. I will have tight stop losses in place, because all good parties end in tears - if this ends in 3 days, 3 months, or 3 years I don't know.  And I will be exiting a great portion of these positions no matter the case in a few weeks as earnings approach.

The charts above are still holding in there, versus a lot more damage done in names such as VMWare (VMW) and Salesforce.com (CRM)... I'll be especially curious to see if Salesforce.com (CRM) can recapture the $114+ level quickly - 2 analysts came to the defense this morning because we cannot have CRM down for more than a few days in a row.  To me, this one looks damaged technically.



Long all names mentioned in fund except VMWare; no personal position


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[Video] Kyle Bass of Hayman Capital at Barefoot Economic Summit - Part 1

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CNBC's Strategy Sessions is down in Texas during the middle of this week, where a host of mover and shakers in the upper fringe of the investment world are being hosted by famous hedge hogger Kyle Bass.  It seems like quite an interesting place to be a fly on the wall, and probably he most concentration of wealth in one place in the country - at least this week.  Bass is always one I like to keep tabs on for his commentary - there is a 3 part interview with Bass and a fellow attendee (parts 2 and 3 here) but part 1 below is probably most pertinent in terms of macro economic view.  I do believe Strategy Sessions will be there today as well, so if there is anything interesting in the commentary I'll post it later in the day.

10 minute video (email readers will need to come to site to view)







Aside from stocks, one of Bass' biggest concerns is the Federal Reserve's effort to boost the economy.
"I also think with what we've been hearing from the Fed and what we've started to hear the Fed wants to print another trillion bucks. We have a monetary base of $2 trillion today and we're gonna print another trillion—what if that doesn't work?," Bass said.

"When you start printing money—as such a huge percentage of the monetary base—and the Fed itself has admitted in the last couple days in speeches that they don't know what they're doing. They just hope what they're doing works," he said.

[Aug 18, 2010: Kyle Bass on CNBC August 2010]
[May 13, 2010: Kyle Bass of Haman Capital - The Pattern is Set, Betting the Bank on a Keynesian Free Lunch]
[Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]
[Oct 5, 2009: Kyle Bass Hayman Capital October Letter to Investors]


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