Tuesday, November 16, 2010

Bookkeeping: Stopped Out of Gafisa (GFA)

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I was stopped out of Brazilian home builder Gafisa (GFA) this afternoon.  Unfortunately a lot of countries that are healthy are going to have to take steps to combat Ben Bernanke.  Brazil is one of them - to slow down the economy and inflation, the rumor mill of raising rates is churning (identical to China) ... and homebuilders don't do well in a rising rate environment.



I'm completely out after making at attempt to get back in on a limit purchase order last week on a "gap fill".  The stock bounced smartly the next day, almost a full dollar from my entry but obviously has given it all back.  Taking a very small loss.  There should be some support down there at the 200 day moving average in the mid $14s.

No position


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Another Touch of Irony

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Well, thus far QE2 is a dud... 0 for 3.  NY Governor Dudley again explicitly said they are manipulating markets... where in the Fed charter is that?  In so many words ... we are taking $600B of Treasuries out of the marketplace, and with that money people can go into riskier assets.

Wow... just wow.

And when those risk assets blow up and conservative investors who are were in bonds are taken to the cleaners?  Oh well... the Fed is just doing its just creating bubbles every 5-6 years (or in this case 2-3)

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

Anyhow, I said last Thursday when I bought Men's Warehouse (MW), my purchase of such a company - with little revenue growth, negative same store sales, and based only on a chart was a mark of a top.  The "Men's Warehouse top".

I have one stock up in the portfolio today.  The name?

Men's Warehouse.



Bugger.

Long Men's Warehouse; and a Congressional move to limit the Fed's mandate to price stability and nothing else; no personal position


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[Videos] ABC Nightly News from China Part 1

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ABC Nightly News is running special reports from China all week; considering Chinese economic reports seem to impact our markets more than American ones, I thought it worthwhile to bring them to the website.  If the rest of the week is as interesting as Monday's reports, it will be a good thing.

Monday's videos include: (a) a general overview of the growth in China (b) an interview with Alibaba founder Jack Ma (looks like the Steve Jobs of China) (c) the growth of the English language in China and (d) a story on factory towns.

All these videos had some compelling factoids that are at one level astounding and at another intimidating.  The main questions as I think out 10-15-20 years is how China is going to continue to provide these jobs as wages increase, and how will the current generation of 1-15 year olds turn out as many are the center of their parents universe due to the 1 child policy.  One can only hope they get "Americanized"... then we don't have much to worry about! ;)  It is amusing to hear how "democracy" is slowing America down - hard to argue with it on some fronts... i.e. if they want to build a road it just gets done, in the U.S. it takes years just to get permits.

Some interesting facts about the English language piece for example.  More people speak English in China now, than do in the U.S.  All government employees below the age of 40 are requires to know 1000 common English phrases.  All children will begin learning English at age 5!

In the video about factory towns, they highlight 2 adults who work in a town, while their child lives in a town somewhere else with grandparents.  They see the child one time a year.

Video 1 - China's Stunning Growth  [5 minutes]



Video 2 - Working for the Future, China's Factory Towns [3 minutes]




Video 3 - An interview with Alibaba's Jack Ma... educated in the U.S. he came back to China 15 years ago and had to insist to government officials there was such a thing as the internet.  (this piece starts with the normal American "rah rah" piece by Prez Obama "The U.S. does not play for 2nd place!" - let's walk the walk sir, not talk the talk) [4 minutes]




Video 4 - Learning English (2 minutes)



As an aside, on the 'comments' section of this story I saw a comment by a person who says "see this proves my point! If everyone in China is learning English why can't we have that rule here?"

First, yes it makes sense that all immigrants should learn English to assimilate. But second, the commentator MISSED the entire point of the story - and is so telling about the way we are inward looking. Instead he should have said "I think it might be a good idea for our children to learn Chinese so that we can easily converse with the world's 2nd largest economy, and potentially largest by the time my child is 40-50."

Bookkeeping: Limit Order to Repurchase Magna International (MGA) Hits

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This is a tricky time, because "buying the dip" worked non stop for months... but if this is stage 1 of a large selloff that takes us down to fill the downside gaps at S&P 1090, and 1110 any purchases in the near term will be painful a few weeks for now.  Hence, the solution is to marry purchases with stop losses and be willing to take (numerous) small-ish losses in case we have a much larger selling event in the future.  With that said, many of our portfolio holdings had super earning reports (along with some names we no longer own) and I want to buy them on dips.  Any potential selloffs in the future will be more due to market events - nothing trades in a vacuum - rather than company specific, so we still have to respect the price action if the selling accelerates in the coming days and weeks.

I cut back on Magna International (MGA) post earnings (Nov 5th) when the stock breached $99, lowering portfolio exposure to about 0.7%.  A very obvious gap in the chart stood out like a sore thumb and since this is not Netflix or Priceline, the gap had a much better chance to fill.  This has happened today, so a limit order to buy in the gap has filled; my price was $95ish but the stock has actually fallen another dollar from there.  I sometimes use the limit orders as triggers to watch a stock closer (i.e. pay attention), so my limit order was only a 0.55% exposure.   To that I've added another 0.9% in a market order in the low $94s, so alltogether I am adding back about 1.5% exposure with a blended cost mid $94s.



Magna International designs, develops and manufactures technologically advanced automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; hybrid and electric vehicles/systems; as well as complete vehicle engineering and assembly.

[Nov 5, 2010: Magna International Crushes Estimates, Announces 2:1 Stock Split, Stock Buyback, Increases Dividend by 20%]
[Aug 25, 2010: Bookkeeping - Starting Magna International]

Long Magna International in fund; no personal position


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Bookkeeping: Closing Citrix Systems (CTXS)

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One thing about how I manage a portfolio is during downtrends I don't need to think that much as I am quite systematic.  Once stocks begin breaking support, I head for the hills and hence the portfolio composition changes on its own quite effectively.  (granted, you can be whipsawed if the stock - or market- turns on a dime after selling off).  Of course the tricky part is knowing when to get back in after the flush of selling.

To that end, yesterday I got rid of VMWare (VMW) when the stock broke a key support level.  Here is the outcome a day later.



Today, Citrix Systems (CTXS) is looking almost identical to VMWare yesterday.  So I am closing out the position, for the same reasons I closed VMWare yesterday.   I only am taking about a 0.5% loss, but gave up some unrealized gains here.



A lot of the "cloud" stocks are starting to behave badly again.

[Oct 26, 2010: Bookkeeping- Starting Citrix Systems]

No positions


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Caught Off Guard

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I did not expect this level of selling today.   I thought we'd hover near the opening print and then try to make a run for that upside gap either very late today or tomorrow.  Technically, I should have laid on some index shorts via ETFs or puts once we broke S&P 1192 and kept them until/unless that level was broken, but due to my inclination on how I thought the day would play out I chose not to.  Can't win 'em all, but I am definitely caught off guard by the velocity of this move.  Once the POMO of the day did little to mark up the market, the selling  came on.  We had our POMO run just after 10:15 AM, and all downside from there.

Apparently news in China means much more than anything out of the U.S. as economic data has been mixed and benign the past 48 hours.  Already the index sits at the S&P 1180 level, 10 points away from key support at the 50 day moving average.  90 more points to go for the 'gap fill' at 1090 ;)



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Bookkeeping: Adding to My Long Term Portfolio Insurance via Jan 115 SPY Puts

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For the past 6-7 weeks, to ill effect, I've held some long dated puts on the S&P 500 index as an insurance policy.  It has generally been in the 0.5 to 1% range, and has been a money loser repeatedly during the melt up rally (large in % terms, but manageable in dollar terms).  As an insurance policy that is understandable, as the long side of the portfolio has been going up, and hence this part of the portfolio down.   That said, I'd like to see the insurance pay off one of these days since a big drop in the market would create some whopper gains in this instrument.  The 115 contract is roughly S&P 500 level 1150, so if either of these gaps of 1090 or 1110 are filled in the coming months, good things should happen.

With the first signs of weakness in the broader market the past 3 days, I've increased my 'insurance policy' from a 0.5% exposure to about 1.2%.  That is the largest it has been since I started it... I have until January for this to pay off.

I also threw some short TNA ETF (2% exposure) on as a hedge, as a nearer term play.

Long January 2011 SPY 115 puts in fund; no personal position


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Definitely a Change in Complexion as 20 Day Moving Average Broken on S&P 500

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I am surprised we have not rallied back over the 20 day moving average already - we have become so conditioned to the 'bulletproof' market that seeing it "give up" without a fight seems strange.

[click to enlarge]



This morning the market has created an upside gap between S&P 1194 and 1197; yesterday's low and today's high.   I would think that would fill quite quickly even if there is more downside to go.  Complicating matters is the 20 day moving average is 1195 which has provided the resistance for the day.

While we are now below the 200 week simple moving average of 1192; I would definitely like to see a close below that level to feel comfortable changing the complexion of things.  Further, the cynic among us have to believe that the market will be up on GM IPO day tomorrow.   So for now, I'll continue to look for long side positions to trim upon weakness while adding many more stop losses, and start looking for weak charts for individual short positions.  If nothing else the "no thinking" market appears to finally be over, which is a relief.  A series of closes below this 200 week simple moving average means bulls are in trouble... Turkey Day or not.  Obviously 1170 is the next tangible downside target; the 50 day moving average.  But I don't think that is a story for today.

Ironically, this market is 0 for 2 on QE2 POMO days, and trying to make it 0 for 3.

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General Motors (GM) Raises Proposed Pricing on IPO from $26-$29 to $32-$33

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From various reports it appears the General Motors (GM) IPO is 6x over subscribed.  So much for coming to market under the radar.   You still have to love the story long term - a huge amount of international sales, much lower cost structure after wrangling massive concessions out of labor, and $93 BILLION of debt expunged in bankruptcy.  Due to the demand, the pricing of the IPO has been raised from a range of $26-$29, to $32-$33.  With 'fair value' estimates in the mid $30s to $40ish, it still should provide a nice pop while providing a better return to the taxpayer.  That said, if this is truly 6x oversubscribed the stock may do even better than I thought on day 1 in terms of ultimate price.  That said, very few of the "common (wo)man" will get their hands on IPO shares, as the IPO market is one place the genteel folk of Wall Street still have to themselves. (unless the company stinks, at which time they are happy to sell the IPO direct to you dear peasantry)

[Please note, in "Investopedia" accounts I cannot buy an IPO on day 1 as the stock won't register in the database until the next day.  In the real world, I was thinking at the original IPO price of $26 to $29, I'd be willing to buy up to $35ish... but with the higher IPO price, it might open even stronger than I assumed]

Via WSJ


  • General Motors says it is raising the price range for its initial public offering of common stock to $32 to $33 per share. The new price range is about 14% higher than originally expected.
  • The share and price expansion are the result of strong investor demand for shares in the U.S. auto maker, which now is generating solid profits after shedding costs under a 2009 bankruptcy reorganization.
  • The new price range indicates the U.S. government, currently owner of a 61% stake in GM, should reap at least $8.6 billion from the IPO, about $1.4 billion more than previously expected. After the offering, the government is expected to be left with about a 35% stake in GM that it expects to sell over time.
  • Earlier this month, GM said it would issue 365 million shares in the IPO, totaling 24% of the company's stock. In response to strong demand from investors, the banks organizing the IPO are likely to exercise an overallotment option that could add another 54.8 million shares. GM also plans to sell $4 billion of preferred stock, up from $3 billion.
  • Separately, the U.S. government is weighing whether to increase the number of shares offered by as much as 20%, or another 84 million shares.
  • GM was given $49.5 billion by the government and so far has paid back $9.5 billion. The government hopes to recoup the remainder of its investment through future sales of its GM stock.
  • This week, the U.S. Treasury plans to sell, at a minimum, 263.5 million shares. Canada's federal and provincial governments, which aided in the rescue, will sell at least 30.5 million shares combined while a health care trust run by the United Auto Workers would sell at least 71 million. If the number of shares to be sold are increased, they could come from any combination of the major holders.
  • GM investors will include three or four sovereign-wealth funds that are planning to buy more than $1 billion dollars combined in the IPO. Sovereign wealth funds are set up by governments to invest in businesses. China's largest auto maker, SAIC Motor Corp., is on track to buy around $500 million in GM shares, pending Chinese government approval, people familiar with the matter have said.

  • As part of the turnaround of GM, he (Rattner) forced out the company's then-chief executive, Rick Wagoner, and pushed the company to shutter plants, lay off tens of thousands of workers and eliminate billions in debt through bankruptcy.
  • Earlier this month, GM reported a $2 billion profit for its third quarter. It earned $1.2 billion in its second quarter and $865 million in its first quarter.
  • China, with the world's biggest and fastest-growing auto market, is now a key source of strength for GM and has been central in its pitch to investors for the IPO. GM is now the top-selling foreign brand in China, having overtaken Volkswagen AG. This year, for the first time, GM is selling more vehicles in China than in the U.S.
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Shanghai Plunges Again as China Contemplates Price Controls as Hot Money Inflows Stoke Inflation

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It appears the increase in inflation in China from 9%ish to 11%ish mid 3%ish to low 4%ish is causing all sort of havoc. [Nov 12, 2010: Even China Accuses China of Fibbing about Inflation[Sep 13, 2010: BW - What's China's Real Inflation Rate?  (What's China's Real Anything?)]  Amazing what "half a percent" of additional inflation can do. ;)  Chinese markets plunged anew, this time to the tune of 4%... following up Friday's 5%+ dip.  (China really needs a premarket 'urgent buyer' to help stop these selloffs)  This chart is one day below but the Shanghai index closed just below 2900, taking it right to the 50 day moving average.  In the snap of a finger.



Thus far the flood of central banker liquidity is playing out as expected - creating price increases (potential early stage bubbles) in commodities and emerging markets as healthy economies attract all the hot, speculative money.  Therefore Bernanke and cohorts are doing a great job of creating inflation... in all the wrong places (where there is velocity of money).  For stagflation to really take root in the U.S. (ex food and energy), the Chinese would need to offset the hot money by increasing wages, prices et al.  Then the U.S. would import the inflation in a great circle of life.  Then instead of higher prices in only food and energy, the middle and working class can enjoy substantial price increases in all things Walmart and Target....  aka "success" in the Bernanke plan.

However we have a wrench in that outcome - China appears to be imposing price controls, at least on food.  Not surprising considering the % of income devoted in the bottom 2/3rd to 3/4ths of Chinese on foodstuffs is tremendous, and hence is a big political issue.   So for now it appears the Chinese will eat the bill.

U.S. markets were off substantially overnight threatening to break substantially below the 200 week moving average (game changer), but the 'urgent' buyer has been working his magic all morning and things are more benign as I type.  We'll see what happens this morning on the open - S&P 1192 remains the key level.


Via Bloomberg:
  • China’s stocks fell, driving the benchmark index to the lowest in a month, on speculation the government will intensify measures to curb accelerating inflation including higher interest rates and price controls.
  • “Speculation that the central bank will tighten monetary policy continues to dog the market,” said Wang Cheng, a strategist at Guotai Junan Securities Co. in Shanghai. “The market will be under pressure for the coming three to 12 months from the threat of measures to cool inflation.”
  • The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, tumbled 119.88, or 4 percent, to 2,894.54 at the close, the lowest since Oct. 14. 
  • The index has plunged 8 percent in the biggest loss for a three-day period since Sept. 1 on speculation policymakers may raise rates for the second time in two months to curb gains in consumer prices. 
Key wording:
  • Central Bank Governor Zhou Xiaochuan said today China is under “pressure” from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years.
  • “Some emerging economies have grown quickly and face some pressure of capital inflows” as growth in developed nations has slowed, Zhou said. Rising prices in China need attention and officials should “strengthen liquidity management and maintain moderate growth in credit and money supply,” he said.
  • China will introduce measures to control rising food prices, including limits on how much products may be sold for and subsidies, the China Securities Journal reported, citing an unidentified person. 

  • Corn prices in China jumped to a record today and rice also reached an all-time high.
  • “Governments usually tend to adopt some form of price control measures when inflation becomes a social issue,” said Peggy Chan and Vincent Chan, analysts at Credit Suisse.
  • "Inflation is very high and the government acknowledges that,” Andy Xie, an independent economist, said in a Bloomberg Television interview in Hong Kong. “They will raise interest rates soon.”

Monday, November 15, 2010

Bloomberg: Farm Economy Headed for Record

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Thankfully, one thing the U.S. multinationals have not figured out how to outsource is Nebraska.  Or Iowa.  (granted we insource the cheap labor from "down south" but that's another topic altogether)   In a crazy revelation it appears when you produce things other countries want, you create wealth.  And not the paper printing type.... the old fashioned kind.  Hmmm, almost feels like USA 1964.  Or Australia 2010.  [Apr 13, 2010: China's Quest for Resources Makes Billionaires Out of Some Australia

I mentioned a few years ago if there was one investment to hold for 50-100 years, it would be Apple farmland, especially with the population growth in the world, [Jun 20, 2008: World Population to Hit 7 Billion by 2012]  and the parallel reduction in arable land   [Jun 18, 2008: The Ultimate Shortage --> Water]  due to the growth of urban areas (and potentially climate change).   Some of the smart institutional money is early on this trend, but unless you are a hedgie or pension fund happy to buy up land itself, it's not an easy investment for the normal investor.

Bigger picture, one can see a future where U.S. wealth centers that are now concentrated around Washington D.C. (federal workers / lobbyist cabal) , Manhattan (investment bankers), and Stamford, CT (hedgies) might have a new sister out in the Midwest.  Tiffany's Des Moines opening in 2014?

How quickly things changes... in 25 years this country has gone from "Farm Aid" concerts to the need for "Rust Belt Cities Aid" concerts.  Of course that won't stop the huge subsidies the federal government is happy  to dish out year after year rain or shine - have to buy those votes. [Mar 27, 2008: WSJ - Farm Lobby Beats Back Assault on Subsidies]

Via Bloomberg:

  • The best second-half for commodities in a generation is pushing U.S. farm incomes and agricultural land prices toward record highs.
  • While the 17 percent rise in the Thomson Reuters/Jefferies CRB Index of 19 raw materials since the end of June reflects higher prices for all commodities, agriculture led the biggest rally since 1972. Cotton prices surged 76 percent to a record, wheat jumped 48 percent and corn reached a two-year high.
  • At a time when the U.S. jobless rate is 9.6 percent and home prices are weakening, this year’s farm income may top the $87.3 billion reached in 2004, while cropland values will rise as much as 10 percent, said Neil Harl, an agricultural economist at Iowa State University and former adviser to the governments of Ukraine and the Czech Republic. The jump in commodities means more sales of Deere & Co. tractors and Mosaic Co. fertilizer.
  • It will be a phenomenal year for farm income,” said Michael Swanson, a Minneapolis-based senior economist at Wells Fargo & Co., the largest U.S. agricultural lender. “We are not going to rebuild inventories in one year. This will take several years. Farmers are already running flat out, and it will take time for supply to catch up with rising demand.”
  • Food prices jumped after drought in Russia and parts of Europe, flooding in Canada and cold in China damaged crops. Cotton rose 77 percent this year, its best performance since 1973, corn gained 32 percent, wheat 31 percent and soybeans 21 percent. The S&P GSCI Agriculture Index added 27 percent, more than twice the advance in the broader S&P GSCI Index of 24 commodities.
  • That surge may not last beyond next year because farmers will respond to higher prices by planting more crops, said Daryll Ray, director of the Agricultural Policy Analysis Center at the University of Tennessee in Knoxville. Corn planting will rise to a four-year high in 2011 and farmers will sow more wheat and cotton.
  • The U.S., the largest grain exporter, may exceed the 2008 record of $115.3 billion in shipments next year, Joe Glauber, the USDA’s chief economist, said last month.
  • “The rural economy is going to lead the way,” Jason Henderson, an economist at the Federal Reserve Bank in Kansas City, Missouri, said in an interview last month. “Those high crop prices will last until the next crop. Export demand will continue to expand.”
  • Agriculture accounts for 1 percent of the $14.3 trillion U.S. economy and its impact may be 10 times greater when including related businesses such as farm supplies, grain handling and food making, Henderson estimates. (pretty shocking it is that low a percent of GDP)

As for farmland prices:
  • Farmland prices are gaining as the return from each acre increases, a trend that’s also attracting investors.
  • The Kansas City Federal Reserve Bank on Nov. 12 said cropland values in the seven-state region it monitors jumped as much as 12 percent in the third quarter, the biggest such gain since crop prices touched records in 2008. In Iowa, the largest corn- and soybean-growing state, farmland prices rose 5.7 percent during the six-month period ended Sept. 1.
  • “In 34 years, I’ve never had so much available capital and so little property,” said Murray Wise, who owns a real-estate brokerage and land-auction company in Champaign, Illinois.
Translation - holy smoke, look at all this hot money raining down from the heavens, chasing a fixed amount of assets!  It's almost like Riverside, CA circa 2006!  Please send all thank you notes to c/o Mr. Bernanke... 

Bookkeeping: Closing VMWare (VMW)

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With the action Friday, we have to run a bit of a tighter ship now and keep an eagle eye on any goofy stock action.  Rather than giving a benefit of a doubt, I am going to be more rigid on cutting potential reversals if the charts begin to act bad.   Many of the stocks I have been buying the past few weeks are not 'leaders' since most of the leaders are up 50-60% in 2+ months with no breaks, so when dealing with these lagging type of stocks, I have a lot less leeway.

I was hoping VMWare (VMW) was ready to break out last week when I bought it as it cleared back over the 50 day moving average, and things looked dandy until Friday.  This morning's action is not the type I like to see, and rather than waiting to see how the stock closes I am taking my 2% loss and putting that capital back to cash.



No position


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Bookkeeping: Sold TNA ETF (TNA)

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In the closing minutes Friday I bought a modest 2.5%ish TNA (Triple long small cap) ETF position for nothing more than the Monday morning gap up, which has been a calling card for this market since March 2009.  The "win rate" has to be in excess of 90%, and just from anecdotal experience I'd say 70%+ of the gains in this market since the low of 2009 have been on Mondays.   The robotic "no thinking" trade worked again, so I am taking an equally modest gain off the table (2%ish)... this sort of trade is more for intellectual kicks than anything.

Interestingly, we gapped up to the 13 day moving average around 1204.   This should not be that important of a level normally, but since it served for support for 2.5 months it might actually be resistance.  We'll see.


Key levels I'm trading off

1225+ (new yearly highs)
1220 (the breakout level, previous highs in April 2010)
1204 (13 day moving average)
1194-1195 (20 day moving average)
1192 (200 week simple moving average)

All these levels create mini ranges for very nimble traders - i.e. one can buy over S&P 1204 (with stop loss below) aiming for a move to 1220.  Or one could short sell below S&P 1204 (with stop loss above) aiming for a move to 1194-1195.  Etc.

Aside from the day trader crowd, bears want to see this cursory bounce fail in the next few days, and then a retest of 1192-1194... and obviously a break below that level.  Bulls want Friday to be a one day event, and a move to new yearly highs.  The action between 1192 and 1225 means nothing to me from an intermediate term status, so those 30-35 points are just "chop" to me... a lot of mini resistance and support levels intertwine here, so we have to wait to see which way this thing breaks.   For the love of QE2 I hope it's down ;)  That said I can't remember any major selloff ever happening Thanksgiving week as the market goes into "stoopid" mode as the retail daytraders take over**, so unless something massive happens this week - I would not hold out much hope for bears next.

**Even during the huge disclocation of 2008, the market went into "joy joy" mode during the holiday period.

No position


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Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 15

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Year 4, Week 15 Major Position Changes

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

Cash: 60.8% (v 60.9% last week)
22 long bias: 38.4% (v 38.3% last week)
3 short bias: 0.8% (v 0.7% last week)

25 positions (vs 25 last week)

Weekly thoughts
After a non stop melt up for 2.5 months, the markets took a well deserved breather last week based on (a) Ireland problems pending bailout and (b) potential Chinese rate hikes due to inflation concerns.  But it was not easy for bears ... it still took 3 bad opens in a row (the first two reversed back up) to finally cause any meaningful selloff.  The reality is the market needed to let off some stream, and any good reason would do - Ireland and China worked as a catalyst this time around.

With that the 13 day moving average was broken to the downside for the first time since the 2nd day of September... this level has been a useful 'buy signal' area, so the 'easy' trade becomes a bit less so.  Normally the 20 day moving average is a better gauge for support during a rally, but this market has been so unrelenting we never saw those levels, until Friday.



With the 20 day moving average in the mid 1190s, and the 200 WEEK simple moving average at 1192 bulls and bears alike both have their bogey.  As long as the S&P 500 holds these levels, any moves down will be muted.  If stocks break below the 1192 level in particular, a change should be afoot.

Probably more interesting than the stock market, was some of the action in bonds.  Despite the first day of QE2, yields on longer term debt actually spiked (as prices fell)... completely opposite to what one would assume.   That said, there were other global issues causing cross currents, so we'll see how bonds play out over the intermediate term.



The "can't lose" commodities trade also finally took a hit, with some huge reversals starting mid week - especially of a silver and sugar kind - and continued throughout the complex as speculators overwhelm the natural supply and demand curve.  Risk was "off" after being "on" for months on end.

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

Economics

As earnings season winds down, there is an absence of news in the coming weeks.   Thanksgiving week is normally (from anecdotal experience, not data) one of great joy in the markets as the retail crowd takes over, driving nonsense stocks up to the moon while millions thousands of viewers tune in to CNBC Black Friday morning to see street reporters tell us how "the shopping season is off to a ROARING start... based on the parking lot."  Of course never in the past 20 years have the parking lots not told these reporters we'd have a booming Christmas.... I can write the Friday AM story myself at this point.

Economic data still did not matter last week as the primary drivers were of an overseas nature.   Hence until they begin to matter I'm on strike discussing them.   Some inflation figures, housing starts, and industrial production are the main ones for the week.

POMO?  Every day this week.  But as I wrote last week, it was a strategic error to make it all day, every day - the magic will disappear.

General Motors will IPO this week which should gather much of the attention.

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Portfolio

With a quiet week on the economic front, overseas news mattered more.... along with a miss by Cisco Systems (CSCO) [which the market immediately attempted to forget].  Key commodities corrected, but all in all no real damage yet to the bulls.... they have had 1 day of pain compared to seemingly dozens in a row for bears.

For the fund, the week end positions are a bit deceiving - they look almost identical, but I was busy hedging intraday with index puts in a relatively aggressive fashion.  Indeed 3 days last week I was in with SPY puts, creating enough profits to offset long side losses from Thursday and Friday.  Frankly most positions on the long side did not sell off much at all.  If the 200 week moving average is broken this week or in coming weeks, a change of portfolio direction will ensue but for now it is simply a case of more caution and tighter stop losses.  Silver Wheaton (SLW) was a star for the portfolio this week.

On the long side:

  • Monday, I sold 50% of Silver Wheaton (SLW) ahead of earnings for a nearly 20% gain from the entry point the previous week.  Tuesday, I sold the rest as silver had gone parabolic - this specific stock was up 29% from my entry point... in 7 days.
  • A position in VMWare (VMW) was restarted as the name finally showed some life after some poor action for a month or two.
  • Tuesday, BorgWarner (BWA) announced some good long term news, but the stock did not react much; that said it was extended so I took 1/5th off the table after a nice run to lock in some profits.
  • Wednesday, Blackstone Group (BX) was closed even though the chart was still solid, but a limit purchase order to add to Gafisa (GFA) as it filled a month long gap, offset the exposure. 
  • In an atypical move, I restarted a position a horrid chart - in EnerNOC (ENOC) - the company was punished on guidance in an earnings report and fell near a yearly low.  This provided a lower risk type of entry - if new yearly lows were created, one can stop out.
  • As crude oil broke over yearly highs of $87, I bought Proshares Ultra Crude Oil (UCO) - but sold out of it Friday at loss as crude gapped down on the Friday morning selloff. 
  • Thursday, Baidu (BIDU) broke to new highs (barely) on huge volume so I doubled the position.
  • The Men's Warehouse (MW) broke out of month long range to new high's, so I created a position, opining this might be the "Men's Warehouse top".
  • Eastman Chemical (EMN) was closed as it seemed toppy.
  • A modest TNA ETF (3x small cap bullish) was put on late Friday, assuming a Monday morning "happy time" as has been the pattern 95% of the Monday's since March 2009.


On the short side:
  • Tuesday, I created an intraday 5% SPY put position, as the S&P 500 broke back down below the key 1220 level (which were yearly highs) - those were sold for an "ok" profit in a few hours as the selloff was more muted than I thought.  I put the exact same trade on in smaller size late in the day (3% exposure) as the market closed below 1220 and near day lows.  I did have overnight risk due to this, but the market opened down Wednesday and fell to the 1204 level where I was happy to take a nice 32% type of profit.
  • Friday after the market opened down 3 days in a row, I noted how it would be completely out of bounds for there to be 3 reversals up in a row.  So after the now "buy in your sleep" buy the dip in the morning, the market reversed down and I once more bought a 5% exposure using SPY puts; I thought the selling could pick up simply because 3 reversals in a row seemed improbable.... this is what happened.  I sold off the position in 3 increments with the best being in the 1194s area (which was just below the 20 day moving average) - a nice win.

Merger Monday! Caterpillar (CAT) Buys Bucyrus (BUCY)

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An excellent purchase for CAT as the world's governing bodies apparently are going to let the mega companies buy all the small fish so that in 10 years only 25 mega cap companies exist...each an oligopoly.  About a 33% premium.

Have owned Bucyrus many times over the years....all CAT needs to buy now is Joy Global

Ironically the main customers for the CATs and BUCYs of the world are the mining giants...already a near oligopoly of BHP, RTP and VALE.

No positions

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Sunday, November 14, 2010

Updated Position Sheet

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Cash: 60.8% (v 60.9% last week) 
Long:
38.4% (v 38.3%) 
Short:
0.8% (v 0.7%) 


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






[Video] ABC News - Neighbors Moving in With Neighbors ... as Economic "Recovery" Continues

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We were asking in the past few weeks where all these formerly working were ending up, as the welfare rolls have not expanded.  One can only live 'rent free' in the U.S. for 18-26 months or so, so what then?  Based on this ABC News report it appears aside from adults moving back in with mom and dad,[Apr 8, 2008: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces college grads not moving out, and divorcees remaining together under one roof, there are places where even neighbors are taking in neighbors.  How widespread is this?  Who knows - but in this one cul de sac in Arizona, 3 different houses have this arrangement!   This explains the lack of household formation in the country, despite population growth.  [Apr 9, 2010: 1.2 Million Households Lost in Great Recession - Through 2008]

Remarkable sidenote of this story - the wife works 4 part time jobs as the 'disposable worker' paradigm pervades more of the middle class.  Talk about underemployed.   [Apr 2, 2008: The Underemployment Rate is Rising] [Feb 16, 2010: USA Today - Use of Temps to Fill Jobs May No Longer Signal Permanent Hiring][Oct 20, 2010: Potential Secular Change in Happening in Labor Markets]

3 minute video



Saturday, November 13, 2010

[Video] Chinese Build Entire 15 Story Hotel in 6 Days

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Amazing video here on how an entire 15 story hotel was built in 6 days.  (obviously the prefab work was not included)  Now we can see, based on this level of efficiency, how the country has completely empty cities sitting around.  [Nov 13, 2009: Ordos - China's Empty City]


(2 minute video)






On a more serious note - I am glad the dogma about the lack of innovation, technology, and creativity by the Asians (hence we have nothing to worry about because America owns the patents on innovation, technology, and creativity) is on full display here.
  • A construction crew in the south-central Chinese city of Changsha has completed a 15-story hotel in just six days.
  • The work crew erected the hotel -- a soundproofed, thermal-insulated structure reportedly built to withstand a magnitude 9 earthquake -- with all prefabricated materials. In other words, a crew of off-site factory workers built the sections, and their on-site counterparts arranged them on the foundation for the Ark project.
  • Despite the frenetic pace of construction, no workers were injured -- and thanks to the prefab nature of the process, the builders wasted very few construction materials.
Somewhere Ty Pennington just fainted.

Friday, November 12, 2010

A Very Fruitful Week, and Does our Urgent Buyer Show Up in the Last 30 to Spike Us Over the 13 Day MA?

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It's been a very fruitful week for the fund, and far more enjoyable than the 'melt up' weeks when you can check your brain at the door.   Looks like we are going to be up around 3% versus the market down about 2.3% - I like it.

I've edited the SPY put piece to indicate I exited the last of the puts (50% of original position) now that S&P 500 has cleared intraday highs of 1198.  It might still fall lower later in the day but I wanted to lock in good gains across the board.  These have been good to me this week, with 3 trades of 5%, 3%, and 5% exposure during various intraday selloffs - all garnering nice gains.  Frankly, until today the long positions all held up quite well this week as well.

The 20 day moving average on the S&P 500 looks like it will hold, barring some miracle for bears in the last hour.  Hence the bulls are still in solid shape, although they took a blow today.  (glancing)  The only question now is do they spike this market to get it to jump back over the 13 day in the closing moments... which we can explain as 'short sellers' covering.... as if there are any short sellers still with their extremities intact after a 2.5 month attack.  But it will make for a convenient excuse if and when.  I bought some TNA ETF (long) [modest - 2.6% exposure] assuming they "mark up the close"... not that I am cynical or anything.



With the hold of the 20 day one would expect the dip buyers to show up again early next week but the fervor seems to have lessened.  The question is what happens after the "oversold" bounce.  (nowadays a 2 day selloff means oversold)  It won't really be safe to be "all in with Ben" until we break to new yearly highs... because one can now make a case of a double top with April highs in the S&P 500.  But we have a clearly defined bottom of 1192 - 1194, so one can place long side bets with that level as your ejection seat.



Larger picture, we have a haze of war area (I often call it "white noise") between S&P 1195 and 1225, or 30 points in which I have no strong opinion. Below 1192 I raise my bear claws; above 1225 I drink Kool Aid.  The gaps at S&P 1110 and 1090 still sit out there; potentially a break of S&P 1192 can lead to 100 S&P points to 'fill the gap'.  Hence buying "the dip" is not something I am in a rush to do.  Plus a lot of the hottest stocks / commodities showed some mean reversals the past 3 days.  "Buy high, and sell higher" has failed some people (finally) although certain situations like Priceline and F5 Networks remain in a cocoon of "only upside".  And as important, the "I can't lose due to POMO" fallacy finally took a hit today.

I do say isn't it ironic that the market sold off in a meaningful way for the first time in a month, on the first day of QE2.  Alanis also wonders that.










Other than that we await the Irish sovereign debt rescue.... and then the Portuguese rescue... and in late 2011 the Spanish rescue.  And no bondholders will ever take the hit as apparently bondholders are the new gods of the world.... the taxpayers are responsible for all the risk bondholders take in the world.
  • “The battle between financial-sector investors and taxpayers is intensifying,” said Kapoor, who advises governments and nonprofits on regulatory policy as managing director of Brussels-based research group Re-Define. “Those with the weakest voices will be left carrying the can. Unborn future taxpayers have the weakest voices of all.”
Why do you care?  Because (a) you are partially funding the European rescues (hello Greece) via IMF and (b) we the taxpayer surely have to make CA, IL, and any other troubled state's bondholders whole in the coming 3-5 years as the state bailouts occur, since they can never be punished for bad investment decisions. Power to the PIMCO.

I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.

--James Carville, Clinton campaign strategist


Back at it next week.

Long some TNA in anticipation of Monday Morning Madness in fund; no personal position


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General Motors (GM) IPO Driving Google (GOOG) Like Fervor [Pun Intended]

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I was hoping the IPO of General Motors (GM) would be 'somewhat' under the radar, with the caveat that this was a taxpayer rescue and hence under the radar is all relative.  I liked the deal for fundamental reasons as I outlined  [Jun 16, 2010: What to Expect from a General Motors IPO] (and have since bought Ford, and a slew of auto suppliers for similar reasons), with the most obvious outlier being GM got rid of most of its debt in its bankruptcy while the team that did it the right way, Ford, is actually punished by not going BK - having to work through mounds of debt over the coming years.

Since that time  the caveat that about $45-$50B of GM profit will be 'tax free' due to some ridiculous concession from the government - makes it even more appealing. [note to government - when you are bailing out a company with taxpayer money, you OWN all the chips!]

Now the pricing looks to be purposefully low at $26-$29 so that we can all feel good about the 'success' of General Motors, and sing kumbaya as newly minted shareholders make easy money on a mispriced IPO.  (of course that screws the taxpayer to some degree, since the company only receives money from the initial sale and if they under price it - so be it).  Hence, the common man institutional shareholder can make mad money with his eyes closed and continue to be talked about as 'smart money' for flipping hot IPO shares handed to them as a 'no risk' proposition. (I only wish I was that smart)

What's that?  You heard the normal process of the best IPOs being handed out to the top customers of the institutional banks would be superseded in this example due to the fact that the taxpayer footed the bill of rescue?  Ah, not so much - at least if you are a customer of the largest e-brokers such as TDAmeritrade, Etrade,  Schwab, et al.  Nope - you're out of luck... surely some "individuals" will be able to get in on the feast, but it will be the same relatively high net folk who are the brokers best clients.  But per usual, the institutional crowd will get the lion's share and be able to flip it to you within 38 seconds of public life for a most likely 20-35% gain.  (many outlets report that true value of GM should be upper $30s to low $40s)

A dutch auction Google style so that the (real) common guy at least has a chance?  Nah, Geither is aiming for one of those Goldman, Morgan, or JPMorgan jobs post 2012 - he's got a family to feed.  And taxes to pay (but only if caught).

Oh well - there's always Facebook!

Bookkeeping: Selling 25% of SPY Puts as S&P 500 Nears 20 Day Moving Average

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Finally some "fun" in the market - I know for most "straight up to the moon" is fun, but not for my style.

Of the SPY puts I brought on this morning, I am selling one quarter as the S&P 500 approaches my first goal at S&P 1196 (it is one point away) - this is the 20 day moving average.  This will generate a 25%ish profit on about 1.25% of the portfolio, helping me hedge off losses from the long side of the portfolio.


The stretch goal for the day is the 200 week simple moving average at 1192.

I'd be a bit surprised if we break right through the 20 day - but happy to accept it.   If the market goes to 1192 I'll sell the remaining puts and then re-assess.  A CLOSE below 1192 is the 'directional changer' for me i.e. all long positions need to be re-assessed, some positions exited or lightened, start finding individual equity positions to build up a short portfolio, create longer term index short positions, and the like.  But we're not there yet.

I'm not interested in making any dramatic moves as 1192 is a huge level for the market in my eyes.  For now I want to make some gains with short term index shorts, to offset the long exposure and then see how things develop.

In terms of 'stop limit' of my puts, instead of S&P 1205 that I had earlier today, now that I have nice profits I'll move it down at least a few points closer to 1200 to lock in material gains.   Either way I will be selling some of the puts by the end of the day to avoid weekend risk and potential nonsense monday morning in premarket.  I'll edit this piece this afternoon with further moves on this position.

EDIT 1:05 PM - S&P 500 is down to 1194 level, so I am letting go another 25% of position go, leaving me with half on.  This batch has a gain of about 35%.  I'm moving my limit stop on the remaining half down to just over 1197 so I lock in profits on any bounce.  


EDIT 2:50 PM - sold the rest of this position on the move over 1198.

Right now our window has changed from 13 day moving average (1204) as the floor to S&P 1225 as the ceiling, to 20 day moving average as the floor and 13 day moving average as the ceiling (1196 to 1204).  And so on and so forth if we can break through 1196...

This is the first day bulls have felt trapped since late August.

Long SPY Puts in fund; no personal position


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"Who Moved My POMO?" - Fed Operations Moved Out 75 Minutes as Speculators Panic 10:15 Heroin Hit Missing

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A kind reader informed me due to a technical glitch (source: The Zero Hedge University) POMO was moved out from its normal 10:15 AM to 11:30 AM today.  You can see the panic that incited in the market when the druggie showed up to his dealer and the dealer said "I don't got any!".  But it's all better now, heroin is being put into our veins as we speak.  Whew... I had the shakes for those 75 minutes.

For those of you around a long time watching markets, the intraday chart is .... well just hilarious, frankly.  You can see the front running of POMO around the 10:15 AM mark, and then when it was not there... the panic.  The market is about P/E ratios, growth rates, company prospects and the like right? haha.

Illustration of intraday S&P 500 chart with sophisticated comments - click below



(I still contend this POMO thing is getting long in the tooth as a reason to buy, but today's intraday chart illustrates to me how dependent people are on the thesis now)

I now return you back to your normally scheduled managed market.   If sellers can't take control, the powers that be will get this index back over the 13 day moving average by the end of day.... boo yah.  What a market - completely dominated by a 3rd party source.  Viva la free market.

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Bookkeeping: Closing Powershares Ultra Crude Oil (UCO) as Crude Falls Back Below $87 & Eastman Chemical (EMN)

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My intent behind buying Powershares Ultra Crude Oil (UCO) was a continued breakout over the $87 level.  That continued yesterday but has reversed overnight with the Chinese news.  Hence the reason for the purchase is (at least temporarily) moot.  So I'm reversing out of the trade for a 3% loss.  I'll return if we return to the path of $100 crude and $3.40 gas.

(Chart of USO which reflects crude oil more real time, then the chart lower on the page which is 1 day delayed)


(a break over $87 was a move to new yearly highs, but for now we have reversed that)



According to David Rosenberg, net speculative contracts on crude oil are in excess of anything we saw in 2008 ... at crude oil $130-$150.... translation: thank you Ben Bernanke for herding speculators into risk assets!  Another "success"!  Seriously - how does this guy keep his job? He is waging war on the the lower and middle class under his misguided economic theories.

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

Fun fact: For every 1 cent increase in gas prices, it costs the U.S. consumer $1.46 Billion annually.  Hence 10 cents = $14.6B annually.  Hence if Bernanke causes 30 cents of gasoline increase with his reindeer games he has washed out the entire 'wealth effect' (using the Doug Kass methodology) of roughly $45 Billion.  But it gets better.... of course the dispersion of the offset is regressive on the poor, working class, and middle class - i.e. the positive effects in stocks goes to the top 10% while the negative effects get spread among the whole society and hence impact the lower part of the economic totem pole in much larger scale.  

Or as Bernanke says: "We all are winners in my regime".  I was really hoping for $4 gas for Christmas so I hope POMO forever (and ever) can get us back to the path of crude $100+.  For now, we have to wait for such gifts.

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

I also closed Eastman Chemical (EMN) with about a 1.5% loss - huge run... has stalled out lately, lots of gaps below, and with risk introduced to the market I want to be dealing mostly with 'the best of charts'.  Still should be ok as long as it holds $75 but I'm in a more conservative frame of mind with a market that needs to correct with some vigor at some point.


No position


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Bookkeeping: Adding SPY Puts - 122 November

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So far a textbook day.  The cursory bounce came this morning as the "bullet proof" bulls showed up.  That move was faded... and now that the bulls see POMO 10:15 AM has not helped them, they appear to be in a slight panic.  What, there is risk in the market?  (EDIT 11:20 AM - reader says POMO actions today have been moved to 11:30 AM rather than 10:15 AM - so my thought process here is incorrect)

I was looking for the reaction after the predictable dip buying this morning, and it is negative.

I'm going back into SPY puts as a hedge - using November 122s and a 5% allocation.  This trade worked out twice for us this week, and I am going for the third time as a charm.  Indeed this could be a big one if we can break S&P 1200.  Otherwise I'll cover over S&P 1205ish to make sure I don't lose mad money.  A move to 1192 (200 week MA) or 1196 (20 day MA) would be peachy.

Long SPY puts in fund; no personal position 


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Even China Accuses China of Fibbing About Inflation

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A quite funny story on Reuters in light of the fright overnight of inflation in "excess of 4%" in China; a government think tank is actually accusing the statistics agency for under reporting inflation by a substantial amount.  Now, I assume "government think tank" means something wholly different in China than it does in the U.S., so this sort of self criticism is even more damning.  Hence, much like a lot of the U.S. statistical data which has been massaged over the decades (there is a whole website devoted to this at shadowstats.com) we have the world's 2 largest economies living in a state of suspended belief.   Which for those of us who like to live in a world of logic, makes all the knee jerk reaction to data that is highly flawed if not outright suspect both here and our friend a few thousand miles away, all a bit annoying.

Looks like the government's of both countries believe the people (as Jack would say) "can't handle the truth".  Obviously the citizens are not that dumb, and realize something is amiss.  Wall Street?  Happy to accept virtual reality as long as it's "better than expected" and gives us "green shoots"... don't let facts on the ground get in the way of a good story.

Specific to China, I have said many times only buffoons believe "Goldilocks" i.e. 10% growth with 3% inflation.  According to the think tank, China is understating inflation by about 7%... which would give you 10% growth at 11% inflation.  Now that I can believe.  But speaking to the previous paragraph it makes it all laughable than we are reacting to the "official 4%+ inflation" reported overnight!

Via Reuters:

  • With price pressures on the rise in China, a rare public spat has broken out in government circles about whether the statistics agency is suppressing the full truth of how high inflation really is.  Many Chinese have long harboured suspicions about the quality of official inflation data, saying that it does not adequately capture soaring property prices or food costs.
  • But criticism took a curious turn this week when the Chinese Academy of Social Sciences, a top government think-tank in Beijing, published a research article arguing that the consumer price index had been under-stated by more than 7 percent over the past five years.
  • The National Bureau of Statistics, which regularly defends the quality of its output, swung into action. "Obviously, the article's conclusion does not hold any water," Sheng Laiyun, NBS spokesman, told reporters.  (obviously!)
  • The think-tank report found a gap between historical inflation figures and those that can be calculated based on the supposed weights assigned to the various components of the consumer price basket.  The inference was that the NBS might have been massaging reported data by changing weightings without informing the public.  (that's one way to do it but very crude... just wait until you get into "substitution" and "hedonic adjustments" - then you've graduated to American style obfuscation
  • "While only publishing the sub-indices of eight categories but not releasing changes in basket weightings, there is an opportunity to adjust the CPI figure," wrote Xu Qiyuan, author of the report.
  • Xu, for his part, was careful to clarify that his report was based on his personal views and in no way represented the Chinese Academy of Social Sciences.  (somehow I think we might never hear from Xu again...)





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