Tuesday, November 23, 2010

Update on New Website

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Preface: nothing easy in life.

The new website is mostly developed now and needs some last portions of content filling that should be done by end of week and ready to go.  However, unlike the normal world where I can operate with my own free will, everything in the mutual fund world falls under a regulator.  Hence everything must be reviewed, I get smacked around for pushing the envelope, and then it is ok'd (or I'm told to talk to the hand).  The website falls under another regulator (not the SEC) so next week I am hoping to get it reviewed.  No idea on turnaround time of review but hopefully something reasonable. It will be 'beta' because of course the documents (applications, prospectus) won't be there (and hence their links will lead to nowhere) but the structure and content will be all intact.  So I'd love to have that ready to go by the end of next week - but as with many things nowadays, I only control part of the process.

That's the easy part of the website - I call it the 'static' part of the website because it won't change.  The hard part is the commentary ("blog") which has more contentious issues.  I'll be having an in depth conversation on this portion of the website next week with various parties to see what can be accomplished.  At this point everything I would bring to the website via commentary would (identical to the static portion of the website) need to be approved by a 3rd party to make sure I don't break a rule.   Since I am a 1 person shop I don't have someone in house who can do the vetting and hence be responsible to the regulator gods (the person who writes the content can't be responsible for review per the rules apparently), so it needs to be outsourced.  That complicates things both from a timing and cost structure.  Those will be the discussions I will be having next week - seeing what is viable and cost effective.   I do know it is possible as I finally found a big fund shop that sort of does what I want to do - see American Century Investments blog. They seem to be the only "big name" doing anything of the sort, but at least I have a model to say "it is doable".  [Someone like Hussman funds does a weekly commentary but not that well known]

Anyhow that is the update on that project, one of many concurrently running.  In the near term I'll still be ending the portfolio tracking Dec 3rd, but I might keep commentary on this webpage for a few weeks after until I come to a solution (if there is a solution) on the new website's "blog".   But for the static portion of the new website, I hope to get that approved and launched officially by end of next week - regulator willing.

May the regulator be with you.

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Summary of Fed Minutes

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Downgrade of 2010 GDP by 0.8%
Downgrade of 2011 GDP by 0.55%

Upgrade Unemployment (i.e. higher) in 2010 by 0.25%
Upgrade Unemployment in 2011 in 0.5%

Summary: after denying reality for as long as possible, we are beginning to face it.

That said, we are drinking Kool Aid in 2012 and 2013 as we model 4%+ GDP for 2 years straight.  Especially considering that will be 5 years out from the 2007-2008 recession... just about time for a new cyclical downtrend in the economy.  (gulp gulp)

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As for monetary policy - we argued a lot.  Some of our members thought QE2 would do something.  Some members thought it would do nothing.  In sum, we have no flipping idea but surely the market will look at us as omnipresent demigods as they always do - so to look like we are useful we will do something.  Anything.

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Bookkeeping: Buying Back this Morning's DSW (DSW) Exposure

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This one worked out very quickly - after being up more than 3% this morning, DSW (DSW) is now down 2% so I made a quick 5% spread on the exposure I sold off.  While still a bit extended and I'd rather buy at the 10 day moving average (at least) I will buy back what I sold this morning (+ a small amount more).   I will continue to set stop losses at a break in trend - in this case the stock has not broken its 20 day moving average in months.  If it does, I'll be either cutting back or out.



Long DSW in fund; no personal position


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Testing Last Week's Lows

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After stubbornly holding S&P 1181ish all morning, the dam has finally broke and the index shed a quick 4 points and is now in the 1177 range.  This sets up for a retest of last week's lows of 1173 which fits in perfectly with the key 50 day moving average.

One positive is after months upon quarters of perfect correlation in this market as almost every stock would sell off... or rally... together (student body left trading) is we finally have more of a stock pickers market.  Individual equities with better stories are holding up far better than those without the past 3-5 weeks, which is a welcome change.  That said, the valuation of some of the names holding up makes little to no sense to me.  So ironically I am hoping for the 'waterfall' type of selling where everything is thrown out together... that includes you Netflix, F5 Networks, and Salesforce.com.

I continue to skew to future weakness as long as the S&P 500 holds below the 200 week simple moving average.... but the market has been whipsawing back up and down over that level the past week; not making it easy.   A break below the 50 day MA would be a nice confirming arrow for the bears, who have been on the endangered species list for months.    A close below 1170 would be a nice sign that a "gap fill" down to 1090 and 1110 is possible this year; those were formed almost 3 months ago.  Unthinkable just 2 weeks ago.

For the technicians out there we also appear to be forming the right shoulder of a head and shoulders formation....

EDIT 11:55 AM - Again, Wed and Fri around Thanksgiving are almost always benign days if not outright cheery as institutional money takes a break and the retail traders come out to play; so very nimble traders can go long due to "happy time" around Thanksgiving, with stops ready if the 50 day breaks.  I'm speaking more intermediate term with the discussion higher up the page.


Bookkeeping: Limit Order for iShares MSCI Hong Kong (EWH) Hits

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A limit order I put on in the past few weeks for some Asian exposure via iShares MSCI Hong Kong (EWH) hit this morning at $18.62.   Due to the extended nature of this ETF over the past quarter and two substantial drops (on large volume) the previous 2 days I am going to have a tight leash on this one; I could be out in a few hours in fact.  But I continue to force myself to try to find some long exposure in case my base case that we have a real selloff coming does not work out; I have similar purchase orders for ETFs of India and Indonesia - but neither is close to my target yet.

Looking at late October lows we have a plateau of $18.40s to $18.50 and the ETF is near there now.   Since my entry is relatively favorable I'll give the name a 1.25% berth (max loss) or a move just below $18.40 to stop out at.  Until then, I've started off with a 1.25% exposure....



Hong Kong is sort of a more structured proxy for China; with that market taking a 13%+ hit over the past week and a half - Hong Kong has reacted in kind but with less beta.   EWH is a very liquid ETF at 7M shares traded a day and $2B in assets, so easy for a fund to move in and out of.  (more information on the ETF here)

Long iShares MSCI Hong Kong in fund; no personal position


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Bookkeeping: Selling 1/3rd of DSW (DSW) on Nice Results; Slight Increase in Yearly EPS Estimates

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Since the purchase of shoe retailer DSW (DSW) in early November, the stock has rallied some 15%+ - not too bad for 3 weeks considering this is not a stock in the "fast money" group. The stock was a bit extended when I bought it, hence I made only a moderate position size - preferring to buy on a pullback.  But when the pullback came last week I did not want to pile in ahead of an earnings reports, so I'm selling down a relatively sparse position size (under 1.5% exposure) by 1/3rd this morning around $41.25 to lock in a portion of my profits.  While the stock is 'breaking out', it is also is nowhere near any support level now - tough to see it continue to run considering it does not sell movies over the internets or "does fancy stuff on the cloud".



I continue to like the space and indeed all retail that caters to the high end or the low end (not the disappearing American middle class).

With 7M American households no longer making a mortgage payment but living 'rent free', the retail space continues to get a self funded stimulus that the savers of America are paying for via 'transfer payment to their neighbors'.  (Banks taking forever to foreclose because they are allowed to 'mark to myth' on their balance sheet, Fed keeping rates at 0% so banks can make the 'spread' between Fed fund rates and what they lend money at, to make up for current and future mortgage losses, savers offered zilch on CD and savings rates). [Nov 5, 2010: The Case for Retail - and Shoes Specifically]    At this point I can only turn negative on the U.S. consumer when ... ironically... the foreclosure crisis comes to an end.   At that point millions of households will once again have to pay for a roof over their head, and all the money not going to banks to pay for mortgages will disappear from the mall, or nail salon, or restaurants, or car dealerships, or cruise ships.  Only in Cramerica must I use this sort of logic!

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For the quarter, DSW estimates were $489M and $0.75 EPS.  (Full report here)

  • DSW Inc., a leading branded footwear specialty retailer, announced net income of $35.5 million on net sales of$489.3 million for the third quarter ended October 30, 2010, compared with net income of $26.6 million on net sales of $444.6 million for the quarter ended October 31, 2009. 
  • Same store sales increased 10.1% for the comparable period versus an increase of 8.7% last year. 
  • Diluted earnings per share were $0.79 for the third quarter of fiscal 2010 compared with diluted earnings per share of $0.60 last year.

Guidance
  • As a result of better-than-expected sales performance for the first three weeks of the fiscal fourth quarter, the Company now estimates an annual comparable store sales increase of approximately 12% and annual diluted earnings per share of approximately $2.30 to $2.40 for fiscal 2010. 
  • This is updated from the Company's previous estimate of an annual comparable store sales increase of approximately 11% and annual diluted earnings per share of approximately $2.20 to $2.30 for fiscal 2010. Fiscal 2009 annual diluted earnings per share were $1.23.
Analysts were in for $2.28 for the year.

DSW Inc. is a leading branded footwear specialty retailer that offers a wide selection of brand name and designer dress, casual and athletic footwear for women and men. As of November 23, 2010, DSW operated 313 stores in 39 states

Long DSW in fund; no personal position

Federal Reserve Moves into Top Spot in Holders of U.S. Debt

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As the latest round of quantitative easing continues in the background (notice it has already become old news on Wall Street), ZeroHedge tells us in full ponzi glory the U.S. now 'owes' the most money to .... itself.  The left hand (Treasury) now has as its largest customer.... (ding ding) its right hand (the Fed).


By the end of QE2 this chart is going to look very different - that pretty red bar is going to be about 65% higher by next June, dwarfing our Asian friends in slots #2, and #3.  Anyhow who wants our largest holder of debt to be someone who "hates us guys"! [Feb 13, 2009: FT.com - China to U.S. "We Hate You Guys"]  Much better for our top creditor to be a benevolent unelected overlord who can act in seemingly unchecked manner.


  • ... the Fed's official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion
  • The purists will claim that the TIC data is as of September 30, and that as the weekly custodial account shows UST buying continues the data is likely not correct. They will be wrong: with the Fed now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won't.
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Remember all that hand wringing over the years about "who is going to buy our debt?" - all for naught. When the Fed monetizes your debt Argentinian style - you are on a path to prosperity. (P cubed - paper printing prosperity) We have a buyer with endless pockets happy to monetize Congressional spending under its dual mandate of (a) letting Republicans buy votes via tax cuts and corporate socialism and (b) letting Democrats buy votes via spending programs. Err, I mean (a) full employment and (b) stable prices. (have I mentioned how excellent of a job the Fed is doing on their mandates?) Speaking of which ... now that the election is over, isn't it time to raise that debt ceiling? We have new tax cuts and spending programs to pass!

North Korea Fires Artillery into South Korea, Pressuring Markets (Index Longs Sold Yesterday)

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Notwithstanding the seriousness of the situation on the Korean peninsula, if this is a 1 off event, today's pressure on world markets should be limited after today.

  • North Korea fired scores of artillery shells at a South Korean island on Tuesday, killing two soldiers, in one of the heaviest attacks on its neighbor since the Korean War ended in 1953. The barrage -- the South fired back and sent a fighter jet to the area -- was close to a disputed maritime border on the west of the divided peninsula and the scene of deadly clashes in the past. 
  • The attack came as the reclusive North, and its ally China, presses regional powers to return to negotiations on its nuclear weapons program and revelations at the weekend Pyongyang is fast developing another source of material to make atomic bombs.

(Scores of Americans woke up this morning, distraught some news about "far off places" interrupted analysis on how the Dancing with the Stars final went off last night.)

It has been a strange 24-36 hours.  Yesterday, we were on schedule for the normal Monday morning mark up as futures surged Sunday night and into the wee hours as the "shocking" Irish bailout formed... however just as sovereign debt issues now seem to have less of an impact on markets as they have become 'old hat', so have the rescues.  The questions immediately turned to [a] whose next and (Portugal) [b] what are we accomplishing here with "rescues" (kicking can down road, nothing else).  Futures were under pressure and as word spread of the SEC/FBI investigation into proposed insider trading via 'expert networks' the markets sold off Monday.

Indeed technically yesterday was also a head scratcher - key support levels (200 day simple moving average) were broken yet again on an intraday basis - and Friday's lows were taken out (creating negative technical aspects) but a furious rally in the afternoon took the S&P 500 right back over that level and at day highs.  Certainly not something I would expect based on the action mid day... and I was taken out of my index long positions put on late Friday near lows of the days Monday.  The end of day monster rally only made one feel worse... although again, it seems liked a preposterous outcome mid day.

In many ways yesterday's rally - shrugging off the news that Wall Street is one corrupt place - had me laughing.  You could almost see market participants say ... once they saw THEIR firm was not in the crosshairs of the FBI (mid day) .... oh well, business as usual, time to buy stocks!! (p.s. call John in the expert network to see how Hewlett will report after the bell!)  Probably more shocking is seeing American regulators do any regulation... because after all regulation only slows down 'innovation' and profits for the domestic oligarchy.  It is best to leave the financial industry to their own oversight because they have proven trustworthy and efficient at stealing the middle classes wealth at an extraordinary rate with help of the Fed.  That said, don't get too excited kids - we'll have a couple of mid level firms taken as sacrificial lambs, most will pay a middling fine the government will trumpet as 'record breaking'... while of course those firms will admit no wrong doing, and it will be back to business as usual bending the rules and "innovating" ways around any and all regulation (that lobbyists now write).  We saw this with Goldman Sachs for those with short memories. [Apr 16, 2010: The End Game for the Goldman Sachs Crisis]  Just change a few terms like "credit default swaps" with "expert networks" and Flashback!


1.  Goldman will hire the best lawyers in the history of the universe, making OJ's Dream Team look like Ally McBeal.
2.  They will make public statements about their "vigorous defense" while negotiating a settlement that will involve a large check and quite possibly the sacrifice of "Fabulous" Fabrice Tourre.
3.  Upon the writing of this check, Goldman will admit no wrongdoing and the White House will claim victory.
4.  Not one of you will be safer, more employed or in better shape as a result of any of this.
5.  The lawyers and PR reps involved in the case will buy Maseratis and vacation homes.  Lots of them.
6.  Fabrice Tourre will be running his own hedge fund within 3 years.
7.  Everyone connected to this case will still have more money in the bank, in real estate and in investments than you could ever dream of. 
8.  The sun will come up the next day, you will go to work, then pick up your kid at Karate, then pay the utility bill.

Trading huddles anyone? Already forgotten. [Aug 27, 2009: Goldman Sachs Trading Huddles] 
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Back to the market... I  continue to be surprised how easily this 200 week simple moving average (last week roughly 1194, this week 1189ish) is being punctured from both the upside and downside at this point.  That is supposed to be a brick wall sort of level that takes a lot of work to move through; instead we're slicing through it daily.  This market also seems increasingly narrow the past week or so - the same high beta names are ramping day after day.  I bought a little Las Vegas Sands last week on a dip and its already up some 14%... ridiculous.  Netflix announces a new "streaming only" service and the market rejoices as if Pets.com announced a new website circa 1999.  Salesforce.com, Priceline.com, Amazon.com, gosh darn this all has a familiar ring to it.

It continues to be a chop fest for now ... very difficult because each time one goes long over the 200 week simple moving average they are chopped at the knees.... and the same for going short below the 200 week simple moving average.  This week is traditionally a very positive one - especially the Wednesday and Friday sandwiching Thanksgiving.  The "hot stocks" of the moment traditionally get bid up and we saw it yesterday - as the fast money crowd could care less about Ireland, Portugal, expert networks or any other item other than turkey... just get them some F5 Networks - pronto!

I remain in 'risk off' status until I see a resolution to this range - we need to break out to new highs for the year over S&P 1225 or to a new low in this rally, which at this point would take out last week's mid 1170s and then 50 day moving average (1172).  In between it is white noise and a choppy white noise at that.



Long Las Vegas Sands in fund; no personal position


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Sunday, November 21, 2010

Updated Position Sheet

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Cash: 68.9% (v 60.8% last week) 
Long:
30.3% (v 38.4%) 
Short:
0.8% (v 0.8%) 


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





BW: How Baidu (BIDU) Won China

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A very interesting read in last week's BusinessWeek cover issue story on Baidu (BIDU).  (click here for full story)  It all started with $1.2 seed money from U.S. venture capitalists.  Rather than copying Google, the original model was to copy Inktomi which long time stock investors will remember from the late 90s NASDAQ bubble - i.e. rather than host an independent site, Baidu's original plan was to provide search content to other portals.  When that started to become too expensive for said portals (ironically due to the success of the search engine), Baidu was 'forced' to go out on its own.   At that time, due to the change in business model one of the seed investors called Yahoo's CEO (Jerry Yang) and offered to sell Baidu to Yahoo for $40 MILLION.  (Oh Yahoo! what an error)

Then later in its life (in 2004), during its 3rd round of financing and pre ipo Google contributed $5M of a $15M round of financing.  About a year later Baidu filed to go public and then the offers came in hot and heavy... including Google at $1.6 Billion.  This story purports that Baidu would have sold out for $2 Billion...

Upon IPO the stock rose on the first day from $27 to $122, creating a value of $4 Billion.

The rest is history.  Half a decade later we see Baidu at $38 Billion market cap. Baidu's founder now worth $7.2 Billion (age 41) after struggling in the U.S. as a $45K programmer at Infoseek.

(I realize to HAL9000 all this data means nothing as it does not contribute one iota to making mad money trading BIDU in 1/3000th of a second increments - but to some of us humanoids, company history still can be fascinating)



Long Baidu in fund; no personal position

Friday, November 19, 2010

[Video] Roubini being Roubini

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With the market on another of its rocket ships as every asset on earth is backstopped by a central banker or sovereign government (which is in turn backstopped by a central banker), Mr, Nouriel Roubini is not getting the same air time or rock star status as he had a few years ago.  That said, he is always an interesting mind to listen to ... and since we share many thoughts of the future, of course I want to share ;)  As Nouriel says - who is going to backstop the central banks?  Mars?  ;) (if you look at their balance sheets they have mountains more leverage than Lehman or Bear ever had - but no problemo I guess as we have full faith and trust in their Socrates like actions)

We'll call this one Manny being Manny Roubini being Roubini

Via CNBC - 10 minute video





"We have too much private debt in the case of Ireland," according to Nouriel Roubini.  But the nub of the crisis is this: "We have decided to socialize the private losses of the banking system. Now you have a huge increase in public debt—going from 7 percent to 100 percent of GDP. Soon it will be 120 percent."


And, turning more broadly to the rest of Europe, "Greece is already at 120 percent." 

Roubini believes that further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, "Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns." 

Essentially, the super-sovereigns underwrite sovereign debt—increasing the scale and concentrating the problems. 

Roubini characterizes super-sovereign intervention as merely kicking the can down the road. 

He says wryly: "There's not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone." 

But, despite the paper shuffling of debt at the national level—and at the level of supranational entities—reality ultimately intervenes: "So at some point you need restructuring. At some point you need the creditors of the banks to take a hit —otherwise you put all this debt on the balance sheet of government. And then you break the back of government—and then government is insolvent." 

And then there is the case of France. "Sarkozy came to power saying 'I'm going to do lots of reform.' He has not done it. Right now, he is weak. He might lose the election. And, therefore, they are going to delay fiscal austerity and reforms." 

And that, according to Roubini, is a major problem for the fiscally challenged French. 

The bond vigilantes may have woken up first in Greece, Ireland, and Portugal. "But France," Roubini says, "does not look much better than the periphery." 

In Roubini's view, the probability of the right steps being taken in France soon is not great. "Politically they are constrained from making reforms." For example, after the French made relatively small changes in their social welfare system—raising the retirement age from 60 to 62 —"You had massive riots in the streets." 

And that, in Roubini's view, was just the beginning of the necessary austerity. 

"What's going to happen when you do more radical reform? That's an open question in the case of France."
Looking beyond France to the future trajectory of the crisis, Roubini says, "The next one in line is going to be Portugal. "Due to the severity of Portuguese debt problems, Portugal is going to lose market access—and that means they are going to require IMF support as well. 

But the real nightmare domino is Spain. Roubini refers to the Spanish debt problems as "the elephant in the room". 

"You can try to ring fence Spain. And you can essentially try to provide financing officially to Ireland, Portugal, and Greece for three years. Leave them out of the market. Maybe restructure their debt down the line." 

"But if Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out."

With Spain, the first problem is the size of its public debt: €1 trillion. (Greece, by contrast, has €300 of public debt.) Spain also has €1 trillion in private foreign liabilities. 

And for problems of that magnitude, there simply are not enough resources—governmental or super-sovereign—to go around.

[Jul 6, 2010: [Video] It's Roubini Time]
[Feb 12, 2010: (Video) Nouriel Roubini Crushes Kool Aid Drinkers]
[Nov 4, 2009: Nouriel Roubini on CNBC: "Mother of all Carry Trades"]
[Aug 13, 2009: They Broke Nouriel Roubini, but not Marc Faber]
[Aug 20, 2008: Roubini - "Told You So"]
[Mar 13, 2008: Scary Stat of the Day: Roubini Calling for $1 Trillion - $3 Trillion in Losses]

Acme Packet (APKT) Catches New Wind on Barclays Upgrade

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At least there was a reason for what I originally thought to be a random rocketshot move; Acme Packet (APKT) is up 7% on nothing more than an upgrade by Barclays.  Boo yaaaahhh.

Via IBD
  • Barclays initiated coverage of Acme Packet (APKT) with an overweight rating and $50 price target and considers the company a critical enabler of the long term migration to VoIP. 
  • The bank said that VoIP penetration is very low and growing rapidly, with the percentage of enterprises currently using VoIP services expected to more than double by 2013.  For 2010, Barclays sees EPS of $0.79, vs. consensus estimates of $0.76 per share, and 2011 EPS of $1.10, vs. consensus estimates of $1.01 per share. 
These are not really huge upgrades in EPS, but I guess the $50 price target attracts moths to the flame.

Usually I don't pay much attention to these analyst actions but when it moves the stock this much, have to mention it.  Some of those November option players need to send the Barclays analyst a thank you note - while others surely are thinking of hate mail.


p.s. the market feels completely devoid of humanoids today.  Don't read much into the action here - it is a lot of chop and flop.  Nothing means anything until we break over S&P 1225 or break below this week's lows and the 50 day moving average down around 1172.  Until then - chop fest, but a 50 point one that we are smack dab in the middle of.  It's flip a coin action or in computer terms: 0 or 1 action.

Long Acme Packet in fund; no personal position

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Bookkeeping: Long Some BGU and TNA

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What can't go down, must go up.... as long as the S&P 500 holds 1192 I must get some more action to the long side as we did a lot of selling this week during the raucous action.  Thus far the test of the 50 day moving average early in the week seems to be holdings and people feel bulletproof as "Magical Monday Morning" approaches.  I bought last Friday for no good reason other than to dump after the 'happy time' in premarket Monday and it worked, so why not.  I spread a 5.5% allocation into these 2 names - triple levered large cap, and triple levered small cap.  Nothing to fear right? Ireland "fixed", Chinese rate hikes don't mean anything and Ben Bernanke rules the world.

(easy as that)

Long TNA/BGU in fund; no personal position


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[Video] Salesforce.com's Marc Benioff with Cramer

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I am amazed by the action in Salesforce.com (CRM) - this sort of reaction to good but not "super great" numbers just speaks to a lot of shorts being squeezed.  I thought the shorts were eliminated the past 2.5 months... but as we all know talk like a zombie "I want my Salesforce.com"



Video last evening post earnings with Craaaaaamer (9 minutes)




No position

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Bookkeeping: Stopped Out of EnerNOC (ENOC) as it Hits New Lows

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There is a specific reason I do not buy falling knives, but every so often I make an attempt at one just to remind myself of why I don't like this strategy.  I tried to buy EnerNOC (ENOC) at the bottom of a range it has traded at the past 12 months a week and a half ago.  Today it broke below those lows of the past year and hence triggered my stop loss at $24.40.  This was a 3% loss... surprising how bad the stock is acting on decent earnings and guidance that was not *that* bad.



No position


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Bookkeeping: Covering TNA ETF

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Looks like the powers that be will not the S&P 500 selloff below 1190 at this point so I am covering my TNA short put on yesterday as a hedge.   I'll restart if if we can see a close below 1192; otherwise it remains the 'unshortable' market.

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Once Ireland Gets its Bailout, Let us Prepare for the Portugal Bailout - Never Hurts to Start Early

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This is now becoming old hat.  In the U.S. it's Bear Stearns, Washington Mutual, Fannie, Freddie, Lehman (oops), AIG, Citigroup, Bank of America, and essentially Goldman and Morgan by turning them into wards of the Fed.

In the rest of world we had Dubai, then Greece, now Ireland, next Portugal, and based on its 20% unemployment rate - hello Spain!  I guess until it's a big economy like Spain no one will care much.  We are becoming immune to the bailouts.  Heck Irish debt was blowing out for a month, and the U.S. market could only rally.  [Nov 9, 2010: Irish 10 Year Bonds Blow Out to Nearly 8%, 5.6% over German Rate - Market Shrugs]  Then when it reacted to Ireland, it was a whopping 3 day event.  Why react anymore when the whole world is one moral hazard - do as you please, take whatever risks necessary - the taxpayer will clean up the mess if it blows up. If not -  you keep the winnings Mr. Investor.

Now that there is "European intergalactic TARP" in place (ESFS) combined with IMF funds (thank you U.S. taxpayer), and a central bank in Europe who kicks the can down the road until the rescues come, we just continue to dance because the music never will be allowed to stop.   The Germans and French want to actually tell bondholders that after 2013 they might actually be responsible for their investment decisions and face losses on bonds in the future.  The bond market is recoiling in horror at this concept!  How dare they ask this of us!  The irony for these European states is if they had never created the EU, there would be "no problem" (using the U.S. as an example).  They could all be mini U.S.', Japans, and U.K's and just print their way to 'prosperity'.  But being stuck under a common currency, you cannot run on a printing press 24/7- which is a bummer.

Speaking of .... we'd be having our own Greece, Ireland and the like if not for the now annual "stimulus" plans (just don't call it that anymore) funneling money into our great states of California, Illinois, and the like the past few years.  And don't forget the subsidy of Build America Bonds.  Unfortunately our states cannot print money so they still rely on the largesse of federal government.   Since there is no price discovery anymore in the bond market as everything is based on the Federal Reserve pushing prices wherever they want... and the assumption anything on Earth that moves will be bailed out, I have no idea on the eventual outcomes to the states.  Until the GOP took back power and even a tiny threat of not sending taxpayer money to the states surfaces, muni bonds were trading as if there was not a worry in the world.  Trying to think things throuhg on any of idealistic free market principles, is long gone in Cramerica.

But returning to Europe, we have solved nothing except bought more time (kicking can) under the global pretend and extend - no bondholder has taken a haircut... and frankly most of the bondholders are banks.  Hence these "sovereign" bailouts are effectively of the banking kind (yet again).  Because these global banks apparently have the whole world over a barrel - can't mess with them, because then we get tiny things like global financial contagion - so keep working "banking socialism" (take from the taxpayer to give to the bank) until at some point, some problem gets to big to bail out.  Or someone is willing to take a haircut.

For now, we await the bailout of Portugal - based on the window between Greece and Ireland, we should be enjoying this event circa Memorial Day 2011 or earlier.  Those EU regulators should just get their tickets to Lisbon now - when you pay that far in advance you get some nice discounts.  For now, you know the pattern ... the finance minister of Portugal will deny they have any issues... then as pressure mounts will say they never have talked to anyone in the EU or IMF about bailouts... pinkie swear.  Then an emergency meeting will be called.  Then arm wrestling will ensue.  Then the U.S. stock market will sell off for 18 minutes over the issue.  Then a rescue, which solves nothing in real terms.  Then we wait for Spain.  Rinse. Wash. Repeat. .

Via Bloomberg:
  • A resolution of the Irish debt crisis may shift the burden of speculation to Portugal.  While officials such as European Central Bank Vice President Vitor Constancio predict a bailout of Ireland will reduce financial pressures in the euro region, analysts from Citigroup Inc. and Nomura International Plc say any relief would be short-lived as investors turn their focus to the next-weakest peripheral nation.
  • The markets indicate that country is Portugal with 10-year bond yields of 6.89 percent, compared with 8.25 percent in Ireland and 11.67 percent in Greece, which received rescue funds in May from the European Union and International Monetary Fund. 

Wait for it....
  • Portuguese Finance Minister Fernando Teixeira dos Santos said Nov. 15 that while “there is a risk of contagion,” that doesn’t mean the country will seek financial aid.
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  • Portugal has made less progress at taming its deficit than some of the other peripheral nations. In the first nine months, the central government’s deficit rose 2.3 percent from a year earlier. That compared with a decline of more than 40 percent in Spain and more than 30 percent in Greece.
  • While Portugal has no plans to sell more bonds this year, so-called market vigilantes drove up yields on its debt during the past month amid doubts about the country’s efforts to reduce the budget deficit. The 10-year yield reached a euro-era record of 7.25 percent on Nov. 11, 484 basis points higher than benchmark German bunds of similar maturity.
  • While Irish and Portuguese bonds probably would rise with a bailout agreement for Ireland, any gains wouldn’t change the underlying problems for peripheral Europe, according to Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank.  “Wait a few weeks and the markets will just go for someone else, with Portugal at the front of the queue,” London-based Diebel said. “The vigilantes pushed Ireland into the same situation Greece is in. Why would you conclude they won’t do the same to Portugal?”

  • Ireland’s debt crisis was triggered by the rising cost of bailing out the nation’s banks, including Anglo Irish Bank Corp. and Allied Irish Banks Plc. While Portugal doesn’t face a crisis in its financial industry, it has a larger debt burden and the country has almost 10 billion euros of debt that comes due during the first half of 2011, data compiled by Bloomberg show.
  • Portugal needs more cash than Ireland does because they go to the market on a regular basis,” said Nick Firoozye, head of interest-rate strategy at Nomura in London. “The market may move onto Portugal at some point because it’s significantly at risk.”
  • While Ireland started to reduce spending in 2008, Portugal has been slower to address its fiscal deficit, the fourth- largest in the euro region, and the government failed to reach an agreement with its biggest opposition party on the 2011 budget plan until the end of last month.
  • Portugal has proposed to lower its total wage bill for public workers by 5 percent, freeze hiring and raise the so- called value-added tax by 2 percentage points to 23 percent.

[Dec 13, 2009: Bond Vigilantes Prowling Europe]  

Bloomberg: Oldest Truck Fleet Since 1979 May Mean 56% Jump in North American Output

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With 2 years of "Great Recession" (I am using 2008-2009 versus the official recession start and end dates), and a 3rd year of muted recovery (2010) in the U.S., commercial trucking activity has been quite poor.  SAles of coal, agriculture product, and the like To Asia are driving railroads, but trucking doesn't get as much benefit due to nature of cargo and distance.  Looks like an emission standard change in 2007 also led to a jump in buying in 2006.

That said, despite domestic transport weakness (hence no need for expansion) the fleet is still aging - effectively 3 years of well below trend of sales is going to create a need for replacement inventory.  The average age of the commercial trucking fleet is the oldest since the late 70s. Bloomberg has a nice piece on this topic today.  This should bode well for companies such as Cummins (CMI), Eaton (ETN), Navistar (NAV), and Paccar (PCAR).

  • North American commercial truck production may climb as much as 56 percent in 2011 as owners refresh the oldest U.S. fleet in at least 31 years, boosting sales at Paccar Inc. and partsmakers such as Eaton Corp.
  • Output of Class 8 trucks, the workhorses of interstate hauling, may reach as many as 235,000 units in the U.S., Canada and Mexico next year from an estimated 151,000 in 2010, said Kenny Vieth, partner at market forecaster ACT Research Co.
  • Rising freight rates and volumes are helping rekindle demand after the worst recession since the Great Depression. A 2006 production surge to a record 376,448 units before new U.S. emissions rules took effect helped create a glut heading into the economic slump, leaving some trucks parked for two years.
  • “My members are saying they desperately need to replace trucks,” Bob Costello, chief economist for the American Trucking Associations, said in an interview.
  • U.S. trucks now average 6.7 years of age, about 11 months older than the historical average and the oldest in ACT data going back to 1979. While that fleet has logged fewer miles than usual because of the drop in shipping, “no matter how we slice it, we still come up with an answer that it’s old,” Vieth said.
  • “The replacement cycle is kicking in,” David Leiker, a Milwaukee-based analyst for Baird, said in an interview. He recommends buying Paccar and rival Navistar International Corp. and holding shares of Sweden’s Volvo AB.
  • Daimler AG, the maker of Freightliner trucks, expects the “vast majority” of 2011 purchases to be replacement vehicles.
  • That’s the case at San Mateo, California-based Con-way Inc., the second-biggest publicly traded U.S. trucker after YRC Worldwide Inc..  “We intend to continue acquiring tractors for fleet replacement, not expansion, in 2011,” said Gary Frantz, a spokesman.
  • The 18-month recession that ended in June 2009 ravaged the shipping industry.... sending the ATA’s freight-tonnage index to a seven-year low in April 2009. 
  • Sales excluding financial services at Bellevue, Washington-based Paccar plummeted 48 percent.
  • Volumes are rising again this year, with truck tonnage up for a 10th straight month in September on a year-over-year basis, (year over year comps are obviously easy due to the huge drops seen the past few years). 
  • “We think both 2011 and 2012 will be years of significant growth,” Eaton Chief Executive Officer Sandy Cutler said in a Nov. 11 interview. “Used truck prices are up, the inventory of used trucks are down, freight is up, and the trucking companies have been announcing price increases.”
  • Shipping volumes remain below their 2006 peak.
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Now the offset is, while the fleet age is long in the tooth, wear and tear is not at usual levels due to the deep recession.
  • As many as 500,000 trucks were idled during the recession, and about 150,000 remain parked, Starks said.  “Age itself is not a very useful tool to say when you have to replace equipment,” Starks said. “With such a deep recession, the dynamics have changed.”
  • Wear and tear is important because annual maintenance costs can more than double once a vehicle exceeds 600,000 miles (965,400 kilometers), said Kubacki, the Avondale Partners analyst.

On the flip side... if I am wrong about the economy and the magic of QE2 creates a dynamic recovery in 2nd half 2011.... then there is upside.
  • “If freight is strong through the first half of next year, I would not be surprised to see growth for the first time surface as an initiative for truck purchases,” he said.

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Investing themes:
  • Parts suppliers such as Cleveland-based Eaton and diesel- engine maker Cummins Inc. would join Paccar and Navistar in benefiting from increased truck sales. Revenue at Eaton’s truck unit plunged 35 percent to $1.46 billion in 2009. The drop at Columbus, Indiana-based Cummins was 25 percent to $10.8 billion.
Heck even our BorgWarner (BWA) is mentioned as a beneficiary.
  • Commercial trucks will be a “strategic area of focus” for turbocharger maker BorgWarner Inc. as the government keeps ratcheting up mileage standards, CEO Tim Manganello said in a Nov. 9 investor conference. Truck manufacturers use turbochargers to boost fuel economy without sacrificing power.

Long Cummins, BorgWarner in fund; no personal position

Back to S&P 1192

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Right back to this all important level based on futures.  China raised reserve requirements 50 basis points so some pressure from that.  I expect dip buyers to show up at the open to defend the 200 week simple moving average.

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Salesforce.com (CRM) With Slight Beat on EPS; In Line Guidance - Still Surges After Hours

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For nearly a decade the stock that has been the most difficult to short due to valuation has probably been Salesforce.com (CRM) [Jul 2, 2008: Does Valuation Matter?]   It is always expensive and even when it reports "in line" type of quarters like it did last evening, it still surges.  Granted there were upside surprises in revenue both in the current quarter and guidance but in my mind that is a net negative.  Why?  Despite coming in at higher than expected revenue - the EPS was "in line" with analysts.  Which means something was lost either via expenses or margins.  But it doesn't even pay to research it because the market is giddy, sending CRM up another 9% in after hours.   (note - based on some of the stories it might be due to a hiring spree)
  • Salesforce's job postings in September grew at the fastest rate in at least two years, which "reflects recent bullishness, but also dampens margins in the short term," according to Mark Murphy of Piper Jaffray.
While liking the company, and owning it on and off over the years (and trying to short it a few times - always a failure), the valuation is always of a boggling nature to me.   And action like we see now in the stock make it a short sellers nightmare. [Sep 2, 2010: [Video] I Want my Salesforce.com]  If last night's prices hold this morning, Salesforce.com should be at new yearly highs today.




A quick look at earnings - estimates were 31 cents and $410.5M in revenue for third quarter.  They came in at 32 cents on $429M in revenue.  Usually high multiple stocks need to "really beat" by a wide margin to avoid being punished, but apparently CRM is an exception.   I guess the revenue guidance was enough to cause shorts to scramble.
  • For Q4, the company sees revenue of $447 million to $449 million, with non-GAAP EPS of 27-28 cents; the Street consensus has been for $424.8 million and 28 cents.
  • The company's paying customer base rose 4,700 during the quarter to about 67,900, 31 percent larger than it was in a year earlier.

Guidance
  • For the current Q4, Salesforce expects to earn 27-28 cents a share, at best in line with analyst views for 28 cents. But its revenue target of $449 million is far more upbeat than analysts' bet for $424.8 million. It would be a 36% gain.
No position

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Thursday, November 18, 2010

[Videos] ABC News on China Part 3

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From Wednesday's shows....

The move from corporate America into China.  It highlights many of the things we've discussed at FMMF for years - how U.S. multinationals are the masters of the universe and how increasingly less important Americans are in the food chain.  Further, how if you want to build a business in China you have to source in China, and use Chinese labor - completely different than the U.S. dynamic.  Protectionist?  Yes.  Helps their citizens prosper? Yes.

Two examples -
GM sold 2M cars in China...95% were built in China.  Profits? Shared with the Chinese government.
Mcdonald's is only allowed to use food grown by Chinese farmers. 

Bigger picture it paints a story where U.S. corporations and shareholders benefit as sales surge overseas (i.e. net positive for stockholders, as sales surge) but aside from that specific niche of citizen, has less of a broad benefit on U.S. society because the items being sold are increasingly not made in the U.S. - hence the worker class does not benefit.  (unless you are a 'trickle down economics' kind of theorist)

4 minute video




Trade is a win win for all parties correct?  Well thus far millions upon millions of jobs have been exported out of the United States... in return estimates say the $70 Billion in goods exported to China have created 437,000 jobs in the U.S.  To put in perspective, the U.S. has lost 6 million manufacturing jobs since the Ross Perot "great sucking sound" era.  And we're not even talking the service jobs lost.  But I suppose we get stuff cheaper at Walmart.   Win win?

3 minute video



Of that $70 billion in exports 1 surprising state is grabbing a huge chunk, indeed about 9%.  Washington State.  See some of the smart things they are doing.

2 minute video


[Videos] ABC News on China Part 2

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Some more videos on China from ABC News special reports this week - from Tuesday's show.

China's education system
  • Compared with U.S. students, Chinese students spend at least 41 more days a year in the classroom.  They average 30 percent more hours of instruction every year than American students do.
  •  A new study by the Institute of International Education found that nearly 128,000 Chinese students studied in America last year, a 30 percent increase over the previous academic year.
  • Chinese students now comprise the highest percentage of international students in the United States at 19 percent. 
  • Landman from the National Committee on U.S.-China Relations said that what's different now about Chinese students studying abroad is that many want to go back to China after a few years. "They feel they have more of a future there. "

Video - 4 minutes






Despite the booming economy, many college grads cannot find jobs - they are called the 'ant tribe' (1 minute)





China is lurching into the green movement, as much out of necessity as anything else.
  • In the race to be the world's leader in green technology, China is speeding ahead of its global competition.    owhere is that more apparent than in the cockpit of one of China's high-speed bullet trains, where you can see trains screaming toward you at speeds up to 230 miles per hour. Next year, the Chinese plan to test a train that could top 300 miles per hour.  On top of the speed, the Chinese say their rail technology is better for the environment
  • The trains are just one example of China's green wave... China spends a staggering $12 million every hour on green energy.  
  • The landscape is lined with the largest number of wind-powered turbines in the world. In rural farming towns, solar-powered street lights are evidence that the green infrastructure reaches far from the big cities. 
  • Even the escalators are different. Instead of moving non-stop all day long, they remain frozen until they sense that a passenger is about to get on. Then, they use just enough energy to carry the passenger before automatically shutting off again. 
  • There's a reason for this focus on green technology, but it's not global warming. For China, it's all about the math.  "China does not have a choice," said Cheng Li, director of the National Committee on U.S.-China Relations at the Brookings Institution. "As a country, it's dealing with serious resources scarcity. China needs to find a better way to survive."

Video - 4 minutes


Bernanke: QE2 to "Create" 700,000 Jobs Over 2 Years

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If you've been reading along for a while you know my thoughts on the "salve" that is QE2.  Almost all the reasons publicly stated are a front for "asset price manipulation".... and potentially setting the table for new "workaround" bailouts of states (munis) or banks (MBS).

But let's go with the (wink wink) theory that the Fed somehow can create jobs.  Bernanke defended himself yesterday by saying he will create 700,000 jobs over the next 2 years via QE2.
  • Bernanke told lawmakers the program could create 700,000 jobs over two years. Bernanke made the comments during a private meeting with members of the Senate Banking Committee, according to Sen. Richard Shelby, R-Ala., and others who attended the meeting. Bernanke was citing research done by the Federal Reserve Bank of Boston.

Let's give him the benefit of the doubt - of course there will be no way to ever prove or disapprove such theories.  (but if the Fed were such a great job creator, I say let's ban the private sector - it's highly inefficient compared to a central overlord)  If accurate, for the mere cost of $857,000 per job, Bernanke will bring us 700,000 new jobs in the next 24 months.  Apparently all these jobs will be brain surgeons, entry level professional baseball players, and wall street bond traders.... based on the pay scale.  Or we're vastly overpaying for the newly minted nail technicians and account receivable clerks....

By this measure, the poorly designed $800B Congressional stimulus plan of early 2009 was a bargain indeed!  I believe all the jobs "created or saved" only cost us around $130K a head (don't quote me on the exact number).  Who knew!?? Pelosi is a far better steward of money then Ben!

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Using Bernanke math, all we need is about $6.8 Trillion of QE and all 8M+ jobs lost during the Great Recession will be regenerated.   QE3 thru QE9 should do the trick.

Boggling Reaction to Great Earnings Report from Spreadtrum Communications (SPRD)

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Judging from the chart, I should have had a huge order waiting at the 50 day moving average for Spreadtrum Communications (SPRD).  Despite a stellar report (10 cent beat + increased guidance), and big move up in after hours yesterday, (and premarket today) the stock was crushed in the opening minutes of the regular session.  A truly boggling reception and one that makes you wonder which hedgie had a field day today collecting stops before driving the stock back up.  The stock is back up 10% off the lows of the days, but still... quite "eye opening" action.



Full report here.  Gross margins steady in the 44% range, and cash flow exploded.

  • Gross margin was 44.1% compared to 44.6% in the previous quarter and 39.0% in 3Q09.
  • Cash flows from operations were US$67.0 million, compared with US$35.2 million in the previous quarter and US$11.5 million in 3Q09.
Only fly in the ointment is some reduction in gross margin in the next quarter (42.5-43.5%).  Still should be on track for about $1.20 in EPS for year end 2010, so about 12x earnings for this exceptional level of growth.  

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Via AP:

  • Spreadtrum Communications Inc., a Chinese company that makes semiconductors for wireless devices, said Wednesday that its third-quarter profit and sales surged, and it forecast fourth-quarter revenue above analysts' expectations.
  • The company said net income was $19.5 million, or 37 cents per share, compared with $630,000, or a penny per share, a year earlier. The company said excluding stock-based compensation costs it would have earned 43 cents per share.
  • Revenue jumped 151 percent to $96.2 million.
  • Analysts surveyed by Thomson Reuters expected the company to earn 33 cents per share on revenue of $92.6 million.
  • The company credited new products such as a chip that letsphones run three GSM SIM cards at the same time, which it said will boost sales outside China.

Guidance:
  • Spreadtrum said it expects fourth-quarter revenue to be between $118 million and $125 million, topping analysts' consensus forecast of $102.6 million.
From their report:
  • In the third quarter, we successfully launched world's first triple SIM in single chip solution, the SC600L7. The ability to run three GSM SIM cards simultaneously in a single mobile handset offers an attractive solution for multiple-operator-markets and business users, and has already garnered positive feedback from customers inSouth America, Africa and several South Asia countries.

Long Spreadtrum Communications in fund; no personal position

Bookkeeping: Restarted TNA Short

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I am using the spike to mid 1190s to restart the TNA short I covered yesterday morning.  (In real world, I'd just use TZA but easier to represent long v short exposure doing it this way)  I am using a 2.7% allocation.

I don't expect the market to reverse down today, as the new nature of the market is almost to never reverse on strong mornings... so we might drift sideways in a modest range of 3-5 S&P points for 5 hours which is the more traditional course of action since early 2009.  There is a gap up to 1197 that still needs to be filled, so that should happen today.



If the market bursts through 1201-1203 or so, than I'll close this out for a loss and have to reconsider policy.  If a 2.5 month rally is consolidated by a 4-5 day 'correction', we are indeed in new times.  I do find it curious how the 200 week simple moving average is being run through both to the upside and downside the past few days as if it is not there.  That said, I want to focus on more of a short bias below 1192; otherwise not as much.

One other potential outcome if 1202+ is cleared is a retest of the 1225 level, forming either a double top, or a new breakout.  Honestly I don't really know what all the excitement today is about - did anyone not know GM was IPOing?  Did anyone not believe Ireland would get bailed out... and the can kicked down the road? (Portugal, you are on the clock)  We are bailout nation globe.  I guess China's inflation problem disappeared last night as well.  Oh humans.

Short TNA ETF in fund; no personal position

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