Monday, December 6, 2010

[Video] CNBC: The Always Eloquent David Einhorn

I can communicate halfway decently with the written word, but hedge fund manager "whiz kid" David Einhorn is excellent with both the written and verbal word.  He does an excellent job on CNBC this morning framing the big picture issues in a calm, analytical way.  If you are a gold bug, he continues to say the path points higher due to competitive debasement amongst all major currencies.

If only we had 100 of these type of minds in the Senate, one could be hopeful again of the long term outlook of the country.

15 minutes of cool....

As an aside he touches on the thought the Fed should raise rates - I've written countless times that the current policy is to steal from America's savers to recapitalize the banks and the debtors.  I never had a firm number to put behind it but I read this weekend that bank analyst Chris Whalen has put this figure at the tune of $750 Billion annually.  Think about that for a moment... savers subsidizing our banks and debtors to the tune of 3/4 of a trillion a year.  Take that seniors!  [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]

[May 27, 2010: David Einhorn Op-Ed: Easy Money, Hard Truths]
[Oct 19, 2009: David Einhorn's Speech at Value Investing Congress]
[Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn]

Sunday, December 5, 2010

The Week Ahead

Similar to many episodes the past 1.75 years, when the market looked threatened mid week to break some key technical resistance - in this case the 50 day moving average on the S&P 500 - buyers rushed in to offset a deteriorating technical condition and helping the market get it's groove back.  So happened Wednesday as the "First day of the Month Effect" [More First Day of the Month Effects] bore fruit yet again.

Both the S&P 500 and NASDAQ look identical, poised to test yearly highs.  While the sharp U-turn has probably pushed both overbought in the very near term, a potential 'head and shoulders' formation that seemed to be forming over the past 2 weeks appears headed for oblivion.

Please note small caps have already broken to new yearly highs...

With all the heavy economic reports out of the way for the month (Chinese PMI, US labor, US PMIs) and the David Tepper effect back on the table as demonstrated Friday (bad news = more Fed or govt support, good news = good news) there is little to stop Santa.  A dip is to be expected in relatively short order but desperate performance chasers will certainly be chasing that dip, afraid of being left out of the upteempth "V-shape" recover bounce; something we rarely saw pre 2009, but has now become the standard.  The only question at this point is the breakout over yearly highs (S&P 1227 for example) be something to chase immediately, or a short term head fake to cause a little pain for stock market elves...before the year end rally.

Performance Chasing 101

On the docket this week are less imposing economic reports; certainly not the type that move markets.  The only kryptonite for Santa would be some news out of Europe but with the entire globe now backstopped by central bank actions, speculators are content with all actions that kick the can as we cycle from country to country.  It appears until German and French spreads themselves blow out, will anyone truly care about Europe as a serious issue - and then I suppose the Ben Bernank (sic) option will come full bore; that is the ECB printing money like mad to funnel into every crevice of Europe.  Until then we watch Portugal... then Spain... then Italy... then Belgium..

Tuesday: Consumer Credit (3 PM)
Thursday: Weekly jobless claims (8:30 AM), Wholesale Trade (10 AM)
Friday:  International Trade (8:30 AM), Import and Export Prices (8:30 AM), Consumer Sentiment (9:55 AM)

On the monetary front, as we debate (sort of...but not really) some sort of long term deficit reduction plan, politicos prepare to unleash another $4 TRILLION of debt over the next decade via extension of Bush tax cuts.  Which purposely were supposed to sunset after a decade.   However we know once a policy is implemented that either hands out money (Dems) or gives tax cuts (GOP) - we will never take it back.  This is the benefit of being the blessed nation which can increase spending AND cut taxes at the same time.  Granted we do not want to raise taxes in a poor improving economy, but you can imagine if the economy was booming the GOP would switch to rationale of "we can not raise taxes because it would choke off growth".  Hence, consider our tax cuts permanent for forever (and ever).   So take your 2010 deficit commission and shove it.... we're about to add $4T for the NEXT deficit commission to deal with.

[Video] 60 Minutes - Bernanke: If I Need to Do QE3, I Will. Happily.

It was leaked in the closing 30 minutes of trading Friday that Bernanke was endorsing a move to QE3 if forced to, and the market immediately jumped some 5 S&P points.  A wide ranging video on 60 Minutes below - not much new here other than admission that unemployment will remain high for many years, Bernanke sees no inflation at all, and QE3 is shaping up as a proposition.   A quick question on income disparity was shook off as a situation due to education variance amongst the populace.

More importantly to our society, Mark Zuckerberg is about to announce a redesign of the Facebook page!

15 minute video

Saturday, December 4, 2010

Updated Fund FAQ/Pledges Tab to be Used as Living Document for Fund Progress

I've updated the Fund FAQ/Pledges tab at the top of the page to include all the new information processed in the past month, as well as a location for updates on the launch of the new sites, and the fund itself.   I will continue to post updates in the body of FMMF website as well, but the fund faq/pledge page go forward will be a repository of information/updates.

As always, thanks for your (non stop) patience.

Friday, December 3, 2010

Interesting 60 Minutes this Weekend - Ben Bernanke and Mark Zuckerberg

Looks like a doozy of a 60 Minutes show coming this weekend if you are involved in markets or economics.  Ben will go to the nation to explain how he has everything under control and $600B to inflate "assets above where they otherwise would be" speaks to free market capitalism, and Zuckerberg will probably just jump into a pile of $100 bills ala a pile of leaves in fall.... while mumbling $35B, $50B, by IPO time Facebook will be worth $150B in this market where no one loses!  "If GroupOn is worth $6B, we're worth $600B!"

No preview of the Bernanke piece (expect a huge dip in ratings for this time segment, as the average American goes "economics? can't be bothered!") but the last time he was on, he uttered green shoots and the market is up 80%? since.  However let's see if his deity like utterings can cause the traditional Monday premarket markup as our 'confidence is increased as we see the man behind the curtain in the round.'  (and if that is not a good enough reason to mark up stocks Monday premarket, we'll find another)  [Edit 3:50 PM - looks like we are getting the Bernanke walks on water ramp already in the closing 30 minutes]

[Random blast from the past from my 2nd month of life at FMMF - [Sep 19, 2007: Great Bernanke Photos]


As for Mark:

In 2006 at the age of 22, he turned down a billion dollars - a move many thought unwise, maybe even foolish, at the time. But Facebook founder and CEO Mark Zuckerberg refused to sell his company. Now, with his social networking site worth an estimated $35 billion, Zuckerberg tells "60 Minutes" correspondent Lesley Stahl in a rare interview it was one of his best decisions.

The interview with Zuckerberg, in which he talks about his life and his business will be broadcast this Sunday, Dec. 5, at 7 p.m. ET/PT.

At the time Yahoo offered $1 billion for Facebook, Zuckerberg was often referred to as the "toddler CEO." Young as he was and inexperienced, he ignored the conventional wisdom.

"We had this opportunity to sell the company to Yahoo for a billion dollars and we turned that down. I think a lot of people at the time thought we should sell the company," says Zuckerberg.

"But you know, I felt really strongly and I think, like, now, people generally think that that was a good decision," he tells Stahl. Users of Facebook have increased fifty fold from less than 10 million in 2006 to over 500 million today.

In October, "The Social Network," a film based on Zuckerberg and his creation of Facebook, hit theaters to much fanfare and Zuckerberg joined in on the fun. "We took the whole company to go see the movie," he tells Stahl.

He found it interesting to see which parts of the film were true to the facts and what was Hollywood invention. They had his character wearing the right tee shirts, he says, shoes too. "They got sandals right and all that. But I mean, there are hugely basic things that they got wrong, too," says Zuckerberg. "They made it seem like my whole motivation for building Facebook was so I could get girls, right? And they completely left out the fact that my girlfriend, I've been dating since before I started Facebook."

The interview includes Zuckerberg discussing the privacy issues swirling around his company, the direction he wants to take it in and what it's like to be one of the most influential CEOs in America. He also takes Stahl and "60 Minutes" cameras on a tour of the company's offices in Palo Alto, Calif.


Bookkeeping: Everything Must Go

Gosh that was a bit traumatic, but I am closing out the tracking portfolio at Investopedia which has been in use for just under 2 years.  Total assets rose from $1M to just over $3M - breached $3M in the past few days, so that's a nice round number.  If I ever have another 2 years like this back to back, I'll be thrilled.  I'll do a write up on the four week performance next week as usual.

Here is a snapshot of the position sheet before it was liquidated.   Click any to enlarge.





On the Structure of Mutual Funds

I thought based on some questions I receive in the mail, and the basis of this website I should have at some point in the past delved into the structure of mutual funds.  Frankly, I did not know the information below when I first started this journey even having been a mutual fund investor for many years.  This might also help alleviate some concerns for those who are considering a direct investment in the fund; thinking they are sending the money to some address in the Cayman Islands. ;)  I will actually link to this post in the FAQ portion of the website because it addresses something most people don't probably realize.


When one broadly speaks of a specific mutual fund there are actually 2 arms length companies that make a mutual fund operate.  I am guilty of mixing them myself when I speak, simply saying "my fund".  It's not that simple.
First is the mutual fund itself; which is an independent trust. The fund has trustees - of which I am one, but 2 are independent.  You can have more than 3 trustees, but whatever the case you need a majority independent.

Second, there is an advisory who is employed by the mutual fund to manage the portfolio.  Obviously going into this I had neither the fund, nor the advisory firm so really there are 2 projects going on behind the scenes at once - the formation and buildout of infrastructure of both entities; with all the work that entails. 
The advisory company is employed by the mutual fund to manage the portfolio.  So it's an arms length relationship.  In theory if I stunk for a long time as a manager, the fund could fire the advisory firm (that decision is by the trustees).


Therefore, when an investor opens a "direct account" it has nothing to do with "me" (the advisory firm).  It goes to a custodian (a bank) that the mutual fund trust is attached to.  In this case Union Bank in San Francisco.

(Since the hyperlink for union bank is a secure link, I cannot link to it - hence if you follow the above link there will be an error message for that specific page. Therefore you just need to type into your browser)

At the end of each month the fund spins off revenue.  And expenses.  A portion of expenses are management fee, and a portion are operations, but net net it's one big line item "expenses".  The net of the two (revenue v expenses) is either positive or negative.  Hopefully positive.  If it is negative then I am liable for the excess costs - even though I am an independent advisor to the fund.  That's just the way it works in a small independent fund.  Which is the main reason for having the pledge sheet and making sure the investor base is reliable and it can be counted on.  If the net of the revenue v expenses is positive the manager makes money, and we all live happily ever after.   But that's the only money the advisory (me) sees... revenue of the fund - expenses of the fund.  That specific stream of money has nothing to do with the investor's money which goes to the bank, and is attached to the mutual fund structure. 

There is a good (short) summary that frames the security issue here.

As an aside, all these issues lead to complications with the 'commentary' (blogging) I am planning in the future.  There is little precedent first of all, and you are mixing 2 different types of firms with 2 different regulators. In terms of day to day communication, there is no real framework as only a handful are even trying to make this type of commentary part of their business.  And the few that do, approach it completely differently. It gets complicated from there, but I won't bore you with the details - needless to say, thinking out of the box is frowned upon by our regulators.



Netflix (NFLX) Falls Dramatically Past 3 Sessions; in Related Note - Hell Freezes Over

This is an example of why it is hard to chase stocks that are so far away from even the short duration moving average (i.e. 10 day or 20 day).  It works, until it doesn't work - and then usually the reversal is quick and dirty.   If you chase a chart this extended, you really need to have some tight stops in place as a long. Neflix (NFLX) has two yawning gaps in its chart in the mid $150s and mid $170s.  It will be interesting to see if the buyers rush in at the 20 day moving average under $184 to pick up this 'bargain'.

When I looked at the chart a few days ago, the stock was up 100% from August and 250% year to date.  Despite the recent pullback, still one of the stocks of the year.  I sold the last of mine some $17 points lower than it is now, back in September!

No position


Bloomberg: Tweeting Restrictions Risk Leaving Brokers Without Much to Say

Boy oh boy, do I know a lot about this issue as of late. With super regulators swarming all around, the financial industry is WAY behind the rest of corporate America in terms of social media.  With all the potential hounding and fines (think airport patdown every time you want to say something), it appears most have simply given up trying.  But being a small guy, social media is one advantage you can parlay - if you can figure out what the heck is actually allowed.  No black and white in this world.

Via Bloomberg:

  • Social media sites such as LinkedIn and Twitter are redefining the way businesses reach their customers. Securities firms are largely absent from the revolution.
  • Regulators and company rules at brokerages have slowed the adoption of social media by the financial services industry, said Margaret Paradis, a New York-based partner at law firm Baker & McKenzie, who advises brokers and fund managers. Firms banning employees from using sites such as Facebook, LinkedIn and Twitter are limiting access to cheap and easy-to-use competitive tools, she said.
  • ‘By ignoring social media, you risk not being out there where your clients are.’’
  • About 84 percent of U.S. brokerage firm employees polled by HNW said they don’t use social media because company and industry regulations make it too burdensome, she said.
  • The U.S. Securities and Exchange Commission, which regulates the securities industry, says all broker stock recommendations must be ‘‘suitable” for individual clients by measuring their risk tolerance, security holdings, income, net worth and investment objectives, according to the agency’s website. Tweeting a stock pick or posting it on Facebook generally breaks this rule, said David Sobel, executive vice president and compliance officer at New York-based Abel/Noser Corp., which helps clients lower trading costs and does allow its employees to use LinkedIn for networking.
  • Firms such as Bank of America’s Merrill Lynch & Co. and TD Ameritrade Holding Corp. generally restrict all broker-to- investor interaction on social media sites because of concerns they may violate SEC rules and those of the Financial Industry Regulatory Authority, the non-governmental body that oversees almost 5,000 brokerages. 
  • Brokers who break the rules may be fined or suspended for communicating in a manner that’s viewed as intentionally or recklessly misleading, Finra said.
  • Finra requires companies to supervise and store all broker- client exchanges, such as e-mails and now Twitter posts and Facebook updates
  • Brokerages also are required to approve most postings on websites, Tom Pappas, vice president of advertising regulation at Finra, said in an interview. Finra released a regulatory notice in January with guidelines for firms using social media. “We issued these standards to help firms understand and follow the rules,” Pappas said.
  • Vanguard Group, the Valley Forge, Pennsylvania-based investment manager, now permits employees to use Facebook and LinkedIn as long as specific investment recommendations aren’t given.  Vanguard’s competitors, such as Charles Schwab Corp., TD Ameritrade, and Merrill Lynch use Facebook pages for general information and marketing without providing specific investment advice. Six in 10 financial firms consider themselves to be social media novices or beginners, the study said.
  • Companies that actively engage potential customers will see better results if they integrate social media into current sites. Creating a sense of community with clients is crucial, Shevlin said.


Bookkeeping: Closing Ultra Silver (AGQ)

As mentioned a few weeks ago I'll be closing the portfolio down at end of session today, to concentrate on other issues.  (will continue to post market, economic, and stock comments here for a while)

That said I am going to get a jump on things - I sold the TNA I bought Wednesday afternoon expecting a much nicer jobs report and move to near 1225.  But I lucked out yesterday as the market rallied predicting a good jobs number, and when the good economic news does not come through it doesn't matter - David Tepper says so.  You win in all situations.

I also sold Ultra Silver (AGQ) which I restarted in the fund Monday.  It is up 15.5% in 4 days as silver is on fire.  Apparently silver now wins in all economies - it is the David Tepper metal; if economic figures are bad it means more central bank debasement of fiat currency, and if the figures are good it means more industrial usage ----> "you can't lose!"

I sold a portion earlier this week after gaining 10% in 2 days, but will dump the rest here as it approaches old highs, for +15.5% in 4 days.  In a real world portfolio I'd cut back here as it approaches yearly highs, and then if it breaks out over that level (say over $30.00) I'd have to consider strongly buying back the exposure on a 'double top breakout'.  Otherwise, I'd buy the David Tepper metal on a pullback.

No position


Stock Market Back to David Tepper Mantra

If the economic reports are good, we can buy....

If the economic reports are poor, we have the Fed backstopping the markets, so we can buy.... (the moral hazard argument)

Conclusion: The market is a one sided bet, and hence we are bulletproof.  Information is just details.

Summary of David Tepper theory.  [Sep 24, 2010: [Video] Appaloosa David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment]

After a month long break market players are back to the mantra.

Let's see if the 10 AM ISM Non Manufacturing is enough to get us back to green now that all the morning's losses have been erased. 


[Video] PIMCO's Bill Gross' December Letter - We're All Living in Allentown, PA

PIMCO's Bill Gross' monthly letter for December is out and it speaks to a lot of themes FMMF has been touching on for years - a very nice read for those of you not familiar with his work.  I also embedded a video of an appearance of his yesterday on CNBC.

Full letter below - hit fullscreen to make it easy to read

Some key points:
  • The global economy is suffering from a lack of aggregate demand. With insufficient demand, nations compete furiously for their share of the diminishing growth pie.
  • In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive.
  • Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space. 

Two ways the U.S. can address this - the hard (but long term healthy) way or the easy (but long term unhealthy) way.  You can guess which way we will ultimately go....

The right way:
  • The constructive way is to stop making paper and start making things. Replace subprimes, and yes, Treasury bonds with American cars, steel, iPads, airplanes, corn – whatever the world wants that we can make better and/or cheaper. Learn how to compete again. Investments in infrastructure and 21st century education and research, as opposed to 20th century education are mandatory, as is a withdrawal from resource-draining foreign wars. It will be a tough way back, but it can be done with sacrifice and appropriate public policies that encourage innovation, education and national reconstruction, as opposed to Wall Street finance and Main Street consumption.
The more likely way:
  • The second route to the level playing field involves political and financial chicanery: trade and immigration barriers, currency devaluation and military domination of foreign oil-producing nations. It is by far the less preferable route, but unfortunately the one that is easier and, therefore, most politically feasible. Politicians do not get elected on the basis of “sacrifice.” They get elected by pointing to foreign demons, be they in the Middle East or in Asia. The Chinese yuan is a far easier target than the American workers earning ten times their Chinese counterparts and producing an inferior product to boot. Politicians also get elected by promising to keep taxes low, even for the rich, with the argument that small business owners cannot afford the increase. The real beneficiaries however, are the mega-millionaires of Wall Street and Newport Beach. And yes, policymakers at the Fed write trillions of dollars’ worth of checks under the guise of quantitative easing, a policy which takes Charles Ponzi one step further by purchasing the government’s own paper in a last gasp effort to support asset prices.

Bill Gross December 2010 Market Commentary                                                              

[Oct 27, 2010: PIMCO's Bill Gross: Fed QE is "If Truth be Told, Somewhat of a Ponzi Scheme"]
[Jan 26, 2010: PIMCO's Bill Gross: Invest in 'Less Levered' Countries]

Wow - Quite a Disappointment: November Figures: +39K Jobs, Unemployment Rate 9.8%

Very disappointing considering the other economic data of late - especially compared to ADP.  I assume it will be revised up in the future.  A big drop in retail employment (-28K) which one assumed would have surged due to holiday hiring. Might be a seasonal adjustment issue.

Private jobs +50K
Public jobs -11K

Average weekly hours fell to boot.

Average hourly earnings were $22.75 in November from $22.74 

Unemployment rate up to 9.8% from 9.6% the past 3 months, which could be more people looking for work as their 99 weeks expire.  Labor force participation rate has been incredibly low - so as this jumps back up, the unemployment rate will rise.

EDIT: The rate did not increase due to labor force participation increasing.  That figure is stuck at 64.5% again in the report.  That's bad; it means the unemployment rate rose for reasons that had nothing to do with more people coming back into the workforce seeking new work.

U6 (broad unemployment) = 17% flat from last month.

Report here.


Overall the bifurcated economy continues on.  Stock market can rally on this because really, who needs employed Americans - they only weigh on corporate profits.  Asians are employed and we'll sell stuff to them.  Buy the dip; the Santa Rally lives.

Thursday, December 2, 2010

Might Not Wait for Friday to Make a Run to Year Highs

So much for a quiet session; the market is grinding along higher hour by hour.  The S&P 500 has surpassed 1220 (it was near 1173 two days ago) and has its eyes on the yearly high .  When you see this sort of buying ahead of a supposedly important economic report, you know market participants are feeling bulletproof.  In a normal market I'd say having this sort of run ahead of much anticipated news, would lead for a potential for a sell the news reaction tomorrow no matter how good the report is (after the initial spike).  But this has not been a normal market in a long time.

(actual high of year is 1227.08 not the ~1225 mentioned earlier)

My relative performance versus the Russell 1000 the past 4 weeks was tremendous 48 hours ago... darn market has made up a lot of ground in 2 sessions.


Goldman's Jan Hatzius Turns Quite Bullish, Helps Drive Rally - Financials Also Surge on Goldman Note

An interesting day today - a lot of the go to 'momo' plays are doing little or reversing while there is a rotation into some laggard groups - most notably financials and housing.  Goldman's Jan Hatzius (a very followed man on Wall Street) has made what appears to be a complete 180... or least 90 degree turn from his views from just two months ago. [Oct 6, 2010: Goldman Sachs - 2 Scenarios for U.S. Economy in Next 6-9 Months (a) Bad or (b) Very Bad]  This was released yesterday so either it was late in the day, or there had to be an excuse to drive up stocks today, and this was a convenient one.   Last bear left, turn off the lights.

Target for S&P 500 end of 2011 = 1450.

Via Business Insider:
  • “The most significant shift in 2011 and 2012 is likely to be stronger growth in the US. Five years ago, our US economic outlook was very pessimistic….Even one year ago, we still had a below-consensus view and predicted a slowdown in GDP growth to a below trend pace in 2010. The reason for this was that the improvement in GDP growth in late 2009 had been due to temporary factors, namely the inventory cycle and the impulse from the 2009 fiscal stimulus package.
  • With underlying final demand still stagnant, we thought that growth would slow through 2010, as indeed it has.  That was then. Now, however, we expect a substantial acceleration in real GDP growth over the next two years to a 4% pace by early/mid-2012.  What has changed? Most strikingly, the performance of underlying final demand, or ‘‘organic growth.’
  • Why such a sharp acceleration? Our best explanation is that the pace of private-sector deleveraging is slowing in an environment of somewhat lower debt/income ratios, improving credit quality and moderating lending standards.
  • Goldman's economists now forecast 2011 GDP growth of 2.7%, up from a prior 2% view. They see 2012 GDP growth of 3.6%

That said, it will remain feeling like a recession for many of the citizenry:

  • “It is important to emphasise what we are not saying. We are not saying that the US economy will now embark on a V-shaped recovery. We believe that the drag from inventories and fiscal policy will still keep real GDP growth at a moderate pace of 2½% in the next couple of quarters.  And even the 4% growth pace that we expect for much of 2012 is still quite moderate relative to typical post-war recoveries. 
  • We are also not saying that deleveraging is over. Indeed, private-sector debt/income ratios are still likely to decline further. But it is the pace of deleveraging——which corresponds to the level of the private-sector balance——that matters for GDP. As the pace of deleveraging slows, the private-sector balance falls, and this implies a positive impulse to GDP growth.
  • Finally, we are not saying that the economy will feel good from a ‘‘Main Street’’ perspective. We only expect a gradual decline in unemployment as growth moves above trend, to 9¼% by the end of 2011 and 8½% by the end of 2012.

As for the financials, a lot of strength as the higher 10 year yields go (mentioned this AM) the better the spread banks can make by simply turning on the lights.  Bernanke keeps short term rates at 0% so savers are destroyed banks can borrow 'nearly free', and then go buy 10 year US bonds for 3% (and rising), and we they all win. [Mar 31, 2010: Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]  Of course the other side of the equation is the non stop losses incurred on past loans will slow down as the greater economy improves. 

  • Goldman’s U.S. portfolio strategy team lifted financials to overweight, the first time it has been positive on the sector since the credit crisis shook global markets in 2008. “Stronger economic growth, higher equity prices, and a more supportive interest-rate environment are positive for many subsectors of financials,” they wrote.
  • Goldman Sachs cited four reasons to be positive on the sector heading into next year: (1) Loan demand should start to show signs of improvement amid a better macro backdrop; (2) Pressure on long-term rates should subside, benefitting banks and insurance companies; (3) Capital clarity (and hence redeployment) should improve in a positive growth environment as tail risks subside; (4) Higher equity prices should drive higher capital markets activity.

No positions

Anglo Saxons Take a Hit in World Cup 2018, 2022 as Russia and Qatar Win Hosting

For you futbol fans not near a news outlet, FMMF (not so) Breaking News reports in double upsets Russia wins hosting rights for the World Cup in 2018 and Qatar in 2022.   A major blow for Anglo Saxons as Britain was one of the favorites for 2018 (or at least a "traditional European nation"), and U.S. a "shoo in" for 2022!  (another subtle shift in the world power from west to east?)

So instead of the world's most dominant sporting event held in Chicago in 2022, it looks like soccer fans are headed for the 'moderate climate' of Qatar in mid to late summer.  Errr....

U.S. lost in the last round 14-8 in 2022.  (let's repeat that... the U.S. just lost to Qatar!)
  • Qatar is no larger than Connecticut and has a population of barely 1.6 million. The 2022 tournament would be played largely in and around the main city of Doha, and in summer temperatures that regularly soar to 105 degrees and above.

As for 2018, Spain and Portugal in the midst of financial crisis, that must have been an interesting bid.

If you want to see an organization rife with corruption and politics, the world governing body for soccer takes a back seat for no one... we can only wonder what the sheiks and Putin promised for these bids.

(For investment purposes, Brazil has the double win of the Olympics and World Cup, and now so does Russia - 2014 Olympics, 2018 World Cup.  Should bode well for infrastructure projects)

2018 FIFA World Cup™

Round 1: England 2 votes, Netherlands/Belgium 4 votes,Spain/Portugal 7 votes and Russia 9 votes (as no absolute majority was reached, the candidate with least amount of votes, England, was eliminated)

Round 2: Netherlands/Belgium 2 votes, Spain/Portugal 7 votes andRussia 13 votes (Russia obtained an absolute majority)

2022 FIFA World Cup™ 

Round 1: Australia 1 vote, Japan 3 votes, Korea Republic 4 votes,Qatar 11 votes, USA 3 votes (Australia eliminated)

Round 2: Japan 2 votes, Korea Republic 5 votes, Qatar 10 votes andUSA 5 votes (Japan eliminated)

Round 3: Korea Republic 5 votes, Qatar 11 votes, USA 6 votes (Korea Republic eliminated)

Round 4: Qatar 14 votes and USA 8 votes (Qatar obtained an absolute majority)


The Big Picture - and Why it Only Matters when it Matters

Let us assess the big picture landscape....

  1. The United States is engaged in an ultra low interest rate environment to attempt to stoke the economy via artifical means.
  2. The country has exited a technical recession, although to many it feel like we remain in one.
  3. Despite many quarters of 'non' recession, net job creation has been kaput - we have been in a jobless recovery.  Jobs have not even kept up with population growth.
  4. But.... consumer spending seems to be picking up as you 'never doubt the American shopper'.
  5. Said consumer is finding non traditional means of funding her spending (i.e. not out of savings nor wages)
  6. U.S. multinationals are increasingly the world's global elite class - moving labor around to low cost centers, lobbying for beneficial tax law in every country they operate, while expanding revenue across the globe.  Profits are flush.
  7. Our central banker - while hissed at in dark corners of the internets (sic) - is largely worshiped by the Wall Street elite (for whom he serves, one nation, under...) 
  8. The country faces massive and growing long term deficits, which it only talks about addressing 
  9. Our political system is dysfunctional
  10. Crony capitalism aka "socialism for the large corporation" is the pervasive economic system in the country.
  11. We are at war.
  12. There is large - and growing - income inequality in the country.
  13. Local and state governments have made tremendous long term promises to the government class via pension and healthcare, that they cannot possibly pay off.
  14. The stock market put in a choppy year with a nice rally in the fall, after having a tremendous return last year.  Which followed a traumatic generational selloff.
  15. China is roaring.
  16. Healthcare costs are out of control.  University costs?  Higher rates of inflation the past decade than healthcare.
  17. The middle class is being slowly and surely eroded as globalization changes the complexion of the country; many of our old goods producing jobs are now gone - replaced by lower paying service jobs.
  18. A majority of the so called 'solutions' being employed by the federal government and especially central bank are simply kick the can ploys, which are creating massive long term inefficiencies and misallocations - from which we will pay dearly.

What am I describing above?

Late 2004.

Why am I telling you this?

Because sometimes seeing the big picture is a hinderance.  All these things apply in late 2010 as they did in 2004. Indeed the stakes and imbalances are even larger now as we are seeing things done to kick the can by central bankers never conceptualized in the past - other than in white papers. 

But guess what - kicking the can, living in alternative realities, worshiping a deity named Greenspan Bernanke can work for long periods.  We'll sing.  We'll dance.  We'll buy stock.  We'll look around (some of us nervously) and wonder how we pulled the rabbit out of the hat (yet again). Indeed anyone who raised these issues in 2004 would have been technically correct to be very worried.  But most likely missed out on years of gains in the stock market.  Indeed, the issues only grew in stature and worsened as the economy "surged" in 2005, 2006, and 2007.  Making anyone who talked about these things a 'perma bear'... or worse 'an idiot'.  Even though in truth they were a realist; but a realist with far too much clairvoyance.  

Our market is increasingly short sighted.  Heck a large proportion of the trading nowadays is in 1/4000th of a second increments - hence anything over 2 seconds is "long term".  Any and all things that kick the can and push the issues out another week, another quarter, or another year is a cause for celebration by the speculator class who only lives for tomorrow.  After all "it all works out in the end".  Until it doesn't.

Larger point being, we have some tremendous issues ahead of us.  Just as we had in the 'improving landscape' of 2004.  But if you drank the Kool Aid in 2005-2006, the United States looked like clear sailing ahead for a decade - jobs (many based on a central bank induced bubbles) finally came to life in 2005, housing (for some) went up 10-15% a year (or quarter!), people were getting rich overnight by the "wealth effect", everything was super awesome.  Within the temporary alternative reality.  It didn't matter to markets.  Until it did.  

I expect the same in the coming years - although we've raised the stakes even further this time around by not taking the medicine and moving the private sector's losses on the taxpayer's balance sheet.  Our margin for error during the next cyclical recession is much smaller.  Many more Americans now live on the edge, dependent on never seen levels of government support.  Many are peeved at the actions of the past few years, which favor the 'bond holder class' over the taxpayer; will they accept the same type of bailouts in the future?  And the central bank is already operating at emergency levels even during a 'recovery'.  One day market forces will rear their ugly head, as the excesses and misallocations will overpower the dam being built.   And the same excuses, and questions about not learning from the past will be asked as we saw in 2008.   But we don't know when this day comes - could be in "2005", "2006", "2007", or "2008".

The same thesis must apply now (and always) - be aware of the long term reality, don't buy into the hype, but participate in what the market gives you in the near term.  That does not mean one has to be sanguine about the situation; indeed if one thinks too much about it, one can get physically ill.  But if we are led to the promised land of S&P 2000, 3000, or 4000 before the next implosion, I'll happily go there ... and then hopefully make money on the dark side during the implosion too. You can have a speculator hat, and an economist hat - and often they can't both be worn at the same time.

In the meantime we can play 'the game', but always with one (beady) eye towards the exit door since all these chairs on the deck .... well they are all on the same ship.  The band sounds nice, but way off in the distance there appears to be an iceberg.  (No worries though, this ship can never sink - the Queen Elizabeth (QE) 14 will catch our distress signal in case of emergency)  So for now, we dance.  Look, there is some Kool Aid being served by the waiter... mmmmmm, looks good.

Bookkeeping: Selling Another 30% of the Acme Packet (APKT)

For reasons of "Egregious" I am selling another 30% exposure to Acme Packet (APKT) (using yesterday morning's position size as the guide) shrinking my exposure to 0.5%.  I sold over $50 yesterday morning on a 4% move, but it kept running and ended up 8%ish for the day, after being up 10% the previous day.  Like Netflix (NFLX) it is reaching the stage it is prone for a pullback.

As for the greater market I expect no fireworks today; we are firmly over S&P 1200 with a "better than expected" employment report teed up for tomorrow premarket.  Bulls firmly in control in the 1200 to 1225 range.  If the market is "surprised" by the 180-200K employment print tomorrow, then we might make a run for yearly highs near 1225 on the gap up open.  Might be worth a short term fade at that point but a break over 1225 next week or whenever should lead to good times heading towards Christmas.

I bought a small smidge of TNA (3x small cap bullish) late yesterday (1.25% exposure) on anticipation of the potential nonsense tomorrow premarket.  The market remains essentially unshortable; in the near term we move up our 'support' from 1172 to 1200 and buy the dip mantra is in place.

Long Acme Packet in fund; no personal position


10 Year US Treasury Yields Hit 3%, Hitting Levels Last Seen in July

If you believed the song and dance out of Bernanke about QE2 being some super cool magic trick to lower yields, we can say it's been an abject failure.  The 10 year yield in late August when the Jackson Hole event occurred was in the mid 2%s; this morning we've hit 3%.  But if you did not fall for that song and dance, hook line and sinker and thought QE2 was much more about asset price manipulation (which Ben admitted to - partially - in his editorial a few weeks ago), you can say QE2 has been a success.

On the plus side, yields will generally rise when economic activity improves so hopefully this is the reason for the move.

The "Short TLT" (iShares Barclays 20+ Year Treasury) trade I had on about a year ago, appeared to have been "very early" (Wall Street parlance for 'wrong') but has finally kicked in lately.

No position


11% of Credit Card Users, or 8M Americans, Stop Using Cards over Past Year

An interesting tidbit via this AP story about a quite tremendous drop off in credit card usage at least by % of population in the country.  Of the 70M users the previous year, 8M have dropped off the radar.  On first glance we might think this is due to 'seeing the light' but a lot of these statistics require further investigation.  For example, there were headlines over the past year about how much debt the U.S. consumer was "paying off" but when you dug into the numbers the reality was, the cause of this drawdown in debt at the aggregate level was almost entirely due to a huge swathe of people defaulting on debt.  Now does this still have the same effect in the long run? (people getting rid of debt) yes.  But not exactly via reasons we'd be clapping for.... and of course with far different consequences.  [The Fed keeping interest rates at 0% so banks can make money with their eyes closed for years, to offset the losses of masses of defaults]

Perhaps some of these 8M did see the light, impossible to tell - but I'd imagine a good portion of them were in other not so rosy scenarios, such as banks tightening standards and being locked out of the credit card game.  With that said, on an anecdotal level back in 2006-2007 I used to get 5-7 0% interest rate cards offers a week.... that disappeared for most of 2008-2009.  However, in the past month I've seen them return and have had 4 in the past 2 weeks show up.  America's back, baby?

  • More than 8 million consumers stopped using credit cards over the past year. About 62 million people now have an active card, compared with 70 million a year ago.
  • The decline stems from a combination of consumer choices and bank actions. An analysis by credit reporting agency TransUnion found that use of general purpose credit cards bearing MasterCard or Visa logos, or issued by Discover or American Express, fell more than 11 percent in the third quarter, compared with the July to September period last year.
  • The Chicago company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off.  "One can quite reasonably infer that's not voluntary," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. Banks have written off record amounts of credit card balances in recent years.
  • But a significant portion of the decrease in card usage reflects decisions by cardholders to stop using credit, Becker said. "They're simply either not purchasing as much or paying down balances."
  • Many of these individuals may have shifted to using debit cards. In the past several years the use of debit cards has grown steadily and now surpasses credit card use in both the number of transactions and dollar volume. Interest rate increases by credit card companies and reduced credit lines have contributed to that trend.

  • Still that doesn't mean consumers are shunning credit altogether. The average card balance stood at $4,964 in the quarter. That represented a slight increase from $4,951 at the end of the second quarter, and the first quarter-over-quarter increase in a more than a year.  Yet it also reflects a 13 percent drop from $5,612 at the end of Sept. 2009.
  • Becker said the balance increase from the second quarter is mostly an indication that consumers are still under stress. Prior to the recession, he said, carrying a credit card balance was more of a lifestyle decision reflecting spending choices. "Now it's out of necessity," he said. "In times of financial distress, nobody wants to carry a balance. Where people can afford to pay things down, they do."

Please keep in mind, one of my thesis are that many of the 7M households not paying their mortgages can easily eliminate all their credit card debt with the newfound 'wealth' they are creating via their 'self stimulus'.  Hence I would assume this is a portion of the reduction in average balances.  Frankly if you have a $1300 mortgage and a $5000 balance, you could get rid of all credit card debt in under half a year - no sweat.

We saw a huge change in behavior during this recession - in the old days people paid the mortgage above all else to keep in their homes.  Now, since so few put a dime into their homes, they have instead treated the credit card as most important as it helps with their cash flow.  The house was in essence a call option for many Americans - if it went up, they cashed in; if it dropped oh well - you walk away.  This is the unintended consequence of a nation where for years you need not put almost anything down, and many states are non recourse if you default

Wednesday, December 1, 2010

More First Day of the Month Effects

I was going to go do the research but much better when someone else does it for me.  While this 1st day of the month effect is much longer term in nature (see post this morning about how good it has been over a 12 year period) we have some more recent data per Marketwatch.

Coming into today since March 2009 (the lows of the market), the market has been up 15 of the 19 first days of the month.  (79%) We can now add today, so that is 16 out of 20 sessions. (80%)

Average gain for that one day is 0.72% (not including today, which will bump that figure up)

If you give me 80% odds that I'll make on average 0.75%ish in 1 session; I'll call you Benjamin Graham on steroids.


How have all the other days of the month done since March 2009?  Up 57% of the days (slightly better than a coin flip), with an average gain of 0.13%

[This data uses the DJIA, not S&P 500]

Conclusion?  You can live a stress free lifestyle by only being exposed to the market from 3:59 PM the last day of the month to 3:59 PM the first day of the month, and capture a great portion of the entire year's returns.... freeing all other days for better pursuits such as supporting the Chinese middle class by going to the mall and shopping, rather than staring at this darn screen all day.


Keeping an Eye on Atheros Communications (ATHR)

People sometimes email asking what you look for in a stock or chart or whatnot.  No simple answer - there are countless patterns or potential special situations to keep an eye out for.  But one simple trend is a long base from which a breakout could occur.  We had one of these in Las Vegas Sands (LVS) a few months ago and the stock took us on a wild and profitable ride.  Below is a chart for Atheros Communications (ATHR) - it is in its 5th week of building a base; generally in the mid $31 to $34.00 area.  It teased this morning by breaking $34 but fell back into its range so a false alarm.  But this is exactly the type of chart... if it breaks out... you want to try your hand in.  For an example we can use ATHR itself - look at the base it build in Aug-Oct 2010.  After a fakeout in late September (aggravating) it finally broke out in late October for real, clearing $28 and it was north of $33 in 2 weeks.  That's nearly 18%.  (granted 18% is three day's work for Netflix, but I'm trying to speak to the 3000 normal stocks in the universe)

Now of course this doesn't always work but playing technicals is all about putting the odds in your favor and probabilities.  If ATHR clears $34 and the market in general is benign at the time, it could have another breakout move ahead.

Long Atheros Communications in fund; no personal position


[Video] CNBC - Want to Invest in Facebook, Groupon, Twitter Before They are Public? Try SecondMarket

An interesting video on CNBC today in regards how one can get in on the action for private companies before they come public or get bought out.  Services like SecondMarket are allowing insiders who receive shares early in a companies life to sell; and hence interested buyers to get in.  Outside of the mechanism there is a lot of interesting discussion about the 'short termism' of our markets and how it is causing some companies to shy away from going public - a pet peeve of mine.  When 70% of the market action each day is based on 1/4000th of a second trades, the original intent of marrying capital with investors to create long term value becomes more or less a moot point.

I did check out the site, and aside from private companies you can invest in a series of other more illiquid sectors; unfortunately there was not a preset list afforded without registration to see what exactly was available.   []

Founded in 2004 and with offices in New York and Palo Alto, SecondMarket is a registered broker-dealer and THE secondary market for illiquid, restricted and alternative investments.

[10 minute video]

[Mar 5, 2010: WSJ - Facebook CEO in No Rush to "Friend" Wall Street]
[Nov 30, 2010: Groupon - From Startup in 2008 to Potential $5-$6 Buyout by Google in 2010]

Bookkeeping: Doubling Down on Ford (F) After Tremendous November Sales of +24%

I've taken some profits on Ford (F) along the way from the initial entry in late October in the mid $14s.  My attentions have been elsewhere but looking at the chart I see after peaking in the mid $17s, the stock has skimmed nicely along its 20 day moving average (where I should have been buying) the past few days.  With the jump off of support today, based on the general market + some good sales data just released, I've doubled down on my existing position size, taking it from 1% exposure to 2%.  An obvious stop out level here is a break of the 20 day moving average, where one can reduce the position size if nothing else.

Today's sales data:
  • Ford Motor followed up with a 24.3% jump to 147,338 vehicles. Ford unit sales have surged 21% so far this year compared with 2009 to easily outpace the broader industry’s growth rate. 
  • Car sales for Ford rose 24.7%, sport utilities gained 13.1% and its trucks surged 34%. 
  • The Dearborn, Mich.-based company also said it plans to build 635,000 vehicles in the first quarter of 2011, up 11% from the prior year.  

General Motors (GM) had a solid month although not as flashy as Ford; but core brands were excellent at over 20%.
  • General Motors's monthly U.S. car sales rose 11.4%. 
  • Excluding the discarded brands, GM’s core four — Chevy, Cadillac, Buick and GMC — saw sales rise 21%.
Long Ford in fund; no personal position

Clear Breakout over S&P 1200 as Lunch Spike Kicks in

After surging to 1200-1201 right from the start of the day, the S&P 500 sat in a tight range for 2 hours, but just experienced a 4 point vertical move (literally) on the chart.  It looks as if 1200 will now be the new floor as the range we've been stuck in for a few weeks appears to be resolved to the upside.  Now I guess we see if we make a move to yearly highs Friday on the 'surprise' better than expected employment data.


Bookkeeping: Sold 25% of Ultra Silver (AGQ)

(please note - I am not normally this good)

Monday I bought a stake in Ultra Silver (AGQ) - today it was up 10% from my entry point, in less than 48 hours.  If you annualize that... errr...

Whatever the case, if I buy something that goes up double digits in less than 2 days, I am compelled to take something off the table so I sold 25%.

I am now reading that overnight the ECB hinted at the nuclear option - that is their own version of quantitative easing as the world is running out of debt buyers willing to buy European sovereign debt, and hence the only solution the world has to globally kick the can down the road is for central bankers to buy government debt and stash it on their balance sheet.  This would have been unheard of in the U.S. or Europe 4 years ago, especially Europe.  But now things are getting so desperate overseas, Trichet is potentially going down the Bernanke path.*

This could explain the resilience of the precious metals....

*please note the ECB has already been buying relatively moderate amounts of bonds in weaker countries, but they have been sterilizing it i.e. not adding to the money supply.  The talk overnight now is they are going to go the full QE route, so this is a whole different animal.  The entire global bond market is completely artificial with central bankers dominating - we continue to live in amazing times.  But for the speculator class this is always 'good news' because artificial prices and moral hazard are 'awesome'.

Long Ultra Silver in fund; no personal position


Bookkeeping: Selling 30% of Acme Packet (APKT)

Acme Packet (APKT) presented at the Credit Suisse Technology Conference yesterday, and whatever they said must have been a doozy (have not had time to listen to a replay); the stock was up 10%+ yesterday.  With the name running another 4% today I am going to lock in profits on 30% of the position and look to buy back on a pullback if and when.

Long Acme Packet in fund; no personal position


Chinese Manufacturing Grows Again, Leading to First Day of the Month Gains in the US Repeatedly

The past year and a half, the first day of the month has usually been an excellent day in U.S. markets as the Chinese Purchasing Manager (PMI) reports come in strong, leading to that overnight S&P futures surge.  Today appears to be another such day, barring some strangeness during the normal session.   Along with Mondays almost always being up, an even better strategy has been to buy the close the last day of the previous month and sell after the first day ramp up.  Indeed this has been an incredible strategy for well over a decade - China or no China [Sep 30, 2010: Amazing Statistic - Over 12 Year Period You Made More Money on 1st Day of Month then All Other Days Combined]

Larger picture it shows how far our world has changed... speculators worldwide now are as interested (and dependent) on Chinese data for their guideposts, over and above U.S. data. Even 5 years ago, this was not the case.

Please note aside from the headline data (there are 2 PMI readings, one private and one government), input prices surged - that is the inflation being created by all the easy money being tossed into the system.  As we've been opining for months the great mystery is who will eat this inflation - someone along the food chain has to, whether producer or consumer.

Via Bloomberg:
  • China’s manufacturing grew at a faster pace for a fourth straight month in November, indicating the economy can withstand higher interest rates as price pressures escalate.  The Purchasing Managers’ Index rose to 55.2 from 54.7 in October, China’s logistics federation said on its website today. That was more than the 54.8 median estimate of 14 economists surveyed by Bloomberg News. A PMI released by HSBC Holdings Plc also jumped.
  • Today’s reports showed input prices surging, reinforcing the case for the central bank to boost borrowing costs again after it lagged behind counterparts from Malaysia to South Korea. 
  • “The risk of a sharp growth deceleration has abated, but all signs are suggesting that inflation may surprise on the upside,” said Tao Dong, a Credit Suisse AG economist in Hong Kong. He called input-price data “alarming.
  • The logistics federation’s PMI showed the strongest reading in seven months, while the measure released by HSBC and Markit Economics was at an eight-month high of 55.3.
  • The Chinese picture of stronger manufacturing and climbing prices was repeated across Asia in reports released today by HSBC and Markit for India, South Korea and Taiwan.
  • In contrast, an Australian measure slid, a report by the Australian Industry Group and PricewaterhouseCoopers showed today. 

More on the surging input prices:
  • The logistics federation’s index of input costs rose to 73.5, the highest level since June 2008. The HSBC report showed that manufacturers increased output prices by the most since data began in 2004.
So what does that mean?  It means input prices are surging as they did during the commodities bubble from late 2007 to mid 2008 (right before the crash in global economic activity).   And China has chosen to not eat all of it, but is passing it along via output prices.

This means retailers who import said goods have to either face pressures in their margins - or attempt to pass along higher prices to consumers.  All "good things" to Ben Bernanke, as he loves his inflation.


Meanwhile back on the Chinese front....
  • McDonald’s Corp., the world’s largest restaurant chain, increased prices in China on Nov. 17 to offset rising costs. Kweichow Moutai Co., China’s biggest liquor maker by market value, may raise prices by as much as 24 percent this month, according to a report by Shenyin & Wanguo Securities Co.
  • In the PMI surveys, purchasing managers cited price gains in agricultural goods, cotton and raw materials including fuel and steel. Spot prices of power-station coal at Qinhuangdao port, a Chinese benchmark, rose to a two-year high this week.
  • Premier Wen Jiabao announced Nov. 17 a package of measures to counter inflation, from the threat of price caps for “daily necessities” to pledges to maintain the food supply by selling state reserves. Chinese futures for commodities including cotton, sugar, rice and natural rubber have climbed to records in the past two months.

The government-backed PMI, released by the Beijing-based China Federation of Logistics and Purchasing and the National Bureau of Statistics, covers more than 820 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics. The HSBC survey covers more than 430 firms.

ADP Employment Reading Bodes Well for Near 200K Official Job Growth Figure Friday

I mentioned Monday it would be a big week of economic data and I expected much of it to surprise to the upside, so despite the technical weakness Monday and Tuesday in the market, I did not want to step in front of the data.   As written Monday

With a rebound in Chinese economic activity and a seasonally stronger part of the year in the consumption driven domestic economy, I expect data to continue to be 'stronger' through early 2011. After the global push to feed the holiday U.S. consumption machine finishes up - along with a spate of seasonal hiring - it will be interesting to see how the economic figures fare post February '11. Even more so if China continues a stronger path of tightening to rein in their inflation issue.

The Chinese came though last night in their purchasing managers index, and the ADP employment print north of 90K bodes well for an upside surprise Friday. 

I suspect the monthly employment estimates will undercount the surge of temporary retail hiring; combined with the nonstop (through recession or not) increase in birth death model adjustments, we could see a surprise Friday to the upside.

ADP comes out the Wednesday before the monthly data and it covers the private sector.  The U.S. government has their own way of guessing the private sector and it includes their estimate of small business creation/destruction (and the jobs associated with that) called the birth death model.  [Jan 27, 2008: Monthly Jobs Report & Birth/Death Model] The spread between the two has lately been in the 70-90K range.  Hence the ADP print of 93K should mean a figure close to 200K Friday, which would beat the consensus of 168K.

whatever ADP comes in at Wednesday we can usually add 60-90K extra (which usually measures nicely with the birth death model) - hence an ADP figure north of 100K means we could see close to 200K jobs added the way the federal government guestimates.

The wild card is (ironically) government jobs, as we are now finally seeing some minor right sizing at the local level to account for the huge drop in local revenues (vs 2006-2007 levels) caused by the housing depression and general economic contraction. 

Technically you cannot just add the birth death figure to the private sector figure (it's not straight addition or subtraction) but for figurative sense we can think of it like this

ADP private sector + federal government finger in the air via birth death = government's version of private sector +/- government work.

In figures

93,000 (ADP) + 110,000 (birth death) - 15,000 (government jobs) = +188,000

Again let me stress that is not how the actual math works, but just a representation of why I think we could get to 200K Friday.


Now of course this leads to the fact that much of the job creation in the US of A the past year and a half has been government's finger in the air guess of birth death adjustments in small business - much of it most likely fanciful modeling rather than reality.  (the government said countless small businesses were creating tens of thousands of jobs even in the darkest days of the Great Recession)  But today in the ADP report we actually saw small business creation of just over 50,000 which is a positive.

Interestingly the market was up huge in premarket based on the Chinese PMI data and reacted very little to the ADP data, even though it points to a surprise upside Friday.  Either way we are now the top end of the S&P 1172-1200 range, and at 10 AM is the ISM Manufacturing report.  Back on Sep 1 we had a monster day in markets based on a combination of Chinese PMI + US ISM upside surprises, so let's see if three months later the 10 AM number can create a repeat event, and push the S&P 500 through 1200.

Tuesday, November 30, 2010

More Fund Updates - (a) Foreign Investors (b) Broker Dealers (c) Commentary on New Site

Just finished up a long conversation to get clarification on multiple issues - some bad news, some good news.

Foreign Investors

My apologies on this one - I was given advice a few years ago the fund could cater to foreign investors.  It appears there are issues with that, although my 3rd party back office team is going to look into the issue to see if there are any long term solutions to allow it.  But for now, unless you are a U.S. citizen living abroad OR a foreign national with a U.S. tax ID living in the states you won't be allowed to invest in the fund.  That's disappointing since I enjoy my foreign readership and it makes up some 20% of current traffic.

Broker Dealers Part I

This is a circus.  The whole landscape has changed and based on discussions today the decision for the 12b-1 has been made for me.  A lot of broker dealers - especially the popular ones - have made wholesale changes on how they approach the business - i.e. a year ago TDAmeritrade, Etrade, and Scottrade were all covered under a blanket agreement and I simply had to pay for transaction costs (i.e. when an investors buys or sells, I pay the commission to these firms).  That's completely out the window now - with many of the changes happening in the past 2-3 months.

(1) Fidelity and Schwab we've discussed the issues - see post earlier today.

(2) Scottrade has abandoned their own platform and now uses Schwab - hence rather than being the low cost option it's part of the syndicate.  So there is no longer a low fee (for the fund) way to get into Scottrade and it might as well be called Schwab for my purposes.

(3) TDAmeritrade apparently saw the success of Fidelity and Schwab and decided it wants in on the action.  A complete change.  While the up front fees are not as high as the other two, they now will be taking a portion of the annual expense ratio for themselves which is a brand new thing.  (A year ago this was not at all part of the discussion)

(4) Etrade: the only one of these majors who still goes under the old system; i.e. the fund only has to reimburse the brokerage for commission costs.

So out of these "top 5", of which 3 were safe havens even 6-9 months ago, now all that is left is a low cost option (on my end) is Etrade.  Considering the heft of TDAmeritrade and Scottrade in terms of pecking order of online brokers - along with Fidelity and Schwab... well as I said above, the 12b-1 issue becomes more clear.  The price to pay to be listed anywhere has risen significantly.

Based on the above, I would encourage investors who are on the fence and have not yet switched money to open a direct account with the fund upon launch if possible - unless you are with Etrade or considering them.  Although the way things are headed, everyone wants in on the action and I bet Etrade goes the same route as everyone else sooner or later.  Ugh.

One other important notice - there is a lag between when the fund is "live" and a review period for each of these brokerages to approve the fund.  (or in theory they can reject the fund)  But generally it is 4-6 weeks of review.  What  does this mean?   Since many of my investors are going to be coming through broker dealers I can request the fund not go live until some period after SEC approval. (I was under the impression the fund was "on" the moment the SEC approved, but that is not true based on clarification received today)  If most of the monies were coming through via direct investments it would not be an issue; but since a lot is coming through brokers it probably will make sense for me to wait about 4 weeks post SEC approval to turn the fund "on".   Another ugh.

Broker Dealers Part 2

These are the brokerages people have asked me about - some of them are Canadian which going back to point one is a moot point at this moment, so I am skipping them.

USAA - yes, upon approval

Interactive Brokers - awaiting response

ThinkorSwim - See Ameritrade

Penson Financial - yes, upon approval

OptionsHouse - trades through Penson Financial

Zecco - trades through Penson Financial

OptionsExpress - appears to be similar structure to Etrade for approval

TradeStation - does not actively solicit mutual funds; only 1% of business

TradeKing - trades through Penson Financial

Vanguard - you guessed it; saw the mad money being made at Schwab and Fidelity and wants in on the action - same problems there.

Bank of America - awaiting response

Barclays - foreign so might be a moot point

Multiple Canadian brokers - at this time, a moot point

Commentary on New Website 

This was the lion's share of today's discussion due to the complications and scarcity of examples.  From 40,000 feet potential exists for commentary but it cannot be on mutual fund website.... instead more of "Mark's site".  Disclosures that this is the writer's personal opinion and not that of mutual fund or advisory firm must be everywhere.  There are many issues over and above that, but in the grand scheme it can be done but at arm's length from mutual fund.... and very carefully.

Direct Accounts

One other issue that came up recently and in the discussion.  We won't have the technological capability to open a direct account online in the near future but a "to do" list item.  Further with new regulations any IRA Rollovers or the like need to have signature guarantees so the online option is moot to some degree for retirement accounts due to the changing rules.  But for regular accounts it was a possibility and an option I would have liked to have but not something the 3rd party back office will offer in the near term.  

You will be able to download applications, prospectus, rollover forms and the like in pdf files from the fund website (and then mail the documents in) or if you prefer call shareholder services for the old fashioned method to receive the documents (snail mail).



Well so far an identical day to yesterday thus far.... I was wrong on the chances of the 2 days being the same.

Debating a 12b-1 Fee to Help Defray Costs of Fidelity and Schwab Supermarket Listing

I am debating a 12b-1 fee to help defray the costs required to be listed on the Fidelity and Schwab supermarkets.  Initially I was against the idea of a 12b-1 fee as I thought of it solely as an expense item charged to investors for advertising, which I felt should not be a cost borne on investors. 

Per the SEC
  • This category identifies so-called "12b-1 fees," which are fees paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses.  "12b-1 fees" get their name from the SEC rule that authorizes a fund to pay them. 
  • "Distribution fees" include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.
  • The SEC does not limit the size of 12b-1 fees that funds may pay. But under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year.  

However after further investigation it seems many funds are using it for the other reason - "compensating brokers.... who sell fund shares." 

Specific to most funds (and myself) is the Russian mafia known as the Fidelity and Schwab fund supermarkets.  Like Ebay they own the marketplace - you have to go to Ebay to sell stuff since that is where the buyers are.  Same for a mutual fund - tons of investors now reside on their supermarkets... I get emails each week asking why I am not listing there.  In many funds 80%ish of their asset flows come from those supermarkets - especially if you are a no load and not the type of fund family huge enough to be in 401k plans.

These 2 firms charge an arm and a leg (and parts of the torso) - essentially for every dollar invested via their supermarket they take 0.4% of the expense ratio for themselves.  Aside from Paypal this could be the best business model in the world.  So as a small stand alone fund I was resigned to the fact I could not get on the platforms until I was much larger since I can't afford to give away such a huge portion of my revenue.   But that's where the 12b-1 fee can help - potentially.  While in theory it can go up to 0.75% that's an outrageous level, and most 12b-1 fees seem to be 0.25%.  Hence you can use the 12b-1 to help defray the costs to the Russian mafia and then be responsible for 0.15% (rather than the full 0.4%) out of pocket.

So at this time I am doing more research on the 'up front costs' (aside from the ongoing 0.4% theft fee, there is also an 'up front' shakedown from both Fidelity and Schwab just to be listed on their networks).  Then I have to figure out what it takes to be a NTF (no transfer fee) fund versus not.

There is an excellent piece from 2004 at Forbes if interested in the topic...


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