Monday, December 13, 2010

Top IPO Performances of 2010

Please note this data is (a) not inclusive of performance today and (b) not representative of what most retail investors (or small institutions) could receive.  It reflects the IPO price i.e. the price the big boys get in the pre public pricing... by the time some of these open up 30-40% at a price retail can get in, the majority of the move is already over.  (i.e. YOKU priced for institutions at $12.80 rather than the mid $20s print it opened at for the retail crowd - i.e. 100% gain for the big boy institutions aka "smart money") That said, it's a good list to scour over to see if there are any hidden jewels that were priced poorly, or came to market during a lull and hence did not receive the fanfare.

[click to enlarge]

hat tip Bespoke blog.

NYT: Even Daytrading is Slowly Being Outsourced

Hmmm... here I thought this would be one of the jobs that the former middle class could hold on to, but I suppose hiring a daytrader in China for 1/10th the cost errr free does make sense.  It probably also helps to explain the voracious appetite (at any price) for some of these Chinese IPOs.

So as the futures landscape emerges, Indians will do the investment banking analysis [Aug 15, 2008: NYT - Cost Cutting in New York, but a Boom in India], the Chinese will do the trading, and U.S. will do the shopping at the malls.  We truly are the chosen people.

Via NYT:
  • Before the opening bell sounded on the New York Stock Exchange on a recent Tuesday, a group of fresh college graduates clocked in at a small trading firm on the outskirts of this capital city (Beijing). They were hired to engage in rapid-fire stock trading with some of the world’s most powerful investment houses in New York, London and Tokyo, and they were instructed to be alert. “The market could be volatile today,” King Chan, the general manager at the firm, Lazer Trade, shouted to the group during a pep talk. “Be careful at the open. And don’t take dumb risks!”
  • Mr. Chan’s day trading shop is one of many that have sprung up in and around China’s major cities in recent years. Trading firms based in the United States and Canada are recruiting inexpensive workers in China and teaching them to engage in speculative trading — which means repeatedly buying and selling shares listed on the New York Stock Exchange and Nasdaq, hoping for quick profits.
  • By some industry estimates, as many as 10,000 people in China are doing speculative day trading of American stocks — mostly aggressive young men working the wee hours here, from 9:30 p.m. to 4 a.m., often trading tens of thousands of shares a day.  “Trading groups have exploded into China,” says Stephen Ehrlich, chief executive at Lightspeed Financial, a New York company that sells trading software to firms operating in China.
  • China prohibits its citizens from using Chinese currency to buy or sell shares of companies listed on foreign stock exchanges, though there appears to be no prohibition against trading stocks for an account owned by a foreign entity.  That legal gray area has enticed several American and Canadian trading firms to set up shop here, at least partly to cater to wealthy clients seeking more diverse investment options.
  • Securities experts are puzzled by the operations. They question how the firms can profit by using inexperienced traders. They also wonder aloud whether the use of traders in China violates American and Canadian securities laws.  “This is a jurisdictional mess for the U.S. regulators,” says Thomas J. Rice, an expert in securities law at Baker & McKenzie. “Are these Chinese traders essentially acting as brokers? If they are they would need to be registered in the U.S.”
  • Officials at the Securities and Exchange Commission and their counterparts in Canada and China declined to comment when asked about the growth of day trading in China.  (one wonders if this story was the first time they were even aware of it)  The New York Stock Exchange and Nasdaq also declined to comment.  (the exchanges love ANYTHING that creates volume)

  • Some of these firms say they can profit from trading operations in China through a combination of cheap overhead, rebates and other financial incentives from the major stock exchanges, and pent-up demand for broader investment options among China’s elite.  (this is like the poor man's High Frequency Ttrading - while HAL9000 can create billions of transactions to receive those rebates from the exchanges, the other option is to employ cheap labor overseas to do the same thing... of course they cannot do it in 1/4000th of a second)
  • Most of the firms say they put up their own capital or capital from private investors in the United States or Canada to open an affiliated trading shop in China. They hire young Chinese to trade for them — often with no standard salary but a promise to share in any profits.
  • Peter Beck, a founder of Swift Trade, a Canadian firm with about 1,500 traders in China, said his operation was thriving and that the firm got a share of the trading profits.  “Our clients — they open an office, give us the money and then hire people to trade for them. That’s our structure,” he said in a telephone interview.
  • One of those risk-takers is Mr. Chan, a 25-year-old American citizen who says he left a job at JPMorgan in the United States last year to invest and manage Lazer Trade.  Some 200 people have applied for jobs at the company in the last two months alone, Mr. Chan said. Turnover is high, with workers typically moving on after four or five months. Very few stay for more than a year.
  • At a Beijing affiliate of Title Trading, the manager — who asked not to be named because he worries about the chances of finding another job if his operation fails — said he moved here from Canada because of the advantages of operating a trading desk with Chinese who were willing to start trading for little or no salary. “Before, when a trader could earn $4,000 to $5,000 a month, Canadians wanted to do it,” he said. “But if it’s $1,000 they won’t. So it’s like anything else: outsource to China.”  (darn overpriced Canadians - demanding a salary? Outrageous)
  • College graduates typically earn $300 to $400 a month in China, but labor experts here say that as the job market for white-collar workers has weakened, more of them have been willing to take their chances in jobs with no guaranteed pay but with opportunities to share in profits.
Like many fields, we see too much global labor chasing too little work - hence, prices for labor will fall in anything that can be easily outsourced.  Just another small example.

  • For their part, the trading firms say they have unique trading strategies that give them an advantage. Some say they use sophisticated risk management software that can, for example, interrupt trades after a series of losses to prevent large losses in a single day. But they concede that losses can mushroom.
  • Still, the growth of trading here suggests someone is making money — and many trading houses say they are generating huge trading volume. Mr. Chan at Lazer Trade, for instance, says his branch office, with about 20 employees, trades up to five million shares a day.  (indeed, human HFT)

How do these Chinese traders train? Online gaming of course:
  • Although many traders say they earn less than $200 a month, (take that overpriced Canadians) ......and say they prepared for the business by playing online games.  “Day trading is like a battlefield,” says Qu Zheng, 24, who has been trading for over two years and typically trades a million shares a day at Lazer Trade’s office in Beijing.

Careful about that Youku (YOKU) on your Shoe

Last week's sensation Youku (YOKU) continues to spiral back down to earth... it is now down $17 from its $50 Friday morning peak aka 34%.   That's pretty impressive work for about 1 "market day".

My "bashing" commentary last week inspired Yahoo Finance type of messages ("loser!" "idiot!" "you know nothing!") from the true believers on Seeking Alpha.... Youku doesn't have a message board yet on Yahoo Finance, so they don't have their normal spot to spend 8 hours a day swearing at each other in a display of 3rd grade testosterone.  Only in the stock market world is stating facts such as YOKU peaked at 100x sales at $50 ($5B market cap), whereas Groupon received a bid for 11-12x sales from Google ($6B market cap) that was booed by the Google investor base as too pricey considered 'bashing'.  Rather than yell at me, it would have been wise to take profits at the ridiculous prices seen Friday.  For all I know the stock goes up 20% tomorrow or down by that much - it will have nothing to do with a sensible valuation.

For a "Groupon-like" valuation of 12ish x sales [we have to use sales multiples since this is a money losing operation] we'd be giving Youku today a $600 million market cap.  Granted I don't expect the stock to ever get there - it would be a $6 stock, and the investment bankers who brought it public have a big incentive to support the price, but assuming Youku doubles sales annually the next 3 years we have

$50M in 2010
$100M in 2011
$200M in 2012
$400M in 2013 (revenues would still be smaller than Groupon has right now)

$400M in sales in 2013 x a 12 time price to sales = $4.8B market cap aka $48ish.  Otherwise known as the price last Friday.   (Groupon has $500M sales today per all accounts)

So yes Youku can "grow" into its valuation someday, but if you pay $33 today you would be waiting almost 2.5 years (mid 2013 revenue of roughly $300M assuming Youku never slows down sales and can grow 100% annum) simply to get to a value similar to what Groupon just received.  (and Youku does have competition)  I realize the 2 companies are in totally different arenas, and in different countries - just commenting on general nosebleed valuations in Internet bubble 2.0 as Ben tries to mimic Alan's Y2K game plan.  Again, none of this means the stock won't jump 20% tomorrow but it will be due to "I can find a new sucker tomorrow" theory - not reality.  For all those that point to (BIDU) as a roadmap for - after its IPO spike, Baidu did nothing for a year (actually for 5 quarters from mid 2005 to late 2006) as it 'grew' into the valuation. And the market opportunity for Baidu is far greater.... what is worth more?  Google's business or YouTube/Netflix/Hulu (or whatever magic combination you want to claim Youku is... or could be in theory)

p.s. How many DVDs has Youku mailed out to customers?  Zero?  Oops that is bashing... just remember, if you can't justify a valuation find another company Youku could be like... Netflix it is!

No position

Merrill Lynch: Ford (F) is Headed to $24

I've been a proponent of the auto industry for a good part of 2010 (although I missed the boat in latter 2009 and early 2010) once sales rebounded north of the 11.25M+ annual levels.  As I've said many times analysts and normal folk simply did not realize how much cost (read: jobs, lower benefits, wage concessions, plant closings) have been taken out of the system.  I'm starting to see recognition of this only in the past 2 months.

General Motors (GM) and Chrysler are their own specific situations as they had huge debt restructurings (major bonus go forward), and apparently the government (which was supposed to be in a position of power when negotiating) gave GM the Christmas gift of $45-$50 BILLION of profits tax free go forward.  Boggling.  Ford (F) does not have that benefit but has the advantage of a proven management team, and the current superstar in the space in management Alan Mulally.  But this trend is bigger than any one man - the cost structure in both the U.S. majors and the supplier base has been completely overhauled to make the entire auto industry profitable at 11-12M annual sales in the U.S. versus 15M+.  There are risks go forward in material costs (commodities) and at some point in the future the labor base is going to be in unrest seeing huge gains in the 'stockholder' and 'management' class largely due to their givebacks (which actually is a great parallel to much of the U.S. economy - especially in the public multinational corporations) but we remain in a window of good times.   [Jul 27, 2010: NYT - Industries Find Surging Profits in Deeper Cuts [Oct 20, 2009: WSJ - Slump Prods Firms to to Seek New Compact with Workers]

U.S. sales are running a bit higher than 12M+ right now in the U.S.; with any form of recovery combined with constant government handouts (on both the tax and expenditure) sides this might get to 13M+ in 2011; where profits would see another leg up - assuming commodity costs don't explode higher.  Of course I am only commenting on the domestic side of business; many of these firms have exposure to the hottest economies on Earth in emerging markets as well.

Merrill Lynch was out with a note late last week offering why Ford (F) will be headed to $24... a near 50% gain from here.  They appear to think the U.S. economy is *really* back with a call for 15M in sales in 2011.  Wow.  If the industry does 15M, I think $24 would be conservative.... and frankly you could throw a dart at any stock in the sector and make mad money.

Via Notable Calls:

- Ford (NYSE:F) target is raised to a new Street high of $24 (prev. $20)

  • Sales are recovering, now with two consecutive months of a SAAR of 12.3mm, a run-rate 1mm units above the Jan-Sep ’10 SAAR of 11.3mm. Merrill believes this recent acceleration in the sales pace is supportive of their above-consensus 2011 US sales forecast of 15mm units as light vehicle demand continues to recover. 
  • Meanwhile, inventory remains lean, and there appears to be price discipline among the OEMs, as industry average incentives are about $175 less per vehicle than peak 2009 levels. While the industry has been slowly recovering in volume and pricing, auto companies have been posting near record margins with volume levels that are still only just up from the trough. Therefore the firm is confident that further operating leverage can be achieved during the recovery in the cycle and that most stocks in the auto value chain remain undervalued by the market.

As Ford (NYSE:F) has been the recent poster boy of the Auto industry, here are the details:

  • Merrill is raising their Ford EPS estimates in 4Q10e from $0.45 to $0.48, in 2011 from $2.25 to $2.40, and in 2012 from $2.40 to $2.55. They are also increasing their price objective from $20 to $24, which is based on a P/E of 10X our 2011e. In their view, Ford’s stock should continue to outperform for a number of reasons, including, strong management, solid operating results, a consistently improving balance sheet, industry-leading product, and recovery in the U.S. sales cycle.

Solid results should continue
  • Ford’s financial performance over the past year has been impressive, with LTM EPS of $2.05 and automotive cash flow generation of ~$6.5bn. Merrill expects the company to continue generating solid pre-tax profits in North America and in Ford Motor Credit, and stable/improving international performances to bolster results.

Balance sheet getting stronger each quarter
  • Ford has made meaningful progress in shoring up its balance sheet, and they expect further improvement ahead. Merrill's current estimates imply that Ford will be comfortably net cash positive in 2011 and FMCC remains significantly over capitalized, which should drive higher value for shareholders.

Product sweet spot and common platform leverage ahead
  • Merrill believes Ford is entering the sweet spot of its product cadence in MY11-MY14 (please see Car Wars 2011-2014 for further detail). They are forecasting an annual U.S. replacement rate of ~30% for Ford during this timeframe, and expect greater use of common platforms/parts to drive significantly lower engineering costs.

Solid leadership at the top
  • It is difficult to measure the short-term success of a management team in the automotive industry, as so much is dependant upon the economic cycle. However, we believe Alan Mulally has led Ford through what is likely the worst of the downturn, and has positioned the company for success as volumes recover.

 [Jun 16, 2010: What to Expect from a General Motors IPO]

No position

HSBC Global: Vietnam Insights

A massive piece of research by global banking giant HSBC on the compelling investment story of Vietnam; a market that should be on everyone's radar in the decade ahead.  (huge pdf file with graphs galore)

You usually get one of two responses when you talk about Vietnam’s stock market.
Either investors are interested but don’t know where to start because of
limited transparency. Or they are not interested because of the low turnover.

But things are changing. Vietnam presents an exciting opportunity in 2011.
The National Party Congress in January 2011 could be the short-term catalyst
while accelerating privatisation and ongoing market reform should provide
multi-year support that lifts liquidity by luring back foreign investors.

We understand investors may be sceptical as these catalysts have failed to trigger a
sustainable rally in the past. We explain in this report why it is different this time.

5 key catalysts:
  1. Economy Set to Outperform
  2. Market Reforms Gaining Traction
  3. Privatization to Accelerate
  4. Party Congress a Near Term Catalyst
  5. Valuations Seem Reasonable

I don't follow the country close enough at this time, so I am not sure what exactly is going on with their stock market, but it has surged in December; after basing all year the Vietnam ETF is up nearly 20% month to date!  If this was a stock you scream breakout...

Hat tip James Altucher via WSJ

[Apr 7, 2010: Vietnam Begins to Lure Business Away from China]
[Dec 29, 2009: NYT - Vietnam is Refining its Role on the Global Stage]

[Video] CNBC - David Walker is Fired Up

I don't know how David Walker keeps going.  I've been following this son of a gun for about a decade and while spreading the same gospel - first within the government itself as comptroller, then in the Peterson Foundation, and now in a new organization - he has been talking to the wind.  Not sure how he doesn't bash his head into the wall each evening.  Anyhow, Mr. Walker returned to CNBC this morning and was particularly fired up, speaking similar songs to what this writer has said - only in America can you have a deficit commission on a Friday and then a plan to spent $900B the following Monday.   I wrote my "Week Ahead" piece independent of this interview, but apparently have been spending far too much time listening to Walker since we both used the credit card analogy.

I did not watch the Sunday morning political shows (I prefer to keep my breakfast down most weeks) - but apparently the mantra by the "fiscal conservatives" is rather than make any decisions that will actually cost them a vote, we will fall back to the easy ethereal solution: "growth will take care of our debts".  Since that policy worked so well in the '00s.....

In fact per Moody's (hat tip ZeroHedge)

From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years.

Higher economic growth should have a positive effect on government revenues and reduce payments related to unemployment. However, the magnitude of this positive effect will be considerably less than the foregone revenue and increased benefit expenditure, resulting in substantially higher budget deficits than would have otherwise been the case.

But but but.... we're going to grow our way out of the problem Moody's! 

Of course there is the elephant in the room... we've kicked the can 2 more years and you can be SURE in 2012 we'll either say "we can't stop these expenditures or increase taxes because it will threaten the recovery and/or worsen the slowdown....."   I can already write the talking points.

In addition, there is a risk that the two-year extension may be renewed at the end of 2012, given that that period coincides with a presidential election.

Somehow I expect I'll be posting the same Walker videos in 2015.

7 minutes

[Jun 10, 2010: My Choices for President and Secretary of Treasury in 2012 or 2016]
[Mar 31, 2010: David Walker - U.S. Standard of Living Unsustainable Without Drastic Action]
[Jan 6, 2010: David Walker CNBC January 2010 Video]
[Aug 7, 2008: I.O.U.S.A. Movie Trailer
[May 23, 2008: David Walker on CNBC this Morning]
[Nov 23, 2008: David Walker in Fortune Magazine]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

The Week Ahead

All systems go as the global Ben Bernanke put continues to put the Greenspan put to shame.  After threatening to break some key supports in late November, the market has been back on the one way ride it enjoyed in September and October.  A wonderful illustration is the NASDAQ which has yet to suffer a negative session in December.   The S&P 500 has had 1 negative session, to the tune of roughly 0.2%, as have the small caps.

We've had "double top" breakouts in all 3 of these indexes, led by the small caps first - then NASDAQ - and finally the S&P 500.   This is a pattern you want to be buying, but one has to consider the fact that normal markets do go up and down, so going out on a limb I'll say the NASDAQ has a negative day one day this week!

Many short term sentiment readings are back to extreme levels just 2 weeks after being somewhat oversold, as Europe is an afterthought and Congress is ready to "buy more GDP" - pushing through a stimulus (don't call it that, Fox News would get upset) program that actually is going to be larger than the original early 2009 Obama stimulus.  Watching 60 Minutes last night I finally figures out the GOP way of thinking on why it is ok to slap on another $1T (surely the figure once all the pet projects are slapped on the Christmas tree) to the national debt:  "We don't have a revenue problem in Washington D.C., we have a spending problem."  Aha.  I'd argue we have problems in both arenas.  Last I checked if you reduced taxes you would need to reduce spending (rather than increasing it) just to keep the deficit flat, - but what do I know?  (Mark you idiot - don't you understand the multiplier effect!  Were you not around for the huge growth and non jobless recovery of the 2000s where low taxes led to massive economic growth.  It's right here in my textbook - trickle on baby!) We're back to the mantra of "we'll just grow our way out of the mess".  Either way, 2011 and 2012 are going to be 2 more steroid full years of data points that reflect little of the underlying organic economy; at which point we can prepare for the stimulus plan of 2013-2014.   But in markets where long term is 'tomorrow' those are issues for another generation.  As long as we keep shuffling a few trillion into the economy, banking system et al every 2 years, it's all good from a speculator standpoint.  The national 'Uncle Sam credit card as fiscal policy' plan is fantastico.

The 10 year bond continues to do some interesting things - again, this can be due to any combo of (a) improving economic prospects (b) heightened inflation pressures and/or (c) compensation for the risk involved in a country that has no credible plan to ever paying back its creditors - exclusive of devaluing its currency and making the debt easier to service.  Part of this might simply be a normalization to mean as the latest European crisis led to capital fleeing to a 'safer' asset the past few months; along with the QE2 anticipation.  This type of run in such a short period of time is quite intense, so let us see if it stalls out soon or continues at pace.  Whatever the case, yields are moving opposite to what Ben directed from his perch at central command.

Bigger picture, in a country now dependent on easy money from every pore - the 10 year rising (if it continues) will soon put pressure on housing prices as ultra low mortgage rates have been supporting stagnant house values.  At 5% thirty year mortgages, you are freezing out those who could get into the market at 4.3% - and for those who can purchase homes, you can afford a bit less house with the same payment term.   Oil is also a potential issue as it feeds into gasoline prices, but the 2% payroll tax holiday is a backdoor way to offset the gasoline price increases - the extra $20-30 a week the average family gets under this plan should dovetail nicely with the price increases at the pump and the grocery store.  In reality this is a tread water solution - cause inflation to kick in on one end, but hand the people money to offset it.  It works as long as you can continue to hand people money in unending fashion.  Considering almost $20 of every $100 a typical American brings home is now a blessing from government... again, I am sure it all works out well in the end.    [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]   

Chinese inflation came in hot at 5.1%* Friday night, but there was no interest rate hike signaled.  Doctor copper continues to surge, as JPMorgan apparently has cornered the LME inventories in London (following Goldman Sachs in doing "God's work").  Other than missing Lehman Brothers, Fannie & Freddie being wards of the state, and Europe bailing itself out every 6 months, it almost feels like it is 2007 again.  Not a worry in a world - Ben Bernanke will fix everything....same talk as October 2007.

*official 5.1% probably means 8-12%

Speaking of which we have a Fed meeting this week (1 day affair) but other than the meetings where Ben pledges to do more QE, these have become non events.  Ultra easy money forever and ever, and the rest is just details.

On the economic front, after last week when the reports were snoozers, there might be a few interesting items that could actually move the market, and heck even induce a selloff for more than 8 minutes.

Tuesday: Producer Price Index - this is inflation at the wholesale level: expectation 0.7% but if you exclude food and energy (which no one uses) it is 0.3%. (8:30 AM).  Retail sales - expectation 0.7%, I'd expect something closer to 1% due to deep discounting, 7M households with much more money since they don't pay the mortgage, et al. (8:30 AM)  FOMC Announcement (2:15 PM )

Wednesday: Consumer Price Index - this is inflation at the consumer level: expectation 0.2%, excluding food and energy 0.1%.  Remember, if you move down from eating NY Steak to ribeye or from turkey breast to spam, in American government calculation that is deflation.  Along with a host of other ways to keep this figure from ever reflecting reality.  Therefore, if the figure ever does rise by 0.4 to 0.5% you know real inflation is really surging.  (8:30 AM)  Empire State Mfg Survey (8:30 AM).  Industrial Production - expectation 0.3% with 75.1% industrial utilization.  Housing Market Index (10 AM).

Thursday: Housing Starts - this figure plunged by 11%+ last month so we can celebrate when they return to a more normal pace this month and scream 'housing recovery'... of course no one will mention the previous month. (8:30 AM)  Weekly Jobless claims - expectation 420K (8:30 AM).  Philly Fed (10 AM).

Sunday, December 12, 2010

[Video] 60 Minutes - Brazil; the World's Next Economic Superpower?

A nice starter piece for those who are not familiar with the Brazilian story - with a fair share of progress, opportunities, and challenges.  After a tremendous 2009, the Brazilian market has essentially been flat in 2010; creating potential for some upside in 2011 - if the moves to contain inflation by raising rates don't cause too many dislocations.

13 minute video

For decades, the joke about Brazil has been that it's the country of the future - and always will be. Despite enormous natural resources, it has long displayed an uncanny ability to squander its vast potential. Now it's beginning to look like Brazil may have the last laugh.

Correspondent Steve Kroft reported, while most of the world is consumed with debt and unemployment, Brazil is trying to figure out how to manage an economic boom. It was the last country to enter the Great Recession, the first to leave it - and is poised to overtake France and Britain as the world's fifth-largest economy.

[Aug 9, 2010:  CNNMoney - Is the Party About to End in Brazil?]
[July 14, 2010: Rio Gains on Sao Paolo]
[Jun 9, 2010: Brazil GDP Grows at "China Like" 9% in First Quarter]
[May 21, 2010: The Economist - Brazil: Too Much Government Spending?] 
[Oct 20, 2009: Ben Bernanke's Money Printing Parade Forces Brazil to Slap a Tax on Outside Investors]
[Oct 27, 2009: Goldman Sachs - "Hazardous" to Underweight Brazil]
[Sep 23, 2009: Brazil's Credit Rating Raised to Investment Grade]
[Aug 11, 2009: BW - Brazil's Coming Rebound]
[May 16, 2008: Brazil is Sexy]

Friday, December 10, 2010

2010 Fund Performance Period 12, and Final Wrapup

I don't have time to do a full overview as I normally do of period 12, so I'm doing a slim version for the last wrapup of 2010 performance.  All historical data (including major trades) is found on the website in the right column under archive so if curious on the week by week transactions that I normally break out itemized in this report, please go there.

If interested in the future mutual fund, please see Fund FAQ/Pledge tab on the website for details and progress report.


Total Portfolio Value, as maintained by 3rd party has been maintained at the past 2 years. (starting value $1,000,000 or $10.00 NAV)

I have posted an update of performance versus the Russell 1000 every 4 weeks; we moved to a new tracking system in 2009 ( as the old tracking system used from summer 2007 to fall 2008 would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence while the website and portfolio began in August 2007, we "began anew" in terms of performance with portfolio "B" as of early 2009. Detailed history on latter 2007 thru fall 2008, as well as 2009, [Jan 7, 2010: 2009 Final Performance Metrics] can be found on Performance/Portfolio tab.

For 2010 our twelfth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

Period 12 was a good period for the fund, but tough for the market until an enormous run in the last week, as stocks surged on the first day of December and ran hard for 3 days straight to finish flattish for the period. Our outperformance versus Russell 1000 was substantial up to that 3 day period (I believe the market rallied some 3%+), but still ended very good.  After a straight up run from late August to early November the market actually fell for a few weeks during period 12, allowing our cash position and hedging to actually create some distance from the indexes. 

For the twelfth "four week" period of 2010 the fund returned +4.3%, versus the market's +0.3%, so an outperformance of +4.0%.

On a cumulative basis in 2010 the fund return was +69.6%, versus the Russell 1000's +10.9%, so an outperformance of +58.7% for the year to date. (48 weeks)

Period 12 was a period of absolute outperformance (making money) and relative outperformance (beat the market). The yearly goal of beating the index by 15% was successful.

As noted. all positions were closed as of December 3rd to focus on work necessary to launch mutual fund in first quarter 2011.


*** Long/Short Fund Discussion below

Portfolio Overview:  See archive on far right of website for week by week discussion of this period.

History of 2010 and 2009 below

[Nov 11, 2010: Fund Performance Period 11]
[Oct 14, 2010: Fund Performance Period 10]
[Sep 16, 2010: Fund Performance Period 9]
[Aug 18, 2010: 2010 Fund Performance Period 8]
[Jul 20, 2010: 2010 Fund Performance Period 7]
[Jun 24, 2010: 2010 Fund Performance Period 6]
[May 26, 2010: 2010 Fund Performance Period 5]
[Apr 28, 2010: 2010 Fund Performance Period 4]
[Apr 1, 2010: 2010 Fund Performance Period 3]
[Mar 2, 2010: 2010 Fund Performance Period 2]
[Feb 2, 2010: 2010 Fund Performance Period 1]
[Jan 7, 2010: 2009 Fund Performance - Final Edition]


Yearly Overview

Overall, this was the best year I believe I've had adjusted for risk.  I did better in 1999 but I was a stupid investor then who put my marbles on risky things, bought every dip, and had zero discipline. I had no system - everyone was getting rich in 1999.  We threw darts - and everyone was a genius. Until 2000. Many lessons were learned, and real strategies developed and employed on a personal level post 2002.  In 2009 the fund portfolio had a better return than in 2010 but I had some bad periods of negative returns when I was fighting the Fed in spring 2009.  Hence some substantial losses were incurred before rebounding later in the year.  So considering drawdowns, it was a weaker year in relation to the much smoother 2010.

While I am happy at the outperformance versus my index (the Russell 1000) in 2010, the fact no 4 week period ended in a negative return was truly the best attribute of the year as a risk manager.  The fund strategy I am using should provide outperformance in down markets and potentially sideway markets, but sometimes lag in up markets.  Overall, I think we followed true to this as I lagged during some of the 'straight up' moves this stock market exhibited in 2010.  But by preserving capital during downturns we were able to keep the NAV near highs all year, and hence required less risk taking during the good times to 'keep up with the Joneses'.

In retrospect my caution on the economy and all the interventions by federal government and Federal Reserve in every arm of the economy and markets was a deterrent.  I was too cautious overall and returns should have been even better if I believed the lengths that the government and Fed would take to avoid reality and kick the ever growing imbalances down the road.  This will create even more pain down the road, but it is a lesson to learn for future crisis periods.  Desperate officials will do anything to create upside.

Specific to the portfolio, stock selection for 2010 was excellent - we had many of the top performing stocks in our portfolio on and off all year - indeed of the 50 best performers in my entire universe, we participated in 8 - that's 16%.  [Oct 28, 2010: 50 Best Performing Stocks Year to Date] Considering my stock universe is roughly 2000 stocks, have 8 of the top 50 for substantial periods of time is a home run.   I could not be happier on stock selection.  However, many of these positions were culled too early or sold out of the portfolio, whereas a 'buy and forget' strategy would have served better in 2010.

In a real world environment the 69.6% return for the year is reduced by 2%ish for expense ratio, and then maybe 1-2% for performance drag/friction dealing with actual equities (i.e. inability to find a stock to short, or moving the stock price slightly on a less liquid name).  That said, I focus on the $500M to $25B market cap range with stocks that trade at minimum 200,000 a day so as a $10M, or $50M fund performance drag should be very minimal.    To make it simple I'll call it a 65% year.

As always past performance has nothing to do with future results... but I'm pleased with past performance all things considered.  People have been able to follow along and see my daily moves day by day, week by week, month by month, year by year in an open and transparent format for 3.5 years.  Hopefully similar success is enjoyed in the years to come.

Update on Broker Dealers for Future Investors

Preface - as noted this weekend, I will be using the 'Fund FAQ/Pledge' tab at the top of this page as a place to update developments as they occur in the coming month or two.  Therefore, if you are not a daily reader but an already committed or potential investor, you can jump there to see the latest progress at any time.

At the end of November I posted an update on a host of broker dealers investors were wishing to invest with and explained the situation and cost structure in dealing with many of these names. [Nov 30, 2010: More Fund Updates - Foreign Investors, Broker Dealers, Commentary on New Site, Direct Accounts]  In the time since, I've done an email survey with with a group of about 60-70 investors to get a sense of how the original batch of money will be coming in.... and during that time we've received more info from some of the brokers we were waiting on. Some updates on the brokerage situation below but first, a few related topics.

Once the SEC approves the fund, I can choose to turn it "live" at a later date.  Since I am balancing people who will be investing direct via stand alone accounts with the mutual fund, and those who will be buying via brokerage I want the two time frames to cross as close as possible.  Generally I have been told an approval on a brokerage platform will take 4-6 weeks, so my current thinking is to turn "on" the fund about 3-4 weeks after SEC approval.  At that point the direct accounts can be opened immediately and all approvals by the brokers should be in the 6th inning or later.

Based on the survey I did with a moderate sampling size (I captured about 15% of the 450 or so pledges), about half will be creating direct accounts with the mutual fund, and half coming through a brokerage.  I expect that to be atypical of the longer term trend (which I assume will be much more heavy on the brokerage side) but this mix that is more heavy to direct investments helps on our end in terms of not having to give away as much of the fund's expense ratio to the brokerages.  If new to that topic see [Debating a 12b-1 Fee]

Specific to the 12b-1 fee, I will be going with a .25% rate to compensate for the changing nature of the market.  However, that is a stated fee and need not be the actual fee, which can be lower (which I'd be very happy about).   How so?  Without getting deep into the making of sausage, every quarter the fund will accrue the 25 basis points (which can only be used for very specific items such as paying off the "mafia" fees to the brokers) but if they are not all needed they sit in a sidepocket until the next quarter, and the 12b-1 fee corresponds with the actual need that quarter.

Perhaps a little difficult to understand without numbers behind it, but to use the most simple of examples let us say we start with an empty mutual fund, and then during the first quarter of life half the accounts are direct with the mutual fund (which require no 12b-1 fees) and half open with a brokerage which require exactly 0.25% to list on that broker.  So the average of the two is a 0.125% rate.  That is all that would actually be needed and charged; the rest accrues for a future quarter, when it would be needed.   So this is a net positive in the early going as we'll have substantial direct accounts (and Etrade accounts), but again my inclination is over the long run 75-80% (I am guessing) of monies will be coming via accounts in brokerages, hence the 12b-1 will kick in closer to its maximum over time.  Long story short, the lower this number the best for all of us since it's basically the fee we pay so no one visits our laundromat and knocks out some windows at night... if you know what I mean.


On to the broker dealer situation.  I have a lot of "one offs" people requested (a broker 1 or 2 people asked about), which I either addressed in the piece at the end of November, or I emailed back specifically to that 1 person the situation.  A few still sit outstanding such as Bank of America which the group working on this for me has not heard back from - but I want to focus on the 'mainstream' names.

To review, for many months I told everyone we'd list at Scottrade, Ameritrade, or Etrade as the fees were low there ... and we would not list at Fidelity or Schwab due to the fee structure to be in their supermarkets.  I set my overall budget that way as well, assuming I I'd have nominal up front costs on the broker side and could devote monies for many other things - such as opening in a large amount of states.  At the time Interactive Brokers and Vanguard were not on my radar, but those are larger broker / supermarkets quite a few people have inquired about.   Unfortunately, my long held guidance was inaccurate and the landscape has changed substantially in 2010 (and continues to seemingly monthly).   Hence the costs also change (both up front and ongoing), so based on what makes sense economically along with pragmatically what makes sense in terms of future investors, is the path I am using.  Let me make clear this point, I have to submit an application for approval on any of these platforms and while the fund should be approved, there is no guarantee - any or all could (in theory) reject the application, but assuming all say yes this is my framework:

(easy color code - green yes, red no, purple TBD)

(1) Etrade - no change from November update, confirmed there have been no changes and remains the only 'low cost' provider requiring no up front entrance fee or taking away of expense ratio.  Only commissions must be reimbursed by fund.  How long this lasts I don't know, but hopefully it does not change in the next 2 months.

(2) Fidelity - no change from last update; up front listing fee is mid 5 digits along with very large take away of expense ratio (40 basis points) - end of discussion.  At some point if there is enough organic investor demand calling customer service asking for the fund to be in their supermarket, then I hear they potentially will negotiate.  But that's a subject for another year.  Or decade.

(3) Interactive Brokers - this company is completely unresponsive to repeated queries by multiple people.   Can't have a discussion with them, if they don't return a single call placed over 3 weeks.  I've asked the back office team to continue to try but frankly it's unprofessional and judging from funds listed on their site - they could care less about small fry.  They only have 15 fund families and aside from 1 fund of $400M all the rest are the huge names like Fidelity, Janus, AmericanCentury, PIMCO, T Rowe Price .  So in summary, we tried (and tried, and tried) to talk to them - they don't respond.  If they did respond -- the chances of being listed seem slim.  Plan accordingly, although Hail Mary pass is an option.  Won't give up until I get a firm no. ;)

(4) Vanguard - received further detail on their structure since November update.  Similar expense ratio takeaway (35 basis points, offset in part by the 12b-1) to Fidelity, but up front listing fee a few thousand.  Vanguard offers a No Transfer Fee (NTF) option and a Transfer Fee (TF) option - both actually are quite hefty on the expense ratio takeaway, so the cost savings to the TF option barely offsets that of the NTF option, so I'm deciding to pay the extra out of pocket and go NTF on Vanguard.  Advisory firm (me) will eat 10 basis points for any investor who goes via Vanguard route.

(5) Charles Schwab and Scottrade - as explained in November entry, Scottrade has essentially outsourced their mutual fund operations to Schwab.  So in theory, if you list at Schwab you *should* have access on the Scottrade platform - although it appears to be a separate application.  (I will find out in the coming months how accurate the theory is).

Schwab's main fund platform ("supermarket") is called OneSource - a ton of bells and whistles if you list there (the fund is eligible for all their screens, their special selections etc), and investors get to buy funds No Transfer Fee (NTF)  - but it is massively expensive.  Not only do they take the 40 basis points of expense ratio but unlike my previous assumption of an upfront fee they charge an annual flat fee.  I won't even bother to go into the figure other than to say in a decade you'd pay substantially over a quarter of a million on the annual flat fee alone.   Not an option in my world, and my long term plan is similar to Fidelity - if the fund some day hits critical mass and enough customers of Schwab call and ask why the fund is not available on OneSource then maybe they are open to negotiation per sources I've talked to.  Also, you need to be listed in all 50 states for OneSource so it's a non starter on about 5 fronts.

That said, Schwab has a Transfer Fee (TF) option, in which you lose all the bells and whistles and they like to put you in a dark corner of their platform.  But you are there, and a convenient option for Joe6Pack investor who shows up in the future and has an existing Schwab account.  Up front fees are substantial (but less than Fidelity) and they still take away a good piece of expense ratio, but no annual flat fee like in OneSource. Also you need not list in all 50 states in the TF option.  Since Schwab is one of the "big 2 supermarkets" for mutual funds AND the fact the fund can be listed in both Schwab and Scottrade (2 birds, 1 stone), I will be applying to get the fund on their transfer fee platform.  To buy you will need the 5 letter symbol of fund, since otherwise it will be near impossible to find.

That leaves the issue of (6) TDAmeritrade - they also have created a system with an up front substantial fee and taking away expense ratio - mimicking the Schwab / Fidelity / Vanguard model.  If the up front fee for Ameritrade was lower, I'd be more than willing to list but at this time paying up front fees at Vanguard, Schwab (and maybe Scottrade) does not allow for the substantial nut Ameritrade also requires.  I am hoping to negotiate with Ameritrade to see if I can get the upfront fee lowered, but at this point until SEC approval, I have no product to even wave in their face - I simply am going to offer that I have a retail base of investors who are 'do it yourself' types (some of which already switched to Ameritrade based on my advice), hence they have a business opportunity.   I put a call in early this week, and thus far silence.  I expect any conversation of merit would have to happen after SEC approval.  But maybe they ignore me - again, we're a tiny fish in a big ocean.


In summary, my original budget situation did not really allow for any of these costs as I assumed I'd get on the before mentioned 3 brokers without pain.  So I've had to take on a not small additional cost to create any of these brokers (save Etrade) as an option for investors.  However, being a start up I can only pay for so many.  The 'traditional' mutual fund investor is going to be found at Fidelity, Schwab, or Vanguard - whereas the Etrade, Scottrade, and Ameritrade are more catering to the 'do it yourself' person who is stock oriented and maybe has a fund or three on the side.  (but also happens to much of the reading audience at FMMF)  Hence, within the budget if it came down to a Schwab-Scottrade combo versus say Ameritrade, it's a no brainer from terms of where future "mutual fund" investors will be coming from, and listing at 2 brokers versus 1.  With that said, I do want to get listed with Ameritrade (in part because I told people to go there for 6+ months) and if they are open to discussions for negotiation will circle back before launch.  Otherwise it will have to be another year.

Any questions feel free to email.  As always thanks for your patience during this long and winding road with myriad stumbling blocks.  Getting closer...indeed I see a future fund family logo ahead....

November 2010 Federal Deficit $150.4 Billion - Highest November on Record

....on an unrelated note, corporations are flush with cash and paid the lowest % of taxes to GDP in history in last year we have records (2008), Americans are being sent cash by the bushel, entitlement spending is through the roof, aid to states is historic, and the stock market propels higher.   These items are completely unrelated as long as there is no cost in cost-benefit analysis. :)  Just like I suddenly have $50,000 if I borrow $50,000 on my credit card.  (no cost of course...only the benefit) 

Kind of laughable in retrospect when I hand wringed about half a trillion deficits "back in the day"  [Jul 28, 2008: US Budget Deficit to Half a Trillion] - that's 3-4 months of federal government work nowadays.

  • The U.S. government ran its 26th straight monthly budget deficit in November amid wrangling over a package that would extend big tax cuts to Americans trying to recover from recession.
  • The Treasury Department, in its regular budget monthly statement, said the government spent $150.4 billion than it collected in the second month of fiscal 2011.
  • Last month's red ink pushes up the deficit to $290.8 billion for the fiscal year, which began Oct. 1. That figure is a little smaller than the deficit during the same period last year. But President Barack Obama's administration expects the deficit to top $1 trillion in this fiscal year.  (uhhh... that's an understatement considering this latest $900B package soon to pass)
  • Washington has spent in excess of $1 trillion during each of the last two fiscal years, as revenues were reduced by the deep recession. At the same time, the economic slump and Wall Street bailout raised the government's expenses. 
  • The Treasury Department says the November budget deficit was 25 percent higher than the $120.3 billion deficit in November 2009. (impressive growth... "better than expected")
  • The budget statement Friday said federal spending totaled $585.7 billion so far this fiscal year, with revenues at $294.9 billion. In the last two months, the federal government spent $128.3 billion on defense, $36.8 billion in interest payments on its debt, and $20.0 billion for unemployment benefits. 

[Jan 14, 2010: First Quarter Fiscal 2010 Deficit 16% Higher than 2009 Levels]
[Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]
[Aug 26, 2009: US Federal Budget in Pictures]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

    Live by the Youku, Die by the Youku

    I am not as obsessed by the (YOKU) as it currently appears; I am just fascinated by human herding behavior.  And I can't recall a valuation like this since 1999... recall a lot of high growth tech stocks trade at 3-4x sales.... and a lot of high value takeover prices are at 6-7 sales.   At the peak this morning of $50, investors were giving this company a $5 BILLION valuation.... or 100x sales.

    It's all fun and games until someone pokes your eye out with a pirated copy of Jersey Shore ("so this is how the Americans live!?  A Snooki would be shunned in China.  We're sending our money to these people?  What a Situation!").  Once these things turn it is a game of musical chairs... the music stops, and suddenly you realize there are only so many bathtubs full of Kool Aid to sit in.  The stock is down more than 20% from the high of the day and 7% for the session.   The pathetic thing is this could drop 90% from the high of the day and still be considering expensive by normal valuation methods. 

    Larger picture this is a good lesson for any newbies to the market about how all the things you are told the market is about, means zilch in the near term.  Sentiment, human behavior, greed, fear - all that jazz means much more with certain names, in certain time durations.  I am sure almost no one in has ever been to the site, and 90%+ did not bother to read up its documents on the SEC website.  To trade a Youku long or short you need all sorts of Antacid.

    Intraday chart

    No position

    The Best Christmas Gift for the Wall Streeter in Your Life

    One of my long time readers who works in the investment field, sent me a photo of a tie than one of the larger ETF houses sent his boss for Christmas.  I thought at first it was photo shop, but this is an actual tie - it shows the Wall Streeters know where their bread is buttered.  The hero worship of "everyone can buy a 3rd house in the Hamptons with this guy in charge" on the Street is now making Greenspan at his peak seem only demigod-like.  I also hear in Manhattan the "chicks dig it" .... you can almost feel the free money being transferred from the savers to the speculator class on the fabric. (made in China I am sure)

    Look, as an investment banker - after you ditch your college sweetheart 'starter wife' you need to signal to the 25 and under set of NYC female that you are part of the 'best and brightest' who front runs the Fed's daily POMO operations (bond trading is so cool in the new paradigm!) or brought Youku public..... and what better way than a tie that screams Ben Bernanke is my god?  Mmmm.... I love the smell of intra economic class wealth transfer in the morning.

    [click to enlarge]


    (google 'helicopter ben bernanke' if none of this makes sense)

    Bruce Berkowitz of Fairholme Fund (FAIRX) - the Megamind of Miami

    Over the past 3 years, three star mutual fund managers have dominated the equity landscape - first Bill Miller of Legg Mason, then Ken Heebner of CGM Funds, and the past few years have seen the crowning of Bruce Berkowitz of Fairholme Funds.  I am not sure when the downfall of Bill Miller actually began in relation to his fame, but he suffered a terrible cold streak for years - and Ken Heebner suffered the "Sports Illustrated cover" curse.   [May 28, 2008: Ken Heebner - America's Hottest Investor]  His Fortune cover story marked the 'top' of performance - within a month.

    While Berkowitz has a completely different style to myself, I've been a fan for quite a while - before he hit the megastar status.  Now like the other two it will be a question of if he can manage the enormous fund flows he is now receiving; unlike Miller and Heebner his methods of investing (long term holds via value rather than growth) probably lend itself to more of a chance of success - but managing near $20 billion to beat the markets in any style seems near impossible from this seat.  That said, he is taking the fund in a completely unconventional direction - which might make it possible (for example he is loaded to the gills in AIG right now, and is moving into distressed debt - something typical for specialized hedge funds).  In the near term, it appears Berkowitz has a major story in Fortune (can't tell if it's the cover story) so we'll see if he can avoid Heebner's fate!

    p.s. still a big fan of the Heebner who more closely matches my investing choices although completely different risk control ideas.

    The full story is here - a compelling read; I'll cut and paste some snippets.

    • He may be the most driven investor on earth. And now the founder of the $17 billion Fairholme Fund is making the boldest bet of his career. 
    • Berkowitz may not be a household name to most investors, but he should be. During the past decade, Fairholme has produced an annualized return of 11.6% over a span in which the S&P 500 (SPX) has risen a paltry 0.7% a year on average. Since the fund launched in 1999, Berkowitz has beaten the market every year except one (when Fairholme was up 24%, vs. the S&P's 29% rise in 2003), and he's on track (up 17% through early December) to easily beat it again in 2010. 
    • "The highest compliment I can give," says hedge fund billionaire Leon Cooperman, who got to know Berkowitz when they both invested in telecom stocks earlier this decade, "is if he called me up to recommend a stock, I would pay attention."  
    • The fund's outstanding returns -- along with Berkowitz's being crowned U.S. stock manager of the decade this year by investment research firm Morningstar -- have attracted a flood of new money to Fairholme. Investors have poured in more than $4 billion over the past year. And they've added $330 million more to his Fairholme Focused Income Fund, which launched in January. He plans to open a third fund, one that focuses on smaller opportunities, early in 2011.
    • Berkowitz welcomes the influx of money. (He says his target is for Fairholme to reach $25 billion in assets.) For now, though, much of the new cash remains just that -- cash. Rather than put it all to work in active investments, Berkowitz has an unusually high 25% of Fairholme's portfolio in cash or short-term debt. It's a huge reserve of liquid funds, and Berkowitz wants it for a couple of reasons, both of which suggest that he sees a rocky road ahead for the U.S. economy. First, if a falling market scares his investors into withdrawing funds, the extra money means that he won't be forced to sell stocks he believes in.
    • Second, stockpiling cash is in keeping with Berkowitz's plan to evolve Fairholme from a regular, stocks-only mutual fund into a more versatile distressed-asset investment vehicle, and to profit from the coming wave of corporate restructurings he anticipates. He believes that dozens of overleveraged companies will need to fix their balance sheets in the next couple of years -- commercial real estate is one industry ripe for it, he says -- and he wants Fairholme to be ready to step in as a Warren Buffett-style lender of last resort, with highly favorable terms for his investors, of course. As Berkowitz puts it, "There aren't many people in the world you can call who can write a check for $1 billion today."
    • Can Berkowitz continue to beat the odds? Can a single investor, even one with singular focus and discipline, successfully manage a portfolio the size of Fairholme? "It's a challenge for any manager to take in that kind of inflow and repeat," says a large Fairholme investor. Says another: "You hope that when you buy a manager, it's a seasoned team. Having a one-man band can be risky."  Berkowitz acknowledges the concerns with his usual candor. "Right now," he says matter-of-factly, "we're at an interesting junction point where people can't decide whether we're about to blow up."

    [Aug 30, 2010: Bruce Berkowitz of Fairholme Fund Interviewed on Consuelo Mack WealthTrack]
    [Jan 31, 2010: Bruce Berkowitz of Fairholme Funds Slashes Pfizer Stake, Exits Boeing and Northrop Grumman; Add to Berkshire Hathaway
    [Feb 17, 2009: Hedge Funds Pile into Citigroup; as does Bruce Berkowitz of Fairholme Funds
    [Feb 3, 2009: Fairholme Funds (FAIRX) 2008 Report]

    F5 Networks (FFIV), Netflix (NFLX) Graduate to S&P 500, as NASDAQ is Up Every Single Day of December

    Two companies we have held on and off over the years (F5 more than Netflix) were announced as new additions to the S&P 500 last night - F5 Networks (FFIV) and Netflix (NFLX).  Congrats to those management teams as this is the most widely followed index on Earth.  (Youku can't be far behind!)  These 2 companies have been superstars in 2010; the problem is they are so extended and rich in value with investors bases full of "momo" types - any misstep in 2011 is going to cause serious havoc.  Next year is not going to be quite so easy for these names...or the 20-25 similar type of companies every growth manager in America is crowded into.

    • Four companies will join the benchmark S&P 500 index .SPX after the closing bell on Dec.17, S&P said in a statement on Thursday.  Netflix Inc, F5 Networks Inc and Newfield Exploration Co will replace Office Depot Inc, The New York Times Co and Eastman Kodak Coin the S&P 500.  Cablevision Systems Corp will replace King Pharmaceuticals In  as King Pharma's takeover by PfizerInc is expected to be completed soon, S&P said.

    On a side note, I've often noted the change in nature of the market the past few years - I think a lot of this is the algo trading and EFT dominance ... a body in motion continues to go in motion far longer now (without a break) than 5, 10, 15 years ago.  While the gains have been modest the NASDAQ index has been up each and every day of December... Santa Claus certainly loves his tech stocks.  The +0.3% to +0.4% pattern in almost every premarket is also back... remember when you are up 0.35% premarket via the 'urgent buyer who just can't wait until 9:30 AM' the market actually has to fall in excess of 0.35% during regular hours just to go negative.  It remains an unshortable market with massive complacency as everyone believes the Fed now backstops everything on Earth.  Free market capitalism rules.

    There is an obvious yawning gap in the NASDAQ chart created on the now systematic "first day of the month rally"; I assume at some point the market will be allowed to go down again and fill this gap. But the first three letters of assume are....

    No positions

    PIMCO Joins Goldman in Raising GDP Forecasts for 2011 as United States "Buys Itself" to Prosperity

    PIMCO has joined the Goldman Sachs camp in raising views for 2011 as the tax package currently working its way through Congress (and surely to expand as every Tom, Dick, and Nancy adds their pet projects to it) is America's way of "buying" more GDP.  No different than the stimulus of early 2009 (or the Bush rebates before that), and all the support by the Federal Reserve 2007-2010 infinity and beyond.  What's a half a trillion among friends anyhow?  Certainly worth the cost of an extra point of GDP. There is no price discovery in the country in any market, and no one has an idea how the economy works anymore without massive injections of steroids.  But as long as we can borrow huge sums of the money and add them to out future liabilities, and push the gains into the here and now - we can slap each other on the back and cheer at how 'resilient' the US economy is.  (while mocking Europe for its slow growth economic policies and high unemployment, right Germany?)

    Considering 1 in every 5.5 dollars of income for the average American is now a direct infusion from the government, are we surprised the malls are bustling?  [May 25, 2010: 1 in 5.5 Dollars of Income Now via Government].  Essentially for every $80 Joe 6Pack earns, the government finds another $20 to hand him.... a most blessed situation.  We don't need no stinkin' jobs - we have D.C..... now inject me in my buttocks with some of the cash, I need to go to the mall! [Nov 5, 2010: USA Today - Anti-Poverty Programs Now Surpass Cost of Medicare] [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States]

    Via Bloomberg:

    • Pacific Investment Management Co., which manages the world’s biggest bond fund, is raising its forecast for U.S. growth next year as policy makers pump a “massive amount” of stimulus into the economy.....
    • Pimco sees the economy growing 3 percent to 3.5 percent in the fourth quarter of next year from the same period of this year. That compares with its previous estimate for 2 percent to 2.5 percent growth.
    • "We revised this week our outlook for U.S. growth in 2011 taking into account Monday's announcement on additional fiscal stimulus measures," El-Erian said.
    • “The U.S. is using fiscal and monetary policy to try to attain escape velocity for the economy,” El-Erian said. “What we don’t know yet is whether that will be enough not just to change the economy’s trajectory for one year but to place it on a medium-term sustainable path.”
    • U.S. policy makers are reacting to the new normal by pursuing “increasingly unconventional” strategies to aid the economy, El-Erian said. 
    • “The new normal is still here,” El-Erian, 52, said. “What the policy makers are doing is kicking the can down the road in response to the symptoms of the new normal, but they’re not yet changing the medium-term dynamics.”
    • Europe, too, is struggling with the fallout from the new normal as the region has been hit with a sovereign-debt crisis. Pimco expects the euro area’s economy to grow by 0.5 percent to 0.75 percent next year, El-Erian said.  “Europe is on a completely different track than the U.S.,” El-Erian said. “It is trying to achieve sustainable growth by getting its economic house in order through fiscal austerity.”
    • The European Central Bank has stepped up buying bonds from the region’s most-indebted countries to prevent the market rout from spreading.  The ECB is “basically providing liquidity support for a solvency issue,” El-Erian said. “The question is whether the market will cooperate with that,” he added. “If it doesn’t, you will get disorderly restructurings in some peripheral countries and even more economic contraction.”
    • In the U.S., policy makers need to follow their stimulus- induced boost to growth with steps to bring down the budget deficit in the medium term and improve long-term competitiveness, he said.   "It's important to ask whether the extraordinary fiscal and monetary stimulus measures, by themselves, will also have a meaningful impact on growth beyond 2011."  (not really... all we need to do is create the next $500 billion per annum stimulus plan when the time comes... along with the effective 0% Fed funds rate to infinity and beyond.  10 to 12% deficits forever will continue to fund the 'recovery'.... remember America does not do cost benefit analysis.  No one remembers what costs are necessary to derive growth anymore.  We just celebrate the 'miracle' of our growth and clap like seals at the 'better than expected' data while not looking our grandchildren in the eyes at what we pour onto them - no costs here.  Only positives - buy stocks.)
    [Nov 18, 2009: Minyanville - Our Economy is on Steroids]

    [Video] CNBC - Jim Chanos Remains Bearish on China With some Compelling Statisticis

    The man who cracked the nut that was Enron, hedge fund manager Jim Chanos, continues in his assertion than China remains a speeding car racing for the cliff.   He does state some very compelling statistics in this video, asserting that for all the Chinese exports we speak about - the GDP of China (whatever the true GDP is) is only 5% net exports.  Instead China is essentially one big construction company with 60% of the economy 'building stuff'.... and a lot of that stuff is completely unaffordable to the Chinese citizen.  An always fascinating subject as the world of the tier 1 vs tier 2 vs tier 3 cities are quite different.

    He also believes due to the profit margins are too thin at Chinese exporters for China to raise the yuan exchange rate materially - although this would instantly raise the wealth of the Chinese as their purchasing power would surge.  (Jim sort of counter argues with himself here in my opinion - if exports are only 5% of GDP, I suppose it really doesn't matter if the thin razor margins get damaged because those factories have nothing to do with 95% of the economy?)

    One area I differ from him is his view that any dramatic slowdown in China would affect the U.S. in only small proportion.  While perhaps true in an economic sense, in a market sense almost all current bull markets derive from China - our multinationals are generating huge demand and profits from China, almost every commodity on earth is moving based on how much China buys, and frankly China has a sphere of influence on the entire Asian region so if China slows it won't just be China it affects but hordes of 'emerging market' countries in the region who are now dependent on the country to export into.

    Anyhow for now, just get your Yokou Dance on and we'll worry about it some other day.

    11 minute video

    [Jul 21, 2010: A Reader's Observations of China]
    [Mar 4, 2010: Hugh Hendry Continues to Doubt China]
    [Jan 8, 2010: Hedge Fund Manager Jim Chanos Continues to Sound the Warning on China]
    [Nov 13, 2009: Ordos - China's Empty City]
     [Dec 16, 2009: CNBC Video - Hedge Fund Maven Jim Chanos on Autos, Banking, and China] 

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