Thursday, March 3, 2011

Update: S&P 500 Priced in "Hard Assets"

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As I've mentioned in the past the performance of the U.S. dollar is a bit misleading since its compared to a bunch of very ugly ducklings - namely the Euro.  This morning ECB President Trichet is indicating inflation is a potential concern overseas and the euro has continued its recent rally against the dollar - but again, this is like picking among two bad choices.  [Dec 23, 2010: Is the US Dollar Weak or Not?]  Unfortunately none of the major global currencies are in great condition as almost all developed countries / regions are trashing their currency in a global race to the bottom.  One exception is Germany but since it is embedded within the EU, you cannot benefit from the old 'mark'.

When one compares the U.S. dollar versus items which have no 'obligations' if you will - hard assets in particular, the story is very different.  What has been strange the past few weeks is during a time of consternation the normal "safety trade" into dollars has not happened - instead, people have moved into precious metals.  This should make you (a) worried and/or (b) peeved as a holder of U.S. dollars - essentially it's a damning indictment.  But when your entire fiscal strategy as a country is print more electronic bills, it is not surprising.

In economic terms we should always look at nominal v real returns.  For example if we print enough dollars we can get to Dow 40,000... or 60,000... or 100,000.  Those who only look at nominal returns would be giddy.  Those who look at real returns, not so much.

So rather than looking at the stock market priced in our trashed fiat currency, every so often I like to look at it priced via a few commodities - today we'll look at it versus the general CRB index (commodities), gold, and then silver.

S&P 500 priced in CRB


S&P 500 priced in gold



S&P 500 priced in silver



As you can see - in 'real' terms versus assets that hold no obligations, the "awesome rally" in the S&P 500 is not so wonderful.  But since most of the public only focuses on the market priced in dead presidents, they don't realize they are in many cases treading water ... if not worse.

On the positive side, the S&P 500 has rebounded priced in Canadian and Australian dollars (two far more fiscally conservative countries) versus the last time we checked.

46% of February ETF Inflows Went into Energy, with over 20% into Energy Select SPRD (XLE)

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An astounding statistic on CNBC today about how heavy the flows in February are into 1 fund.  This also showcases why so many stocks, especially of the large cap kind within a sector, move together.  The hot money in the hedge fund world all piled into Energy Select SPDR (XLE) in February, with nearly 1 of every 4 dollars headed this way.
  •  Net inflows into exchange-traded funds in February were $7.51 billion .  XLE was the inflows leader with almost $1.6 billion in new investments.




TOP HOLDINGS
Company name% Net assets
ExxonMobil Corporation17.81%
Chevron Corporation12.66%
Schlumberger, Ltd.8.22%
ConocoPhillips5.03%
Occidental Petroleum Corporation4.45%
Apache Corporation3.41%
Halliburton Company3.18%
Anadarko Petroleum Corp.2.89%
Devon Energy Corporation2.87%
National Oilwell Varco, Inc.2.55%
Percentage of holdings 63.07%

You can see Exxon's chart is not very much different from the ETF - quite amazing when an ETF can affect the country's largest stock.



No positions

[Video] CNBC: Rare TV Interview with Manager of World's Largest Hedge Fund - Ray Dalio of Bridgewater Associates

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It is ironic how some smaller hedge fund managers get a lot of publicity while a few of the largest rarely surface in the media.  The fund manager of the largest hedge fund - and a person the casual investor probably has never heard - Ray Dalio made a rare appearance on TV today.  Apparently there are some articles running around the internet speaking of such bizarre practices leading to a 30% annual turnover at his firm.  That was enough to smoke him out... it is a quite lengthy and interesting interview; any frankly anyone managing $60B is worth listening to.

24 minute interview - email readers will need to come to site to view.






Some quick hits via CNBC (sorry about the caps)

Dalio on Being an Independent Thinker:
IN ORDER TO MAKE MONEY IN THE MARKET YOU HAVE TO BE AN INDEPENDENT THINKER. AND I THINK ALSO CREATIVE, YOU HAVE TO BE WILLING TO MAKE MISTAKES. AND SO THE PROCESS IS THAT ANYBODY IN THE COMPANY, IF ANYTHING DOESN'T MAKE SENSE TO THEM, THAT THEY CAN BRING UP WHAT DOESN'T MAKE SENSE TO THEM IN A NONHIERARCHAL WAY AND LOOK AT WHETHER IT'S TRUE OR NOT AND WHAT WE SHOULD DO ABOUT IT. WE PARTICULARLY LIKE LOOKING AT MISTAKES OR WEAKNESSES THAT WE HAVE IN ORDER TO GET STRONGER. 


Dalio on the Dollar:
I THINK IT'S INEVITABLE THAT THE DOLLAR'S ROLE AS A WORLD CURRENCY DIMINISH FROM THE DOMINANT WORLD CURRENCY TO ONE OF A FEW AND IT WILL HAPPEN OVER A GRADUAL TIME. WE'VE BEEN VERY LUCKY, BECAUSE THE DOLLAR IS THE WORLD'S CURRENCY AND CONSIDERED THE PLACE THAT'S SAFE SO FOREIGN COUNTRIES WILL SAVE THERE AND WE'VE BEEN ABLE TO BORROW AT CHEAPER RATES THAN WE COULD HAVE OTHERWISE. AND SO THAT IS DIMINISHING. 


Dalio on the World Being Broken in Two-Parts:
THE WORLD IS BROKEN INTO TWO PARTS NOW. WE HAVE THE DEBTOR-DEVELOPED WORLD. SO THE UNITED STATES, EUROPE AND JAPAN BASICALLY ARE COUNTRIES WHICH ARE OVERLY IN DEBT AND EXPENSIVE. THEN WE HAVE THE EMERGING WORLD. BASICALLY, IT'S 50-50. EMERGING WORLD NOW ACCOUNTS FOR 53% OF GDP. THE DEVELOPED WORLD IS 47% OF GDP. 


Dalio on the Emerging Market:
THE ONE WORLD IS BOOMING. THE EMERGING MARKET. INFLATION RATES AND STRONG GROWTH RATE AND TIED THROUGH THIS CURRENCY LINK TO THE U.S., EUROPE AND JAPAN. AND AS A RESULT, THEY HAVE TOTALLY INAPPROPRIATE MONETARY POLICIES BECAUSE IF YOU HAVE A CURRENCY THAT'S LINKED, YOU HAVE INTEREST RATES THAT ARE LINKED. AND IT'S CREATED TOTALLY UNECONOMIC BEHAVIOR IN THOSE COUNTRIES. THIS IS GOING TO BE THE BIG NEXT SEISMIC SHIFT, I BELIEVE. I THINK THAT PROBABLY SOMETHING IN 2012 IT WILL BECOME INTOLERABLE TO MAINTAIN THOSE CURRENCY LINKS AND WE'LL PROBABLY HAVE A BIG SHIFT. 


Dalio on US Equities:
U.S. EQUITIES FIRST ARE STILL COMPARATIVELY CHEAP. BUT MORE IMPORTANTLY, THE FLOWS ARE BENEFICIAL TO THEM BECAUSE U.S. EQUITIES BENEFIT FROM CURRENCY DEPRECIATIONS. I THINK, AS I SAY IN 2012, THE DEVELOPED COUNTRIES' CURRENCIES WILL DEVALUE IN RELATIONSHIP TO THE EMERGING COUNTRIES' CURRENCIES.

ISM Services Up a Bit in February v January

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While ISM Manufacturing gets much of the attention, that sector represents just over 10% of the U.S. economy.  Meanwhile services dominates, so today's ISM figure is much more relevant.  Much like last month it was a nice headline print, with cost pressures increasing and some positive trends in employment - which have yet to really filter through to the government's monthly data.
  • Headline figure at 59.7 in February versus 59.4 in January.
  • Employment Index increased 1.1 percentage points to 55.6 percent, indicating growth in employment for the sixth consecutive month and at a faster rate. 
  • The Prices Index increased 1.2 percentage points to 73.3 percent, indicating that prices increased at a faster rate in February.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
FEBRUARY 2011
  Non-Manufacturing Manufacturing
Index Series
Index
Feb.
Series
Index
Jan.
Percent
Point
Change
Direction Rate
of
Change
Trend**
(Months)
Series
Index
Feb.
Series
Index
Jan.
Percent
Point
Change
NMI/PMI 59.7 59.4 +0.3 Growing Faster 15 61.4 60.8 +0.6
Business Activity/Production 66.9 64.6 +2.3 Growing Faster 19 66.3 63.5 +2.8
New Orders 64.4 64.9 -0.5 Growing Slower 19 68.0 67.8 +0.2
Employment 55.6 54.5 +1.1 Growing Faster 6 64.5 61.7 +2.8
Supplier Deliveries 52.0 53.5 -1.5 Slowing Slower 11 59.4 58.6 +0.8
Inventories 55.5 49.0 +6.5 Growing From Contracting 1 48.8 52.4 -3.6
Prices 73.3 72.1 +1.2 Increasing Faster 19 82.0 81.5 +0.5
Backlog of Orders 52.0 50.5 +1.5 Growing Faster 2 59.0 58.0 +1.0
New Export Orders 56.5 53.5 +3.0 Growing Faster 6 62.5 62.0 +0.5
Imports 53.5 53.5 0.0 Growing Unchanged 7 55.0 55.0 0.0
Inventory Sentiment 57.5 60.0 -2.5 Too High Slower 165 N/A N/A N/A
Customers' Inventories N/A N/A N/A N/A N/A N/A 40.0 45.5 -5.5

So Much for Resistance...Premarket Gappage on the Way

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After a busy 2 days on Capital Hill, Bernanke is back in the turret and futures are surging. ;)

That resistance at S&P 1314 will be smoked in premarket - as almost any resistance level the past 2 years has been taken care of.



Weekly jobless claims came in at a 368,000 - the lowest we've seen in some 2+ years.

Amazingly, after quarters of incredible productivity growth out of the U.S. workers we still saw a 2.6% print today for the fourth quarter.  Which is good on the surface but when you combine it with a 0.6% drop in unit labor costs, it continues to paint a fantastic picture for corporate profits but not so much for the labor force.
  • Productivity increased at an unrevised 2.6 percent annual rate, the Labor Department said on Thursday. The growth pace was in line with economists' expectations.  
  • Productivity, a measure of hourly output per worker, grew at a 2.3 percent pace in the third quarter. For the whole of 2010, productivity expanded 3.9 percent, the fastest pace since 2002.
  • Depressed unit labor costs will help to keep inflation pressures contained at a time when rising oil prices are pushing up input costs for many businesses.   For the whole of 2010, unit labor costs fell 1.5 percent after declining 1.6 percent in 2009.

LA Times: Corn Based Ethanol Producers are Cranking Up as Oil Soars

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The LA Times reports on the fuel that is good for the corn industry, but not so much for everyone else.

  • Corn-based ethanol is the renewable fuel environmentalists love to hate. But as turmoil in the Middle East and North Africa has sent oil prices soaring, U.S.-made ethanol is making a comeback.  Plants mothballed during the economic downturn are reopening. Domestic ethanol production hit record levels last year, topping 13.2 billion gallons, according to the Renewable Fuels Assn. in Washington. 
  • The recovery can be seen in Stockton, where a once-shuttered factory is now thundering to life. Train cars laden with Midwestern corn arrive daily to feed the grinding mills and steaming pipes that distill the grain into gasoline substitute. The surrounding air is pungent with the smell of yeast.
  • That's largely because of Uncle Sam. Concerned about U.S. reliance on foreign oil, federal lawmakers mandated the nation to quadruple its use of biofuels to 36 billion gallons annually by 2022 from 2008 levels. Corn-based ethanol is assured a 15-billion-gallon share of that market. Plus it's heavily subsidized. The federal government gives producers a 45-cent-a-gallon tax credit. A number of states provide subsidies as well.
  • The liquid is blended into almost every gallon of unleaded gasoline sold in the U.S and accounts for about 10% of the fuel that motorists pump into their cars. That percentage is set to rise as the U.S. Environmental Protection Agency recently approved the use of blends of up to 15% ethanol for newer vehicles.
  • But whether corn ethanol is good for the planet, U.S. taxpayers, the global food supply — or even an automobile's engine — is a matter of intense debate.
  • Some scientists have concluded that growing corn, harvesting and distilling it, and trucking it to refineries causes as much environmental damage as burning oil. Many environmentalists want taxpayer subsidies devoted to developing next-generation biofuels rather than supporting big agribusiness and the oil companies that are now operating ethanol plants.
  • An estimated 35% of the U.S. corn crop will be devoted to ethanol this year, a figure that makes some agricultural and global food policy analysts uneasy.
  • ...."We have to become energy independent. We don't want to do it at the expense of food riots," Clinton said.
  • Auto manufacturers are concerned as well. They're suing the EPA to stop sales of the 15% ethanol blend, known as E-15, which they said would confuse consumers and damage older vehicles.Ethanol industry officials said E-15 pumps would be clearly marked, so consumers would not be misled. 
  • Critics of ethanol aren't deterring investors — 17 idled ethanol plants have reopened across the United States in the last year. And the country's largest producer, POET Ethanol Products, is seeking federal help to construct a 1,800-mile, $4-billion ethanol pipeline.

Wednesday, March 2, 2011

[Video] NBC News - Apprentice Programs Popping Up to Compensate for Lack of Higher End Skills in U.S. Manufacturing Workers

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Pretty interesting story from NBC news last night on the changing face of manufacturing in the U.S. - 4 minutes with Tom Brokaw.  No more low skill set jobs.



The Bernank Does not Rule out QE3

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Not much of a confrontation today between Ron Paul and Bernanke as Rep Paul did most of the talking; I would have preferred a nice Q&A session but tough to do anything in 5 minutes.  Instead a lot of lawyers who have no idea about economics seem to have spent a lot of time talking partisan issues.

Anyhow, within the conversations were some blanket "non answers" by Bernanke, which open the potential up for QE3.  My working assumption right now is after QE2 ends in June, there will be a break for at least a while.  But last time that happened spring 2010 the stock market promptly plummeted 17% and since Bernanke seems to think manipulating managing the stock market is part of the Fed's role, I could be very wrong on his plans.

With our employment issues being very much structural, and not as much cyclical, and the Fed's favorite measures of inflation muted, Bernanke could be QEing for years more from here under his current guidelines.  Slow wage growth among the masses is now seemingly a permanent feature in the U.S. as globalization leads to wage arbitrage so by the formal economic theory, there cannot be widespread inflation if consumers don't have excess money to accept increasing prices.  They will just cut back on other expenditures as say food and energy soak up more of their incomes.  Current spending levels are being supported by never seen before levels of federal assistance as it is.  [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare] [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High  Additionally, recall if the recent payroll tax cut is not extended in 2012, the 2% wage gain every worker just received goes away in 10 months as well - another stress.

Ironically the more QE to come, the more speculators will drive up commodities.... which will impair corporations (who might cut jobs to preserve profit margins) and consumers... which (in the Fed's mind) will require more QE.  Circular logic anyone?  But in The Bernank's view his actions only make the stock market go up and not other assets (read: commodities) so he won't make the connection. 

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

Via Bloomberg:

  • Federal Reserve Chairman Ben S. Bernanke didn’t rule out expanding the central bank’s asset purchases aimed at stimulating the economy, saying he doesn’t want to see the economy relapse into recession.  
  • Asked at a House Financial Services Committee hearing today what conditions would warrant a third round of so-called quantitative easing, Bernanke said that “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”
  • Bernanke’s testimony today and yesterday signaled that he will keep the Fed on course to complete $600 billion of Treasury purchases through June under the second round of quantitative easing, a policy criticized by Republican lawmakers as risking an inflation surge. He’s avoided saying what the central bank may do after that.  A third round of purchases “has to be a decision” of the Federal Open Market Committee, and “it depends again on our mandate” for stable prices and maximum employment, Bernanke said in response to Texas Representative Jeb Hensarling, the House panel’s vice chairman and a critic of QE2.
  • Responding to a question from Representative Nydia Velazquez, a New York Democrat, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.” “The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” he said.
  • Since August, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,” he said in testimony this week.
  • Inflation is likely to remain low through 2013, Bernanke, 57, a former Princeton University economist, said in Senate testimony yesterday.
  • At the same time, the labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” he said. “The housing sector remains exceptionally weak,” and “slow wage growth” is keeping labor costs in check, he said.
  • The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

20 Day Moving Average Held as Resistance So Far

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So far so good for those of bearish inclinations.  After a cursory morning bounce, the S&P 500 went to touch the 20 day moving average and was pushed back.  We are in a bit of a range here between some recent support levels and this 20 day moving average, so it will be interesting to see which way we break.  I would think downward based on the technical action of late, but using historical precedent has been a losers game of late.  Whatever the case the easy melt up 'balls to the walls' trade seems to have finally taken a pause.



This morning we had the monthly ADP report and it came in 'better than expected' at over 200K, but there has been such a disconnect between this number and what the government reports 2 days later, it seems to have been ignored.  ISM Services tomorrow at 10 AM and Friday's employment data should be the 2 big drivers of the next few days..

That said, the market seems to be trading more on a 1:1 with oil at this moment... and gold and silver continue to surge as the people use precious metals rather than the U.S. dollar as a safe haven.  Silver is in yet another parabolic move...+30% in 5 weeks.  I wrote on the 18th it had broken out [Silver Broke Out Yesterday], and aside from a wicked reversal head fake last Thursday it has been straight up action since.


No positions

OECD - Food Crisis Not as Severe as 2008 Due to Rice Prices

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I've written the past few quarters to keep your eyes on oil and rice.  The former for obvious reasons and the latter due to the huge influence in most of the East.  While many other commodity prices surged in 2010, rice was one of a handful (such as natural gas) that were limp.  And thus far in 2011, price appreciation has been contained again.

[click to enlarge]



So in a relative sense, we've (they've) been lucky that the massive inflation in such things as corn, cotton, wheat and such has not hit in rice, or global turmoil would be taken to the next stage.  [Mar 19, 2008:  Philippines Brace for Rice Shortage]  [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]


Via Bloomberg:

  • A global food crisis on the scale of what happened three years ago isn’t recurring because an increase in the cost of rice, a staple for half the world, has lagged behind a jump for other grains, according to the OECD. 
  • Rice futures rose 3.4 percent in the past 12 months, compared with 60 percent for wheat and 93 percent for corn. World milled-rice output will rise 2.4 percent to a record 451.7 million metric tons in 2010-2011, the U.S. Department of Agriculture forecasts, helping keep stockpiles near the highest in seven years.
  • Rice prices almost tripled in the 20 months to April 2008, contributing to a worsening in world hunger that meant a record 1.02 billion people were deemed by the United Nations to be undernourished in 2009.
  • “The scale of the problem is not as bad for large parts of the world as it was in 2008,” said Ken Ash, the trade and agriculture director at the Organization for Economic Cooperation and Development in Paris. “With two-thirds of the world’s hungry largely reliant on rice as a staple, rice prices have not increased and supplies are relatively strong.”
  • Rice added to the previous peak in food costs in 2008, with prices climbing 33 percent in 2007 and another 11 percent the next year, after export bans by producers including Cambodia, Vietnam, India and Egypt. Rice, which jumped as high as $25.07 for 100 pounds in Chicago in April 2008, traded at $14.315 ...today.
  • Global food prices rose 28 percent in the past 12 months and reached a record in January, according to the UN’s Food and Agriculture Organization. That’s fueled riots across North Africa and the Middle East that have already toppled leaders in Tunisia and Egypt. More than 60 food riots occurred worldwide from 2007 to 2009, according to the U.S. State Department.
  • Rice planting in the U.S., the world’s third-largest exporter, may drop 25 percent this year because growers can earn more from corn and soybeans, according to the median in a Bloomberg survey of nine analysts and farmers in January.
  • “Good seasons” in parts of Africa and Asia have helped build up grain supplies there to levels above those of 2007-08, reducing the impact of rising world prices, Ash said. “Local grain supplies in parts of Africa and Asia are very good.” 

[Jan 5, 2011: World Food Prices Surpass 2008 Records]

    Sina (SINA) Hit on Small Beat and Inline Guidance - Weibo Users Double to 100M

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    You can tell how much mind share a company is getting by the number of news outlets that report it's earnings.  For a long time Sina (SINA) barely received any attention, but based on how many different outlets reported on its earnings, this company has definitely hit the big time in terms of attention.  The company reported ok results, essentially a small beat in EPS and in line guidance. (Full report here)  It was already very expensive after a huge run up (doubling) in latter 2010 and early 2011, as it is being valued not so much on its underlying business but the potential in Weibo ("Twitter of China").  On that end the user base has doubled in short order (4 months) to 100M users and is fast approaching the size of Twitter itself.  But for now there is no monetization of that service so the stock will appear to be quite pricey.  (keep in mind, Twitter is being valued somewhere in the $7 to $10 BILLION range in the private market) There does appear to be some first efforts at monetization coming in the 2nd half of this year.  Bigger picture, from this seat I'd love to see an spin off IPO in 2012 of Weibo.
    • Chao said Sina will further pursue partnerships with e-commerce startups and consider offering an e-commerce advertising platform on its microblog, or payment services for e-commerce companies. 

    Technically the story for Sina is very different from 2 weeks ago when there was not a care in the world and the stock surged to the mid $90s.  Since then, there have been two gap downs, $20 of losses, and a break of the critical 50 day moving average.  $75 is the recent low and if that breaks there could be some more prominent downside - that said, it would offer long term oriented investors the first attractive opportunity in a few months if we another major tumble.  Any move down to the 200 day moving average would be very appealing for entry.



    One very interesting move is the intent to purchase a 19% stake in Chinese online apparel maker Mecox Lane (MCOX) for $66M.  Hmmm... that came out of left field.
    • China's biggest Internet portal also said it will pay $66 million to buy a stake in Chinese fashion e-commerce company Mecox Lane Ltd. (MCOX) as the company explores further ways to participate in China's booming e-commerce industry. It will buy the shares from Maxpro Holdings Ltd. and Ever Keen Holdings Ltd., both units of Sequoia Capital. 


    Via IBD:
    • China Web portal Sina (SINA) late Tuesday reported Q4 results that edged views, but swung to a net loss on a big impairment charge. The company's per-share profit minus items jumped 48% from the year-earlier quarter to 46 cents. That beat the 45 cents expected by analysts polled by Thomson Reuters. Sales rose 12% to $110 million, where analysts were expecting $104.4 million.
    • For the current quarter, Sina said it expects revenue excluding certain items of $93 million to $96 million. Analysts were expecting $95.2 million, but it was unclear if that also excluded the same items
    • The company said its ad revenue last quarter jumped 30% to $82.5 million from $63.2 million in Q4 2009. It expects Q1 ad revenue of $71 million to $73 million.  The expected drop in revenue from Q4 to Q1 is seasonal, says Mike Hickey, a Janco Partners analyst who rates the stock a buy.
    • "The first quarter is actually not good for advertising because people are offline spending time with their families during the Chinese New Year celebration, so seasonally it's the lowest point in advertising spend," Hickey said.
    • The company's stock has doubled since late August to more than 80 but is down 14% since mid-February, as Goldman Sachs cuts its rating to neutral from buy. Goldman cast doubt about when Sina's Weibo microblog will generate revenue.
    • "2010 has been a year of transformation for Sina," Chao said. Besides ad growth, "we have successfully built Sina microblog Weibo into the largest and most influential social media platform in China, with user base increasing by more than 25 times in 2010."
    • Weibo has more than 100 million users, a figure he says doubled in the past four months. The service is "the centerpiece of Sina's new media growth strategy," Chao said.  Sina hopes Weibo will bring users and software developers that offer value-added services. It expects advertisers then will follow.
    • Investors are having a hard time trying to value Sina because its microblog still hasn't generated any revenue, says Hickey.  "But in the future, it could be an incredibly valuable asset," he said.
    • China's government likely remains the biggest hurdle for Weibo, Hickey says. "There is concern that the government is going to come in and tighten its grip on those sort of platforms like Weibo and that has taken the top off the stock (since mid-February)," he said.
    • For Q4, Sina reported a net loss of $100 million, or $1.51 a share, including a write-down of $128.6 million related to an impairment of an equity investment in a Chinese real estate entity called CRIC.
    [Feb 18, 2011: BW - A Twitter Knock Off has China Talking]
    [Feb 16, 2011: Goldman Sachs - Sina Cut to Neutral; Says Weibo Fully Valued]
    [Jan 31, 2011: Sohu.com Results Should Bode Well for Sina,com]
    [Jan 11, 2011: Word is Getting Out on Sina's Secret - Weibo]
    [Dec 9, 2010: The Twitter of China - Weibo]

    No position

    Tuesday, March 1, 2011

    Why this Reversal "Could" be Important Technically

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    One thing you want to see as a technician is a constantly higher price on each upward thrust.   On this last rebound from 1295, the S&P reached intraday 1330 yesterday (and briefly higher today).  However it obviously failed to reach the last peak point over 1340.   If there is no imminent reversal back up in the coming 1-3 days, I'd offer that this reversal day could be important technically as this would be the first time we've seen the move up after a drawdown of any sort (which have been extremely rare the past half year) not surpass the old high.



    The S&P 500 currently sits at the 20 day moving average, just as did when we came back from holiday last Tuesday.   Those pressing against this market want to see this level obviously break and then a new low formed (i.e. break last week's S&P 1295).  Then the pattern of 'higher highs and higher lows' is broken - and a much more cautious stance is warranted.  Very tricky here in the short term because this is the one week of the month that economic news actually matters (ISM Services, and monthly employment data) so we are prone to quick moves off of macro news.

    But to the earlier point, the lack of reaching to a new high on this bounce could be something we look back in retrospect in a few weeks as a very important development.

    As an aside, the NASDAQ has the same issue...


    Bifurcated Economic News

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    The economic news the past 12-15 months has been quite interesting in the U.S. - it is almost as if we are staring at two petri dishes.  In one, is a lot of dead bacteria; that dish is known as "housing and employment".  In the other dish, is everything else which has rebounded solidly in most cases, although in relationship to the demonic drop suffered in economic activity in 2008 thru early 2009, has been somewhat uninspiring.

    The one area that has been impressive is what remains of U.S. manufacturing - but unfortunately we're culled that down to only 11% of GDP (and 9% of employment), so while the figure is closely watched on 'the Street', we are not living in the 60s or 70s anymore when manufacturing activity was a more dominant piece of the economic pie.  [Nov 29, 2010: America Has Less Manufacturing Jobs Today than Before the War.... World War 2]  Today's ISM Manufacturing figure was another impressive data point, coming in at 61.4  (50 is the reading that separates expansion from contraction). 
    • Manufacturing in the U.S. grew in February at the fastest pace in almost seven years, driven by gains in orders, employment and exports that signal factories will continue to propel the expansion.  The Institute for Supply Management's factory index increased to 61.4, the highest level since May 2004.
    Prices paid continue to ratchet up as "no inflation" continues to be seen everywhere, except at the Fed:
    • The gauge of prices paid increased to a seven-year high.

    Meanwhile on Capital Hill:
    • Bernanke, who will testify for a second day before a U.S. House of Representatives panel on Wednesday, said the Fed expects inflation to remain low and that long-term inflation expectations appear contained, both according to market indicators and surveys of consumers.
    • "The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation," Bernanke said. 
    Technically he could be correct because without wage increases to absorb increasing costs, consumers will have to cut back elsewhere.  Hence firms won't have pricing power to pass along rising costs.  Which should be bad for Wall Street as margins are threatened ... in theory anyhow.

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

    Showing the bifurcation in the economy, construction spending fell 0.7% - to the lowest level in 5 months.  Perhaps we can just blame it on the weather, which has been a convenient reason for every illness of late.
    • The Commerce Department said construction spending fell 0.7 percent to an annual rate of $791.82 billion, the lowest since August.
    • Private construction spending in January contracted 1.2 percent as investment in nonresidential projects tumbled 6.9 percent to $244.44 billion, the lowest since August 2004. The percentage decline was the largest since January 1994.
    The one area of strength in construction has been apartment buildings, as former homeowners return to their roots.  In just about every other area, the U.S. overbuilt during the credit "house ATM" steroid era.
    • However, private residential construction rose 5.3 percent, likely reflecting a pickup in the construction of multifamily homes as demand for rentals rises.
    As for jobs, we have the keenly watched monthly employment data this Friday.  The last few reports have been major head scratchers as the labor data has not really seemed to fit with a lot of other economic markers.  While the unemployment rate has dropped from 9.8% to 9.0% much of this has been due to Americans disappearing from the labor force.  (remember, in America if you don't actively week work for 4 weeks - you no longer are unemployed)   So while many have been expecting monthly job readings of 150-200K per month, this has not happened.   Perhaps one of these months we'll see a 'catch up', as the previous few months of under performance vs expectations all pile into one month.  Frankly we've been waiting for 150-200K job creation since early 2010 - they keep promising us it will be "this month".

    Ironically good employment data may be the worse thing for Wall Street because it might mean QE3 is not coming in July.  Or QE4 in March 2012, or QE5 January 2013.
    • The labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” Bernanke said today. “The housing sector remains exceptionally weak,” and “slow wage growth” is keeping labor costs in check, he said.
    • Some, like ex-White House advisor Christina Romer, argue that the economy could benefit from another round of Fed bond buys when the current $600 billion purchase plan ends.

      Rare Event

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      Well, really 2 rare events - first the obvious; a market in the U.S. down on the first day of the month.... and second, one that started in the green and is degrading severely during the day.  The once relatively common intraday reversal, has been another strange missing character since March 2009...



      p.s. Hey Bernie Madoff - looks like they found a sacrificial lamb inside Goldman after all.  But a board member rather than a trader? Hmmm...
      • CNBC has reported that the SEC has filed suit against former Goldman Sachs Board Member Rajat Gupta regarding allegations of insider trading.
      • The Securities and Exchange Commission today announced insider trading charges against a Westport, Conn.-based business consultant who has served on the boards of directors at Goldman Sachs and Procter & Gamble for illegally tipping Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.

      China PMI's Slow Down, European Manufacturing Quickens

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      Along with a U.S. market that almost always goes up, the other thing that happens on the first day of the month are global releases of manufacturing data.   US ISM will be out at 10 AM. 

      China's 2 PMI's (one from govt, one from HSBC) showed a slowdown, while Europe was stronger.  The Chinese slowdown could actually be seen as a positive, as they are trying to slow their economy and China seemingly can turn on a dime when needed.  Early last fall I believe their PMI readings were near 50, then they turned the spigot on - and were back off to the races.  Plus during Chinese New Year, the data is not as useful.  Through most of these reports there continues to be cost pressures, which either need to be absorbed by consumer or producer.  Thankfully the U.S. is an inflation free zone ...

      Via Marketwatch

      • Chinese manufacturing activity softened in February, as mounting inflationary pressures acted as a negative drag on demand, though overall manufacturing activity still expanded, according to two purchasing managers’ surveys of the nation’s industrial activity released Tuesday. 
      • Analysts cautioned against reading too much into the data, as it offers a snapshot of factory activity during a month when businesses shut down across the country to mark the Chinese Lunar New Year holiday.
      • China’s official purchasing managers’ index, released by the China Federation of Logistics & Purchasing, was 52.2 in February compared to 52.9 in January.    Tthe survey marked the 24th straight month that the PMI remained above the all-important level of 50, which separates expansion from contraction.
      • Meanwhile a privately compiled PMI put out by HSBC and U.K group Markit, eased to a seven-month low of 51.7, down from 54.5 in January
      • New export orders were negative on a month-on-month basis, marking the first such contraction since August.  HSBC also said....was the sharpest month-on-month drop since the series began in April 2004.
      • HSBC’s chief economist for China, Hongbin Qu, said concerns about a slump in growth were “unwarranted,” though he acknowledged the data confirmed China’s manufacturing is cooling.  “This is a good number, suggesting Beijing’s policy tightening is starting to cool excessive growth and inflation."
      • Bank of America-Merrill Lynch downplayed both PMIs because of potential distortions during the holiday month and an inability to adjust the data series the for seasonal factors in a credible way. 
      • The HSBC survey covers 400 companies, while the federation's monthly reports measure data from 820 companies across a range of industries and is an indicator of future trends. 

      Via Reuters:


      • European manufacturing growth accelerated to the fastest pace in more than 10 years in February, a further sign the economy is gathering strength.  A gauge of manufacturing in the euro region rose to 59 last month from 57.3 in January, London-based Markit Economics said today. That’s the highest since June 2000. A reading above 50 indicates expansion. 
      • British manufacturing also grew strongly, at its fastest pace in nearly two decades.
      • The output price index in the 17-nation euro zone hit a record high for the survey, which was conducted February 11-21 before oil prices spiked again last week. 
      • The ECB is not expected to exit from the ultra-loose monetary policy it adopted in the depths of the financial crisis when it meets on Thursday but economists expect an interest rate hike by the fourth quarter of this year.
      • Raw material costs have risen broadly with oil. Worries abound that a sustained rise in commodity prices, from metals to grains, could reduce demand and so slow economic activity around the world.  

      U.S. Market Has Not Fallen on First Day of the Month Since Last Summer

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      I noted a few quarters ago how the "first day of the month" was becoming strangely positive....it was not relatively known at the time and I was joking my 2nd fund would only be open 1 day a year - buying just before the end of close on the last day of previous month and going to all cash by end of day on the first.  The past 3-4 months I have seen notice of this 'situation' pop up all over the financial blogosphere.   Indeed it is now so obvious that even 'old media' has figured it out as we see in this morning's Wall Street Journal.   I will keep repeating these sort of comments but "in the old days" when everyone knew something, it stopped working.  Something has changed the past few years, where 'obvious' things now self fulfill much often, despite everyone (and their mother) knowing... not sure exactly why that is.

      Bespoke blog has a chart of the past 14 "first day of the months" and as you can see there are only 2 losing sessions.  Ironically (grassy knoll alert) those happened when QE1 was over and QE2 had not begun.  I don't recall when QE1.5 happened exactly (rolling over of funds from expiring MBS into Treasuries) but I think maybe Julyish.  Whatever the case or reason, it is what it is....



      Even cooler, Bespoke made a chart of returns during this 14 month period showing how it really does not bother to be in the market the rest of the month, especially if you understand risk adjusted returns versus just plain old returns.  You have a winning percentage (how often the first day of the month leads to gains) in excess of 80% and can capture in those few days almost the entire gain of the S&P 500.  That's risk adjusted nirvana.

      [click to enlarge]



      Again, until blue in the face, this is so obvious it should no longer work... but it continues to.

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

      Some snippets from the WSJ piece
      • It is the latest twist on an old adage: Trade the first day, and stay away.  Some traders have been adopting a new ritual in recent months—buying early on the first day of the month and selling by the day's close—taking advantage of a peculiar phenomenon that has seen the Dow Jones Industrial Average rise substantially on the first day of each month. That one-day move often has accounted for much of the Dow's gains for the entire month.
      • Ed Yardeni, president of Yardeni Research, an economic-consulting firm, is recommending a new trading strategy: "Work during the first trading day of the month, and take the rest of the month off."
      • Just why the trend has been so consistent is a mystery. But market watchers like Mr. Yardeni point to the release of nationwide manufacturing data that usually hits on the first day of the month. The manufacturing sector has been one consistent source of positive surprises during the economic recovery.  Others suggest that the first day of the month is when money comes out of paychecks and into 401(k)s, ready to be plowed into the market.  Some also point to window-dressing by investors whose performance is measured monthly. These investors often sell toward the end of the month to lock in any gains, only to jump back in at the beginning of the fresh month.

      Monday, February 28, 2011

      Bernie Madoff: 'The Whole Government is a Ponzi Scheme'; 'The Whole New Regulatory Reform is a Joke'

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      Ponzi?  I guess it takes one to know one....

      I am not sure what to feel, when I find myself in agreement with so much of what Bernie Madoff says in a fresh interview with NY Magazine.   I guess when you have nothing left to lose, you can be brutally honest. Thankfully our regulatory bodies are captured, our politicians are bought and paid for, and our circus and bread goes full steam ahead.  So nothing to see here....

      "It's unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme."

      Now now Bernie... Goldman is only doing God's work...

      The piece is mostly about how Bernie got to where he is now, but there were definitely some interesting big picture quotes as well.  Full interview here:

      • He sees himself not as some evil mastermind but as part of a system of corruption, maybe its linchpin, but he believes that people have lost their perspective on what actually occurred.
      • Madoff told me he wished he’d been caught earlier, anything to put an end to a nightmare he didn’t have the courage to end himself. In his mind, he even tried to act honorably. “I was always able to rationalize it … Look, I tried to give moneys back to my individual clients when I realized it was impossible to get myself out. I tried to return funds to my friends, moneys to the smaller clients. They wouldn’t take it back …"

      [Jul 17, 2009: Jon Stewart - the Pyramid Economy with Goldman Sachs as the Eye]

      For all the Fuss About China, India Has Been the Better Option the Past Decade ...and Since the March 2009 Lows

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      Some interesting charts over at dshort.com, comparing some of the major world indexes (plus the 2 emerging Asian giants) since January 2000, and the U.S. March 9, 2009 bottom.   One can see despite a horrid start to 2011, India has been the lead horse in both categories - in fact more than doubling the return of investing in China over that time.  These 2 countries were neck and neck for much of the decade but after their late 2007 peak and subsequent crash, India has had the much better run.   It remains a shame so few Indian companies trade on American exchanges as ADRs.  For every Indian stock I can throw a dart and find 25 Chinese ones.


      Performance since January 2000 (click to enlarge)




      Since the March 9, 2009 U.S. lows India not only has been the leader, but China has done worse than even the developed market indexes.  Now to be fair, China bottomed a few months ahead of the U.S. so if we moved the axis back a few months to January 1, 2009 things would look somewhat better - but it even surprised me to see China lagging Japanese equities!  Hong Kong has been the far better option...

      Performance since March 9, 2009 (click to enlarge)


      Salesforce.com (CRM) Finally Stalling?

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      Interesting past 2 days for juggernaut Salesforce.com (CRM).  After reporting Thursday evening, the stock scorched short sellers with a huge gap up open at $147ish... then has proceeded to sell off continuously since; both Friday and this morning.  The stock seems to tire in the $145-$150 area the past few months, and has once more broken its 50 day moving average.  When the stock did this in January, it simply turned on a dime and made a mad dash, ignoring the technical damage.  What is interesting here is there is a yawning gap that asks to be filled from November, which is almost the exact price level of the 200 day moving average.  But very few have the strength, or patience to try to short this puppy for any period of time since valuation means nothing.



      I won't recreate the wheel on the earnings - the Wall Street Journal shows some of the issues with the company which despite very nice revenue growth, struggles to post increasing profits - especially of the GAAP variety.  
      • Salesforce's sales grew 29% last quarter, but its total operating expenses soared 40% to $365 million. As a result it actually booked a loss – of $391,000 – from operations. 
      • Even for the full year, sales rose 28% but costs rose faster, with the result that operating income actually fell by 15%. The company made a mere $97 million at the operating level out of $1.55 billion in sales.
      • Where's the money going? So many places. It's hiring new staff aggressively, including around 500 just last quarter. It's paying sales staff huge commissions, plus big incentives including in stock.
      • And it's not just the cash that's flying out the door. A lot of stock is flowing to staff in the form of incentives. That's a real cost to investors, too. The numbers tell the story. Six years ago, soon after Salesforce went public, the annual report revealed that there were a total of 111 million shares in existence. Today: 140 million. And next year, management warns, it will rise to 145 million.
      • Now look at earnings. Under generally accepted accounting principles, earnings per share at this growth company plunged 25% last year to 47 cents. That included a 50% fall in the fourth quarter. By that measure, Salesforce stock is now about 300 times last year's earnings.

      Of course on Wall Street we IGNORE generally accepted accounting principles in favor of NON GAAP where we can ignore so many costs and wink at each other how "cheap" stocks are as long as don't count things as massive option handouts....
      • Management has been selling the stock.   A lot of it. That's especially true of CEO Mark Benioff. Admittedly, they have been doing this for several years. But according to InsiderScore, Benioff alone sold $220 million worth of stock in the past year.  Net income attributable to the stockholders during the same period? Just $64 million.
      • Management prefers a more generous way of measuring net income. But even by this measure, earnings barely edged up 6% last year to $1.22 per share, and the growth last quarter crawled ahead by a mere 3%. And even that leaves the stock trading on more than 100 times historic earnings.
      • In the next year, Salesforce management now expects the company will earn 11 cents or less (under the strict measurement of earnings) or $1.38 or less (under the more generous measure).
      • Salesforce has plenty of sales growth ahead. There's no question about that. But to justify an $18 billion price tag, it's going to need it. Even to bring the earnings multiple down to a more reasonable, say, 25 times, it will need around $720 million in net income, and so maybe $1 billion in operating income. Right now Salesforce has operating margins of just 6%. 

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

      This gentlemen at Seeking Alpha also does a very good job at sniffing out other issues; but again - with stocks like this, it does not matter until it matters.

      No position

      Sweet Monday Mornings

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      Remarkable isn't it? It has almost become like clockwork - I've never seen a pattern continue like this at a 80%+ type of success rate.  Another wonderful surge in futures between 6 AM and 9 AM on a Monday morning, for no particular reason (not even a "Merger Monday" to use as an excuse).



      Much like last month, we have Monday morning markup following by the "first day of the month" magic on a Tuesday.  It will almost be a shock to the system if there is a selloff tomorrow.  Last week's selloff is already a fading memory and if tomorrow's rally delivers its normal 0.5 to 1.5% pop we should be at yearly highs.

      Side note - no less than 3 "non stock market" type of people asked me this weekend why prices for "everything" were going up.  I told them not to worry... just there imagination as the official statistics show no inflation.  I left it at that, otherwise it would have been a 2 hour conversation each. 

      Saturday, February 26, 2011

      Groupon Revenue Hits $760M in 2010; Staggering Year over Year Growth

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      I am keeping an eye on Groupon because it most likely will be the hottest IPO of the year.  The company is currently in hyper growth stage as outlined in the WSJ; the year over year growth is simply astounding as this company - born in late 2008 - continues to amaze.

      While the $760M is a jaw dropping figure, I would like to know if the $760M represents the gross amount of coupons sold, or what Groupon received since they only keep half of the coupon deals.  Could not tell from this story.  But even if it's gross revenue, growth from $33M to $380M in a year is astounding.

      • Daily deals website Groupon Inc. saw its revenue surge to $760 million last year from $33 million the previous year, with more than a third of its 2010 sales coming from outside the U.S., according to an internal memo. 
      • The email, sent by Groupon Chief Executive Andrew Mason to staffers in early January, also reveals the founder's grand ambitions for the company he started three years ago. Mr. Mason writes that he hopes to achieve "billions in revenue" in 2011.
      • Groupon is one of a handful of Internet companies, including Facebook Inc., Twitter Inc., and LinkedIn Corp., which have had investors keening for either private placements or an IPO. The scramble has fueled a spike in valuations of these private companies.
      • The Chicago-based company spurned a $6 billion takeover bid from Google Inc. in December and went on to raise $950 million in financing from private investors early this year. It is also preparing for an initial public offering later this year that could raise $1 billion, people familiar with the matter have said.
      • Groupon had grown to more than 4,000 employees and expanded to 565 cities at the end of 2010, up from about 120 employees and 30 cities in 2009, according to the memo. Some of that growth has been fueled by the acquisition of rivals in Europe and Asia. Overseas activity represented about $285 million of its revenues last year and almost three-quarters of its employees.
      • Mr. Mason told his staff to beware of complacency, warning that "clones" and large technology companies, will commit significant resources to taking away Groupon's market share. "If you feel a little like Frodo climbing Mount Doom, you can't be blamed," he wrote, a reference to the protagonist of "Lord of the Rings."
      • The company, which is known primarily for offering online coupons for local merchants, is also moving to generate sales from national retailers. According to the memo, "national deals" accounted for 12% of revenue in the fourth quarter of 2010.
      • Groupon now has 51 million subscribers to the email it sends to promote deals, and hopes to increase that number three-fold, to 150 million, by the end of this year. The company also hopes to generate more revenue that doesn't rely on this email blast. In the memo, Mr. Mason wrote that he hopes for, "at least $1B in revenue from new products we launch in 2011, not just the current daily email."

      Links for Warren Buffet's 2010 Letter

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      Warren Buffet's much read annual letter is out and I've added some links below for those who are interested.

      The full letter in pdf format is here.

      1) The NYT Dealbook does an overview in As Berkshire Improves, Buffet Sings Praises of U.S.

      2) The Associated Press writes Warret Buffet Remains Optimistic About U.S. Future

      Billionaire Warren Buffett wants Americans to be optimistic about the country's future but wary about borrowing money and the games public companies play with profit numbers they report.  He said a housing recovery will likely begin within the next year.

      3) WSJ Dealbook has quotes and quips from the letter below

      Discussing why Berkshire keeps so much cash on hand:
      Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.
      ****

      “Money will always flow toward opportunity, and there is an abundance of that in America.”
      ****

      On human potential and the nation’s future
      Human potential is far from exhausted, and the American system for unleashing that potential–a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War—remains alive and effective.
      ****

      John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime. University finance departments often behave similarly. Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.)
      ****

      One footnote: When we issued a press release about Todd [Comb's] joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops–that may not be the smartest metaphor for an 80-year-old CEO to use.)
      ****

      On hedge funds:
      The hedge-fund world has witnessed some terrible behavior by general partners who have
      received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners.
      ****

      Berkshire and the housing/mortgage crisis:
      Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind. If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did.
      (Emphasis added)
      ****

      On home ownership
      Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. … But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender–often protected by a government guarantee–facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.
      ****

      On the worst of the global financial crisis:
      As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth–and I still have my wife.”

      ****
      In discussing the bazaar that is the coming annual meeting:
      Remember: Anyone who says money can’t buy happiness simply hasn’t learned where to shop.

      Friday, February 25, 2011

      NASDAQ Bounced Perfectly Off the 50 Day

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      Sometimes I get caught up on my focus on the S&P 500 index, and ignore Mr. NASDAQ.   In retrospect we had a helpful hint that a bounce may be coming because while the S&P 500 did not get within sniffing distance of its 50 day moving average, the NASDAQ did.  Indeed, this index traded intraday below the 50 day briefly both Wednesday and Thursday....



      Now both the S&P 500 and NASDAQ are in almost identical position on their charts, breaking back over their 20 days ...

      The VIX Calls Trade

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      I mentioned early in January that normal hedging procedures were causing a major detriment, as the non stop melt up wrecked havoc on a portfolio which was not "100% long and strong".  Instead I offered the a strategy employing VIX calls - buying some call options out 4 months (minimum) and then using that as portfolio insurance.  For example, I mentioned the trade Jan 7th around 17 (you could have averaged down later that day into the mid 16s), and when the Egypt fiasco broke out at the end of January, I said to take 1/3rd off the table in the 19s on that Friday spike down in the market.  Then when VIX fell back into sleepy time under 17 you could rebuy those VIX calls (this time moving out to at least May so time decay does not hit you).

      My ultimate goal was "something in the 20s" which took almost 2 months to happen, but finally struck this past week - one could have sold the last 2/3rds of the original January position (in 2 pieces) first on the huge volatility spike Tuesday (I think VIX was up near 30%) and then the last 1/3rd Wednesday.  That would have left you only with the "replacement" VIX calls (in this case May) that you bought post Egypt, with the entire original position bought Jan 7th sold for very nice profits.



      I am not mentioning trades day by day anymore, but if you wanted to be more aggressive the VIX has been an excellent range bound trade that I would have definitely been playing on the side as well, aside from the major trade above.  Buying $16.50 and below and selling "near $18" would have yielded multiple winners as the VIX seems to have a floor near 15/16.  And in this specific case since VIX was nowhere near 18 when the Libya situation broke out, you would have extra gains from not just the main VIX trade, but this shorter term batch of VIX calls as well.

      I'd continue this strategy until it stops working...

      No position

      [Video] Bob Prechter of Elliot Wave Defiant, Continues to Call for a Retest (and Break) of 2009 Lows

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      After some impressive calls in 2008 and 2009 (including one to get out of shorts and go long as sentiment had gone extremely poor in February 2009), Bob Prechter of Elliot Wave fame has had a more difficult time of it of late.  That said, he is not the only one because the only working strategy for most of the past 2 years has been "buy in the morning, buy in the afternoon, and buy some more".  While I respect someone who has a disciplined system and sticks to it (which I think is the only way you survive in the long run in the market), as I've been saying for a few years this market does not act like it used to.  So adjustments are necessary.   Respect the trend...until it ends.   The trend right now is "massive pain for those who bet against The Bernank".  Maybe in the "long long long" run Prechter will be proved correct, but can we ever imagine a real serious correction ever again?  The Fed will come in with multi trillion QEs as managing the stock market is now apparently a new mission for the institution....

      For those interested, he is even bearish on commodities and his only favorable long idea is the U.S. dollar since sentiment is so strongly against it. 

      p.s. I do agree that sentiment is off the chart, but we've been talking about that for weeks (if not months) and it has not mattered.




      • Investors have gotten wildly bullish of late, as the bull market that started in early 2009 keeps driving stocks to new highs.  But the pigs are about to get slaughtered, says Bob Prechter, president of Elliott Wave International and editor of the Elliott Wave Theorist.  
      • Prechter still thinks the new bull market is just a cyclical "retracement" of some of the bear market losses that we've had since the market crashed in 2008.  Prechter expected this retracement to drive stocks 50% above the market lows, but stocks have since soared 30% higher than than he expected.  
      • So when the day of reckoning comes, Prechter thinks, it will be even more startling.  And Prechter still thinks that stocks will eventually crash to new bear-market lows (read: below 6,800 on the DOW). 
      • What makes Prechter think this day of reckoning may come sooner rather than later?  Sentiment indicators and other technical analysis. 
      • Investor bullishness has now gotten so extreme, Prechter says, that it has exceeded the levels in 2008 before the market crashed.  Investors could still get even more bullish, of course, but eventually they'll pay for this optimism. 
      • And Prechter's not just bearish on stocks: He thinks oil, silver, and other commodities are absurdly overvalued, too.  The only thing he's bullish on is the dollar. 
      • And lest he be dismissed as a perma-bear, Bob Prechter is quick to add that he hopes there will come a day when he can come on the show and tell everyone that stocks are finally so crushed and hated that it's a historic opportunity to buy them. 

      Very Short Half Life for Bears

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      "Here we go again."

      As I said yesterday when explaining how I thought turn out, "X and Y most likely would happen but..... in a normal market; this is not a normal market."  With the break of Wednesday's intraday lows of S&P 1300 there should have been a nice downside follow through.  Instead since 2 PM yesterday, the S&P 500 has gained 1.85% in a span of some 4.25 market hours.  We have seen so many "V shaped" moves since March 09, it is too numerous to count.  They come off good, bad or indifferent charts - and they don't need any large amount of volume, as many have been of the low volume variety, further confounding any of us who started in the market pre 2009.  All that we know is what used to be a rare pattern has somehow become common. 



      My gut was shorts would scramble to cover Friday afternoon ahead of "Monday morning gap up" (and the move up would be far less intense than nearly 2% in hours) but even that was asking too much by 24 hours.  The half life of a bear move of any sort is tiny.

      Bigger picture the S&P 500 has moved back above the 20 day moving average so short sellers had a level to bet against, and that level has been punctured.  Back to the daily melt up, until the action tells us otherwise.   If the market remains strong and finished out here or higher, the only hope the bears still have remaining is a 'double top' on a rally to last week's highs and then some sort of reversal.  If not, off to the races...

      Thursday, February 24, 2011

      Algos Go Wild - Oil Drops $4 in Just over an Hour, S&P Rockets up 15

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      Quite a reversal going on; the S&P 500 certainly broke 1300, down to 1294ish around 2 PM.   Then oil which was hovering near $100 all day, began dropping like a rock and gave back some $4+... with it almost step by step the S&P 500 ran up in a straight line.  Amazing how all these HAL9000 algos connect and move in concert.  We are but gnats on elephants HAL's behind.

      Intraday move of S&P 500 - zoom zoom.


      Here is the closest instrument I could find to represent what happened in oil intraday - breathtaking drop.


      General Motors (GM) Falls Below IPO Price on Earnings

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      Not a good day in the auto sector; General Motors (GM) just fell below its IPO price making a lot of instiutional investors unhappy.  This despite a beat on earnings - the reasoning is much the same as I mentioned with Magna earlier in the day.  They also rewarded their workers to the tune of $200M, which in Wall Street's short term focused objectives, is a negative.



      Via Reuters:
      • General Motors Co posted fourth-quarter results that topped Wall Street expectations, but its shares fell below their IPO price as investor concerns shifted to the pressure from rising oil prices and higher costs of launching and selling new cars.  GM posted a profit of $4.7 billion for all of 2010, its first full year after a landmark bankruptcy that scoured costs and debt from its balance sheet.
      • That marked the automaker's first full-year profit since 2004 and its largest profit since 1999, when it earned $6 billion on booming sales of trucks and SUVs.
      • GM's fourth-quarter net income of $510 million represented a slowdown from the previous three quarters, but topped analyst expectations after adjusting a one-time charge to buy back preferred shares held by the U.S. Treasury.
      • Revenue rose nearly 15 percent from a year earlier to $37 billion.
      • Barclays Capital analyst Brian Johnson said GM's fourth-quarter results represented "somewhat of a mixed bag" that would call into question the "upper end of investor expectations."  The most bullish forecasts for a recovery in the cyclical auto sector had been under scrutiny since last month when GM's closest rival, Ford Motor Co, reported a fourth-quarter profit that fell far short of expectations.
      • Ford's results touched off a slide in shares of both companies as investors worried that higher costs for everything from steel to plastic to the engineering teams behind new vehicles would erode profitability in future quarters.  
      • The surge in oil prices to 2 1/2 year highs near $120 a barrel on Thursday added to the pressure on GM and other auto-related shares, analysts said.  
      • In addition to higher commodity costs, analysts have questioned GM's higher spending on incentives since the start of 2011, with some rivals saying the automaker was at risk of slipping back into its old ways of pushing volume by sacrificing profit per car.  GM said it had pushed its spending on incentives up by almost 13 percent in January, but executives said that was a temporary move that would be reversed. 
      • Separately, GM said it would pay more than $200 million in bonuses to hourly workers, including payouts of about $4,300 for each of its roughly 45,000 U.S. factory workers represented by the United Auto Workers union.
      No position


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