Tuesday, December 30, 2008

I Wish I was That Optimistic

Doug Kass published his list of possible surprises for 2009 here. I'm reading his annual lists with great interest for several years. What can I say, his 2008 list was great! Unfortunately, there was no deflation in it. And Doug still hasn't recognized deflation as the main current event.

That's the main problem with this list. Surprises 2-6 are contingent on great success of government house market rescue program. Never mind that this program has to be approved by Congress somehow, it's just doesn't exist. I have very high opinion of Larry Summers, I think he is the greatest economist alive, but he doesn't live on mount Olympus and doesn't have supernatural powers. I just don't see how any program can save housing market in the 2nd quarter of 2009. Maybe bulldozing the whole neighborhoods? A lot of them? Of course, lower mortgage rates can help. First of all they would help people who have good credit rating, have a house they can afford and wants to refinance. Give me 4.5% and I refinance. Unfortunately, that would do nothing for the housing market. It would put some more money into hands of people who won't spend them anyway.

Surprise 1 is interesting, but I don't see how to make money off it.

Surprises 7-9 and 11 completely contradict idea of housing market recovery and stock market boom.

Surprise 14 is, again, contingent on recovering economy. Even then, Microsoft is not buying Yahoo!. Somehow I believe Ballmer that they are not interested. Some deal is possible, but Microsoft doesn't sit on a pile of cash anymore, it doesn't have 20 billion ready. It might be able to raise money, but I don't see a reason why. Again and again most analysts, traders and investors make the same mistake: merger of software or internet companies is not 1980s style corporate merger. Software and 'net companies have most of their real value in people, not in equipment and real estate. If you buy Yahoo and dismantle it, you get less than you paid. Much less.

Surprises 18 and 19 are long overdue. It might be a good time to short remaining newspapers. Deadwood press is becoming obsolete.

And surprise 20 is really no surprise. Middle East build up is a real bubble. Need to think if there is some money to be made here.

Full disclosure: at the time of publication author did not have positions in any companies mentioned. Positions can change any time.

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CLosing BIP

Closed Brookfield Infrastructure Partners position today.

Full disclosure: at the time of publication author did not have any positions in BIP. Positions can change any time.

Monday, December 29, 2008

Selling BIP

Started selling Brookfield Infrastructure Partners (BIP) today. This is the stock I've got as a dividend on my Brookfield Asset Management (BAM) position. The price is low, sure, but I think it's going to stay this way for a while. Reason for selling: I don't want to mess with partnership tax forms. Position isn't big enough, easier to close it.

I really wish US tax code was much simpler.

Full disclosure: at the time of publication author did have a long position in BIP. Positions can change any time.

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Sunday, December 28, 2008

Oil Future Market: Unwinding The Bubble

Almost every day since July I'm reading (correction, scrolling through and mostly ignoring) articles, declaring oil price bottom and setting "natural" price targets for oil. In August those targets were in range between $150 and $200 (last one by Goldman Sachs, I still want to know if their traders listened to their analysts and if so, how much money they lost in result). Currently range moved to something like $80 to $100. What a bunch of crap! And I completely refuse to discuss bunk "Peak Oil" theory here.

First of all, I don't know where oil price is going in the short term. Second, if price of oil was defined by supply and demand of real commodity, price should stabilize somewhere between $50 and $60, which is current marginal cost of Canadian oil sands companies and deep water extraction. I can't seriously accept claims that Middle East costs are reaching $120. Yeah, sure, if you think that Iran's development of nuclear arms, Saudi's money going to support the most reactionary, most antisemitic mosques in the world, Venezuela's stupid government spending on arms and "social" projects are parts of cost of oil, I have a dozen bridges in Minnesota for 99 years rent. If you strip all the crap, cost of Middle East oil still doesn't exceed $25. Situation in Russia is a little bit worse, but still cost of most producers doesn't exceed $40, translated into price of light sweet crude. And still deep water oil and oil sands production is the most expensive to extract and thus gives us good estimate of marginal cost.

So, in the long term oil should stabilize between $50 and $60. But this is the long term. In the short term, there is a small problem with oil price. And the problem is, since the beginning of 2007 price of oil as a commodity was separated from price of future contracts. Starting in the end of 2006, lots of money went into future contracts of oil. Hedge funds bought a huge number of oil contracts, creating a bubble which peaked in July. They were helped by sovereign wealth funds, endowment funds and even state pension funds.

In July oil bubble popped. I was naive then, thought that oil should gradually fall to about $90 by year end and settle to around $50 in couple of years. Boy, was I wrong! I stupidly sold PowerShares DB Crude Oil Double Short ETN (DTO) in August. You know what happened next.

Why oil is keeping going down? Surely, at under $40, marginal producers should just stop production and wait until price is good enough for them. That would be true if oil market was a pure commodity market. But we have future market which was separated from physical market for more than a year. Looks like marginal producers decided to sell future oil production while prices were still high. Can't say for everyone, but Devon (DVN) did exactly that in August, according to Jim Cramer. Interesting picture: oil already sold for $100+ competes with oil coming to spot and short term future market. Guess where prices should go?

That's why it's impossible to predict short term oil price: margin cost does not define market price. I don't know how long this situation will persist. But in the short term, oil can go up or down. Huge supply of oil in inventories, including floating ones (tankers contracted exclusively to hold oil for several months) creates a ceiling which would be hard to breach short term. Can it go much lower? Sure. I wouldn't bet on $15 oil, but it might happen. Would this price be sustainable? No, hell no. But it can happen. And I probably will be a buyer of U.S. Oil Fund ETF (USO) or something similar then. Can price go higher from here? Sure. But unless we have some big event, like big Middle East war, or war between Venezuela and Colombia, with US participation, I just don't see price above $60 for 2009.

Of course, futures market can still surprise us. But most funds don't have money to create big bubbles now. A lot of hedge funds are under huge redemption obligations. Some of them are gated, i.e. they refuse redemptions, but in any case they are in no position for big speculation. Endowment and pension funds are in worse condition. Most of them probably will replace management for more conservative one (which would be the right move), which will automatically exclude them from any future markets.

Until oil futures bubble is completely worked out and price starts reflecting real supply/demand situation, don't expect expensive oil.

Full disclosure: at the time of publication author did not have any positions in USO or DTO. Positions can change any time.

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Tuesday, December 23, 2008

Adding to TBT position

Added to TBT position today. Looks like I started it too early, we'll see. Quite possible that Treasuries buyers are right and I am wrong. Only three or four weeks left to find out.

Full disclosure: at the time of publication author had a long position in TBT. Positions can change any time.

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Sunday, December 21, 2008

Dollar Carry Trade Is Bigger Than I Thought

Just got new information on Friday: it's a little bit easier to get dollar credit in Russia for good businesses than credit in local currency. Means that I was wrong in my previous post: dollar carry trade is returning to Russia. Then it should be returning to other places as well, including Brazil and Asia.

I don't know if this is good or bad news. Definitely, fall of dollar in the last three weeks was caused by carry trade. Can dollar fall even more? Don't know, depends pretty much on loan repayment conditions. If most loans were short term, repayment is coming right now for monthly and four week loans, and borrowers will have to buy dollars to pay back. But they might choose to refinance the loan. At the same time more borrowers will get loans from carry trade.

Bad thing, dollars are still not going to US businesses. And this situation reminds pretty much Japan in 1990s. When Bank of Japan cut rates to zero, yen carry trade exploded, but local businesses still couldn't get credit cheap enough.

There is hope, it's coming from two sources:
1. Events are moving much, much faster now, than in Japan in 1990s.
2. US enterprising spirit. It always invents something new, something the whole world needs. Not always good things, but always new: personal computers, mass adoption of cell phones, commercial software. Also collateral debt obligations and multiple financial derivatives.

If we follow Japan's path, dollar rate should stabilize at current or little bit lower rate. Don't see how to make money off it, unless you participate in dollar carry trade.

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Wednesday, December 17, 2008

Fed Non-Event

How does it feel runnin' around
How does it feel watchin' from upside down?

(Slade, How Does It Feel?)

First of all, sad congratulations to myself. I predicted here, in January, Fed's rate below 1% by January 2009. Doesn't make me feel good.

Yesterday's target rate cut by Fed doesn't mean anything. Real rate, as reported here, was mostly below 0.5% for a long time and below 0.25% since December 5. Unfortunately, most commentators could even read Fed's statement right. "Quantitative easing" really means that nothing in Fed's arsenal is working. Fed is desperately trying to stop deflation by any means possible. It's flooding banks with money. And where is this money going? Treasuries are up, I'm not sure they were that high even during the Great Depression. OK, so a lot of dollars went for Treasuries. Dollar is down. It feels very wrong in deflationary environment. But there is a probable explanation: dollar carry trade. Trade to Euro zone, because almost nobody is lending to anybody else. Maybe China, but I wouldn't bet on it. Not Russia, not Latin America. I'm thinking if there is a way to make money off it, but dynamics are not obvious. The main problem though is that money is not going to where it's needed: businesses. And Great Depression 2.0 is not off the table exactly because businesses can't get credit. So what's next, uncle Ben? Direct lending to businesses? Throwing money down from helicopters?

Some time ago one of my articles was called "Why Doom And Gloom?". Now I see the answer. Well, there were successful businesses during Great Depression. There were great businesses launched during Great Depression. Doesn't mean I want to see GD 2.0.

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Monday, December 15, 2008

Changed Facts Or Public Service?

Jim Cramer repeated today on his "Mad Money" show that Great Depression 2.0 is off the table now. His mantra is "When facts change I change too". I'm signing under this statement any time. The only problem I see, facts haven't changed, yet. Yes, Fed is trying to flood economy with money, but this money doesn't go farther than Treasuries. Yes, there is TARP program. All it can really do is to help banks to conform to reserve requirements. Yes, there might be some help to GM and Chrysler which at least will keep some people employed. But so far, we are in deflation. GD 2.0 is not off the table until we see at least some inflation.

But Jim also said one thing which reminds me of my life in Soviet Union. He said that proclaiming Great Depression would be bad public service or something like that. This is the first time when Jim really speaks the same language as Lenin, whose portrait he is keeping in his studio (he thinks they look similar, nothing of the sort, by the way). No Jim, saying what's "good for the public" instead of truth is a very bad public service. It's just a lie. I understand that politicians are lying (sorry, saying what public wants to hear instead of truth) quite often and always make corrections for that. But Jim Cramer is no politician! He was a hedge fund manager, extremely successful, and he never forgets to remind us about it. He gives investment advice, i.e. telling people how to make money. Tell me honestly, Jim, would you buy now counting on recovery or counting on possible Great Depression? I don't care about public good when investing. I only think about my money. For public good, I donate to charities, I vote, maybe some of my articles are for public good too (not for money, that's for sure).

Fortunately, Jim's investment advice isn't tainted by this approach. I agree with advice to buy high yield companies with reliable dividends and acted on it. But there are some new filters in my head when watching Jim.

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Friday, December 12, 2008

Stocks, Bonds And Commodities

They say on Wall Street, that if stocks and bonds point to different directions, bonds are usually right.

Bonds are pointing to Great Depression 2.0. No doubts here. Treasuries are at GD levels, corporate bonds are too, selling new bonds issues is almost as hard as in 1930s.

Stocks? I don't understand where are they pointing. Market is down big for the year. We had a local bottom, with obvious capitulation, on November 20. Market is up since then, but S&P didn't break 900 and trading in a 800-900 range. It can go either way from here.

The strangest thing right now is behavior of commodities, including gold. Fall of dollar is strange as well. This week commodities market is screaming "Inflation!". Dollar confirms. But Treasuries yields don't predict any significant inflation. More like deflation.

What's in future? Stocks don't say. Bonds say we are in GD 2.0 already. Commodities say inflation and recovery. Last year, when commodities and stocks were pointing to growth and bonds to recession, bonds were right. If they are right now, bad.

My crystal ball is all misty. The only thing I know is that dollar fall this week doesn't make any sense to me. If it continues to fall, I probably will buy DRR, to play on dollar recovery.

Opened TBT position today, as a way of shorting Treasuries. I'm also looking at ProShares UltraShort Lehman 7-10 Year Treasury ETF (PST).

Full disclosure: at the time of publication author had a long position in TBT and no positions in PST or DRR. Positions can change any time.

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Wednesday, December 10, 2008

Treasuries Craze And Window Dressing

I want to propose one more explanation to current bubble in Treasuries. It was noted that current prices of Treasuries can be explained by financial panic, possibility of Great Depression 2.0 or combination of both. I also noted here that between August and October dollar and Treasuries were both going up and after mid-November dollar is more or less stable, when Treasuries shot up sharply.

One theory which can explain current growth of Treasuries (which means drop of yields) is window dressing. Funds which lost big on commodity and stock markets this year need to show that they are currently in safe investments. What can be safer than Treasuries! And total size of those funds is enormous. There are trillions of dollars in various pension, endowment and sovereign wealth funds. They were managed badly, invested a lot of money in commodities in the last and first half of this year, lost huge amounts and now desperate to show investors that their money is safe. And because this money was invested in dollar denominated assets before, funds don't need to buy dollars, hence dollar stabilization.

I still don't discount financial panic and Great Depression 2.0 (or Great Recession). But I want to play on window dressing. The easiest way to do it for individual investor is to go short iShares Lehman 20+ Year Treasury Bond (TLT) or, better yet, go long UltraShort Lehman 20+ Treasury ProShares (TBT). I think to buy some TBT shares into year end and sell in the first half of January. There is some risk still, so due diligence still applies: buying small positions on the way down and selling at the first sign that trade might go wrong.

Full disclosure: at the time of publication author had no positions in TBT, TLT or any other stocks related to treasuries. Positions can change any time.

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Tuesday, December 9, 2008

Range Confirmed.

Looks like Dow Jones range 8000-9000 is confirmed for now. Turnaround Tuesday (Thanks, Todd Harrison, for coining this term) stopped big rally.

My apologies to Jim Cramer. He is no dancing bull. He understands that we are in a trading market. He understands that it's way too early to talk about recovery. And idea from today's show to buy auto companies convertibles is very interesting. I'm looking at Ford convertible now (F-PS). Not at after hours prices though.

Treasuries craze continues. People are buying 3 month bonds for no interest! No, it's too early to short Treasuries. I'll wait.

I see that my yesterday article on Microsoft was quite popular. It was my view as an investor. I'm trying to separate my view as IT specialist from that. From investor's point of view, MSFT has a lot of hidden value, which can be unlocked by splitting company.

Full disclosure: at the time of publication author had no positions in MSFT or F-PS. Positions can change any time.

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Monday, December 8, 2008

Microsoft: Crumbling Empire?

Interesting news: the share of computers with Microsoft Windows OS surfing the web dropped below 90% (article here).

Of course, Microsoft (MSFT) is still an enormous cash machine. It still has a near monopoly on corporate desktop and laptop market. Many investors might assume that company still can produce great returns. But I think Empire is cracking.

Let's take a look at the last quarterly report (quarter ended September 30), available here.

Operating income by divisions.
Client division, i.e. Windows for desktop/laptop: 3267 million, slightly less than a year ago.
Server and Tools division, i.e. Windows Server, SQL Server, Exchange and other things: 1151 million, or 20% more than a year ago.
Business division (Office): 3311 million, 20% increase.
Entertainment and devices (Xbox and Windows Mobile): 178 million, slight increase.
Online services: loss of 480 million, compared to 267 million a year ago.

This is operating income. If you look at it from corporate point of view, Entertainment and devices is in red, and online division is a huge sinkhole.

Balance sheet looks healthy. Lots of cash. Small problem is that all that cash and then some is already allocated for a huge buyback. Microsoft, first time in it's corporate life, is issuing debt. It has enough free cash flow to service it, so debt shouldn't be a problem.

It looks like a picture of a very healthy company, maybe with some small problems. What can possibly go wrong? The answer is simple: real competition. Let's see by divisions.

Client division: strong competition from Apple (AAPL) on the upper end. And competition from Linux in subnotebooks (AKA netbooks) segment. The last one is so bad for Microsoft, that it had to do unthinkable: issue licenses for product they wanted to retire, Windows XP, specifically for subnotebooks. Competition is mostly localized to the home computer segment so far. Microsoft still dominates client OS market for the businesses for now. There are couple of small problems here though: businesses mostly refuse to upgrade to Vista (no additional revenue), and Apple starts penetrating into enterprise.

Windows Server: Strong competition from Linux. UNIX is still in business too.
SQL Server: Very strong competition from all sides: Oracle, IBM DB2, open source (MySQL, PostgreSQL, Ingress).
Exchange: No serious competition so far.

Business division: no serious competition to Office. Companies have an option of switching to open source (Openoffice), but reluctant to do so.

Entertainment and devices: very stiff competition. For Xbox it's Sony PlayStation and Nintendo Wii, for Windows Mobile it's Apple iPhone, running OS X, Google Android and Linux.

Last but not least: Web services. It's not that Microsoft has competition here. It's that Microsoft is not a competition for others. Companies with which MSFT wants to compete are profitable: Yahoo! (YHOO) and Google (GOOG). Attempt to throw huge money on this problem doesn't help.

How fast Microsoft can die? That's a big, $180 billion question. Thing is, tech companies sometimes can die fast, like CDC or Wang Computers. They can linger for many years (as Jim Cramer says, dead companies walking), like Unisys (UIS). Or they can reinvent themselves, like IBM, which is more like an integrator than a tech company.

I don't think Microsoft can reinvent itself. It never could compete on even field. All its victories in competition were achieved by "leveraging" its OS monopoly. Now, when this monopoly itself is under question, what can Microsoft do? It's still possible that company can survive for many more years, just on the sheer inertia of huge installed base. The best decision would be to split into two or three companies. Just close the Web shop (no one in his sound mind would ever buy it), sell entertainment and mobile, if there is a buyer. Core businesses need to be changed too. OS development has to be completely changed. Every successful OS right now is UNIX or Linux based. The only way to make a good OS is to take BSD UNIX and add some proprietary GUI, like Apple did. You can even call it Windows Berkeley. Office can do just fine. Mobile shop has to be closed too, it can't compete on its own with Apple and Google. I see separate OS company, Office company and Enterprise Server company (Exchange and SQL Server). Resulting companies can be much smaller, drastically cutting costs.

Can company do that? I don't think so. But I'm watching Microsoft now. If there is any hint of a split, I am a buyer.

Full disclosure: at the time of publication author had long positions in AAPL and GOOG and no positions in other companies mentioned. Positions can change any time.

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Friday, December 5, 2008

Dancing Bulls And Great Recession

Cramer joined the troop! For several weeks he blasted dancing bulls, preached capital preservation and was as bearish as Jim ever can. Now he has converted. It's not Damask road, but pretty close.

What happened? Did we get great new economic reports? Nah, everything was doom and gloom, today's employment report just finishing the picture. Jim got his cool-aid from two facts: Dow didn't test 8000 level since November 24, and market up today, despite bad news. Well, first fact really means something, technical signal in a pure technical market. I actually think that November 20 was a local bottom, which might hold for a while, and mentioned it here. My main indicator was a kind of capitulation we had on Nov 20. As for the second signal... We are in a trader's market, technical one. We are trading in Dow 8000-9000 range, or 800-900 S&P range. 200 Dow points up or down, what difference does it make?

Bad sign for me: Doug Kass is also bullish, although short term. Last several times Jim and Doug were both bullish, market fell big, if I remember it right. Wanted to check it through thestreet.com, but site is so badly organized, you need to spend hours if you want to go back more than couple of months.

I liked a new term "Great Recession", mentioned today on CNBC. That's almost acceptance. With such speed, we can get real acceptance real soon. Like in February or March. It's almost funny, but this term might be more correct that "Great Depression 2.0". If we start getting out of it in 2010, it's not a depression. Deep recession, yes. Lot's of people suffer and many more will suffer. But it will be over fairly quick. I hope. Because there is another possibility: Japanese disease.

But even my best forecast (spring of 2010) doesn't match bull market now. Market leads economy by half a year, usually. Then bottom should be in fall of 2009, a year from now. Market might hold current level or go lower. It's not likely to go much higher.

Of course, I can be wrong. Actually, I want to be wrong.

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Thursday, December 4, 2008

Dollar And Treasuries: Dichotomy

Let's take a closer look at behavior of dollar and treasuries lately. Here I mused that treasuries are pointing to financial panic, when dollar isn't.

On the graph below UUP, is a proxy for dollar, compared with TLT, long-term treasuries ETF. Y axis is a percentage change of these ETFs since July 1 of this year.

Vertical lines split this chart into 4 periods. As we can see, in the first period, from July 1 until about October 6, both dollar and treasuries moved slowly up. My idea at the time was that world was running scared from all asset classes into US Treasuries, buying a lot of dollars along the way. That would be worldwide financial panic.

Then we have period from October 6 until October 24. Treasuries were moving sideways and a little bit lower, but dollar was in a parabolic rise. Was it dollar carry trade unwinding?

Next period, between October 27 and November 17. Both ETFs trade in range.

And the most interesting part, after November 17. Dollar still trades in range, but we have rapid, insane rise in treasuries. Coupled with failures to deliver, this amount to real panic buying. What's happening? We can't attribute this to the international buyers, because dollar is not rising. My best guess is that funds of different kind (endowment, sovereign, state and companies pension etc.) are moving into treasuries from other asset classes. They already lost hundreds of billions (maybe trillions) of dollars on stock, bond and commodities markets. Looks like now they are investing in the safest paper possible. Trouble is, at these price levels, treasuries are lousy investment. You need to hold them for decades to get any kind of return.

Can we make money off this? Doug Kass thinks it's time to short treasuries, for example here. He is currently short TLT. I don't want to do it, yet. First of all, it's dangerous to short bubbles. Second, failures to deliver probably keep a lid on the prices, which can go even higher. Last, but not least: treasuries prices are at Great Depression levels right now. If we are in GD 2.0, they might remain at high levels for a long time. I will be watching for inflation data. If we start getting any inflation at all, then it's time to short treasuries. If we get into depression, then time to short will be when this fact is accepted. I'll short when I see New York Times headline "Great Depression II!".

Full disclosure: at the time of publication author had no positions in UUP, TLT or any other stocks related to treasuries. Positions can change any time.

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Wednesday, December 3, 2008

CEG: Ringing The Register

Good news: I expected to make respectable 10% on Constellation Energy (CEG) arbitrage. Today it jumped to more than $29 in the morning trade. Sold it, of course, right there and then.

Reason for a jump is simple: Electricite de France is in bidding war for the company with Buffett's MidAmerican Energy. OK, I can take gifts from the market.

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Monday, December 1, 2008

Oh, Dear...

When I wrote my yesterday's entry, I didn't expect it that bad. Looks like we have a new range. If October action was mostly for S&P between 900 and 1000 (or for SPY between 90 and 100), now it moves to between 750 and 900 (maybe between 800 and 900, if we have upside action tomorrow). I'm probably a (very cautious) buyer at this level. Just for a trade. Probably SPY, it's hard to guess individual socks in this market.

Bad thing if we break below 750. Looks like it's the level where most traders have their stops. If they are stopped out, we can easily go to 680 in couple of days.

I used to look at any action from fundamental point of view, usually. But this is not the usual market. Fundamentals don't matter. They will, eventually. Problem is, nobody knows how low can we go...

Bernanke astonished me today. He acts like we are in Great Depression 2.0. But he absolutely denied that we are having one. Is it PR or conviction?

Full disclosure: at the time of publication author had no positions in SPY. Positions can change any time.

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Sunday, November 30, 2008

What Next?

November was another bad month. But we had a nice rally after Nov 24. If you look at the chart of S&P index (or of SPY), there is the perfect reverse head and shoulders formation with bottom on Nov 20. And then we had rally. Number of bulls on TV grew up a lot.

This rally might mean that hedgies finished forced selling for the year. Or maybe they just made a pause.

I don't feel that this rally has legs. Three indicators are against it. Number 1: number of bulls on TV (contrarian). Number 2: falling volumes last week (weak indicator, might be related to the holiday). Number 3: S&P is right at the level of October lows, if you don't count Oct 27.

I'm waiting for direction here. If S&P breaks above 950, it might be bullish. To see complete reversal of the bear market, we need a break above 1000, better yet, above 1050. If rally stops here, I probably would go short S&P, either by shorting SPY, or by going long SDS.

Full disclosure: at the time of publication author had no positions in SPY or SDS. Positions can change any time.

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Thursday, November 27, 2008

I AM Thankful

I am thankful to my wife, for the happy years together.
I am thankful that I'm in good health, for my age.
I am thankful to USA, great country I live in and to American people.
I am thankful to capitalism, because it allows me to make money to live comfortably.
I am thankful to democracy, which allows me to choose who is governing the country.
And I'm thankful to all reasonable people of this world, for making it better, one small thing at a time.

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Tuesday, November 25, 2008

Market Is Telling Something

I just don't get the message. First of all, up three days in a row. Great! Maybe time to short, but several gurus, including immensely respected Todd Harrison, are neutral, so me too. Strange picture on the treasuries market. I thought that failure to deliver (what on the stock market is called naked shorting) several trillion dollars in size is just a temporary blip, but it's going on for at least three weeks now. There is only one explanation possible: huge unsatisfied demand for treasuries. Which means panic: financial world is buying the safest investment vehicle. At the same time, dollar fell significantly against practically all currencies and gold went up sharply. Gold price is just another side of panic: "safest" way to hold your money in valuables. Dollar fall is not that clear (looks like I sold UUP just in time).

If dollar grew up as well, the message would be clear: deflation and depression. As it is, not clear. Let's wait and see. Maybe it's time to short treasuries, they just can't get much higher, by definition. They are at 1930s level already.

Full disclosure: at the time of publication author had no positions in UUP and no positions in other stocks mentioned. Positions can change any time.

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Sunday, November 23, 2008

OTC Stocks: Good News

I just noticed that now quotes for many over the counter stocks are available real time. Before, until about three weeks ago, they were available only some time after close, which made trading quite hard. Now you can see real time quote information provided by broker and Yahoo! Finance. Of course, I don't care for most of the OTC stocks, they are usually worthless pieces of paper. But, there is a lot of ADRs (American depositary receipts) trading over the counter, and among them you can see such companies as Volkswagen (VLKAY.PK), Nestle (NSRGY.PK), the world biggest food company, Australian and New Zealand Banking Group (ANZBY.PK) and many others. These are big companies, with liquid stocks. There is only one reason they are not listed: they don't want to comply with Sarbannes-Oxley requirements, mostly because it increases costs.

Makes our life a little bit easier. It's always good to find good news, it's even better in bad times.

Full disclosure: at the time of publication author had a long position in ANZBY.PK and no positions in other stocks mentioned. Positions can change any time.

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Friday, November 21, 2008

Cautious And Temporary Optimism

Looks like 7500 Dow bottom holds. For now. It might be good temporary bottom, good enough for a trade or two. One more reason for optimism: CNBC poll results. 2/3 of all polled think that market can go down to 6000. This is a pretty good contrarian indicator. We might hold here for a while. Can we hold till the end of the year? Anybody's guess.

Why don't I think that we have a real bottom? First of all, I'll be insanely happy if it is. I still have significant long portion of my portfolio, and if market goes up, not only I would be happy, I'd make money. But I'm pretty sure that we are in Great Depression v2.0 now. There are a lot of entries in this blog about it. And I don't believe in real market bottom until acceptance sets in.

There is a lot of talk that stocks are cheap on valuation. So what? During and after Great Depression, they were insanely cheap on valuation, comparing any other time, including this one. Some data from last similar period.

September 3, 1929. Dow closes at the highest point to date: 381.17
October 28, 1929 (Black Monday). Dow closes at 260.64, dropping 38 points.
November 13, 1929. Dow closes at 198.69, lowest point for the year. 47.9% Drop from the high.

Looks pretty bad so far. But

July 6, 1932. Dow closes at 41.22, the lowest point of Great Depression.

November 23, 1954. Dow closes at 382.74, setting first new high after 1929.

So, market went down 89.2% from the high of 1929 to the bottom in 1932. And then it spent 22 years more to reach 1929 level. Should be especially comforting picture for buy and hold folks.

If we are really in GD 2.0:

Dow high for 2007: 14164.53, on Oct, 9.
Dow low for 2008: 7,552.29 yesterday (so far): 46.7% drop from high (hey, pretty close!)

Lowest point should be: around 1530, for 89% from the high. Impossible? Why?

Honestly, I don't think we sink that low. But the real bottom might be much lower than anybody thinks.

All numbers are from Yahoo! Finance.

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Thursday, November 20, 2008

Great Depression v2.0: Road Ahead

More and more small facts are telling me we are there already. Deflation, including core CPI deflation, is confirmed for October. It should be expecially comforting for those inflation hawks who shouted that core CPI is a hoax and full CPI is the only real inflation indicator. One of those is Paul Volcker, former Fed chief, who successfully fought inflation in the end of 1970s and beginning of 1980s. He is a great man, but disaster in waiting if Obama appoints him Treasury secretary. He is a general who successfully fought last war, with inflation. We have deflation now.

Consumers are on strike. This is serious. Latest poll in Minnesota results: average consumer is going to spend 11% less on Christmas shopping than last year. Year, we are thrifty here, in the Midwest, but double digit figure is scary. And unemployment situation in Minnesota is better than average in the country.

Oil dropped below $50 today. I was bearish on oil since May, but never believed it can fall so low so fast. Hell, I didn't believe it can go below $50 at all.

Stock market dropped below all reasonable levels, but technical indicators tell me that it has a lot more to drop.

Bond market still in disarray. Although LIBOR is at reasonable level right now, bond issues are sold at huge premiums.

Treasuries are insanely expensive. They are at Great Depression (yes, that first one) level.

When is it going to end?

We need to go through usual 5 phases: denial, anger, bargaining, depression and acceptance, before things get better. Right now almost nobody is in acceptance phase (OK, I am. And Todd Harrison is pretty close). Most people, and, more importantly, most decision makers, are still in denial phase. Some are in anger phase, Congress for example. Some are bargaining: auto makers, Jim Cramer. Although Jim is moving to depression phase quickly. Just two more steps, Jim. Two small, easy steps.

We will start getting out of depression when acceptance becomes common. It will be very easy to spot: there will be articles in all major newspapers and magazines (those which survive): "We are in a Great Depression II!" It will be the greatest time to buy stocks. The question is: are we going to have any money to do that?

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Nardelli Doesn't Deserve $1 A Year

Bob Nardelli said that he agree to work for $1 a year if Chrysler gets government help. This is a clinical case, Nardelli is not Iacocca. Yes, Lee Iacocca, after receiving government help, set $1 salary for himself, sharing sacrifices with employees. But Iacocca, before becoming CEO of Chrysler, was a successful manager at Ford, launching two great cars, Mustang and Fiesta. What successes Nardelli had? He almost killed Home Depot, destroying shareholders value. Does he understand anything about auto industry at all? We don't know. He should go. Of course, Wagoner is the first, but Nardelli is close second.

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Local Bottom?

Action today was almost capitulation. Almost. Still, lots of dancing bulls around. Come on guys, you should be leveraged long already! If not, you are liars, if yes, you are stupid.

I'm thinking of buying something tomorrow for a trade.

I don't believe it's a real bottom. We have a long and rough road ahead. More about it later. In short, we need to wash out most of the bulls.

Bought more Altria (MO) today. I can't believe it can be this cheap.

Full disclosure: at the time of publication author had a long position in MO. Positions can change any time.

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Wednesday, November 19, 2008

Time To End Piracy

That's too much. Supertanker taken by pirates is a threat to the whole civilized world. It's about time to end piracy in the Aden Straits. I've read that UN doesn't want to allow to attack pirates on the ground, because it can harm innocent people. But history tells us that if region or country becomes threat to the civilized world, you just have to take care of the problem, harming innocents in process. Afghanistan is the latest example, but there are multiple examples in history. Barbarians have to be stopped, and if you can't do it gently, so be it.

I don't care much what measures should be taken. Commandos raids, artillery or air bombardment, international occupation of Somalia and maybe parts of Yemen, doesn't matter. Piracy have to be stopped now, or it will become much bigger problem. Al Qaeda, hosted by Afghanistan under Taliban, didn't seem to be big problem, even after Cole and embassy attacks. Result is well known: 9/11. Do we really want something like this happening this time?

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GD 2.0: Jim, We Are There.

Jim Cramer said today on Mad Money that we need to do everything to avoid Great Depression v2.0. Sorry Jim, We are there. The question now is how long is it going to take to get out of it. And whether we can get out of it without major war. His recipes might be right. When I wrote GM Has To Die, I didn't mean that it (or other autos) should get no help. I think government should help them, help big time. But they should pay a steep price for that help. A lot of people have to go, and Rick Wagoner is number one on the list. Bob Nardelli is number two, hiring the guy who almost ruined Home Depot (HD) to head Chrysler wasn't a bright idea, to put it mildly. Unfortunately, thousands of others have to follow, but US auto companies have to be restructured.

Anyway, we are in GD 2.0. Today's FOMC report forecasting recovery is way too optimistic. I think of the end of 2010 the earliest, most likely 2011. I don't believe recovery can happen before stabilization of housing market, and that wouldn't happen before end of 2009. Houses are still overpriced, inventory of new ones is way too big and builders are still building new ones. Prices have to come down to normal affordability level, home ownership have to fall to normal level of 65%, only then we can see housing stabilization.

Can it be worse? Sure.

Full disclosure: at the time of publication author did not have any positions in GM or HD. Positions can change any time.

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That Sinking Feeling

Market broke through October lows. Just what I was afraid of yesterday. Let's see if it goes straight down to 7700.

Steve Ballmer of Microsoft (MSFT) repeated today that they don't want to buy Yahoo! (YHOO) anymore. Surprise! Not for me. In February Microsoft had a lot of free cash to pay for Yahoo! (terms of the deal were half stock and half cash). Not anymore, all that cash is allocated already for a huge buyback. And Mr Softee is not eager to get in long term debt. Damn, I didn't short Yahoo! yesterday because pop was too low to my taste. Well, opportunities are made up easier than losses. Now both companies are in "don't touch" category for me.

Bought some Constellation Energy (CEG) today. This is an arbitrage trade, Berkshire Hathaway (BRK.A) is buying it for 26.50 (all cash) sometimes next year. I normally don't do arbitrage, but this one looks as low risk, relatively high reward deal. And while waiting for a deal, I can enjoy 8% yield.

Full disclosure: at the time of publication author had a long position in CEG and didn't have any positions in YHOO, MSFT or BRK.A. Positions can change any time.

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Tuesday, November 18, 2008

Great Depression v2.0: Reason For Optimism

I wrote why I think we are falling into Great Depression here and here. So far, my thoughts were right, unfortunately. But lately I found a reason for optimism.

Everything is happening faster than I expected. I expected Fed rate to be below 1% in January. Target rate is 1% right now, but real rate is below 0.4%. I expected commodities go down in price, with oil reaching $90 for a barrel by the end of this year. You know where oil is. I expected dollar to go up relative to other currencies and wanted to make 10% in about a year, in half a year at best. I made almost 15% in less than three months.

Looks like things are moving faster than in the first Great Depression. And faster than in Japan after 1989 crash. Which tells me that maybe we will go through this one fast. This doesn't mean it's going to be easy. No! It's hard enough already, and going to get harder. Just one look at my portfolio makes me cringe. But we will go through this in three years, four max. Maybe two, but it would be way too optimistic. It's just a hunch, can't confirm it with numbers. And comparing to most of "analysts" it's way too pessimistic, they think that in 18 months everything will be just great. But even four years will be great improvement comparing to the first GD. And, I hope, we'll get out of this one without big war.

Can we make money from this hunch? Don't know yet. Big moves in commodities and currencies are probably done. Stocks are trying to breach October lows, and don't seem to be oversold, which means that probability of breach is high. I'm taking a break to think. Jim Cramer is right: this is a trader's market, not investor's market.

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Monday, November 17, 2008

Understanding Jerry Yang

Jerry Yang is resigning as CEO of Yahoo! This is the right move, Jerry had to go.

I wanted to call this article "In Defense Of Jerry", but I can't. His position during talks with Microsoft is not defensible. As CEO, his duty to shareholders was to get maximum value for their money. Which meant to sell the company. $31 a share was a great price and $33 offer, if it ever really existed, was an incredible price.

But as a programmer myself I perfectly understand Jerry. The systems you created are like children to you, and you never sell your children, in good times or bad (well, most people don't). Microsoft (MSFT) - Yahoo! (YHOO) deal could never happen with Jerry at the helm. But, according at least to some reports, not only Ballmer wanted Yahoo!, but he wanted it with all best geeks, Yang and Filo included. Reports could be wrong or right, I don't know. I know one thing for sure: neither Jerry Yang, nor David Filo would work for Microsoft. Probably half of key programmers wouldn't work for Microsoft either.

There are plenty of rumors around that Microhoo! deal might be back in some form now. I'm not that sure. If Yahoo! goes up in price now, I'd probably short it or buy puts. Microsoft just doesn't get the Web. Never did, never will, it's not in company's DNA. I already wrote here what would happen if Microsoft buys Yahoo! Such deal is off the table now. There are some other possibilities, for example buying just search technology, or some shared interest. Maybe it happens, don't know.

Yahoo! shareholders shouldn't complain. They had their chance. When Microhoo! deal was announced, I wrote here that Yahoo! shares are to be sold right there and then. Even big holders could unload significant part to arbitrageurs. They had their chance and blew it. C'est la vie.

I bought Yahoo! shares in 1998 and sold last year.It's not an investment for me anymore. But it's still a service I use every day, and for that I'm grateful to two geniuses, Jerry Yang and David Filo.

Full disclosure: at the time of publication author didn't have any positions in YHOO or MSFT. Positions can change any time.

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Sunday, November 16, 2008

GM Has To Die

No, I don't make this statment lightly. This is a great US company, it employs tens of thousands of people, it buys parts and raw materials from companies which probably will go bankrupt too if GM fails. I even think that it's a good idea to help US auto makers.

But I'm absolutely against helping GM in its current form. Any help to this particular company should come with one condition: current management has to go, common stock is canceled and all current contract with UAW are voided. Sorry, commercial companies should not exist to support employees. That would be Soviet model. Companies exist to make profit. GM has to be restructured to make it profitable. There are possibly several different ways to accomplish that. One extreme is to declare bankruptcy and government help would go to accept pension liabilities and guarantee loans which financial arm of GM took. Or maybe government can also help for early retirement of some workers. Government can even throw big money to buy out most of the employees and pay for plant closure. Anything will be cheaper than giving money to Wagoner. He has to go.

Full disclosure: at the time of publication author did not have any positions in GM or any other auto company. Positions can change any time.

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Friday, November 14, 2008

What's Going On In China?

Current forecasts: 6% growth. Current situation in sectors previously driven by China: below bottom. Commodities are easiest to track, nothing good is going on there. Spot shipping prices, according to today's CNBC talk, are below costs. Good information from Diana Shipping Inc (DSX): Fleet Employment. As you can see, 7 of 12 Panamax class ships don't have contracts beyond Feb 2009, which is 3 months from now. A year ago, all ships were contracted at least one year forward. This is one of the best dry bulk carriers in the world!

Then we have stimulus package from Chinese government. It's scary. It tells me that building activity in China stopped cold and needs government money to continue. The package itself is OK, it will help economy. But the only possible reason for it is hard drop of business building activity. Half a year ago, China was building like crazy. That's the country which produced half of steel in the world and consumed most of it. Businesses stop building for one reason: they don't need extra capacity. Which means: they don't see growth in near future. If recession in Europe and USA is helped by crisis in China, we might get full blown global depression.

I might be too scared right now. But there are good reasons to be scared. Total lack of reliable economic data from China doesn't calm me down.

Can we make money from this? The best I can come with: don't buy any Chinese stocks or companies with sales in China. Wal-Mart (WMT) can get better deals from suppliers, one more reason to invest in it.

Full disclosure: at the time of publication author did not have any positions in DSX, WMT or any China based company. Positions can change any time.

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Thursday, November 13, 2008

It's Still a Bear Market

Good bounce today. Sold my yesterday's lot of Spiders (SPY) in the end of the day. Hit it to quit it.

I don't believe it's a bottom. We had a typical bear market rally today, 550+ Dow points without any meaningful news. We might even go higher, for a while. But there is no reason for a sustained stock market growth. And mood on the Street is not what it should be at the bottom: we need doom and gloom, complete capitulation of bulls, growling of bears to make a bottom. Real bottom happens when almost everybody is bearish, when almost everybody sold everything. Then, there is nobody else to sell anything and market starts rising. That's about what Jim Cramer says. That's what I'm waiting for. So far, let's make money on volatility.

Full disclosure: at the time of publication author didn't have any positions in SPY. Positions can change any time.

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Wednesday, November 12, 2008

Et Tu, Paulson?

This is the worst thing possible, change of plan in the middle of execution. President and Treasury secretary spent a lot of political capital pushing TARP, and now what? The most important thing, nobody understands why. So much for promised transparency...

Bought even more Altria (MO) today. Maybe it might get in trouble and cut the dividend. But it's more likely that it's one of the stocks hedge funds are selling right now. Also bought some Spiders (SPY), thinking that everything is oversold too much. I'd prefer some individual stock, but don't see anything obvious. This is a trade, I can sell SPY at any moment for a lot of reasons, including taking profit or being stopped out.

I wonder how much more redemptions hedgies have to meet. It's just unbelievable. Looks like every endowment fund, every state pension fund and a lot of others are withdrawing their money from hedge funds. What were they doing in the hedge funds in the first place? Is anybody there doing some risk analysis? When state pension funds invests into oil futures, that's crazy. When diversification of such funds means investing in oil futures, China and real estate, it's even more crazy. Any state official making that decision should be on the street right now. Doing community work.

Full disclosure: at the time of publication author had long positions in MO and SPY. Positions can change any time.

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Tuesday, November 11, 2008

Selling UUP

Everything moves way too fast this year. 10% moves of S&P in two or three days. Currency exchange rates go up or down 15 or more percent in couple of months. Great stocks drop 50% or more in a month. What do we do? We stay nimble.

I bought UUP in August and increased position in September to take advantage of rising dollar. Wanted to make about 10% in half a year or maybe a year term. It's up more than 15% in less than three months! Chart looked just too much parabolic until the end of October, and now it's range bound. Fundamentally, dollar should stay strong, but who knows, in this market. Today I sold UUP into strength.

Full disclosure: at the moment of publication author didn't have any positions in UUP. Positions can change any time.

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Monday, November 10, 2008

Thinking Google

Was tempted by action on Google (GOOG) today. Price was down to under 310 at one point. Decided not to buy anyway, was scared by the fact that almost all technical indicators were bearish. In current market, if in doubt, don't buy. I know that Google is cheap under 500, never mind current price. But I don't want to buy when it can go even lower. Looks like we are in one of paradox situations described by Jim Cramer: hedge funds have to sell something to meet redemptions. And they sell what they can, not what they want. Google is one of the most liquid stocks, so they sell it as well. Today's earnings downgrade was just an excuse to sell, come on, target price was lowed to 490, which is 1.5 times higher than current one.

Let's see what tomorrow brings.

Full disclosure: at the time of publication author had a long position in GOOG. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

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Sunday, November 9, 2008

Deflation Is Horrible

Great article in Minyanville last Friday. Agree with author on almost everything. Yes, world economy is in big trouble. Yes, people and businesses are taking on less debt and this is going all the way to the top, i.e. Fed. As a result, inflation in current situation is close to impossible, despite all attempts by Fed and Treasury. The only thing I disagree with is the premise that deflation is good.

OK, everybody might agree that prices going down make you feel better. And in some sectors of economy it's decades long reality (computers, for example). Unfortunately, what's good for a person is bad for economy, and as a result, for everybody. In deflationary environment, everybody tries to delay purchases. Why hurry, this thing will cost less later! Economy slows down, companies cut expenses the usual way: laying off employees. Less paid employees means less demand for goods, creating positive feedback, or as it's known since Great Depression, deflationary spiral. Eventually economy might find equilibrium in deflationary environment, but this equilibrium will not be happy one, with unemployment much higher than in inflationary environment. Empirical rule known to economists as a Phillips Curve, defines inverse relationship between inflation and unemployment. There is only one example of deflationary economy after World War II: Japan. In 1990s it experienced deflation. Surprise, it was also a period of almost constant recession. This paper suggests that Phillips Curve flattens in the negative inflation (deflation) zone. The problem with it, Japan is a quite unique example. Businesses there are not eager to lay off employees at a drop of a hat. It just might be that Japanese corporations kept extra workforce on their payroll because they used to do that (remember lifetime employment?). In US example (Great Depression), picture was very different. Unemployment jumped to 25% and stayed there for a long time.

Some people can argue that world lived mostly in deflation since invention of money. True. But world also lived in economy which wasn't growing much and most people had subsistence living standard. They couldn't cut expenses even if they wanted to. Great Depression showed us for the first time what can happen when deflation hits economy in which significant part of spending is discretionary. Our current economy has much higher discretionary part than in 1930s.

My take on it: be afraid of deflation, be very afraid. I applaud Fed and Treasury efforts to stop deflation. And I'm afraid that they are too late.

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Thursday, November 6, 2008

Sinking Feeling

Not only because of today's market. Mostly because people making decisions can't get their act together. Sure, generals are always ready for the last war. For current financial leaders last war was inflation and deflation was distant memory. Some of them even said that it's easy to fix deflation, just run the printing press. Year, right, and Japanese experience didn't tell them anything. As if Japan was some obscure country, not the second biggest economy in the world.

Interest rate cut by European Central Bank is telling, I didn't expect 0.5% from Trichet. But cut by Bank of England is more like full blown panic. It tells me that, despite falling LIBOR rates, there are some other problems ahead. Maybe banks are lending money to each other, but credit is still not cheap for people and businesses. Banks are cutting credit card limits. And it looks like people are not eager to spend money, awful! They cried that people need to save more, spend less, but when it really happens and they see consequences, truth hits them: it's a road to total disaster. Our economy (and I mean world economy here) is mostly based on production of discretionary goods. Which means that people really can cut expenses when they want and bring economy to its knees. Last time such thing happened, in 1930s, depression was cured by World War II. Now discretionary part is much bigger in economy, people can cut their expenses much deeper. What can pull us out of it now? Nuclear war? Thanks, no thanks.

Bought more Altria (MO) today. Looks like we are going to retest October lows, so I'm ready to buy more.

Too many talks about bottom. Too many people are bullish, even some permabears. Sorry, bottoms don't happen like this. We need total capitulation, when almost everybody is bearish.

Full disclosure: at the time of publication author had a long position in MO. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, November 5, 2008

Trying To Make Sense

My yesterday's post was wrong. Instead of crying, I should keep trying.

Current picture, collected from bits and pieces of information: funds got mad. By the way market reacts, significant percentage of them. That includes hedge funds, mutual funds, university funds, state pension funds, i.e. all kind of them. Looks like many funds use methods developed by hedge funds in order to increase performance, "beat the market". The biggest problem with this approach, as Jim Cramer noted in his great book "Confessions of a street addict", is that you can't beat the market if you are the market. And many funds behave the same way, buy and sell things (stocks, bonds, commodity contracts etc.) at the same time. We can see the results of this behavior in the commodities run in the end of the last year and beginning of this one, huge downfall of stocks in September-October and last week rally.

Of course, not all funds are doing the same thing. But you only need about 10% of participants to behave the same to screw up market. So, when hedge funds started liquidating after Lehman Brothers collapse, stocks went down huge. When pension funds felt that oil is going down and there is no force in the world to keep it above $120, they sold everything.

Of course, there is a huge problem here for the funds themselves. If fund calls itself "hedge fund", it can't have huge one-sided positions. It needs to hedge positions, buy options to defend long or short positions, sell 6 months ahead future contract if they buy 4 month one etc. But you need to do a lot of work and performance would suffer. So they try to find current trends and play them. The problem is, when funds are the market, or at least the active part of the market, they magnify any trend they are in and create bubbles.

How can we profit from it? Tough, but not impossible. We need to identify bubbles and short them when they are bursting and identify severely oversold stocks which don't deserve it. I did it with oil in the end of July and beginning of August (sold DTO too fast, granted, but made profit anyway). Another approach is to detect trends which are not obvious for other market participants yet, like I did with dollar. I'm still holding UUP, but now looks like time to sell. We'll see. I don't allocate big part of my portfolio for such trades, until last year I was pure long term investor, but this market is not for investors. I think of allocating more of capital for trades from investment.

Full disclosure: at the time of publication author had a long position in UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, November 4, 2008

This Market Makes No Sense

First of all, my congratulations to Barack Obama! It's really historic victory in really historic election.

Now, back to the market. It's crazy. Jim Cramer said today that stocks trade like both candidates won. Market is severely overbought, almost everything is up. It might be time to sell something into strength, will think about it tomorrow. Of course I'm glad that market is up, it makes my portfolio go up as well. It's just annoying that I don't see any reason for it and I'm not alone.

There is some silver lining in the financial markets: LIBOR rate is about 2.7% today. That means that world credit freeze is thawing somehow. Maybe we can avoid deflation. Life is looking a little bit brighter.

Monday, November 3, 2008

Good Riddance, October

The most awful month in my investment life. I wish never to see another one like this.

Thursday, October 30, 2008

Paper Loss? Yeah, Right

It's a huge folly when people are saying that unrealized loss is a "paper loss" only. Come on, IRS does make a distinction, we shouldn't. We gain or lose whatever we do, no matter if we sell or cover. So, looking at your account, remember: what you see is what you have, minus commissions to close positions.

Jim explained today that unexpected rally this week is from mutual funds rotating part of their money into stocks. Well, that explains something. He doesn't believe we are past bottom. I don't believe it either. There are way too many people declaring bottom already. Real bottom happens when almost everybody thrown the towel.

Wednesday, October 29, 2008

Selling The Rip

In this bear market, selling the rips is a must. I sold half of my positions in Red Hat (RHT) and Ebay (EBAY).

Fed cut rates today. Great. Is it too late? No idea. We are in uncharted waters, real Fed rate is below 1% for the last couple of weeks anyway. The most important number, 3 months Libor rate is still around 3.5%, not good. Even worse the situation when banks still don't lend money to businesses. I mean, they do, but number of rejections is very high, rates are extremely high. As a result, money velocity is down big and we are still in danger of falling into deflationary spiral.

Full disclosure: at the time of publication author had long positions in RHT and EBAY. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, October 28, 2008

What a Day!

It's a confirmation that's we are in a bear market. It was mentioned many times already that big upside days don't happen in bull market, when market "climbs a wall of worry".

Didn't trade anything today. May be will sell something tomorrow, we'll see.

I want to add a little bit to my previous article (this one). There might be some misunderstanding how structural crises work. Emergence of new technologies doesn't mean that there will be a structural crisis. New technology need to change something radically, change the way a lot, better yet, most, people live. In 1920s that new technologies were automobile and tractor. They were not new, but in 1920s they mostly replaced horse in transport and agriculture. That changed the way most people lived in the developed world. Lots of businesses were created to produce, service and distribute new technologies. That created 1920s boom. But then changes in the economy created huge imbalances. Not only old businesses (horse harnesses, veterinary services etc.) started dying en mass but also demand for agricultural goods fell (less horses to feed), productivity grew up a lot in agriculture, moving people into the cities, transport became much cheaper. That's the level of change you need for structural crisis. That's why I don't think that the Internet alone could be enough to create structural crisis. It didn't bring enough changes to people and businesses. But together with globalization, it's quite another matter.

Friday, October 24, 2008

Great Depression v2.0: Missing Piece Of The Puzzle

I mused about possibility of repeat of Great Depression here almost a year ago. I thought that we have only two crises of three: financial and real estate, but I couldn't find structural crisis. It just hit me: we have a huge structural crisis now, caused by globalization. And, just as an icing on a cake, we also have the Internet, which destroyed a lot of old forms of money making and will destroy even more. So we have all three components, the only question is: can Fed print money fast enough? Because our only hope is to inflate our way out of GD v2.0. It doesn't even matter anymore if we have big inflation as a result. Who cares! It's still better than deflation.

I'm also afraid that governments might try to roll globalization back. That cure would be much worse than disease. Of course, nobody can kill the Internet right now, it's here to stay.

Today action on the market was strange, to say the least. Futures stopped at limit before opening, I expected capitulation, was ready with trading screen open and finger on the mouse... And... nothing. Of course, almost everything went down (with exception of UUP, I'm still congratulating myself with that bright idea). But not enough. And it was obvious from the action that buyers were ready, sometimes with limit orders in the system. Once prices went down to some level, buyers took everything and then some. My only buy for today was Altria (MO), I increased my position. At price under 19, dividend rate is over 6.7%, that's incredible. And company just increased dividend, no way it's a dividend trap. Who needs bonds if you can hold Altria! The fact that it's an ultimate recession-proof company doesn't hurt.

I think market is going lower. Sellers are not done yet, we need to see big capitulation.

Full disclosure: at the time of publication author had long positions in MO and UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, October 22, 2008

Taking Profit

Today I sold shares of Apple bought yesterday. Not very big profit, but profit anyway, better than loss. Sure, yesterday after hours was the time to sell. But OK, it's still profit.

May be I'm wrong about UUP? Sure, dollar should grow now, but at such speed it soon will be at parity with Euro, with purchasing parity of around 1.15. On the other hand, purchasing parity quite often is different from real course. I enjoy the ride so far, but it's time to monitor situation better. Euro parity might be a good time to sell.

Doug Kass is still thinking about inflation in today's Thestreet.com article. Come on, we are in deflation already. I really like Doug, read all his columns, but his idea of coming "blahflation", which he defined as high inflation with zero or lower growth, seemed ridiculous to me even half a year ago. Now he woke up. Who's next? The problem of perception: Doug's generation still thinks that inflation is the scariest thing in economy and they just don't see the horror of deflation. Unfortunately, this generation is at power, in companies' boards, in CEO chairs. They are making decisions right now. Too little, too late.

Full disclosure: at the time of publication author had long positions in AAPL and UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, October 21, 2008

Sweet Apple?

Added a little bit of Apple today, 2 minutes before close. Price was way too low, below 92. Looks like I'm going to pick up some profit on it, after hours it closed over 103.

This is a trade, my current position is big enough. I mean, Apple is pretty low at any price below 150, but with current multiple contraction, I don't know when is it going to grow.

There is still a lot of talk about inflation around, although some people start to wake up. I'd like to have inflation now! No such luck, we are in deflation. Banks just don't want to lend. Libor is going down, good. Banks lend to each other. But they cut credits to businesses and people and that's the problem. As far as I see, almost nobody's buying commercial paper.

Currencies behave as I predicted. The only strange thing is a jump of yen. What, Japanese Central Bank doesn't dump yens for dollars anymore? Anyway, I'm not selling my UUP position any time soon. Maybe swap out of it in the end of the year, just to avoid all K1 troubles.

Precious metals are strange. Gold holds somehow, silver is down, and platinum is down huge! It was over 2000 just several months ago, now it's below 900! OK, part of it is South Africa situation, but come on! I know, auto companies spread the rumor that they are working on some nanotech way to reduce platinum usage, but it's not gonna happen next year. Something strange is going on here. Maybe Russia dumps a lot of metal? Need to look it up, might be some profit here.

Full disclosure: at the time of publication author had long positions in AAPL and UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, October 20, 2008

I've Been Wrong!

I'm back from vacation. Just "enjoyed" last two weeks.

What did I do wrong? I mean, I did some things right, but rights will take care of themselves.

Didn't sell anything before going on vacation. Gross error. Cost me a lot. Didn't leave any buy orders for insanely low prices on some of my stocks. Cost me as well.

What to do now?

First of all, I'm selling Ebay and Red Hat. I don't care about the price anymore, those companies don't have much growth potential in this environment. Ebay's quarter was so-so, outlook is just horrible. Meg Whitman was a very good CEO, with her retirement this company doesn't have any direction. Decision to draw on credit line to finance next takeover just makes my decision easier. I prefer companies without debt right now. Red Hat has OK business, but growth is slow and investors doesn't seem to care about it.

Second, I'm not buying into this rally. If it goes way higher, I'm selling something else. I don't know if we escaped Great Depression v2.0, but recession is still coming and I think that October lows will be retested. Then it would be time to buy. Carefully, in stages, in small increments.

Oil is tricky. I didn't think it could go that low that fast. It overshot my price target, 90, by a wide margin. Now it can go any direction. But long term outlook should be still down. Other commodities are simpler, commodities don't go up in recessions.

Thestreet.com is a special case in my portfolio. I'm thinking of buying more. It's way too low, it can't be right. Of course, I can be wrong.

Full disclosure: at the time of publication author had long positions in RHT, EBAY and TSCM and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, October 1, 2008

See Ya

Going on vacation for couple of weeks tomorrow. Hope to sell something into strength before that, will let you know.

Unless I sell something, next post after 18th.

Tuesday, September 30, 2008


What happened to Google in the last minutes of trading today? What does it mean "erroneous trades"? Were they erroneous because of computer errors? Or because of ask/bid imbalance? This lack of information just makes me jumpy, if I can't trust one of the most liquid stocks on Nasdaq, what the sense in investing?

I wonder if SEC is going to investigate?

Full disclosure: long Google.

Monday, September 29, 2008


I mean legislators. President woke up, at last. Legislators are dozing. It's such a good time for politicking! Who cares about economy! Republicans approach: tax cuts cure everything! Dems approach: tax the rich, nationalize healthcare, it'll cure everything! Blame the other guy! Why is this package called "Wall Street Bailout" is beyond me. It has nothing to do with Wall Street anymore. It's about hundreds of thousands of people who will try to refinance their ARM mortgages in the nearest four months and I wish them all luck in the world. I doubt that without this bill even half of them can get refinancing. The other half is going into foreclosure, at least the most of them.

Go to cash, young man. There is no sense in equity right now. Not until this bill passed, if ever. If not, stock market is dead for couple of years.

Saturday, September 27, 2008

The End Of The Road

That's it, guys and girls. We are officially sliding into a Great Depression II. Yes, there will be some kind of a deal next week. No matter who says what, there will be a deal, just to keep US banking system more or less alive. But it's too little, too late. Credit is not running anymore, economy's blood stream is clogged.

Republican party deserves Hoover Prize. I propose small silver apple cart.

What to do? I don't know. I'm definitely selling into rallies next week. I'm keeping Phillip Morris International (PM), keeping and increasing at dips Altria (MO), keeping UUP: dollar is going up, depression = deflation. In case I'm wrong and we're getting big inflation instead, it's loss worth taking. Just gimme inflation, I'll take it. Positions to close: Red Hat (RHT), probably Ebay (EBAY). Positions to reduce: everything else. My goal: increase cash position to at least 40%, better yet 50%, by the end of the year. Raytheon (RTN) is still on my radar, but I think the best time to buy would be after election. Obama's victory is almost ensured by last economic events, and these elections will be about economy. Common misconception is that he is going to decrease military expenses, but he wouldn't have such luxury. So there should be a dip in November.

I hope for a deal over weekend and some rallies next week. If no deal, I will sell some anyway, there is no sense in holding a lot of equity.

Full disclosure: at the time of publication author had long positions in MO, PM, RHT, EBAY and UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, September 24, 2008

Waiting For Solution

I didn't know that our Congress is so economically illiterate. And that they are so economically irresponsible. This is a question of going or maybe not going into Great Depression II. I mean, if some decision is made this week, we might, I repeat, might, avoid going into depression. If no decision from Congress, we are in it. Great Depression II, which might be lighter than original. I wouldn't bet on it though.

The bad thing though, is that we might not avoid depression even if Bernanke/Paulson plan is accepted in some form. The situation is way too bad. And this plan only solves a part of a problem: bad house loans. There are several other elephants in the room: credit default swaps, insurance, commodities. I don't know what would blow, but something will.

I'm holding my position in UUP, which is a play on a strong dollar. Whatever decision is (if) made, it isn't going to inject enough liquidity into the system to start things moving again fast enough. Deflation, or at least increase of dollar value, is in the cards.

Buffett invested in Goldman Sachs. Makes sense with his time horizon. I don't know, GS still holds huge long commodity positions. There was only one worldwide recession when commodity prices went up, during stagflation of 1970s. Not gonna happen now. Companies don't have pricing power. Workers, at least in US, don't have negotiating power. Never mind workers in China. So I'm staying away from all financials now. At least until Bernanke cuts rates again. My forecast of interest rate below 1% in the first quarter of 2009 stays.

Still thinking about increasing Altria position and buying Raytheon.

Full disclosure: at the time of publication author had long positions in MO and UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, September 23, 2008

Would They Wake Up at Last?

It's just amazing. Paulson, Bernanke (scholar of Great Depression) at last saw it coming. Way too late to my taste, for me this was obvious in January (link). But, anyway, they are not asleep anymore. Now, who can wake up Congress, if these two can't? We can't spend 700 billion, it's too much? Come on, if not this bailout right now, then we are gonna spend couple of trillions saving FDIC later. Maybe Congress can get Jim Cramer to give testimony?

Missed Friday opportunity to unload something. Well, don't want to sell now, but do want to sell something into strength. We'll see.

Couple of possible buys at current price levels:

Altria (MO): it's becoming better than bonds. When most bond ETFs are nosediving right now, Altria holds. Dividend is over 6% already! And people don't smoke less in recession. I think of adding to my position.

Raytheon (RTN): from my point of view, the best defense company out there. Great play on Cold War II, I wrote about it already. Now it's at the price level at which I want to buy.

Full disclosure: at the time of publication author had a long position in MO and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Thursday, September 18, 2008

Crazy Day, Crazy Market

Unbelievable. That's all I can say about today.

Not much activity for me. Added to my UUP position. I'm sure that dollar will grow, whether it's good or bad.

Two themes today.

First. Jim Cramer needs to see a specialist. This article might be enough for diagnosis, but I'm not a professional shrink. There is no financial force in the world to manipulate US market. Even part of the market, financials. You need to have huge money to do that, nobody has that much. Simple truth: people are afraid of financials, especially investment banks, and sell them with abandon. It's not necessary to sell short to kill stock. You can just sell what you have. If big guys sell a lot, it's enough.

Hot money is looking for home. Since crash of commodities, a lot of money wants to find something, anything, to invest to. Attempts were made in financials, tech, yesterday and today in gold, silver and other commodities. Even oil, although that one can't keep a gain no matter what. This problem is going to get worse until the end of this month. Funds of different kind are doing window dressing right now, and the only good thing they can show on accounts right now is cash. I'm afraid that sell-off will continue because of this, despite all government efforts. By the way, window dressing might explain sell-off of financials. Unless foreigners come and rescue market. Like in Russian joke in the end of 1980s: there are two ways to save country: fantastic, we will do it ourselves. Or realistic, aliens will come in flying saucers and rescue us.

What to do? I still want to buy more at current prices. Work interferes with investments again, but tomorrow, again, is another day. Probably need to buy something before month end, maybe even Goldman. Price below book value is too tempting. The only problem is that I don't know how much commodities Goldman had on books in the end of August, now they all worth less.

Full disclosure: at the time of publication author had a long position in UUP, and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, September 17, 2008

Have To Buy Something

It's bad. It's so bad out there that I just have to buy something tomorrow. Yes, market can go down 1000 points more. Sure. But you never know. The only thing I know for sure is that when market is down huge, you have to buy something. And if it's up huge, something has to be sold. That's how you make money in sideways market we are since March 2000.

What is on my radar: Raytheon (RTN), I wrote about it before (here). UUP: I have a small position and if it stays not much over 24, I'm adding to it. Brookfield Asset Management (BAM), I own a significant position, but price is way too low for a company which is profitable for the last 20+ years and pays good dividend. Banco Bradesco (BBD): own it too, Brazil isn't going anywhere. Indian Fund (IFN), own that one and India is still on the map, and Indian market is going to open up tomorrow. Last, but not least, is Altria (MO). What the hell, company is paying 6+% dividend and it increased dividend for the last 10 years!

Was way too busy with my job today. Again! Well, tomorrow is another day.

The fact that I'm buying tomorrow doesn't mean you have to. I always might be wrong.

I will not buy any Russian related equities. Russian government suspended market operations today and gave order to exchanges to take measures for market recovery. That's KGB thinking about market operations. I was wrong, just a little bit, about Russia here. You could get out until yesterday. Now time's up. Write down your investments in Russia. KGB owns the country and everything inside. Maybe Russian exchanges will open. Maybe. Good luck with it.

Full disclosure: at the time of publication author had long positions in BAM, BBD, IFN, MO and UUP, and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, September 16, 2008

It's Worse Than You Thought

Hell, it's even worse than I thought. And if somebody can mistake me for an optimist, it's only in a sense of an old joke: pessimist thinks it can't get any worse when optimist is sure that it can. Thanks government for saving (in a sense) AIG. No thanks to Uncle Ben: Rates are too high at 2%. Hell, in half a year you would dream of negative rates, but such thing doesn't exist. It's time to start helicopters!

Seriously, we are quickly running into deflation. And it will get us, like tar pit: slowly but surely. Maybe emergency cuts would come. Afraid that would be too late, too little. Some time ago I wrote "Why So Much Gloom". Now I know.

Looks like my call on Google and Intuitive Surgical was right. Didn't have any time yesterday, it was time to buy something. Didn't have time to analyze Goldman Sachs earnings today. Cramer says it was good. Dunno. Anyways, my job stayed in the way of stock trading last two days. I'll try to do better later.

But. The cash is the king. The dollar is the king of cash (and yen is a queen). Some tech with very deep pockets and very high growth rate might be good despite of everything. Anything else is scary. I'm thinking of selling every rally instead of buying dips.

Long forgotten, but necessary addition to the list of basket case countries:

Haiti: Type 1 (was type 2 under Docs, but nobody knows how to fix it). I think only North Korea is worse, but I might be wrong.

Full disclosure: at the time of publication author had long positions in Google, Intuitive Surgical and US dollar via UUP, and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.