Thursday, December 31, 2009

Crazy Year, Great Year!

This was a crazy year. We had S&P 500 at intraday 666, and the year ended at 1115. Everybody predicted doom and gloom (I wasn't very cheerful either), but we are doing just fine. Economy is growing, unemployment is tolerable, stock market is shooting up like a rocket.

I ended this year with rate of return 51%. Good, albeit not enough to cover last year losses. The main lesson from this year? The majority is usually wrong. Almost everybody thought that rally, which started in March, was a bear market rally.

This year I do have a resolution: take more risks and be not afraid to go against the crowd.

Coming up soon: yearly portfolio review.

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Tuesday, December 29, 2009

Taking Profits in Intuitive Surgical

Sold a little bit of Intuitive Surgical (ISRG) position. Taking profits after incredible run in the last 10 months.

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

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Monday, December 21, 2009

Dumping TSCM

I closed my (TSCM) today. This was my worst investment ever. Oh well, our mistakes should teach us something.
First of all, reasons for selling. They are straight from Jim Cramer's book, "Real Money"
From chapter 6 "Stock-Picking Rules to Live By"
Twenty-Five Investment Rules to Live By
Rule 19: When high-level people quit a company, something is wrong.
In March, Thomas J. Clarke Jr, long time CEO of the company, suddenly left.

From chapter 9, "Spotting Tops":
8. Accounting Mayhem
Accounting irregularities = sell.

I can't say there is an accounting mayhem in the company. But definitely there are some irregularities. Company didn't report quarterly earnings for two last quarters and recently got 180 days exception from Nasdaq for 2nd quarter of 2009.

Why didn't I sell right away in March? Because market started meteoric rise and rising water lifts all ships. But now is the time. Of course, at $3 time was even better, but I was stupid not to sell then.

What can I learn from this? I did by TSCM to bank on popularity of Jim Cramer. I remain a follower of Jim, he made me a lot of money. But TSCM also represents a business. And, judging by what I read in another Jim's book, "Confessions of a Street Addict", business of was troublesome from the beginning. In no small part because of Jim's personal choices. Well, I read this book after I bought TSCM, but it's no excuse. I had to collect more information before buying.

I always might be wrong. TSCM might shine and make a lot of money for other people. Might. But there is another rule of investments written by Jim:
Rule 13: No woulda-shoulda-coulda
As a follower of Jim, I have to sell.

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

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Thursday, December 17, 2009

Buying Citi Group

Looks like Citigroup (C) secondary offering didn't go that well. $3.15 probably isn't the price Citi wanted. Actually, I agree with Jim Cramer that it's a very good play on possibly improving economy next couple of years.

I don't think that Citi is a great company. Quite opposite. It's one of the worst banks in the world, grossly oversized and badly run. On the other hand, it's definitely too big to fail, and government, which holds about 25% of shares, isn't likely to sell its share soon. We buy stocks, not companies. I just think that this stock will cost more eventually.

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

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Wednesday, December 16, 2009

(Very) Short Course of Money

How money is made? Most people think that government prints money. Wrong! At least in USA, and in other developed countries, government doesn't.

Economists tell us that the basic equation of money economy is:

M * V = P * Q

Of course, real equations are a little bit more complex, you can look at them here.

M is amount of money in circulation.

V is the velocity of money, or how many times M is turned over within one year.

P is the price of the average transaction.

Q is the number of these average transations.

We can see, that price level P is in direct proportion to quantity of money and money velocity and in reverse proportion to the number of transactions during one year.

So far so good. But where money comes from? Times when money was some precious metal, are long gone. You can forget about it. Currently, all money in circulation, with a small exception of coins, is... debt. Most of money in current economy is just some kind of electronic records. This money comes into circulation when Federal Reserve lends money to banks, which lend it to other banks, which lent it to businesses and population etc. There is also paper money, printed by Treasury. And paper money is debt too, this time debt of government, because paper money doesn't live long. When paper money becomes unusable, government buys it back.

Yes, since 1971 we live in the brave new world. Money = Debt.
This equation, though, has several consequences, obvious and not so obvious.

First of all, if money velocity falls (crisis, like now), economy needs more money, so Fed needs to increase amount of debt. It reduces interest rates, so banks can borrow more money from it. It can also directly inject money into circulation by buying some debt, usually Treasuries. Note, that this debt should be already on the market. If money velocity increases (boom times), Fed, in order to slow down inflation, should decrease amount of money in circulation. So it raises rates and also might sell some of debt tools it's holding.

So far so good. But this machine of money creation can only work in inflationary environment. Because there is no such thing as negative interest rate. If we have deflation, and rates are already at effective zero, like right now, Fed doesn't have the ability to ease credit anymore. It can buy more Treasuries and even some more debt tools, but, again, this debt should be on the market already.

Which means that we have another equation: Public Debt + Private Debt = Money. In other words, if amount of private debt decreases, like it was for the last 18 months, public debt, i.e. debt of federal government and state governments should increase. Looks like this part just can't get into the heads of so-called "Fiscal Conservatives", which want balanced budgets. If you balance budgets on all government levels, economy will collapse in the first crisis.

Deflation is bad. Why? If prices fall, you can buy more stuff, right? If you have a job, of course. And here's the problem. Money = Debt, without debt, economy doesn't have money. In deflation, debt cost interest rate plus rate of deflation. If debt is expensive, less companies take it, decreasing money supply even more. This is called "Deflationary Spiral". It was big part of depressions of 1873-1879 and 1930s. We now have unemployment rate 10%, how about 25% like in 1930s?

That's why all ideas of returning to precious metals, gold standard, etc. are total bunk. I mean, if we want stagnant economy, we can do it. If we want economy growing 2-3% a year, we need growing money mass. You can't increase amount of gold at this rate. I have suspicion that Gold Standard of the end of 19th century and beginning of 20th survived that long (about 40 years, if you take most of the world) only because of discovery of great gold deposits in South Africa.

Another not so obvious consequence: fiscal responsibility, at least defined as "spend less, save more, don't take much debt, if at all" is bad for the economy! It's good for the individuals and, maybe, some businesses, but bad for the economy in the whole. Usually "Paradox of thrift" is explained as the fact that reduced demand harms economy. But there is another explanation: because Debt = Money, people and businesses which take less debt, reduce amount of money in circulation. That's why I'm very angry at our President for calling to spend less and save more.

There is one problem with current money though. Economics, as usual, doesn't completely take equation Debt = Money into account. Economists are looking in rear view mirror, as usual. And the worst phrase I've read about money lately came from Ben Bernanke, our Fed Chairman. He wrote: "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation." Year, right, we can see quite opposite in Japan. 20 years of deflation, my deep condolences to the lost generation of that country. I know, Uncle Ben wrote a book on Japanese Depression, but it doesn't mean he can get it right.

We are in a very serious crisis right now. Maybe we avoided depression, only time will tell. But definitely, this time is different. Economics is not an exact science because you can't predict behavior of people. In order for any economic policy to work, people should respond to it right. For example, if Federal Reserve wants to print more money by easing credit, people and businesses should be willing to take credit and banks should be willing to give it. In Japan, that wasn't happening (looks like still doesn't). Bernanke Doctrine doesn't tell us what to do if they give money and nobody comes. Especially naive is an idea of currency depreciation. Japan was trying to that too, you know.

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Monday, December 14, 2009

Death of TV Is Near

Newspapers are dead. We all know that. Mr. Murdoch is trying to stop that, with about the same level of success as a horse can stop oncoming train.

All predictions about the Internet are coming to life. TV is the next to go. I thought that we have about 10 years before that, but this article in New York Times completely changed my mind. If you have high speed internet connection, you can get rid of cable right now. Well, people in the article are still watching the good old TV shows, but that's not for long. There will be new ways of video shows production which will completely change what we watch. Like blogging is killing traditional journalism, successors of Youtube will change video.

Youtube is not there yes. There will be something else. And this something else will appear, have no doubts about it. We live in a brave new world, internet is changing everything.
From investing perspective, new developments mean:

1. Cable companies are going to become internet providers, mostly. There will be some people paying for cable for some time, but their numbers will decrease. Cable companies are not good places to invest. The future of satellite companies doesn't look very bright either.

2. TV networks are not going to die very soon. They will play with different internet distribution models and some of them are going to survive in the end. But I wouldn't invest long term in any of them.

3. Hollywood is going to change or die. I thought that DVD is going to be prevailing distribution channel for a long time, looks like I was wrong. I'd give it about 5 years, after that it's going the way of VHS. Which means that current Hollywood model, getting most of the money from selling and renting DVDs, is not going to work after that. Internet distribution is the key to survival. But that would be the smallest problem of Hollywood. Much bigger problem is sharply reduced barriers to distribution. You don't need to print tens of thousands of DVDs. Just rent some server space with good connections (available in the clouds right now). Making a good movie is still requires art, but it doesn't always require much money, as Blair Witch Project proved.

4. Netflix (NFLX) is the best internet movie distribution system right now, and taking over DVD distribution. Despite that success, I don't expect outright victory for Netflix in the 'net. There will be very tough competition. I don't know where it's coming from. Not from Hulu or iTunes.

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

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Tuesday, December 8, 2009

Gold, Dollar And Stocks

Too much talk about reverse correlation between dollar and everything else. Yes, we had such correlation since March. It doesn't mean such correlation would last forever.

During the great bull market of 1982-2000 dollar was going up, commodities down. Gold fell in 2001 to $256 from $850 peak in 1980. Oil traded as low as $10.50 in 1998. During bull market of 1960 commodities prices went up.

However, current correlation does present some useful information. This is information about markets. And it's very simple: this market is driven by traders. They are trying to find some order, some kind of dependency which can be traded, and run it as much as possible. Never mind fundamentals.

Right now market is in transition. It's still looking for direction. It's laughing at all attempts to find rational explanations. I was surprised to hear from Jim Cramer today that transports telling us that bull market is alive. Maybe. Maybe not. Nothing is certain right now.

I'm bullish long term. Almost certain that stocks, at least those I holding right now, are going to be much higher 18 months from now. But I'm not sure of short-term perspectives. So far, market was trading on technicals until March, then it was trading on sentiment. It ignored fundamentals. Now technicals don't tell anything (nice triangle formed up on S&P 500 graph, no?), sentiment is mostly bullish, but not outrageously so. Fundamentals still suck.

My hope is that fundamentals will start improving in the first quarter of 2009 and stock market will follow. Maybe we'll see the improvement even sooner. Let's say, US GDP shows second quarter of growth in the row, should be a great news! My problem with it: most earnings reports for the last quarter weren't that good. Earnings growth without revenue growth.

That's my hope. Let's see what will really happen.

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Thursday, December 3, 2009

Tired of Cramer

I'm probably not the only one. I'm watching Mad Money less and less. Enough to quickly scroll through recap.

My main problem is the first segment. I don't need to hear Cramer's view on the economy in whole and on the market every day. Stock picks aren't very good either lately. Usually I could find 2-3 stocks a week for follow-up review. Just about a couple in November.

Maybe Jim got tired of his show himself?

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Tuesday, December 1, 2009

Trimming Banco Bradesco

I started trimming my Banco Bradesco (BBD) position today. This is a strategic decision: I decided to sell this position. Of course, I'm doing it in stages.

This was an attempt to make money on one of BRICs.

The main reason I'm selling this position: political situation in Brazil. Bad (for business) news are coming from there. Government more and more interferes with business decision. Last news: government tries to increase share of state banks in financial sector. Other news include plans to direct banks to increase lending. Brazil government more often finds itself in agreement with government of Venezuela, which is even more worrisome. I don't know if Lula wants to be Chavez, but you I can't completely ignore such possibility.

Another reason: Brazil economy is in situation of investment bubble. Real (local currency) appreciated a lot since beginning of year. Government even tries to slow down foreign investments: Brazil nuts? The country’s new capital control.

Third reason: Brazil economy mostly depends on export of raw materials and food. So far commodity prices are growing this year. But I have my doubts, especially because one of main export materials, iron ore, is in a bubble by itself. So much bubble, that China, main importer, uses less ore than it imports, stockpiling a lot of ore in ports (look here).

These factors make Brazil stocks way too risky for my taste. I will continue cutting down this position.

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

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Thursday, November 26, 2009

Giving Thanks

I am thankful to my country, United Stated of America. With all problems, with all drawbacks, it's the best country in the world.

I am thankful to all people around me.

I am thankful to the market this year. I recovered my of my last year losses.

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Tuesday, November 24, 2009

Can Fed Defeat Dollar Carry Trade?

I wonder if Fed is accounting for dollar carry trade in their models. Because if not, we are all in a big, like Great Depression 2.0, trouble.

First, a little bit about money. Fed is creating money, true. But then it lends money to the banks, which lend money to other banks, businesses and people. There is multiplication effect on the way, because most of the borrowed money falls back into bank accounts and then available for borrowing again, with a 10% taken by Fed as a reserve. Usually every dollar lendt by Fed creates about 9 dollars in circulation.

By the way, the fact that almost all money in the country is a credit money, has interesting consequences. For example, to keep prices stable in expanding economy, country needs more money. Which means more credit. Which means that all calls to borrow less and save more are only good for contracting economy. People, calling for that, including our President, are calling for Great Depression 2.0, plain and simple.

There is a lot of talk about coming inflation. Sure, Fed wants to create some inflation. That's because alternative is so bad. Deflation is awful. Unfortunately, only very old people remember it in this country. Most of the people remember inflation of 1970s and fear it the most. But deflation is much, much worse than inflation. Again, all money in the country is on loan. In deflationary environment, money returned to the creditor worth more than it was when borrowed. Which adds to the interest rate you pay for the loan (somehow negative interest doesn't exist). As a result, money mass is contracting in deflationary environment, enforcing the deflation (deflationary spiral).

For more than a year, Fed keeps interest rates at almost zero. It seems that a lot of money is pumped into economy. Why don't we see inflation, which is "always a monetary phenomenon"? Because prices depend on money supply, money velocity and amount of goods sold. Money velocity dropped faster than money supply grew, it's that simple.

Can Fed increase money supply even more? That's a trillion dollars question. Remember, of 9 dollars of money mass, 8 are created by banks, not by Fed. Actually, 8 dollars should be created by banks, but looks like that's not working right now.

Enter dollar carry trade. Businesses are borrowing dollars with almost no interest rate and either lend money in other currencies or buy some stuff which supposed to grow up in price. Most of this money leaves the country or gets frozen on margin accounts, not creating new money in circulation. This is what was killing Japan in the last 10 years: Central bank was giving away yen, but borrowers didn't lend it inside the country, money mass was not increasing, country was (still is) in deflation and depression.

It's too soon to say if dollar carry trade would have the same effect. Yen carry trade, while negating Japan Central Bank policies, funded mortgage bubbles in US and Europe. Currently a lot of dollars went into commodity futures, funding possible mining bubbles. Some went into developing countries. China looks more and more like a bubble now. Bubbles pop sooner or later, as we know well. The question is: sooner or later?

Even if bubbles don't pop, carry trade can prevent Fed from pumping money into US economy. The main question is: can Fed fight dollar carry trade effects? Or we are going Japanese way?

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Thursday, November 19, 2009

Parking Cash

Added to my position in Wells Fargo Capital Trust XII (BWF). Parking cash in a high yielding place.

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Wednesday, November 18, 2009

Want to Invest in Russia? Your Employees Might Be Killed

One more illustration about investing in Russia. Sergey Magnitsky, lawyer for Hermitage Capital investment group, died in jail. He was imprisoned for almost a year, government and court decided to keep him in jail until his court date.

Hermitage Capital was a little bit more lucky than many other investors. William Bowder, CEO of the company, withdrew most of money from Russia before government people could rob him. That probably was the reason for persecution of Magnitsky.

This is a lesson for anybody who wants to invest in Russia. Not only you risk your money, you also risk your people. If your company falls in disfavor in Russia, your employees can be jailed under invented reasons, they can be killed by prison officials or by hired killers on the street. Russian government thugs don't care who those employees are. They can imprison pregnant women, women with small children, terminally ill people. There are hundreds of examples.

And to get to the good side of Russian government, you'll have to bribe officials, sometimes surrender significant pieces of your property to government owned companies. Even in this case you are not safe: if your Russian counterpart falls in disfavor, you can lose everything.

Full disclosure: at the time of publication author did not have any positions, long or short, in Russian companies or in funds invested in Russia.

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Wednesday, November 11, 2009

Opening HTR

I opened a new position today: long Helios Total Return Fund (HTR).

This is somewhat risky fund: more than 50% of it is invested in various mortgage backed securities. On the other hand, it pays more than 11% dividend, with monthly payments.

Last several days, HTR price was going down, when Net assets value (NAV) of the fund was going up a little bit. Currently fund is valued at about 9% discount.

My bet: mortgage backed securities are currently undervalued, and HTR is undervalued against underlying assets. High dividend doesn't hurt either.

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Monday, November 9, 2009

Market is Looking for Direction

Well, I nailed pullback somehow (here). Small one, I didn't even have time to buy much.

Now the game is changing again. Last couple of months the trend was: dollar down, stocks up, commodities up. Last week we had several different combinations, and on Friday dollar was up a little, stocks up a lot and commodities down.

Unfortunately, I don't see what's going to happen. A lot depends on the direction of dollar carry trade.

Let's wait for market to tell us the truth.

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Tuesday, November 3, 2009

Buying more PGF

Bought even more PowerShares Financial Preferred Portfolio (PGF) today. I'm almost sure that market is still going down, but "almost sure" is not "certain" and discipline dictates that I have to start buying on the way down. Besides, this ETF was down too much today compared to banks preferred shares.

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

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4 Possible Market Scenarios, Updated

In April, I wrote Fork On The Road, which was published on Seeking Alpha as 4 Possible Market Scenarios. I think I have enough information now to update these scenarios and define investment strategy for the nearest future.

Scenarios, mentioned before:

Inflation and stagnation = stagflation

We had an amazing rally in commodities since March. Lately, we also had rally in gold, breaking through 1000 dollars per ounce. This is looking pretty much like dollar carry trade, or, as Nouriel Roubini said, the mother of all carry trades. Traders borrow dollars and buy everything they define as "hard assets", hoping for inflation. This might end bad, very bad indeed. Don't want to go into details, Roubini explains it much better. Despite bull run in commodities, inflation in USA is nowhere to be found. I still see probability of high inflation under 10%.

Japanese disease (Zero growth with zero inflation or low deflation)

Latest developments make this scenario less likely. The main problem in Japan is society, not economy. It's way too conservative, way too rigid, doesn't promote initiative, puts too much trust in managers and in government. I don't see anything like that in US. Banks are getting restructured, companies are laying off and cutting costs like crazy. It's painful for people, yes, but it's much better than sweeping problems under rugs, like Japan did for 20 years. The only similarity I see with Japan so far is carry trade.

Probability: around 10%.

Great Depression 2.0

Here I have to curb my enthusiasm. Probability of this development is higher now than it was back in March. The main change: higher taxes. They are creeping from all sides. Many local governments are raising taxes. Some states are raising taxes. Federal taxes are going to go up, it's almost given. I'm not against some tax increases in principle (no, I'm not Ayn Rand fan), governments provide essential services (at least some of them) and we need to pay for them. But I'm absolutely against any tax increases in the nearest future, i.e. before 2012. Otherwise we might repeat 1937 (just take a look at Dow chart!). All whining about deficit is misplaced, Japan has government debt at 160% GDP and counting, we are still below 100% GDP. Talks about reducing or ending stimulus programs are not improving my mood either.

Probability: about 35%.

Great Recession

Last quarter GDP numbers look great. Maybe US economy is recovering already. But accurate numbers are usually available 12 months later. And one quarter is not that important, in the last 20 years Japan sometimes had up years. Lots of good quarter reports, companies are beating profit estimates. But not many of them really grew revenues, profits are mostly driven by cost cutting. And dollar carry trade is looming huge. Despite of these developments, I still see this scenario as most likely one. After all, we just had a huge rally in stocks, and more importantly, in bonds.

Probability: about 45%.


I see lower probability of Japanese scenario and higher probability of GD 2.0. If we take a look at corresponding stock indices, it's bullish. Stocks went down and then stayed mostly flat in Japan in the last 20 years, but during Great Depression direction was up after 1932.

My stance continues to be bullish.

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Wednesday, October 28, 2009

Closing Panera Bread

Closed my (small) position in Panera Bread (PNRA) today.

This is an interesting story. Company is growing fast, has no debt (amazing for a restaurant chain) and has a great management. Company had a great quarter, raising some prices when people moved from full service restaurants to discounters.

Why am I selling it then? The answer is simple: I'm selling stock, not a company. This stock can move 20% up or down on no news at all. There are some reasons for that: sometimes institutional investors buy or sell big positions. Big short interest (currently about 13%) adds to volatility.

In short, this stock is better as a trade than as investment. I might enter position again at lower level.

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

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Wednesday, October 21, 2009

Google: No Pin Action

Google (GOOG) reported good quarter last week. Main number: year-to-year revenue and earnings growth. Reaction of financial press: advertising is coming back, it's the end of recession.

Not so fast, guys. First of all, Google is the only advertising company so far showing improvement. Yahoo! (YHOO) reported revenue drop. I'm not sure traditional media is going to report any improvement either.

I think the main driver for Google is the shift of advertising from traditional media to the Internet. Yahoo! missed this move, company is too busy with reorganizations. We'll see traditional media reports soon, but I don't see any pin action. Google is swallowing advertising market, that's the real picture.

Full disclosure: at the time of publication author had a long position in GOOG and no positions in YHOO. Positions can change any time.

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Sunday, October 18, 2009

Things are Looking Toppish

I'm afraid to blow it again. Couple of times I called the end of this rally or at least a pullback and was dead wrong both times. But.

We see different reaction to the news now. Last quarter earnings were met with "buy, buy, buy" reaction, whether earnings were good or, more often, not so good. Now, earnings are coming better, I can actually see real growth in some reports, but every company gets killed. With exception of Google (GOOG), which reported outstanding quarter. I'm going to write more about Google later. But the fact that very good earnings from Intel (INTC), IBM (IBM) and Goldman Sachs (GS) were met with sell-off is telling.

Another point: sentiment is becoming more bullish now. If I understood Todd Harrison's last missive right, he's not bearish anymore. That's telling. Would be even better to see Doug Kass bullish, but I don't think so.

I thought that rally in July-September was a buying panic. Still think so. Looks like panic is over, window dressing finished in September. We are up for a pullback. How big is it going to be? Nobody knows.

Short term, I'm tempted to play earnings. I know it's a sucker's game, but temptation is too big. Medium term, I'm waiting for a 10% pullback. Because I'm bullish long term (defined as 18 months in my case), I'm buying such pullback and buying even more if pullback goes deeper. And of course, I want to take some profits.

Right now, I want to buy Intel. Jim Cramer is absolutely right: any company running 63% margin is a buy. Apple (AAPL) is tempting for a trade.

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

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Monday, October 12, 2009

Natural Gas from Shale

Suddenly a burst of articles about old news. Yes, companies developed technology of horizontal drilling which allows to extract gas (and some oil) from shale. Those who follows oil and natgas industries know about it since last year.

Is it game changing? Somewhat. This technology probably doubled world natural gas reserves in less than a year. It added a little to the oil reserves. As a new technology, it has a lot of room for improvement, so I expect gas and oil reserves to increase even more.

Is there a trade or investment here? Not much. Obviously, natural gas prices in US aren't going to grow much anymore, supply is way too big. Additional supply of oil is too small to make a change. Situation in Europe is different. As far as I know, Poland and Estonia have huge shale fields. In Estonia it was even feasible to use shale rock as a fuel. With Europe looking to diversify gas sources from Russia, it might be a very bad news for Gazprom. Don't even think about investing in it.

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Monday, October 5, 2009

Back From Vacation

I've spent last two weeks recuperating on Antilles. Now I'm back in full force. Can anything kill this buying panic? There is support for it from sentiment reading: people are still mostly bearish. Technicals are telling me nothing, with a small exception: we are about to see downtrend line running from November 2007 cross uptrend line started in March. Fundamentals are bad and not getting better.

Earning season is upon us, as well. Let's see. As Todd Harrison says, reaction to the news is more important than news itself.

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Monday, September 14, 2009

Great Depression 2.0: Is It Over?

It's almost a year since I wrote Great Depression v2.0: Missing Piece Of The Puzzle.

Let's review main points. We have only one full blown worldwide Great Depression for comparison: 1928 - 1938 (there is a point of view that it only ended in 1942). There are also two known to me depressions which were not international: depression of 1873-1879 in US and Great Japanese Depression: started in 1989, still counting.

There is a one thing in common in these three. Each one had three components: real estate boom which went bust, financial crisis and structural crisis. A lot was written about first two, but structural crisis somehow avoids economists attention. Which is unfortunate, because it's a key. There are a lot of examples of financial crises, which were resolved relatively quickly. There are examples of real estate crises which didn't crush economies: 1990 - 1991 in USA, 2003 in UK and plenty of others.

Structural crisis is different. It's created when some new technology, or market change, or combination of both change the way significant part of economy works. Initially there is a boom, new technology creates new jobs, new demand for products. But later on, old industries are getting killed by new technologies. In ideal case, economy adapts quickly enough to the change, no other big crises happens and everybody is happy. Examples: personal computer revolution of 1980s, first phase of internet revolution in the end of 1990s. Below are not so ideal cases.

By 1873 in US there was a huge buildup of railroads. A lot of money was invested in them and associated real estate. Railroads changed the way economy worked, creating structural crisis. Whole industries (for example, cattle runs, pony express mail, shipping between East and West Coast around the Horn) were about to be destroyed. Maybe this process could be less destructive, but in 1873 country adopted the Gold Standard, triggering severe deflation and financial crisis. Real estate crisis quickly followed.

By 1928 developed world mostly switched from horse to internal combustion engine in transport and agriculture. It was a huge structural change, which was going relatively smoothly. But in the end of 1920s US was hit by real estate crisis, and stock market drop in 1929 created financial crisis. Welcome, Great Depression. Structural change was worldwide, so was the depression.

By 1989 Japan reached great success as an exporter of excellent and inexpensive products. Japanese companies became world leaders in car, heavy equipment, electronics manufacturing. Unfortunately, internal economy changed slower than export-oriented, sometimes economists joke that there are two economies in the country. Japanese, extremely conservative people, invested most of their savings in real estate. Some money started moving to the stock market in 1980s, including a lot of foreign money. There were two bubbles in Japan by 1989: real estate (several blocks in the center of Tokyo were priced higher than all real estate in California) and stock market (P/E of Nikkei was, if I remember it right, around 57!). It's the longest running depression in the modern world now.

Bernanke just said that recession is technically over. Great. If we get out of this crisis next year, I will be first to propose to install giant gilded statue of mister Bernanke right in front of Federal Reserve building. I have my doubts though. The three depressions mentioned above didn't finish until structural imbalances were worked out. It takes time. Japanese Great Depression is an example what happens when government and Central Bank try to fix depression using financial tools alone: nothing. I just hope that people of Japan started necessary structural changes by voting LDP out of power.

Current structural crisis is a result of double whammy: internet plus globalization. A lot of good things happened as a result of two, including fast development of poor countries, including China. But this development also created huge imbalances. There are whole industries which have to downsize and restructure. First of all, everything related to information. Newspapers, TV, magazines, music, phone services, books. Another imbalance: prices of commodities. Most of them are overpriced, compared to historical trends. Mining industries and agriculture didn't keep up production with demand. But they will catch up, eventually. Big imbalances need long time to be worked out.

Of course, we can hope that governments and central banks of the world managed to fix current crisis and everything is going to be just fine soon. Hard to believe though.

How depression affects investments? Long term, it depends on societies, governments and central banks making right decisions and not trying to hide problems under the carpet. That's the difference between Great Depression of 1930s and Japanese Great Depression. Let's suppose we are going American way, not Japanese way. If it's true, now is the time to buy, buy, buy. Despite the high probability that we have several years of worldwide depression ahead of us. Best time to buy stocks in 1930s was in the middle of 1932, when Great Depression was just flexing its muscles. Current depression is running faster than before, my assumption is that we are in the equivalent of 1932 now.

What to buy? Forget about commodities. Long term, they are dead as an investment class. Depression = deflation, forget about other inflation fighting investments. Invest in the future, in new technologies. Most of the tech companies don't have any debt and have a lot of cash. Cash is the king during deflation. Some of the companies will fail, some will win, but as a class, techs will win. Banks will win, they can get money from Fed. Sin always wins, tobacco companies pay huge dividends and usually do great in crisis. Don't know about anything else.

The danger is, as usual, in assumptions. If we go Japanese way, cash is the only way to go. I'm betting on American way.

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Tuesday, September 8, 2009

Gold Prices are a Sign of Nothing

Jim Cramer said today on "Stop Trading" that Gold Prices are a Sign of "Robust" Economic Growth.

I have several objections to this.

First: there are no signs of economic growth. Things are getting worse slower, that's all recovery I see so far. Potential headwinds are strong, including the most dangerous, deflation, which is almost forgotten among the noise about coming hyperinflation. I don't know when higher inflation is coming (hope soon!), but so far we have deflation, plain and simple.

Second: gold is a security investment. Higher prices of gold mean that people afraid of something and buy the most reliable (from their point of view) form of money storage. Or maybe traders anticipate such behavior of people and try to front run the trend.

Third: industrial demand for gold is a very small part of gold demand. Most of the gold is consumed as investment (hoarding) or as jewelry. And significant part of gold which is counted as jewelry is actually bought as investment. Especially in Asia. But currently jewelry demand for gold is down, in some months it's negative (people sell more gold as scrap than buy). And the biggest importer of gold, India, reduced imports this year at least by 50%. Which means that quoted price of gold is actually price of futures and has little relation to supply/demand of physical gold.

Growing price of gold means only one thing: there is a change of supply/demand balance of gold futures. For investors not related to gold trade, it means nothing.

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Thursday, September 3, 2009

Starting Netflix

I started Netflix (NFLX) position today. There are several reasons for my decision.

I am a happy customer. They have great selection of movies, service is excellent, subscription price is unbelievable low.

Business model is unique. Blockbuster tried to do the same and failed. Rental kiosks serve different customers, they are not big competitors.

Company has a great financial position. Balance sheet looks great, earnings are growing.

The main asset of the company, however, is Netflix Culture Manifesto. When most companies treat their employees like replaceable parts at best and often like dirt, this company understands that great people make great company.

Of course, opportunity helps. I waited for an entry point and here you are! YouTube deal with movie studies is not certain, wouldn't happen for months. It also doesn't even touch main reason people subscribe to Netflix: great selection of movies on DVDs and great service. Web content delivery might be important in future, Netflix makes money from DVD rentals now. But YouTube news pressed NFLX down. Good entry point.

YouTube belongs to Google(GOOG).

Full disclosure: at the time of publication author had long positions in both NFLX and GOOG. Positions can change any time.

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Wednesday, September 2, 2009

Should I Stay Or Should I Go?

Market went down for two days and failed to have snapback rally on the third. If I had more time for trading now, it would be perfect setup for Jim Altucher's 3x2 quant trade. Unfortunately, I can't sit at the trading screen.

Is it correction? Is it an opportunity? As usual, we'll see later. Some would claim they made a great call some would be silent. It's really hard to make a call here, because last month was a month of panic buying by big guys. Market now in their hands. If they think they bought enough, we are going to have a correction or sideways market. If they need to buy more, market is going up.

Honestly, I remember only one buying panic which was bigger: first half of March 2000.

Doug Kass predicts 10% pullback. Great! If so, I'm a big buyer. Even bigger if market drops another 5%. I'm all in on another 5%. We are in the market which mimics 1932, in compressed form. Which means: "buy, buy, buy". But discipline says: "wait for a pullback".

There are two big clouds on the horizon. First one is looming tax increases in US. Most of Bush tax cuts expire in 2010, which will be a huge hit for recovering (maybe) economy. I wasn't a big fan of those cuts, but raising taxes in time of crisis is bad. Actually, it's insane, but I'm afraid that current administration will go for it.

But federal taxes won't be up for a year. Another cloud might be much closer. We have a bubble in China. Many (most) refuse to recognize it. They ignore simple arithmetics: more than 20% drop in exports can't match 6% growth in export depended economy. No way, no how. The only question now how this bubble will end. If it deflates slowly, world economy is OK. We'll see significant drop in commodity prices, which really would most economies. Unfortunately, most bubbles in economy end up with the bang. And that's scary. Sharp drop in Chinese stock market would be bad by itself, but sharp drop in commodity prices might create a worldwide disaster, especially in commodity depended economies. I don't mind if Venezuela or Russia lack money for their ambitious political projects. Problems in Brazil, Argentina, Chile, South Africa might threaten their stability, which is much worse.

Anyway, I'm still bullish. 10% pullback? Gimme!

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Monday, August 31, 2009

Good to be back

I'm back. My family matters are taken care of, I can return to blogging.

The main theme right now is continuing buying panic. Some big funds buy everything, good or bad. They don't care, the only bad thing for them is to show too much cash on balance on September 30. I don't know when this panic is going to end and which way. So far, I did couple of trades around positions, which I mentioned earlier. I'm still in a bullish mode, if there is a pullback. But I'm not going to buy into buying panic, this is a sure way to lose money. There will be opportunities to buy cheaper. My sectors of interest are still tech, banks, debt and REITs.

Another emerging theme is China. This might be huge. Somehow most pundits think that US debt is the next bubble and miss the obvious. China's export is down more than 20% year to year and they claim growth?! In export depending economy?!! The problem is pin action. If China bubble pops, commodities are going down. All of them, with exception of natural gas, which is lying on the floor already. And this is a double edged sword. Lower commodity prices should help economies of the world to recover. With exception of economies depending on said commodities. Because many of commodity depending countries are not politically stable, implications can be frightening.

And third theme: Japan. There is functioning democracy there, at last. I hope it will help to revive petrified society, which should be good for economy. My huge congratulations to the people of the country! In other words, first time in my investment career, I'm considering buying Japanese stocks or ETFs.

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Thursday, August 27, 2009

Buying more PGF

Bought more PowerShares FInancial Preferred ETF (PGF) today. This is financial preferred ETF, paying about 10% yield. ITF was oversold lately, good time to buy.

I was quite busy with family matters lately, no time to blog. I'll be back!

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

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Wednesday, August 26, 2009

Selling some SNF

Yesterday sold some of Spain Fund (SNF) holdings. Took profits on the shares I bought in June (mentioned here). Another reason: fund stopped its policy of quarterly dividends equal 2.5% of NAV.

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

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Wednesday, August 12, 2009

Buying back IFN

Yesterday I bought back IFN shares I sold on July 23 (mentioned here). I was going to buy back from the secondary offering, but price was too good yesterday, close to NAV.

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

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Tuesday, August 11, 2009

Cramer vs Kass, Part Deux

In my previous article on that matter (this one), I sided with Kass, thinking that we are in sideways/slightly downwards correction. I was wrong, at least for three weeks. We had such a wonderful rally!

Doug wrote a piece today which almost matches my thoughts. Almost.

Now we are talking long term. Which in our brave new world means about 18 months. I'm thinking about positioning and every decision now can bring big gains or losses.

So, who to follow? Cramer, who is all "buy, buy, buy", but lately prudently recommended to sell something into the rally? Or Kass, who doesn't see any long term upside?

Funny enough, I can't take either side now. I think that Dougie is closer to the truth in his analysis of economy and the way recovery is going to progress. We are going to have slow recovery, harmed from time to time by bad decisions, such as tax hikes (already going on and more coming), big stupid government programs, like medical welfare for everyone, biofuels and God only know what else.

But I don't agree with the conclusion. I think that we are going to have a huge bull market next several years. And there is only one reason for my optimism: history of the previous Great Depression. That one started in 1929 and ended in 1939 (or, as some would argue, in 1943). You'd think that stock market was down the drain all those years. Wrong! Dow Jones fell 89% from 1929 peak to 1932 low. But after that, Dow rallied. Rallied huge. Anybody who invested in stocks any year between 1932 and 1943 won huge.

Was 1932 bottom related to any improvement in economy? Just kidding. New Deal and other stuff were still ahead. Economy didn't even think to recover and unemployment was at around 25%. The reason for the rally was simple: stocks were dirt cheap and paid huge dividends.

Fast forward to now. Stocks were sold way too much. Many of them are dirt cheap and pay huge dividends. Lots of REITs, bond ETFs and CEFs pay more than 10%. Not all of them are going to be destroyed. Banks are cheap. Bank preferreds are cheap. Again, most of the banks will survive. Tech is still dirt cheap.

I am bullish long term. We are going to have volatility, which should be used to trade. But I an going to use current pullback to increase my long position. Economy might suffer in the nearest future, but it doesn't mean that stocks can't rally.

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Monday, August 10, 2009

Cash For Clunkers: The Best Stimulus So Far

I'm outraged at the outrage. Government is spending pitiful 3 billion dollars, which is not even a blimp on the total stimulus money and return is huge. Auto sales are way up, program is widely popular. People are spending money, banks increase lending, gas hogs are replaces with more efficient vehicles.

Let's compare to other stimulus packages.

Consumer stimulus package of 2008: 146 billion. Result: consumers paid off some debt (i.e. no stimulus).

AIG bailout: 150 billion and counting. Some of it probably will come back, but dozens of billions are lost.

Farm welfare packages: hundreds of billions every year. Hard to say exact numbers, they are changing all the time. Results: overproduction of some goods (milk, for example), inefficient production (sugar), waste of resources.

Energy packages (ethanol and organic diesel): hundreds of billion every year, complete waste of money, higher prices of agricultural products, environmental harm caused by more land used for intensive farming.

This list can be continued. Of all other stimulus packages, only bailout of banks made sense, and this money will be returned, most probably with big interest. And Cash for Clunkers is much more efficient than any of them. It does what stimulus should do: increase customer spending, when financing only part of this spending. I think 3 billion is not enough, maybe even 10 would not be enough. Make it 20, help people to spend, help auto industry, help local dealers, help economy.

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Thursday, August 6, 2009

Sold BBT

Sold my BB&T Corp (BBT) today. I bought it as a speculation on the secondary, which didn't work out. Even wanted to take a loss, but then current buying panic started. It's now time to take profit and reduce the number of positions in my portfolio.

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

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Tuesday, July 28, 2009

Buying Panic

I expected it a month ago. It's hard to imagine what is causing buying panic right now. But all signs are clear: stocks are going up no matter what. Number of bulls on TV and in press jumped up.

Usual reasons for buying (and selling) panic do not apply here. There is no change in fundamentals: maybe things are getting worse slower than before, big deal! Earning reports are mostly awful, the only reason most companies are beating estimates is because they cut expenses to the bone. This is not the way to improve economy. Technicals are contradictory and sentiment is too bullish. All signs are pointing down and stocks are going up.

Looks like big guys (remember, according to Jim Cramer "they are the market") woke up to the fact that we are in the bull market. Surprise! It took them more than 4 months! They are too big, they can't increase positions in couple of days. That's probably the reason we didn't have window dressing rally a month ago. Now they are building positions for window dressing for the quarter ending in September.

What does it mean for a small investor? It's time to look for discrepancy between perception and reality, in words of Todd Harrison. There are some stocks which moved a lot lately, it's possible to trade around them. There are some obviously overpriced, we can take profits there, if we have them. Buying panic is not the time for buying long term.

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Thursday, July 23, 2009

Selling IFN

Sold part of my India Fund (IFN) position today. This is a trade on the rights offering. Every owner of IFN has the right to buy 1 share for every 3 she or he owned on July 20 at 95% of net asset value (NAV). Currently stock trades at double-digit premium to NAV. So I think I can buy this stock back (and then some) cheaper than I sold it today.

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

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Wednesday, July 22, 2009

Bye, Apple.

I sold remaining shares of Apple, Inc (AAPL) today, into strength after earnings report. This is a strategic decision, I wanted out of Apple for a long time, but wanted to get more money for my shares.

My reasons for selling Apple are outlined here. That article was published more than a year ago, but all points are still valid. Actually, they are more valid now. Point by point:

Steve Jobs health is much worse, and Apple still doesn't disclosure this material information. Even SEC is investigating the matter.

iPod market is not growing.

Computer market share is down, in the faltering economy. It will grow back, but growth is limited for obvious reasons (price). I still don't see serious attempts to get into enterprise computing.

iPhone market share is growing fast, so far. But there is competition around. Blackberry is still king of corporate smart phones. Palm Pre might or might not be Palm's (PALM) savior, but it's a pretty interesting product. Google's (GOOG) Android OS is making inroads, and there is a lot of free software for it. And, unlike iPhone, Android plays flash movies (and flash plugin is promised for Palm Pre). There are also a lot of smart phones using Simbian OS. And some Linux based.

Another problem is size. Apple is just to big to grow as fast as it did last 10 years. But P/E is still suggests fast growth. I don't see any new areas where Apple can introduce new products and make money. Unless they want to change videogame industry. But margins on game hardware are not what Apple is used to.

In short, Apple is not good enough as an investment. Stock can be used for trading and I will keep it on my radar for that purpose.

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

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Monday, July 20, 2009

Cramer vs Kass

We have two calls by great traders/investors:

Jim Cramer: buy, buy, buy.
Doug Kass: preserve cash, it's sideways correction.

Who is right? Doug Kass, who is "right as a rain" (Jim Cramer). Or Jim Cramer "El Capitan" (Doug Kass)?

I'm inclined to believe Doug. My reasons are below.


Despite latest rally, market is still in the trading range since mid-May. None of technical indicators is working. If S&P breaks 960 and stays there, it might be decisive, but I'm more likely to believe Todd Harrison, who thinks that we are to see a false breakout. There is also a huge similarity with pattern of 1932, when 9 week rally from the bottom was followed by 5 months of slow correction.


Slowly but surely, sentiment is changing to the bullish side. This is a contrarian indicator, so situation is actually bearish.


Fundamentals are bad. Unemployment is going to break 10%, no doubt here. We are in the reporting season, and most companies are beating earnings expectations, which would be great, if they were not missing revenue expectations. Looks like US companies did a great job of cost cutting, but cost cutting alone can't improve economy. Increasing saving rate in US is even scarier. People don't want to spend, who is going to buy all the stuff? Without increased consumption recovery is not possible.

There is a huge black cloud on the horizon: rising taxes. Obama's administration wants to raise taxes to pay for multiple projects and for the sake of "responsible budget". If you look at the time of Great Depression, it's the worst idea possible, but who cares! Even worse is the situation in states. Most of them just can't or don't want to issue new debt and may be forced to raise taxes. Especially sale taxes, which is exactly the worst tax in the recession. We need to encourage, not punish consumption. Add to that rising pressure on the Fed to raise rates, and we might get 1937 scenario soon. I don't expect it until the second half of 2010, but who knows!

I think Doug Kass is right. It's time to keep more cash at hand and try to play volatility, trading around most healthy and most liquid stocks.

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Friday, July 10, 2009

Buying More BAM

Added even more Brookfield Asset Management (BAM) to my position today. I think it's a great bargain at current price.

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

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Tuesday, July 7, 2009

Oil Futures: It's Not Manipulation, It's Stupidity

Bravo, Cramer! On Mad Money show today Jim at last agreed that oil futures market doesn't reflect oil supply/demand picture. He thinks it's manipulation. I don't agree. Thing is, future market became a way of investing for a lot of institutions. Organizations, which you can't call manipulators, like State of California pension fund or Harvard endowment fund, are investing a lot of money into commodity futures. They invented for themselves a new asset class and invested hundreds of billions.

There is one fundamental problem with the futures: they are not a real product. They are just pieces of paper. And when volume of futures becomes high enough, and traders on the market have no relation to particular commodity production/consumption/trade, prices of futures don't reflect supply/demand of a real product. They reflect only supply/demand of the futures themselves. As a result, we had last year's boom/bust situation in oil futures. And it looks like this situation repeats right now, on a smaller scale. Tail wags the dog.

Government regulation exists on all markets. It's ridiculous to think that it shouldn't exist on the markets of commodity futures. Kudos to CFTC for looking at the regulation at last.

One note to Jim Cramer (no, he is not reading my blog, I'm sure): oil is not alone. Most of commodity future markets separated themselves from real products. I can't even imagine all consequences of coming regulation.

Last, but not least, a note to "investors" in commodities. Stop right now, before you destroyed even more capital. Paper speculation destroys capital of most participants. Investing in commodity futures is not wisdom, it's stupidity.

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Technical Meltdown?

Dow and S&P crossed down 200-day moving average. So much for good technical indicators I wrote about last week. There are different hypotheses around why is it happening. I subscribe to two right now: sell-off before earning season and long awaited correction.

We'll see the difference next week. Reaction to the earnings will show. But I'm afraid it's a correction.

I'm still operating from the 1932 perspective. And if you look at Dow Jones Industrial index chart in 1932, you'd see that there was a sharp rally after market bottom in July, and then there was long correction. That time, rally lasted 9 weeks, and correction took almost 6 months to unfold. This time, rally, measured between March 9 and June 12, lasted three months. Does it mean 9 months correction? Million dollars question...

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Monday, June 29, 2009

Now What?

I'm trying to look into my crystal ball for the nearest future.


Technicals are mostly pointing up. S&P and Nasdaq composite are well above 200-day moving average and above 50-day and 13-day averages. Dow still can't get over 200-day MA with conviction, but I don't know how relevant is Dow right now. Markets are overbought, they are overbought for more than 3 months already. There is a small reverse head and shoulders formation in Dow, and kinda the same in S&P, but it's not conclusive for me.


Sentiment is still bearish. Majority on TV is bearish, majority in the 'net is bearish, even Warren "be greedy when everybody is fearful" Buffet is bearish. I don't see buying panic, which is surprising after 3 months of bull market. Sentiment being contrarian indicator, this is very bullish.


Nothing to write home about. "Green shoots" mostly exist in the imagination of bulls. Sure, speed of the decline slowed, but economy is still going down. Deflation rules, despite all efforts of Fed. Companies beat expectations, but most of those are very low, and year-to-year comparisons are scary. Fundamentals are as bearish as they can be.

Other stuff

This is the end of the quarter. After the whole bull market quarter you'd expect huge windows dressing buying. Somehow it failed to materialize. Huge bull market in commodities is even more confusing: there is no growth in economy! There is no increase in demand of physical products. But we see that, in Jim Cramer's words, commodities, or to be more precise, commodity futures, became an asset class of its own and lots of fund managers are buying them left and right. They think that they are buying "hard stuff", not so long ago we heard the same about real estate. And, of course, commodities crashed last year, destroying a lot of capital, there is no reason why they won't crash again. Another problem with commodities boom: higher commodity prices are putting brakes on possible economic growth. My feeling that these points are bearish.


I don't feel this market. By 2 to 1 vote, we should be in bullish territory. But fundamentals are still bad, and they matter more than technicals and sentiment combined. I am going to do nothing so far and try to understand what market is telling me. Of course, I will make an occasional trade if I feel like that.

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Wednesday, June 24, 2009

Health of Steve Jobs Is Material Information

First of all: Steve, get well soon.

As for Apple (AAPL), it plays on the edge of the law. Maybe lawyers can prove that Steve's health is a private business. Maybe. But for the market it's material information, no doubts about it.

For me, Apple is not an investable company anymore. I still have a small position, as a speculation play. But long term investment is not for me. Accounting irregularities equal sell, what about informational irregularities?

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

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Sunday, June 21, 2009

The Great Bing Scam

It's amazing how much trust people still have in Microsoft (MSFT). Company launched a new search engine lately and it was meat with some incredible claims. This article reports that on the first day Bing overtook Yahoo! (YHOO) and asks if Microsoft can challenge Google (GOOG) in search. Hailstorm of articles makes similar incredible claims.

I was almost ready to believe it myself, but one small thing caught my attention. I just started a new assignment, and at my new workplace Internet Explorer 6.0 is the only allowed browser. Of course, in the first several hours I mistyped some link in the browser address field, and, surprise, I see a Bing search page! It was a classic WTF moment. I checked browser search settings, Google was a default search engine. A little googling made things perfectly clear.

This article explained it all to me. Microsoft made a "mistake" and IE 6 in the whole world switched to Bing as a default search engine. Why on earth all MSFT "mistakes" are always to the company benefit?

Bing is not a Google competitor. All statistics showing Bing great start are caused by this "mistake", which, if you ask me, is just a scam. Thing is, IE 6 is still the most popular browser, because of policies of many companies and common people laziness. So, when default search for a browser was switched to Bing, it made a blimp on the statistics. Little wonder, more than 50% of internet users still use IE 6. I'm surprised that this blimp wasn't even higher. Of course, Microsoft had to correct this problem soon, otherwise company would have serious antitrust problems. But initial jump in statistics gave Bing publicity it wouldn't get otherwise. Shame on Microsoft. More shame on everybody who get caught on this cheap trick.

(Correction made on June 23, 2009: IE6 is not the most popular browser anymore, it's share is about 15%).

Full disclosure: at the time of publication author had a long position in GOOG and did not have any positions in MSFT or YHOO. Positions can change any time.

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Tuesday, June 16, 2009

Buying More VmWare

Bought more VmWare (VMW) on weakness today.

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

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Sunday, June 14, 2009

Liz Claiborne Turnaround?

Just a quick picture from last Saturday: Liz Claiborne (LIZ) outlet shop, almost empty for the last year and a half, was full of people. There was a line to the fitting rooms! I'm putting company on my watch list, there might be a turnaround in process.

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

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Thursday, June 11, 2009

Still No End for This Rally

Majority is wrong. It's usually wrong on the market, this is how markets work. This rally is going on for three months already, and all we hear: "Bear market rally". Come on, guys, I understand, it's hard to sit on the sidelines (never mind being short) when market is going up. But if you don't recognize the obvious, you lose money.

I expected some bullishness, if not exuberance, by now. I sit on good gains since March, and my finger is itching to press "sell" button. But there is no point in selling when there are so many bears around. Sentiment remains neutral to slightly bearing on my unscientific screen. And I remain bullish, buying more lately. All my transactions are in the blog, welcome to see them.

The end of quarter remains the crucial point. There is some window dressing going on for sure. But most of it is on the oil market, which is so disconnected from physical product now that even price of natural gas doesn't want to follow it. No panic buying in tech and financials. Mostly sideways action with little upside. That's a "buy" signal, not a "sell", not even "take profit" signal. Sure, if you feel scared sitting on 40% profit, take it. But I'm going to buy more. I don't have any stocks I like very much, so I was buying a little bit of this and that, with exception of VmWare (VMW). This one is one of the Next Great Things, and I'm buying more on weakness. Reasons are outlined here.

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

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Wednesday, June 3, 2009

How to Play Oil Contango

There is a straight way to play oil contango: buy physical oil and oil futures for the equal amount of it several months ahead. Store oil in Cushing, OK or in supertanker somewhere offshore, paying about a dollar per barrel per month and deliver it when future contracts expire. This is for serious oil speculator, who has big capital.

Is there anything individual investor can do? And filling up your swimming pool with crude is not what I have in mind. Yes, there is a possibility to speculate on contango.

Let's take a look at U.S. OIL FUND ETF (USO). As everybody knows, oil price, which usually means next month future contracts for West Texas Intermediate oil (WTE), almost doubled since beginning of the year. USO, which represents next month WTE futures, is up whopping 9.5%. WTF? There is a small problem with USO design: this ETF buys next month future contracts, and in the end of month rolls them over to the following month. Of course, in case of contango, it buys less contracts for the following month, because they are more expensive. Repeated every month, this procedure kills USO in case of contango.

There is another trading tool for oil price: PowerShares DB Oil Fund (DBO). This fund also holds oil future contracts, but somehow loses much less money on contango effect.

Suppose, you shorted 1000 shares of USO at 33.10 and bought 1500 shares of DBO at 19.29. Net difference is $4165. If you sold/covered them today at the close, USO at 36.25 and DBO at 24.88, you'd get additional $1070. Net gain of $5235 minus commissions.

There is a risk involved. If contango is replaced by backwardation (longer future contracts less expensive than near term ones), USO will outperform DBO. DBO is not as widely traded as USO, and there isn't much information evailable about it, so there are some unknown risks as well.

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

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Buying More

I was using today's pullback to buy more. Opened position in PowerShares Financial Preferred Portfolio (PGF), this is an ETF representing portfolio of financial preferred stocks, with yield about 10%. And added to my Spain Fund (SNF) position. This closed end fund trades at discount around 16% to its net account value (NAV), and pays yield of 10% of NAV. For the last half a year it's been priced as if Spain is going to disappear. I don't think so.

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

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Tuesday, June 2, 2009

Buying VmWare

I started VmWare (VMW) position today. Reasons are outlined in my yesterday's post.

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

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Monday, June 1, 2009

The Future in the Cloud

Last Thursday I visited VmWare (VMW) forum in Minneapolis. And I saw the future.

There is a lot of talk about cloud computing. The idea is simple: take a lot (hundreds, thousands) of inexpensive, Intel-based computers, put them into racks, connect to the network, and use them for different tasks which require a lot of computing power. There is a small problem here: computers without software are useless. And cloud computing requires specialized software. There is specialized software in huge data centers built by Yahoo! (YHOO), Google (GOOG), (AMZN) and by other companies. All this software is proprietary, you can't build your own data center with it.

Here comes VmWare. This company produces virtualization software. Initial idea was that you can build your specialized virtual machines inside of a real computer and then move them around if you need. But new product, vSphere 4, allows you to build a cloud. All cloud functions are here: you can rapidly build virtual machines, clone them, move data and whole virtual machines around.

If you asked me a month ago "what do I need to build a computer cloud?", my answer would be: hundreds of millions. You'd need huge resources to pay good programmers to develop your own cloud computing software, debug it, make it production ready and then support it. Not anymore. Now you can just install VmWare software. It will cost a bundle, but orders of magnitude less than cost of building your own.

I wanted to by VMW right after the forum. As usual in the last couple of months, waiting for a pullback just makes stock more expensive. I'm going to open position anyway in the next several days.

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

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