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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