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.

Seeking Alpha Certified

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.

Seeking Alpha Certified

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.

Seeking Alpha Certified

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.

Seeking Alpha Certified

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.

Seeking Alpha Certified

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.

Seeking Alpha Certified

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.

Seeking Alpha Certified

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?

Seeking Alpha Certified

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.

Seeking Alpha Certified