Muddling Investor

Huge Bull Market

2012-01-23T23:17:00.002-06:00

It catches you unawares. You are in a safe mode, with huge cash position, ready to trade ranges. Then you find yourself in the middle of the massive rally, forced to by something, anything in order to make money.
As usual, I might be wrong. Often I am. But all metrics are aligned too well.

Fundamentals are good. Most companies report good profits. Yes, US growth is slow, Europe is probably in recession, we don't know what's going on in China and developing world is struggling a bit. But in the stock market, fundamentals are about profits and profit growth, not about the whole economy.

Technicals are excellent. Charts are beautiful. All three major indices are trading above 13-, 50- and 200-day averages. 13-day average is above 200-day MA, and 50-day MA is closing on 200-day. Market is a little bit overbought, but overbought condition can be worked out either in price or in time.

Sentiment is incredibly bearish. Most pundits tell you to be careful, to preserve capital, to avoid bull traps, yada, yada, yada. Only Doug Kass is bullish, cautiously. Nothing can be better for bull market.

Market reaction is great as well. Good earnings are bought (with rare exceptions), bad earnings are sold for a day, without follow through.

Possible problems? Well, best technicals usually happen at market tops...

Buying Back Europe

2012-01-23T22:41:00.001-06:00

Bull market doesn't want to die. I know, it's very hard to buy in this environment. You want to buy dips, but there are none around. Well, we play cards we have, not those we want.
I decided to get back into European stocks. It looks like Euro debt panic is subsiding. Today opened a position in Banco Santander (STD). It's the best Spanish bank, with branches around the world. Sure, it has a lot of problems with Eurozone debt, but it will survive. I don't think of it as a long term investment though, I don't really like banks. But it should do fine in the nearest future. I think.

Buying More

2012-01-20T23:23:00.000-06:00

Added to Alpine Total Dynamic Dividend Fund (AOD) today. I might be wrong, but my feeling is that we are in a huge bull market right now. Which means that I need to put more cash to work. AOD is down a lot, because it's a fund invested in high dividend stocks in US and Europe.
On a side note, selling part of Intuitive Surgical (ISRG) was a good idea. Not selling part of Google (GOOG) was a bad idea. As usual, you win some, you lose some.

Getting Longer

2012-01-13T15:54:00.000-06:00

In line with my yesterday's headline Surrendering to the Bull, I added to my VmWare (VMW) position. I don't know if current bull run will continue. But I feel that my long exposure is not big enough if it does.

Surrendering to the Bull

2012-01-12T15:44:00.000-06:00

I waited. And waited. There should have been a drop. Even a small one.
But bull didn't want to listen. Still doesn't want to. Stock action is very bullish and I decided to increase my long position.
Today I added to my $IFN position. Indian Fund is a closed end fund invested in Indian companies. Stock is down a lot since last August. Current action paints quite nice bowl pattern, which is bullish.
I might be wrong. It can be a buyer's panic. That's why, as usual, I trade in small increments, around 2% of my total portfolio.

When Big Boys Return...

2012-01-06T23:12:00.000-06:00

This week was good for my portfolio. More than 1% return, that's great. Overall, market went up. Does it mean anything? I don't think so. Volume is small, movements are erratic and I feel that it's just junior fund managers playing when upper crust is on vacations.
I don't want to say that market will drop next week. I don't know. What I want to say is "let's see what happens when big boys are back".

Trading Around

2012-01-03T16:15:00.000-06:00

Today I finished one more roundtrip for 3D Systems (DDD). Closed position again, with significant profit.
Year started with a bang. I don't know if it's going to continue. But, I'm starting this year with substantial cash position. I am ready to buy if I feel like that, and I'm ready to sell.

It's Been a Good Year

2011-12-31T00:03:00.000-06:00

Time to count sheep. I just calculated my IRR for this year: 7.9%. Not much. But much better that S&P 500 (0%), never mind Nasdaq Composite.

I hope to do better next year. You never know, of course. But I think I learned something this year.

Happy New Year, everybody!

Taking Profits in Intuitive Surgical

2011-12-30T15:51:00.000-06:00

I love this company. Intuitive Surgical (ISRG) is a true paradigm changer. It makes surgical robot systems Da Vinci, which are adopted around the world. Initially systems were almost exclusively used for prostate removal. Many analysts tried to predict Da Vinci sales based on this. They were completely wrong. FDA approves new uses of the system all the time, hospitals around the country are experimenting with even more new surgeries.
Company has all components for continues explosive growth. Da Vinci is the only robotic system which has FDA approval. Which means it has a moat, speaking in Buffett's terms. A lot of revenue comes from service and spare parts sales, which is a very stable source of income. New surgeries means new sales.
Why am I selling? First of all, I'm selling only a small part of position. Even after this sale, ISRG is the second biggest position in my portfolio. Again, I love this company. But profits are made to be taken. Discipline trumps conviction. Stock almost doubled this year. And my initial investment into company has quadrupled. Any reason is good enough, taken all together, they told me: take the profit. At least some of it.

Full disclosure: I still have significant long position in ISRG.

Closing Logitech

2011-12-22T16:10:00.000-06:00

One more trade gone bad. My worst trade of the year.

I bought Logitech (LOGI) as a trade on return to averages. After stock went down about 20% I thought that it should return back to 200-day moving average. Market didn't agree with me.

Lessons:

1. There was sharp fall in most tech in the middle of the year. It was a good hint for me to close the position. I ignored it. My bad.

2. I misjudged market reaction to the failure of Google TV device, produced by Logitech. I thought that projected sales of the device weren't that great in the beginning and failure wouldn't count for much in the balance sheet. Market ignored the financial side and decided that failed hype should be punished.

3. Last, but not least. I need to put strict time limits for any technical/quantitative trades. It creates discipline which trumps conviction in the long run.

Why I Sold Intel

2011-12-22T16:08:00.000-06:00

I closed position in Intel (INTC) today. Decision was made when I heard a preannouncement a week ago. Intel said that revenue for the quarter will miss the mark by smothing likt 15%. They claimed floods in Thailand and subsequent deficit of hard disks reduced production of PCs, and demand for Intel CPUs. Well, it figures.
What was surprising is the reaction of Wall Street. Quarter earnings estimates were cut, but just a little bit. I couldn't believe it when I saw it. Look at the income statement. There are two major expense categories: "Research and Development" and "Selling and Administrative". For Intel, that's essentially fixed costs. I feel that INTC is going to miss initial profit estimate by 25-35%, not by 14%, which is current consensus.
Intel is a great company. It will recover. And it pays great dividend. I think it will fall hard after reporting for the current quarter. It will be time to back up the truck. For now, I prefer to take profit and wait for a good moment to get back.

Full disclosure: I still hold small INTC position on my IRA account.

Why I sold Goldman

2011-12-21T16:31:00.001-06:00

I bought Goldman Sachs (GS) in the beginning of 2010. My main idea was that if banksters are crooks and earning big money, I want a piece of action (and it's legal!) Reality interfered. All financials are down (lucky me, got rid of everything else long time ago). It doesn't matter if GS is full of crooks, or management is bad, or it's just bad luck. They lost. I lost with them.

This is not a usual tax related sale. Size of the position and loss I'm taking are not big enough to make any difference. It's a strategic sale. I don't believe in financials right now and I don't want to go into next year with them. Position is closed and forgotten.

AT&T Is Not Buying T-Mobile! I'm Happy

2011-12-20T23:01:00.001-06:00

That's great news! I was outraged when heard about the deal in the beginning. But it looks like Justice Department is doing its job, at last. If antitrust enforcement was really good in this country, Ma Bell wouldn't even think about it. But enforcement was lax, so they decided to try. No way.

It's especially good news for T-Mobile (DTEGF.PK) customers. AT&T (T) is consistently worst cell company in the country. I've been there, couldn't wait for 2-year contract to end.

T-Mobile wants to find a buyer? Maybe Vodaphone (VOD)?

Full disclosure: no positions

Cleaning Up More

2011-12-20T22:59:00.000-06:00

Closed position in Morgan Stanley India Investment Fund (IIF) today. Another trade which became an investment. I am not sure if this conversion was right or wrong. Result is bad, sure, so it was wrong. I still feel that India is punished for wrong reasons and I'm still holding a significant position in India Fund (IFN). But it's a season of selling for tax reasons. This is a first time in my investing life I'm doing it. Thing is, I sold a lot of positions, taking a lot of profits, did some profitable trading and received a lot of taxable dividends. Now is the time to take some losses too.

Waiting For Santa

2011-12-16T23:03:00.000-06:00

There are two questions (in no particular order) for the last two weeks of the year.

Are we going to have Santa Claus rally?

What is the window dressing trade for year end?

Santa was detected well beyond horizon in the end of November. Then he disappeared from the radar. Todd Harrison still thinks that reverse head and shoulders pattern in S&P is not broken, I'm not that sure. We'll see.

Window dressing looks strange. If I'm not mistaken, everybody is selling everything, with exception of muni bonds (I'm glad that I have a significant overall position in several muni CEFs). Another exception: very small number of Nasdaq large cap stocks (GOOG and ISRG in my portfolio). Can we profint from it? I don't know. The most obvious sell-off is in commodities, but swings there can be very big in a very short time and it's a dangerous game. And don't tell me to use tight stops: as they say in London Tube, mind the gaps. Gold behaves strangely. There was a headline on CNBC couple of days ago: "Gold drops 3 percent on Technicall Sell-Off, Euro Fears"". I thought it was a bad joke, looked for similar headlines in Google, there are dozens of them! Come on, people, gold should go up on fears, not down. I think we see a breakdown of the parabolic chart. Two months ago everybody was buying gold, now last fool owns it already. And some fools forced to sell on margin calls.

I'm sitting tight.

Full disclosure: At the moment of publication author had long positions in GOOG, ISRG and muni CEFs: BTA, CEV, MZF, NMO.

PS. Events in Russia are developing fast, and accelerating. I don't know how they will end, one thing is clear: there will be changes. My heart is with people who went to the meetings in Moscow and other cities on Dec 10. There will be more meetings tomorrow, on 24th and later. The white ribbon below is the symbol of, I hope, new Russia.

Short Term View

2011-12-14T16:58:00.002-06:00

Common view: this market is defined mostly by Europe, and metrics don't matter. Common view is usually wrong. Well, I correct myself: common view is usually right, but you can't make money off it. You make money when common view is wrong and you can see it before others. Disclaimer: I don't claim such powers, just trying to make a penny. And another.

Technicals

Ugly. The only bright spot was perfect reverse head and shoulders formation in S&P, but it's got broken today.

Fundamentals

US is surprisingly robust. Stocks should reflect future earnings, right? Well, earnings are great, and they might be even better in the nearest future. The main problem is Europe. Some people say: "so what, US only exports about 5% to Europe, even 10% drop is peanuts", Well, US and Europe are tied together with millions of different connections. Physical goods is just a small part of those connections. Money flows between us are much, much bigger. Europe is going into recession next year with high probability. I think market is trying to discount effect on US markets.
In short, fundamentals are good short term, but uncertain long term.

Sentiment

Funny. I don't have other definition for it. Every time S&P is close to 1250, sentiment is bullish. Every time index drops close to 1200, it's bearish. Sentiment follow market now, I think we can safely ignore it.

And here's the problem: market doesn't have a direction. Doug Kass mad a great call for this year, predicting range bound market. So it is. Even Santa Claus rally failed to materialize so far.
I'm keeping oversized cash cushion and trading the range. Today I opened 3D Systems (DDD) long position again. I think it moved into 14.50 - 16.50 range for now.

Blame Dollar Carry Trade

2011-12-02T23:49:00.000-06:00

Financial press looks like blind wise men from the old story: when asked to describe and elephant, one said it was a rope, another one, a column, and a third one, a pipe. What to we see in press lately? European debt crisis, withdrawals from hedge funds, (hyper)inflation which can't ever materialize and intervention of Central Banks. And nobody can see an elephant in the room. Well, almost nobody.. Howard Simons of minyanville.com has this article and couple of others.

In short, in the last couple of years, banks, hedge funds and anybody who wanted and could do it, borrowed dollars (cheap) and bought securities around the world with much higher yield. Underlying idea was that Fed is printing dollars like crazy, that dollar has nowhere to go but down and it looks like an easy and sure way to make huge money. Of course, people always forget that there is no easy and sure way to make money. Fast forward to July 2011. Hedge funds started big attack on Eurozone sovereign debt. There were lots of publications in press how this debt is unsustainable and why some (or many) countries will be forced into default. I don't think all of this press was paid for by hedgies. But significant part of it certainly was. Result: yields on debt are up, but, what is more important, Euro fell more than 10% related to dollar. And this is the level of currency fluctuation which kills carry trade dead. I don't know all the details, they are mystery even for SEC, but it looks like the main reason for MF Global collapse.

I'm afraid, that MF Global collapse is just peanuts comparing to the size of the problem. We are talking hundreds of billions, if not trillions, of dollars. Coordinated intervention by Central Banks tells me that trillions is a better guess. And dollar carry trade is not restricted to Europe.

We are not out of the woods. Eurozone politicians still don't understand the size of the problem. The other parts of the world are still to find out.

Commenting on the action of Thanksgiving week, I wrote that it looked like margin call action. I think I can further qualify it as a margin call related to dollar carry trade unwinding. Some people think that this problem is not related to US. After all, Europe is only about 10% of US exports. Yeah, right. And one collapse of a big European bank can easily topple all world financial system. If dollar carry trade to unwind fast, we will import huge, massive deflation from Europe.

What investment decisions can be made? The only thing I can think of is to increase cash cushion and hope for the better. Big bank collapse is not a tradable event, everybody would suffer, the question is: how much.

Thank You, Uncle Ben!

2011-11-30T22:34:00.001-06:00

This is what we really need: leadership. It looks like Bernanke persuaded heads of Central Banks to do something. They probably didn't have any choice, situation is really scary. It looks like dollar carry trade is unwinding right now. Banks, which borrowed dollars to buy Euro denominated bonds, now are forced to sell everything and buy dollars back, because Euro fell related to dollar and they are probably facing massive collateral calls. I wouldn't be surprised if a lot of hedge funds got caught the same way and now are faced with huge margin calls.

Central Banks action is good, but not enough. Not even close. We need coordinated QE from Fed and ECB. Soft default of Greece killed a lot of liquidity (talk about unintended consequences). Sharp rise of yields on Italian and Spanish bonds created huge strains. International financial system is in a huge trouble. If something big happens (default of one more country, failure of a big bank, exit from one country from Euro), everybody will suffer. We are not isolated in US. We can have much more trouble than in 2008.

Why I Closed Position in 3D Systems

2011-11-04T15:47:00.000-05:00

I closed position in 3D Systems (DDD) today. This is a change of plan. Initially, I wanted to accumulate position, trading around it. But I didn't like last earnings report and liked conference call even less. So I decided to make a pause and sold position.

This is a good company, with good growth and excellent balance sheet. But we don't invest in present, we invest in future. And last quarter somewhat reduced my confidence in future. Maybe it was one off quarter. If so, I will change my opinion.

Stock remains a great trading vehicle. I might buy it back when it trades lower.

Netflix's Bigger Problem

2011-10-25T22:41:00.000-05:00

I closed my Netflix (NFLX) position today. Way too late. The only good thing is that I bought it when it wasn't on anybody "buy" list, well below $50. Sure, I should've sold it long time ago. Well, rear sight is always 20/20.

Yes, last quarter report was the trigger. Actually, one little thing in the report: it seems to me that Reed Hastings, CEO of Netflix, wants Netflix to be like HBO. Well, HBO is a part of Time Warner (TWC), and if you look at long term chart, it's not a good investment, to put it mildly. If Netflix wants to be HBO, I don't want to invest in it.

There are a lot of comments. People are rightly questioning latest moves, cost of streaming content, attempts of content providers to charge more and/or strangle Netflix as a competition to cable TV. Everybody is missing one thing: there is almost no content. I cancelled my Netflix DVD subscription not because of price increase, but because couldn't find anything on DVD I wanted to watch. I went through US and foreign classics, some new movies in 2009 and 2010. There are probably 3 movies released in 2011 I want to watch. I watched one in the theater. For 2 remaining I can use pay-per-view on Dish Network, much cheaper than keep Netflix subscription. I don't care about multiple remakes and remakes of remakes. I hate most of the comics based movies. Vampires and zombies are not even funny anymore. There is nothing else out there. I have the impression that content providers are reducing costs by dumbing down their production. Well, they are losing me as a customer.

Somebody might say that my taste is not mainstream, that only fringe watches, for example, Woody Allen movies, that most people want to see transformers and vampires and zombies. Maybe. But I know for sure that there are a lot of people with diverse tastes which are (were) Netflix customers. And many of them have the same problem: there is nothing to watch.

Full disclosure: I don't have any positions in NFLX or TWC.

This is a Breakout. Why am I not Happy?

2011-10-22T09:34:00.000-05:00

As children say, the answer is "because".

First of all, breakout (S&P over resistance at 1220) is not confirmed. Let's wait until Monday. Second problem, bigger one: Nasdaq composite did not break out over its resistance level of 2670. Not even close. If you look at charts, during this depression Nazz was the leading index.

I will be happy if market is going up. I will be extremely happy. After all, my long positions exceed my cash and fixed income positions. But I have serious reasons to be careful. Current action doesn't look like bull market action.

Exhibit one: earnings reports and reaction. Google (GOOG) beats by a mile, stock jumps the next day, no follow up. Intuitive Surgical (ISRG) beats, stock jumps the next day, no follow up. Same picture with Intel (INTC), VmWare (VMW).

Exhibit two: market still pretend to depend on Europe. Well, it's a good excuse for market to not go up on great earnings. What would be a next excuse? And next after that?

Actually, Europe deserves extra deliberation. First of all, it's not going anywhere. Second, for better or for worse, but EU economy is bigger than US economy. Now, cutting through BS they feed us from all sides. EU is there to stay. There is no way to dissolve such union, not right now, not in the nearest future. Eurozone, i.e. currency union inside of EU, is there to stay as well. As much as Germans grumble, saving Eurozone is much (orders of magnitude) cheaper than dissolving it. Granted, currency unions of independent countries never survived long before. But Eurozone countries are not politically independent. They are part of EU.
Currently they are coming to a kind of soft bankruptcy for Greece. They will need to recapitalize banks, to create some kind of loan mechanism which can't be killed by speculators. In a year or two we will see something like QE from European Central Bank (ECB). They are moving slow, but they are moving. They will not fall apart, the price is way too high.

So, there is no end of the world coming from Europe. Why, or why am I not happy? Why don't I predict a huge bull market? Because we are in a Great Depression 2.0. Everything is moving faster now, so in 2008-2009 we quickly went through analogy of 1929-1932. Rally of 2009-2010 was quite like rally of 1932-1936. Now we are in analogy of 1937. Everybody tells about austerity, savings, cost cutting. Nobody (that is, except for Fed) is talking about stimulus. That's a huge mistake. We need stimulus. We need inflation. We need more debt, public and private. And everybody is talking austerity, cost cutting, deleveraging.

Unfortunately, analogy ends right here. In 1942, Great Depression was ended by stimulus package also known as World War II. World War now is so scary, it's almost impossible. Even if it happens, it will be the end of the world, not a stimulus package. And the only modern depression known to us after WWII is going on for 22 years already without any sign of ending any time soon. I mean Japanese Great Depression (1989 - ?).

That's why I am not happy. That's why I don't believe in any big rally. We might get to S&P 1400 by the year end, sure. I will be a seller then. Because austerity is coming, and bear market is coming with it.

US Downgrade is Stupid

2011-08-05T23:16:00.000-05:00

I don't know what is used instead of brains at S&P. Up until 2007 they easily stamped AAA on collaterized debt obligations consisting of barely prime or even subprime mortgages. Now they slap downgrade on the country which paid its debts for more than 140 years! Yes, last debt limit debate was crazy, unnecessary and damaging US reputation. But memory of it will fade quickly. After all, there were similar partisan battles in 1979 and 1987 (first time republicans played the role of idiots, second time, democrats).

I agree with Barry Ritholtz. This doesn't say anything about US credibility. It says everything about rating agencies credibility. It's zero. And probably will be below pretty soon.

Game of Chicken

2011-07-30T11:21:00.000-05:00

You would think that theatre of absurd around debt limit is senseless. Not at all. It's politics as usual, only at its worst.

On one side we see ideological idiots from GOP. They want nothing less than reversal of Roosevelt's New Deal. Don't be fooled by rhethorics. They tell you that they want responsible government, staying away from business making everything work. In reality they want the end of Social Security, Medicare, undemployment benefits and other things which construct social safety net. That's big business program running amok, desire to hire people as cheap as possible.

On the other side, mostly no less ideological Democrats, including President. They want big government running everything, clean energy (impossible), end of oil (impossible). Thanks God, they at last abandoned idea of "gun control", which in their lingo means total ban on firearms for population.

Until lately, both sides somehow found compromise in the last 30 years. It was messy, expensive, with a lot of unnesessary spending. Both sides are guilty in that spending, GOP sponsoring no less stupid programs than Dems. Government waste is an equal opportunity sport in Washington.

The problem now i entirely of GOP making. As much as I hate many things Dems do, current crisis was created by GOP. They voted for current budget, but now refuse to authorize increase of debt limit necessary to execute said budget. In fact, they are trying to hold the welfare of the whole country hostage of their interest.

They played game of chicken with Obama. They thought they can call his bluff and force him to agree to any extreme program they can think of. Their problem is that in politics they are children compared to Obama. He saw an opening which allows him not only to win White House next year, but also to soundly beat GOP in both Senate and House. He is going for shutdown of government and possible default. And he is putting the guilt sqaurely on GOP, where it's really belongs. They forgot that politics is an art of possible. They wanted impossible and already lost.

Next steps are obvious. On August 2, Treasury will declare which payments will be stopped first. Of course, accourdint to 14th Amendment, part 4, interest and principal payments to holders of Treasuries will be first priority. There will be a lot of hurt, thousands of people are going to be laid off. Next stage will be delay in payments to all government employees which will not be laid off. Then come payments to unemployed.

I hope that GOP will stop somewhere there. Because if everything is going out of control and US defaults on its debts to holders of Treasuries, all financial hell is going to break loose. It's a financial analogy of 6 mile wide asteroid. When it hits, nothing is safe.

Looks like current generation of GOP is done, losers. They are not going to survive this. It's a pity, because a landslide of Dems next year isn't any better for the country. We really need a divided government. But we also need a government which can compromise and find solutions. Well, that will have to wait until 2016 at least.

What's next? I hope that hard default isn't going to happen. GOP really doesn't have any justification for a hard default situation, they are going to be voted out and be happy that they are not rolled in tar and feathers before kicked out of Capitol. So let's hope that after some bickering they vote for debt extension before the end of August. Everything is going to be OK, right?

Wrong. Very wrong. We are going back into depression no matter what solution of debt limit crisis is adopted. Recovery, while it lasted, was triggered by Obama stimulus. That stimulus was tiny compared to what was (and is) really needed. We needed at least twice as much. And we need much more than that now. Instead, we are getting severe budget cuts. Ain't gonna help recovery. Budgets are cut in states, in counties, in municipalities. Now federal budget is going to be cut. Dozens of thousands of people are going to lose their jobs. Some "economists" and all GOP elected want to tell us that that's OK, that private business, facing less competition from governments, will pick up the slack. That's bullshit. Private business is doing nothing of the kind and is not planning to. We are in depression and business is not expanding, with just a few exceptions. There are no real competition for resources: interest rates are very low, wages are stale, unemployment is high. We are going back into deflation mode soon. The only little hope left is QE3, which is probably coming in October or November. I'm afraid that's not enough.

US got out of Great Depression thanks to World War II. World War III is unthinkable. What is going to pull us out this time? Or maybe developed world is going Japanese way for decades of depression?

What am I going to do with my money? I'm keeping big (for me) cash position right now and will keep it until debt limit crisis is resolved one way or another. I'm going to start investing right after debt limit is raised. Unfortunately, there aren't many places to invest in depression. It's going to be fast growing tech and some dividend paying stocks. Tobacco is out. Dying industries (paper books, newspapers, TV stations, movie studios, cable TV) are out of the question. As usual, I'll play it by ear.

We Need More Debt!

2011-07-19T22:40:00.000-05:00

Somehow it's a common knowledge that debt is bad All kinds of debt, public, private and corporate. Every day you can see several articles crying: deleverage!

This is totally wrong. It's wrong for all kinds of debt. Reducing debt right now is bad for the country, bad for corporations, bad for the people.

First of all, reducing total national debt is bad for economy. All money is debt. Most people don't understand that, for details, look here: http://seekingalpha.com/article/178797-how-the-government-creates-money
Because money is debt, reducing total debt reduces amount of money in circulation. Which leads to low inflation, and in severe cases, to deflation. Well, many people, especially those living on savings and fixed income would tell me: what's wrong with the deflation? Our income can buy more things! True, but deflation increases cost of credit, depressing business activity. In severe cases (see Great Depression) high deflation leads to dozens of thousands companies closed, failed banks and very high unemployment. In the last hundred years, best growth was achieved in economies when inflation was between 2 and 5%. We are running around 1% right now. We need more inflation, more money, more debt.

Many people say that debt is a bad thing. It's almost from Christian church playbook of Dark Ages, when interest bearing credit was banned (usuty!). Economy was doing great in Europe between 7th and 13th centuries, wasn't it? In some Muslim countries credit is against the law, do they have good economies? Debt by itself is a good thing. It allows corporations to finance their expansion. It allows young people to start living comfortably, go to college, buy a car, a house. It allows government to pay for a lot of things, especially when economy isn't very good.

Word of the day: austerity. Why? Did anybody ever got richer by austerity? Did US escaped Great Depression using austerity measures in 1930-1932 or in 1937? You don't grow corporation using austerity, you don't grow economy using austerity. For people proper measure of debt is a relation between market value and debt. For a person it's a relation between income and debt. And for a government, GDP to debt. Ways to improve picture and grow in all cases is to increase income, not to cut expenses. I can understand austerity measures in Greece, where government sector was more than half of all economy. They need to cut budget and privatize like crazy. There isn't much room for privatization in US (USPS, ports and airports, anyone?) and government sector isn't that big. Main reason for US to take more debt: our government can borrow at outrageously low rate. If I could borrow at 3% for 10 years, I'd be loaded to the gills.

There is one more "reason" to reduce debt: someone sometimes will have to pay it. Well, corporations and governments can live many dozens of years with a big load of debt, just roll it over, preferably at good rates. And now is as good time to roll over debt as ever, at current low rates. Debt is only bad if you can't roll it over.

If we had booming economy, low unemployment and elevated inflation, I'd be first to call for debt reduction, especially government debt reduction. But we are in Great Depression 2.0, we need to pull our country (and the whole world, whether we want it or not) out of it. The only way to do it is to take even more debt.

Midyear Portfolio Review

2011-07-08T23:30:00.000-05:00

Portfolio goal. Growth. This is high beta, unapologetic growth portfolio with some safeguards and some boring investments. The goal remains unchanged.

Basic Principles. Most of the stocks in this portfolio were chosen for long term investment, which, for me, is about 18 months. Every stock is under review all the time, with major review of portfolio twice a year. I can trade around any position if I feel like this. Portfolio is not diversified by sectors. Maybe "diversification is the only free lunch" (Jim Cramer), but I'm a big believer in TANSTAAFL (There Ain't No Such Thing As A Free Lunch, popularized by Robert Heinlein). Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

Paradigm Changers. These are stocks of companies that are changing business in sectors or even in the whole world.

Google (GOOG)

Ultimate disrupter. Google is changing the advertising world. Company is also agressively moving to mobile internet advertisement.

Added to position since last review.

Risk: All great empires were destroyed by internal problems. But there is also a threat of internet fragmentation, with ISPs and device producers restricting the use. Example: Apple (AAPL) banning Google advertisements in applications developed for iPhone and iPad.

Plan: Hold, trade around.

Intuitive Surgical (ISRG)

Robotic surgery that is changing surgery of internal organs. Company has monopoly on robotic surgery right now.
Reduced position since last review.

Risk: new technologies are being developed, legislation changes can reduce demand.

Plan: hold.

Netflix (NFLX)

This company completely changed video rentals model. It's also the best internet movie delivery company. No position changes since last review.

Risk: Things on the Net are changing quickly.

Plan: hold, add on weakness.

VmWare (VMW)

Cloud computing is all the rage, and VmWare is on the frontline. If company wants to create its own cloud, VmWare is the way to go.

Reduced position since last review.

Risk: it's not clear that internal clouds would win over external ones or over software as a service.

Plan: hold.

ARM Holding (ARMH)
New position. This is an example of a pure brain company. Company designs ARM CPUs for a wide range of mobile devices and licenses them to diferent companies. Most smartphones and all tablet computers I know run on ARM CPUs.
Risk: Tech world is changing quickly, somebody can invent a revolutionary new design and beat ARMH.
Plan: hold.

Banks.

Goldman Sachs (GS)

This is not exactly a bank, more of a broker/trader. Absolutely best Wall Street company.

No position changes since last review.

Plan: Hold, add on weakness.

Steady growers / high yield. Companies with steady growth, high dividend or both. I am increasing weight of this group, such companies are best investments in depression times.

Annaly Capital Management (NLY)

REIT. Huge dividend and good management are main reasons. Company makes money on distressed mortgages, current holdings are mostly supported by US Government.

No position changes since last review.

Risk: possibility of management mistakes, another real estate crash, rise of interest rates.

Plan: hold, add on weakness, reinvest dividends.

Altria (MO)

I don't smoke. I don't recommend anybody to smoke. But people do anyway, and they pay exorbitant prices for tobacco products. Altria grew profits steadily in any environment, ignoring tobacco lawsuits, tax hikes and anti-tobacco campaigns.

No position changes since last review.

Risk: ban on tobacco, tobacco deregulation, both are highly unlikely. Possible huge legal expenses. New risk: contraband between states, because tobacco taxes vary a lot between states. This is a threat to the whole industry. Once smugglers are established, they can start smuggling cigarettes from other countries, including counterfeit ones. Another new risk factor: DIY tobacco planting. It's inevitable with current high taxes, can grow up to as big illegal business as marijuana or even bigger.

Plan: Reduce position on strength.

Phillip Morris International (PM)

Same reasons to hold as for Altria. Can be also put into "International" category.

Reduced position since last review. I think stock is overvalued at current price.

Risk: legislation changes abroad. World is quickly moving to smoking restrictions everywhere. Most of EU countries banned smoking in restaurants. I visited Czech Republic in 2008, it was impossible to breathe, restaurants were full of smoke. Such a big change. Many countries raised tobacco taxes as well, which will lead to smuggling and DIY growing.

Plan: hold, reduce on strength.

American Capital Agency Corp (AGNC)

REIT. Highest yield among the stocks I know.

Traded around position since last review.

Risk: company is highly leveraged, if interest rates are to go up, yield might suffer.

Plan: hold, reinvest dividends

Intel (INTC)

This is a tech company, but not a paradigm changer anymore and not a fast grower. But it enjoys almost a monopoly position, grows steadily and pays big dividend, which increases almost every year.

Risk: tech world can change fast.

Plan: hold, trade around position, reinvest dividends.

Since last review I closed General Mills (GIS) and Pepsico (PEP).

International

Indian Fund (IFN)

India is the only part of BRIC which I like now.

No position changes since last review.

Risk: political.

Plan: hold, add on weakness.

Morgan Stanley India Investment Fund (IIF)

New position. Also CEF investing in India. I

Risk: political.

Plan: hold.

Since last review I closed Ibero-America Fund (SNF).

Fixed Income

Blackrock Income Opportunity Trust (BNA)

Fund holds mostly high quality corporate bonds and Treasuries. Good depression hedge.

Added to position since last review.

Plan: hold, add on weakness.

Wells Fargo Capital Trust XII (BWF).

I use it to hold cash I don't need right now. Good yield.

No position changes since last review.

Risk: Bankruptcy of Wells Fargo.

Plan: hold, sell when need cash.

PowerShares Financial Preferred ETF (PGF)

This is a bet on recovery in financials plus excellent cash management tool.

No position changes since last review.

Risk: Another crash in financials.

Plan: Hold, sell if need cash, trade around position.

Eaton Vance California Municipal Income Trust (CEV)

California munis are priced very low, and pay a big, federal tax free yield.
No position changes since last review.

Risk: mass bankruptcies of California cities and counties. I don't think it's going to happen

Plan: Hold, add on weakness.

Nuveen Municipal Market Opportunity Fund (NMO)
One more muni fund, this one invests around the country. Big, federal tax free yield.
New position.
Risk: mass bankruptcies of municipalities around the country. Highly unlikely.
Plan: Hold, add on weakness.

Helios Multi-Sector High Income Fund (HMH)
Bought this fund when it traded at big discount to NAV, as a replacement to EAD.
New position.

Since last review I sold Evergreen Income Advantage Fund (EAD), when it was trading at premium to NAV.

Nothing is sacred. Any position can be sold any time I feel like that. I can trade around any position when I see the opportunity.

Bad, Bad Market

2011-06-15T23:08:00.000-05:00

This market is bad. And I don't see any improvement soon.

I decided to do most of my blogging on Seeking Alpha (here).

One trade I didn't mention in the blog yet: I sold a small part of Intuitive Surgical (ISRG) position on Monday. This stock is mostly growing, but might have big swings. So I'm trading around the position, now is time to sell some.

Short Natural Gas

2011-06-09T22:50:00.000-05:00

Natural gas shot a little bit high lately. Usually it was trading between $3.5 and $4.5 in the last couple of years, now it's just shy of $5.
Shorting is a risky game, so I chose safer strategy: bought some $12 July puts on UNG. We'll see how it plays.

Buying Downturn

2011-06-06T22:30:00.000-05:00

Week started down, as I expected. I think it's time to buy a little bit, for a trade. Using 4x2 system, two best candidates were: Waste Management (WM) and Intuit (INTU). I bought both. I'm trying to play volatility, hence yesterday's and today's buys. The best case if I can sell all three (including DECK) by the end of the week at a profit. Of course, trading is never about the best case, but I still hope for a profit. We'll see.

Buying back DECK

2011-06-03T23:02:00.000-05:00

Well, it's down to the price I like. Would I hold it for a while? Don't know. I don't really like current market. To put it honestly, I hate it. We'll see.

Apology is in order: I forgot to write here that I sold Waste Management (WM) position last Friday. I mentioned about this trade in my page on Seeking Alpha (http://seekingalpha.com/author/alex-filonov).

Buyin Waste Management

2011-05-25T23:01:00.000-05:00

Bought some Waste Management (WM) today. I'm trying to get a feeling of this market, and passive observation doesn't work so far. WM was one of the stocks in 4x2 signal today. This system isn't working anymore, but together with other signs can help. I wanted to buy something, because current pattern is down on Monday and Tuesday, turnaround on Wednesday, up on Thursday and maybe on Friday.
Of course it might not work. It's trading, not winning.

Remembering Mark Haines

2011-05-25T22:51:00.000-05:00

This is a sad day. We will never hear again "From the financial capital of univers, this is Squawk on the Street". We won't hear how mighty CEOs and fund managers are cut down to size (sometimes small size) in several words.
Mark made CNBC alive. It was real reality show, not just a dry informational stream. I enjoyed his jokes, his mild attitude, nicknames he gave to people working with him. I will miss him.
Thing I remember the most? March 10, 2009, half joking, Mark said, that S&P 666 intraday on previous day looks like a bottom. And it was. Mark was one of only two people who called that huge, generational bottom.
Rest in peace.

Closed EAD

2011-05-10T22:53:00.000-05:00

Tornado season began in Minnesota. Touchdown 3 miles from home, scary.

I closed my Wells Fargo Advantage Income Opportunities Fund (EAD) position. This is a closed end fund, and it currently trades at almost 5% premium to net assets value (NAV). This is too much. Discipline says that I can't hold CEF with more than 4% premium.
This is a good fund, it made me money and it pays good dividend. I will buy it back when it trades at discount to NAV.
I still think that corporate debt is a good place to be right now. I'm looking for some alternative to EAD right now.

Sold DECK

2011-05-05T22:51:00.000-05:00

When buying Deckers (DECK) two days ago, I thought that I can keep it for a while. But it was up more than 8% from my buying price intraday today. Discipline tells me to sell in such cases, profit is to be taken when you have it. So I sold it. I can buy stock back if it goes down a little bit more. If not, well, you can't win them all.

You Should Own Stocks (Answer to James Altucher)

2011-05-04T23:00:00.000-05:00

I like James and read almost every his article and blog post. I can agree or disagree with him, but his ideas are quite interesting. I strongly disagree with this article, here's my rebuke.

James' reasons not to own stocks and my response.

1. You’re not that good at it

Well, maybe. But even if you worse than professionals (which is a big question), you are still OK if you make decent money. And in today's market everything above 3% is decent.

2. Your competition wants to slit your throat

Not exactly. They want to make money, that's it. If you still make money, who cares if Buffet makes more.

3. Competition, part II

Sure, there is a crowd of crooks on Wall Street. I'm still making money in stocks since 1998. You can too.

4. Competition, part III

Computers are great. As an IT professional, I know that. I also know that computers are only as good as the code you put in them. One wrong assumption, and instead of decent profit you get a huge loss. If it were easy, programmers would be hard to hire, they'd be trading stocks. Well, I am a programmer and I'm trading stocks part time. I'd be glad to do it full time, but it doesn't work this way for me. So far.

5. It’s mostly a scam

Who cares if you make money off it?

6. True wealth in the stock market only comes if you make all the wrong decisions and then get lucky

Dunno. Bad examples here. Buffet didn't invest everything in one company, he created a company and invested its money in a lot of different companies. Gates didn't invest anything, he just created a company and successfully made it an OS monopoly. Of course, both were lucky, but they knew what they were doing.

7.The best investors in the world make on average between 10 and 15%

And ain't it great?! If you can make more anywhere else, take you money there. If not (and most of us can't, saving accounts pay 0.1%, money market 0.3%, if you are lucky), stock market is a place to be. Even if you are not as good as the best ones and take paltry 7%. Somehow I averaged 14% since 1998 and I don't think it makes me the best investor. Or does it? Contact me ASAP if you think so and have a business offer.

8. Competition, part IV

High speed trading is for computers. But looking at current market, I still see a lot of room for people. Volatility is big, you can make money off it. Or find several high growth stocks with good potential and buy them for several years hold. Or buy stocks with 6-7% yield.

9, Well, what about daytrading?

Yeah, it's a separate discipline. I think it should be full time job. Don't have guts for it. I still make money in stock market.

10. Stocks are really boring

Wrong! It's fun! At least for me.

And now, my reasons to be in stock market

1. It's really fun. At least for me.

2. You can really make money by using your brain. Directly. If you think better than half of the market participants, you make money.

3. It's the best way to grow your money.

4. It's fun. What, I'm repeating myself? Well, so be it.

Back From Vacation

2011-05-03T22:50:00.001-05:00

Paris is great in April! Returning to Twin Cities when it's around 33 degrees isn't so great. I hope it gets warmer soon, I'm tired of the last winter and of spring which isn't much different from winter.
I opened position in Deckers (DECK) today. This is a great company, fast growing and trendy. I know, I know that UGGs don't look that great, even when on great legs under a mini skirt. But that's just my opinion. I don't smoke either, which doesn't prevent me from having big positions in Altria (MO) and Phillip Morris International (PM). Besides, I like my UGGs when it's below zero, which happens a lot in Minnesota.
I watched this company for some time, looking for an opportunity. I think I found one. Stock is down a lot after reporting a quite good quarter. OK, we like buying low. I will be buying more on the way down, if it really goes down more.

Taking Profits in VmWare

2011-04-15T23:29:00.000-05:00

I have the impression that momentum is over for VmWare (VMW). Head and shoulders pattern, visible on the 12 months chart, can lead stock down to mid-60s. I decided to sell part of the position. That was a great ride, position almost tripled in less than 2 years. Time to take some profits. Especially before earnings report.

I might buy shares back if price drops under 80, definitely under 70. This is a great company, leader in the cloud computing software. But right now stock looks overpriced and that H&S pattern doesn't look good.

Selling Some PEP

2011-04-11T22:30:00.000-05:00

Pepsico (PEP) is trading within 62-68 range for the last 12 months. Last 6 months range is even narrower, mostly between 64 and 66. Today stock went over 66, so discipline tells me to sell some. I will sell more over 68, and buy back below 64 and 62. Current market is not clear, it might easily go either way, but range trading works in every market. That is, while stock is in range.

Closing RSH

2011-04-08T23:25:00.000-05:00

Closed RadioShack (RSH) position today. It was bought for a trade, because RSH was trading below 200-day moving average. Didn't work as I expected, but still sold at a profit. I don't like this market, can't keep this trading position anymore.

Selling Some Phillip Morris

2011-03-29T22:37:00.000-05:00

Took some profits in Phillip Morris (PM) today. I was watching patiently while stock grew over $60, but $65 is too much. It's not a bad company, quite opposite, it's a great company. And eventually it might be worth much more. But for now... Tobacco company with 4% yield is not something I call exiting. So I decided to sell some of it. I'm still holding a sizable position and might add on weakness.
On the big scale, it looks like we are up to another round of Wall Street rally. And most probably it's going to be a rally in growth stocks. PM is a staple, it might grow faster than domestic tobacco companies, but my bet is on high growth stocks with four letter tickers...

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

Business Travel: Bad Time for Investing

2011-03-26T00:52:00.000-05:00

This week was mostly spent on business travel. Didn't have much time to think about investing or to do something. Had just enough time to catch drop in AGNC on Tuesday (Mar 22) and add to position on weakness.

Well, can't complain, this week was just great. If we are to believe technicals, correction is over and a lot of good days are ahead.

Next Victim of Internet: TV

2011-03-17T22:57:00.000-05:00

Well, it' official now: Internet killed music industry, newspapers and bookstores. Sales of CDs fell through the floor, Borders (BGP) is in bankruptcy. People don't want to pay $15 for a CD to listen to one hit (maybe two). They buy this song alone on iTunes or on Amazon (AMZN). They don't want to carry a trunkload of books going on vacation or on a business trip. It's much easier to read books on your phone, computer or Kindle.
Not so obvious is the future of DVD and Blue Ray. I think it's the way of dodo, deadwood press and bookstores. I know some people who owns DVDs. But most of us don't want to watch the same movie over and over again. Once is quite enough. Netflix (NFLX) is doing a great job of internet movie delivery. Competitors will be there, sometimes. Blockbuster (BBI) is walking dead, no matter what Icann thinks.
But all this is yesteryear news. Internet is not done, it's just starting.
Next, very obvious target is TV. And I mean everything in TV: content, news, delivery (cable and satellite). Almost nobody can see it now, with one small exception: TV related companies. They see it and their reaction is exactly the same which destroyed any hope of music industry and bookstores. They are trying to fight back. First line of defense: net neutrality. Because cable companies provide significant part of broadband access, they are trying to selectively set transfer rates for different types of content, effectively killing TV over Internet. There are two reasons why this will not work: competition from phone companies (DSL) and government regulation. I am not a big fan of government regulation, but here it's just necessary. Imagine that phone company charges you different rates for speaking over the phone with different people (in the same area) or depending on the subject of conversation and prevent some conversations from happening. What cable companies want is the internet analog of such approach. Competition should work as well, but in many areas of the country there is none.
Second line of defense: government regulation. Media and cable companies are only against regulation when it doesn't let them screw consumer and all for regulation which helps to screw us. So media companies are inventing new ways how government should help them. Copyright is the most obvious option. I'm all for copyright for 28 years, maybe even for 42. But 100+ years like it is now? And Congress increasing this term all the time, so there is a possibility that works which are copyrighted now will never get into public domain. Attempts to enforce DRM (digital rights management, rights of the corporations, not the consumer) are also in the works.
Funny thing, this is all for nothing. In the worst case, we will have to pay dear for some content, owned by corporations, which we really want to see. But there is a lot of content already created, it's free or very cheap, it's on YouTube or other video sites. Yes, most of it is unprofessional and worth the money you pay for it. But there is some which is good and even great. And it's the way of the future.
Of course, TV as we know it is not going away tomorrow. It will live long, long time. After all, there are hundreds of thousands of horses in this country, 125 years after invention of the car.
What does it mean for investors? Don't even think of broadcast and cable companies. Be very afraid of satellite TV operators. There might be good trades there, but not long term investments. For good (multibaggers) investments look into NFLX and likes. Watch for new companies inventing new business models in this area. Look for content creators which embrace internet, although I don't hold my breath here, content prices will come down, as did music and as books doing right now.

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

Still Buying Panic

2011-03-16T23:03:00.000-05:00

Added yesterday to my position in ARM Holding (ARMH). I have no doubts we are in correction right now. Nasdaq composite is trading below both 13-day and 50-day moving averages. If this correction is like last one, in May-September 2010, Nazz should drop below 200-day MA before recovering. But, I don't even pretend I know everything and can predict the future. So I'm buying more with every good panic. ARMH was my trade of choice yesterday because it dropped a lot and it's a terrific growth stock. Almost every smartphone, every touchpad computer has ARM CPU inside. No, company doesn't produce them, but it's the beauty of the business model: no inventory, no plants, just a bunch of people designing chips and selling licenses to producers.
I'm planning to buy more if price drops more.

Closing General Mills Position

2011-03-08T23:24:00.000-06:00

Closed General Mills (GIS) position today. Stock is trading mostly in 35-37 range. I might consider buying it back under 35.50.

Code for Google Docs Portfolio

2011-02-25T19:13:00.000-06:00

In addition to the yesterday's post, I'm publishing code. Use of code is free and unrestricted.

function colortickers() {
  // Color background of ticker columns depending on price and limits
  var price = 1; // this will hold the answer
  var sheet = SpreadsheetApp.getActiveSheet();
  var row = 2;
  while (price > 0) {
   price = sheet.getRange(row, 2).getValue();
   if (sheet.getRange(row, 2).getValue()) {
   price = sheet.getRange(row, 2).getValue();
   var low = sheet.getRange(row, 3).getValue();
   var high = sheet.getRange(row, 4).getValue();
   if (low > 0 && price < low) {
   sheet.getRange(row, 2).setBackgroundColor("red");
   } else if (high > 0 && price > high) {
   sheet.getRange(row, 2).setBackgroundColor("lightgreen");
   }
   else {sheet.getRange(row, 2).setBackgroundColor("white");}
   }
   row++;
  }
}

function gettickerprice(ticker) {
  // Function to get current price of stock
  var price = 0; // this will hold the answer
  price = FinanceApp.getStockInfo(ticker).price
  return price; // return the answer to the cell which has the formula
}

Managing Portfolio with Google Documents

2011-02-24T23:17:00.000-06:00

Last week I had a very unpleasant surprise. I use Yahoo! Finance quite extensively for portfolio management. One of portfolios is set up as a shopping list, with low and high limits set. Very useful feature, you can see at a glance which stocks are trading outside of set limits.
Last week, Yahoo! completely changed portfolios layout. Among other changes, the ability to set and see limits was completely gone. I was outraged, a lot of my work just disappeared. I submitted complaint to Yahoo! and probably was not alone, because couple days later old portfolios layout was returned, and all my limits with it. But this made me think: what if by some whim of somebody such thing happens again?
Here comes Google Documents. There is a whole lot of possibilities for investment management there, and I am just scratching the surface.
Here's the link to the simple portfolio spreadsheet. Columns "Ticker", "Low Limit", "High Limit" and "Notes" are entered by user. Column "Price" is a function based column. Function "gettickerprice" reads current stock price from Google Finance. Price quote is delayed, as per Google Finance rules. Another feature of this spreadsheet: tickers are painted red if price is below low limit and green if price is above high limit. This work is done by script "colortickers", which is also a part of this spreadsheet.
This spreadsheet is public read only. You can (probably) copy it into your own Google account and modify as you wish.
I'm still working on synchronization of Yahoo! Finance shopping list portfolio with this spreadsheet. Not sure it's possible, but we'll see.

Opening ARM Holding

2011-02-23T23:13:00.000-06:00

This is the company which was always more expensive than I wanted to pay for it. I was wrong so far, it was growing like crazy. ARM holding (ARMH) designs processors used in the most smart phones, including iPhone, and also in the most touchpad computers, including, of course, iPad. Company doesn't produce chips, which allows it not to spend huge fortunes on chip fab facilities. For comparison, Intel (INTC) currently spends about $15 billion to build 22 nanometer fab. ARMH licenses CPU designs to other companies. With the explosion in smartphones production, ARMH sells more and more licenses every month. Valuation is pretty steep, current P/E is just under 100, but I think company can see several years of explosive growth ahead.
That's why I started ARMH position today, on the second day of Libya related panic. I don't see any dependence between Libia and ARMH, so it looks like a good entry point.
Of course, I'm kicking myself for not buying it at $10 (was thinking about it at the time), but better late than never.

Buying Panic

2011-02-22T23:18:00.000-06:00

Panic today on Wall Street. People are worried about Libya. I am not much worried about Libya, so I decided to do a little buying. Maybe I am wrong, maybe I am right, time will show.

Added to positions:

Google (GOOG). I was looking for a good entry point after last quarter report, and capitulated. Company is just too good. And Larry Page as a CEO is exactly what this company need.

Indian Fund (IFN). Technically, India was bottoming last couple of weeks. Today is a good entry point. If I read risks right.

Main risk is that panic will be much deeper this time. I can live with it, there is some cash to continue buying if market drops lower.

Brent/WTI Spread: It's Crazy

2011-02-14T23:14:00.000-06:00

I mentioned what I thought then big ($4) spread between Brent and WTI futures here. It was 3.5 months ago. Today's spread is whopper: over $16!

Obviously, this spread has nothing to do with real product supply/demand. Difference between Brent and WTI processing is around $1, and usually it's easier to process WTI. So the only explanation for the difference is supply/demand situation on the futures market. It's not about oil, it's about paper. The question is, why Brent paper, traded on ICE, is much more expensive than WTI paper, which trades on Nymex. I don't have an answer, but there are several ideas which require additional digging.

Idea 1: CFTC started enforcing wash sales rules. In futures world, wash sale is a sale, where buyer and seller are essentially the same entity. This is going on for years, many countries with national (i.e. government owned) oil companies also set up sovereign (again, government owned) investment funds in US, which invest, among other things, in oil futures. It would be a good idea for CFTC to stop such activities, by I've seen no proof that it has any intention of doing that. If it were true, sovereign money could move to ICE, which is governed by British law. Variation of this idea: volume of wash sales sharply increased lately on ICE, without much change in US.

Idea 2: Oil futures suddenly became popular as an investment class in Europe. This happened not long ago in US, right now money is moving to the stock market. Maybe in Europe process of investing in commodities future is just starting? It's very hard to find any information supporting or disproving this idea.

Maybe there are some other ideas out there?

Opening RadioShack

2011-02-09T22:41:00.000-06:00

Opened position in RadioShack (RSH) today. This is mostly technical trade.

Technical indicators:

Stock trades more than 20% below 200-day moving average.
Stock crossed over 13-day moving average yesterday, and stayed above today, indicating uptrend.

Fundamentals. I don't usually buy stocks with bad fundamentals, no matter how good technicals are. RSH is profitable company, with single digit P/E and projected growth. Good enough.

Closed PCAR

2011-02-07T22:38:00.000-06:00

Closed Paccar Inc. (PCAR) position today. I've got nice 1.5% profit in one trading day, good catch. From the beginning, it was just a trade. Multiple signals (almost 10% drop after good quarterly report, 4x2 buy signal, which mostly doesn't work anymore, technical bottom signal) pointed to possible profitable trade, and trade I did.

Friday Feb 4 Trades

2011-02-07T09:59:00.000-06:00

Bought Paccar (PCAR), added to Pepsico (PEP) position. PEP is trading at the bottom of current trading range, PCAR dropped way too much after good quarterly report.

Adding to BNA position

2011-01-30T16:48:00.000-06:00

I added to BlackRock Income Opportunity Trust (BNA) position on Jan 27. This is pure cash management decision, stock trades at the lower end of the band and I have too much cash.

Non-Predictions for 2010: Results

2011-01-26T22:59:00.000-06:00

I did an experiment about a year ago: tried to predict events that will not happen, even though many people believed they might (here).

Results are good. I'd say they are excellent.

1. Fed will not raise rates.
Fed raised discount rate, but not the federal funds rate. This is the only prediction that partially failed, I give it score of 0.5.

2. Chinese bubble will not pop.
It didn't. Score 1.

3. Israel will not attack Iran.
No attack. Score 1.

4. Gold will not hit $2000.
Still below $1500. Score 1.

5. There will be no commercial real estate crash.
None so far. Score 1.

6. Not more than one EU country will default.
None. Score 1.

My non-predictions were right on. Total score: 5.5 of 6.
I will publish my non-predictions for 2011 shortly. So far I feel that predictions 1,4,5,6 for 2010 are good for 2011 as well. Not so sure about 2 and 3.

Annual Portfolio Review

2011-01-23T23:08:00.000-06:00

There were changes in my portfolio since last review.

Portfolio goal. Growth. This is high beta, unapologetic growth portfolio with some safeguards and some boring investments. The goal remains unchanged.

Basic Principles. Most of the stocks in this portfolio were chosen for long term investment, which, for me, is about 18 months. Every stock is under review all the time, with major review of portfolio once a year. I can trade around any position if I feel like this. Portfolio is not diversified by sectors. Maybe "diversification is the only free lunch" (Jim Cramer), but I'm big believer in TANSTAAFL (There Ain't No Such Thing As A Free Lunch, popularized by Robert Heinlein). Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

Paradigm Changers. These are stocks of companies that are changing business in sectors or even in the whole world.

Google (GOOG)
Ultimate disrupter. Google is changing the advertising world. Company is also agressively moving to mobile internet advertisement.
No position changes since last review.
Risk: All great empires were destroyed by internal problems. But there is also a threat of internet fragmentation, with ISPs and device producers restricting the use. Example: Apple (AAPL) banning Google advertisements in applications developed for iPhone and iPad.
Plan: Hold

Intuitive Surgical (ISRG)
Robotic surgery that is changing surgery of internal organs. Company has monopoly on robotic surgery right now. Added to position since last review.
Risk: new technologies are being developed, legislation changes can reduce demand.
Plan: hold.

Netflix (NFLX)
This company completely changed video rentals model. It's also the best internet movie delivery company. No position changes since last review.
Risk: Things on the Net are changing quickly.
Plan: hold, add on weakness.

VmWare (VMW)
Cloud computing is all the rage, and VmWare is on the frontline. If company wants to create its own cloud, VmWare is the way to go.
No position changes since last review.
Risk: it's not clear that internal clouds would win over external ones or over software as a service.
Plan: Sell some into strength, hold the remaining part of the position.

Banks.

Goldman Sachs (GS)
This is not exactly a bank, more of a broker/trader. Absolutely best Wall Street company.
No position changes since last review.
Plan: Hold, add on weakness.

Since last review, I sold US Bancorp (USB) position. Easy money is made here, and I don't really like banks.

Steady growers / high yield. Companies with steady growth, high dividend or both. I am increasing weight of this group, such companies are best investments in depression times.

Annaly Capital Management (NLY)
REIT. Huge dividend and good management are main reasons. Company makes money on distressed mortgages, current holdings are mostly supported by US Government.
No position changes since last review.
Risk: possibility of management mistakes, another real estate crash, rise of interest rates.
Plan: hold, add on weakness, reinvest dividends.

Altria (MO)
I don't smoke. I don't recommend anybody to smoke. But people do anyway, and they pay exorbitant prices for tobacco products. Altria grew profits steadily in any environment, ignoring tobacco lawsuits, tax hikes and anti-tobacco campaigns.
No position changes since last review.
Risk: ban on tobacco, tobacco deregulation, both are highly unlikely. Possible huge legal expenses.
Plan: hold, reinvest dividends.

Phillip Morris International (PM)
Same reasons to hold as for Altria. Can be also put into "International" category.
No position changes since last review.
Risk: same as with Altria.
Plan: hold, reinvest dividends

Pepsico (PEP)
This is a "staple" company. People are buying its products no matter what. Products sold in US are also addictive, because most of them contain caffeine.
No position changes since last review.
Risk: management mistakes.
Plan: hold, reinvest dividends

General Mills (GIS)
Another "staple", and local company headquartered in Minnesota.
No position changes since last review.
Risk: management mistakes.
Plan: hold, reinvest dividends

American Capital Agency Corp (AGNC)
New position. Another REIT. Highest yield among all the stocks.
Risk: company is highly leveraged, if interest rates are to go up, yield might suffer.
Plan: hold, reinvest dividends

Intel (INTC)
New position. First was bought for a quick trade, didn't work out, held anyway. Later on added to position when stock was crushed after October earnings report. Sold some in the end of December. This is a tech company, but not a paradigm changer anymore and not a fast grower. But it enjoys almost a monopoly position, grows steadily and pays big dividend, which increases almost every year.
Risk: tech world can change fast.
Plan: hold, trade around position.

Since last review I closed Brookfield Assets Management (BAM).

International

Indian Fund (IFN)
India is the only part of BRIC which I like now.
No position changes since last review.
Risk: political.
Plan: hold, add on weakness.

Morgan Stanley India Investment Fund (IIF)
New position. Also CEF investing in India. I bought it as a play on the annual distribution. Usually stock drops after distribution ex-date, and then growing up, because of dividend reinvestment by holders and DRIP plans. Didn't happen with this position, yet.
Risk: political.
Plan: hold until it's up 5% from buying point or for about three months, whichever comes first.

Ibero-America Fund (SNF)
I like EU, and Spain, even less. But this fund is not about Spain anymore. It moved to Latin America, and disqualified itself from my portfolio. According to Cramer, Latin America is always a trade, never an investment.
No position changes since last review.
Risk: Multiple political and other.
Plan: Sell, look for other EU opportunities

Fixed Income.

Blackrock Income Opportunity Trust (BNA)
Fund holds mostly high quality corporate bonds and Treasuries. Good depression hedge.
No position changes since last review.
Plan: hold, add on weakness.

Wells Fargo Capital Trust XII (BWF).
I use it to hold cash I don't need right now. Good yield.
No position changes since last review.
Risk: Bankruptcy of Wells Fargo.
Plan: hold, sell when need cash.

Evergreen Income Advantage Fund (EAD).
One more change of plan. In the second half of last year I completely sold position, when fund traded at premium to NAV, then bought again at discount to NAV. It looks like economy is really improving, so corporate bonds are OK.
Risk: economic slowdown/downturn.
Plan: hold, add on weakness.

PowerShares Financial Preferred ETF (PGF)
This is a bet on recovery in financials plus excellent cash management tool.
Sold part of position since last review.
Risk: Another crash in financials.
Plan: Hold, sell if need cash, trade around position.

Eaton Vance California Municipal Income Trust (CEV)
New position. California munis are priced very low, and pay a big, tax free yield.
Risk: mass bankruptcies of California cities and counties. I don't think it's going to happen
Plan: Hold, add on weakness.

Since last review I sold Helios Total Return Fund (HTR), when it was trading at premium to NAV.

Nothing is sacred. Any position can be sold any time I feel like that. I can trade around any position when I see the opportunity.

Closed BAM

2011-01-21T22:43:00.000-06:00

Today I finally closed position in Brookfield Assets Management (BAM). Reasons for that are outlined in my to previous posts:

Selling Some BAM

Selling More BAM

Selling More BAM

2011-01-13T23:06:00.000-06:00

In December I reduced my position in Brookfield Assets Management (BAM) and blogged about it. My blog entry was republished on Seeking Alpha site (here) and all comments were negative. I.e. everybody thinks that I was wrong. They think that I don't understand company's business.
I gave it some thought. And agreed. Looks like I really don't understand company's business anymore. From being mini-Berkshire (Hathaway), it became concentrated in three major areas: timber, in which I really understand nothing, hydro generation, and commercial real estate. I understand a little of last two, but probably not enough. And I don't understand why company in such business would have future P/E around 30 and PEG above 2.
Decision is easy enough. If I don't understand business, I shouldn't be invested in it. I am scaling out of this stock, sold another portion on Jan 11.

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

It's Been a Good Year.

2011-01-02T23:07:00.000-06:00

Closed this year with return a little bit over 20%. Not that great but acceptable. At least higher than S&P 500 and much, much better than any money market fund can give me.

I hope this year will be better. Right now it doesn't look good though: bullish sentiment is out of hand. Something might trigger a huge sell off at any time. Or maybe not: fundamentals aren't that bad. I'm waiting for market to show some direction in January.

End of Year Selling.

2011-01-02T23:01:00.000-06:00

With all the holidays I forgot to mention two sales I made on December 30. The main reason to sell: I think that most of December run was just a window dressing and wanted to sell into it to have more cash in the new year.

Sold part of Intel (INTC) position. Stock traded in the 18-22 range most of the year and I don't believe it's going out of range any time soon. Will buy back under 19.

Sold full US Bancorp (USB) position. I usually don't hold financials. Picked it up when all banks were in a hole, how is time to sell.

Playing Distributions in Closed End Funds

2010-12-29T23:01:00.000-06:00

It's a year end. And it's time when Closed End Funds (CEFs) are making their yearly distributions. Many of these funds also have dividend reinvestment plans for some investors.
Sometimes funds had a good year and distributions are significant. In this case, price of shares on the ex-distribution date goes down about the amount of the distribution. But, if fund has a dividend reinvestment plan, fund management has to buy back shared in the open market to make those distributions. Usually CEF just can't issue new shares, that's why they have to buy them back in order to make DRIP distribution.
I had some experience playing big distributions before. Usually you need to look at a drop of 5% or more, otherwise market noise kills any profit.
OK, this is the theory. I made my first practical move today: bought shares of Morgan Stanley India Investment Fund (IIF).
I'm going to sell shares when they recoup between 30% and 50% of the price drop.

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

Selling Some BAM

2010-12-27T23:02:00.000-06:00

I sold a portion of my Brookfield Asset Management (BAM) position today.
There are several reasons.
First of all, stock is up a lot. Stock shot up more than 50% since it's yearly bottom in July.
Second, I'm starting to dislike BAM. Company missed last two quarters, it trades at almost 30 future PE and projected PEG is way over 2. I'm going to do more research and determine if I want to get rid of position completely. But reducing it now looks like a good idea.
Third. We are in a strong year end window dressing mode. It's a good time to sell.
Last but not least. This portion was bought long time ago at higher price. Selling it actually creates a tax loss, which isn't that bad to reduce tax profit for the year.

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

Financials Are Up: Boom or Short Covering?

2010-12-22T22:58:00.000-06:00

Banks are up last couple of weeks. I'd be happy to believe Cramer, who said that it's a great boom in financials. But something else draw my attention.
Bank common stocks are up, right. At the same time, bank preferreds are down. Just couple of months ago we saw the opposite: common down, preferreds up. It was the time when all fixed income boomed, including preferreds.
There are several explanations for current action. Maybe Cramer is right and banks just joined the Santa rally. Maybe funds are unwinding the pair trade "short common, long preferreds". Or maybe we will see a bullish action in financials next year. I don't know, my crystal ball is not showing anything.
Time will tell, so far I'm not planning any actions.

Full disclosure: at the time of publication author had long positions in banks: GS, USB and in bank preferreds: PGF, BWF. Positions can change any time.

Playing AGNC

2010-12-20T22:40:00.000-06:00

I sold part of my position in American Capital Agency Corp. (AGNC). I bought shares of this REIT to enjoy a huge, almost 20%, yield. Why did I sell it then?
Simple. In the last 5 quarters, price of the stock fell after ex dividend day more than the dividend itself. Quite unusual, and quite inviting pattern. I think I can make more money buying it after ex dividend date around $27 and selling in the range $29.50-$30 right before next ex dividend date.
Why is it happening? Don't know and don't care. As long as this arbitrage is working, I'm running it.

Full disclosure: at the time of publication author had a long position in AGNC.

Buying Back EAD

2010-12-15T22:29:00.000-06:00

Bought back Wells Fargo Income Advantage Fund (EAD) yesterday..I sold it July and October, when it was much higher than now and traded at big (up to 5%) premium to the NAV. Now it's just above $9 and trades at a discount to NAV. With yield almost 10%, it looks like a bargain.

Full disclosure: at the time of publication author had a long position in EAD.

Adding to Intuitive Surgical Position

2010-12-09T22:33:00.000-06:00

I pulled the trigger today. Added to my Intuitive Surgical (ISRG) position.
Stock was going down lately. When I sold part of my position last year at $308, my target price for buying back was at $260, near today's price. I have a feeling that it's near bottom. Fundamentals are great, with future P/E at 25 and PEG at 1.15.
Of course, I can always be wrong. If stock is going down more, I am a buyer.

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

Waiting for Santa Claus Rally

2010-11-29T23:00:00.000-06:00

Things look gloomy. Markets are going down. We are bombarded by bad news. Europe is falling apart, again. States are gonna default on their debts. Banks are lying about their exposure to (choose any number of) Europe, bad mortgages, bad corporate loans, bad personal loans etc.
And I am turning optimistic. There are reasons for that.

First of all, there is one obscure technical indicator: 13-day moving average. Since July of 2008 it was pretty consistent showing current trend. When one of major indices (Dow, S&P or Nasdaq composite) crossed above it and stayed this way for more than 2 days, index went up for several weeks. Same thing (with opposite sign, of course) happened when index crossed under 13-day MA. So, last Wendesday, November 24, Nasdaq composite crossed above 13-day MA. And it closed on Friday and today above this line as well. This is a bullish sign. Dow and S&P are still under 13-day moving averages. But for the last couple of years Nasdaq Composite was leading Dow and S&P.

Then let's take a closer look at current fears. Europe is not going to fall apart. They have enough money and enough will to save their economies. Yes, several countries are under attack and can't refinance current debt obligations at reasonable yields. I think we see classic bear attack coupled with media hysterics. I don't know if press is hired by bears or acts on the premise that bad news sells better than good news, probably both. But reality is that Euro zone has a big fund, more than 800 thousand Euros of emergency funding and they can double this fund without much trouble. Add to that possibility (I think necessity) of European Bank doing its version of QE, that would be enough to cover needs of every country in trouble.
States are in more precarious position. But nevertheless, state bonds are selling well, yields are not that high. And I think Uncle Sam will come to help in case of emergency. Because default of a big state would be a disaster for the whole country. I can't even think what default of California would look like.

The main reason for my optimism is seasonal. Historically last month of the year is bullish for stocks. Santa Claus rally usually comes after Black Friday. I expect it this year too. Because economy isn't that bad. Because employment picture is improving, albeit slowly. Because life is still going on, despite all the gloomy predictions in media.

Full disclosure: author has long position in SNF, which is CEF invested mostly in Spain and in CEV, which is CEF invested in California state and municipal bonds..

Sliding Slope

2010-11-16T22:52:00.000-06:00

Big day down. But that's not the problem. The problem is that all metrics are pointing down more.

Fundamentals

Not good. Economy is kinda growing, but slow. Unemployment is still high. Banks are not lending and businesses are not trying to get more credit. QE2 so far only managed to scare everybody into fixed income and commodities and now this trade is unwinding. Company after company predicts uncertain outlook. Worst of all, inflation is nowhere to be found, unless you listen too much GOP BS.

Technicals

Broken. Indices closed third day under 13-day moving average and closing to 50-day MA. Trend is fresh and good, probably all way to 200-day MA.

Sentiment

Too many bulls everywhere. That's not good either.

My take, this downtrend is going to continue for a while. We might get some reprieve (should get one tomorrow), but fall rally ran out of steam and markets need some time to readjust and recover. I still think that we might get another rally in December (Hey, Santa, where are you?), there should be window dressing.

Not Buying Cisco Back

2010-11-11T16:45:00.000-06:00

I'm watching "Fast Money" right now and decided not to buy Cisco (CSCO) back for a while. Maybe some time later. But not now. The reason: just everybody on Fast Money said that stock is undervalued. Yeah, right. These guys are quite representative of Wall Street. If Wall Street thinks that something is a buy, I'm not a buyer. They probably already bought their positions (some of Fast Money guys did) and now waiting for stock to go up. Good luck, guys!
Apart from that, I absolutely don't like two points of Chambers interview on CNBC:
1. Most of the missed demand is from government entities. This demand isn't coming back any time soon.
2. Predicted growth is in range of 8-10%. Doesn't work for P/E 15. Not unless company starts paying sizable dividend.

Full disclosure: author was long CSCO until November 9 and doesn't have any positions in stock right now.

One More Junction

2010-11-09T23:14:00.000-06:00

Stock market is at another junction point. We had a great rally which started in August. As many, I didn't like this rally initially, because of correlation of stock market to commodities and reverse correlation to dollar. But rally just somehow felt right. Couple more factors fueled this rally: elections with expectations of GOP big win and promised by Fed QE2.
Elections didn't disappoint. GOP shouldn't celebrate much though. People don't vote for, they vote against. In this case they voted against obvious socialist tendencies of the administration: healthcare reform (which is not going anywhere), attacks on big businesses, Wall Street and stock market in general. They did not vote for neocons, they did not vote for social conservative agenda, they actually didn't vote against stimulus and even the horror of horrors: higher taxes for rich.
QE2 didn't disappoint either. Uncle Ben even slightly exceeded expectations. I don't have much hope for it, but it's the theme of a separate article. Anyway, QE2 is a long term story. We need to know what to do now.
And it's complicated. If rally was mostly caused by elections and QE2, then market is going down: sell the news. If it was driven by stupid idea that dollar is going to be worthless and we are going to have hyperinflation, then it should continue. Of course, it's almost the end of the year, and various window dressing strategies should come forward. Most funds should be buying stocks, to make an impression that they participated in the rally.
Metrics don't say much. Technicals are great, but they are always the best at the top. Fundamentals are improving, but they still stink. Sentiment is about neutral.
We had several sharp corrections during the rally. That's how it should be: biggest days up happen in bear markets, biggest days down - in bull ones. But last two days are different. We are going down bit by bit, which is more consistent with the top.
I'm not sure it's a top. We might as well have the rally continue into the year end. But it's a possibility. So I decided to lighten up a little bit, it's time to get more careful.
Today I closed my position in Cisco (CSCO). Reason: stock was bought after last earnings report, when it was punished too much. Tomorrow is another earnings report, and I don't know how that is going to play out But my cash position is a little bit too big, so I decided to invest in a muni CEF: Eaton Vance California Municipal Income Trust (CEV). Fund trades at discount to NAV (a rarity among muni CEFs) and has a decent yield.

Where is WIT/Brent Arbitrage?

2010-10-27T23:05:00.000-05:00

There is one thing I don't understand about oil market. There are two major standard oil contracts on futures markets. There is West Texas Intermediate, aka WTI aka Texas Tea, traded on Nymex. And there is Brent, which is oil extracted from North Sea and traded on ICE. Usually price difference between WTI (what is usually presented to us by TV networks and internet sites as a price of oil) and Brent is below 2 dollars per barrel. But quite often this price difference can jump to 3-4 dollars in either direction.
My question is: why such price difference can exist and why it can stay for several days? Historically, price difference is below 2 dollars, so why there is no simplest price arbitrage: if difference above 3 dollars, sell more expensive oil and buy the one which is cheaper. Close contracts when price difference falls below 2 dollars.
Things would be much easier if there was a good liquid ETF for Brent. The existing one, The United States Brent Oil ETF (BNO), is not liquid at all. There are days when it's not traded at all and average daily volume is just about 12000. If it was liquid, it would be possible to short BNO and long USO, or vice versa. Of course, oil ETFs don't represent price of oil very accurately, and such trade would be riskier than direct futures trade. Anyway, I consider this trade when (if) BNO becomes liquid.

So, why there is no arbitrage?

Full disclosure: no positions.

State of the Market Report

2010-10-20T23:17:00.000-05:00

I'm still listening to the market. But it's time to come to some conclusions. As usual, I'm trying to watch market from three points of view: fundamentals, technicals and sentiment.

Fundamentals

Hard to judge. Some companies report great earnings. Some, not so great. Manufacturing fell in US in September, this is minus. Fed is probably determined to go with QE2: big plus. I'm going to judge fundamentals as slightly bullish, because "you should never fight the Fed".

Technicals

Screaming. Major indices bounced off 13-day moving average yesterday, for the second time during this rally. 50-day for major indices is just about to cross above 200-day MA, that's Golden Cross. The only technical indicator which is bearish is relative strength: markets are grossly overbought. But they are overbought for more than a month already. Besides, overbought condition (as well as the oversold one) can be worked out with time. Technicals are very bullish.

Sentiment

Despite very bullish calls made by such insignificant people as Warren Buffet, Legg Mason's Bill Miller, Jim Cramer etc., most calls are bearish to hysterics. However, there was some turn to bullish sentiment on CNBC lately. I'd judge sentiment as mostly bearish, but changing. Being contrarian indicator, it's bullish but changing to less bullish and maybe bearish.

Of course, there is something fishy in this rally. Still a silly reverse correlation between dollar and all (or almost all) asset classes. Still grossly overpriced commodities. But as Buffet, Miller and Cramer tell us, stocks are extremely cheap compared to bonds. Something gotta give. Another development: looks like fixed income is topping now. Not sure about Treasuries, but looks like corporate bonds are at the top.

Rally is great. You make money without moving a finger. The question: when and how it ends?

Back to Even

2010-10-18T23:01:00.000-05:00

I missed this moment. Some day in the middle of September my portfolio got back to even, compared with the end of 2007. It's up several percentage points since.

One more illustration that somebody without Wall Street experience, not a professional investor, can beat major indices in the long run. I had years when my performance was below major indices, but in most years I managed to beat them. My portfolio beat major indices for any 5 year interval since 1998. I think it's even beat for any 3 year interval, but not completely sure.

It's not blind luck. It's not some system. Just a lot of work, at least 10 hours every week, usually much more. Searching for picks, trying to understand current state of economy and markets, trying to predict trends. Sometimes right, sometimes wrong. Huge successes, like with Apple (AAPL), Yahoo! (YHOO), Google (GOOG). Huge disappointments, like TheStreet.com (TSCM). Laggards like Home Depot (HD). It's all averaged out to nice 13% annual growth since 1998.

Cause for celebration? A little bit early. I'll get my bottle of good champagne on December 31st. For now, back to work.

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.

Listening to Market

2010-10-11T23:30:00.000-05:00

First week after vacation. First impressions: market is crazy. All dollar gains of last three months: gone. Commodities shot up. Old game: if dollar is down, everything (stocks, commodities, even bonds) is up. OK, I can lament and whine, but it doesn't make me money. Or I can take different position, and remember what Niels Bohr supposedly answered to Albert Einsteins's "God doesn't play dice". The answer was: "Don't tell God what to do".
I decided that instead of telling Mr. Market what to do, I should try to understand what is it trying to tell me.

First: panic about EU countries possible default has gone. Market forgot about the issue.

Second: panic about US dollar future is back in vogue. Never mind that we are still in deflation, everybody is worried about future inflation, buying gold, commodities, and, which is funniest thing of all, Japanese yen. It's funny, because Japanese debt/GDP ratio is much higher than ours and government and Central Bank are explicitly trying to bring yen down.

Third: the only trend of the last three months which is still alive is fixed income bull market. All bonds are up, even junk.

Fourth: stocks are going up. S&P 500 index broke through 1150 resistance level, Dow Jones is above 11000, and Nasdaq composite is above 2400. This is the most important trend, because as most of my money is in US stocks, I can just sit and watch it grow.

What am I planning to do?

EU stocks. I think they are dead in the water for a long time. No action here.
US dollar:. No action either. I don't feel current trend.
Fixed income. Already sold all junk. I will keep remaining bank preferreds and REITs.
US stocks. I'm bullish long term, but don't see anything I'd like to buy now. That doesn't mean there is nothing to buy, just that I haven't found what to buy yet. That's main direction of my research for the current week.

Trend I don't see: there is a high probability that Bush tax breaks are not extended, including capital gain and dividend taxes. Capital gain increase from 15% to 20% isn't that big, but dividend rate increase from 15% to the marginal rate is huge. Why high yield stocks are going up?

I'm listening to Mr. Market...

Back to the Game

2010-10-04T23:10:00.000-05:00

Just returned from vacation on Hawaii. Fresh and rested, I'm back to the game.

First order of business, made some changes to my fixed income positions. Out goes Wells Fargo (former Evergreen) Advantage Income Opportunity Fund (EAD). Fund curently trades at more than 5% premium to its NAV, that's too much. I'm really surprised with the rush to buy any corporate bonds which I see in the last four months. I'm all for high quality corporate bonds, but junk is bought in high quantities as well. Since EAD holds mostly junk, I don't see any reason to hold it in risky environment.
In comes more of American Capital Agency Corp. (AGNC). This is a REIT with 20% yield. There is a small risk, this company is about 800% leveraged, but it's risky only if interest rates are going up, which is highly unlikely in the nearest 12 months.

Full disclosure: at the time of publication author had a long position in AGNC and no positions in EAD.

Tired, Dazzled and Confused

2010-09-14T23:09:00.000-05:00

I'm tired. Thinking to take some vacation soon. It's hard to take a read on this market now. It's been in a range trading since May. If it stays there, maybe it's time to buy some downward protection. I'm thinking about options on some ETF.
On the other hand, September started great. No real down day yet. Three major indices are trading above 200-day moving average. We might get a breakout at last.
Dazzled and confused. I'm going to think couple of days and take some action. Probably some protective action.

Selling some PGF

2010-09-09T22:53:00.000-05:00

Forgot to mention it in this blog: I sold part of my position in PowerShares Financial Preferred Portfolio ETF (PGF) last Friday. Reason: plain old profit taking. I'm still holding a significant position in PGF.

Adding to Intel Position

2010-08-31T23:16:00.000-05:00

Intel (INTC) fell below 18 today. So much for my wise idea of holding for initially trading position. Solution? Well, I bought more today. Tech company with billions in cash, paying 3.5% dividend, still growing, with almost monopoly position in CPUs for almost all computers in the world, trading at P/E 11? It's a buy in my book.

Starting American Capital Agency

2010-08-26T22:59:00.000-05:00

Market is down so much, I just had to start buying. But nothing on the shopping list hit my price target yet (yes, I am a cheap bastard, especially when buying stocks). So I decided to invest in a high yield REIT: American Capital Agency (AGNC). I have one REIT in my portfolio already: Annaly (NLY), which has huge dividend, 15%. It can't get any better, right? Wrong! AGNC yields 20%! I bought it yesterday. Company has the same model as Annaly: borrowing money for cheap and buying mortgage obligations backed by Fanny Mae and Freddy Mac. Current sharp drop of debt yields should be beneficial for both companies. I don't expect growth from this stock, it falls into "Slow growers/high yield" category. Honestly, 20% yield is all you need from an investment. Boring though, but I can live with it.

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

I Shouldn't Have Done This. But I Did

2010-08-17T23:24:00.000-05:00

One of Cramer's commandments says "Thou shalt never turn trade into investment". Well, I just did. Not exactly to investment, but...
Some time ago, I bought Intel (INTC) on a signal from my 3.5x2 trading system (more on this system here). Today Intel was second day up, it's a sell signal in the system. Rule number one: discipline trumps conviction. But I'm in tech buying mode. Just bought Cisco (CSCO) last week. So I decided to take a closer look at Intel. Company has forward P/E of 9.3 and PEG of 0.72! Should be a screaming buy. When you recalculate forward P/E after taking cash out of the price, it comes to 7.3! Can tech be so cheap? Why is tech, the best sector in US for the last 40 years, is cheaper than banks or railroads? Especially companies like Intel and Cisco, which have a lot of net cash.
So I broke a lot of rules and decided to hold INTC. Maybe I'm wrong.

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

Buying Tech

2010-08-14T00:04:00.003-05:00

One after another, the whole sectors are getting crushed on the market. For a while, then they are coming back. We saw it with all European securities in May and June. Now the focus is on American tech. This is ridiculous. This sector is what America is about: enterprising spirit. It doesn't need TARP; best tech companies have full coffers of cash. It's not afraid of deflation: it's in its own deflationary environment since 1970s. It's not afraid of Chinese import: survived Japanese and Korean import threat in 1980s. Tech is positioned perfectly to survive.
That's why I was surprised by market reaction to Cisco (CSCO) earnings. Company beat on earnings, missed less that 1% on revenues and didn't predict any serious slowdown. Year-to-year growth is over 20%. Company has P/E of 18.09, forward P/E of 10.73 and PEG of 1.04. These are very impressive numbers. But I think that these numbers are too conservative. Demand for networking hardware is increasing, we have mobile internet infrastructure expanding now, Internet TV is coming soon, which also will require infrastructure upgrade. Besides, company has $6.85 cash per share. If you recalculate P/E, taking cash out of price, forward P/E comes to around 7.3. This is unbelievable!
That's why I bought Cisco on Thursday. And if price goes down more, I will buy more.
Cisco is not the only tech company trading too low. I'm looking for more tech to buy right now. So far, Broadcom (BRCM) and Xilinx (XLNX) are also on my screen. Honestly, even Apple
(AAPL) is way too low. I have my own reservations regarding Apple, but temptation might be too strong.
If you think that I'm taking my ideas from James Altucher: (CSCO and these 6 tech stocks will be higher a week from now), you are almost right. I agree with James on everything but HP. XLNX is his idea I am borrowing. I found other stocks using my own research. I don't like HPQ because of management problems. Even the greatest company can easily be killed by bad management.

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

Another Critical Junction

2010-08-10T22:48:00.000-05:00

Crazy action on the market continues. I'm not very optimistic medium term, my thinking is close to that of Doug Kass, who thinks that this year will be spent in a range. But look at a short term picture!
Second week in a row, market starts with a boom. And then falls on Tuesday. And now we are coming to a critical juncture, in technical terms. If you take a close look at S&P chart, you will see that 13-day moving average crossed over 200-day MA today. At the same time, index is still trading just a little bit above 13-day MA. If we don't have a down day tomorrow, it would be a strong bullish confirmation. Yeah, and 50-day MA is going up lately, which is bullish too.
Of course, fundamentals, to put it mildly, suck. Which was confirmed by uncle Ben (Bernanke) today. But sentiment is quite bearish lately, which is bullish. So, if we have bullish technicals tomorrow, things will be looking bright. On the other hand, if S&P closes under 13-day MA, that would be a problem and possibly sign of another leg down.
Interesting picture in fixed income for the last three weeks. Everything is going up, Treasuries, munies, high-rated corporate debt, junk bonds, bank preferreds, everything! Looks like some big guys are gearing up for deflation, although it beats me how junk bonds can be any good in deflation and associated depression.
Staying focused, careful and hopeful.

Selling some stuff...

2010-07-29T23:09:00.000-05:00

Yesterday sold part of Evergreen Income Advantage Fund (EAD) and closed position in
Helios Total Return Fund (HTR). Both funds are well above net assets value (NAV). Both funds are not depression proof: EAD holds mostly corporate junk bonds, when HTR holds mostly mortgage backed securities.
There is something strange going on the market last couple of weeks. All fixed income is going up. Looks like some funds are doing a lot of buying for reasons unknown. Well, when everybody buys, I'm selling and vice versa.
Maybe I will buy HTR back if it goes well below NAV. Not sure about EAD.

Midyear Portfolio Review

2010-07-27T14:25:00.016-05:00

Usually I review my portfolio only once a year. Of course, some corrections are possible during the year, but they can be done without full portfolio review.

This year is different. I already changed my economic forecast from cautiously optimistic to quite pessimistic. Austerity measures in different countries and coming tax hikes will make situation worse. The only question is: how much worse. I already decided to open positions in depression-proof stocks (here's the link). But changing situation warrants full portfolio review.

Portfolio goal. Growth. This is high beta, unapologetic growth portfolio with some safeguards and some boring investments. The goal remains unchanged.

Basic Principles. Most of the stocks in this portfolio were chosen for long term investment, which, for me, is about 18 months. Every stock is under review all the time, with major review of portfolio once a year. I can trade around any position if I feel like this. Portfolio is not diversified by sectors. Maybe "diversification is the only free lunch" (Jim Cramer), but I'm big believer in TANSTAAFL (There Ain't No Such Thing As A Free Lunch, popularized by Robert Heinlein). Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

Paradigm Changers. These are stocks of companies that are changing business in sectors or even in the whole world.

Google (GOOG)
Ultimate disrupter. Google is changing the advertising world. Company is also agressively moving to mobile internet advertisement.
Risk: All great empires were destroyed by internal problems. But there is also a threat of internet fragmentation, with ISPs and device producers restricting the use. Example: Apple (AAPL) banning Google advertisements in applications developed for iPhone and iPad.
Plan: Hold

Intuitive Surgical (ISRG)
Robotic surgery that is changing surgery of internal organs. Company has monopoly on robotic surgery right now. No changes since last review.
Risk: new technologies are being developed, legislation changes can reduce demand.
Plan: hold.

Netflix (NFLX)
This company completely changed video rentals model. It's going to put Blockbuster (BBI) out of business soon, becoming almost monopoly. I was wrong in my previous review, NFLX is so far the leader in rentals over the internet. Since last review, stock shot up. I sold significant part of the position into strength.
Risk: Things on the Net are changing quickly.
Plan: hold, add on weakness.

VmWare (VMW)
Cloud computing is all the rage, and VmWare is on the frontline. If company wants to create its own cloud, VmWare is the way to go. Since last review, stock is up a lot.
Risk: it's not clear that internal clouds would win over external ones or over software as a service.
Plan: Sell some into strength, hold the remaining part of the position.

Banks. Change of course here. I don't think banks (with one exception) will be good investments in depression time.

US Bancorp (USB)
This is a very good bank. But it has to go anyway.
Plan: Sell into strength, probably after Treasury approves dividend increase.

Goldman Sachs (GS)
New position. Bought it before well known SEC investigation became public, I'm down on this position about 4%. This is not exactly a bank, more of a broker/trader. Absolutely best Wall Street company. Yes, it's living on the edge of law, hence a huge settlement with SEC. I think company can recover and bring more profits to shareholders.
Plan: Hold, add on weakness.

Since last review, I sold Citi Group (C) position. I don't consider it as an investment anymore, but can use as a good trading tool.

Steady growers / high yield. Companies with steady growth, high dividend or both. I am increasing weight of this group, such companies are best investments in depression times.

Annaly Capital Management (NLY)
Just started this position. Huge dividend and good management are main reasons. Company makes money on distressed mortgages, current holdings are mostly supported by US Government. Since last review added to position during May panic.
Risk: possibility of management mistakes, another real estate crash.
Plan: hold, add on weakness, reinvest dividends.

Brookfield Asset Management (BAM)
Company owns a lot of high income properties, including power generation and transmission, commercial real estate etc. It's also involved in financial asset management. Sometimes referred to as "mini-Berkshire". Canadian company, can also be in "International" category. I'm changing my mind here. Company has a lot of commercial (mostly office) real estate properties, and in depression this is not the best way of making money.
Risk: successful asset management is an art, and management changes, if happen, can kill any such company quickly.
Plan: Sell part or all into strength.

Altria (MO)
I don't smoke. I don't recommend anybody to smoke. But people do anyway, and they pay exorbitant prices for tobacco products. Altria grew profits steadily in any environment, ignoring tobacco lawsuits, tax hikes and anti-tobacco campaigns.
Risk: ban on tobacco, tobacco deregulation, both are highly unlikely. Possible huge legal expenses.
Plan: hold, reinvest dividends.

Phillip Morris International (PM)
Same reasons to hold as for Altria. Can be also put into "International" category. I added to position during May-June panic and then sold some.
Risk: same as with Altria.
Plan: hold, reinvest dividends

Pepsico (PEP)
Position was added after last review. This is a "staple" company. People are buying its products no matter what. Products sold in US are also addictive, because most of them contain caffeine.
Risk: management mistakes.
Plan: hold, reinvest dividends

General Mills (GIS)
This position was also added since last review. Another "staple", and local company headquartered in Minnesota.
Risk: management mistakes.
Plan: hold, reinvest dividends

International

Indian Fund (IFN)
India is the only part of BRIC which I like now.
Risk: political.
Plan: hold, add on weakness.

Spain Fund (SNF)
Since last review, I like EU, and Spain, even less. But this fund is still priced for Armageddon, and I don't think Armageddon is gonna happen any time soon. On the other hand, fund is not paying regular quarterly dividend anymore.
Risk: EU financial and political problems
Plan: Sell if trades at NAV, look for other EU opportunities

Since last review I sold my position in Brazilian bank Banco Bradesco (BBD). I don't like Brazil anymore, reasons are outlined here.

Fixed Income. Usually very small part of my portfolio, but increased sharply in size last year.

Blackrock Income Opportunity Trust (BNA)
I am changing my mind on this position. Don't want to sell it anymore, because this fund holds mostly high quality corporate bonds and Treasuries. Good depression hedge
Plan: hold, add on weakness.

Wells Fargo Capital Trust XII (BWF).
I use it to hold cash I don't need right now. Good yield.
Risk: Bankruptcy of Wells Fargo.
Plan: hold, sell when need cash.

Evergreen Income Advantage Fund (EAD).
Changing my mind here. Fund mostly holds junk bonds, risky in depression environment.
Plan: Sell into strength.

Helios Total Return Fund (HTR).
Fund holds mostly mortgage backed securities. With depression in sight, not so great investment. As a play on agency backed paper, Annaly is better.
Plan: Sell into strength.

PowerShares Financial Preferred ETF (PGF).
This is a bet on recovery in financials plus excellent cash management tool. I added to this position during May panic.
Risk: Another crash in financials.
Plan: Hold, sell if need cash, trade around position.

Nothing is sacred. Any position can be sold any time I feel like that. I can trade around any position when I see the opportunity.

Closed Banco Bradesco

2010-07-26T22:47:00.002-05:00

I closed Banco Bradesco (BBD) position today.. Reasons for that decision were outlined here. Right now is a good moment to sell, because, for the second time this year, BBD issued 10% stock dividend, which is equal to 11/10 stock split. Which means that stock got diluted, but the fact is not reflected in price yet, probably because this information is only available through your broker if you own the stock. At least I haven't found it on usual sites, like Yahoo! Finance. You can see it on Google Finance chart, but it takes some digging to understand. Of course, dilution will make its way into price eventually, so it's better to sell now.

Selling Phillip Morris

2010-07-17T00:08:00.002-05:00

Sold part of Phillip Morris International (PM) position at the open. Price is quite good now, and position grew way too big after I bought two chunks during panic in May and June. Profits are made to be taken.

Book Review: Trade Like a Hedge Fund by James Altucher

2010-07-14T22:36:00.002-05:00

This book bears endorsements from several people, including Jim Cramer. But it lacks the warning: "Careful, geek stuff", which should be printed in big red letters on the cover.

I really like the book. There are a lot of quant strategies which can be used by almost anybody. Doesn't matter if you run ten thousand dollars or hundred million. The catch is: investing world is changing all the time. Some strategies aren't working anymore. Some need adjustments. To use this book for trading, you need to be a geek (or hire one) and run backtests for strategies you are planning to use. Most of strategies also require significant computational power to search for candidate stocks.

The best feature of the book: author is trying to provide reasonable explanation why this particular strategy might work. Some are based on psychology. Some on the way mutual and hedge funds trade during specific periods of time, like end of month, options expiration week, end of quarter. Some are based just on technical indicators.

One system which probably was changed by publication of this book (or maybe quant traders forced this change): Wednesday Reversal became Turnaround Tuesday. Is it tradeable? I'm going to run backtest soon and find out.

I am currently running an experiment: trading two variants of "four down days" system. This is a link to the article describing them. Planning to run them till the year end.

The most important chapter of the book: "TECHNIQUE 19 What Does Not Work?". It describes strategies which either never worked or worked in past but don't work anymore. You should be aware that any strategy described in the book (as well as any other trading strategy) can suddenly stop working.

Full disclosure: I received the book as a gift from author.

Spain!

2010-07-12T09:32:00.002-05:00

Today is an exception. I only wrote about investment here before. But today I congratulate Spanish Football (OK, soccer for Americans) team with a World Cup! This is one of the greatest teams ever, I enjoyed every game. Final game was dirty, Holland fought hard and fouled without second thoughts, but, as it usually happens in World Cups, class prevails.

Back to investments now.

Selling Santander

2010-07-08T22:53:00.002-05:00

Sold Banco Santander (STD) yesterday. Stock jumped more than 10% in two sessions and I still don't like this rally. Maybe I will reenter STD under 11.

Bought General Mills Last Week

2010-07-06T12:33:00.002-05:00

Forgot to mention in the blog, I bought General Mills (GIS) on June 30. This is a part of my staples, preparing for a long depression.

Demographics and Money

2010-07-05T22:34:00.002-05:00

Maybe we are all looking at the wrong things? Maybe we are not in Great Depression 2.0, but in something new?

Let's take Japan. Usual explanation of current Japanese nightmare (21 years of depression and deflation and counting). Usual explanations: real estate and stock markets were grossly overpriced in 1989 and then there was no next idiot to buy either. But usually depressions of this kind end in 6-10 years. Explanation for 20 years long depression is that Japanese, instead of fixing the problem, tried to hold brave face and sweep problems under the carpet. Partially true, there are still companies with lifetime employment, banks which should've been closed, companies which should've gone bankrupt long time ago.

But there is one thing nobody is talking about. It's not exactly in economy, more likely in politics. One feature of Japanese society is that it has very low birth rate. Population is actually shrinking and immigration practically doesn't exist. Add to that high life expectancy and you get society with very high proportion of people who don't work and live on pension and some kind of savings or fixed income. What's the most important for these people? Price stability, deflation is even better. And when you have significant and politically most active part of population interested in deflation, what do you get? Politicians might not declare deflation as their real goal, they might talk about fixing the budget, prudent money policy, something else. But in reality senior population will vote for deflation.

I understand that nothing is simple in politics. And currently Japan prints money and government borrows at scary rate. But they spent 1990s doing practically nothing and lost time was very expensive.

You'd think other countries would take Japan as an object lesson. Yeah, right! On the last G8 forum what was the main theme? Recession? Deflation? Hell, no! They talked about austerity measures and cutting budget deficits. Especially Europeans. Why? Because demographics of Europe aren't much better than in Japan. Birth rates are low, populations are shrinking. Immigration helps somewhat, but immigrants don't vote, not until they are naturalized.

It can't happen in US, right? Our country is younger, birth rate is at least covering deaths, immigration is much bigger than in Europe. But our government in its infinite wisdom is going to shrink budget deficit by reducing spending and increasing taxes. Remember, young people are much less politically active and immigrants don't vote until naturalized. Population is mostly happy to hear about austerity measures. Some are unhappy about rising taxes, but they don't want deficit to increase, they'd just prefer to cut spending. Six of one, half dozen of other. Cutting deficit decreases money mass in circulation, it's a deflationary measure.

Unfortunately, modern economies just don't work in deflation. They shrink. To support increasing population of pensioneers, we need economy to grow. So the deflationist policies are leading us to a trap: economy shrinks, but fixed income people increase their incomes. Such situation is not sustainable.

I'm hope I'm wrong. I hope that austerity policies is just a fashion based on false believe that "prudent" economies work better. There is no proof for that, prudent economies lead to depressions. But this is a belief, almost a religion, and when you try to speak to zealots, it's useless. It's even worse if zealots really win from advocated policies. Working people lose, because of high unemployment and non-existent wage raises, but why would most politically active people care if they win?

Preparing for Depression

2010-06-29T22:46:00.002-05:00

Hope for the best, prepare for the worst. I still have some hope that we avoid Great Depression 2.0, but it's still the most probable outcome. Which means that I am switching my investment strategy.
What works in depression? Staples: food, tobacco (addictive product), soft drinks (a little secret: most of US made soft drinks contain caffeine, making them addictive too), cheap restaurants, high quality high yield corporate bonds. And, something which is the best in America: tech, if you choose the right tech, of course.
On my shopping list so far:

Staples: Pepsico (PEP), General Mills (GIS).

Restaurants: MacDonalds (MCD), Yum Brands (YUM), Panera Bread (PNRA).

Tech: TBD.

Today I started position in PEP, it was low enough to trigger first buy.

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

No Time for Anything...

2010-06-21T22:28:00.003-05:00

I'm apologizing to my readers for long silence. Between work, World Cup and investment there is no time left for this blog.

Market is the craziest I've ever seen. Last two weeks most stocks traded in lockstep. I didn't have any buy signals on my 2.5x2 and 3.5x2 screens. Looks like most of the trade was in ETF universe. Daily volume charts of stocks confirm that: volume during last half hour exceeds the rest of the day! Which means that ETF managers are buying or selling stocks en mass to conform to their models.
Short term, we are going to see some kind of window dressing. No idea how is it going to look like.
Longer term, I'm in a very bad mood. Everybody is talking about budget balancing, government spending cuts, austerity measures etc. Here is what I think about it. We are, at best, for a couple of years of depression, at worst, turning Japanese. Which would actually benefit, at least for some time, people on fixed income. Doesn't make me happy.

I am working on two articles right now, will publish this and next week. Please be patient.

Going Defensive

2010-06-07T22:32:00.003-05:00

I'm loading on defensive stocks. Today I added to my Phillip Morris International (PM). I'm also planning to add some soft beverage stock (usual question, Coke or Pepsi, although I drink neither). I think Pepsico (PEP), looks like it has better management. Then I need some food company, local favorite General Mills (GIS) looks good. Can't find any good booze company yet, people should drink more when times are bad, shouldn't they?

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

Fork on The Road, Update 2

2010-06-02T22:53:00.002-05:00

This is the third article in this series. First one was written in the end of March 2009. Market switched to a bull mode then and future seemed to be rosy. Next one was written in November of the last year. Future still seemed rosy, although a little bit darker. May of 2010 changed everything.

What happened in May? Europe woke up to the depression. They call it liquidity crisis, bank crisis, sovereign debt crisis. Wrong! This is full blown financial crisis, part of Great Worldwide Depression of 2008-?

Inflation and stagnation = stagflation

After last May, there is no possibility for this scenario. Inflation does not happen when banks don't lend. You can get inflation during crisis, but you still need banks to lend money for that to happen. Now banks in US and EU and many other countries just do not lend money. Worse, there are multiple reports from both US and EU that in many areas demand for loans is low, which means that banks can't lend more money even if they wanted.
Probability of stagflation any time soon: 0.

Great Recession

I wanted to believe it. Almost everybody wanted to believe it. US economy grew nicely in the second half of 2009 and in the first quarter of 2010. And in this scenario, we should be out of the woods already. But, again, May changed everything. Economy might still grow couple more quarters. But deep recession in Europe, which will definitely follow current financial turmoil, cancels the possibility. EU economy is as big as US one, when it goes down, it pulls down everybody, just like US. There might be tiny possibility that quick response from European governments and central banks can trigger quick recovery there, but I just don't see it. Instead of emergency spending, governments cut budgets. It's OK for Greece, with its bloated government sector, or maybe for Spain, but Germany, with relatively small sovereign debt, should not cut. They need emergency spending. There is always a way to spend money for a good reason. There are always roads to build and repair, bridges to rebuild, schools to improve.

Probability: around 5%, if we are lucky.

Great Depression 2.0

Here we are. This is just too much like version 1.0. Started in US, becomes full blown when Europe goes to pieces. Current scenario is different on one account only: neither US nor Europe is in the mood for trade wars. Which is great, because any kind of trade war between EU and US will make situation very bad very fast. Main problem: both regions are in deflation. And deflation was the main problem during Great Depression in 1930s. Latest information about M3 money aggregate in Euro Zone and US is awful. ECB and Fed failed, the last thing they should allow is falling money supply. Remember, what Bernanke said? That Fed can always increase money supply, having fiat money and printing press. So, where is the printing press when we need it? Or, as it happened during GD v1.0, every dollar coming from printing press goes directly to mattresses?

Probability: about 60%

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

I still think this scenario has lower probability than GD 2.0. Maybe it's just my wishful thinking. Arguments against this scenario: US and even Europe are more dynamic societies than Japan, there is no habit of sweeping problems under the carpet and keeping them there for many years, voters kick out governments much faster etc. But there are arguments for this scenario as well. Demography: Population is not growing in Europe, it's falling in many countries, just like in Japan. Government sector is way too big in Europe, and government employees are not enterprising enough to pull countries from depression. US is different, our population is still growing, but mostly because of immigration.

Probability: about 35%

Conclusion

Most probably, we are in GS 2.0. It will last several more years. I hope that it will not end in a big war, like Great Depression did. In this case, and in case of ended Great Recession, the right investment behavior would be to buy stocks. Question is: which stocks? In case of Great Depression, best stocks are high yielders with relatively safe market. Tobacco, entertainment, food, cheap retail. In case of ended recession, it's fast growing companies, high tech first of all. The worst case scenario would be Japanese. In this case, the best investment is in cash.
I am going to change my portfolio this summer. Reduce or eliminate bond funds, leaving only bank bonds, because governments will not let majority of the banks fail. Add more high yield companies. Reduce weight of tech. And keep large cash reserves to play with opportunities.

Korea Kills Market

2010-05-20T22:54:00.002-05:00

There is a lot of speculation around, blaming EU problems for the current state of stock market. Some people also blame coming US financial regulation.

Wrong! Both these themes are yesterday news. Yesterday news don't move market.

I think the news which sunk market today was from Korea. Situation there is really bad. Seoul is under constant threat from North Korean artillery, that's why South is usually very careful in everything they say and do. But now situation is crystal clear: Northen sub entered waters of South Korea and sunk a warship. Act of war, loud and clear. South has to respond. Question is: how? And US is under obligation to help South in case of war.

The main problem is Government if North Korea, if this gang of murderers can be called government. I have the impression that they are completely crazy. OK, they have maybe 5 nukes, they can kill millions even if one hits Seoul. But they will be wiped out from the face of the Earth in such case! Probably they don't know any other way than to bully and present themselves as fearless machos.

I hope that this situation doesn't lead to war. But hope is not an investment vehicle. That's why market sold out. I don't expect significant improvement until this situation resolved one way or another.

New Position: Banco Santander

2010-05-19T22:58:00.002-05:00

Forgot to mention it before: I opened a new position last Friday, May 14: Banco Santander (STD). I think it was hit too hard and deserves better.

Buying More PGF

2010-05-17T22:41:00.002-05:00

Today I added to my position in PowerShares Financial Preferred Portfolio ETF (PGF).
Financials are getting priced for another Armageddon. Some predict complete breakdown of Euro zone, some even think that end of EU is nigh. Ain't gonna happen.EU and Euro zone will be here tomorrow, a month later and a year later. With all problems, with all trade unions pressure and riots and other problems, majority of population in EU countries understand that without EU their countries are in much worse shape. They will keep it whole.
I'm holding PGF as a way of cash management. With 8% yield, paid monthly, it's a great tool to hold your cash. Price of PGF shares in normal times is close to $25, which is a usual buyout price of preferred shares of banks. So when I have some extra cash and have no idea what to do with it, I buy PGF or something similar.

Back From Vacation

2010-05-10T22:42:00.002-05:00

Just returned from vacation. Been to London, UK, completely unaware what was happening here. The only news in UK last week was election and a little bit of Greece events. It appears I missed a lot of action. Well, you can't win them all.

I'm going to watch action for couple of days before making any decisions. To my taste, prices are still pretty good on some buy candidates.

Europe is awake, at last. Stupid, stupid, stupid! ECB has controlling inflation as task #1. As if Euro doesn't need a lender of last resort. Yeah, right. Situation could've been solved couple of weeks ago for about 100 billion dollars. Now it's trillion euros. Price of the delay: order of magnitude. The funniest thing, of course, is that most of this money will be simply printed. By ECB. I hope Trichet survives this experience and learns from it.

Deflation is not over yet. It can reappear at any moment. Repeat after me: printing press doesn't solve deflation if money moves from press into mattress.

Selling more Netflix

2010-04-26T19:46:00.002-05:00

This is ridiculous! This stock doubled in three months! I expected it to go up, but now, with a parabolic chart, it's downright insane. I sold one more portion of it today. I might be wrong again, like I was when sold part at 75, but I have 100% profit and it must be taken. Now playing with house money.

Netflix (NFLX) is a great company. They created excellent DVD by mail distribution system, deliver a lot of movies over the internet, service is great, management is great. And forward P/E of 31 and change isn't that big, if we consider that company managed to beat expectations in the last four quarters. But parabolic chart is always a bubble. The only way of making money on a stock market that I know is to buy good stocks when they go down and sell them when they go up.

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

Netflix: Parabolic Chart

2010-04-22T22:47:00.001-05:00

Netlix (NFLX) just reported quarterly earnings yesterday and the are GRRREAT! What is not great is a pure technical perspective. The chart is absolutely parabolic and parabolic chart is always a bubble. I have a long position in NFLX, sold a little bit at 75 and now feel stupid looking at price above 100. How long can it continue? I am not complaining, remaining part of my position is growing at breaknecking pace. The question is: how long can you ride this tiger?
I'm holding my position for now. Maybe overbought condition can be worked out as a function of time... I doubt it though. The main question is: when to take more profits?

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

SEC vs Goldman: Where's The Case?

2010-04-19T22:45:00.002-05:00

Maybe I am stupid. Maybe my mind is clouded by the fact that I hold a small long position in Goldman Sachs (GS). But for the life of me i don't understand the case SEC is trying to make.
They say that CDO sold was created with purpose that it goes down in price. Please name me one company which creates and sells derivative it thinks will go up in price. This is how the derivative game works: there is a seller, who thinks that product goes down in price and a buyer, who thinks that products goes up. In derivatives, there is always a seller. Because every derivative is an artificial product, it only exists when somebody sells it short. Anyway, Paulson is not charged, so shorting derivatives is OK.
Apparently, the charge is that Goldman didn't disclose to buyers that derivative was sold short. What!!? Come on, derivative can't exist if it's not sold short. I am not sure Goldman has the right to name the seller to the buyers, but as far as I know, they just don't have to. SEC is waiving disclosure rule as a flag, but how much they really had to disclose?
SEC didn't file a criminal complaint. It's only a civil suit. But the most suspicious thing is timing. In the middle of option expiration trading session, just tell me why doesn't it affect market. If company releases material information in the middle of the day, usually stock is halted, why wasn't it done with GS this time? Is it legal for SEC to make announcements in the middle of trading day? If so, maybe it's time to make it illegal.
I think this whole case stinks with politics to high haven. Looks too much like a part of the push of financial reform package.

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