Wednesday, January 6, 2010

6 Events Which Will Not Happen in 2010

Everybody is doing list of events which will happen in 2010. Boring. I decided to do a list of events which will not happen. These events have some probability of happening, but my hunch is they won't.

1. Fed will not raise rates. The only reason for Fed to raise rates is inflation or the threat of it. Inflation is nowhere to be found and economy is still in shambles. I don't see any reason for higher rates.

2. Chinese bubble will not pop. I'm still sure that China is in a huge bubble. China makes more than half steel in the world, there is a city for a million people staying empty etc. Eventually, it will pop. But I feel that there is still enough room for this bubble to grow.

3. Israel will not attack Iran. This is a tough one. I might be wrong.But there are very serious reasons for Israel not to attack. Iran is in disarray, and attack can consolidate society. USA is absolutely against such attack. Attack can't reach main objective: destroy all major nuclear facilities.

4. Gold will not hit $2000. Follows from number 1. No high inflation, no bubble in gold. It might reach $1500 at some point, but with the same probability it might drop to $600.

5. There will be no commercial real estate crash. Here I'm completely agree with Jim Cramer. Occupation rate is still very high, we didn't have many bankruptcies. Yes, Linen'n'Things and Circuit City went bust, but those were long time in the making.

6. Not more than one EU country will default. There is some probability that some EU countries will default on government debt. Candidates: Hungary, Greece, Spain, Latvia. But I don't think EU would allow default in more than one. They shouldn't allow even one, but if that happens, we'll have panic similar to the one happening after Lehman Brothers collapse. Will be huge buying opportunity.


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Monday, January 4, 2010

Strarting Annaly and Adding Netflix

I started a new position today: Annaly Capital Management (NLY). This is a REIT with huge, over 15%, dividend. This is a play on improving housing market, because NLY is in the business of buying distressed mortgage securities.

Also added to Netflix(NFLX) position today. Stock was down for no reason, again. Now it's probably the information that box office receipts in 2009 exceeded DVD sales. But Netflix is not in the business of selling DVDs, it's in the business of renting them.


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


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Thursday, December 31, 2009

Crazy Year, Great Year!

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

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

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

Coming up soon: yearly portfolio review.

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Tuesday, December 29, 2009

Taking Profits in Intuitive Surgical

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

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


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Monday, December 21, 2009

Dumping TSCM

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

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

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

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

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

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


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


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Thursday, December 17, 2009

Buying Citi Group

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

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

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


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Wednesday, December 16, 2009

(Very) Short Course of Money

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

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

M * V = P * Q

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

M is amount of money in circulation.

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

P is the price of the average transaction.

Q is the number of these average transations.

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

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

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

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

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

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

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

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

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

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

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

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