Insomniac Hedge Fund Guy

Weekend Reading

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According to www.livetradingnews.com US’s actual employment numbers not that bad The market was disappointed with Friday’s US employment data, but on a close look the actual total employment, as opposed to the widely reported seasonally adjusted numbers, was no near the headline disaster that the market’s reaction took.       Welcome to austerity, America! CNN Money By Nin-Hai Tseng, writer-reporter June 3, 2011: 11:36 AM ET Those calling for smaller government should be pleased: State and local municipal employees are losing their jobs at a much faster pace than the private sector. FORTUNE – For all of Washington’s bickering … Read more

” HUD secretary says – latimes.com

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Foreclosure settlement to come in a ‘matter of weeks,’ HUD secretary says Buy long dated calls (Leaps) in Wells Fargo.  Expectations are very low.  Insider buying, housing near bottom (mortgage prices near rent equivalent), and this headline make for very compelling upside. June 2, 2011 | 4:49 pm A settlement between a coalition of federal and state agencies and banks over foreclosure practices will come in a “matter of weeks,” Shaun Donovan, secretary of Housing and Urban Development, told the Los Angeles Times. Donovan.Donovan Donovan’s agency is involved in the negotiations with the banks, along with attorneys general from all … Read more

‘s Cross?

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This is a checklist I use to quickly come to a conclusion on a stock.  I score a stock, each line getting a 1, 0, or -1.  A stock  that scored 1 on each line would be a perfect 10.  Buy it! Some of these items are quite subjective.  For example how would I score Cash Flow?  If a company’s cash flow is much lower than it’s reported earnings, that raises a flag and I would score it a -1.  If there are more insiders buying than selling, I would score it a 1.  If there are no apparent catalysts … Read more

‘t See this One Coming

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Every evening, I analyze every position I own based on technical analysis.  That doesn’t mean I’ll trade on it but I like to check my predictive powers so to speak.  I mark on a printout a plus sign, minus sign, or 0 based on what I think the stock will do the next day trading day.  Last night I went to bed thinking just about every stock I owned could go up the next day.  Out of the 40 positions I held I thought  a staggering 31 of them could go up the next day.  Boy was I wrong. Instead 4 went up and the remaining 36 … Read more

The Next Big Thing or NFC

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I don’t know how to play it yet but I have been looking for some time.  The problem is EVERYONE will be there.  This is a good article I found in my new favorite blog, Chipworks. NXP’s NFC technology in the PN544 controller by chipworks contributed by Sam Thumm First the smartphone came along and replaced our MP3 players, our paper maps, our portable gaming systems, and our in-car DVD players. Even before the smartphone, they held our kids photos and our contact lists so we no longer needed to carry these things in our wallets. However, they have not … Read more

How Can A Call Option Decline In Value When A Stock Rises?

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5:18 AM (17 hours ago) How Can A Call Option Decline In Value When A Stock Rises? by Kirk I’m sure we have all traded a call option that declined in value when the stock was on the rise. I know I have done it many times before I started focusing mostly on option selling strategies. We all know that stocks and options are completely different investment vehicles. What’s hard about the question above is that a stock’s price is just one of 7 factors that effect the price of an option. And usually this question is asked by newbie options … Read more

‘s erratic market behavior?

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I believe this was part of the downdraft and erratic market behavior in May.  Combined with the cram down offering of AIG, let to a rough patch.  Oil  rising predictably shook some consumer confidence and crimped discretionary spending.  But all of this was known.  The unknown was the larger seller sitting on the market at the close of the day each week.  SAC investors begin to eye the door.  An article by Katie Benner from Fortune is the first thing I have seen written about what I have talked privately about. By Katie Benner May 31, 2011: 7:37 AM ET The government investigation of Steve Cohen’s firm … Read more

‘s not enough to read the news, you must predict it. Intel Apple new alliance

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  Apple Intel prediction Intel stock has been less than stellar lately for two reasons.  One was their ill-advised overpriced purchase of McAfee.  See SA article for more background on that purchase.  More importantly is their apparent failure to dominate the low power consumption mobile chip market the way they have PCs.  Apple  doesn’t use Intel processors inside the iPad or their phones and there are rumors that the next AirBook could even have an ARM processor.  Microsoft also has been cited as having next generation designs for their tablet product to include ARM processor compatibility.  Analysts are worried that Intel … Read more

Why I believe so much in charts

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The 20 biggest and most active Apple-trading hedge funds By Philip Elmer-DeWitt May 27, 2011: 8:53 AM ET Who’s behind the weekly Max Pain phenomenon that has become the tail that wags the dog? In our ongoing quest to understand what part the trade in weekly Apple (AAPL) options plays in keeping the company’s stock price from reflecting its performance (see here, here and here), we had a chat the other day with Mark Sebastian, a former market maker at the Chicago Board Options Exchange who posts frequently on TheStreet.com. He’s been encouraging individual investors to piggyback on an options … Read more

The Japan Investor – You Need One Megabank

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If You Buy Japan Recovery, You Need One Megabank May 30, 2011 As outlined last week, global fund managers continue to be constructive about Japanese equities, despite the lackluster movement in Tokyo stocks, the continued strength of JPY/USD since the Tohoku Disaster on March 11, 2011 and the greater-than-expected decline in Japan’s economy. Tokyo Stock Exchange data show no abatement of record net buying of Japanese equities over the past couple of weeks, particularly from North American investors. The bear case against Japan is extensive, well-chronicled and to many, persuasive. But value investors say the macro story obscures the many … Read more

‘s easy to figure out who is making money in this crappy economy

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  Just look at the SEC filings.  Insiders are unloading stocks at staggering quantities.  But selling is the nature of the casino market and insiders always sell stock, at least the smart ones.   But some selling is more portending than others.  Here’s my reading of the tea leaves and as usual any actionable trading ideas I can glean from it.   Southern Company SO Southern Company made a lifetime high on 5-19 at $40.87.  According to the Washington Service  “At Southern Co. (SO), the stock reached a 52-week high on 5/19/11, and  has slipped only slightly since that high. Ten … Read more

Weekend Reading Highlights

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As a rule, I don’t post weekend reading that I think is just interesting but only stuff that I think can make you money or save you money or stimulate you to do one or the other.  But the first article I posted was so well written, I had to share it. On the Floor Laughing: Traders Are Having a New Kind of Fun from Atlantic Monthly MAY 9 2011, 1:41 PM ET34 The modern trader is playing the most sophisticated, dynamic, immersive game in the world. Here’s how it works — and why your job might be the next … Read more

PowerShares 3x Dollar ETNs Arrive

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PowerShares rolled out the first 3x leveraged currency exchange-traded products earlier this week (5/24/11).  PowerShares DB 3x Long US Dollar Index Futures ETN (UUPT) and PowerShares DB 3x Short US Dollar Index Futures ETN (UDNT) will track leveraged multiples of the Deutsche Bank Long U.S. Dollar Index Futures Index using a monthly reset of the leverage. UUPT and UDNT are ETNs (exchange-traded notes), which are long-term unsecured debt obligations that carry the credit risk of Deutsche Bank, the note issuer.  They do not actually invest in the components of the underlying index, which consists of futures contracts whose underlying asset … Read more

Chanos vs. China?

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Svea Herbst-Bayliss and Matthew Goldstein of Reuters report, Top hedge fund chiefs: short green tech, store gems:
Bet against solar energy, says famed short seller James Chanos. Squirrel away gems, advises bond guru Jeffrey Gundlach. Go long on discount retailer Family Dollar, counsels activist investor Bill Ackman.

These and other hot — or unusual — ideas emerged on Wednesday from an annual conference where top hedge fund managers pitch their best investment ideas.

Chanos threw cold water on alternative energy companies, saying that shares in wind turbine maker Vestas Wind Systems and solar panel maker First Solar Inc likely will fall.

Arguing that alternative energy may not create the jobs politicians predict, Chanos said he would likely offend the green movement with his bets.

“The cost of wind is 50 percent more expensive than natural gas,” Chanos said, adding that Denmark-based Vestas would be a good company to bet against or sell short.

The environmental benefits of solar power are also questionable, he said.

Chanos said he is certain that he is on the right path on First Solar because top managers are leaving the company. “We advise you to heed their warnings,” he said, drawing both applause and laughter.

Ackman, who has cemented his reputation as a polite activist, said his new idea is on the passive side — indeed it is not even his own, but investor Nelson Peltz’s idea. He likes retailer Family Dollar Stores Inc for being accessible to shoppers and selling unique and inexpensive products.

While lagging behind chief rival Dollar General, its managers are trying to close the gap, and the company may be a buyout candidate for private equity firms, he said.

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How AIG Could Achieve Insurance Greatness

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It seems that I can’t escape AIG anymore.  I asked my kids (who are still at home) today, “Of all the jobs I had, where did I get treated the worst?”  The oldest answered “AIG.”  He was born shortly after I left AIG in 1992.

I guess I made some of the wounds obvious enough.  I don’t believe in “payback,” I believe in “Love your enemies,” and “Be honest.”  Thus I find it odd that I am being ever more sought out by reporters on any AIG news.

Granted, I’ve written on underreserving by AIG, the problems they had at their operating insurance subsidiaries during the financial crisis, which got picked up by SIGTARP.

What has prompted recent inquiries, is the sale of stock at $29/share,  at only a 1.6% discount to the prior closing price.  That price was a hodgepodge between what the market would bear, and what would give the government a “profit.”  Bad idea in my opinion; it would have been better to price the deal lower, say $28.50, where the government took a loss, but where the market might have driven the price up.  A 1.6% gap is marginal and would invite sellers. $28.50 would be over 3% and would invite buyers.

Now, some sympathy for Bruce Berkowitz — He saw book value decline by almost $1 today, from $47.32 to $46.35.  I don’t know if he was buying as the largest private shareholder of AIG, but he was certainly disappointed by the company offering shares.  Why offer shares at less than 2/3rds of book?

Easy, because AIG can’t borrow or issue any other security.  But that is a signal to what the company is worth.  I mean at worst, AIG could have procured a secured loan to  provide $3 billion, offering a valuable subsidiary as collateral.  They chose to dilute, which tells you what the stock is likely worth.

Also, with such a large fall in price after the offering the next offering should come at a larger discount to the recent market price.  Those that were burned in this offering will be less willing to step up and take immediate losses.

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‘m selling out soon

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This is a checklist I use to quickly come to a conclusion on a stock.  I score a stock, each line getting a 1, 0, or -1.  A stock  that scored 1 on each line would be a perfect 10.  Buy it! Some of these items are quite subjective.  For example how would I score Cash Flow?  If a company’s cash flow is much lower than it’s reported earnings, that raises a flag and I would score it a -1.  If there are more insiders buying than selling, I would score it a 1.  If there are no apparent catalysts … Read more

Divergence- the best technical indicator

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Divergence A divergence is a move in the price of an asset not confirmed by a comparable move in the applied technical indicator. For example, a bullish divergence exists when a market reaches a new low without the indicator reaching a corresponding new low. Conversely, a bearish divergence exists when a market reaches a new high without the indicator reaching a corresponding new high. In my opinion, divergence is the most predictive of all the indicators. It will be early more often than not. Early can be very painful. A popular stock market tidbit of wisdom reads like this: “What’s … Read more

Avnet Buy Hold or Sell?

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This is a checklist I use to quickly come to a conclusion on a stock.  I score a stock, each line getting a 1, 0, or -1.  A stock  that scored 1 on each line would be a perfect 10.  Buy it! Some of these items are quite subjective.  For example how would I score Cash Flow?  If a company’s cash flow is much lower than it’s reported earnings, that raises a flag and I would score it a -1.  If there are more insiders buying than selling, I would score it a 1.  If there are no apparent catalysts … Read more

Warren Buffett’s Portfolio – Shocking Truth About How He Trades Options

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By Kirk Du Plessis I’ve told people for years and years that Warren Buffett’s portfolio and Berkshire Hathaway company publicly discloses that they are naked put option sellers. More specifically they sell index put options, the exact same strategy we use here at Option Alpha. Why Is This So Shocking? Honestly I always get a weird response when I tell people this. Why is it so shocking to think that one of the best investors of all time my use the same strategy that I prefer. Well, I guess I’m using his strategy and not the other way around right? … Read more

The Future of Books and Libraries–and Education?

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Seth Godin has a stunningly useful commentary on books, libraries and librarians. “The librarian isn’t a clerk who happens to work at a library. A librarian is a data hound, a guide, a sherpa and a teacher. The librarian is the interface between reams of data and the untrained but motivated user.” I learned this truth too late in life.  The librarian is not the keeper of the book warehouse, but is a knowledge guide. Let me take it one step further and apply Seth’s concept to education. In the medieval university, books were scarce and expensive, far too scarce … Read more

More Spying on Elite Funds – Part 2

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A follow-up to my last comment on spying on elite funds. We begin with an article by Naked Value on Seeking Alpha, Paulson & Co.’s Biggest Buy, Biggest Sell and Top Holdings. You’ll notice that unlike Dodge and Cox, Paulson & Co sold all their Pfizer shares, and initiated a new position in Hewlett-Packard Company (HPQ).

Unlike Soros, Paulson & Co is still betting big on gold, owning a significant stake in SPDR Gold Trust (GLD) and expects a continued recovery, and as such it thinks banks like Citigroup (C) will continue to benefit. The fund also owns Anadarko Petroleum Corp (APC) and Transocean Limited (RIG), which is the company Ontario Teachers’ bet on and made a bundle on.

Are you confused? Don’t be. You should be using the tools on the NASDAQ website to slice and dice the portfolios of these elite funds. For example, clicking on the % change in value header at the top of the fourth column will show you Paulson & Co’s new holdings (click on image to enlarge):

Note that apart from Hewlett-Packard mentioned above, Paulson & Co made a significant new investment in Weyerhaeuser (WY), buying up 31,700,200 shares during Q1 2011. Share prices for both companies are well off their highs, and if the fund did their homework, these could yield excellent returns going forward.

When analyzing 13F quarterly filings, it’s important to look at new holdings, not just top holdings. For example, looking at new holdings for Dodge and Cox which I neglected to do in my last comment, you’ll notice that they bought a significant stake in Motorola Mobility (MMI) and Microsoft (MSFT) during Q1 2011 (click on image to enlarge):

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Technical Analysis that Works

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  “You see I can predict this stock went down!”   I’ve read a great deal on technical analysis and spent a great deal more time testing various indicators, programs, backtesting, and attending seminars on the subject.  At first I thought I would write a piece with a top down view and summarize the major indicators in use today.  I’ve hesitated and even anguished over doing that for a couple of reasons:  But first let’s set the discussion by quoting Wikipedia’s succinct definition: “Technical analysis is a financial term used to denote a security analysis discipline for forecasting the direction … Read more

Mark Haines – We Miss You Already.

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Turning on Squak around 5 this morning I never would have imagined I’d hear “we lost Mark last night” At the ripe age of 65, CNBC anchor Mark Haines, has passed.  He was the best in the business.  I didn’t know him personally but having watched him every morning for more than a decade, it feels awful to know he won’t be on tomorrow. These 2 clips give you some insight in to the type of person and type of host he was. His heated interview with Barney Frank  and his touching goodbye to his long-time morning co-host Erin Burnett earlier this month… [youtube=http://www.youtube.com/watch?v=LrAY3ZxVOH4&w=450&h=400]  We … Read more

HKK: Small Cap Muscle for Hong Kong

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If you ever get a chance to go to Hong Kong, do not pass it up.  I received my first opportunity in 1982 and immediately fell in love with the place.  The business energy level is so high there that it is infectious.  Perhaps that is one of the reasons that just two days ago, the Swiss-based International Institute for Management Development (IMD) ranked Hong Kong the World’s Most Competitive Economy.

The large companies of Hong Kong help make it a global powerhouse.  However, its smaller companies, the unsung superheros of Hong Kong, might better exemplify its true competitiveness.  With Wednesday’s (5/18/11) launch of IQ Hong Kong Small Cap ETF (HKK), U.S. investors can for the first time get easy access to this desirable segment of the world economy.

The underlying Index IQ Hong Kong Small Cap Index is a capitalization-weighted index that aims to capture the bottom 15% of the publicly available total market capitalization of companies located in Hong Kong.  The 15-year old iShares MSCI Hong Kong (EWH) targets the largest 85%, which theoretically allows for zero overlap between them.  Although the two ETFs may compete for the dollars investors decide to allocate to Hong Kong, they are actually complementary products.

HKK’s sector breakdown has Consumer Discretionary at 23.6%, Financials 18.9%, Materials 15.7%, Technology 10.9%, Consumer Staples 8.8%, Industrials 6.7%, Transportation 5.6%, Communications 2.7%, Energy 2.6%, Utilities 2.3%, and Health Care 2.2%.  This is vastly different from EWH, which has a 61.9% allocation to Financials (EWH overview page).

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Spying on Elite Funds – Part 1

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It was a beautiful long weekend in Montreal. I tried to enjoy it as much as possible getting out of the house every chance I got. Even went out with some buddies of mine on Saturday night and came back in the wee hours of the morning. Haven’t stayed up that late in a long time and of course, paid the price on Sunday as I was in a zombie state pretty much all day. One thing about turning 40, you can’t party like your 20 anymore, which is something my trainer reminded me of tonight as he trained me … Read more

Segmenting to Make Better Decisions

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This post was stimulated by this academic research piece: When Smaller Menus Are Better: Variability in Menu-Setting Ability.  The truth is, we do best in choosing between a limited menu of options.  Let me give you an example.

For a while, my wife asked me if we could replace our living room furniture.  Trying to be frugal while starting up my business, I showed her some items from Ikea, and she said yes, but I could not replace the recliner at Ikea.

So, after a month, she asked about the recliner.  I did a little searching and went to La-Z-Boy.  (Note: she uses the recliner most.)  I looked around the place and had three thoughts:

  • Low price
  • Reclines the way she likes.
  • Fabrics/colors that I know she likes.

Those criteria enabled me to narrow down the field to two recliners, and a field of six or so “maybes.”  I know my wife pretty well; she trusts me in purchases that many wives would not let their husbands touch.  But for something she uses so much, I took her to the store, along with our youngest (who got a kick out of playing with the electronic recliners).  I took her to the two recliners.  She oohed over them and sat in both.  She liked the fabric better in one, and the comfort of the other.  She tentatively chose the latter, and went on to look at other recliners. As she went on, she said that she wasn’t finding anything that she really liked.  We ended up buying the second chair.  It’s at home now, and she likes it.  Score one more for the husband.

The key to my success was winnowing down the choices.  There were over 100 recliners at the store. But by eliminating options that I knew would not work, I came to solutions that would save my wife time, while

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Chart of the Day: Will the US Dollar Finally Break Its Long-Term Downtrend?

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May has been a great month for the US Dollar, rallying nicely off of its lows.  Lets take a look at the US Dollar Index over the past year….recently breaking the short-term downtrend channel, and days away from breaking its long-term downtrend channel…Will it rally and break through or find strong resistance and come back off? Will the US Dollar Index break through its downtrend channel? Yes No Free polls from Pollhost.com Source: Bespoke Investment Group

19 Famous Quotes From Great Investors That You Can Still Rely On Today

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By Kirk Du Plessis I love reading trading books and learning from some of the great investors and traders. My personal preference is to learn from the “Old Guys” like Livermore, Buffett, Lynch and Graham. These guys laid the foundation for modern investing. They didn’t trade on technicals and always offer great insight. Here are 19 great quotes. Add your favorite quote via the Facebook Comments! “The first rule is not to lose. The second rule is not to forget the first rule.” “If past history was all there was to the game, the richest people would be librarians.” “Risk … Read more

VROM: And Then There Were Three Automotive Funds

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U.S. investors somehow survived for 25 years with just one automotive fund.  In the last ten days their choices jumped to three.  Global X Advisors rolled out the newest entrant, the Global X Auto ETF (VROM) last Thursday (5/19/11). Global X Auto ETF tries to represent the entire automotive industry.  Sub-industry allocations in VROM are currently at 73.9% for Automobile Manufacturers, 20.6% Auto Parts & Equipment, and 5.5% Tires & Rubber.  The new ETF provides access to all key components of the automotive industry and offers diversity by including suppliers as well as manufacturers. The underlying S-Network Global Automotive Index is a … Read more