Lee’s article originally appeared in the New Mexico Business Weekly. It was so well received that it has now been printed in the Orlando Business Journal, where it is no longer behind a subscription wall.
I just read a tremendous piece from Doug Kass and he echo’s what I have been worried about for a while: I just can’t get a handle on the market. It was encouraging to see one of the greats say the same thing. While he is more articulate in outlining his rational behind the erratic behavior, I can see it in my trades.
So, were to we go from here? Smaller trading and investment positions. This means keeping 30% in cash reserves at all times just to make sure settlement issues are never a problem and I can trade 10% a day at will. It means never being fully invested for the rest of the year, perhaps longer. There is just no way of knowing which way the wind will blow. However, this will put a higher importance on short and intermediate term trading as it may be the only way to grind out decent returns in an era of substandard returns.
I say bring it on! Trading is hard, but letting clients (and mine!!) money sit around earning nothing is not an option. You have to preserve and simply take smaller bets as we go forward. This doesn’t mean you give up on profits! You win some, you loose some, but you keep on fighting. Only, smaller and more reserved for a while. . .
On another note, yesterday I sold my BAC too early and was mad as hell. The issue was the position size. I figured that everything I need to learn about my biz comes from my 1 year old daughter and the movie Wall Street.
1. My daughter has taught me to bounce back and recover fast. She has no memory of being sick or falling down.
2. Gordon Gecko was right: the most important thing is your capital reserves, it allows you play in the tall weeds with the big dogs. Now, for those that know the movie will note I sanitized that for our own protection.
Here is a heartbreaking work of staggering genius from thestreet.com. Ok, I admit I am quoted in the story so my first comment is not exactly unbiased. However, I did want to point out what stocks people are focused on and how to pair trade them using simple devices.
“A lot of traders are starting to identify BAC as a bellwether stock,” says Lee Munson, chief investment officer of Portfolio Asset Management.
Last Wednesday Munson’s biggest position was in Bank of America, while he was shorting the broader sector by using the ETF UltraShort Financials ProShares (SKF Quote). While the play seems counterintuitive to some degree, Munson says it’s a popular one because BofA is “safer and purer” than other banks that are overexposed to a particular geographic area, rely on proprietary trading for profits, or shore up confidence with “big personalities” like JPMorgan Chase’s (JPM Quote) Jamie Dimon.
Bank of America is the nation’s largest bank, serving one half of the country’s households through mortgages, credit cards, small business loans, corporate relationships and portfolio management. It has received a huge amount of taxpayer support with $45 billion in bailout funds. It acquired two deeply troubled firms at the crux of the crisis, Countrywide and Merrill Lynch.
In effect, Bank of America is the economy.
“Remember in the old days, whatever Intel (INTC Quote) or Cisco (CSCO Quote) did, that was it?” Munson continues. “Well, right here, right now, for the last several weeks, traders are looking at BAC on their screens all the time. Nobody’s looking at the [KBW Bank index] anymore. Everybody’s looking at Bank of America.”
Then my favorite line of the article:
Even Munson, who calls BofA “a winner” and “the most solid choice,” has to concur.
“If it breaks $10,” he says, “all hell breaks loose.”
Right now I won’t trust a rally this early in terms of an end of quarter mark up fiasco. Also, options expire on Friday, so be careful out there and don’t believe the hype – bullish or bearish.
Michael McDonough has been reporting on the shipping industry for thestreet.com Silver (i.e. you need to have a subscription to get it). Let me just get to the heart of the matter and if you have a subscription here is the link.
A week ago I was blogging about how the Chinese government was ‘asking’ companies to reduce excess steel supply by 30% or get fined. Only the Asian press was reporting this news and it was driving me crazy that nobody in the west was talking about it. The implication being that the increase of demand was just digging a hole and filling it back in. However, McDonough’s piece backs up what I was pounding the tables on in May. He has pieced together from multiple sources a theory that once the price of iron ore rises above $70 per ton, the Chinese will stop importing it at breakneck speed. Think of it like this, when beer in on sale at my favorite store (Quarters in Albuquerque!) I ask the guys to fill up my trunk and charge it. Why? Because I have the space in my garage and my checking account is only getting 1%. Once the beer is not on liquidation I buy it as needed. So, right now I have 4 cases in the garage. So does China! Here are brilliant and concise points McDonough outlines:
1. Iron ore inventories at China’s two main ports have nearly reached capacity.
2. Global demand for Chinese goods remains sparse, in spite of record dry bulk imports and inventories.
3. The shipping industry is on the verge of a supply glut due to projected increases in capacity and clearing congestion at Chinese ports.
One of our core positions is Horizon Lines (NYSE: HRZ). Now you know if you have follow our previous research on Horizon that they are an indirect play. They are Jones Act shippers and deal with dry bulk between US territories. Hawaii will always need stuff from the states, but China will lean on the more expensive domestically produced iron ore if the prices continue to rise. Right now the best guess is that the price of importing ore is at the tipping point.
So, while the decision to hold, sell, or add to HRZ is fundamentally dependent on the US and in my opinion a solid defensive play, the technical’s are certainly influenced by the price action of the greater shipping group. One needs to separate the fundamental thesis that HRZ has all the good parts (defensive protection business) with the technical bad parts (the group may sell off). It is not good enough to say HRZ is paying an 8% dividend and you can just hold on. I prefer to work the position AND collect some dividends. My firm is will be watching DRYS in particular as the company has historically had a high correlation to the Baltic Dry Bulk Shipping Index (BDI). Right now, however, we are in the mood to sell out and watch the charts versus buying the weakness. Just make sure your stay afloat.
No, I just wanted you to read this article from David Reilly. Yes, I know I have said it a million times that David is the best journalist covering the banking fiasco. Here is the link.
Bondholders have a new risk to contend with — the Obama administration’s policy of “shared sacrifice.”
The bottom line is that Obama is completely unconcerned about the rule of law when it comes to bondholders rights, but not prisoners in Guantanamo Bay. Screw the terrorists, I am not into ‘shares sacrifice’ when it comes to a legal contract for a company to pay me my money I lend it to them. Up until now, I said Obama was not a socialist, but I am starting to worry. So should you. Unless, of course, you are a Republican, in which you already think he is a socialist. Either way read the piece and let the blood boil.
This is a good one! And I thought only Goldman Sachs traded ahead of clients! Read here. So, a guy named Nilesh Shroff was front running trades. I know, big deal, but this is not 1999 anymore. People won’t stand for this crap anymore. At least the FSA took some action after three strikes. . . .
When clients told him to buy particular stocks, he bought those stocks for the firm first, causing the price to increase before he executed the customers’ trades. If the customer order was to sell, he first sold on behalf of the firm, decreasing the price.
Here is the latest interview from CNBC’s Closing Bell. Big credit to Michael Yoshikami of YCMNET Advisors who was great to be paired with. Great to see some young blood!!!
We cover utilities, staples, and the issue with Chinese steel demand. ENJOY!
Today in the Washington Post David Sokol wrote about how we are being gamed by the government. Read the whole article here. Here is the juicy part:
If you liked what credit default swaps did to our economy, you’re going to love cap-and-trade. Just read Title VIII of the bill, which lets investment banks, hedge funds and other speculators participate in the cap-and-trade market. They don’t have emissions to cut; they have commissions to make.
Now, I am up for making money no matter what the market does, but I would prefer good versus evil. Credit Default Swaps (CDS) never made much sense to me because it allowed people to buy insurance on stuff they didn’t own. Now, you may say that buying a put option on a stock you don’t own is the same thing, but put options cause a companies ability to issue debt to blow up. Options are also regulated and despite the pits of traders you see on TV, they are ‘orderly’. After all, we keep them in a pit!
Cap and trade will do nothing but give hedge funds and investment banking houses the ability to speculate on a new ‘green’ world while driving up prices to the consumer and killing off industrial companies. In the end, I really don’t look forward to making money off these side bets as they blow up entire industries. Maybe the bill won’t pass. . .
Check out my recent research piece on Seeking Alpha here.
On the front page of the Financial Times yesterday (sorry, I gave up reading the Wall Street Journal when it went mass market) the headline was “Oil at $60 for first time in six months.”
How wonderful! I was long oil using commodity ETFs/ETNs since December when the price was in the 30s. Thus I expected the price to be up 50-80%. This is where I hit the empty well.
The bottom line is that I will be moving on and not dealing with ETF’s that can’t perform as the marketing people suggest. There are a million excuses why the slippage happens, but my clients don’t care and neither do I.
