Maximizing Profits

It is difficult to avoid trying to capture short term gains while still pursing a long term strategy. A 15 day chart is noise against the backdrop of a 5 or 10 year trend. A sound investment policy can help avoid that pitfall, which eventually leads to over trading or high turnover. High turnover only means that your initial decision was either unsound or not thoroughly worked through. A sound policy will help minimize emotionally impulses and allow your strategy or system to work. While reading "Winning the Loser's Game", Charles Ellis mentioned that investors get jubilant when stocks are rising and depressed during a fall, but who among us, reacts that way in the mall. When prices rises we shun items and when they fall we buy more than we need, however securities are treated completely contrary. Again a sound policy will aid in quelling the urge to push prices up with the rest of the market. A word of caution, I am not advising buying on dips or averaging losses. If you like the actually enterprise at a market cap of $3 billion and it falls to $1.5 billion because of systematic market movement, you should buy twice as much. If you are trading, cut your losses promptly and move on.

Land Mines

Like many investors, I turn on the computer or television and see stocks that jump up 100% and say dang why I'm I in XXXX instead of that pharma stock that found the cure to balding. Recently, there have been many pseudo GSEs that have seen values double or triple within weeks. However, while I missed most of these names, I am still very cautious. I am long FNM and have sold calls against the position. But I think the government should wind down both FNM and FRE for various reason, but will save that for another post. But I cannot predict the future so for INVESTING there should be a margin of safety. That means a moderate dividend yield, sizeable amount of cash and book value and market value are at a reasonable proportion. I have experienced trying to catch the tail of a rally only having it turn and bite my position to in half. While my experience differs from others I cannot advocate holding positions that lack fundamental reason.

Sheeple

There truth is no one wants to be alone. Who wants to be the only money manager at a social not buying tech stocks in 2000. Who wants to be the only member of a California neighborhood without an investment property. In the short term the market is a voting machine, but in the long term the market is a weighing machine. In the investment community there is a great deal of group think, which is reaffirmed by rising prices. Fannie and Freddie were more than 90% institutional owned and lets not forget AIG also. There is even an emphasis on what institutional managers are buying so the home gamers can follow. Let me expand on a point I heard from Accrued Interest blog. Leverage was not the problem, the problem was bad investments. Being leveraged 25 to 1 and buying Google or Apple 5 years ago would have been brilliant. Being leveraged 25 to 1 and buying WAMU or Indymac would have been a disaster. Below is another video courtesy of American Public Media's Marketplace detailing the rise of toxic assets.

Toxic assets from Marketplace on Vimeo.

Training for a Marathon

Any competitive sport requires participants to consistently train and practice. For marathons the key is endurance because there are no TV timeouts, 2 minute warnings or out of bound whistles to stop play. Investing has been compared to a marathon, however there is one major difference, the race never ends. Because of this continuity investors can hang on to poor performers because nobody stops the race. You could have purchased GM in 1990 and lost the race due to their filing Chapter 11. My goal is not to discourage you but to emphasize practice and training. Investors must study the past, the present and human nature. These seem to have more bearing than valuations. One young reader encouraged me to explain aspects of the market using more media, therefore starting today I will have videos courtesy of Marketplace(one of my favorite radio shows)that explain market activities from CDOs to Dark pools. Also, remember in the marathon you are trying to beat time, if you focus on your peers speeding by you, you may run out of steam trying to catch up or even find yourself in the hospital. Focus on your pace and continue to train for a never ending race.

Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.

In the Dollar Store

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.- Warren Buffet
Again with the Warren Buffet words of wisdom. Again Mr. Omaha is right, for some strange reason individuals think when a stock is at a dollar it is a sale and they are getting a bargain. While the upside is infinite and the downside is $1, that is a logical fallacy. You are foregoing the opportunity to make money by buying a dud that will not make money or even lose money. I believe the fascination is the ability to buy many shares example 1000 shares for $1 instead of 20 for $50 a share. These days it is hard to find the wonderful company trading for a low dollar price, maybe a low multiple, but that is also rare. The real money is made in private equity and venture capital. Buying into a little known company before it is followed by big Wall Street firms. My new goal is to file a 13G or 13D within 3 years.

Uncle Warren

I am no fan of Warren Buffet. Maybe it is pure jealousy or maybe because he simplicity shows the inferiority in my bad trades. However, I have begun to read the book "Snowball" about the life of Warren Buffet. This has lead me to begin reading books about sports handicapping. Ironically, I have heard some investors compare investing to horse racing. One rule is that the gambler does not have to win it back the same way you lost it. I have bought a stock at the opening, seen it fall quickly and attempted to make it back by buying or shorting another stock immediately. The reason I think Buffet's style agitates me is that I am impatient. Telling individuals that you can make them a guaranteed 18% in two years does not seem to get their attention. However, I can make you 18% in 30 days, stops them in their tracks. That is why Ponzi schemes are so successful. But while investing and gambling are different there is a great deal of overlap. Consequently to be successful in either you need discipline.

From CIT to Sallie Mae

As Debtwire reports, several correlations desks made a killing over the recent CDS blow up: most notably Natixis and the omnipresent Goldman Sachs. According to Debtwire's Nicoletta Kotsianas:

"Correlation trading desks at a few firms, including Natixis and Goldman Sachs, have been buying up CIT protection on the cheap since January to hedge risk in the instruments they structure and trade...CIT stood out to some traders, both because of its exposure to the credit crunch and its ubiquitous placement in the bespokes, said two correlation traders. Just six months ago, jump to default exposure to the name averaged roughly €50MM for many correlation desks, estimated two of the trader sources... One correlation trader who runs a mid-sized bespoke book said that he bought $85MM in short dated protection at an average price of 12 pts up in January and throughout the spring. Five-year protection on the name was quoted at 34 on 9 July but ballooned to the high 50s by 20 July when it became clear the government would not bail out the asset-based lender. Much of that price movement originated from other correlation desks rushing to hedge their jump risk."

So whose CDS will Goldman's correlated tentacles blow up next? According to Debtwire, it is Sallie Mae's turn:

"Sallie Mae is the next name in correlation traders' crosshairs, said two correlation traders, an analyst at a boutique brokerage and a sellside desk analyst. Five-year protection on Sallie Mae trades at 20 pts upfront, reflecting relatively low risk of default in post-credit crunch terms. Though not as widely held in bespokes as CIT, nor as distressed, Sallie Mae caught attention in recent weeks as correlation desks braced for the company to be downgraded to junk, all the sources said. Standard & Poor's last week placed the ratings on credit watch following a vote by the House Of Representatives Education and Labor Committee to pass a bill that would eliminate the origination of federal student loans by private lenders after July 2010... Offers to sell protection from dealers grew scarce this week and several dealers have faded offers, in a sign that not all desks are covered for Sallie Mae jump risk, aid three traders. Some bids did get picked up this week but the market is now 18/20 upfront on the contracts as opposed to 691 bps on July 19, according to a broker and data from Markit." Again watching CDS spreads and purchases can show who firms think are weak.

This post is courtesy of Zero Hedge( shoutouts on the new site) and Debtwire.

Disadvantaged Masses

Yesterday, I listened to one of my favorite television shows, Wealth Track. Yale's Endowmment Manager David Swenesen was interviewed and shared some words of wisdom. The individual investor is at a disadvantage. Many investors do not know what their IRA, 401k or ESA owns. The truth is most mutual fund managers underperform index funds. The other truth is that mutual funds want large amount of assets under management to increase the fee income they generate. The problem is that the financial service institutions who receive your weekly payments or lump sum deposits do not have your best interest at heart. The stock broker wants you to make money but he/she needs you to trade and make as many transaction as possible. The mutual fund manager needs to increase assets to make more money for themselves and the firm. Your bank wants to give your money and forget about so they can make loans without worrying about withdrawing deposits. Even thought your 401k gives you a large basket of funds to choose from, they all will underperform the index benchmark. Investors must read and educate themselves. The expert on television makes $1o million annually because you pay him to perform his job in a mediocre way. Investors must take their future into their own hands because most firms do not have their interests aligned with their non-high net worth clients. The masses are deluded if they believe that their financial institution gives them the same attention that a millionaire client recieves.

Capitalism is Back?

This weekend CIT negotiated with its bondholders to avoid bankruptcy. The negotiations were rushed due to the Treasury office and FDIC refusal to aid the small business lender. CIT may still fail because the money is enough to pay down interest and outstanding debt but the firm still needs capital to continue to earn money. This was a trade I had on but closed because the government was an uncertain wild card. Whether CIT was too little to save or not a threat of systematic risk the government must allow failure. While some argue for drastic situations call for drastic measures, this view is wrong. For capitalism to work there must be destruction and creation. The government allowing small firms to fail and rescuing large firms is the systematic problem. If capital is tied up in large failing firms, small efficient firms do not have access to capital to grow and expand. This is my stance but I still plan to buy BAC, as a trader buy the winners that will take taxpayer money and increase earnings.

The Insanity

When a company is in bankruptcy or retains bankruptcy counsel, that is not the time to go buy thousands of cheap shares. Stocks are never too cheap to short or too expensive to buy. I am more likely to short a stock getting kicked down than rising exponential. There was more profit in shorting old GM at $34 but when the stock was at $5 and there was talk of bankruptcy thats was a good time to short as much as you can carry. But investors lose billions of dollars seeing a large pull back in a bad stock and buying thinking, "This stock was trading at $50 a share 8 months ago, it is bound to go to at least $25 from $2". While I have seen marvelous rebounds, I have seen more cases of investors pushing a stock down because there is a problem. But there is always money to be made in the market.

The 30 yr Trade

Over the last 30 years, if an investor had put their money in the S&P 500, they would have made 1.70% less than their bond (10yr treasury) counterpart. The table below shows how the 10 year has performed versus the S&P index. I do not believe this trend will continue. My solution is to invest in a basket a sovereign debt throughout the world. I would include the BRIC countries, Germany, Australia, South Africa, Thailand, one or two Middle Eastern countries and of course the United States. While I can think of many other nations that should have tremendous GDP growth, this is not a trade to call and brag about to your neighbor. The key is return OF capital. The other important issue I want readers to take away is, you could have paid no commission and slept soundly for 30 years and still beat most of the money managers on the Street. But there are no shows on CNBC about buy treasuries. Great article from WSJ discusses the misconception of long term investing.


Treasuries Outperform

zzzzzzzz10 yr TreasurieszzzzzzS&P 500zzzzzzzzAnnual Diff.

30 yrszzzzzzz9.40%zzzzzzzzzzzzz7.70%zzzzzzzzzzzzzz1.70%

10yrszzzzzzzzz6.80%zzzzzzzzzzz-3%zzzzzzzzzzzzzzzzz9.80%

5 yrszzzzzzzzzz6.20%zzzzzzzzzzz-4.80%zzzzzzzzzzzzz11%

1 yrzzzzzzzzzzzz9.70%zzzzzzzzzzz-38.30%zzzzzzzzzz 48%

Source The Leuthold Group

Express Yourself

Before I express my opinion let me say that I have absolutely no idea when the recession l will end and really I do not care. I will take long and short positions based on my analysis and experience. But calling the recession is pointless if one does not profit. So if Dennis Kneale believes his claim he should go buy the SPY, SPY calls and any instrument that will benefit when the recession ends. Rather than attack the data I will take a different approach because data can be subjective based on an individual's beliefs and bias. I believe that the market is biased towards optimism. As the markets crashed from late December 2007 until May 2009, guest came on CNBC and recommended buying stocks on a scale of 10 o 1. Rarely, you saw a guest continue to doubt a rebound and even less likely to recommend short positions. I do not know why the market is obsessed with owning stocks, my feeling is that a large portion of money in the game is on the long side. Other large players make money on transactions so they only care about volume and trading activity. Short sellers are despised and even threatened with jail when a poorly run institution fails. But while I do want people back in work, food on tables, care to the sick and other benefits of life, it would be foolish to allow my optimism or desire of a better life for others to influence my trading and blind me to objective facts. Bottom Line: Everyone should leave the belief of the American people and hope for a better future at 9:30 am and pick it back up at 4 pm (of course Monday through Friday).

Penny Stocks

I have been asked about investing in penny stocks quite a few times. Keep in mind this is my opinion based on personal experience and I do not have any quantitative figures to support my argument, honestly I would like to hear from those with a different take on the issue. My posts are not meant to confirm my beliefs or ideas, but to find falsification in my theories or hypothesis. I do not look for penny stocks to purchase but if I see an opportunity (real or perceived) I would be willing. Usually when a stock trades under $1 it deserves to be there. When the stock trades below a penny, I am less likely to make a purchase. There are many exceptions of stocks going from under $1 to $4 (Citi) but many penny stocks do not have the analyst coverage of Citi or the daily volume of Citigroup. I would rather short a falling penny stock if I see weakness in cash flow and more debt than cash. Right now, I do not use debt to assets because in a deflationary environment fixed assets might not sell for book value and inventory may be sold at a steep discount. I know it is easy to own 100k shares of ABC because it trades at 5 cents compared to 10 shares of XYZ because it trades at $500. But again my experience has shown me greater profit from XYZ, when in a bull market or fundamental events are occurring. Happy hunting, I do not know which way we are headed but the best advice I can give is to stay flexible.

Pull Back Heaven

In the next couple weeks if equities are still declining, I like oil service providers, agricultural companies and I will take a short position on long term treasuries. Like the previous post I like REITs but I am selective in this group. I do not want to name particular issues because it will influence or make your research bias. Good hunting and if you do not like prices, you could wait or pyramid. Pyramiding a losing position is not recommended but in my experience it can make money even though I would recommend pyramiding only winning positions.

Commerical Real Estate

This is the next shoe to drop. That has been the comment spoken since late March and I continuously hear it everyday. Unlike residential real estate, commercial buildings were not built as frequently a single family homes however there may be an over supply. Also, one lessee missing a payment does not ruin an owner (hopefully not the anchor tenant) unlike a single family household. While I do not doubt there is still trouble in the credit environment, the one thing that makes me uncomfortable about this trade is it is oversubscribed. I am not claustrophobic in real life, but I am in markets. Crowded trades bother me, because when the fire alarm goes off I might get trampled on or burned alive. So, I will rather stand by the exit and wait patiently. I am not saying there is no problem or that there will not be large CMBS defaults, however in my experience when general consensus is reached it is sometimes a collection of misconceptions.