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Monthly Archives: February 2010

Another quiet month in the books

So there goes February 2010, another month of slow, boring trading.  Not the best environment for us intraday traders but certainly a month to learn and get better and prepare for the days of volatility that will eventually come.

The problem with this month is that the market virtually died around 10:30 am every day and did not pick up until after 3 pm if it picked up at all.  Without any follow through it is hard for a momentum trader like myself to maximize my days.

March is said to come in like a lion and I hope that goes for the stock market volatility as well.

A New Month: A New Opportunity

Well, the trading days of February are gone and there is only one question to ask myself, what do I need to do to improve in March? I believe the answer is clarity and that is what I will be focusing on over the weekend. My focus will be on my business plan and hammering out the details and protocols I need to follow in order to succeed in trading and at TFG.

The business plan will cover all aspects of trading and my current position but the majority of my time will be delegated to risk and outlining my day. Yesterday I started to define my risk parameters and I feel I’m off to a good start. By following the risk parameters I have set for myself I should be able to keep myself from getting behind the eight ball and give myself the opportunity to have a “boring” profitable month. We talk a lot about good trade being boring and systematic, the risk parameters are a good first step to obtaining that goal.

We also discuss consistency as another attribute needed to becoming a good trader. The senior traders have spoken numerous times about consistency being extremely important in trading and in life. If I can outline my day, hour by hour, of what I need to accomplish in order to have a productive day I will force myself to become consistent. In order to force myself to follow my schedule I will set up every task as a goal and check off each goal as I accomplish them. I can then grade myself at the end of everyday on my productivity and consistency.

I’m excited for March and the opportunity to put my new business plan to the test.

Athena Not Lookin’ Too Smart (she’s the goddess of wisdom)

athenahealth (ATHN) is down 12% after announcing that they will be delaying announcement of their fourth quarter and full year 2009 results.  The impetus for the delay is “an internal review, initiated by the Company, of its accounting policy for the amortization period for deferred implementation revenue”.  Implementation revenue is revenue earned during the installation process.  Depending on the size of the contract and complications that arise, the time from contract signing to completion of installation averages between 3 and 5 months.  Revenue earned during the implementation process is not recognized until service begins and it is amortized over the life of the contract.  The typical athenahealth customer signs up for a 1 year contract which, until now, has been the time over which implementation revenue has been amortized.  The company is now considering extending that amortization period as most customers’ contracts renew automatically. 

A quick look at the ATHN income statement shows that the “Implementation and Other” revenue line is a relatively small percentage of total revenue, running about 5.5% of total sales for the past couple years.  So why the huge down day if this accounting change won’t even affect cash flow?  First, I will point out the obvious.  Do year end results and the earnings call need to be pushed to an undetermined date because you’re recalibrating the length of an average customer’s contract?  I have to believe that information is readily available.  Next, I will recount the past 2 months in the athenahealth finance department. 

On January 11, ATHN announced the appointment of Timothy M. Adams as CFO in replacement of Carl B. Byers, the company’s CFO since 1997 who did announce his retirement plans the preceding summer.  On February 4, the company announced that they would be changing their calculation for non-GAAP adjusted net income.   Through 3Q09 ATHN recognized unrealized gains on interest rate derivative contracts, amortization of purchased intangibles, acquisition-related expenses and stock-based compensation expense in non-GAAP earnings on a pre-tax basis; going forward these items will be added back after-tax with a tax rate of 40%.  At the time, this was not a big deal, most sell-side analysts have been making this adjustment on their own and the stock actually finished up on the day.  On February 6, however, Barron’s did a write-up on ATHN that indicated accounting practices at the company may be of interest to the SEC.  The stock was down the following Monday, but had rallied about 13% since then.    As I have blogged before, the healthcare IT sector is hot and ATHN has huge institutional ownership, but it would seem that the smart guys at those institutions have had enough.  A new CFO followed by two accounting changes and delayed results warrants more than a raised eyebrow.

TPC stands for (T)his (P)iece of (C)rap

Just kidding.  I actually think that this company, which before today, was one of my top performers, it actually going to make me some real money.  But given that the stock is down 6.5% today, I’m entitled to bitch.

TPC opened and as it turns out, the stock hasn’t traded down as much as I had originally feared. I guess when you’re long, sometimes the best way to approach a negative situation is from the most conservative standpoint. In any event, it looks like, at least for now, investors are taking a longer term view on the stock. Also, one saving grace in the name is that TPC is not widely followed.

The stock is currently trading at 19.88 down 1.51 or 7.06%.  At this price, the stock is trading at a net-of-cash PE of ~ 7.2x (excluding the $100mln in long-term investments on the balance sheet which would translate into another $2 per share in net cash bringing the PE to around 6.3x.

We sold 50% of our position to allow us to re-access the situation.  At this point, we will probably wait to see where the stock settles before trading it anymore.

TPC Q4 EPS beat but guides down

TPC Q4 EPS came in at 0.66 vs 0.54 but they lowered FY 2010 Guidance to $2.00-$2.20 vs expectations of $2.51.

Unfortunately, the stock could be down as much as $4 but will probably be down in the $2-$3 range.  Assuming the net-of-cash PE remains constant, the stock should be down $2.67.  If the stock drops $2.67, it will still be trading at around 6.5x EPS on a net-of-cash basis.  The multiple is even lower (around 5.8x) if you include the $2 per share in auction rate securities on their balance sheet which I am not.  The street may trade the stock to a slightly better multiple as expectations have been lowered so the potential growth in earnings from the new lowered base is higher.  So, there is a chance that the stock trades a little better than this but no promises.

The reason for the guidance reduction is that they didn’t book as much business in the last few months of 2009 and the first couple months of 2010 as they thought they would.  This reduction is coming primarily from their private building business as the private market continues to struggle with financing for deals and project bidding has gotten very competitive.  The company was bidding on the World Trade Center project and they lost to a $542mln bid so I think they were probabilistically including that bid in their guidance.

My thesis here is that the company will benefit from increased public works spending as a result of the governments stimulus programs, so my overall thesis has not changed as a result of this guidance reduction.  Having said that the timing on an overall earnings recovery now looks to be pushed out quite a ways.

TFG is long TPC.

Now Batting… The U.S. Economy

Now batting… the United States economy… So far we have had 3 high profile economic data points this week, and so far we’re 0 for 3. Not only that, the prints have all been so abysmal, that let’s just say we have gone down looking each time. This morning, we play a doubleheader with the Chicago PMI and Existing Home Sales at 9:45 AM and 10:00 AM respectively. While I never throw my hat in the ring in predicting data, save my Quick and Dirty model for estimating Nonfarm Payrolls, I find it hard to believe that given what we have seen this week that Existing Home Sales will print an improvement this month over last which the consensus currently predicts. Similarly, the expected small downtick in the Chicago PMI seems awfully optimistic such that the economy certainly has the chance take the collar for the week. Regardless of all the snow we have had all over the country this month that might skew some of the data, obviously, this is a troubling trend.

Yet, the S&P 500 is only down about 50bps for the week with only the jaw dropping Consumer Confidence number exhibiting any legs on the day of the release. What gives? Certainly, I have espoused the belief that stocks will continue rising on its way to a high for the year based on solid fundamentals and even better market internals. To be sure, this week’s set of numbers has shaken the recovery story a bit, but similar to stocks, an economy does not move upwards in a straight line. I offer up the Alan Greenspan “soft patch” from the late summer and early fall of 2004 which saw a burst of weak reports before rallying back in a few months time. Back then, we had already commenced a tightening, albeit far too slow, cycle. Currently, the FOMC has no thoughts whatsoever of removing accommodation in the near term as Chairman Bernanke told us so while visiting some old friends on the Hill this week. On the technical side, the SPX has hit its low in the morning 11 out of the last 12 trading days with 9 of those coming before 10:30 AM, clearly a sign of solid large institutional buying as the big boys need a full day to allow the market to absorb their size more appropriately.

Today, however, is the last day of the month, usually a domain for large asset allocation rebalancing. That is, portfolios that have fixed asset percentage holdings may have to compensate for the relative change in prices between stocks and bonds. With the SPX up modestly and the long end of the Treasury curve off moderately, potentially a manager may need to buy bonds and fund those purchases by selling some of his equity positions. If that is the order of the day, then look for weakness to show up late. Historically, the sell programs seem to be clicked on at around 1PM, but more recently the allocators have showed their hands as late as 3:40. Regardless, despite my belief that stocks should continue to trend upward on a longer term basis, today, with an assist from likely weak economic data, too many strong headwinds will keep equities from having a constructive session.

S&P 500 E-Minis Key Technical Levels
Support: 1095.00 1090.00, 1084.50, 1079.50, 1065.00, 1060.00, 1057.50
Resistance: 1107.50, 1111.00/11.75, 1120.00, 1125.00, 1130.00, 1138.50


Very frustrating morning, UNH traded down to a terrific level, which I failed to exploit and AGU kept moving higher as I continued to short it. I was long UNH at S4 and the 200 SMA on the 5 minute chart, which I would define as an A trade. I ended up taking UNH for 25 cents but was unhappy as I watched the stock move another 75 cents higher. I was unhappy for three reasons: 1) It was a low risk trade and I only had 100 shares, I should have been fully positioned, 2) I had opportunities to add to the position as my confidence grew and I didn’t add, and 3) I have watched the stock make this move day after day and I failed to take advantage of it.

After becoming frustrated with my poor execution in UNH I chased AGU from the short side as the stock moved higher. Although the set ups were very good I over extended my risk and ended up using 2/3’s of my daily stop in one stock. After reviewing my trades over lunch I realized I need to curb my risk and create concrete rules.

As of now my daily stop loss is $150, today I lost $100 in AGU, $60 in my first trade and $40 in the next. Losing such a high percentage of my daily stop loss in two trades made it very tough for me to battle back, so moving forward I have established new risk parameters. My new parameters are as follows: I will risk no more than $25 (16.7%) of my daily stop loss on one trade, I will risk no more than $50 (33.3%) of my daily stop loss on one stock, and my risk/reward ratio must be 1.7/1 or better on every trade.

By sticking to these risk parameters I will be able to eliminate any emotion from my trading because I will know the result, good or bad, of every trade before entering. This will also help me avoid getting bogged down in one stock and spread risk to other ideas. I feel confident with the risk parameters and by sticking to them I feel I can get my winning days to surpass my losing days.

Discipline is Key

Today I did not execute my plan with the same degree of discipline I practiced on Tuesday. On Tuesday, I put out bids and offers and waited patiently for my orders to be filled. This conferred two distinct advantages. First, it allowed me to enter trades at levels that gave me the most advantageous risk to reward ratio. Furthermore, by using limit orders, I was able to avoid many trades that would have likely ended in a stop out. Today, I intended to use the same strategy as Tuesday but had some different results. First, I chose to use more lenient stop outs today which increased my average loss per losing trade. Despite this, I still kept my stop outs within an acceptable range and my biggest loser only cost me $30. Next, I was stopped out on a larger percentage of trades than Tuesday. The majority of my positions were short sales and I found myself fighting a losing battle against the market. Although I was stopped out, I did not regret these trades because my entry points were advantageous and my reasons for entering the trade were clear.
What cost me dearly today were the “chop” trades. For these, I capitulated and used market orders for 100 shares, hoping to ride the momentum of a move. After one such trade in CAT that resulted in success, I began to believe that these types of trades were any easy way to chip away at my P&L, and improve my overall day. This flawed mentality caused me to enter trades in the middle ranges and left me unprepared when the trade began to move against me. As predicted, I was able to maintain stronger discipline in the morning, but as the day progressed and my P&L continued to ebb, I began to take the types of trades that were not consistent with my plan. Had I stuck with this plan, I cannot say if I would have been green, but I can guarantee my losses would not have been in the triple digits.

An Inherent Problem

I see a problem with my trading that needs to be worked out. This problem is simply that I am too quick to take a profit off and too slow to take a loss. It is a terrible problem that creates skewed numbers in which I make 25 dollars on my winning days and lose 125 on my losing days. And it is indeed a sure fire recipe for disaster in this business. Why is this the case? On my winners, it is simply a question of fear. I want to make sure that I hold onto my profits so badly that I micromanage the trade to the point where I get stopped out. This is because I am so nervous that a winner will turn into a loser that I am either too apt to take a part of the trade off to soon or I move my stop up until the point where the stock moves against me five sent and I have exited the position. A great example was my CVS trade, which I made today. I shorted 200 shares 3 cents off of the high for the day. The stock moved 20 cents in my favor and I took 100 shares off the table. I then moved my stop up so that if CVS retraced 6 cents it would stop me out. It did. Then the stock sold off another 60 cents. This is a trade therefore I could have maximized to 120 dollars worth of P&L on the downside or to be fair, let us say I scaled out properly, I should have made 75 dollars. Instead, I made a mere 30 dollars. This problem will get me in the end if I do not adjust my low tolerance on the long side.
Likewise on the short side I will give a trade room to run because I believe too strongly that I am right and that the trade is going to turn around and then I have quickly lost 60 or 70 dollars. At this rate of making 20-30 dollars on my good trades and (60) on my bad I would need to make 2 to 3 times more good trades then bad. This is a recipe for disaster.
On my computer I have the solution to the problem. A simple phrase to remind me of the path to better profits: “Set it and forget it.” This method will allow me to put out my bids and offers and my stops and exits and then let the trade either moves to my profitable exits or to my stop-outs. But in either case I can quantify my winners and losers and skew the numbers in my favor.

When a good thesis goes bad

Another day, another tough market.  The lack of momentum in this market is making me crazy, no follow through and this midday counter trend move is stealing P&L from me like Hans Gruber stole Japanese Treasury bonds in DIE HARD!!

Let’s follow the pieces of the puzzle: Bad economic number and the market goes down below key support, market feels weak all day thwarting any small rallies, for essentially no reason a large move up at 1:45 pm and lo and behold I am stopped out for the day.  No sour grapes, just life as a trader, but still makes me unhappy.

Lessons to be learned by me and hopefully all of you:  I had a great thesis, a thesis which as of this writing I still believe will be proven correct, but I did not manage my risk well enough to be able to sustain a large move against me and therefore I am stopped out.  First lesson is that this is not a momentum market and until it proves that it is, I will be more short term oriented and more focused on being flat through the middle of the day.  Second lesson is that I need to manage my size better if I do plan to take trades during that time.

It is important to know that I do understand that I made my bed and took my best shot, I do believe that I had a chance to make at least twice as much as I lost, but the fact remains that I did not trade this market well today and it cost me a chance to make money in the afternoon.

Learn from my losses as I know I will as I vow to make this tuition and not a loss.