Hedge Fund LIVE - An Interactive Trading Community
New to Hedge Fund LIVE?

Monthly Archives: March 2010

Goodbye March

Well March was come and gone and there was much learned and absorbed at TFG. March had its ups and downs but I kept my emotions in check and moved forward as a member of the firm. I continue to learn more everyday and I’m starting to get a better feel for the market and my names. My PNL in my individual account was flat as I avoided taking any major loses. I’m pleased with the way I kept my PNL in check, as kept my largest winning days equal to my larger losing days, which is a first since being a member of the firm.

My role has also changed at the firm, I have become an execution trader for one of our portfolio managers Dean Machado. It has been a great experience working with Dean and getting to see how one of the larger and longer term books works at a hedge fund. It has been interesting seeing how the books hedges (i.e. SPY’s or IWM’s) moves throughout the day with the market. If the hedge is traded effectively throughout the day it can have a major effect to the overall performance of the portfolio. I also had the opportunity to make some intra-day trades in Dean’s book and as I become more seasoned this is an area I can add some real value by generating alpha intra-day.

Moving into April I have to push myself and elevate my performance in order to earn my seat on the desk. This means I have to work everyday to provide better color then the day prior. I have to work with Moskowitz and find beneficial levels that Dean can use to either add to or lighten up his positions. I have to continue to learn the names in Dean’s book and get a feel for intra-day levels so I can generate alpha day in and day out. I also have to become more focused on finding ideas the firm can put to use, either abstractly or in the freshman traders technical pre-market session.

There is no time to relax at The Frommer Group as we push the business forward everyday. I am excited for the month of April and another opportunity to grow as a member of this firm.

End of the Month

March was a modest success. This month brought about a bevy of changes in TFG and with these changes came new responsibilities. As Freshmen, we were able to move beyond the day to day jobs that hallmarked our Trainee stage and accept our roles as individuals who will help the business move forward. Most notably, Jeff and I were given roles as execution traders; responsible for carrying out the orders of the portfolio managers. This opportunity helped me to understand a new aspect of the business as well as a new style of trading.

Despite the successes of the month, I believe that there were times when I did not perform to the best of my abilities. I became complacent and overly comfortable in my seat and lost the focus and drive that is expected of me. Every day I must prove why I deserve to be in this seat. We do not walk in the door hoping to achieve mediocrity; we must strive to achieve excellence. My performance must rise to meet the ambitions of the company. The work I plan to put forth in April will make March look like a joke. There is no alternative.

Crystal Bowersox… You can Book it

Season 9 of American Idol has been awful. Ok, first things first. I watch the show only as a fun activity with my two oldest daughters, but after seeing the contestants navigate from the initial auditions through Hollywood Week and then to the live performances, I got hooked even though the current rendition has Ellen Degeneres providing utter noise pollution with her commentary and Simon Cowell, the star judge, going through the motions in his final season. But what makes the show truly abysmal are the awful voices of the Top 10 finalists, save one Crystal Bowersox who will end up a bona fide star once she finishes her “Idol Journey.”

Ms. Bowersox so far outdistances the other 9 singers; currently offered at 60 in the various global internet futures exchanges where winning settles the contract at a price of 100 units, she is a sure bet to win. I wish our prime broker would clear these “securities,” for I think even at those levels, she provides huge value. Who needs to bet the Spooz hoping and praying for a 5-6% selloff when one can trade American Idol, a veritable lock?

Speaking of the Spooz, we have a lot to chew on today. First, we have ADP’s Job Estimate at 8:15 which takes on added significance because of the Good Friday release of the Employment Report and the fact that Nonfarm Payrolls will be a moving target with the onslaught of new workers added for the census which ADP will not count. Look for a dump in the E-Minis more exaggerated than usual for any print less than zero while any number better than +75K should launch the futures to test that critical 1177 level. On the heels of the jobs data, we have the Chicago PMI numbers at 9:45 AM which always has importance because of its predictive, albeit loose, nature to tomorrow’s ISM. For good measure, we even have RIMM reporting after the Close tonight as well.

But the big item on the menu today surrounds asset allocation and the “big push” into quarter end. Fortunately, both forces will complement each other to create late downward pressure on stocks aiding my thesis which calls for an intermediate 5-6% pullback. For the former, stocks have so severely outperformed treasuries for the month, managers who have strict mandates for equity vs. fixed income weightings must increase their bond exposure with funding coming from liquidating stocks. On the other side of the coin, expecting a final cherry to an outstanding opening quarter, many predict investors will try to protect gains today by keeping the market well bid. That may end up being the case, but similar to what happens so often on December 31, some significant selling the last hour of the day should be expected as traders cut positions to avoid risking any late nuttiness to muck up a good start to the year. When the dust settles at the end of the day, if I lose a few ducats getting short the E-Minis late, at least I can always try to get long some Crystal Bowersox and cash in big time during the American Idol finale on May 26. Trust me, you can book it.

S&P 500 June E-Minis Key Technical Levels

Support: 1165.00/64.25/63.50, 1156.50, 1147.75, 1145.50, 1136.50, 1134.00, 1129.50
Resistance: 1173.75, 1176.50, 1180.00, 1190.00, 1198.00, 1200.00, 1210.00

The Lumberjack Hour

So today on the desk we got the much over due Lumberjack Hour. The Lumberjack Hour as most of you are aware is a weekly hour segment, where Jeremy Klein goes over the week with the freshman and trainees. Jeremy gives his comments about the trader’s week, the traders will then state his thoughts and then Jeremy will give them advice to push their trading forward. In brief, the Lumberjack Hour is a one – on – one session that takes place on the webinar.

Today Jeremy and I discussed my new role as an execution trader for Dean. We spoke about my feelings about no longer having my PNL listed on the firm’s sheets, which I hadn’t even thought of until then. We also discussed adapting to trading a much larger account, adding value, and evaluating my performance.

At this point adding value is constantly keeping Dean updated with how the book is trading, communicating with him levels I discuss with Moskowitz and how Klein feels the market is trading. I also need to keep him updated as to where all his stocks are trading, news stories that might come out intra-day, and how his stocks are performing relative to his book and the market.

Gauging my performance as an execution trader is something foreign to me considering this is the first time I have executed trades on behalf of a portfolio manager. Jeremy Klein told me that I have to monitor my slippage on every order Dean gives me where I am given discretion. Over the next week my task is to mark the current market price when given a discretionary order and keep the slippage within 15 basis points. So if I was given an order to buy 1000 GE @ 18.20 the order should be filled with an average price of no higher than 18.22.

This is an exciting task and a great way to quantify my performance as an execution trader. I look forward to seeing my performance and discussing it during the next Lumberjack Hour.

WINNdow Dressing?

Why has WINN traded up over 14% since March 25th.  There has been no news.  There has been no supermarket deal.  There hasn’t been a thing.  So, I ask again, Why has WINN traded up so much.  Well, maybe because some large shareholder wants to dress up his portfolio and needs an illiquid name that has been the subject of takeover rumors to move.  “Hey, why not buy some extra WINN.”  “It’s average volume is only around300K shares per day.”  “Oh, and it has been the subject of takeover rumors.”  “So if I buy this thing then maybe I can goose it up a point or two and help my month out.”  Now I don’t know it that is what is actually happening but it sure is odd that the stock is rallying right into month and quarter end on no company-specific or even industry-specific news.  Strange I tell you, just plain strange.

RIMM: Reporting on Wednesday after the Close

RIMM, which we are long, is reporting on Wednesday after the close.  The current expectation is $1.28 in EPS.  Given that everyone (and their brother) on the street has recently taken up their numbers, its pretty clear that RIMM, which has not come out to temper expectations, will announce a strong quarter.  The question is, how will the market react given that everyone already is expecting a strong quarter.  Well, that depends on how strong the quarter is.  If RIMM blows away the street EPS expectations while putting up better-than-expected unit sales while maintaining ASPs and thus holding the line on margins, then I don’t care who already is expecting a strong Q, the stock will go higher.  If they beat by a few pennies but the beat is mainly due to increased lower margin consumer sales then the stock will likely go down.  In any event, we are currently long RIMM and short the April 80 calls.

Hot Seat

Today was my first lumberjack hour. When called to the “Hot Seat” I had no idea what to expect. I thought I was going to get quizzed on market information or economic indicators, as it is led by our Chief Market Strategist whose economic intelligence is rightly justified by his job title. The lumberjack is not only the desk’s futures trader but he is an economic whiz with an incredible ability to retain information and spew it out accurately at a mile a minute. So, under the daunting spotlight of the desk, I was weary of what would be asked of me.

The lumberjack did not ask me anything arcane, rather he asked me about my trades. How many winning days vs. losing days did I have under my belt? Of the wins, what was my average gain? Of the losers, what was my average loss? What stocks did I make or lose money on the most? These are questions  for which I had to refer to my spreadsheet, but really I should know these off hand. I should be able to spew out this information as the lumberjack spews out the economic numbers and news every morning. It turns out I’ve had a lot more down days than up days and I must reevaluate the stocks I watch. I’ve mostly been trading 3 large cap tech stocks which have been difficult to trade in the relatively low volume market the last month. The lumberjack advised I pick four new stocks on my posting list and pick them based on how well I know the company products or sector. Immediately, I took this advice and picked four stocks that go along with the firm’s lifestyle and consumer thesis that have pretty fairly high average daily ranges.  I should’ve known better that HPQ, INTC, and DELL all have pretty low daily ranges.

The reality is that this hour could not have come at a better time. I’ve been feeling unconfident in my trades and it’s because I don’t ask myself enough of these qualitative and quantitative questions. The hot seat was more like a cold shower of reality. I needed to hear it from a senior principle that I must evaluate my trades and strategy. While he pointed out that I’m losing more than winning, I felt good and left the hot seat with my head lifted high to trade on his advice.

ITG: Maybe We’re Wrong

ITG has been acting horribly the last couple of trading sessions.  It’s as if someone has advanced color on the March volume report or the company has been going around meeting with investors and has said something negative in one of those meetings which has created a seller.  Well, who knows what’s going on but I did speak with the company today and I didn’t get any new color on the name except for the fact that they do view the decline in pricing that they have seen over the last few quarters to be a permanent decline.  Volumes, on the other hand, are still a big question mark.  The company has done some pretty severe cost cuts to right-size their business so when (if) volumes do returns, there will be some serious operating leverge which will lead to some stock-moving profitability.  However, volumes are not coming back as one would expected them to after such a big rally in the stock market.  So, the question is: “Are the volume declines secular or cyclical?”.  That is the $64K question  and the answer to the recent sellers in the stock is the former.

We sold half of our ITG position today so I could get some perspective on the name while I do a little more work.  Our view has been that trading volumes will start ramping up very soon and once they do the stock will rally as the company puts up a few good quarters especially given that they have about $5 per share in net cash per share on a stock that is trading at around $16.50 and should earn around $0.80 in a really bad year and as much as double that (if not more) when things improve.  Assuming the company could earn $1.50, at a 12.5 PE, the stock is worth $23-$24 per share ($1.50 x 12.5 = $18.75 + $5.00 = $23.75).  In addition, the company is currently trying to get a credit line which would allow them to deploy as much as $100mln of the $200mln of excess cash on their balance sheet.  Also, ITG could be an attractive takeover candidate as the company has another $2.50 per share in net restricted cash that could be freed up as a result of an aquisition by a larger acquirer.  Add the $2.50 to the $5 per share means in net unrestricted cash means that an acquirer could buy ITG for as little as $9 per share net of all cash.  A value as low as $9 per share on a stock that could be earning north of $1.50 when volumes improve is just too cheap.

Having said that, given that Jan and Feb 2010 volumes are down 18.3% from 2009 levels, even with the restructuring plan that was announced last December, we think that it will be very difficult for the company to make the $0.37 street consensus Q1 2010 earnings estimate.  We’ll see.

Poker and Trading Stocks, not so distant cousins

For those that have listened to the webinar or purchased any of my products in the past, you know that I love trading and I love playing poker.  Many people believe that the common thread between these two vocations is the thrill of making or losing money and the notion that gambling and luck have a lot to do with success in each of these endeavors.

Since I have developed an affinity as well as a higher than average level of expertise I feel that I am qualified to say that the above thoughts are what the unsuccessful trader or player hang their hats on to make themselves feel better for being on the wrong end of a stock or of a back door straight.  The longer you are able to participate in each endeavor, the less luck will play a part in the final outcome.

I can take someone off the street, throw them in front of my computer and have them buy or sell a stock, odds are pretty even of the final outcome.  But have them make 100 trades and the odds change dramatically.  I could play a hand against Phil Ivey and maybe I can win, but over a year he will take my bankroll as he 1) is a much better poker player than myself and 2) he has enough capital to outlast a bad streak.

The common thread to success is having a method that you know will work over the long pull.  That strategy may lose money in the near term, but over a longer term you know you will end up ahead.  How much risk you can take in that near term is in direct proportion to the size of your account or how much your risk manager will bear.

The longer you can stay in the game, the more you can learn and refine your strategies until you don’t even have to think you just react.  You might still suffer a “bad beat” along the way, but that will be the exception and you will make a lot more money over time.

LS Portfolio Recap

The Long / Short book took its first major loss in about a week ending the day down $5K on a flat day in the market.  The biggest losers on the day were WINN, BAC and ITG.  The biggest winners were MA, XIDE and IMAX.  WINN continued is late month rally today on no apparent news.  Its probably more rumors that they will be acquired which I think is BS as they have been a rumored acquisition candidate for a decade.  I rembember reading an article from April 2001 that Kroger was going to buy WINN.  I continue to hear those rumors and don’t see why KR would want to weigh themselves down with a 500 store chain that needs another half a billion dollars in capex just to try to compete with Wal-Mart and Publix.  The other reason that WINN could be up is that it is month-end and investors are pushing up the stock in order to window dress.  If the stock drops on Thursday or Friday, then that will have been the reason.  Regarding ITG, we sold half our position as it is clear that someone has advanced color on how crappy the March volume report will be.  Regarding BAC, I think it was down today for a few reasons: 1) new fears about a housing double dip, 2) profit taking, 3) banking reform, and 4) SEC investigations into banks’ repo transactions.  We added to our BAC today on weakness.

Our winners included MA which was up on no news except for the fact that they announced their earnings release date which will the morning of May 4th.  Maybe the stock was up simply because the earnings release announcement did not include a negative pre-release.  Regarding XIDE, it was up on no news because thats the way it trades.  Finally, IMAX had an up 1.7% day on no direct news.  We have traded around this position a little with some success but our view is that this stock is on its way to $20-$25 before being acquired.

The LS book went out today at an absolute value of $3.1mln, $1.7 long by $1.4 short.