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Monthly Archives: May 2010

Pricing and Consumer Perception

I find the effect of pricing on consumers’ perception interesting.  I was at a Barnes and Noble yesterday when I overheard a cashier informing a customer about the Barnes and Noble membership benefits.  She excitedly said that for just $25 a year, you get 10% off on all bookstore and café items, 20% off all adult hardcover books, and 40% off hardcover bestsellers.  “Wow,” the customer says, “that’s a great deal.”  I’m not sure whether he ended up getting the membership.  But my reaction was actually the opposite of how the customer responded.  I thought to myself, “Really?  Barnes and Noble is that desperate to gain customers?”  Then I thought I might as well figure out the math.  $25 per year means that you’d have to spend at least $250 throughout the year, assuming that no one buys hardcover books anymore (hence, I just used $250*.10=$25).  That comes to about $20.83 per month.  Is that legit?  Of course it depends on the type of consumer you’re talking about.  But most of the people I know don’t make shopping at Barnes and Noble a habit; it’s more of a once in a while thing.  Nonetheless, it’s an attractive deal.  You could just buy one DVD per month and grab a Starbucks coffee on the way out and that would just about justify your $25 annual fee.  But to me, it still softly cries for desperation given the digital era we are in.  Even the nook doesn’t seem to help the company.  There is typically an employee at the nook stand in the store and every time I pass by it, no customer is there.  I’ll stop the bashing here because in reality I still frequent the store since it’s just about the only place where you can sit and read (yes, I have heard of libraries, but I prefer not to feel like I’m in junior high or below).  Bottom line, sometimes “cheap” = bad.

On the other end of the pricing spectrum, you have luxury goods.  Companies jack up the prices for these items, even when an equivalent product by another company sells for significantly less.  It’s interesting how once a consumer finds out the price of a product, the intrinsic value of it usually goes up.  Take, for example, a store that recently had a new opening on 34th & Fifth Avenue, which seems to be well received in NYC: Desigual.  This private apparel company is without question unique in terms of its products.  It’s not everyday fashion, with its Spanish-inspired colors and patterns.  I thought the clothes were decent, that is until I looked at the price tags.  I wouldn’t say the prices are high enough to be considered expensive, but they aren’t on the cheap side either.  That was enough to boost my perception on the company.  Brand name then isn’t always the main factor in classifying luxury goods.  Companies can just play with pricing to help improve consumers’ perception on their brand and products.  That clearly would not work across all industries, but it certainly does in retail.  Just my two cents on how to read companies’ pricing methodologies.

Portfolio Recap 5-28-10

The book held up pretty well today which is saying quite a lot given the volatility in the market.  We ended the day down 15bps vs the market which was down 1.24%.  For the month the LS Book was down approximately 80bps vs the market which was down 8.2% for the month.  While the book did perform well relatively, the day was a disappointment in the end as I fully expected the market to rally as a result of asset allocation trades that were supposed to carry the market in the latter half of the day.  This did not happen, however, as the market sold off on the announcement by Fitch that it had downgraded Spain’s IDR (Issuer Default Rating)  to AA+ from AAA.  While not entirely unexpected, the downgrade did have a very negative impact on the market which was rallying at the time of the announcement.  The market sold off hard for an hour or so then started to recover until the US MOCs came out at 3:45pm much better to sell.  This took the market down very hard into the close which made it very difficult for the LS book to stay in the green.  Fortunately, thanks to J Klein who called out the MOCs with an uncharacteristically surprised tone to his voice, I was able to get a decent short off in the SPYs which saved us from losing more than we actually did.  We closed the book out at around 25% net long as I do expect a rally on Tuesday of next week as it is the first day of the month of June.

Our top three performers were SPY, FXE, and AAPL.  The SPY made us 18bps.  FXE was down 0.7% as the euro sold off as a result of the Spanish downgrade.  AAPL rallied 1.4% as the iPad went on sale in Europe to very long lines.

Our worst performers were MA, GNW, and XIDE.  MA was down 2.6% on an antitrust warning from Senator Durbin made to the card processors.  GNW was down 2.5% as a result of the selloff in the market.  XIDE was down 2.5% due to the market as well.

BAU, Please

Looking back at my previous blogs, I can’t believe I was “complaining” about a quiet, uneventful market just last month.  After these past few weeks of drowning in the tidal waves of the market, we’re finally getting some room to breathe.  It’s been exhausting, which is why I say (plead, if you will), business as usual, please.  I don’t and won’t mind quietness in the market now.  We are ready to have our technicals and fundamentals back.  As the market “normalizes,” if I can call it that, I will be looking to go back into derivative thinking mode along with focusing on M&A, which we are certain will take off in the near future. 

But I have to say that the sell off we just endured was nonetheless beneficial to me.  I was having a conversation with a friend yesterday in which I was reminded to expect and prepare for volatility in the markets.  Over these past couple of weeks, I gained the understanding that you need to be able to stomach market volatility.  It’s just a necessary part of this business.  My mom suggests that during tough and volatile periods, people will be drawn away from this business.  But I say it is during times like these that separate the real traders from those who just happen to land on trading desks when everything is “fun and games.”

You call that a market contagion?

When people are bored they tend to do stupid things. So today is a continuation of the Stupidity Contagion. The market seems stable after a tremendous run. Very bullish sign, but who cares what the technical or the fundamentals tell you. When a marionette puppet in Korea, Kim Jong-il, who lives under the thumb of China, can convince the bears at 10:40am on the friday before Memorial Day that they have a chance , the Boredom Infection is spreading the Stupidity Contagion.

MARK-et thoughts 5/28/10

Yesterday was a great day for the markets and for Hedge Fund Live as we have our largest profit day as a firm and the markets broke through key resistance and more importantly made a bullish engulfing pattern which will hopefully rocket this market higher and keep the MoMo bus a rollin’. 

Please watch my videos on the front page as to why the bullish engulfing candle was important yesterday.

Candles need confirmation so I will keep watching the next few days and alert the membership when that signal is confirmed.

During the February to April run up in the markets, we saw many days that started out with moves lower an S3 buy pivot was signaled and confirmed with a hammer candle and this led us to solid moves higher for the better part of the time period.  My plan today is to go back to the well and watch for this setup to occur.  When I see this setup I plan to hit it hard so listen closely as I will be calling it out.

Remember that today is Friday, a day before a long weekend so volumes could be lower than normal, but with a lot of volatility which does not always make for easy trading. 

Happy trading and have a great long weekend!

Lady Luck

I have always maintained that success in trading or investing comes exclusively from skill and hard work. Bringing out the rabbit’s foot, the four leaf clover, or a $2 bill won’t help much. Neither will bowing and praying to the trading “gods.” However, lady luck as a matter of circumstance, at least in the short term, can sometimes smile down on you. Given that today marks the end of May and Tuesday the first of June, we have the good fortune of potentially benefitting greatly from one of those times when the stars align.

After yesterday’s near 4% rip higher in the SPX, one typically might expect stocks to breathe a bit. Certainly, most of the 190K E-Mini equivalent shorts that opened the previous three sessions have been squeezed shut suggesting another imminent outsized feeding frenzy to the upside seems doubtful. However, given the fortuitous timing of the calendar, I believe equities have a couple good days directly ahead. Since we close out a very miserable May at 4PM, I will turn my attention to the action which often dominates the final trading session of a month.

As a reminder, asset allocators are mandated to keep strict investment levels among classes such as equities and fixed income. For example, one blended fund could have a requirement to maintain a maximum of 70% and a minimum of 65% of all dollars in stocks while concurrently parking the remaining cash in bonds. Since it is too cost prohibitive to rebalance the portfolio daily, managers will wait for an end of period, usually monthly, timeframe to adjust weightings to ensure compliance. Consequently, when a period has a vast divergence in performance between the two classes, the amount of additional buying and selling can be massive. We witnessed that in April when the SPX was down 1.7% while Treasuries had a solid day to the upside. With the blue chip index dumping more than 7% and the 10YR Treasury Note’s yield making the gigantic move in yield from 3.66% to 3.35%, the likelihood that a good number of funds have naturally become under allocated in stocks over the past 31 days is high.

To bring the portfolio into its appropriate asset class bands, traders will need to buy equities while funding these purchases by selling bonds. The tricky part comes from the timing as the flows sometimes start as early as the morning or as late as 3:55 PM. Given the large divergence in returns, I tend to think the buy programs will start sending out waves early in the afternoon without stopping until the Bell to provide another constructive day for the markets. Therefore, if one rode yesterday’s wave of good times, then he or she might hedge a bit of the book for the morning before gradually peeling the shorts off right after lunch. Doing so will protect Thursday’s gains from potential Friday noise coming from a shakeout from the Chicago PMI or anything else random before capturing more free beta into the weekend. On the Close, I may tidy things up with the hedge again as the exchanges will remain dark for three days. However, we will then sail again with the wind at our backs on Tuesday with buying that benefits from the consistent and predictable inflows which result from the first of the month – historically the best day of the calendar for stocks. If I am wrong, there’s always that rabbit’s foot.

S&P 500 June E-Minis Key Technical Levels

Support: 1096.50, 1093.00, 1087.50, 1082.50, 1060.50, 1055.50, 1049.00, 1038.50/36.50

Resistance: 1103.00, 1110.00, 1116.25, 1118.25, 1122.75, 1124.50, 1130.00/31.00, 1137.00, 1140.00, 1147.50

If History Repeats Itself

What a day! We finally got the buying we have been looking for since last week when our Chief Market Strategist Jeremy Klein said the bottom was in. It has been an intense week at the firm as the PNL has whipped around with every tick in the Spooz. I have found myself paying more attention to the pre and post market futures than ever in my short career and it was nice to wake up to the futures up 25 handles. I felt a sense of calmness walking into the office this morning and I was quickly confirmed of my senses when Klein, with much confidence, said the selling is over.

Not only did Klein say the bottom was in but the bullish engulfing pattern Moskowitz had predicted had already been put in and the Spooz had 10 handles of breathing room in order to realize the pattern. The market ended up grinding higher the entire day as the bears retreated and money came into the market as the Long/Short book closed at an all time intra day high. After the close Moskowitz asked me to take a look at the pivots from the February lows to get a sense of what we may be in for tomorrow.

As we said on the desk yesterday after the close and throughout market hours today, the action in the market is very similar to that of the early February 2010 when we had our last correction. We stated that the bullish engulfing pattern formed on Feb. 9th is the same as the bullish engulfing pattern today. If history continues to repeat itself we will see selling off of the open down through S3 but shy of S4. S3 tomorrow is going to be 1088, just above the 1087.50 level we have spoken about on the desk. The market will then catch a bid and rally up to R3, once the Spooz trade up to R3, they will find resistance and pull in to close the day flat.

Looking forward to another interesting day and the chance to see if the market action will continue to mimic that of February 2010.

*This is historic data from February 10, 2010 and is by no means investment advice.

Johnson Controls

For many years, the collective conscious of the developed world has recognized the shortcomings of our current energy system. We know that changes need to be made, yet our satisfaction with the status quo blinds us to its lack of sustainability. We have sought alternative solutions; however, the incredible cost effectiveness, portability, and shelf life of fossil fuels makes these endeavors seem futile. Despite this fate, a few brave individuals and groups of individuals have taken the bold step forward and have brushed aside today’s impracticalities, envisioning a day when they will no longer exist. Some important questions remain; which form of renewable energy will be king? What are the most significant limitations of alternative energy? What are companies doing to ensure they will be well positioned for the future?

This was the introduction I read when presenting an analysis of the alternative energy space. I believe that this statement continues to hold true, especially in the wake of recent events. The BP oil disaster has proven that our extensive use of fossil fuels is harmful to the environment even when we are not burning them. Although the need for clean, renewable energy is apparent, our technologies are still a long way from completely replacing our oil driven infrastructure. Until wind farms and solar fields become cost and energy efficient, we must seek more creative investment ideas in the alternative energy field. The description of one such company is as follows:

Johnson Controls (JCI) is divided into three main segments; building efficiency, automotive experience, and power solutions. The building efficiency segment offers integrated heating, ventilation and air condition systems for which it operates throughout the entire channel from design to installation. Building efficiency also offers energy management and residential services. The automotive segment designs and manufactures various components for automotive interiors including control panels, electronic amenities, as well as doors and seating. The power solutions business offers tradition lead-acid batteries as well as various battery types to be used in hybrid vehicles. The company serves customers in over 150 countries and employs approximately 130,000 people

Johnson Controls makes an attractive investment for several reasons. First, the company is well integrated across several markets and has a diversified customer base. If orders for their automotive components begin to ebb, they will be able to rely on their commercial and residential building clients as a steady source of revenue. Next, the company’s involvement in the building and automotive battery segments go hand in hand with our firm’s thesis that these two areas will offer growth opportunities as our overall economy continues to recover. Finally, Johnson Controls finds a unique niche in the alternative energy space. Rather than attempting to sell a technology like solar panels which have not been fully developed, the company attempts to take existing technology and make it more efficient. As companies and individuals begin to transition towards a greener life, the building efficiency segment will allow these users to cut energy costs without having to completely revamp their systems. Furthermore, as more individuals move towards hybrid vehicles, the battery segment will likely expand while the company will maintain revenue streams from its traditional battery business.

Portfolio Recap 5-27-10

Best day since inception for the LS book today.  We were up 1.94% today which brings the LS book to down about 66bps for the month.  This is a great number considering the market was up 3.3% today and is down 7.05% so far on the month.  The primary driver of the book today was the broad rally in the market that we have been predicting for the last week.  The buying was broad based and didn’t feel like it was simply short covering as solid names seemed to rally on average about the same amount to a little more than the average short name.  I decided to leave the book somewhat hedged as the market really squeezed higher into the close so I hope I don’t walk in tomorrow morning to find the futures up 20 handles again.

Top performers were GNW, XIDE, and TPC.  GNW was up 8% on the day.  XIDE was up 9.5% on the day.  TPC was up 5.2% on the day.  Our worst performers were SPY, FXE, and DB.  The SPYs cost us 38bps.  FXE which I just re-shorted today at really crappy levels cost us about 7bps and DB which I also shorted today was up 8.6% as Europe looked like a much safer place today than it did yesterday.

Mid Day Thoughts

As part of our business model around hedge fund transparency, we devote much of our efforts to our members, continuously thinking of ideas that would benefit them.  I believe the added advantage of trainees with no HF experience is that they are essentially part of the target audience.  They can relate to the target members in this way.

My friend used to frequently tell me about what he does at the fund he works for.  I was definitely intrigued, but 99% of what he told me went over my head.  I like to review on a regular basis what and how much I’ve learned while working at this fund.  Now that I’ve gained a bit more familiarity with the lingo, I wish I could go back in time and hear what he had to say all over again as I would have garnered some interesting information.  However, I am fortunate enough to be surrounded by the information that I once could only be curious about.  The “you want what you can’t have” mentality that I brought up in a previous blog applied to me when it came to working at a hedge fund.  Well, to our target members who seek transparency within the buy side world, we can finally collaborate in trying to understand this business and the markets we trade in. 

Without pumping anyone’s ego up too much, I think today’s action highlighted how well our firm did in trying to read the markets over these past few days, and even weeks.  The light at the end of the tunnel is finally in full view.  Just some mid day thoughts as I’ve picked up some great insights so far today.