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Monthly Archives: March 2011

Burgers and Subs

HedgeFundLIVE.com — The worlds largest fast food chain that has restaurants in many countries, has been dethroned by a similar chain. McDonald’s serves over a million people daily and can be found in many countries, from USA to Germany to India. Each restaurant is specifically designed to fit the culture of that country and is widely popular within the natives. McDonalds’ has 32,737 units all around the world but Subway, according to last year’s data has 33,749 units. Who knew that Subway would exceed in units to McDonald. One would expect a similar franchise, such as Burger King or Wendy’s to compete with the universal burger shop, but in reality Subway comes out on top. Started in 1984, nearly 40 years after the birth of McDonalds subway has appealed to the people in a faster and different way than McDonald has. The success of Subway is the fact that it has opened in many locations that Mcdonalds has not. Subway has made it way, where ever there is desire for food. For example, Subway has opened its restaurant, in automobile shops, riverboats, zoos and even small stores all across the world.

Even though Subway has more units, its is no where close the leader in revenue earned. McDonald earned nearly $25 billion last year and hope to exceed the number this year. McDonald has no problem being second, as far they are first in revenues.

Judgment Day for Your College Degree


Over the weekend, the New York Times published an article by Paul Krugman entitled Degrees and Dollars.  The article begins with an anecdote from President Obama’s recent speech in Florida where he proclaimed “If we want more good news on the jobs front then we’ve got to make more investments in education.”  Krugman refutes this notion by stating how an influx of technologies have been slowly replacing “white collar” jobs for years.  He states “More broadly, the idea that modern technology eliminates only menial jobs, that well-educated workers are clear winners, may dominate popular discussion, but it’s actually decades out of date.”

This argument is particularly salient for the Wall Street community.  In 2009, it was estimated that 73% of all US equities orders were placed electronically.  The advent of algorithmic execution has had a profound impact on market action and has eliminated the need for many trading positions.  Why would a portfolio manager hire an execution trader when he or she could simply run a VWAP.  Or better yet, that same manager

Hedge fund manager of the future

could pay a team of programmers to build an elegant model that accounts for market participation, time, velocity, and an array of technical and fundamental figures. The only thing left to do is sit back and ring the register.  Even some of the most successful, employed day traders have been unable to adapt to the changing market environment and find themselves digging at the bottom of an empty bag of tricks.  How many times have you heard the guy next to you say “This market is just impossible, day trading is dead!”  So while education and self improvement will always be the pillars of growth, they are not necessarily the pillars of success.  Perhaps we should add two new courses to the modern college curriculum: Lowered Expectations and Robot Construction.


Short This Market- Now’s the Time

HedgeFundLIVE.com - Last month I wrote a blog about when I would be willing to get short this market.  At the time of writing that blog, the market was still on a tear and at overbought levels.  Everyone and his brother knew the market was long due for a pullback.  Trading, though, is all about timing.  When I wrote my blog in mid February, I said that I wasn’t willing to jump over to the short side just yet.

When would be the time to get short then?  I believed it would be when the market starts to struggle at a level for a few days and when there is a real and visible battle between the bulls and bears for at least several days.  My reasoning was that historically corrections following 52 week highs tend to be preceded by this type of action.  Looking at the market over the past couple of weeks, we’ve been witnessing a great deal of back and forth action between the bulls and bears.

Anyone can act once the uncertainty has been resolved, but by that time the greatest bargains will be gone.

Gains made over a couple of days are erased by the subsequent day or two.  This type of struggle in the market is what I had been waiting for before getting short and now that it is happening, I will put myself out there and say it is time- to short this market.  A bit of inspiration from Howard Marks of Oaktree Capital in his year in review letter, if you are afraid to short here:

“The crisis provided a great buying opportunity, but if you didn’t step up during those fifteen post-Lehman weeks, you missed it. …It was the hardest thing most of us have ever done [behaving counter cyclically], as financial institutions were disappearing as independent entities, talk swirled of the end of the financial system, and observers decried the folly of trying to catch falling knives.  But our view was simple: it’s our job to buy under those circumstances.  Anyone can buy once the uncertainty has been resolved, but by that time the greatest bargains will be gone.”

Similar story now, but for the opposite case- a great shorting opportunity, but if you wait too long for the uncertainty to clear up, the greatest bargains will be gone.

Having said all that, don’t be an idiot about it.  Proceed with caution by using sizing and scaling.


Oaktree Capital’s Howard Marks Is Cautious, But Won’t Be Consigned to Sidelines

HedgeFundLIVE.com — Howard Marks, manager of Oaktree Capital, today released his yearly review memo in which he sums up how 2010 was an “unusual year.”  Last year was all about correlation, according to Marks, as macro trends drove performance within asset classes.  As a result, most stocks had a difficult time outperforming benchmarks.  2010 was certainly not a stock picker’s market and, hedge funds, particularly long/short funds, saw weak returns as longs and shorts tended to perform similarly.

Marks says he is cautious, but will never be consigned to the sidelines.

A lot of interesting material in his year in review letter, which you can read for yourself, but I will just highlight Marks’ outlook:

- When looking at the macro picture today, factor in that the financial crisis and economic contraction are past us, but so is much of the market recovery.
- The U.S.  economic recovery is genuine.  Economy is gradually improving and capital markets have stabilized, even turning generous.
- Low yields on short term Treasuries render the idea of solid returns + safety impossible.  It is one over the other.  As more investors choose the former (return), most equities have become at least fairly priced.
- Investors are putting their money to work and not sitting on the sidelines.  The blind euphoria that existed in 2005-2007 is not present in today’s market. With that said, investors are still pretty reserved, and rightfully so given the  macro risks/uncertainties that have yet to be resolved.
- Two year recovery of the markets + at least adequate pricing of most asset classes + macro uncertainties => time to proceed with caution.
- Come to terms with the idea that we are in a low return world now.  This low return world demands caution, careful risk management, skepticism (good one IMO), discipline, discernment, and selectivity, all of which were required in 2004-2007 right before the financial crisis.
- The caution with that Oaktree will proceed will never consign them to the sidelines.


Wendy’s - A bargain?

HedgeFundLIVE.com — in 2008, Wendy’s merged with Triarc in a $2.28bn deal that was supposed to bring a lot synergies and cost reductions.  Now here we are with the Arby’s franchise dragging the stock lower.  Arby’s revenues have declined 17% since the incision and little to none synergies were enjoyed.  Both companies have separate headquarters and the cost reduction in SG&A has not happened.  WEN is lagging behind with the lowest margins in the industry and that is mainly due to the lack of performance in Arby’s.

Recently Management has come upfront with their decision to sell or divest the Arby’s franchise.  That will most likely happen as management is pressured by shareholders who will greatly benefit from the divestiture.  The stock ran up 7% when management explicitly said it is pursuing buyers for Arby’s in their latest Conference Call.  When that happens, shareholders will receive income from the sale in the form of reduction in debt or a per/share payout.  In addition, WEN will be left with a profitable business line that will generate around $207mm in operating profits and thus, making its valuation very attractive.  Management predicts a 15-20% growth in EBITDA in next years, but even if we use a 5% growth and a 15% WACC, we end up with a company value at over $3bn, or $7.17/share.

WEN is without a doubt a BUY now at 4.91 for the reasons described above.

By Rodrigo Polezel - Rutgers University

Making the morning trade- two key facts u need to know

take the money and run


This morning was ur typical rudimentary trade that all traders can learn from. we had a clear divergence in the nasdaq futures vs the spus.  right off the open the spus showed clear strength while the nasdaq’s showed their weakness as the leaders in the group ala goog aapl ffiv and amzn were breaking lower.  i shorted the nasdaqs for a quick trade and made 5 handles short.  at around 10am thw spus started to follow the weakness in the nasdaqs and the whole market gave in . one can look at this trading pattern and gather a couple important facts.

1- nasdaq was the leader of this mkt and eventually gave up 30 handles from highs based on the weakness in the nasdaq leaders.

2- the spus , after showing some strength in the morning could not sustain its leadership

this is a great trading pattern that all beginner traders can look for when trading the first hour of the mkts.  _  overiding weakness in the names that have led this mkt rally  ( aapl, goog, amzn ,ffiv, intc and nflx)  led this nice move to the downside.




The rich really are getting richer: LVMH acquires Bulgari maj. stake at 60% premium

If you’re rich LVMH will hook you up

HedgeFundLIVE.com — Moet Henessy Louis Vuitton (LVMH) announced today that it has acquired a majority stake in Bulgari.  The Bulgari family which was the majority shareholder in the eponymous company will exchange 152.5 million Bulgari shares for 16.5 million LVMH shares and become the second largest family shareholder with a 3% stake.  Paolo and Nicola Bulgari will stay on as Chairman and Vice Chairman of the company and will have the opportunity to appoint 2 new members to the LVMH board of directors.  Bulgari’s CEO will be tapped to manage LVMH’s watches and jewelry division later this year.

Bulgari is just the latest in Bernard Arnault, the LVMH CEO’s, growing stable of luxury brands that already includes Dom Perignon, Marc Jacobs, Fendi and Tag Heuer.  This move played out quite differently from Arnault’s surreptitious acquisition of a 20% stake in the Hermes family’s closely-held Hermes International.  The Hermes family has gone to unnecessary lengths to ensure their company’s independence from LVMH.

What is most surprising in this time of economic uncertainty and financial malaise is the 61% premium that LVMH paid above Bulgari’s closing price on Friday.  Arnault has repeatedly stated in interviews that he is not concerned with the spending habits of the US, UK, and EU – his focus is on the emerging markets where, for example, he last year opened a Louis Vuitton store in Mongolia.  Asia, excluding Japan, accounted for 25% of LVMH revenue last year.  Margins are lower, in line with lower average sale prices, but growth far exceeds any other demographic the company tracks.  Other LVMH outposts can be found in Ho Chi Minh City, Vietnam, Cambodia, Macao, and Abu Dhabi.

If the emerging markets are going to continue to drive luxury brand sales the natural question is “who’s next on the deal list?”  Shortly after news of the Bulgari acquisition hit, both Burberry and Tod’s shares were up about 4% in European trading.  Stifel Nicolaus is out saying that Tiffany (TIF), Coach (COH), and Sotheby’s (BID) are the dominant US luxury players in their verticals and could therefore be ripe for a takeover.  At 60% premiums it may not hurt to take another look at the Claymore/Robb Report Global Luxury Index ETF, ticker ROB; top holdings are Hermes, Swatch, and BMW.


Monday Market Expectations - Buy em, Sell em and then Short em big



I could not hold my full position, I was able to hold enough such that the trading group was up 68,000 for the first 4 days of the month and I contributed my share. Though we had the right call for Friday, the short squeeze on Thursday jeopardized the month. As I have said before, you cannot do today that which would risk your entire business tomorrow. I had a speaking engagement on Friday and missed all the fun. I would have had quite a nice day, as my style is to have sold all day into the weakness and algorithmically covered through out the last hour and a half, 2:30 – 4. But such is the life of a trader. I look forward to Monday, to buy the dips and to find further opportunities to short the rallies, cover and take limited overnight risk. This is the trade I will continue to look for, irrespective of the fact that the general trend in the market is up, for as long as the fed continues to fool the marketplace. Over time I will be paid off and will eventually experience a mini flash crash day that will put many months to shame in one single day. It may take several weeks, but we are heading for a tipping point in the market place, in which one more test will be needed to believe that we are truly in a sustainable bull market and that repercussions of the financial crisis if not behind us, have at least all been identified.

I believe the shock to the system will be Bahrain. We are so focused on Libya, that the market and the media are overlooking the greatest concern. On Friday nearly 100,000 protestors demonstrated in Bahrain. But unlike Egypt and Libya, the US has actually openly supported the monarchy and what is an ambiguous offer from the monarchy to negotiate with protestors. This will create one of the first great disappointments for the US with respect to their involvement in the middles east revolution. The protesters will not forget that the US sided with the monarchy, or more appropriately, Big Oil told the US government to back the monarchy. These people will eventually prevail. It may take a long time, but it is inevitable. Our fleet will no longer be welcome there, and our relationship with Saudi Arabia will be jeopardized by the a Shiite led neighbor next door to the Saudi kingdom. How will Iran view a Shiite victory in Bahrain? This will only serve to fuel the insanity of Ahmadinejad. We also seem to be ignoring the Muslim brotherhood, now regaining their position of strength in Egypt and fanning flames in Jordan, assisting anti monarchy protest. The New York Times.com reports, “Opposition leaders in Bahrain said Sunday that they would not be mollified by offers of money and jobs, raising the prospect of a protracted standoff between protesters and the embattled government of this strategically important island nation.” If it doesn’t work there, it won’t work in Saudi Arabia. The Arab Monarchies are insane, “King Hamad bin Isa al-Khalifa, the leader of a royal family that has ruled Bahrain for two centuries, in February offered 1,000 dinars, or about $2,600, for each family soon. The government of Kuwait in January announced that each citizen would receive the equivalent of $3,500. And last week, the sultan of Oman decreed that anyone without a job would be eligible for a stipend of $375 per month.” Perhaps they are confusing American styled stimulus packages with bribery. The King isn’t trying to stimulate consumer spending, he is trying to stop a revolution, and bribery just wont do the trick.

I will start the week off buying dips looking to cover shorts and take long positions in names sitting on support. This will be a short-lived strategy, as I will be selling into any rally I see and ultimately build into a significantly net short position by Wednesday afternoon.  I will spend Thursday and Friday shorting the market as I expect a correction to start later in the week that will hold for the remainder of the months. I expect March to be the first negative performance month of the year.

tune in for our live broadcast at hedgefundlive.com, tune in to my channel and see if I follow through.

12 Things Saudi Arabian King Abdullah is Doing to Quell the Spreading Unrest

HedgeFundLIVE.com — Given all that is going on in the MENA region (Middle East / North Africa) and the fears that it will spread to Saudi Arabia, I thought it made sense to actually list the things that King Abdullah is doing to prevent this from happening.  The bulk of the items in the list below are part of the $36bln in spending programs announced by King Abdullah a few weeks ago.

1) King Abdullah has announced structural reforms at the political level including ministerial reshuffling as well as opening a dialogue on a possible move towards a constitutional monarchy.

2) Extension of the inflation allowance for the country’s public servants at an estimated cost of $8.5bln.

3) Increase the budget of the country’s housing fund by approximately $11bln and raise the housing sector budget by $4bln.

4) Raise the capital of the Saudi Credit Fund (SCF) by $8bln to support lending to small and medium businesses and cancel two yearly installments for clients of the credit bank.

5) Inject an additional $270mln  into the budget of the Social Security Fund.

6) Increase the budget of charitable organizations by 50% as well as inject $2.5mln to every literary club and professional association as well as providing increased support to sports clubs.

7) Support needy students at universities and cover all stipends of students studying abroad to the King Abdullah Scholarship program.

8) Confirm a 15% inflation allowance to become part of the basic wages of public sector employees which is effectively a 15% increase in public sector wages.

9) Create 1200 jobs to support supervisory programs.

10) Defer loan payments for a large number of individuals who are currently in jail.

King Abdullah Throwing Money at the Problem

11) Provide a one year unemployment allowance for individuals looking for employment.

12) Increase wheat reserves to cover Saudi Arabia’s needs for a full year instead of six months.



Setup A Perfect Trade: NFLX and the 50 day Moving Average

HedgeFundLive.com — NFLX is a volatile high priced stock and is one stock to trade very lightly keeping your risk parameters in mind but an important trading philosophy to adapt is that when you see a great setup you have to be willing to put dollars at risk and go for it.  This was the case with NFLX on Thursday March 3, 2011.

Every morning my team and I identify entry levels for stocks on both a swing basis and an intraday basis.  NFLX was a stock that I have traded many times but have gotten away from it recently as it made a wonderful run up to $244 and I was not involved.  I do not get upset about missing an opportunity because the markets are filled with tons of names but I will continue to watch for that pullback that allows me to make a good entry.

Netflix held great support

As the market started its pullback in late February I identified the 50 day Moving Average as a great level of support for NFLX and it would be the place that I would look to make a swing entry.  Each day we would make a note of the daily pivots looking for that day when a support pivot lined up with my desired 50 day moving average level.

On March 3 S4 was $201.20 and this Moving Average was $201.83 so of course I set my entry pre market and forgot about it.  Mid morning Justin and I both noticed that NFLX was making new daily lows very quickly.  At this point I am not watching anything else simply focusing on this entry and watching to see if my bid gets hit.

The stock gets within a few pennies of my bid and starts to head back up, not wanting to blow my chance for a great trade, I lift a few hundred shares to make sure I am involved around $201.60.  Soon after NFLX pulls back in, my original bid gets hit, my mental stop is a move through $199 where if I got stopped out, I would reload lower or chase the trade up if it started to work again.  My plan was very clear and I was comfortable with the risk.

I was never tested on this level as the stock bottomed at $200.35 and started to rip back up again so I lifted more shares just under $201 and the stock was off to the races.  Even though I was going to hold the stock for a swing trade I wanted to try and pick off some extra profits meaning I traded around my core position and sold the entire position at $205.80.  If NFLX got above $207 I would buy it back for the swing and then focus on the rest of my day.

I was able to buy my core position just before the close at $203.40 which for me is just found money.  The next day NFLX opened near my closing purchase so I added more shares back and let it ride selling my extra shares at $210.40 before the weekend close.  Here I sit writing this on Saturday afternoon with over $6,000 in profits in a name I was risking $1500 and I still hold my core position over $9 from my original cost.

The most important lesson from this trade is that I was completely prepared in my entry price, my stop price and the number of shares I wanted to own.  I was comfortable with my risk and I had a great plan, the only thing I had to do was not screw it up and to this point I have been perfect.

Be sure to tune into the DayTradeWell channel on www.hedgefundlive.com.