HFL Portfolio Recap: 8-5-2010

The Hedge Fund Live Book had a tough day closing down 62 basis points and underperforming the broad market for the third time this week.  The S&P 500 was down 13 basis points while the NASDAQ composite was down 46 basis points.  It was pretty clear that they were selling stocks today especially the Semi/LED producers after a report out of Taiwan said that LED order have been cut by flat panel makers.  Also, the S&P Futures were only down 9 basis points versus a market that was down 46 basis points.

There wasn’t much green in the book today with the futures being are biggest winner on the day closing down 9 basis points.  Our MON calls were the second biggest winner on the day closing up 3.13% on a day where all the agriculture names showed strength.  Our RIMM short had another nice day as it traded all the way down to the first support level, which was the June lows of 52.21.  We covered 70% of the short and will be looking to short a pop if we get the opportunity.  Closing out the winners was GOOG.  GOOG  had a decent day and rallied into the close to end the day up 35 basis points.

CREE, MasterCard, and IMAX were the major losers today getting hit hard in today’s selling.  As I said earlier CREE got whacked on the news that panel makers were cutting back on their LED orders.  CREE actually rallied about 2% off of the lows to close the day down 4.81%.  MA looked to be one of the stronger names right out of the box but was sold into for the rest of the day and closed just 50 cents off the lows down 1.79%.  Last is IMAX which saw heavy selling from 9:30 to 10:30 before rallying back 50 cents by noon.  IMAX then traded sideway’s for the rest of the session before closing the day down 3.36%.

We took our long exposure down by about 11 basis points as we head into the number tomorrow morning which leaves us about 23% net long.

Earnings Season Nearly Behind Us

As we enter the slow weeks of August, there’s less news and earnings to chew on especially for financials which report earlier in the season and Congress going on break doesn’t add an juice to the market either. The only lurking piece of data out there is how companies will perform amongst all the new financial reform rules. Now that most of earnings are behind us, executives of big banks and financials institutions will have to seriously take into consideration bottom line impact. J.P. Morgan Chase & Co., which unofficially kicked off the season July 15 with a better-than-expected bottom line, raised questions about the near future for itself and the rest of the industry because of lower revenue, fee income and net interest income. Where will cost-cutting come into play and what strategies will banks take? GS, MS and C are already in talks to spin off their trading groups. According to CNBC GS could announce GSPS spin out as early as tomorrow. If this is the case we should see some action in financials even if the unemployment numbers don’t shake things up.

 Over the last few days I’ve read some of Ace Greenberg’s “Memos from the Chairman”, a book we have in our library. The memos are written by CEO and Chairman of Bear Stearns addressed to company personnel throughout Greenberg’s tenure at the firm. I find the memos quite entertaining and appropo to today’s financial climate. Greenberg creates a fictional character named Haimchinkel Malintz Anaynikal, who is the dean of economic philisophy in his mind that give out words of wisdom pertaining to how a company can achieve success. Most of the memos discuss the company’s progress as it tries to grow and compete amongst the bigger trading groups on Wall Street. Haimchinkel Malintz Anaynikal speaks most of cutting expenses to improve the bottom line. Most of the advice surrounds the notion of cutting costs, specifically office expenses. So all of Bear Sterns follows the advice and limits their use of paper clips, reuses envelopes and switches from FedEx Mail to US Mail among many other cost-cutting tactics. Financial companies affected by the new regulatory environment will need to start considering the wise words of Haimchinkel Malintz Anayniakl if they strive for continued growth.

Two quotes I particularly like from the Memos: ”thou will do well in commerce as long as thou does not believe thing own odor is purfume”

“when you’re working in a large group, there is bound to be a person or two who is not your exact cup of yogurt”

Industrial Sector Wrap-up & the August Trade

Today brought an uninspiring day from the Industrials book, closing down 40 basis points vs. an S&P 500 that was down 0.13% and a Russell 2000 down 1.19%. Our largest winning position was CVE which closed up 1.67% at $28.56. Fortunately, we had the prescience to purchase this stock yesterday just above the 28 figure. This trade was based on a favorable risk to reward ratio; if the stock sold off, there was support from the 50 SMA at $28.70 and if the stock rallied, it had a clear shot all the way up to $30. So far the trade has paid off. The next winner of note was GE, closing up a modest 30 basis points and conferring an unimpressive $80 of P&L. What is interesting about this stock is the fact that it closed nicely above its 200-day SMA of $16.36 for the second consecutive day. If this stock can continue to hold these levels, it has another 50 cents of room to run before the General meets resistance at $17.

From a discretionary trading standpoint I kept it fairly light today and closed the day up 32 wampum. After two consecutive losing days I was glad to be able to break the cycle and book a positive day. The majority of my trading came before 10:30 a.m. as the market traded exceptionally light volume throughout the afternoon providing little opportunity for “A” trades. Rather than force a trade for the sake of trading, I was comfortable sitting on the sidelines, posting on my names, and trying to learn from others on the desk. With light volumes, I have noticed that levels tend to lose some significance and a preponderance of shakeout moves that stop you out of a trade even when you are right. In this frustrating environment I find it best to stick to Mark’s most important axiom; have more shares when you are right and fewer shares when you are wrong. Through proper scaling and sizing, a trader can limit his or her pain when the shakeout move does occur and be positioned appropriately when the trade begins to work.

How to Make a Buck Off the BP Oil Spill

What do I need to see to leverage up?

I believe this was the question posed to myself and Dean Machado last night by Jeremy Frommer. We are under capitalized at this point and unfortunately I have yet to get the intraday setup that will allow me to take more size in my trades. Certainly the S&P has been grinding up and I think there are times to be over leveraged and there are times to be under capitalized.

Why has it been tough for me to get long this market? Because nearly everyday we are maknig R3 sell signals and slowly grinding higher. This setup makes it nearly impossible for me to take long trades.

What is the setup that would be most advantageous? Last Friday we had a great setup, a move into S4, good candle pattern and then confirmation. Yesterday again was a difficult setup for me. I really hate to go against the pivots as I believe in them, so as a discipline trader I will wait for my best pitch, my great setup and then look to hit it hard when that time comes.

Tech/Telecom Portfolio Recap: 8-4-2010

The Tech/Telecom book had a solid day today trading right inline with the broad indices and the XLK which is the Select Sector (Technology) ETF similar to the XLF you here us talk about every day.  The book was up 76 basis points outperforming the S&P 500 which was up 61 basis points but underperforming in comparison to the tech heavy NASDAQ composite which was up 88 basis points.  Technology and Telecom finished in the middle of the pack as far as sector go with services leading the pack and financials lagging.

The top performers on the day were GOOG, MA, RIMM, TTWO, and AAPL.  The action is GOOG was terrific as it grinded up the entire day closing well above the 500 level up 3.51% at 506.31.  Although there was no direct news out on GOOG my speculation is that the weakness in RIMM and the final acknowledgement of how powerful android is drove the stock higher.  MA was up nice 2% following their earnings report from Tuesday morning, MA is still 3 points from the Monday morning highs so pay attention to the 208 level as it should be decent resistance.  RIMM the lone short in the book got smacked today on the combination of news.  The first item of business is the Torch and the new OS are not very new, the OS is still slow and congested and the Torch is the Storm and Tour/Bold/Curve smashed into one and second is the fact Saudi Arabia will block their service because of security issues.  TTWO was up as a result of ERTS earnings and AAPL had a decent day considering more negative news came out regarding iPhone and iPad security.

The losers on the day were DELL, MSFT, V, and CREE.  DELL showed weakness throughout the day closing down 1.56%, watch the 13 figure for support.  MSFT, V, and CREE were down on no direct news and can’t really make up what direction they feel like going.

Tax on Internet Gambling: Desperate Times Call For Desperate Measures

The blog title is inspired by our federal government’s contemplation of lifting its ban on and taxing online gambling.  Last week the House Financial Services Committee approved such a bill.  A few months ago the freshmen discussed on the webinar the concept of sin taxing- imposing taxes on “sins” like gambling and tanning.  Basically, activities we (the government) deemed as illegal before are suddenly okay once we can tax them.

There was an article in the Times the other day about Pennsylvania authorizing table games at some of their slot machines-only parlors.  This move comes in light of the huge deficits that state governments are facing;  for casino rich states like Pennsylvania more gamblers and more tax revenue will act as a small bandaid to their deficit issue.  In the year ending June 30, Pennsylvania saw ~$1.2B in slots taxes come in, which is marks a 23% increase y/y.

Hopes appear to be high for the gaming industry.  In fact, the CEO of Mount Airy casino in the Poconos is spending $2M in NYC as part of an advertising campaign to attract customers to its casino, 90 miles away from Manhattan.  While helping state deficits through this alternative means seems fine to me, one of the questions that is circulating around this issue is whether the addicitve nature of gambling will draw consumers to spend more than they can actually afford (can almost sound cyclical in regards to the transfer of debt from the state to the consumer).  As a sign of faith in the consumer, I will say that I am all for the lifting of the internet gambling ban, though I will say this whole thing sounds hypocritical on the part of the government.  But what else is new.

HFL Porfolio Recap: 8-4-2010

Today was a solid day for the fund and the first day of outperformance this week as the overall book closed up 64 basis points versus the S&P 500 which was up 61 basis points.  The top five winners on the day were GOOG, CBS, MA, ATLS, and GME while the top five losers were the futures, DELL, SPY, BAC, and AXP.  We added 50 basis points to our net exposure as we initiated a long position in BKS on the thesis that the buyout could be north of twenty.  We also added into our position in CVE and our short in RIMM on today’s weakness.

GOOG was the standout to the long side making up roughly 21% of our total PNL, GOOG was strong all day on the RIMM weakness and continued strength from Android and their new deal with MOT and VZ to make a TV Tablet.  CBS was up 4.13% on solid earnings after yesterday’s close, they beat the street estimates on both top and bottom line.  MA was strong today closing at the highs of the day $205.30 up 2.15%.  ATLS and GME rounded out the top five closing up 2.81% and 2.90%, respectively.

The E-Mini’s or the futures we have was the biggest loser today closing up 54 basis points erasing yesterday’s loses.  DELL was down 1.54% on just another weak day as we continue to pull into an important support level at $13.00.  BAC and AXP were both down 1.05% on a day where the financials were the worst performing sector in the S&P 500.  Also, AXP was unchanged until their analyst day started and the stock immediately dropped a couple of percent before rally back and trading sideways into the close.

Overall a good day and a needed day for the firm after two days of underperformance, the financials lagged on a positive day so keep an eye on the banks tomorrow.

Slow Market

Did summer just start? According to the stock market is did. Today was the 2nd lowest volume in the EMINIS (S&P Futures) in three weeks, which is a fairly good indicator of overall market volatility. On days like today, I tried to get some side work and reading done in addition to light trading. I spent a little time today reading how banks fail. That’s right how banks fail. My focus these days is financials as I both execute and trade on names such as DB, JPM, BAC, GNW etc. Once a week I’ll read a report about how X number of banks failed last week and the count for 2010 is up to 108. Through my research I was brought to the FDIC’s failed bank list over the last ten years. I compiled the data and created the below pie chart. So far in 2010 there have been 108 failures and in 2009 there were 139 failures. At this pace in the new financial regulatory environment, 2010 might see more failures than 2009. To keep it simple, there are three primary ways a bank can fail. First, there is a bank run where depositers panic and withraw money like crazy. Second, a bank can’t sufficiently barrow money from other banks on an overnight basis-this can happen when a bank’s rating is drastically lowered. Third, regulators can become concerned that a bank’s reserve levels are too low, specifically with Tier-1 capital ratio (the minimum acceptable is 6% and the strongest banks have ratios of 13-20%). The stress tests that have been taking place starting in Europe and most recently China tests the ability of bank’s to survive too much risk with a specific reserve level. Many banks are finding it hard to lend at when they must keep their reserve levels at a minimum. While all stress tests have seen a majority of their banks pass, a serious air of uncertainty remains. Financials institutions, such as GS, are wavering as to whether they can keep all aspects of their businesses running under the new regulation. Most institutions, in fact, are willing to forgoe a piece of their business to appease both regulators and customers. The question remains as to whether this tight regulation can act as a double edged sword, purging the system of bad banks and requiring the existing banks become stronger and resistent to shock.

Dow Jones Index drops 1,000 points

Why am I making this prediction? How long until this comes true?

In listening to Fast Money on CNBC and that John Paulson is selling half of his equity assets due to uncertain economic times gets me to thinking that the market has had a huge move off the bottom and that a small correction may be in the works. Then I go to the CNBC website as well as Bloomberg site and I see that many big time managers are about split on where they believe the market is going to go.

So all of this divergence in opinion tells me that the range that we have traded in since late April is still in tact as the market is in a virtual deadlock between opinionated managers with lots of capital. Bob Doll who is the CIO of Blackrock and permabull is calling for 8% average returns over the next decade and at the same time his firm is applying to the SEC to create ETF’s that can short stocks, hmmmmm.

The last part of my thesis is that today I was heavily short this market and although I lost a little bit of money, I was never hurt that bad and as we have seen over the last few weeks, the market often will trade counter to the last move of the previous day. The market is at resistance, we have rallied 120 handles on the S&P and we have payrolls data on Friday. Earnings are mostly behind us and the economy stinks, regardless of what people want to say.

Do we drop 1,000 Dow points tomorrow? Let’s wait and see.