August 2007 Archives (Vad's Best Ideas)

August 2007 Archives

Rough start- week 1

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My worries about going fully invested last Monday had some merit. As the first week shows worries about credit crunch are spreading further and further. Fear is slowly overcoming greed to become the main market driver. Bear Sterns made a move that might have been questionable - late on Friday they held a call with Investors explaining that BSC has sufficient capital to survive- the question some people might hav here is why would they do that?

As we all know without access to capital and prsitine reputation Wall Street is nothing more than a group of overcompensated MBA grads. The problem of Bear is that they are on the verge of losing both- possible debt dowgrades could explain why BSC is trading at a very low (by WS standard) 1.2 times book -investors are expecting that BV is going to decline significantly in the immediate future. Reputation damage is even more troubling at this point- the next logical steps would be employee layoffs, increased attrition and finally takeover by one of the big banks like BofA, Wachovia or Citi...

Anyway as far as my portfolio goes- I had a roough couple of days- my bigges losers so far are NOV (Varco) and NVLS (Novellus). Similar stock symbols but very different stories- Varco is one of the best O&G servicing companies that I think is just taking a short breazer from a phenomenal rise of the last few years. I feel comfortable holding on to my short term losses here- 6 months target-$150 or roughly 45% return.

NVLS however a whole different story- its a semiconductor company that went through quite a turbulent 52 weeks and right now is in a falling knife pattern. Trying to catch it might be painfull but given how attractive the fundamentals look at this time, I am willing to weather he turbulence and have a target 6 months return of roughly 40% from here.

Looking at the bright side of things

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My best performing picks so far are PEG - utility play with great fundamentals and solid dividend that should support a 20% expected 6 months return for me here.

ATI- materials play - only slightly cheaper than the industry but growing faster and in the sweet size spot positioned for a possible take over- 25% return target here

IBN- is the largest non state bank in INDIA- while I presently don't like financials-this one is an exception- it has the greatest growth potential of any mid-cap financial institution out there as far as I can see.-30% in six months is the target

CEO- two words- China and Oil combined make for an explosive combination- either a greatest opportunity of a super hot growth economy with unsatisfiable thurst for the world's most valuable resource (water does not count :)), or an example of speculative bubble with overheated stock market and commodity on a top of the cycle. Either version has merits but for the next 6 months I don't think much is going to change so let's take a chance with a scenario 1.

ASPV- beaten down pharmaceutical company that is trading at roughly book value- speculative but high return potential- 100% return expectation...

PDE- more O&G exposure at the right price.

WFR, LRCX- more exposure to higher growth semiconductor players

New trade in - NOV out CHNG in

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Given the uneven performance of the last few days I am making one change. One of my favourite pick CHNG had quite a pull back in the last few days on the news of the private placement. I think its a great time to add some shares...

Is NovaStar going bankrupt? I am not so sure yet

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I am making another change switching IBN for NFI... Will look for a quick 20% rebound but will sell if it dips under $5... First trade today 8% position at $5.60...

After the release of the Fed's statement I tried to play a reversal that usually follow a large down move after the release- sold half position of ATI and bought more NFI. ( now up to a 15% position)

Gambling with a company that could easily end bankrupt is not something I do every day but given the overall market mood, I think shorts are overreacting a bit. Book value of NFI before the fall out was very respectable $50 a share. Undoubtedly it's going to decline signigficantly but I am betting my Strategy Lab success on the chance of them surviving...

This opportunity with sub prime lenders/homebuilders today reminds me the sell off of anything related to natural gas/utilites/power generating companies following Enron's collapse. Anyone who was smart and brave enough to pick players like AES, EP made a killing. The main point though was diversification- because we know that a number of companies like Mirant and Calpine did not survive. However if were holding a diversified portfolio of power producers you made a killing because positions in bankrupt companies can't go down more than 100% while real winners like AES produced returns that exceeded 1000%...

I am going to spread my bets a little. Reducing all of my initial positions to 5% and buying some Impac Holdings (IMH), Countrywide (CFC) and IndyMac (IMB)

When taking gambles pays off

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Honestly, after my portfolio closed down at $930K yesterday I was a little worried that my gamble with mortgage lenders might be a devastating blow to my Strategy Lab hopes.

After spending several hours digging through financials I got a bit more comfortable that both NFI and IMH have a good chance to survive the blow up in credit markets and if that turns out to be true- both of them will easily become multibaggers...

However lets not become self complacent here- the housing mess is nowhere close to being over and thus either one of the two can potentially blow up any day wiping out 10-12% of my portfolio value. Both NFI and IMH have a nice cushion of liquidity on their balance sheets and thus my bet is - they will survive...

P.S. My portfolio finally broke the magical $1M range again with a whopping 5% gain for today. I doubt it will stick at that level today but hopefully by the end of next week we'll make it onto the leaderboard

Calling a bottom on subprime lenders

Rating: 1.17 (6 votes) Vote:

The news from BNP hedge funds hammered financials today but the sell off wasn't as bad as one might have expected...Is it because the hedge fund story is old news by now? Come the correction started a month ago... The fact that french banks can't calculate the NAV of their hedge funds is not surprising and thus I think today is a buying opportunity day...

I spent hours and hours reading through 10Qs, press releases, message boards erc last night trying to figure out how to best take advantage of the fear present in the market. I think we might have one or two more players go bankrupt but overall the sector is doing ok and going to survive and adapt to the new reality... Wave of consolidations and bailouts is looming on the horizon and thus the upside is tremendous- risk is huge as well though!

ECB and Federal Reserve finally decided to pump in some liquidity in the market and thus the healing phase has just officially begun...FNM and FRE are next in line- I expect that their mortage caps will go up and thus more liquidity and more good news for the lenders.

I am taking an aggressive action to take advantage of overreaction- all of my initial positions are being sold out this morning and I am using the proceeds to spread the risk among the most beaten up names in the lending sector...

I am buying LEND, more NFI (up to 20%), DFC, TMA and FCH

Behavioral finance lesson- herding is stupid? is Cramer wrong? (at least in the short term :))

Rating: 2.00 (26 votes) Vote:

The day started with what are seemingly terrible news of more troubles in the credit field, DOW has dropped 350 points but most of my trades today worked it back into the black before the close...The fund loaded with a bunch of sub prime lenders which according to Cramer are all going bankrupt closed in black, Booya 

However difficult it might be for us to stay calm and rational when everyone around us is kicking and screaming, I think that the most important thing that the investor can do is keep emotions out of the decision making process. On some days I just take my coffee mug and several pieces of dark Venezuelan chocolate (yeah I know we shouldn't support them- but their chocolate is by far the best out there) and go outside for an hour or so with some print outs of the latest 10Qs and press releases of my picks- being calm rules!!! -I've learned it when studying for my Level III CFA exam :))...

P.S. Jim Cramer some days is sooo annoying it's not even funny. I've noticed that after he comes on too strong on a particular pick or a sector after the several days of euphoria/overreaction, stock/sector usually ends up way below his recommended target...I wonder if someone actually keeps track of his all his most touted picks and confronts him with the results. Is he dead wrong on the lenders now? - I hope so 

Here is what Wiki has to say about what I refer to as "Cramer's effect"

"One characteristic of overreaction is that the average return of asset prices following a series of announcements of good news is lower than the average return following a series of bad announcements. In other words, overreaction occurs if the market reacts too strongly or for too long (persistent trend) to news that it subsequently needs to be compensated in the opposite direction. As a result, assets that were winners in the past should not be seen as an indication to invest in as their risk adjusted returns in the future are relatively low compared to stocks that were defined as losers in the past."

Go sub prime :) I need to get into the Top 5
Cheers,
Vad

Playing with fire and/or diversification magic !?? ^)

Rating: 2.50 (2 votes) Vote:

My fund was 90% invested in sub prime lenders as of yesterday. So one might have expected that with most lenders down in double digits today my fund will quickly move in the bottom 50 again, but guess what it's not going to happen- at least today. After the closing bell yesterday both CFC and NFI reported results that confirmed my thoughts on the sub prime- while all the lenders will struggle in the near term - long term most of them should survive...

NovaStar reported book value is way over $400M with a market cap of $50M and because of the shrewd management moves at least in the short term the liquidity on hand is sufficient to survive the storm. Countrywide is simply too big to fail and while profits might and will evaporate for the next 12 months or so with $49B in available credit CFC is definitely not going out of business.

Now back to the bad news- while CFC, TMA, DFC and IMB all are down in double digits today. But my larger positions with LEND and NFI are providing a hedge with huge gains... LEND is more likely now to get bought and thus the spread between the expected sale price of $15 a share and yesterday's closing price has been closing slowly...I am not sure the transaction will go through but market certainly believes its possible I guess.

Another funny point- now Cramer ( I think he has responded my bashing yesterday :)) is saying that sub prime is the place to be because Fed might cut the rates :) While I am not that that will happen on Monday like Cramer thinks I think that expectation now is that the next move is definitely down not up :)

Even that logic might be false because all the liquidity that Fed is pumping into the system should theoretically increase inflation which does not bode well for the rate outlook.

So long story short- it's a trimming day today- I've sold some NFI this morning to get back to 20% with a limit order of $5.80 and have another limit in for LEND at $6.80... I will reinvest the proceeds in the most beaten up of my picks IMB, TMA and CFC...

Time for coffee and chocolate again,
Cheers

Another batch of trades

Rating: -1.00 (1 votes) Vote:

Just sold out of LEND for a $25K profit and reinvested proceeds into all new sub prime position- DFR - Dierfield Triarc Capital- 9% position

Leftovers (due to complaince trimming) reinvested into IMB up to 9.75%, CFC- 9.75%, FCH- 7.5% and TMA-9% positions.

Another batch- sold out of FCH - used $50k of proceeds in TMA and $25K first small position in another beaten up sub prime stock FMT. Will buy more on weakness

Broker's dream... or Fear and Greed!

Rating: 0.75 (8 votes) Vote:

It's been only two weeks since the beginning of the Strategy Lab contest and I have already made 71 trades and paid $15K in commissions... Results have been encouraging so far with the NAV of my fund at $10.39 as of Friday, I am comfortably above where my original conservative portfolio would have been ($9.55) if I just stuck with it.

However, my plan going forward is to eventually reduce turnover and volatility through diversification away from sub prime into IT, healthcare and consumer staples. I believe in reversion to the mean and sector rotation. IT and healthcare have lagged the overall market for the last 3 years and it's time to give back.

But the "Great Unwind" of quant and hedge funds is not over yet and thus we'll see whether early next week will be a good time to unload some of my positions. I think Monday and Tuesday will determine which of my bets are destined to fail. I have a growing fear that DFC and/or IMH might throw in an unpleasant surprise for me in the next few days and go belly up. The trick here is how to get out profitably before one of them crashes and burns...

So don't be surprised to hear me trading out of one of my existing positions and possibly buying back one of my previous sells for example LEND. Their buyout story with Lone Star took unexpected turn after-hours Friday. As you might know Lone Star has offered LEND $15 a share before the sub prime blow up which management accepted with great enthusiasm. So one might ask why was LEND was still trading at $4 on Thursday? The answer is simple- it is clear that Lone Star will do all it can to try to get out of the contract. The real pickle here is - who know how definite the contract is and what if anything can LEND get out of Lone Star if they pull out.

On Friday morning it seemed like the deal is getting closer to completion and stock rallied 50%. After I sold out with a 25% gain and watched the stock rally another $2 a share, my greedy conscience was telling me that by selling out at $7 a share I gave up a clear chance to become the leader of the whole Strategy Lab contest... But what do you know -Lone Star came out after hours and said that they will try to get out of the deal and stock plunged 50% again... What a rollercoaster ride or was I simply lucky?...

But I do smell opportunity again. If LEND legally goes after Lone Star aggressively enough they will at least get some liquidity out of them or may be just renegotiate lower price. Either way assuming management spent some time shoring up liquidity concurrently with trying to close the actual deal. This after hour selloff might tun out to be a good chance to jump back in on Monday morning...

Fear and greed drive Wall Street- right now fear is winning but in the long term greed always wins...

Cheers and trade safe,
Vad

Today's Recap - fear is winning :)

Rating: -0.75 (4 votes) Vote:

Today's Recap:

Out of DFC (10% gain) and FMT (5% gain) because I need more cash, added more TMA on an unexplained and unexpected weakness. SP downgrade news hit on Friday so I am not sure why such a large decline today.

As expected IMH imploded today but I am not selling- may' be will even add some shares...NFI call went ok- company plans to stay in business, will look to reduce holdings if it pushes above $7 a share.

Have put in limit sell orders for CFC and IMB, both out the money by a $1 a share- might do the same with DFR but only if with the sells my NAV goes above $10.50 which should allow me to get into a Top 5.

Mortgaging my SLO future...Or how to quickly lose a lot of money...

Rating: 1.21 (19 votes) Vote:

After a week of very intense trading I have managed to move from the 1706s place to number 13...Doing so wasn't easy and I took some huge gambles along the way. But I think that after today's TMA blow up I might be catching the other side of my sub prime trade...

The surprising thing is I expected trouble will come from one of my speculative picks like DFC, NFI or IMH but it came from one of the most conservative players in the whole mortgage industry-TMA. Their balance sheet look pristine - high quality AAA rated assets, stable dividend income and earnings but it does not look like banks are behaving very rationally here- all the mortgage lenders are bunched into one big group and credit terms are becoming tougher- more collateral and higher interest is required.

As a result SP downgraded TMA on Friday, but this move, while unpleasant, wasn't really surprising and thus could not explain while such a sharp sell off occurred today. I guess everyone now expects that the dividend will get cut but while I think it's quite possible I am not sure it will go down to zero.

Anyway this position is $42k under water right now and something has to be done about it. I am expecting to collect some very small profits/losses from CFC and/or IMB tomorrow or on Wednesday and will do something I've been told many times not to do- double down on TMA which will take my portfolio out of compliance temporarily and put the position up to 30% of my entire portfolio.

P.S. I guess my fund right now looks like one of those sub prime mortgages taken out with a "teaser" rate that assumes no one goes bankrupt in the next few weeks. The real talent will be getting out before that assumption will be reset and ...

Countrywide can not fail!? Or could they?

Rating: 1.00 (3 votes) Vote:

My heavily mortgaged portfolio has taken me for a wild ride during the last few days...Technical difficulties with Ms website did not help either but my previous headline correctly predicted that my SLO fund is capable of losing money with unprecedented speed. On Monday my fund tumbled 10% in one day because TMA troubles took a turn for the worst and got crushed with a $90k loss to my portfolio.

I spent the last three days trading as much as the Marketocracy's web site has allowed me too sometimes missing 5-10% swing trade opportunities because tickets did not show up fast enough or at all. The summary result so far has been mixed with my fund bouncing back by roughly $70k since the bottom but still under $10NAV...

I have gotten out of CFC, IMB, DFC, FCH, TMA, CHNG and now I am down to only 5 heavily concentrated positions:
NFI at 25%, IMH at 20%, LEND at 23%, FMT at 10%, DFR at 13% with 10% in cash being deployed into weakest position- DFR...

Thank you "Helicopter Ben"!

Rating: 2.00 (13 votes) Vote:

The move to cut discount rate on the part of the Fed is surely going to attract a lot of attention. Hundreds of experts around the world are going to weigh in and speculate whether this move encourages the speculators or whether it could actually save the world economy from almost unescapable recession. (I will present my thoughts on this in the next few days)

But the short version is as far as I am concerned this move was fully warranted. The fact Federal Reserve has cut the discount rate rather than the Fed Funds rate means that FR agrees with what most of the hedge funds are saying- current market turbulence is driven not by fundamentals but rather by liquidity fears and simultaneous deleveraging. Banks and other financial institutions are simply afraid to loan each other money because no one is sure any more what counterparty's risks are. Hedge funds on the other hand got caught trying to exit the same positions and thus only exacerbated the volatility while losing their shirt in the mean time. However, the smart money should be buying subprime debt and not selling. One of the greatest opportunities ever to profit is unfolding in the debt market before our eyes and my belief is that shrewd and bold players will make fortunes buying CFC's and TMA's debt at deep discounts. This how the huge fortunes are made! I wish I had a few millions to invest right now:)

On the unrelated matter -while reading foreign newspapers and blogs I find it simply amazing how many of the US critics are still saying that United States is simply no longer important enough to the world economy, and that any US crisis will stay within our borders. Thus it almost seems ironic that emerging markets have reacted to the market turbulence in the United States just like they did every time before that- they sold off!!! High beta investments behaved just like they were predicted to do- they fell multiple times more than the market (US) did. Here you go simple advice for all the emerging market junkies- United States was and still is "The Driver" of the world economy and all other economies are still only followers. Could it change some time in the future- surely Yes but not quite yet anyway.

P.S. Today's Fed cut might stop the sell off in the short term but question is how many of the Financial stocks that bounced 20%+ today will actually be around in the next 6 months? My SLO has been definitely well positioned to today's events and hopefully I will prove my critics wrong by using my heavily mortgaged portfolio to jump firmly into the first place of the competition. But here is some bad news- I've been trying to sell almost ALL of my holdings today except for LEND (they will be bought by Lone Star after all I still believe:) because, while I anticipated the sub prime bounce, I certainly recognize that some of the holdings might end up in bankruptcy eventually.

It is prudent to take advantage of opportunities when they present themselves however wrong everyone thinks you are, but it is also important to make sure that the greed does not overrule common sense, and that is precisely why I am getting out of the sub prime game at least for today :)

Trade safely,
Cheers, Vad

Collection of random thoughts...

Rating: 1.59 (17 votes) Vote:

One thing I have noticed while browsing my favorite economic blogs is that the best ones are not necessarily the ones that present a very deep and technical description on world's events but rather the ones that have an arrangement of seemingly random descriptions of various events around the globe. With this thought in mind I will keep posting my short trade recaps which are almost guaranteed to gather many more -1 ratings due to the simple fact- they are boring :)

Was Fed's discount rate cut a brilliant or stupid? Here is my take- first of all discount window is simply a tool for banks to borrow money directly from the Fed rather from other banks (fed funds). Thus this tool is usually used when bank can not borrow from other banks and could be considered worthless for most creditworthy institutions because it is 100 basis points more expensive than the simpler way to borrow- fed funds. So here lies my question- why would a financially strong institution want to use a more expensive credit source unless it is in trouble. I guess that is exactly the same question that Fed is asking and thus they gathered the "Big Boys club" (BofA, Chase, Goldman) and tried to convince them that borrowing from the discount window will be considered a sign of strength rather than weakness. I personally doubt that the "Big Boys" are going to use Fed's window but some of the more troubled players should be certainly thankful to Ben and Co.

I guess the next smart move would be to change limits on the Fanny's and Fredie's portfolio. I would probably stat with increasing the size of the jumbo loans that could be accepted by the agencies. I mean come on $416K is not going to buy you a house in California or New York- 95% of people that buy houses at those prices are more credit worthy than people that buy conforming $100K mortgages. Anyway- main beneficiaries of those expected moves would be CFC, TMA and IMB so I might look to pick up some shares on any weakness next week.

Carry trade- given that Yen kept surging last week the "Great unwind" of carry trade is not yet over. All the hedge funds that according to Goldman earned 19% annually by simply selling 5 lowest yielding currencies and buying five highest yielding ones are now abruptly exiting their positions. As it usually happens when ten people are trying to exit through the same door during the same second- it starting to look like a real stampede- Look for some big hedge funds focusing on currencies to blow up in the next few weeks and after the Yen breaks below 112 I would expect the Japanese to intervene and help to reverse the surge. I have not yet decided how to best play this scenario but something like buying Toyota or may be even some ETF focused on Singapore, Korea and Japan might work... I don't the timing is right yet though because fear is not the appropriate level but if we have another 6-10% decline I will step in and buy.

Trade safe and cheers,
Vad

Taking it easy...

Rating: 1.22 (23 votes) Vote:

I remember the first time I ran across Marketocracy''s web site back in 2003... The concept of someone running a virtual portfolio fund with a potential to eventually being able to manage "real" money seemed so attractive that I spent all night doing my research and establishing my first fund. I picked 20 or so stocks and let go...

What I did not realize at that time was that I was changing the direction of my entire life. My involvement with Marketocracy became an obsession. I spent entire days/nights reading WSJ, Motley Fool, MSN, Yahoo and pretty much anything else I could easily get a hold of related to investing. I started to participate in various contests and after realizing that my success ratio was consistently high I changed my major from Management to Finance...

Now Finance IS my life- I consecutively passed all three CFA exams and spend most of my time valuing companies for living. So I guess while I am not a professional portfolio manager theoretically my background is well suited for money management. What's more breaking into the Investment Management is my ultimate goal and having a verifiable track record at Marketocracy helps to prove my skills...

Anyway, I have been very quiet last week and that was for a reason. Last week's problems with order filling have interrupted my logical flow and thus I decided to take a short break from active trading in SLO. I am still fully invested but this is not my dream portfolio in any way shape or form. My picks today are just a bunch of short term bets on some specific events...I doubt any of those will be huge winners- but I believe they will outperform cash in the next week or two...

LEND- Lone Star buyout story
FSIN- moving from OB to bigger stock exchange
NDAQ- saga with LSE sale
VVUS- news on a restructuring
DHIL- buyback impact
VPHM, IBN, GROW- oversold pull back

Once all the problems with M's trade fills are fixed I will get back to trying to get into a Top 1 spot again...
Cheers and trade safe,
Vad


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