Vad's Best Ideas

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

Comments: View Comments |  Sunday August 12, 2007