Vad's Best Ideas

I apologize for not posting my thoughts on Fed's latest move earlier, but I wanted to finish reading Greenspan's new book to understand a bit better the mind of one of the history's greatest central bankers. I started reading it on Monday night and after the first 50 pages I realized that Greenspan is even better than many people give him credit for. I have personally criticized him numerous times for his aggressive monetary policy moves, and still think that he might have been a bit too accommodative but I understand his rationale a lot better now.

Greenspan was able to correctly calculate that his otherwise overly aggressive support for the economy would be offset by the deflationary pressures from various events throughout his reign at the Fed (example millions of new entrants entering the workforce across the globe after the fall of the Soviet Block, unprecedented productivity increases driven by IT revolution of the 90s etc). However, one of the most chilling revelations of this book is that he now too believes that most of these deflationary pressures are now thing of the past and that the new Fed faces challenges that he never had to face- most of the same deflationary events have turned the other way now- productivity is slowing, salaries are rising dramatically across the globe, "weak dollar" is leading to higher imported inflation etc.

He stated (before the cut Tuesday by the way) that US will be facing higher interest rates and inflation in the years to come. I happen to agree with him a 100%, and think that the decision by the "Bernanke Fed" will lead to the most unwanted outcome- significantly higher inflation in the years to come without really supporting economic growth. I have outlined my logic in the previous posts.

Now instead of trying to further rationalize yesterday's move by the Fed, I will now simply try to point which sectors I think will benefit from the cut and how to best take advantage of the situation.

Here are the actions I took yesterday immediately following the move:

Sold my "insurance" ultra short picks- TWM, SDS, QID for a small loss (they were all in green on Monday so the overall loss was miniscule); Sold PEG (utility play) and NDAQ (Nasdaq) with double digit gains. Both of my sub prime "non junk" ( sorry Andrew- great post on your part but I certainly think rational people would agree that IMH, NFI and LUM are riskier than IMB and CFC which their moves to cancel the dividend only confirm :)) picks did very well with a double digit gains over the last few days, and I expect to sell them in the next few days as the "Fed fever" wears off. I would have probably sold early this morning but was away from the computer at the time ( I need to become a full time investment manager I guess :))

Now here is the punch line- we have been dealt a deck of cards by the Fed - not exactly what we wanted but that does not mean that the world is over. I still think that US will end up in recession in the next 12-18 months but this outcome has been delayed by a few more quarters. So here is the composition of my new portfolio and quick rationale for them:

The markets that will benefit the most from the cut are emerging markets for several reasons- they are a lot more dependent on commodities that will run up with spike in inflation and will also benefit from the reverse flight away from quality that lower rates entail. So I picked the country that could be considered a definition of the commodity market- Russia and picked the sector with one of the highest Betas- telecom. Two largest players are Vimpelcom and MTS- they control majority of the cell phone market and have been great money makers for me in the past. Neither one of them is particularly cheap at this time but I am hoping to score some gains as Russian Rouble rallies against the dollar in the next 3 months. So here we come- VIP and MBT both at 9.5%.

Next pick- technology play- NVDA- looks a little overextended here but it is hard to win this contest competing against high Beta portfolio loaded with technology plays that are predominately momentum driven. Today momentum favors Large Cap Growth stocks and thus if it lasts until December -those pure bet portfolios could win by simply being at the right place at the right time...NVDA in with a 9.5% position.

My next pick here is NXG- contrarian beaten up commodity play- I've made a lot of money on this stock before and think that the "permit decline" sell-off has been overdone. I might even double down if situation unfolds the right way.

My strategy with DFC and FMT will be purely data driven and those two are subject to sell at anytime. I am expecting more gains from these picks but will monitory situation closely to make sure I get out before it's too late.

CHNG and FSIN are both Chinese value plays and do not seems to be correlated to anything or any particular even so I will keep them on tight leash with limits in place to reduce positions with double digit gains.

DHIL- looking to sell above $84 for a nice gain.

P.S. I promised not to question Fed but here it comes-still can't believe that did they get comfortable with a fact that inflation is still so disturbingly high:
•Food prices have been rising at an annual rate of 5.6% vs. 2.1% increase for all of 2006
•Overall inflation is rising at an annual rate of 3.7% , up from a 2.5% increase for all of 2006
•Energy prices are up at 12.7 % annual rate this year, even with the declines in the past three months and that's before prices hit $80+ per barrel recently
•Medical costs are up 4.5 percent over the past year
•Core inflation rising at an annual rate of 2.3 percent through August, down from an increase of 2.6 percent for all of 2006 but still way above the 1-2% comfort corridor

Now done, more thoughts on this later
Trade safe and cheers,
Vad

Comments: View Comments |  Wednesday September 19, 2007  |  Stocks: CFC, CHNG, DFC, DHIL, FMT, FSIN, IMG, IMH, LUM, NDAQ, NFI, NVDA, NXG, PEG, QID, SDS, TWM,