Vad Yazvinski
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October 2007 Archives
The Leaderboard Review
Rating: 1.05 (23 votes)
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It is tough to judge your own performance when competing against others and it is even harder to earn positive reviews for it, because critiquing other stock pickers usually trigger a "snake bite" effect (I can already feel at least three or four other posters nervously hitting a -3 rating for this post and wondering why didn't it go any lower). But I will try to be somewhat objective I guess as long as this post does not earn too many negative reviews I will consider it to be successful at delivering my (I hope) mostly unbiased opinion. As my wife would say sometimes I try to bee too logical but hear it comes. First, we need to define what the objective of a good investment blog is- to me it is not only to post heavily wordy/philosophical or highly technical description of why a certain pick has been chosen but, I think, it is just as important to find your own style and your own reader, who shares your views and thoughts on the big picture and on how the markets operate. Given my "classical CFA" (:) financial education, one might think that I believe in mantra of DCFing every stock I pick for my portfolio but it could not be any further from the truth. Building hundreds of DCF's has taught me a very valuable lesson- if 15 very talented people are given the same set of data working independently from each other, they are very likely to come up with 15 different values for any given stock. The reason is pure and simple "Junk in- junk out". The different set of assumptions used by each person is likely to introduce significant variations to the final value and thus DCF alone while a valuable tool is not a magic crystal ball. Relative market value analysis is even more error prone but when used in conjunction with DCF's could be valuable in tilting the portfolio with the desired asset groups. However, I would also caution my fellow readers not accept the mantra that "markets are efficient blah, blah" and that the only real way to make profits, is to be a momentum driven technician and that DCF's don't matter at all. There are quite a few good TA traders out there (for example one of the fellow posters here- Kevin (Wildmap)) that make some very interesting and timely calls but they are rarely consistent in the long run and the ones that are good, are also rarely purely TAs. They usually introduce a healthy dose of fundamental analysis in their investment management process as well. So as far as the big picture goes- to me the stock picking is a combination of good fundamental skill with a healthy dose of some momentum driven basic buy and sell rules. As a second point I would also note that I tend to agree with Alan Greenspan's point on the validity of general economic forecast. I think, our ability to predict what the economy is going to do in the short term, is extremely poor. To me the key is in being flexible- for example my thoughts on the Fed cuts were not any way a prediction of what the Fed is going to do- which was the way many interpreted it- my thoughts represented what I would have done given the set of data available to me. Was I right or wrong is unclear at this point, but instead of being stubborn and explaining/whining on why didn't Fed do what I judged to be a correct move, I simply made new investment choices that I though would benefit from that move. Have I been generally correct on my calls with Sub Prime and Emerging Markets?- I think so. I proved it in August and early September with healthy gains in down market and then again with Chinese and Russian breakout. Could I have made more money by selling several winners earlier?-Surely I could have. But would I've made more money if I stuck with the "I hope that Sub prime rally continues and that Fed sucks" rhetoric? I don't think so. It could have made for a good reading with some good ratings but certainly is not a sound investment philosophy. As an example my long time "Sub Prime" Top 2 partner Demonhawk, who has been breathing down my neck for almost a month, has lagged the other leaders recently for one simple reason- he decided to stick with his "When buying junk, buy junk philosophy" and missed out on some of the easy gains driven purely by rate cuts- commodities and emerging markets. I've enjoyed reading his thoughts, but I definitely disagree on a very deep fundamental level with his assessment of the similar risk profile of Countrywide and Indymac vs. IMH and LUM. I don't know what exact probabilities are, but it certainly naïve to believe that CFC (even after risk/return adjustment) is as likely to go bankrupt as is IMH. Lastly, I think that participating in this contest so far has taught me another valuable lesson- posting good posts that describe your thoughts well and that also earn good ratings (or liked by all people) is tough or even almost impossible. I think that the fundamental question for Ken and Mark now is very simple- Is blogging a really good way to weed out some of the "AAPL is cool because my sister has one" or "China's ADR's is hot because they are Chinese" "quasi master" investors that might even end winning all Top 5 spots given some luck and continued high beta push? Or are you purely interested in having people post cute articles that describe some interesting family or news related story, without necessarily having the sound financial basis for their decision? Or is the truth, as usual, somewhere in between? Strangely enough, even some of the people whose picks are being used to run the actual MOFQX fund and who seemingly have a great long term track record, have made some very disappointing posts so far, that seriously question whether their track record is simply a reflection of several lucky picks over the period of a long bull market. Looking on the bright side of things- may be Marketocracy has stumbled upon another gold mine concept of actually finding even a better way to being able to separate the true quality top investors by requiring them all to blog at least once every two weeks. I can almost see at least three or four people of the current M100 falling off the list, because they don't seem be able to put several good sentence together, which certainly questions their ability to contribute meaningfully to the long run to the well being of the great concept called Marketocracy, other than by the fact of pure luck, even if it lasted for 2-3 years. I guess my post got a bit negative and wordy at the end, and few my fellow posters that actually kept reading through all the way, will now move their cursor to the negative rating button, but here comes some positivism- some really good posts from the posters I enjoyed reading. http://www.investorplaceblogs.com/users/toma47/2007/09/rate_cut_reaction_strategy.php http://www.investorplaceblogs.com/users/eileenteska/2007/09/be_true_to_yourself.php For any questions please feel free to e-mail me at VYazvinski@gmail.com | ||
"The Worldly Bubble" Emerging Markets Review #1
Rating: 2.26 (38 votes)
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"All is not gold that glitters" "Up to 100% mortgage with no money down"- does this sound familiar? What is the first thing that comes to your mind when reading this- Florida condos? Flip that house TV show? Or may be it's a near failure of some of the largest US lenders and Fed's bailout of Wall Street? After the shockwaves that sub prime fiasco sent throughout the world economy you probably wouldn't expect to see that slogan repeated en masse in US for quite a while, but here comes the interesting part- I was shocked to see just that last week in the airport of one of the four largest developing countries in the world- Russia. Due to the uniqueness of my job I have been able to observe first hand the tremendous changes that happened in Russia during the last few years. I have also made handsome profits from investing in some of the companies there. But now I think that as all good things come to end eventually, this advertisement in Moscow airport might just be an indication that the end of the phenomenal run of Russian equities is not too far away. And one might say that it has been well justified- corporate profits are growing for most companies with solid double digits, GDP is expanding in high single digits and headlines of Russian billionaires buying up the real estate in London and setting new records on Christie's auctions are more frequent than reports on new Britney's meltdowns. But there is a scary dark side behind this boom. Russian economy is showing significant signs of the illness that has been called "Dutch decease". Its symptoms include near complete crowding out of investments in manufacturing and other productive export oriented sectors due to the unsustainable trend of the strengthening currency driven by excess petrodollars. The real estate prices in central Moscow are higher than that of 99% of the largest cities in the world and that all with GDP per capita at ¼ that of the United States. Significant inflation pressures are becoming more visible every day (with just the headline inflation rate of 9%). Salaries growing in double digits make even some of the most promising industries like high technology uncompetitive very rapidly. Combined with near complete nationalization of the main driver of the boom- oil and gas sector and announced national champions program for many other industries, investors into the private sector companies have plenty to fear. With so much capital flowing into less productive government driven sectors and inflation inhibiting long term success of the many of the other most promising export oriented investments, it is hard to see how Russia could avoid a meltdown should oil prices decline significantly. One might say that is all great but given that oil prices are not yet showing a significant downtrend Russia a great place to invest. I have been agreeing with that point of view until very recently. Russian companies' profits have been fueled mostly by outsized gains in the price of oil and other commodities and expansion of the consumer banking which in turn drove retail and other oriented industries to show outsized gains. Many Russian ADRs are still priced as if this double digit profit growth can continue indefinitely. However, with real estate prices stabilizing and even declining recently, even the push of the new sub prime like credit offers might not be enough to allow Russian companies to continue growing at the same brisk pace as it did during the last 5 years. What's more I think that this artificial commodity driven asset bubble is starting to show some signs of strain and could be up for a significant correction in the next 6-12 months. Thus I am exiting two of my existing positions in Russian equities- VIP and MBT and will look to reinvest the proceeds into something that could offer more return with less risk. Don't get me wrong I am not trying to predict that Russian economy is going to crash and go into oblivion in the next few years. But I am definitely worried that even if the highly flexible US economy has had troubles dealing with the sub prime fallout, Russian economy might not be able to withstand a crisis of its own quite as easily, when (not if) it occurs. Bernanke's rate cut certainly benefited Russia more than it did the US in the short term, but however shiny and promising Russian companies might look today- they are less likely to look just as good tomorrow when "the Shot Effect" of the Fed induced liquidity and inflation stimulus starts to wear off. The punch line is that in the Wall Street investment terms I would begin to slowly underweight Russian equities compared to most other emerging markets for the next 6-18 months. Trade safe and cheers, Please feel free to e-mail me with any comments or questions- VYazvinski@gmail.com | ||
"Never trouble trouble till trouble troubles you"
Rating: 2.08 (38 votes)
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It is almost disturbing how high the market has run up in the last few weeks, feels very bubbly to say the least. I am not very comfortable with valuations of most of the companies I held this morning so I organized a reshuffle which I will detail later tonight...But here is my take on one of the everyone's favorites. You know I am somewhat surprised by the number of people in the SLO contest that hold Apple stock. Don't get me wrong, I think AAPL is a great company with unmatched products, shrewd management and loyal customers but, at the time of this writing at $171 a share, I personally do not believe that the risk/return tradeoff for this stock (not a company) is favorable. It is quite possible that given some luck and momentum, the market could carry AAPL another 5-10% higher, but at this price just as easily any negative news could easily lead to a gap down that could be quite severe. Here is some food of thought and some questions that I was asking myself recently after reviewing AAPL's financials and various reports out there: Positives: Negatives What ifs: As far as valuation goes with only $4B in projected net income for 2008 we are talking about a hefty 35 P/E with EV/EBITDA of 17 times. In order to justify this multiple AAPL has to grow of at least 20% for the next 5 years to make the purchase reasonable for my demanding eyes. As far as the fictional sum of the parts goes here it comes: | ||
"The Wordly Bubble" Part 2
Rating: 1.78 (18 votes)
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"Pick battles big enough to matter, small enough to win" I am a big believer in sector and style rotation. The reason for that is pure and simple- economic business cycles always repeat themselves. Despite the simplicity behind the logic of the business cycles you can always hear people here and there saying something like "This time is different" or "It's a New Deal that does not be fit inside the usual business cycle". My advice in this case is very clear- as soon as you hear someone say something like that- simply put him into your "ignore his/her investment advice" list. The truth of the matter is that business cycles embody human nature of fear and greed, and as long as this world economy is governed by people rather than emotionless machines, business cycles will continue to repeat themselves. Once the demand equilibrium for one good/stock is out of balance- human greed will continue to push for more supply until the balance tilts the other way. Certainly someone might ask why can't the market's supply/demand balance in the long term- and the answer again lies in the human psychology- regardless of what the conventional economic theory assumes- people are irrational creatures- they are always too greedy at market top and too fearful at market bottom. As many behavioral studies have shown, it is simply a normal part of human nature- to shun regret and to accumulate pride. People quickly forget the mistakes and only remember their successes. Otherwise how would we explain that most of the individual investors under perform the market, but keep investing thinking that they can do it better next time ...? What's more recent studies show that after some time passes by, these same investors believe that they actually have done better than the market, even though the data clear contradicts it. Same is true with most of the professional money managers. It has always been a puzzle to me how ignorant Wall Street is to business cycles- I guess the greed is in action again-"after the spring bonus is cashed- the past year results are irrelevant". Sub prime fiasco was not something that happened overnight, it took several years for the fear to finally outweigh the greed and here are we are now... It is hard to describe the current situation with some of the emerging market equities and super hot high fliers in the US in any other way than the "irrational exuberance" all over again. I mean, come one, some time during last week market cap of PetroChina has exceeded the market cap of GE (we are talking of the most valuable company in the world outside of the Exxon Mobil, the icon of the US economy). Or here is another one-market cap of ICBC (Industrial and Commercial Bank of China) is now higher than that of both BofA and Citi. And we are talking about the bank, that to be cleaned by the regulators with a significant capital injection just a little while ago, the bank whose loan quality is at best questionable and the bank with a significant chunk of earnings coming from investment gains in other irrationally priced Chinese securities... Don't get wrong not everything in Shanghai is overpriced but we are getting awfully close... It seems like everything that has a word China in its name has gone through the roof recently. You don't really need to have earnings history or even a legitimate business strategy- it seems like you can just slap some numbers together and feed it to investors, they will readily buy it at any price, even if does not make sense whatsoever. As you know after the Fed Rate Cut I tilted my portfolio heavily towards emerging markets with Chinese stocks being featured prominently. I tried hard to pick only stocks that made enough money and had "good enough" growth potential to justify the higher risk/return return I believe the prudent investors should require from such an unstable developing economy. But as the headline of this post indicates, I try to only to fight the battles that I can win. I certainly don't expect the Shanghai or Hon Kong markets to suddenly adjust to a more reasonable valuation level. There are many factors that led to the current euphoria that include US investors current hunger for growth, combined with Fed induced dollar weakness and the inefficiency of the Chinese capital markets in general... But I think we are getting dangerously close to a tipping point were many investors could suffer severe losses, because in the momentum game of musical chairs someone is always left behind. I certainly don't try to predict the date and time when this will occur, but the truth is it is very likely that it will. The Chinese economy is definitely on steroids today, but it going to slow down, it always does... How much of the current booming investment capital has been fueled into unproductive areas of the economy that will never produce return is not clear at this time. I am also not sure that any kind of major correction will unravel prior to next year's Olympics, so I guess one might ague that we can play musical chairs for a little while longer, but it is certainly not something I am personally eager to do... Hopefully the aftermath of this correction will be less severe than that of Japan and Taiwan at the close of the last century, but if I had to make a bet today, I would say than when the time comes, China might make the previous boom/bust cycles seem very minor... But the key here is to stay positive. It's not all doom and gloom out there. As I said before, I believe that all events out there, even the most negative ones are could and should be transformed into opportunities .My strategy for investing is simple- don't try to fight the windmills but rather pick opportunities that could benefit from the events that should unfold in the aftermath. I have sold my last shares in CHNG, ACH and CEO and moved money into what I think could be lower risk stocks- NVO, GILD, GEOY, BCPC, EMC, SAIA... By reducing my risk profile, I certainly open myself to a potential underperformance against the "on steroids" portfolios of some of my closest competitors, but I believe that this is a prudent move and that while timing the market consistently over the long haul is close to impossible, one should certainly preserve some gains when it makes sense, while staying a 100% invested just in case if he/she were wrong... In the next post I will try to explain why the IT sector in US and large cap growth stocks in general have been doing so well and why I think this trend will continue... Trade safe and cheers,
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Inflation fears or is Fed your friend!?
Rating: 1.65 (26 votes)
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"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair" Someone famous once said "Invest in inflation. It's the only thing that is going up" and you know what- I could not agree more. In this world of fiat money one thing is guaranteed - your money will be worth less tomorrow than today. As you might have guessed from my previous posts I am not a great believer in politicians' abilities to guide/understand the economy in general, and definitely get extremely irritated when some of the most vocal and most popular of them try to give advice to the Fed. This advice usually says something like this:" I can't believe you have not reduced rates yet... What the hell is taking you so long-my constituents are suffering and you are doing nothing about it... etc." I think there should be a prize of some sort that is awarded annually to a politician that actually asks to increase rates for once- the only problem is - this prize could go unclaimed for years... Anyway, back to business. Any of you that have read my previous posts might recall that I have not been a huge fan of Bernanke's 50BP rate cut in September. Prior to that meeting I stated what I thought the most logical beneficiaries of the cut were- emerging markets and commodities and in this case my call was on target. Now since it seems like the market has spent the last few weeks trying to scare the Fed into easing more, we need to spend some time trying to analyze which sectors could benefit now if Fed makes a move again... First things first- as you might recall my investment strategy is predominately event driven, obviously Fed meetings were rates are predicted to move one way or another is the next such event. One could assume that after observing the impact of their last action (i.e. assets bubbles in commodities and emerging markets) Fed might be a bit more careful during the next meeting... But at this point market seems to disagree. Below is a chart of probabilities for the next Fed meeting as prepared by Federal Reserve Bank of Cleveland. It is based on pricing of the options on the fed funds futures and while not a slam dunk could serve as a good indicator of expectations on where we are heading with Fed Funds. The first graph shows that in the last three trading sessions the likelihood of Fed easing has climbed to over 75%. The question in traders head now seems to be simply how much will Fed cut rates- 25BP or 50BP? Do I agree with this assessment- Not at all, but am I going to fight it? - Nope, the truth of the matter is that no one can do that ... Even though it is certainly not too small of a war to matter, but it is most definitely too big of a war to win...
The next graph shows that market is currently pricing a virtually a 100% probability that rates will end the year lower. And the probability of Fed funds rate being at 4% (75BP cut from here) is now nearly 25% and rising.
So what can we make of all this? The logical answer would be that current sell off is temporary, and that higher Beta picks like Chinese ADR's, commodities, dry bulk shippers and beaten financials should outperform through the year end. What does that mean for this SLO contest?- I think that if Fed bends under pressure and makes the expected moves- then "on-steroids" portfolios will end up dominating the Top 5 and that my fund due to its lower exposure to the higher risk inflation plays potentially might even cost me the Top 10 spot. But on the other hand - assuming that Fed wakes up and hints that inflation is a significant concern, the commodities and emerging markets might under perform drastically even before the year end. In which case playing tech and airlines could be a good bet- I for example just bought some AAI and ALK in my real money account... As I said before- large cap IT is also a great place to be for the next few months and thus one could feel relatively safe with money parked safely in INTC, EBAY, EMC, YHOO, MSFT, AAPL, RIMM, GRMN and GOOG. Don't take this statement as outright agreement that these stocks are a bargain or even that they are fairly valued (I actually think most of them are not a good risk/return trade off for the long haul)- I simply expect them to hold up better then the market until December 31st 2007... Anyway trade safe and cheers, | ||
Another collection of random thoughts
Rating: 2.13 (40 votes)
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"Everyone, whether contrarian or otherwise, will eventually be right, and wrong. Just wait long enough." I have made a mental commitment to myself not to post here more frequently than twice a week, and even though I saw some posts by my fellow contestants that I really wanted to answer, I stayed quiet. The concept of the six month competition is just a very tough cookie for me personally to swallow. I am not sure how many of you guys out there are actually paying attention to my portfolio, but ever since I firmly occupied a spot in the Top 5, my turnover has been crimping up higher and higher which is not my usual style... You know it is hard for someone like me who is a fundamental contrarian to try and play the momentum game against a bunch of sector portfolios. As anyone who has read my blog has seen, I have predominately made my performance stand out (so far) by taking positions in stocks that no one else wanted to buy-sub prime stocks when everyone was scared to death to touch financials in August, CHNG when it went in the opposite direction of the hot Chinese money and most recently (today actually) on Countrywide when almost everyone and their mother feared an immediate bankruptcy. But you know it takes a lot of patience to actually see your 10% lead evaporating in a matter of weeks, because contrarian picks frequently decline for a while longer after the purchase, as it is almost impossible to pick an absolute bottom and because sector rallies can last for longer than 6 months. I acknowledge my main SLO weakness (strength?) so far- I traded way to much in the last few weeks but now it has to stop- I am not a speculator or a day trader (even though I do both on the small scale). I don't buy stocks because they are hot, and I do not sell because they are cold. If one wants to follow a great trader- please follow someone else. However, the amazing thing so far has been the fact (check out the timing report of your fund as well) that my buys on average so far have been up 23.53% over a 60 day holding period- that is a pretty tough number to achieve over the long haul. My 1 month batting average vs the S&P is at a 100% as well :) I love buying when everyone is fearful and hate buying when everyone is greedy. During the last week I accumulated a large position in Countrywide Financial (CFC) because no reasonable person could suggest that they will go bankrupt in 2007 or for that matter any time soon. An average analyst, by the way, can not be reasonable by definition because his/her paycheck comes from the same bank account that feeds his investment banking and commercial lending colleagues. The screamers "aka Cramer and some others" are just a group of jockeys, which more often than not, just talk about the stocks that are hot, so they can generate some attention. I am not saying Cramer is unintelligent, but he is certainly not someone whose recommendations I would follow. What's more, I frequently do just the opposite, after the initial impact of his "pump" speech fades away- I take the opposite position- usually a week or two after... Anyway back to business- I sold my CFC position this morning and reinvested a good portion of it into a new contrarian pick Moneygram - MGI. Everyone probably heard the name so there isn't much introduction required here. I am not going to go into too much detail on financials either as I think it's fairly boring for the blog here. Here is the punch line- MGI is now trading at a multi year low because of one stupid mistake their treasurer has made- investing in sub prime securities for a little extra spread for their money order business. This mistake might end up costing them $500M or so in write offs. So for now the general public is fleeing because everyone is scared that MGI is having a liquidity crisis as we speak. Bu the truth of the matter is that their money transfer business is fundamentally solid, liquid and is worth at least double today's market cap. So even after adjusting for $500M book loss we are talking about an extremely undervalued stock at this price. So I bought this morning and then in the afternoon bought some more. If it keeps going down like a falling knife, I will buy more, and then more again until it hits the 25% portfolio compliance threshold... But even absent low oil prices- airline sector is behaving a lot more rationally than it did in the past- shedding capacity, raising prices and plus is ripe for consolidation. So the punch line here- my advice is to allocate at least a portion of your portfolio to airline stocks as they are a good hedge against eventual crash of the oil price. Another investing idea- E-Trade ETFC- got beaten up again because of the sub prime exposure, but the underlying fundamentals are relatively healthy- volatility is back to life, and thus number of trades people make is poised for more growth. Plus they are cheap right now and thus could be taken over by some of the larger players like Ameritrade. And to finish off -kudos to my competition: many of you are doing phenomenally well- MagicNiner- I am in agreement with you on the rationale of investing in SDS- it makes little sense to me as well... Andrew Carlson-demonhawk- agree on FMD being a good and cheap stock- hope you'll get a nice boost after today and may be another one next week after the Fed meeting... Colbyhouse- agree that you can't time the market- but you also can't prove that it wasn't just luck that got you in the top 10 unless you can at least bring your portfolio into compliance :) JeffKalniz, TomA47 and PKauk- enjoy reading your posts- please keep it up... Jaudio- agree with your overall sentiment and understanding of the market-but you can't really stay all short in the long term- inflation and the fact that your upside is effectively capped at 100% will catch up to you eventually ;) Anyway good luck and cheers,
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