To all short sellers: Please address the following:
1. If selling short drives prices downward, do they not also hold rising prices down?
2. Oil cracked $150, then plummeted to under $100 in less than 2 months. What role did the shorts play in this price action? What role did the shorts play in the Monday rise in oil price?
3. Is it beneficial to give a financial incentive for individuals to identify problems in companies?
4. Name 3 advantages of the existence of shorts.
5. Name 3 disadvantages of the existence of shorts.
6. How do shorts lock in their gains? What happens to the stock price when they do?
I will put forth the following: All of the individuals whining and crying about short sellers are those individuals who have portfolios going into the toilet right now, which is clearly affecting the function of the neurons misfirings in their brains.
It's true, misery loves company. If your portfolio is getting hit, bitch about short sellers and that may make you feel better-for a while. The problem is, after all the bitching, the situation remains the same and you have made yourself look like an uninformed ass in the process. And after all is said and done, it hasn't added one cent to your coffers. Better for you to spend your time re-grouping.
The above 6 points aren't part of some simple stock shorts 101 test. The questions hit at the very essence of short selling, when you actually take the time to answer them. Short selling is akin to Newton's third law of motion...every market force has an equal and opposite force. The only difference is that you can't go below zero in stock price whereas the ceiling is limitless. This illustrates the risk that the shorts take, and the risk when "oversold" hits zero. But I digress slightly. . .
If you honestly answer each of the above questions, there is no way you can go about claiming that the shorts are evil, immoral, unpatriotic, and should be banned.
Yes, I think a temporary ban of shorts to limit panic selling and capitalizing on rumor mongering is prudent. After all, if a company is truly bad enough to go to zero, then delaying things by a week or a month will only delay the inevitable. If the company isn't fundamentally flawed, a delay of short selling will prevent an oversold condition hitting zero, thus preserving the company. Yes, I believe anyone that intentionally tries to manipulate stocks by spreading rumors (long or short) should be prosecuted to the fullest extent of the law. There are rules on the books, and they should be enforced, plain and simple. I do not oppose circuit breakers that will halt the markets in the event of panic selling. Again, it is another prudent device in place to help us when we aren't being rational, and it allows us the time to round up those buyers (Buffett like types) to come in when no one else has the stones to buy.
Short seller haters never make the above distinctions--never. They never distinguish between legitimate short selling and illegal activity. "Shorts" and "illegal" might as well be synonymous.
Short seller haters try to make people believe that perfectly sound companies, those with solid books and great business models can somehow be easily taken out by a rogue short seller. HOGWASH!
The shorts are no more "bad" or "wrong" than long sellers. It is all about what side of the trade you are on. By the way, in regards to the price of oil, shouldn't all of you short haters be thanking the shorts from keeping oil from rising past $150? Or, shouldn't you thank the shorts for the decrease in oil price? Oh, I get it. The shorts are bad only when I lose money out of the deal, am I reading that right? You people need to pull your head out of the sand, or whatever orifice it may be residing at this time. Maybe you should just say "thank you", and then get on your way and trade. There is rarely substance to the blanket anti-short arguments. Bitch all you want about the illegal activity of spreading rumors for profit, in which I am in agreement with you, but the act of short selling isn't the root problem. Taking away the shorts takes away information from the market, plain and simple. Maybe those long sellers should hang tough as these evil short sellers are pushing the price down and not sell themselves. That's another point never addressed by the short haters . . . it compounds their market view so it is easier to ignore. Also ignored are stocks that have been shorted and publicly lambasted, yet are resilient. (Maybe because the management wised up and made changes?) Short interest levels are also ignored, but only when the short interest does not suit their market view. Otherwise, it is shouted from the mountaintops.
Just admit it, short haters. Your portfolio is in shambles, and you're looking for someone to blame. A little honesty goes a long way.
--Jonathan
p.s. and yes, I have read Tom Armistead's Moral Hazard--A Danger to our Financial Ssystem (sic)
Most of my trading has always been with ETFs and very few individual stocks. I have been able to successfully trade through a lot of the ups and downs of the Financials, the Industrials, Energy, and Commodities. I was able to slowly exit a large position in SKF just before it dropped almost 50%, while buying long individual banks (C, HBAN, and BAC) before they popped. My position in SMN, the Ultrashort Basic Materials ETF increased and has erased my earlier losses. FXP, the ultrashort China ETF has been great with a few buys and sells moving up from $70 to $90 while hedging with FXI. I was able to get into BUCY and MAS before their pops and have since exited.
All of this self-congratulations comes along with some badly timed picks with SEPR, RIG, JOYG, CHK, and YHOO, but the damage has been minimal so far. Though I have kept a significant amount of money on the short side of the market, I have been picking a few stocks long while trading in and out of short positions. This has lowered my losses with the wild jerking of the market. This is also what brings me to my current bind.
I have about 20% of my portfolio in cash, with several limit orders to sell positions that could potentially get me close to "out-of-compliance" at 25%. There's so many clashing market signals that it seems best to keep a large chunk of cash ready to deploy at a later date.
Clashing signal #1: This is a bear rally that will send the S&P to 1370/We are about to begin to retest the July lows again because of the Financials.
I don't buy the current rally in Financials. Though I exited a large portion of my SKF position, I have since bought and sold small positions several times since. I have done the same with SRS, Ulrtashort Real Estate. Both SKF and SRS have rewarded me greatly and bit me hard in the past year, and for those that own either, you know what I am talking about. If you buy into the idea that the naked short sellers are what ground the financials down in July, then it would make sense to buy SKF expecting the same thing now that the short selling ban will be lifted. With continued weakness in the financials coupled with doom and gloom headline stories about the latest woes, it may be a good play. I don't believe the naked short selling myth, so I won't be adding more until it drops below $110. It is too lukewarm for me right now, but I would like to see a good 2.5% one day rally in the S&P to start rebuilding the shorts.
Clashing signal #2 Lower oil price = good for the markets/ lower oil price = strengthening dollar and weaker exports
Commodities have been getting clobbered as of late, with oil and food dropping big and the dollar gaining strength. Even so, I have cut my position in UUP, the Bullish Dollar ETF, to just 20% or my original position. I believe the dollar rally is short lived, although I have not transitioned to other currencies; I have just kept everything in cash. I'm looking for UUP to drop to around the $22.50 mark before getting back in. I am going against the grain buy putting money in Gold (GLD).
How low will oil go? I originally thought $90 a barrel back during the parabolic rise. I am now long on oil in the short term(UOY), and short on oil in the long term (DUG). Let's have a nice recession in China take its toll on the price of oil. Let me take this time to say that we should all call up those wonderful people known as "Short Oil Speculators" and thank them for lowering the oil price. Due to their diligent hard work in selling the market short, we are able to buy gasoline for 30 cents less a gallon this month, with further decreases to come. Long Oil Speculators = Evil and Short Oil Speculators = Good. At the same time, Long Financial Speculators = Good and Short Financial Speculators = Evil. That's the Kool-aid we are supposed to drink, correct?
Will the sinking oil price help the markets? Will the strengthening dollar hurt exports, our only gem in the misery of '08? It depends on who you read or who you watch. Lick your finger, lift it into the wind, then decide.
China has to be one of the most confusing of all trades. I own both FXP and FXI, with FXI being the hedge. I originally planned to dump FXI once the Olympics started, now I am not so sure. The China markets have been deflated more than 50% from the 52 week high. Does that mean it is time to buy China long? How much are companies worth in China anyway? I have always thought that mixing communism with rotten capitalism was akin to the cobra and the mongoose sharing the same cage; a lot of intense moments, some controlled chaos, but the ending isn't pretty. A few blogs ago I mentioned how I was taking a position in FXI because I thought the Chinese could follow the Pakistani lead and ban short selling. Little did I know, the Commies were laissez-faire and the red, white, and blue were the ones to sell and implement the snake oil. I believe it is a matter of time before the Chinese economy gets hit really hard, and I don't think the Chinese markets have fallen far enough. That being said, I am not adding to my FXP position since it already is over 12% of the portfolio. I am comfortable with this position, although I will be selling if it continues higher. Even so, I continue to read articles bullish on China as I have for the past year. The China markets always seem to be two heartbeats away from a major turnaround.
Overall, I am in a holding pattern. I would like to see the rally continue toward S&P 1370, and the VIX sink below 17 before going on a short selling (buying) spree, but as with many of my predictions, it may be best to do the exact oppisite. So is the nature of the market.
---Jonathan
]]>Imagine if I offered you the opportunity to buy a company that sells a product that trails its competition in almost every category. It costs more to build their product. Margins are minimal. The company is on the hook for entitlements to its employees. And to add insult to injury, the product they produce is subpar on quality when compared to its competition. Would you buy this company?
If your answer is yes, go ahead and drop some cash on GM. For those with a little sanity, play the risk/reward scenario somewhere else.
Don't get me wrong, GM could be a great trade in the short term. For all the technicians out there, they can give you all the details. For those that buy stocks as a medium or long term play, GM isn't even on the radar. Most bloggers will detail reasons that are pro and con from the standpoint of the fundamentals, the management, or even the technicals. I will cover reasons why not to by GM stock from the consumer's standpoint.
GM makes products with poor quality, plain and simple.
Before all you Silverado driving guys give me a beating, hear me out. I am not saying that every single GM product is garbage. Their trucks and SUVs have been pretty good. I personally like the Silverado, although I do not own one. The Cadillac line has come on strong in the last 6 years. But GM is bigger than Trucks and Caddys. Just like a diversified investment portfolio, a company can't have all it's eggs in one basket when it comes to profits. With GM, that has been trucks and SUVs. What happens when that goes sour? Oh, never mind, that is already happening. Check your local newspaper to see the results to the tune of 15.5 billion dollars. And that's in the red, not in the black. That's chump change compared to GM's third quarter of '07, and the losses just keep on coming.
Most of the time, the debate about GM, Ford, or Chrysler is always framed by the "Buy American" premise. Somehow, people that buy American cars and trucks are suppossed to be more patriotic than those that didn't. If you buy a foreign car, then you are sending money overseas, and are a defacto Benedict Arnold. The problem for GM that has increased over the years--and it has taken a lot of years-- is hard core GM buyers have been slowly abandoning their first love, not because a foreign lady enticed them, but because their first love took them for granted and gave them a poor product time and time and time again. GM customers have ended up broke, sad, and lonely. Sounds like a good GM themed country song.
Case in point: talk to anyone with a GM vehicle that is two years old and ask them how much "upside down" they are in their loan. Don't talk to just one person, talk to as many as possible. Now do the same thing to Honda and Toyota owners. Compare the data.
Toyota and Honda owners are only upside down in their loans for a little over a year after they drive it off the lot. The cars hold their value, regardless of whether or not you want to argue that it is "only perception".
Value perceived is value achieved, and both Honda and Toyota are achieving.
Honda and Toyota cornered the market on fuel efficiency, and they slowly started taking away market share from the domestics with trucks and SUVs. They were smart, though. They didn't put all their eggs in one basket. High oil prices hurt the truck and SUVs, no problem. Diversification wins the day. On top of that, Honda and Toyota planned years ago for hybrid technology, and in the last 3 years it has paid off big. Go back to 2004 and see what GM's vice president of product development was saying about the hybrids at the following link:
http://money.cnn.com/2004/01/06/pf/autos/detroit_gm_hybrids/
What does GM have to show for the hybrid market? Oh yes, I forgot . . . they have the Johnny-come-lately to the party Chevy Volt in which they will lose money on every single one they sell. How is that good business again? My dad used to tell jokes about the dumb farmer from across the river (I grew up in Ohio, so you can guess where he was talking about) that would buy 50 bales of hay for $5 each and sell them at the market for $5 each. The dumb farmer claimed he was making up for the price by selling volume. Seems to me that GM has adopted this policy toward their hybrid line of vehicles. An expensive advertising campaign, perhaps?
GM vehicles simply do not last as long as the foreign cars. My own anecdotal evidence would be completely dismissed by domestic car zealots, but I can tell you that if you have popped the hood and actually turned wrenches on both domestics and foreign cars like I have, you would know what I am talking about. The only upside to GM vehicles have over foreign cars is the parts cost about 1/3 less......but it doesn't help when you have to fix it 3 times as often.
Have you ever had a GM car that had radiator problems? Many people did, since GM used "Dex-cool", and orange colored radiator fluid, in their systems from 1995 to 2004. Most people ended up overheating their cars and blowing their head gaskets (thats a $1600 or more repair). Every winter people are told to "winterize their cars" and some people top off their GM cars with green radiator fluid. The problem is that the orange fluid in the car doesn't mix with the green, causing clogging and overheaing. Only after a lawsuit did GM stop using Dex-cool . . . talk to any mechanic and they would have told you that Dex-cool was garbage back in 1996. Of course, it took 8 years and countless GM owners parting with their money for the change to take place. If you were lucky enough not to have the Dex-cool clog your cooling system, it also would eat away all of the gaskets in came in contact with, and depending on the car, more $$$$ in repairs. Water pumps, heater cores, and even transmissions are affected by this hair-brained idea that took over 8 years to correct. That is just one of many, many reasons people don't want to buy a GM vehicle.
The "Buy American" reason to buy a GM vehicle is also going the way of the dodo. Honda employs well over 15,000 Americans at its plant in Marysville, Ohio. Hondas . . . built by Americans, in America. Jobs supporting American families. Think about all the people connected to dealerships here in America selling Hondas. Now add all the mechanics doing the maintenance to Hondas here in America. The "Buy American" tagline for GM and Ford is tiresome, boring, and specious. It may have given them a bump in yester-year, but you can't treat your customers this bad for this long and expect them to stay.
For argument's sake, let's say that GM turns around tomorrow. How long will it be to gain back a customer's confidence in quality? That's for a marketer to figure out, but I can guarantee you, it doesn't happen overnight. Even if GM starts making the highest quality cars on the road starting tomorrow, it will take years for the perception to change. You must win customers to sell product, and you must sell product with real margin to make money. GM hasn't been doing it, and it shows.
Again, GM may be a trading opportunity for some, but I am staying away from it. For all the accolades I have laid upon TM and HMC, I am not buying them either. In this economic slowdown, there will be tough times ahead, and the shares will only get cheaper in the next 6 months. That will be a buying opportunity soon. Buy quality, and avoid garbage in motion.
-----Jonathan
Imagine if I offered you the opportunity to buy a company that sells a product that trails its competition in almost every category. It costs more to build their product. Margins are minimal. The company is on the hook for entitlements to its employees. And to add insult to injury, the product they produce is subpar on quality when compared to its competition. Would you buy this company?
If your answer is yes, go ahead and drop some cash on GM. For those with a little sanity, play the risk/reward scenario somewhere else.
Don't get me wrong, GM could be a great trade in the short term. For all the technicians out there, they can give you all the details. For those that buy stocks as a medium or long term play, GM isn't even on the radar. Most bloggers will detail reasons that are pro and con from the standpoint of the fundamentals, the management, or even the technicals. I will cover reasons why not to by GM stock from the consumer's standpoint.
GM makes products with poor quality, plain and simple.
Before all you Silverado driving guys give me a beating, hear me out. I am not saying that every single GM product is garbage. Their trucks and SUVs have been pretty good. I personally like the Silverado, although I do not own one. The Cadillac line has come on strong in the last 6 years. But GM is bigger than Trucks and Caddys. Just like a diversified investment portfolio, a company can't have all it's eggs in one basket when it comes to profits. With GM, that has been trucks and SUVs. What happens when that goes sour? Oh, never mind, that is already happening. Check your local newspaper to see the results to the tune of 15.5 billion dollars. And that's in the red, not in the black. That's chump change compared to GM's third quarter of '07, and the losses just keep on coming.
Most of the time, the debate about GM, Ford, or Chrysler is always framed by the "Buy American" premise. Somehow, people that buy American cars and trucks are suppossed to be more patriotic than those that didn't. If you buy a foreign car, then you are sending money overseas, and are a defacto Benedict Arnold. The problem for GM that has increased over the years--and it has taken a lot of years-- is hard core GM buyers have been slowly abandoning their first love, not because a foreign lady enticed them, but because their first love took them for granted and gave them a poor product time and time and time again. GM customers have ended up broke, sad, and lonely. Sounds like a good GM themed country song.
Case in point: talk to anyone with a GM vehicle that is two years old and ask them how much "upside down" they are in their loan. Don't talk to just one person, talk to as many as possible. Now do the same thing to Honda and Toyota owners. Compare the data.
Toyota and Honda owners are only upside down in their loans for a little over a year after they drive it off the lot. The cars hold their value, regardless of whether or not you want to argue that it is "only perception".
Value perceived is value achieved, and both Honda and Toyota are achieving.
Honda and Toyota cornered the market on fuel efficiency, and they slowly started taking away market share from the domestics with trucks and SUVs. They were smart, though. They didn't put all their eggs in one basket. High oil prices hurt the truck and SUVs, no problem. Diversification wins the day. On top of that, Honda and Toyota planned years ago for hybrid technology, and in the last 3 years it has paid off big. Go back to 2004 and see what GM's vice president of product development was saying about the hybrids at the following link:
http://money.cnn.com/2004/01/06/pf/autos/detroit_gm_hybrids/
What does GM have to show for the hybrid market? Oh yes, I forgot . . . they have the Johnny-come-lately to the party Chevy Volt in which they will lose money on every single one they sell. How is that good business again? My dad used to tell jokes about the dumb farmer from across the river (I grew up in Ohio, so you can guess where he was talking about) that would buy 50 bales of hay for $5 each and sell them at the market for $5 each. The dumb farmer claimed he was making up for the price by selling volume. Seems to me that GM has adopted this policy toward their hybrid line of vehicles. An expensive advertising campaign, perhaps?
GM vehicles simply do not last as long as the foreign cars. My own anecdotal evidence would be completely dismissed by domestic car zealots, but I can tell you that if you have popped the hood and actually turned wrenches on both domestics and foreign cars like I have, you would know what I am talking about. The only upside to GM vehicles have over foreign cars is the parts cost about 1/3 less......but it doesn't help when you have to fix it 3 times as often.
Have you ever had a GM car that had radiator problems? Many people did, since GM used "Dex-cool", and orange colored radiator fluid, in their systems from 1995 to 2004. Most people ended up overheating their cars and blowing their head gaskets (thats a $1600 or more repair). Every winter people are told to "winterize their cars" and some people top off their GM cars with green radiator fluid. The problem is that the orange fluid in the car doesn't mix with the green, causing clogging and overheaing. Only after a lawsuit did GM stop using Dex-cool . . . talk to any mechanic and they would have told you that Dex-cool was garbage back in 1996. Of course, it took 8 years and countless GM owners parting with their money for the change to take place. If you were lucky enough not to have the Dex-cool clog your cooling system, it also would eat away all of the gaskets in came in contact with, and depending on the car, more $$$$ in repairs. Water pumps, heater cores, and even transmissions are affected by this hair-brained idea that took over 8 years to correct. That is just one of many, many reasons people don't want to buy a GM vehicle.
The "Buy American" reason to buy a GM vehicle is also going the way of the dodo. Honda employs well over 15,000 Americans at its plant in Marysville, Ohio. Hondas . . . built by Americans, in America. Jobs supporting American families. Think about all the people connected to dealerships here in America selling Hondas. Now add all the mechanics doing the maintenance to Hondas here in America. The "Buy American" tagline for GM and Ford is tiresome, boring, and specious. It may have given them a bump in yester-year, but you can't treat your customers this bad for this long and expect them to stay.
For argument's sake, let's say that GM turns around tomorrow. How long will it be to gain back a customer's confidence in quality? That's for a marketer to figure out, but I can guarantee you, it doesn't happen overnight. Even if GM starts making the highest quality cars on the road starting tomorrow, it will take years for the perception to change. You must win customers to sell product, and you must sell product with real margin to make money. GM hasn't been doing it, and it shows.
Again, GM may be a trading opportunity for some, but I am staying away from it. For all the accolades I have laid upon TM and HMC, I am not buying them either. In this economic slowdown, there will be tough times ahead, and the shares will only get cheaper in the next 6 months. That will be a buying opportunity soon. Buy quality, and avoid garbage in motion.
-----Jonathan
In the classic Edgar Allen Poe story, The System of Dr Tarr and Professor Fether, a gentleman visiting an insane asylum learning about the innovative methods of treating the inmates, sees that many bizarre practices are being employed for treatment. By the end of the story, he realizes that the inmates had overpowered their keepers, and the lunatics were running the asylum. The idea is that those that are in charge that should be looking out for society's best interest are actually doing things to hurt us, hence the figure of speech.
We now have several lunatics at the helm of many of our government entities, some in Congress, some in the FED, and some in the SEC.
Yesterday, the SEC cracked down on naked shorting, which in turn has the haters of short sellers smelling blood and demanding even more. Read more in the Bloomberg.com link below, as reported by By Jesse Westbrook and David Scheer:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPokh6La9.HY&refer=home
If you aren't up for all the reading, I will summarize it for you: much of this market pain is the fault of short sellers, and rules need to be put in place to stop them.
Bear Stearns tanking? Lehman Brothers, Fannie, and Fred going under? Any institution part of the XLF gasping for air? Yep, it is the fault of short sellers. When in doubt, blame a short seller.
For those of you that detect my sarcasm, congratulations. The same people that moan about oil speculators are the same ones that do it regarding short sellers. I have commented on it repeatedly, and one of my first blogs last year mildly criticized those that wanted to blame the abolishment of the uptick rule on market problems:
http://www.investorplaceblogs.com/users/jaudio/2007/09/abolishment_of_uptick_rule_to.php
Every time a company gets hit, you can bet that a short seller will be blamed. It has been this way since short selling began, and history will continue to repeat. The problem is when those in the SEC buy into the myth, spurred on by self-serving politicians like the illustrious Senator Charles Schumer. He wants a reinstatment of the uptick rule (as if that would do any good), and so far the SEC is resisting. Yes, the lunatics are in charge.
Blaming short sellers for the market problems is the mirror image of blaming long buyers for a raging bull. I have an idea . . . let's hang Louis Navellier and Ken Kam from a yardarm for recommending a stock, and actually buying the shares! After all, it could cause the company to launch. This is lunacy, and It makes no sense, even to an insane man.
There are those in the market that engage in pump and dump ploys and those that do the opposite. There are laws in place to hammer them, one at a time on a case-by-case basis. All of this blanket blaming of market turmoil on oil speculators and short sellers makes me want to take a flamethrower to the whole place. I've got a better idea . . . let's invite Senator Schumer to a party and only invite Indymac shareholders. Make sure you bring your cameras, ladies and gentlemen.
In the SLO2, I lost over 50k selling oil short with the now defunct Macroshares DCR. No blaming here, I was just wrong. I am now dipping in my toe to a few companies long including BAC, C, and my hometown bank HBAN. Some refiners have hit the screen, and I am even getting long of the dollar with UUP. My shorts including SKF, FXP, and DUG have been good to me lately, so I have taken profits and am currently shopping for some long buys. The VIX cracked 30 yesterday, so I am looking to get in on the bear bounce we have all been waiting on.
Let's not lose our marbles in this market. Let's stop assigning blame and start being smart. Scared of the market? Stick your money in bond ETFs or go to cash and wait. Scared but sane? Keep on buying or selling the market short, wherever your research takes you. Until then, let's cross our fingers and hope the lunatics won't bring down the whole system.
---Jonathan
That's the problem with free markets: when they are making everyone money, they're the best thing since electronic trading. When they are going into the toilet, everyone collectively curses, assigns blame, and jumps out the nearest window--Unless you happen to be in a pseudo-free market, like China.
The Chinese markets are in turmoil right now, clocking a 40% plus loss since last October--and we think we have it bad. For those with money in FXP, the ultrashort China ETF, it's been a money-maker. However, there have been some bumps in the road. Since last October, FXP has climbed upwards of $120 before correcting back to below $60. FXP is now in the mid 80's because of the latest market shock waves, and it doesn't look pretty for the Chinese markets.
Or does it?
The leaders in China have intervened in their market before to give it a bump, and things are shaping up for China to again make an effort to give the market a short term jolt. Back in April, China reduced the stamp tax on stock transactions from .3% down to .1% in order to support the market. The Shanghai composite index then bounced over 4%. This reduction came just 11 months after they raised it from .1% to .3%, put in place to cool the blazing hot Chinese markets, which it did by trimming off over 30% of value. The reduction of the tax in mid April came after the Chinese market had been flat for 2 months and starting to rise. Since then, the Chinese markets have been going up, that is, until about May 15th. Since then, it has been grinding down, getting close to the lows reached in mid-march.
The time is right for the Chinese to intervene, and I am going to protect my profits in FXP with a hedge in the FXI, iShares FTSE/Xinhua ETF.
My 6 month view is that China will go down even further, but with the Olympics coming up, China isn't looking for any bad press, and that includes the markets. China has a big inflation problem, a problem that reached a 12-year high in March, and although it has eased a bit, it is still around 8%. They have the same problems we do with high commodity costs, but government interference with the free market doesn't solve the problem (Jimmy Carter, anyone?). They even have a "weather modification office" that will keep it from raining on the opening ceremonies by way of shooting artillery shells of silver iodide and dry ice at threatening clouds, making it rain before it gets to the stadium. I wish I were making this up. With the propensity to interfere in virtually every aspect of human life, the Chinese leaders can't sit idly by and watch their market go into the tank.
So what are the options?
I'm worried they may take a lesson from the Pakistani playbook and ban short selling prior to the Olympics. The WSJ covered the Pakistani move last week, which resulted in a quick 8% plus boost to the market. If that happens, the FXI will pop and FXP will tank, at least, temporarily. This would be the worst-case scenario for those like me, heavy in FXP. Last March I sold off some FXP, almost hitting the top. As it started downward, I bought positions in the mid 100's, mid 90's and into the mid 80's. By the time April arrived, I had plowed a lot of profits into FXP, taking hits the entire way, looking for the Chinese markets to tank again. Just as FXP turned the corner, the stamp tax was cut and I got crushed down to $60. An almost 30% gain was dead even or at a slight loss in less than 2 months. Now I'm back up to over 10% with FXP, but it's high time to protect profits just in case of some Chinese funny business. Tomorrow I am taking a $30k plus bite of FXI for hedging purposes.
My blogging has been non-existent in the past 2 months due to my efforts to buy a house and having my hours at work increased, defying the sluggish economy. I have a lot of opinions about the current state of real estate specific to my situation, but that will wait for another time (hint***the name jaudio shorts says it all). Kudos to Duffbeer, for offering me some great real estate advice. I followed it, and if the deal works out, I'll come out better than I ever imagined. The advice offered was given at no charge, so many thanks again to Duff. If anyone is looking to buy real estate up in Duffbeer country, don't be afraid to hit him up. He's a straight talker, although he is former Air Force, but I don't hold that against him. Semper Fidelis, even to the Air Farce.
In other trades, I am now long RIMM, SEPR, MAS, IMA, NUAN, and LLY. Although I have lost a lot of money shorting oil, I have bumped up positions in DUG to almost 90K and I have bumped up SMN (ultra short basic materials) to almost 90K. I am a loner with this decision, I know, and the market has punished me for it so far. We will see.
Now it's time to kick back and pray for rain on the opening ceremonies.
---Jonathan
Yes I am. In fact, I jumped on the train selling oil short last week. More about the trades in a bit.
The dents in the armor of skyrocketing oil are already in place, and the stage is being set for oil to fall. Most players are on the opposite side, looking to ride oil past $200 and beyond. I not only view even higher oil prices unlikely, but $200 oil is next to impossible in the time frame being put forth.
My views are simple, based on economic principles that have been around since Cain traded vegetables with Abel.
1. Supply
2. Demand
3. Strength/Weakness of the Dollar
Most of us understand supply and demand. (All of you oil company conspiracy theorists can stop reading now). China wants more oil, the emerging markets are demanding more, and the USA isn't curbing its appetite for oil. We are using up oil as fast as it comes out of the ground. With more people demanding it, the price goes up, of course. Couple this with countries falling behind with total oil output, like Russia, and further price increases are expected. To make the perfect storm complete, oil is priced in US dollars, so as the US dollar weakens, oil creeps upward. Speculators are there to play the game, and they sometimes get caught up in the hysteria. It seems that oil is destined to continue its upward climb, with no end in sight.
If it were only that easy.
The simplified story of oil in the last 12 months that I just recounted above cannot and will not continue. Here's why:
Again, the supply story is a great one. We think of the recovery of oil as drilling a hole in the ground (or the ocean for all of you RIG owners), and then pumping out that dark liquid known as Black Gold. Naturally, oil is recovered in places where the technology allows us to get it, at a price that allows acceptable profit to the particular companies doing the work. As the price of oil increases, it becomes more cost effective to employ technologies that are more expensive than drilling into the ground. Oil Shale and Oil Sands hold a tremendous potential, with more than enough supply to satisfy demand--at the right price, that is. No one can nail down the magic price of oil that will open the floodgates permanently to oil shale and oil sands, but oil won't get to $200 per barrel (in 2008 dollars) before it is cost effective. There are always environmental concerns, bureaucratic red tape, and worries about dropping oil prices that impede this process, but it will eventually get done. Throw in the token clean energy technologies coming on line (although minuscule when compared to oil), and the supply will be satisfied. There is a short-term price ceiling here.
The demand story is probably the most misunderstood of all, with conspiracies, collusion, and myths of intentional sabotaging of technology (the 200 mph carburetor). There are a lot of people that believe no matter what price oil rises to, Americans and other people in the world will not change their habits. They think we will use the same amount of oil no matter what . . . after all, we all must drive to work and such, right? This is short-sighted thinking. We all have an individual mark that gasoline would hit before we change our habits. I can tell you, mine is much higher than most because I live so close to work, so $10.00 per gallon gasoline is probably my limit. I would then bike to work. Everyone has a breaking point, and as a people, collectively, we are setting the price. As the price climbs upward, people change their behavior, that is, they drive less. That includes not taking a vacation that requires driving hundreds of miles, and it means car pooling when going to Jimmy's birthday party. The car that gets better mileage is used a lot more, while the SUV sits in the garage. Whatever the case, behaviors do in fact change as the price climbs. Modification of behavior means less demand, and less demand will lead to price decreases given the supplies stay constant or rise. Rising gasoline prices made me figure out a way to break free of my own dependence on it, and due to my own lifestyle modifications, I now pay no attention to the price. I am an extreme case, but everyone has a breaking point. As the price goes higher, more people reach that point, making further price increases more difficult because of the slipping demand.
The weakening dollar is pretty easy to understand. A barrel of oil is priced in US dollars, and when the dollar gets weaker, the price rises. Likewise, when the dollar strengthens, the price of oil will slip, given the supply and demand factors stay constant in our make believe world in this example. The Wall Street Journal had a great article on the editorial page entitled The FED's Bender in Monday's paper showing the escalation of the price of oil and graphed its price in Euros and dollars. If you missed it, go back and read it. Though there are some stories about the price of oil pushing the dollar down, I don't buy them. A connection of a weak dollar and higher oil exists.
The wild card for the price of oil is how much the recession will cause it to decrease in price. We are at best in an economic slowdown and at worst a recession. This will eventually put downward pressure on oil due to a decrease in demand. We also have the possibility of the FED holding rates steady, which will help halt the slide of the dollar. Even if the FED cuts rates, the consensus will be that no more cuts will follow, so the dollar bears will cash out. Oil is traded globally and demanded globally, and any economic slowdowns overseas, particularly China, will certainly put downward pressure on oil. I'm not about to predict an impending China recession, but the free market doesn't put the rules on hold just because the Commies are at the helm. Oil has been on fire, and it's time to cool down.
So how have I been trading ahead of this situation? I have first held steady in my position of DUG, the Ultrashort Oil and Gas ETF. It is one of the safer ways I have played it, even though it is Ultrashort. DUG will move up and down a few percentage points, sometimes in tandem with the price of oil, and sometimes not. I only have a small percentage of money in DUG at this time, mostly because I am looking for juicier returns with declining oil.
The second position I have taken is in DCR, Macroshares Oil Downtradeable Trust. You won't find a lot of love for DCR when you do research, and the price movements don't follow any rhyme or reason. Since I started buying DCR, I have had a 12% move up, a 10% move down, and today (Tuesday) a 19% move upward. DCR is risky, so with a 2% move upward in the price of oil, you may see yourself 15% in the hole. Tread lightly on this one. I have made money on it trading in and out, but you will need to be able to stomach the volatility.
The third move I have made, ahead of the FED, is selling off a full position in the Mexican Peso, and half positions of the Swedish Krona, Swiss Francs, and UDN, the dollar bearish ETF. I plowed that into UUP, Powershares Dollar Bullish ETF. Regardless of what the FED does, I will be selling off the rest of the foreign currency within a month, but on the off chance the FED holds rates steady, it'll be sold immediately. I highlight these trades because the movement of currency goes hand in hand with the price of oil, and I the moves I am making with currency reflects my view on oil.
It's time to chuck oil overboard. Any takers?
---Jonathan
Today I cut my positions in MON, POT, SYT, MOO, and BG. The first three have done well in the short term, and BG popped today. My decision is based more upon my long view of macro-economics than the technicals of each. Ahknaten made a great case of POT being overvalued in his last blog entitled, "POT may be legal in B.C. but . . ." and Vad Yazvinski speaks more about the agriculture plays in his April 3rd entry, so I won't retrace their steps. Commodities, just like everything else in investing, have their ups and downs. The past 2 years have been amazing for agriculture, and miners, but the party won't last forever. To believe that both will continue the march upward into perpetuity, powering through a US recession is going against tough odds. What are some of the reasons cited for the continued climb?
1. Demand from China.
Not a day goes by without hearing about the China boom that is driving up the cost of everything. As long as China continues to grow, some believe commodities will remain resilient even in a US slowdown.
2. Everyone eats, therefore, agriculture will continue booming. Furthermore, as more of the world develops and diets improve, better food will be demanded by more people pushing agriculture even higher.
3. More people are demanding petroleum products, not only in the USA, but China and the emerging markets. Coupled with limited, finite supplies, oil will move ever upward along with any companies connected to the drilling and refining process. This strengthens the case for using other forms of energy, like coal, and higher demand for coal will lead to higher stock prices for those companies.
There are more factors thrown into the mix, of course, but the three above seem to be the ones that are talked about from time to time. I am not about to put forth arguments against the continued climb of commodities, but only because others have done it much better than I ever could. A great article to read is by Eben Esterhuizen on seekingalpha.com regarding this:
http://seekingalpha.com/article/70034-why-commodities-are-likely-to-struggle-in-2008
I do agree that speculators can push up commodities in the short term, but not as a long term trend. I am long on gold with GLD, and will remain so at least for the next couple months because I believe the weakening dollar and the threat of inflation make it a safe haven. Despite my seemingly contradictory position on gold and the basic materials sector, I say all of the above, to make one point, and that is this: If you believe as I do, that commodities have made their run and are on the cusp of falling back down to earth, then you must position yourself to make a profit from it. You can do this in several ways, but my way is staking a position in the Ultra Short Basic materials ETF, SMN.
As I stated before, I have cut several of my positions in the agriculture stocks, but have not eliminated them completely. I do this only as a way to spread my risk. There could still be a lot of money left to make in agriculture, and if so, I will capture part of the gains as I slowly sell out of them. Conversely, if the agriculture stocks take a dive tomorrow, I have booked some profits today with no worries. During this time of selling the agriculture positions, I am also increasing my stake in SMN. For a short period of time, I will cross into a zone where my money is perfectly balanced between the two, almost canceling any movement up or down. Gradually, though, my stake in SMN will increase reflecting my own macro-economic view that commodities will go down as the US enters recession. As the US goes into recession, SMN will go up as the commodities come down.
SMN is designed to inversely double the Dow Jones US Basic Materials Index. This index contains a lot of our favorites in the SLO, with major steel, coal, agriculture, chemical, and mining companies as components. (For a component list, go to www.djindexes.com) It's no wonder that basic materials ETFs have been soaring since the majority of the companies in the index have prospered greatly in the past few years. This is the reason that SMN is so dangerous. If commodities continue up, I will be losing doubly. Before today, my original stake in SMN was down over 17% . . . that's a nice paper loss, embarrassing to the most stoic of players. I bought it at the wrong time, and only bought it one time, without averaging in. This time I am playing it safe. I took a 14k stake today, and I will be taking at least 2 more similar stakes in the next 2 months. The only reason I may hold off on taking a bigger position will be if commodities crash rather than taking a slow ride down. Again, it may hurt me in the short term, or even for the contest, but I believe my strategy is sound. SMN is trading just a tad above its 52 week low, and at $34 a share, its way off of its January 22nd close which was around $53. Any chinks in the commodities armor can become bigger problems in another mini-panic sell off. If that happens, those that positioned themselves on the short side will clean up.
Where do you stand?
I've made my decision. Anyone want to raise me one?
---Jonathan
]]>Here's a shout to Jubak, Markman, and anyone else who speaks up for "Joe six pack" or "Joe Investor"--- none of you speak for me, and I am tired of your assumptions on my social class. The "Main Street" you speak of is the one I live on, and I don't need your condescension.
I am Joe Investor, and you are not, so let me tell you about things here in the trenches. My wife and I make less than 75k combined, and we are doing just fine thanks to a little hard work and pre-planning. We are putting away over 35% of our income toward a fund that will help us put a down payment on a house in about a year, probably a house that someone else got overextended on due to their own irresponsibility. We have our goals, and we are reaching them a little bit at a time, one day at a time. Not everyone on Main Street blows their money on cigarettes, beer, satellite t.v. , and lottery tickets. Some do, but assuming we are all miserable is plain wrong, and I doubt I am in a small minority.
Jubak writes, "So if you think your paycheck isn't keeping up with the price of milk, bread, medicine, and gasoline, you're absolutely right. And for many American families, this isn't a recent phenomenon. The median hourly real wage has been falling for the last three and a half years. So a family in the middle of the U.S. economic pyramid knows there's a recession going on; for some the recession has been going on for three years."
When I read tripe like that, it makes me wonder if someone as smart as Jubak thinks that lowly of regular folks, or if its just an article churned out to play to some readers emotions who have it good, but feel bad for those that don't. I guess I should check my freedom in at the door and Jubak can be my dad. "Woe is me", I should say. I give up . . . let's just surrender the country to the financial elite so we regular folks don't send it to Hades in a hand basket. Paychecks not keeping up with the price of milk and bread? My wife and I compare prices each and every time we go to the grocery store. We pre-plan meals so we don't waste food. We only buy cereal when it is on sale, and if it isn't, we eat oats, which is a heck of a lot cheaper and most of the time, more healthy. Repeat that on many other food purchases. I can't be the only person that does this type of stuff!
Gasoline is too expensive? Please. We should all be writing letters to the CEOs of Exxon Mobil (XOM), Royal Dutch Shell (RDSA), BP, and the rest of them with long letters of thanks. Thank you for providing me with a product that allows me drive wherever I want for holidays, birthdays, to work, or to the mall. It sure beats hitching up the horse. I used to have a boss that whined about the price of gasoline while he and his wife purposefully bought a house out in the countryside and commuted 40 plus minutes each way to work and back. Did you catch that? There was a choice involved there! Since when did the free choice of purchasing a product become an entitlement to get it for whatever price I think is right? Now that I am on my soapbox about the gasoline price whiners, let me tell you what I did about the price of gas.
Over two years ago, before I got married, my soon to be wife and I sat down and did a cost benefit analysis of our future living and working situation. We purposefully chose to move closer to work, so that our commutes would be shorter, not only to save on gasoline, but to also give us more free time. We crunched all the numbers, (rent, insurance, gas, wear and tear on vehicles, etc) and decided to make the move based on this analysis. I now live less than 2 miles from work and she is less than 4 miles from work. I not only gained an extra 40-50 minutes of time every day, but I also haven't looked at the price of gas in months. I have no idea what gasoline costs here in central Ohio. I fill up maybe once a month. A choice was made, and it is paying dividends. And by the way the abridged version of the story above wasn't easy. Sacrifices were made. Here's some things I didn't do:
1. Whine about the oil companies
2. Demand my politicians "do something about it"
3. Demand a windfall profits tax on those associated with the oil business.
All of the things listed above aren't proactive. You need to get off your butt and do something about your own situation. People do it all the time and will continue to do it. We aren't all helpless, are we? Can't move closer to your work? Get a car that gets better gas mileage. Can't do that? Forego one night of going out to dinner, and put that money in the tank. Lose the Starbucks coffee (SBUX) every morning. Get rid of that Tim Horton's bagel. Come on, people. In the end, it boils down to the fact that no one wants to make even one slight modification of their consumer behavior to accommodate for price fluctuations. I drive a car that is paid for, and my next car purchase is already planned, months in advance. I seriously hope I am not the only one on Main Street that pre-plans purchases. That big fat economic stimulus check? Yep, a plan is already in place, and blowing it all isn't the plan. Listening to Jubak, I must be the only one on Main Street doing this. I guess that although I make several consumer choices, it must be someone else's fault I have no cash in my pocket. It's someone else's fault all the time, every time.
By the way . . . even if an oil company gets hammered with a big windfall profits tax, how does that help you? You are still paying market price! Here's an All Points Bulletin from Main Street: It'll be a long wait if you are always looking for someone else to help you.
Jubak says, "The last time we had a recession, the rather mild one that ushered in the current decade, Congress acted to extend unemployment benefits beyond the basic 26 weeks in March 2002. By that point in the recession, 1.3 million workers had exhausted their basic benefits. This time around, in the frantic effort to get any kind of stimulus package past both parties in Congress and past the White House, Congress refused to extend unemployment benefits for workers who had exhausted their basic benefits. Out of work for 27 weeks? Tough luck, we're cutting you off."
Guess what, Jim my man? I have been out of work before, and there's nothing like tough luck to put some fire under someone's rump. Doing odd jobs for months is tough, but it is one heck of a motivator. Going through pain teaches us lessons. Going through pain teaches us to prepare. Going through pain in the tough times helps us flourish in the good times. This business of always blaming someone else while our hands are extended looking to take a freebie is the problem. Time to buck up, folks. Those of us on Main Street can deal with economic problems, it just takes more economic nudging for some than others. Hand-outs don't help us, they hurt. The sooner we all realize that the better.
I have 40 or so years to prepare for retirement, but if I am to listen to any of about 12 talking heads, I may as well throw in the towel now. There's nothing I can do, 40 years isn't enough time, and it'll be someone else's fault I am not ready for retirement. I am destined to be social security poor, right? I say "social security poor" because if I get to retirement age and social security is all I have, I will be in poverty, plain and simple. (Despite this sad reality of Social Security, there's plenty of people that want to preserve this system "as is", continuing the cycle. This dumbfounds me). I guess I need to prepare today for blaming someone tomorrow.
Sports stars juice up, and it isn't their fault because of the pressure of being a top athlete.
Homeowners are losing their homes, but it isn't their fault because someone didn't tell them to read the contract, ask questions, or even think about preparing for a worst-case scenario. It's someone else's fault.
A kid commits a crime, and it's society's fault, the school's fault, or the neighborhood's fault.
A man is morbidly obese, and it's Mcdonald's fault (MCD), Burger King's fault (BKC), or Wendy's fault (WEN) for making him fat. This same man has high cholesterol, and Lipitor costs a lot. That's Pfizer's fault (PFE). Hopefully the class action lawsuit he is part of against the tobacco companies can pay for the drugs. After all, it's Altria's fault (MO) that he can't breathe after smoking for decades.
My all time favorite blame game was a subject I covered in a blog last September in an entry called "Abolishment of the Uptick Rule to Blame?" I bet you didn't know it, but the reason many company's stock prices have been in the toilet is because of those charlatans called short sellers. Since the uptick rule was abolished, short sellers have been getting a large chunk of blame. I was in the gym the other day watching Cramer on Mad Money spewing forth more uptick rule abolishment anger, and in today's Wall Street Journal, there is an article by Gregory Zuckerman laying out the case for and against the elimination of the uptick rule. Don't blame boneheaded moves by management. Don't blame the normal cycle of markets. It's someone else's fault, and that someone else is a short seller. We get constant droning on and on about how we need to view the market long term and invest long term, but at the same time these same people complain about volatility and downturns of the market.
Want to read some common sense on short selling? Go read Vad Yazvinski's "Why I think short selling makes sense", a blog post from February. While you are at it, go read his bio. Foreigners that come to this country are successful because they work hard and don't make excuses. Vad is an example of that. Immigrants aren't making excuses, they are taking the bull by the horns and making the sky the limit. They aren't used to having every type of economic safety net known to man to catch them when they fall. Home grown Americans need to learn that work ethic. My generation, the Generation X-ers, need to get our lazy duffs in gear, and you boomers need to teach us some tough lessons, not provide hand outs. I respect my elders, but you guys need to stop being soft. (I am now stepping off my soapbox).
The market tore a chunk out of me today, ripping out a good 2% plus piece of meat from my portfolio, and my cash has been deployed to beef up my short ETF positions. This rally could actually have some teeth this time, so I am glad the cash is there to buy when necessary. I have followed FXP all the way down from my last sell at $118.00, and I have no worries.
Actually, shouldn't I be finding someone to blame for my portfolio problems?
----Jonathan
Let me give you a real life example of economics in action.
Back in January of 1997, I was a mere PFC in the United States Marine Corps doing training at Camp Geiger, North Carolina. My unit's squad leaders, mostly sergeants, told us we were going to the field for 2 weeks with no access to the normal base luxuries, including the Post Exchange. (The PX is where you buy gear, like a mini Wal-Mart). We went to the field, and it became my first real life lesson of how markets work.
How so?
With no access to the Post Exchange, the normal items that troops take for granted ran in short supply, and with it, high demand (desire) to obtain those supplies. The supply I speak of was cigarettes. Most guys didn't prepare adequately for 2 weeks in the field, but the smokers were especially unprepared. Some guys spotted an opportunity. Armed with 2 cartons of cigarettes, individual Marines went about their daily training, smoking their normal lot and awaiting the time to capitalize on those that were unprepared. As the days wore on, those that only brought a few packs out with them ran out. At the first sign of trouble, they bummed cigarettes, but when the overall supply of cigarettes dwindled, no one could "bum a cig" due to the short supply. The smokers got desperate. They started trading for cigarettes and paying for them with whatever cash they brought out to the field with them. Bid and ask prices for cigarettes were the norm, increasing as the days wore on. By the last 2 days of training, I watched several Marines paying $5 for one cigarette or trading 3 MREs (Meals Ready-to-Eat) for one cig. Being hungry for several hours or trading a piece of green paper with Abe Lincoln on the front was worth one cigarette in that situation, at that point in time. It was the free market working as it has always worked. The smokers that were the most prepared came out of 2 weeks in the bush with a pocket full of cash and a smile on their faces. They had the foresight and the smarts to spot an opportunity.
How does this compare to the current market conditions we are facing? Some people have prepared and some haven't. Those that haven't are going to get eaten alive and those that have prepared are going to launch themselves into a much higher tax bracket. People will pay only what they deem an item is worth, plain and simple. JP and Bear did the best they could with the information available, and $2.00 per share was the result, like it or not, take it or leave it. No one would touch Bear with a 100-foot pole, let alone a 10-foot pole. JP did with Other People's Money.
More deals like this are on the horizon. Citi has been crushed in the past 9 months, and someone could buy a share of it and make more money then they know what to do with. It will go beyond Financials and Real Estate. It might not be now or 6 months from now, but it will happen. Free markets work, even if they work in a way we dislike. Sure, people will throw around phrases like "price gouging", "monopoly", or "bear raider", but it is the seller's and buyer's choice, and we are making it.
You have options in this market. Buy it long or sell it short. It is that simple. Where is the bottom? Tell me and we can be multi-millionaires together. Are we going into depression? Put your money where your mouth is and sell the market short big time. Is the bottom going to be when housing prices are stabilizing? Well, sell short and then go long.
There are over 6.7 billion of us in this world that are affecting the markets. They go up, and they go down. I have this market sold short, but honestly, all of this doom and gloom about the markets is making me want to backhand a trader or two. You aren't hamstrung . . . you have choices! Make them, and get moving. We are at the beginning of a bear market, and bear markets are part of the normal path of markets. Let's worry, but let's not panic.
----Jonathan
----Jonathan
]]>For any active or former military SLO players out there, I would like to recall a couple of my favorite quotes from USMC lore:
"Retreat, hell! We're attacking in a different direction!"
--General O.P. Smith, Chosin Reservoir, Korea, 1950, when asked it his "fighting withdrawal" constituted a retreat.
"We're entirely surrounded, those poor bastards. They've got us right where we want 'em. We can shoot in every direction now." -----General Chesty Puller, Chosin Reservoir, Korea, 1950, when told that 10 Chinese divisions had his men completely surrounded.
Investing in this market has been very much like fighting a war. Jmcdowell of the Visually Compelling TA portfolio has been educating us on the game of chess and how it compares to the market. I agree with Mcdowell, and raise him one. Making money in this market is like fighting a war. We gain ground only to lose it the day after. We lose ground and fight all day to win it back. There are a lot of casualties, and for those at the top of the leader board, half can be chalked up to luck, myself included. How is investing like fighting a war?
In a war, diversification in a key ingredient to winning.
Send the Army, Navy, Air Force, or Marines? Hit the target with planes, tanks, artillery, or infantry? Dumb bomb, smart bomb, high explosive, or white phosphorous? We must have a diverse amount of weapons at our disposal to achieve the objective and to absorb the hits as they come. Sure, we can stack our portfolios totally with Ultra Short ETFs (No offense to the players doing it-I am a brother), but when the tide turns it turns big. Diversification doesn't mean a portfolio won't go down in value. Rather, it allows you to absorb the hits until the conditions swing the other way.
In a war, Intelligence = the edge.
Some people view "military intelligence" as an oxymoron. Intel is still trying to wipe the mud off of its face when it came to the realization that there were no large stockpiles of new NBC weapons in Iraq. The "slam dunk" was blocked by the rim. However, the Iraq situation shows the power of good and bad Intel. You can never have too much information. Knowing the right information at the right times will allow an army to properly deploy forces to meet the objective. Discerning the bad Intel from the good Intel is essential, since there is a lot of bogus info to throw you off. In investing, we also must have access to the right information, and we need to be able to keep from being sucked into the hot stocks at the wrong time. Bad Intel will lose battles, and bad Intel will lose money.
In a war, the situation is fluid, requiring constant adaptation.
There is a saying that once bullets start flying downrange, all plans go to hell. That isn't totally true, but the original battle plan goes through constant adaptation in order to achieve mission accomplishment. It is impossible to plan for everything that can go wrong. What happens if there is a communication breakdown? Equipment failure? No water, no food, no bullets, the LT got shot, the chopper went down . . . the list is endless. Adapt and overcome is the name of the game. Investing is a fluid situation, with rallies turning into retreats, turning into rallies. Commodities are hot today, cold tomorrow. Have a plan, and plan for contingencies. When there is no plan for the contingency, improvise. Investors make money when the markets go up, and investors make money when the markets go down. It isn't retreating . . . it's attacking in a different direction.
In a war, reinforcements can turn the tide.
In the battle of Gettysburg, the Union Army could have collapsed and been routed if fresh men and ammunition not arrived to save the day. Having enough beans, bullets, and band-aids is critical, especially when the assault is on. In investing, this means having enough cash on hand to take advantage of buying opportunities. In SLO round 1, I was fully invested on the short side for the majority of the competition. Several buying opportunities arose, but with no cash on hand, I could either let it pass me by or I could lock in losses of other holdings to obtain the funds. Most of the time I watched. So far in SLO round 2, I have kept anywhere from 50k-100k in cash with at least another 100k plus in currency and bond ETFs, ready to be cashed out to fund buying opportunities. So far, the cash position has allowed me to take advantage of several swings on both the long side and the short side. The currency and bond ETFs are extra "reinforcements" awaiting deployment and making a small percentage while they wait.
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I have finally reached a point in my portfolio where I am satisfied with all of my holdings and the size of each position. There are a few holdings I am not happy with, but overall I have been able to stay toward the top with long stocks, long ETFs, and short ETFs. Technically, I am mostly short hedging long. My short squeeze picks have been average, with a few moving double digits in a single day, but only getting me just over the break even point. Gatehouse Media (GHS) popped over 19% today, and Crystal River (CRZ) gained over 20% over two days. Both of these were short squeeze picks that popped, but I have yet to lock in a profit. Timing is everything, and missing the buying point by even one day has its consequences.
My darling of the portfolio remains FXP, the Ultra Short China ETF. I have been buying and selling small positions in FXP since competition started, and if you like volatility, sink your teeth into FXP. During the market rally on Tuesday, FXP dropped over 20%. That's right, a 20% drop might as well qualify as a crash. It crossed one of my limit buy prices and away I went. I just sold that small position today, locking in a 10% gain. FXP is my friend right now, but can quickly stab me in the back as I play with fire. With my position around 50k, I am still uneasy, but not stressed. When it finally crosses the $110 mark, I'll trim down to a safe 30k, but until then I will be buying and selling at specific points in the range between $80 and $100.
I want to take the time to tip my hat to the illustrious KB, the most dangerous player in the SLO, Uncle John for his iambic pentameter on demand, Jmcdowell for his chess, and the Family Man, Ric Bottorf, and big Don Ferk for their constant contributions. Though there are others I have missed, you are not forgotten. The market is out there. Lock and load men, it's killin time.
Markman says, "The very idea that the modern world could run out of food seems ludicrous". I got news for you, Jon. It is ludicrous, barring thermonuclear war or the abolition of democracy and capitalism around the world. I guess those that espouse ideas from The Population Bomb by Paul R. Ehrlich probably agree that it is all misery from here on out, but I beg to differ.
Food shortages and famines are caused by political thugs, not high demand.
When is the last time a democracy experienced famine? I'm really not sure . . . the SLO bloggers will need to help me out with that one. India pre-1967? That's the great thing about free markets. When the price goes up, more people strive to get in the game to get a piece of the action. Prices will go up, and people will pay more for food, but there won't be mass starvation. The simple truth is that if doomsday ever did come, the developed world would be the last to starve.
Markman also says, "Unlike energy, you can't drill deeper in the ocean or under Arctic tundra for more food."
Though this is a true statement, he is missing a giant piece of information: higher yields from the same amount of land. There is a reason I said, "You're smoking POT, MON". POT and MON are just two of a great number of companies that create products so farmers can get higher yields from their crops. Why have both companies been on fire lately? They are filling the global demand to meet higher yields. How is it that US farmers "feed the world"? That 17 year streak of no major crop failures is only part of the reason. As an aside, how is it that the US has been able to have a 17 year streak in the first place? It wouldn't be because agriculture companies crank out products that make us grow, protect, and harvest better than everyone else, is it? God provides the sunshine and rain, but he also provides us with the smarts to make the most out of every acre. That is true from the CEO of ADM down to the 10 year old farmer's son waking up before dawn. Again, barring thermonuclear war, we are going to be able to eat. High world demand is the least of our worries.
Another bit of comedy within Markman's article is when BMO Financial Group strategist Don Coxe claims that all ethanol plants will be shut down when doomsday arrives. Earth to Don Coxe; free markets respond in real time, buddy. Ethanol would either die a slow death, or farmers would figure out how to meet the demand so we could eat and use ethanol both. Oh yeah, I forgot . . . we still can drill for oil (or get it out of sand, or get it out of shale . . .) and refine it into gasoline in order to drive. Amazing how that works!
The only part of the article that I agree with is when he stumps for Ag companies at the end. Commentators and bloggers have talked about all of the companies and ETFs at length. I just wish he could have spared us the doom and gloom leading up to the final pitch. I love ya, Jon, but you struck out on this one.
--Jonathan
Find yourself scratching your head? No problem, you are in good company. Between the jabs of Helicopter Ben, the Bernanke put, and comments about being the evil spawn of Arthur F. Burns, there really isn't anything good to say about him. Stagflation anyone? It's all Ben's fault, right?
I've had my own complaints and rumblings about Mr. Bernanke, but I think I may have jumped the gun and will offer a few opinions as to why Mr. Bernanke and the rest of the FED members are not a bunch of oxygen deprived cretins.
First of all, it's easy to criticize the guy at the top when things aren't going well. Keeping rates as low as they were for as long as they were can be laid at the feet of Mr. Greenspan, with Mr. Bernanke being an unindicted, co-conspirator at best. The "mess" we are in right now isn't a result of one guy doing one thing at one time. It's a snowball that has steadily grown larger for several years.
1. Do we blame the FED entirely for keeping rates too low for too long?
2. Do we blame lenders that threw money at people (tricked?) that had no way of
making their house payments, with "liar loans" and the like?
3. Do we blame homeowners who didn't have the credit, the income, or the
discipline to prepare for the day their ARM would re-set?
4. Do we blame investors for quickly demanding and paying top dollar for anything
related to real estate, including sub-prime loans?
5. Do we blame the government for wanting everyone to be a homeowner, even those
who shouldn't be? (Should everyone be a homeowner?)
6. Do we blame everyone for thinking that property only goes up, up, up? (house of
cards, anyone?)
Feel free to add a few more to the blame list. What's done is done, and to quote a favorite movie of mine, "It's a big $#@% sandwich, and we're all gonna have to take a bite". Those comrades in arms will know which movie I am referring to.
And biting we are. Those non-speculators and prime mortgage people are suffering the fallout despite their acts of being responsible. Why should people suffer for being responsible? Give that one to the theologians when talking about the problem of evil.
Which brings us full circle, back to the man in question, Ben Bernanke. Last August when the credit engine seized, should he and the FED just kept the status quo? I thought so at the time, but the more carnage about the credit market that gets revealed, the more I am thinking the FED was right. The rate cuts will end up making the recession less severe, although painful like any recession. Since the rate cuts take several months to work their way into the economy, we probably won't be seeing any effects until mid summer, so until then we should brace for more bad news. Hopefully the rate cuts will be finished by the next FED meeting, since the next ride on this coaster will be inflation fighting with rate hikes. We may have over steered right and will soon be over steering left. What's a FED chairman to do? Housing will finally reach equilibrium, but when? Prices will continue to drop until the vultures come in and clean up the mess. The vultures are good for us. They'll get rid of this supply glut of houses and property a lot faster than a Congress dangling carrots in front of the irresponsible buyers who bear a portion of the blame. We will take the hit, lick our wounds, and get back to business. In other words, the FED had no other choice last September, and they saw the seriousness of the situation better than most. I have disagreed and criticized the FED over the past few months, but I was wrong. I don't like inflation, and I don't like the situation the economy is in, but the markets will work it all out. I believe in free markets, and I believe the free market will correct itself if we can just stay out of the way ($160 billion anyone?). I'll revisit this opinion in a few months to do further Monday morning quarterbacking.
As far as my portfolio is concerned, it has taken a bit of a hit this week, mostly because of my position in FXP, EWV, EEV, and EFU; all of which are Ultra short ETFs for China, Japan, emerging markets, and Europe/Asia Pacific. I have taken profits in these over time in small chunks, but the pullback made me suffer a little more than my liking. FXP hit two of my limit prices to buy, so I am back up to over 9% of my portfolio shorting China. My original intention was to trim my position in FXP down to about $30k, but the price was right to buy and buy I did. EWV, EEV, and EFU positions remain the same since I already have 100k on the table shorting China.
Along with shorting the overseas markets, I have $40k in foreign currency ETFs and a bearish US dollar ETF which all do well with the fall of the US dollar. I have been using all of the currency ETFs as a short term place to park extra cash and remain in compliance. They have yielded a return of a little over 3% so far, a mere pittance for the leaders, but satisfactory for me until we get later in the game.
The bond ETFs in my portfolio have been rather boring, returning - .5% on the 100k that I have parked there. Again, I am not too worried since the bonds are for diversification and can be emergency money if the time comes.
I have been satisfied with the performance of GLD, streetTRACKS Gold Shares and SDY, the dividend aristocrats ETF. Both have been slow and steady moving upward, handling the bumps in the markets just fine.
Finally, my short squeeze picks are performing average to below average, only because they haven't moved too much up or down. I have sold two positions, WGO and BHS for a 10% plus gain. Since I didn't have a lot of money on the line, it didn't translate into hefty profits, but I'll take a couple 10% winners from a crew of beat up companies any day. Most of them have been swinging up and down 5% from my initial buy in, so not a lot of excitement yet. I have added two more short squeeze picks to the portfolio, NCT and IMH. Until I cash out a few more, it looks like my short squeeze picks are final.
As a sharp contrast to SLO round 1 where I had minimal trades (only about 50 for the entire 6 months), I have been trading almost every day in SLO 2. However, every trader (traitor?) needs a break, so tomorrow will be no trades other than automatic limit orders. I am headed off to Seven Springs, Pa to snowboard the slopes and recharge for next week. Sayonara.
---Jonathan
I am now about 2 weeks since my first short squeeze buy. In my last blog, I outlined my strategy with entry points, doubling down, and when I will bail if it continues to sink. In this blog I will be more specific on the strategy, and I will outline how I rate the performance of each.
First of all, I must say that I personally don't like any of my short squeeze picks. All of these companies have an obscene short interest ratio for a reason: there are professional investors that have discovered the major problems with these companies and have acted on the information. Knowing nothing else other than the short interest ratio tells me by laying money long when many others are laying it short, I am part of a lonely minority. In addition, I have put less research into these short squeeze picks, so make that two strikes against me. Despite this, I have yet to worry about the picks and their performance. I still have a substantial cash position to spend on them, so I still have a ways to go before I am bankrupt. My short squeeze picks as of 2-21 are as follows:
WGO, CCU, TOC, GY, BRC, BHS, CC, TWP, SFE, BLG, GTN, SIRI, HZO, GHS, CRZ
I set a limit order for about 30 short squeeze candidates, and the ones above met the limit. Since I only have $5000 on the line with each buy in, I looked forward to being wrong on so I could get to doubling and tripling down. So far, only two plays, GHS and GTN crossed below the 5% threshold for doubling down, and GTN has dropped enough that I'll be doubling again soon. The rest have been rather calm. CCU (Clear Channel) actually popped 12% on great earnings news the day after my buy in, but I didn't see it until the markets closed. It has since retreated 5%, but I fully expect it to break back through the 10% mark and I can dump it.
I have no limit order to sell, only because when a short squeeze candidate actually gets "short squeezed" it can rocket upward and a limit sell order can make you miss potential profits. If one of them does pop, I have found the best policy is to let it bounce off its price ceiling before selling, but watch it closely.
Throughout this competition, I will be buying short squeeze plays and rating their performance once I sell the position. Here's my own "jaudio shorts" rating system of my short squeeze plays.
A---20% plus gain.
B---10-20% gain
C---0-10% gain
D---0-5% loss
F---5% plus loss
My sell criteria are simple.
1. Sell any position that has a 10% plus gain
2. Sell any position within 30-40 days after initial buy, regardless of gain or loss
3. Sell any position with a 10% loss after being "all in" at $30k.
Sell Rule #1 is in place because a 10% or more gain fits my definition of a "pop". A real short squeeze pop will be well beyond 10%, however, I will be content with 10%, and if I miss out on potential future profits, no problem. It's the cost of doing business. Sell Rule #2 is in place because none of these short squeeze plays are "long term" buys. Either they pop short term, or I will lose money. No use holding them longer than 40 days. Sell Rule #3 is in place to stop the bleeding before things could get worse. It's that simple. The rules are in place, and I will trade by them come hell or high water.
For the rest of my portfolio, I have been able to withstand some of the hits the markets have been taking as of late. I still have too much money shorting China with FXP, and it leaves me vulnerable, especially because FXP swings wildly. Although I am trying to trim my position in FXP, it hit my mark for a limit buy at just under $86. I was able to dump the buy with a 10% gain, but I would still like to see it break $100 so I could reduce the position to 4% of my portfolio. The other shorts in my portfolio all have limit sell orders for further reduction, although I won't totally abandon the shorts. On the long side, I have some money in GLD, and SDY, which have weathered the storm nicely. I really would like to see the Dow, Nasdaq, and S&P dip into bear territory for a few weeks before I start going long. Going long looks more and more attractive, but it's a little too early. I'll give it some serious thought around mid March.
Until then, I still have a lot of money aside in cash, currency ETFs, and bond ETFs. All told, it is almost $300k, but I stay in compliance thanks to the ETFs. It's pretty conservative, but it will allow me to unleash when the time is right.
It's been fun so far.
---Jonathan
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