Page 1909 - Mad Hedge Fund Trader

Bidding for the Stars

A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her.

The bids soared to $10,000, $11,000, $12,000. After all, it was for a good cause. But when it hit $12,400, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $12,000.? I said ?no thanks.? $11,000, $10,000, $9,000? I passed.

The current altitude of the stock market reminds me of that evening. If you rode gold (GLD) from $800 to $1,920, oil, from $35 to $149, and the (DIG) from $20 to $60, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now?

I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.?

At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.

See Any Similarity?

Time to Mend the Nets

The Death of the Mutual Fund

Diary, Newsletter

ETF?s are much more attractive than mutual fund competitors, with their notoriously bloated expenses and spendthrift marketing costs. You can?t miss those glitzy, overproduced, big budget ads on TV for a multitude of mutual fund families. You know, the ones with the senior couple holding hands walking down the beach into the sunset, the raging bulls, etc.? You are the sucker who is paying for these. Sometimes I confuse them for Viagra commercials.

I once did a comprehensive audit on a mutual fund, and a blacker hole you never saw. There were so many conflicts of interest it would have done Bernie Madoff proud. Any trainee assistant trader can tell you that more than 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so.? Published performance is bogus, they show a huge survivor bias, not including the hundreds of mutual funds that close each year. And there?s always that surprise tax bill at the end of the year.

If there was every an industry crying out for a fundamental restructuring, consolidation, price competition, and ultimately a whopping great downsizing, it is the US mutual fund industry. ETF?s may be the accelerant that ignited this epochal sea change, with the number of mutual funds recently having shrunk from 10,000 to 8,000. It?s still early days, with ETF?s only accounting for 5-6% of trading volume, even though they have been around for a decade.

The Mutual Fund?s Days Are Numbered

March 18, 2013

Diary, Newsletter, Summary

Global Market Comments
March 18, 2013
Fiat Lux

Featured Trade:
(MARCH 20 GLOBAL STRATEGY WEBINAR),
(HAS APPLE BOTTOMED?), (AAPL),
(TESTIMONIAL),
(SOVEREIGN DEBT WAS A GREAT PLACE TO HIDE),
?(PCY), (LQD)

Apple Inc. (AAPL)
PowerShares Emerging Mkts Sovereign Debt (PCY)
iShares iBoxx $ Invest Grade Corp Bond (LQD)

Has Apple Hit Bottom?

Newsletter

No one has suffered more than I from my slavish devotion to Apple?s products, its performance, and, oops?. it?s stock. A long position in Steve Jobs? creation remains my only losing position of 2013 (remember the January $525-$575 call spread?).

Without the hit I took on that, my Trade Alert Service would be up 33.3% so far this year, instead of only 31%. By comparison, the average hedge fund is up a pitiful 4.5% in 2013. I can hear the pink slips flying already.

However, there seems to be a growing consensus that the long suffering stock is close to hitting bottom, and that we soon need to flip from selling rallies to buying dips. Word on the street is that some of the biggest value players are already starting to scale back in.

There is no doubt that the stock has gotten cheap, possibly becoming the least expensive issue in the entire market. Have you noticed how the number of analyst upgrades has suddenly started to keep pace with the downgrades?

The $137 billion the company carries in cash on its balance sheet is more than the entire market capitalization of rival Samsung. The market is currently putting the enterprise value of Apple at less than that of supermarket chain Safeway (SWY). What kind of crazy world is this?

As with all great trades gone awry, the reasons for Apple?s demise are screamingly obvious with the benefit of 20/20 hindsight. It was owned by just too many damn people! I should have seen the writing on the wall when my cleaning lady, Cecelia, asked me if she should buy more in the day Apple became the largest company in history.

Not only that, the stock has a long history of peaking around new product launches, as it did with the iPhone 5 in September. Compressing several product launches into a short period last fall led to a new product drought in the winter, which unjustly shined a spotlight on Samsung, and sent Apple?s shares tumbling. Blackberry?s (RIM) return from the grave was another contributing factor.

As I told my readers in my ?throw in the towel? piece in January, a different type of physics seems to apply to companies that exceed $500 billion in market capitalization. And even after being in the business for 45 years (50 years if you count the one share of IBM I bought with my paper route savings), I still make the same mistakes as a first year, wet behind the ears intern.

Using the product cycle argument again, now could be the time to buy. Apple will shortly begin gearing up for the late summer launch of its iPhone 5s. There will be other products on the way, as the company seeks to move down the value chain and exploit the market for prepaid, no contract phones, which accounts for about 70% of the global subscriber base. There is also Apple TV, which will probably deliver more hype than earnings, but will be good for the share price anyway.

Then there is the issue of what to do about that cash mountain. A partial return to shareholders could take the form of a higher dividend, a share buyback, or a surprise acquisition. Action on this could be imminent and could deliver an immediate 10% boost to the stock price.

Of course, timing is everything. Propitious may be the one year anniversary of the announcement of Apple?s first ever dividend, which is in the coming week. The last dip could come when the June guidance is doled out in April, which is expected to be horrible. That may give us our final flush. On the other hand, action on the cash surplus could be imminent cancelling out the final capitulation.

Here?s a real curve ball for you. What if a generalized market sell off in the late spring starts driving money into laggard Apple because it can?t go down any further. Could Apple become the new safety trade, the ?RISK OFF? trade? We shall see.

Testimonial

Testimonials

Another great trade by you on the (SPY). ?After watching you for almost two full years, I funded $100k with a broker and joined you live. ?This is ridiculous ? you are the BEST trader I know and your style is PERFECT for me, as I don't want to sit in front of the screens all day long. I was also in with you on the (FXY). I am truly thankful for your teachings and admire how good you are.

Jay in Germany

Sovereign Debt Was a Great Place to Hide

Diary, Newsletter

I am constantly asked where to find safe places to park cash by investors understandably unhappy with the risk/reward currently offered by the markets. Any reach for yield now carries substantial principal risk, the kind we saw, oh say, in the summer of 2007.
I have had great luck steering people into the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) for the last few years, which is invested primarily in the debt of Asian and Latin American government entities, and sports a generous 4.75% % yield. This beats the daylights out of the one basis point you could earn for cash, the 2.0% yield available on 10 year Treasuries, and still exceeded the 3.84% yield on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ?BBB?, or better, US corporates.
The big difference here is that (PCY) has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in the region going back to 1820 is in the backs of their minds.
You would think that a sovereign debt fund would be the last place to safely park your money in the middle of a debt crisis, but you?d be wrong. (PCY) has minimal holdings in the Land of Sophocles and Plato, and very little in the other European PIIGS. In fact, the crisis has accelerated the differentiation of credit qualities, separating the wheat from the chaff, and sending bonds issues by financially responsible countries to decent premiums, while punishing the bad boys with huge discounts.? It seems this fund has a decent set of managers at the helm.
With US government bond issuance going through the roof, the shoe is now on the other foot. Even my cleaning lady, Cecelia, knows that US Treasury issuance is rocketing to unsustainable levels (she reads my letter to practice her English).

Since my initial recommendation, my total return on (PCY) has been 50%, not bad for an insurance policy. Money has poured into (PCY), the net assets under management increasing nearly tenfold. If we get a sudden sell off in Treasury bonds, a scenario that may have already started, I think it will take the rest of the fixed income universe along with it. I therefore want to take the money and run.

I lived through the Latin American debt crisis of the seventies. You know, the one that almost took Citibank down? Never in my wildest, Jack Daniels fueled dreams did I think that I?d see the day when Brazilian debt ratings might surpass American ones. Who knew I?d be trading in Marilyn Monroe for Carmen Miranda? Given the advanced age of this bond bubble, I?m now thinking of swearing off women altogether.