The Big Picture

The Bear is Back, Part II

Sunday, July 06, 2008 | 10:30 AM

Yesterday's Bear is Back table was re-envisioned and reformatted as a chart by Jake:

I don't really buy breaking the 2000 Crash into 2 pieces, but that's how it was done in the table . . .

Barron's: The Bear's Back

Saturday, July 05, 2008 | 08:00 AM

in Markets | Psychology/Sentiment | Trading

This week's cover story has a nice wrap up of the current market, along with some good research from the boys at the Bespoke Group:

And a video discussion of the same:

Source:
The Bear's Back
RANDALL W. FORSYTH and VITO RACANELLI
BARRON'S COVER, MONDAY, JULY 7, 2008
http://online.barrons.com/article/SB121512473043028031.html

Trading Buy

Wednesday, July 02, 2008 | 06:00 AM

in Markets | Technical Analysis | Trading

Our Institutional Research firm -- my day job -- made a short term buy call last night.

Its only a trading call, but I will see if I can get permission (from our clients) to release it publicly.

Bottom line: A bounce, similar to January, only not as strong or long-lasting. And, its not a lasting bottom.

Lehman Brothers $20 Price Target Complete

Monday, June 30, 2008 | 05:15 PM

in Quantitative | Short Selling | Trading

In the beginning of June, I noted that Lehman Brothers (LEH) was reiterating a sell signal on the Fusion IQ ranking system. So too was CIT Group (CIT).

Lehman closed at $19.81, and is now at an eight year low on "Take-under" speculation. CIT is $6.81, about 32% below the June 3rd call.

At the time, we put a $20 price target on Lehman, and warned against owning CIT. LEH is since down 41.4+%; CIT is down 28.77%.

>
I rarely use the blog to promote our Quant tool, but damn, if you missed this one, you left a lot of money on the table. I am reiterating these two calls because they were such jumbo winners -- 30% in less than a month. If you haven't tried the tool you are missing out on an enormous moneymaker.

Advertisement over.

Crude Oil = $143+

Monday, June 30, 2008 | 07:15 AM

in Energy | Trading

At a certain point, the falling dollar and runaway Oil prices are going to have to take precedence over the economy and credit crunch.

Are we getting closer to that point?

This morning, Crude touched $143.67

August Crude Oil Futures, Intraday, June 30th, 2008
click for up-to-date chart

via Barchart.com

Related:
Fed's Priority Is Likely to Be Oil-Price Shock
MARK GONGLOFF and JON HILSENRATH
WSJ, June 30, 2008; Page C1
http://online.wsj.com/article/SB121478525202814621.html

Chinese Oil Conundrum

Monday, June 30, 2008 | 03:30 AM

in Commodities | Energy | Markets | Trading | Video

China's subsidized fuel prices worked miracles in the past, but because they hurt energy stocks, they are now a major policy concern.

click for video

Related:
For Chinese, the Reality of Higher Gas Prices
JIMMY WANG
NYT, June 21, 2008
http://www.nytimes.com/2008/06/21/business/worldbusiness/21gas.html

Quote of the Day: Paul Desmond on Bear Markets

Saturday, June 28, 2008 | 03:00 PM

in Markets | Trading

Your mileage may vary:
>

"In the average bear market, the Dow Jones Industrial Average has fallen 30% and sometimes much, much more. The Dow decline of 2000 through 2003 involved a loss of 55%, the bear of '73-'74 caused a 50% loss and the 1929 market wiped out a full 85% of the Dow's value."

"We think we're still quite a ways from a bottom. Over the next year, the Dow could fall 30% to 50% from its October '07 top. The market could enjoy a few short-lived rallies during that span, like the one we experienced from March through May. But each rally is apt to result in a lower high and a lower low in the market."

-Paul Desmond, Lowry Research, quoted in Barrron's

Previously:
Q&A: Paul Desmond of Lowry's Reports (February 2006)
http://bigpicture.typepad.com/comments/2006/02/qa_paul_desmond.html

Part II -- Q&A: Paul Desmond of Lowry's Reports (February 2006)
http://bigpicture.typepad.com/comments/2006/02/part_ii_qa_paul.html

~~~

What Was THAT?

Thursday, June 26, 2008 | 08:53 PM

in Markets | Psychology/Sentiment | Trading

The bottom dropped out of the market today. The Financials fell apart, GM hit a 53 year low, the Dow crash through its year-to-date lows. The broader indices posted their worst June since the Depression.

What was this -- the beginning of the end, or the end of the beginning? How bad is it -- are we going to 10,600, like Louis Yamada said?

Or is this a bottom, a great buying opportunity? Barton BIggs said the worst was over for both the economy, stocks (unfortunately, he said it a month ago in the WSJ).

~~~

What say ye?

New 2008 Lows For Dow -- But Not SPX or NDX

Thursday, June 26, 2008 | 11:25 AM

in Markets | Technical Analysis | Trading

Just a frame of reference here, the intraday low in the DJIA today 11,456 is below the prior lows set on January 22nd was 11,635.

The DJIA is down 9.4% this month, its worst June since 1930 (-18%).

Interestingly, the S&P500 remains above its 2008 lows -- and the Nasdaq remains appreciably above the YTD lows.

Let's Get Technical

Tuesday, June 24, 2008 | 10:00 AM

in Contrary Indicators | Financial Press | Markets | Psychology/Sentiment | Trading

Ninety percent of science fiction is crap, but then ninety percent of everything is crap.”
-Theodore Sturgeon

Yesterday morning, Portfolio's Felix Salmon had a post "Adventures in Technical Analysis, Jim Cramer Edition."

I cannot put aside the fact that Cramer is not, and has never been, any sort of technician. We do not dismiss medicine because accountants cannot do open heart surgery, so it seems kinda odd to use a bad technical call of Cramer's -- an admitted non-technician -- as proof that technicals are worthless ("astrology!").

But what really caught my attention were the following paragraphs, which amount to the standard criticism of Technical Analysis:

"They all do it: even much smarter and much more analytical traders like Barry Ritholtz do it too. Do what? Resort to "technical analysis", which is the art of drawing lines on charts and extrapolating from them what the market is going to do next.

Whenever you hear words like "overbought" or "oversold" or "momentum" or "support" or "resistance", it means that whatever you're hearing is garbage. But it also means that the person you're listening to has no idea what's about to happen, and is therefore resorting to the financial equivalent of astrology. In such cases, it's worth ignoring the message completely, but it's also worth having some serious thoughts about the messenger, too."

There are so many different ways to take this down, its hard figuring out where to start. Let's begin with a definition of what technical analysis is not:

Technicals are not magic. They are not a way to forecast the future, nor are they a guarantee of future profits. They are not based on someone's estimate of what future earnings might be, nor do they require you to guesstimate management's skill set or presume the desirability of a new product. Pure Technicians don't even listen to conference calls or even talk to management.

Technicals can be, however, far less squishy than fundamentals. Technicians use the data that is generated by the markets itself: Price and volume to start, then many other data points and derivatives thereto.

From this basic data, there are many variations of Technical Analysis:

• Trend followers believe markets exhibit persistence, mostly due to big institutional purchasers. This leads to buying uptrends and selling or shorting downtrends. John Henry and Richard Dennis are classic examples of trend follwoers

• Quants use a variety of mathematical data points. A goods example is the fund Renaissance Technologies.

• Contrarians use Sentiment data to determine when markets have moved to far in one direction or another. The goal is to anticipate a major reversal. See Jason Goepfert as a prime example.

• Pattern recognition traders look for various pictures -- pennants, flags, cup & handles, head & shoulders, etc. I find that this last form of TA -- Pattern Recognition -- to be especially prone to Sturgeon's law above.

There are lots of other types of technicals, but this isn't meant to be an exhaustive survey (feel free to discuss Elliot Wave, Fibonacci, and other forms of technicals in comments).

The question as to whether technicals "work" or not is actually framing the wrong issue. There is as much Art as Science in the application of TA. That some people are lousy technicians proves only that it requires skill.

A better question to ask is "What information do charts and related data provide, and how can this be used by investors and traders?"

I posit that, when used appropriately, charts and data can provide tremendous insight:

-Provides a statistical approach to investing, one that describes the probabilities of various outcomes (versus making predictions)

-Charts show you if we are in a bull or bear market, allowing you to manage risk appropriately;

-Trends can keep you away from the wrong sectors (Housing, Autos, and Finance are obvious examples) or keep you in the right sectors (eg., Energy and Ag)

-Developing good risk/reward analyses;

-Tracking what the institutions are doing;

-Identifying specific stocks that might be appealing;

The bottom line is that TA is merely a tool, albeit one used more skillfully by some than others.

Finally, consider this question: If you could look at one and only one source before buying your next stock or fund, which would you choose: a fundamental analyst's report (with no charts in it), or any chart of your choosing? While I like having access to both, I cannot ever imagine buying something without first looking at the chart . . .

Note: We previously addressed these issues a few years ago in Tracking the Elephants (Part I and Part II).

~~~

10 Year VIX versus SPX

Tuesday, June 24, 2008 | 08:00 AM

in Contrary Indicators | Markets | Psychology/Sentiment | Technical Analysis | Trading

Yesterday, we showed a one year chart of the VIX versus SPX.

It was apparent to someone watching both of these squiggly lines that a big scary spike in the VIX is a very good entry for traders on the long side fort he most part.

Here is the same chart comparison, only this time, we go back a full decade instead of 12 months.
>

VIX versus SPX, 10 Years

chart via Fusion IQ, Bloomberg

This is one of those technical analysis pieces which many people either ignore or do not understand . . .

My response to Felix will be posted at 10:00 am . . .

~~~

Fifth Third Bank

Wednesday, June 18, 2008 | 03:30 PM

in Trading | Valuation

Bouncing around trading desks is this comment on Fifth Third Bancorp (FITB):

"Given its recent performance, the company has announced they are changing its name to "Three Fifths" Bank . . ."

Looking at the chart below, perhaps that should even be "Two Fifths" Bancorp !
>

Thanks, Mike!

~~~

Fast Eddie Lampert Bets on Housing, Mortgages

Wednesday, June 11, 2008 | 09:14 PM

in Consumer Spending | Real Estate | Trading

Ed Lampert, CEO of Sears Holdings (SHLD) has been called the next Warren Buffett:

"Billionaire hedge-fund manager Edward S. Lampert is placing new bets on a U.S. housing recovery, buying stakes in beaten-up home builders, mortgage lenders and a home-improvement retailer.

Mr. Lampert's ESL Investments Inc., which owns half of department-store giant Sears Holdings Corp. and 40% of car retailer AutoNation Inc., has previously focused with mixed success on retail and bank stocks.

Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.

ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments."

AutoNation (AN), CIT Group (CIT), KB Homes (KBH), PHH Corp (PHH), Centex Homes (CTX), Home Depot (HD)

Somehow, I don't think Buffett is buying any of those names . . .

Related:
"The Next Warren Buffett?" http://mybackpagesbyjessefelder.blogspot.com/2008/06/next-warren-buffett.html

Source:
Lampert Puts Money On Housing Rebound
Stakes Being Taken In Battered Builders, Lenders and Retailer
GARY MCWILLIAMS
WSJ, June 12, 2008
http://online.wsj.com/article/SB121321901442365679.html

Newsweek: Why It’s Worse Than You Think

Monday, June 09, 2008 | 04:00 PM

in Contrary Indicators | Financial Press | Psychology/Sentiment | Trading

No, this is not a cover indicator -- the cover indicator requires several factors not present here: It helps to be for a widely tradable item (Stocks, Oil, Bonds, etc.), and it has to be something that is widely known -- A recession is questionable amongst the pros, although surveys make it clear the public is hip to this.

The economy is simply too big and too general to be much of a trading tell via a cover. Same thing goes for single companies, too -- Google, Apple etc.

Previously:
The Single Company Magazine Cover Indicator (March 2006) http://bigpicture.typepad.com/comments/2006/03/the_single_comp.html
>

Source:
Why It’s Worse Than You Think
Daniel Gross
NEWSWEEK June 16, 2008
http://www.newsweek.com/id/140553/page/1

On Speculators

Sunday, June 08, 2008 | 12:30 PM

in Commodities | Markets | Trading

My friend Rob Fraim on Speculators:

You know, we don’t mind it when speculators drive up the price of our stock portfolios. And we didn’t complain when speculators made our house values rise.

However, now that (arguably) speculators are said to be driving up the price of oil, we hear the outcries of outrage and the call for more regulation on energy trading. “Speculator” becomes a bad word all of a sudden and said speculators are evil and must be stopped. So many are saying at least.

But let’s take a deep breath. What has always happened after speculative forces have driven the price of stocks too high? Eventually they corrected to reasonable levels (and beyond.) And what about the recent speculation-driven housing boom? It busted.

If a price movement is purely driven by speculators, at some point the market will do what the market does and the aberrant price will normalize. If on the other hand the reasons for the movement of a market are fundamentally rather than speculatively based, then all of the grumbling and grousing about speculators is shown to be irrelevant.

If skyrocketing oil is the fault of speculators time will work it out, and some of the speculators will be burned. The risk we run is that in pointing fingers at market participants and blaming them for energy prices, we end up having our attention diverted from the fundamental issues that need to be addressed – energy exploration, governmental policy, energy conservation, improving energy efficiency and most importantly the need to develop energy technology and alternative energy sources to ultimately make oil a much less critical commodity.

Good stuff -- thanks, Rob!

Follow Analysts at Your Own Financial Risk

Saturday, June 07, 2008 | 05:00 PM

in Earnings | Trading | Valuation

One of our major themes around here is that investors need to learn to think for themselves. That may be obvious, but unfortunately, it needs to be repeated.

In the past, we have noted the dangers of imitating the trades of Billionaires, listening to the news media, aping the pundits, or trading based on the calls of analysts.

Now, that doesn't mean that there aren't some analysts who have insight, or are value added. We have found that its worth paying attention to those analysts who have shown a good tracking record of forecasting earnings for a particular stock AND are outliers to the rest of the analysts forecast on that stock. But overall, the entire analyst community does not facilitate individual investors.

Which leads to this article from Bloomberg:

"Investors who followed the advice of analysts who say when to buy and sell shares of brokerage firms and banks lost 17 percent in the past year, twice the decline of the Standard & Poor's 500 Index.

Buying shares on the advice of Merrill Lynch & Co.'s Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, cost investors 17 percent, according to data compiled by Bloomberg. Deutsche Bank AG analyst Michael Mayo's counsel to purchase New York-based Lehman Brothers Holdings Inc. lost 59 percent. Citigroup Inc.'s Prashant Bhatia still rates Merrill ``buy'' after its 56 percent retreat from a January 2007 record.

Of the 38 analysts tracked by Bloomberg who follow stocks in the Amex Securities Broker/Dealer Index, 31 produced losses for investors. Investors who bought brokerages on "buy'' recommendations, sold when they switched to ``hold'' and speculated prices would decline when analysts said "sell,'' lost 17 percent in the last year through June 3, compared with the S&P 500's 8.5 percent drop.

Source:
Analysts Lose 17% for Investors in Brokerage, Bank Stock Picks
By Eric Martin and Josh Fineman
Bloomberg, June 6 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTuI17bC.igE&

Barron's Asks: Bear Market Rally?

Saturday, June 07, 2008 | 12:00 PM

in Index/ETFs | Technical Analysis | Trading

In Barron's The Trader column, Kopin Tan asks: "Is the Stock Market's recent resurgence just an ephemeral, bear-market rally?"

Before answering that, have a look at the chart at right. It accompanied his questions; the black lines are my own.

There are several things to be gleaned from this:

First, the Nasdaq remains the healthiest of the major indices. Thats could be due to strong sectors within it (i.e., Enterprise Software). Or it could be due to specific stock leadership, namely -- Google (GOOG), Apple (AAPL), Research in Motion (RIMM), or Baidu.com (BIDU).

Second, the down trend seems to be not yet quite vanquished. What was described by some as a breakout is now looking like it could turn out to be a false breakout.

Third, the SPX and Dow are at critical levels -- a failure at the trend line likely means more downside to come. And, the recent May highs appear to be a lower low to this old traders eyes. Any failure at this level means more trouble ahead.

Last, a further failure at the March lows would be disastrous for the indices.

Your mileage may vary . . .

Source:
Oil, Unemployment Rise, Stocks Fall
KOPIN TAN
Barron's June 9, 2008
http://online.barrons.com/article/SB121279288358653337.html

Financial Sector: Beware LEH, CIT

Tuesday, June 03, 2008 | 11:19 AM

in Derivatives | Finance | Short Selling | Trading

Every day, we run a series of screens, large and midcap, buys & sells, breakouts and breakdowns.

Today, our Large Cap Sell Screen identified Lehman Brothers (LEH) as a Sell. It has a current master score of 33 (out of 100) and has an abysmal technical score of 17. It went to a sell signal back in March around $52, and two weeks later, traded as low as $20.25. It recovered somewhat, flipping to neutral around $44.

Its now back on a sell signal, with a $20 price target. (See chart below)

The MidCap Sell Screen found a smaller financial: CIT Group (CIT). It also went on a Sell signal. Same set up as Lehman Brothers: First sell signal was in March about $16, fell to $6.45 a few weeks later, back to a neutral a month later. Now, CIT is back on a Sell/Short rating, with a possible target about 30% lower.

Lehman Brothers (LEH) Six month daily

CIT Group (CIT) Six month daily

NOTE: Traders who short stocks should always work with stop losses. The financial sector, with outside investors, have been very volatile, with squeezes occurring regularly.

Regular FusionIQ posts can be found here.

Boone Pickens: Speculation a 'Scapegoat' for Oil Prices

Tuesday, June 03, 2008 | 03:30 AM

in Energy | Trading | Video

Billionaire Boone Pickens, founder and chairman of BP Capital LLC, talks about his investment in wind power, the impact of speculation and demand on oil prices and Microsoft Corp.'s efforts to buy Yahoo!

click for video

Source:
Pickens Calls Speculation a `Scapegoat' for Oil Prices: Video
Bloomberg, June 2 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOycL4oJTmSs

NYMEX Raises Margin Requirements for Crude

Friday, May 30, 2008 | 06:37 AM

in Commodities | Energy | Trading

Hefty increase in margin rules from the NYMEX, effective earlier this week:

The New York Mercantile Exchange said on Tuesday it will increase margins for its crude oil and related futures contracts, beginning at the close of business on Wednesday.

Margins for the crude oil, crude oil calendar swap, and crude oil financial futures contracts will go up to $7,250 from $6,500 for clearing members, to $7,975 from $7,150 for members and to $9,788 from $8,775 for customers, NYMEX said in a release.

Margins for the NYMEX miNY crude oil futures contract will rise to $3,625 from $3,250 for clearing members, to $3,988 from $3,575 for members and to $4,894 from $4,388 for customers. Margins for the NYMEX MACI index futures contract will increase to $1,450 from $1,300 for clearing members, to $1,595 from $1,430 for members and to $1,958 from $1,755 for customers.

That may be one source of pressure on Crude this week . . .

UPDATE: May 30 , 2008 11:00am

For all you folks who are Google-impaired:

May 29, 2008

NYMEX to Change Margins for Brent Crude Oil, Related Futures ContractsNEW

NYMEX to Change Margins for RBOB Gasoline Futures Contracts

NYMEX to Change Margins for Heating Oil, Related Futures Contracts

May 28, 2008

NYMEX to Change Margins for Crude Oil, Related Futures Contracts

May 27, 2008

NYMEX to Change Margins for Natural Gas, Related Futures Contracts

May 22, 2008

NYMEX to Change Margins for Heating Oil Crack Spread Calendar Swap Futures Contrac

These come from the 2008 NYMEX Press Releases.

Incidentally, this is what the Fed should have done with Stock margin requirements in 1998-99: gradually increase required capital.

Source:
NYMEX to raise margins for crude, related futures
Gene Ramos;
Reuters Tue May 6, 2008 10:25pm BST
http://uk.reuters.com/article/oilRpt/idUKN0651587320080506

The Fall of Bear Stearns

Thursday, May 29, 2008 | 11:30 AM

in Corporate Management | Credit | Derivatives | Financial Press | Trading

If you haven't read the Kate Kelly's fantastic 3 part WSJ series about the Fall of Bear Stearns, you are missing out. (I cannot wait for the book!)

These are simply fascinating reading:

Part One: Missed Opportunities As the firm's fortunes spiraled downward, executives squabbled over raising capital and cutting its inventory of mortgages.

Part Two: Run on the Bank Executives believed they were about to turn a corner, but rumors and fear sent clients, trading partners and lenders fleeing.

Today: Deal or No Deal? The Fed pressured Bear Stearns to sell itself, but a misstep in the hastily drawn agreement nearly scuttled the deal.

Kudos to the WSJ editors for making the series available to the public.

Video:

Sources:
Lost Opportunities Haunt Final Days of Bear Stearns
KATE KELLY
WSJ May 27, 2008; Page A1
http://online.wsj.com/article/SB121184521826521301.html

Fear, Rumors Touched Off Fatal Run on Bear Stearns
KATE KELLY
WSJ, May 28, 2008; Page A1
http://online.wsj.com/article/SB121193290927324603.html

Bear Stearns Neared Collapse Twice in Frenzied Last Days
KATE KELLY
WSJ, May 29, 2008; Page A1
http://online.wsj.com/article/SB121202057232127889.html

Speculators & Oil Price Spikes, Part II

Tuesday, May 27, 2008 | 07:18 AM

in Commodities | Energy | Markets | Trading

Why is it that market-worshipers claim fundamentals are responsible for equity prices, but speculators are to blame for Oil prices?

Bill King goes even further: "There is a fervid, global crusade, especially by politicians, to pin escalating oil prices on speculators."

On the other side of the argument, George Soros warns Speculators are largely responsible for driving crude prices to their peaks in recent weeks. And Germany has called for ban on oil speculation altogether. (See John Authors video here)

My own view is that speculators have contributed to the price to some degree, but the tight supplies and freefalling dollar get more blame.

This weekend, John Mauldin looked at a variety of factors impacting oil prices, and if you missed it over the long weekend, its worth a few minutes of your time.

Rather than adding to the noise, lets look at a few charts -- both pro and con -- that may reveal some insight as to the impact of speculators.

The Impact of Commodity Index on Spot Prices

Commodity Prices and the Weak Dollar

Not Widely Traded Commodities

This is only a brief survey, and I'm sure I missed some worthy links -- please add related articles in comments . . .

Sources:
The Short View: Commodity speculation
John Authers
FT, May 20 2008 19:54
http://www.ft.com/cms/s/0/3072f8b6-2694-11dd-9c95-000077b07658.html

George Soros: rocketing oil price is a bubble
Edmund Conway,
Telegraph, 12:53am BST 27/05/2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnsoros126.xml

Germany in call for ban on oil speculation
Ambrose Evans-Pritchard
Telegraph, 12:53am BST 27/05/2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnoil126.xml

Whither the Price of Oil?
John Mauldin
Thoughts from the Frontline, May 23, 2008
http://www.frontlinethoughts.com/printarticle.asp?id=mwo052308

Related:

Masters Capital Management
Committee on Homeland Security and Governmental Affairs May 20, 2008
http://hsgac.senate.gov/public/_files/052008Masters.pdf

High Oil Prices Spur Thoughts About Bubbles,But This Might Be Misguided
WSJ, May 27, 2008;
http://online.wsj.com/article/SB121175335973420383.html

Energy Watchdog Warns Of Oil-Production Crunch
WSJ, May 22, 2008;
http://online.wsj.com/article/SB121139527250011387.html

Understanding crude oil prices
Econbrowser, May 24, 2008
http://www.econbrowser.com/archives/2008/05/understanding_c.html

Commodities Investment Bubble May Burst by Yearend, Lehman Says
Bloomberg, May 16, 2008
http://www.bloomberg.com/apps/news?pid=20601081&sid=aNpLC6_ZrK0k&

John Authers: Speculators & Oil Price Spikes

Tuesday, May 27, 2008 | 03:30 AM

in Commodities | Energy | Trading

"Speculation appears to be changing the way commodity markets work. A debate is needed and changes to regulations may be justified. But speculators cannot take all the blame for the price spike."

click for Video

>
See charts here

Source:
The Short View: Commodity speculation
John Authers
FT, May 20 2008 19:54
http://www.ft.com/cms/s/0/3072f8b6-2694-11dd-9c95-000077b07658.html

Confessions of a Short Seller

Saturday, May 17, 2008 | 09:43 AM

in Psychology/Sentiment | Short Selling | Trading | Valuation

Nice Interview with my pal Doug Kass, the "anti-Cramer" in this week's Barron's, called "
Confessions of a Short Seller."

Doug runs a short only fund, Seabreeze Partners. He discusses a few key datapoints from the interview:

• As of April 30, flagship Seabreeze Partners Short fund was up 16.5% (vs 5.6% loss for the SPX)

• Since inception (January 2005) the fund is up 40.7%, versus a 15% gain for the S&P

• The amount of trading dollars that are in dedicated short pools are tiny: About $5.4 billion (Knowledge@Wharton). That's one-seventh the size of Fidelity's Magellan Fund.

• The $5.4B dedicated short hedge funds are a sliver of the nearly $2 trillion of hedge-fund assets.

• Over the past two decades, 58% of the issues on the New York Stock Exchange have advanced, while 42% have declined -- every year.

Here's an excerpt from the Interview:

What makes short selling so difficult to do effectively over a long period?

The objectives of a long buyer and a short seller are similar. Both want to produce uncommon returns by taking common risk -- typically by developing a variant view. Many believe short selling is a mug's game, but I don't, and thus far our results at Seabreeze have supported our opinion. But it is essential to maintain a disciplined short-selling strategy because, remember, risk and reward are asymmetric in selling stocks short. An investor can make only 100% if correct -- that is, if the stock sold short goes to zero. But you can lose an infinite amount if you're wrong as the stock keeps appreciating. And there is a gravitational pull of stocks higher over longer periods of time. So we use a very conservative approach to shorting.

Explain it, please.

First, we're diversified across company and industry lines. No individual security exceeds 2.5% of our partnership's assets and no industry sector exceeds 20% of the assets. We'll have 35 to 40 holdings at any given time. Second, "Wee Willie" Keeler, a .341 lifetime hitter who played in the early part of the 20th century, liked to say he "tried to hit 'em where they ain't." We try to do the same by being creative in our stock-selection process.

In what ways are you creative?

We strenuously avoid stocks whose short interest is high relative to the float, or companies whose shares have large short positions relative to their average daily trading volumes. Many short sellers have made the mistake of shorting valuation and have blown up during short squeezes. Avoiding them allows us to sleep at night and allows time for our negative fundamental catalysts to develop.

We also mitigate risk by avoiding leverage [borrowing to enhance the size of a position]. Historically, short sellers have taken concentrated positions, often in companies with small to medium capitalizations, and then used -- and abused -- leverage. That's a recipe for disaster, particularly when they select investments with too many shorts. The average market capitalization of our holdings is more than $10 billion. Shorting large-caps is another way to control risk.

Interesting stuff . . .

Source:
Confessions of a Short Seller
Interview With Douglas A. Kass, President, Seabreeze Partners Management
LAWRENCE C. STRAUSS
Barron's May 19, 2008
http://online.barrons.com/article/SB121097996687000019.html