How to Get A Head in This Business

October 2013
How to Get A Head in This Business
I wish to begin this letter by thanking all my LinkedIn contacts who have been
endorsing me for various skills. Anyone who has seen my profile lately now
knows me to be proficient in portfolio management, market strategy, hedging,
risk management, entrepreneurialism, square dance calling, trading, and
leading small cannibalistic tribes in Africa.
On the Side: Market Valuation
{Note to Securities Regulator: I am kidding about the cannibal stuff. I do not
eat people. In fact, I keep kosher. I do have contacts who are head hunters.
Also, I require a segue in order to say, “these two cannibals are having lunch
together. The one turns to the other and says, ‘Here, taste this and tell me:
Does this clown taste funny to you?’”]
In last month’s issue of the Leading Hedge, I mentioned that if you wanted to
own shares of Twitter, you would have to buy them privately; the stock did not
trade on any public exchange. So of course since then the company files to go
public (IPO) and trade its share likely on the NASDAQ.
The market rallied followed the announcement that Laurence
Summers was withdrawing himself from contention for the
position of Federal Reserve Chairman. Summers is considered
to be hawkish as regards monetary policy. He is been seen as
likely to put a rather quick end to the Quantitative Easing
Program.
The likelihood that he would be the next Fed Chair was being
discounted by financial markets; hence the rally when this
turned not to be the case.
Of course, Mr. Summers’ opinions should be taken seriously. If
he believes the economy would be better served by the
shuttering of QE, and he turns out to be correct, what the
market is cheering about today could turn out to a source of
gloom down the road.
As for the indicator itself, we are still mildly in overbought
territory. Historically, the market doesn’t stray too far from
the GDP trend line. As with all empirical observations,
however, recent history should outweigh more distant history
in drawing inference.
Notwithstanding, if history IS a guide, then the continuation of
favorable monetary should lead to one of two possible
outcomes: 1) that such stimulus will finally have the desired
effect on GDP, in which case the market will reflect a more
reasonable valuation, or 2) the market will have to correct to
restore historical ratios.
Why now? Likely this has to do with the recent performance of Facebook,
ascending to all-time highs, not to mention the similar rise in LinkedIn.
Companies that want to go public would like to do so when the stocks of
companies that are already public in their sector are performing very well. This
reflects a strong demand for shares in that sector, and helps insure that the
company issuing shares can price them higher than would otherwise be the
case.
I recall that, in 1993, there was a very strong demand for shares in the oil & gas
sector. So many companies went public then. Notwithstanding the above, the
issue price was kept in line by the sheer number of new IPOs, which meant
much competition for the investor dollar. In fact, some of the new issues that
came out were priced so attractively that the fund company I was with at that
time was able to boost the return for our unitholder by investing in them.
That year, our equity fund returned in excess of 120%.
When contemplating buying shares in an Initial Public Offering (IPO),
there is the general rule. If you can buy all you want, you don’t want
any. If you can’t buy any, you want all you can buy. The meaning: Tight
supply coupled with high demand almost always leads to higher prices.
So what to do? Call up a broker and tell him or her that you wish to buy
a small amount of the shares. Say 100. If you are told something like,
“I’m sorry, but I only got a very small allotment which I gave to the first
client who asked (read: a better client than you),” thank him or her,
quadruple your order and call another broker. If the first broker simply
laughs at you over the phone, hang up abruptly and do whatever it
takes to get an allotment from other brokers. I my case, I threatened to
come down to their offices and sing “My Yiddishe Moma” repeatedly
until I was allotted some shares (this works in many life situations).
You can try something different, like, for example, letting slip the “fact”
that you come from a long line of head hunters and cannibals…
The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting.
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Keep on Truckin’
Trader Radar… Internet Stocks
…or, “Keep Truckin’ On.
It’s often a useful exercise to look at which stocks and/or sectors top
performing mutual funds have been buying. Funds send out quarterly
reports to their unitholders containing, among other things, a list of their
holdings.
Those of you who read this newsletter with
any regularity have undoubtedly encountered
the occasional spelling mistake, or typo. It
happens. I am, however, so prone to it that
even my blood is Type O. So spelling mistakes
are in my blood.
It just lets you know that I am human when
others have doubted that.
But how you get “Mullins Trucking” when you
meant “Micom”? That can’t happen
unless…well, unless you’re me.
Well, actually, it can when you are trying to
spell a stock symbol rather than the company
name. That’s how you end up owning shares
of a company you’ve barely heard of in your
portfolio, rather than one you’ve spend days
analyzing.
Fortunately, Mullins Trucking performed
better than did Micom during the period
held. It’s often better to be lucky than smart.
Spelling mistakes happen, but seriously…
According to Investor’s Business Daily (investors.com), these top funds have
been feasting on stocks of internet content providers like Facebook,
LinkedIn, Priceline.com, Google, and a bevy of others.
What the article doesn’t tell you—but I will—is that it is the very interest in
these stocks that make those that purchase them better performers.
To use a highly-simplified example of what I mean, suppose you wanted to
buy 10,000 shares of XYZ stock. Your broker tells you that 1000 shares are
offered at $11.00, 1000 shares at $11.10, 1500 shares at $11.20, 2000 shares
at $11.30, 2000 shares at $11.35, and 2500 shares at $11.40. We would
expect that, in general, the higher the price the more shares offered (why?).
So if you buy these 10,000 shares you will have paid a total cost of $112,900,
assuming 2¢ a share commission. But the last price the security traded at
was at $11.40, and valuation of all shares in the total position in a given
portfolio are usually based on the last price it traded at. So just by buying
your position you are already “up” 1% on the entire position.
Now imagine what could happen when there is a surge in institutional
demand for shares of all stocks in a particular sector.
This is why we monitor price and volume change: in order to get a feel for
when institution investors are warming up to a particular stock and/or
sector, thereby getting in before they do so in full force, and, perhaps more
importantly, begin the stampede out.
Incidentally, because buying shares generally causes their price to rise, it has
been known to happen that portfolio managers will buy shares at the end of
a quarter in order to artificially inflate their return for that quarter.
Tis the season: According to our friends at EquityClock.com, the following seasonal patterns
are or will soon be in force:
th
Consumer Discretionary (Starting October 28 ); Health care (until October
th
18 , don’t bother); and Informational Technology (already begun, you have
until January).
EquityClock.com also delivers seasonal chart patterns on companies ahead
of their earnings announcements. One of more useful resources.
The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting.
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Bonds signal south:
TLT’s, the 20-year U.S. Treasury Bond ETF, has
gone from buy to sell on our daily trading model.
Not so, or not yet, on our weekly model, but
expect it to follow suit:
Out of Options:
I had lunch the other day at the home of someone with whom I hadn’t
spoken to in quite some time. In the course of normal conversation he
informed me that, although not a trader by profession, he did use to
trade options. He told me how he was able to spot patterns in the prices
of certain securities and therefore was able to predict the direction, in
most cases, of their next move. Options were then used to increase the
size of the return when the next move occurred as expected.
I say “use to” because he doesn’t trade them anymore. He lamented that
the price patterns that he could once detect were no longer evident, that
supercomputers were detecting and pouncing on the opportunity to the
capture the gain of a predictable price move long before any human
possibly could, that is, within a couple of nanoseconds of the opportunity
appearing.
Of course, supercomputers have been a part of the trading scene since
the time when the only option my friend ever considered was what to do
about a zit.
Although this newsletter caters mainly to investors rather than traders
(though trading skills do give even investors an edge), it’s worth pointing
out that, as a general rule, the more traders there are using a particular
computerized trading routine (or algorithm) the less effective that
algorithm becomes. This is why these trades tend to be proprietary
rather than being available to the general trading public.
But “algo” traders look for nickels and dimes, and make money—those
that do make money—by executing on small margins and large volumes.
Therefore, those of us who don’t trade on an hourly basis are not
affected in any meaningful way.
The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting.
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To Einstein-Proof the Economy
The following is quoted from Boston College Professor of Economics
Laurence Kotlikoff, as it appeared in the September 28, 2013 edition of
Forbes:
And while Bernanke says this is all to keep down interest rates, there
is a darker subtext here. When the Treasury prints bonds and sells
them to the public for cash and the Fed prints cash and uses it to buy
the newly printed bonds back from the public, the Treasury ends up
with the extra cash, the public ends up with the same cash it had
initially, and the Fed ends up with the new bonds.
More Einstein quotes:
Great spirits have always found
violent opposition from
mediocrities. The latter cannot
understand it when a man does
not thoughtlessly submit to
hereditary prejudices but
honestly and courageously uses
his intelligence.
A person who never made a
mistake never tried anything
new.
Anyone who doesn’t take truth
seriously in small matters
cannot be trusted in large ones
either.
Logic will take you from A to B.
Imagination will take you
everywhere.
Intellectuals solve problems.
Geniuses prevent them.
Memory is deceptive because it
is colored by today’s events.
Yes, the Treasury pays interest and principal to the Fed on the
bonds, but the Fed hands that interest and principal back to the
Treasury as profits earned by a government corporation, namely the
Fed. So, the outcome of this shell game is no different from having
the Treasury simply print money and spend it as it likes.
And:
I hope you’re getting the point. Having addicted Congress and the
Administration to the printing press, there is no easy exit strategy.
Continuing on the current QE path spells even great risk of
hyperinflation. But calling it quits requires much higher taxes, much
lower spending, or much more net borrowing (with requisite future
repayment) from the public. Yet weaning Uncle Sam from the
printing press now is critical before his real need for a fix – paying
for the Baby Boomers’ retirement benefits – kicks in.
It is becoming increasingly obvious, if not obvious already, that the paradigm
of the current administration is to increase short term gains, even at expense
of longer term prosperity. This helps wins elections, which are never more
than two years away, and by the time the “long term” roll around, it’s no
longer the problem of those responsible for its creation. A text book example
of using the same thinking to solve a problem that was used to create it.
The nice thing about investing is that is equally possible to make money in
declining markets as it is in rising ones. Not easier, just equally possible.
There is a benefit in just knowing this. It helps us consider the possibilities of
declining markets long before they happen. This makes us adept in defensive
posturing.
The market may indeed edge higher despite yes another crisis pertaining to
budget funding and raising the debt ceiling. If it does, it will have done so in a
market environment that reflects increased risk.
Which party will be a political pumpkin
by Halloween?
The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting.
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THE MARKETS…
The graphic below depicts the S&P 500. The values are weekly, and it’s starting to perform weakly.
FEATURED MODEL PORTFOLIO
This model portfolio does not boast the best return of all those we follow, nor should it. It focuses on
earnings and dividend growth, and may answer the call for more stability and yield in this volatile
environment.
The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting.
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HAPPY HALLOWEEN!!
End of Stock Clearance
Back in the July 2013 edition of The Leading Hedge, I listed
some of the fictitious jobs I’ve held en route to becoming a
Portfolio Manager. Due to overwhelming lack of demand, I
thought I would include those that were not on that list.
•
I went to work for a company that makes
medical electronics, in their product development
department. My first idea was for a device for
heavy sleepers, those who don’t wake up even to
an alarm clock. My idea was for a timer-equipped
defibrillator. I was told to CLEAR! out.
•
But I wanted to stay involved in electricity.
So I went to work for the local Hydro distributor.
Uh, remember the great blackout of 2005? Well,
suffice it to say that it wasn’t my “current” job for
too long.
•
Desperate for work, I even took a job as a
department store Santa Claus. Even there I was
given the ol’ heave Ho-Ho-Ho.
•
Got a job fixing bicycles. After one day, it
was me who was two-tired.
•
I did once get a job in a library. One day I
was quietly asked to leave.
DISCLAIMER
This newsletter is meant to provide the reader with a general
view of our market outlook and investment philosophy, and is
not to be construed as providing specific investment advice or
recommendations. Such advice and/or recommendations should
only be provided by a competent advisor and based on
knowledge of the client’s investment parameters and risk
tolerance.
•
I even tried working as a model.
Unfortunately I was only able to get hired by an
Indian tribe. You see, they were carving this totem
pole and..
Although not current registered, Sheldon Liberman was formerly
a registered Portfolio Manager, Investment Fund Manager, and
Exempt Market Dealer, in Ontario and other Canadian
jurisdictions. He may be contacted at 647.896.2424 (Toronto),
646.340.2000 (New York) or at [email protected].
Information contained in this newsletter are from sourced
believed reliable; however, the author, editor and contributor(s)
assume no responsibility for any inaccuracies
The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting.
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