prev

REMINISCENCE OF A BEAR MARKET OPERATOR

"The game taught me the game."
-Jesse Livermore


As you might imagine, I get a lot of emails throughout the day. Feedback is greatly appreciated and I'd like to thank everyone who continues to enrich our exclusive research network for their great questions.

In this ever so globally interconnected market place of interacting factors, I am a firm believer that collaboration wins. As my Partner, Daryl Jones, reminded me yesterday, "in the long history of humankind... those who learned to collaborate and improvise most effectively have prevailed" (Darwin).

I am on the road this week, but I have my trusty notebooks with me, and the aforementioned 'Reminiscence of a Stock Operator' quote taped in the insert of one of them. If you want to throw me off my game, steal my notebooks - they help me proactively prepare and plan for my every move.

I was fortunate enough to first cut my teeth in this game in the Baby-Bear market of 2000-2002. What we have here in 2008-2009 is much more akin to Papa-Bear, and one has to sleep with one eye open to be sure not to get mauled by him. While we made a decent Bear Market trading call in the last few weeks, I will not mistake this for anything other than what it was - a Trade.

One of the better risk managers I learned from in this business used to always say, "keep a trade a trade" - and as are most rules/patterns that govern dynamic systems within the mathematical spheres of Chaos Theory, that one is very simple. I don't make a habit of violating it.

Yesterday, I sold into the proactively predictable follow through squeeze that Mr. Market offered up to us, partly because I am human and I, like most, fear missing large short term percentage gains... bear market rallies tend to go too far too fast, however - history's lessons are crystal clear on this front.

I know, I know... a lot of people out there fancy themselves as "investors for the long run", and I respect and appreciate that strategy, provided that they are not buying SP +57% higher than Monday's low, and selling 2009 consensus Bear Market fear (yesterday's weekly II Investor Sentiment Survey showed only 26% of Institutional money managers admitting they are bullish - bears were reported up again at 47%!). In today's game at least, I consider "trading" the most impactful risk management strategy one can employ. Talking about risk management doesn't do you any good unless you act on it.

I cut our Asset Allocation Model's US Equities position down from 24% on Monday to 12% by yesterday's close. The SP500 is up +6.7% over the span of the last 48 hours, and I think most people would be looked on pretty kindly if that was their reported annual return for either 2008 or 2009... so I don't lose too much sleep in booking some of it. I am still long the SP500 via the SPY etf, but I sold out of my position in the Nasdaq (QQQQ) for a healthy gain.

For the last 4 trading days, I have started off our Macro client 830AM strategy call saying that the reward in being long the US stock market was outstripping the risk. This morning, the immediate term Trade's risk/reward is balanced for the SP500 at +3% upside versus -3% downside. For the Nasdaq, the risk outstrips the reward by one percent at -3% versus +2% upside.

If you're looking for what my notebook says on critical support levels for both the SP500 and the Nasdaq, I'm at 703 and 1329, on those broad indices respectively. As the facts/math within this game changes, I will. All the while, expect me to keep my feet moving out there - when Bears are chasing you, standing still with a bucket full of fish in your hands of positive Macro ETF gains is not what I recommend...

My Asset Allocation to USD denominated Cash has been the beneficiary of selling down US Equity exposure. I'm now back up to 69% Cash, and that position makes me nervous. Why? well, because the one thing I hear most frequently from my friends in the hedge fund community is how much Cash they are in. That, as John McCain would say, "my friends" is consensus.

I am from Thunder Bay, Ontario. Bears don't scare me - but consensus does, to a fault. I guess that's a personal thing that I have to live with. Jesse Livermore reminded us all that "the game does not change and neither does human nature."

May the game continue to teach us the game, and God Bless this country's brave Bear Market Operators.
KM



LONG ETFS

EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level.

SPY - SPDR S&P500- We bought the etf a smidgen early, yet the market indicated close to three standard deviation oversold.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +17.2% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.
TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.


SHORT ETFS

LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.2688. The USD is down versus the Yen at 98.3480 and down versus the Pound at $1.3834 as of 6am today.


THE GOOD, THE LESS BAD, AND THE UGLY (PART III)

The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

The Ugly:
• Las Vegas Strip – The only thing worse than the gaming revenue trends are the room rate trends. Unfortunately, room rates have higher margins. (MGM, WYNN, LVS)
• Locals Las Vegas – Won’t overcome a 45% peak-to-trough housing crash this year. Population growth could drive 2010 revenues higher. This market should look Less Bad soon. (BYD)
• Atlantic City – The economy, Pennsylvania, smoking bans, where do we begin? (BYD)
• Mississippi – This was a tweener. We don’t have February data yet and I’m conservative so I’ll throw it in the ugly basket. (ISLE, PNK, PENN)
• Macau – Looks can be deceiving. Tough Rolling Chip comparisons from an overflow of junket credit last year distorts the picture here. By September, this market may skip a category right to The Good. (LVS, WYNN, MGM)

No comment necessary.
Tough 2009 but 2010 could show positive growth
Ouch
Looks can be deceiving. Wait until September.

THE GOOD, THE LESS BAD, AND THE UGLY (PART II)

The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

The Less Bad:

• Indiana – The impact of slots at racetracks is lessening. (PENN, BYD, PNK)
• Illinois – Lapping the smoking ban but volumes are still down. (PENN)
• Iowa – Low gas prices helping an already stable market. (ISLE, ASCA)

2009 better than trend
Not great but better than trend
The Good

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

THE GOOD, THE LESS BAD, AND THE UGLY (PART I)

The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

The Good:

• Louisiana – I’ll have what they're having. Lower energy prices not making a dent on this energy economy. Hurricane relief and construction workers appear to be gambling. (PNK, BYD)
• Missouri – They lost the loss limit and presto more revenues. (ASCA, PNK, PENN)

Positive Growth
Positive Growth

In Mervyn King the UK Trusts?

Bank of England Governor King argued today that its newest measure to buy 2 Billion Pounds ($2.7 Billion) of government bonds with newly created money will “work in the long run” to prevent further deflation.

Today’s monetary action is the first installment in a 3-month plan of the central bank to spend as much as 75 Billion Pounds on bonds, whose maturities range from 2014-2018, and comes after officials cut the interest rate to a record low of 0.5% last Thursday.

King hopes that the “new money” being pumped into the financial system will work to help return inflation to the 2% target and promote what PM Brown stressed in late February, namely, that “domestic growth would come from granting loans to first-time buyers, entrepreneurs, and individuals of middle and modest incomes.”

For the UK to turn around the deflationary current, King is relying on UK Banks to pass the line of credit onto lenders. With data out today that the UK trade deficit widened in January to 7.7 Billion Pounds (from 7.2 Billion Pounds a month earlier) and the UK economy contracted 1.8% in the quarter through February, King will have to track more than just loans reaching Main Street to get a handle on controlling the inflation/deflation balance.

Matthew Hedrick
Analyst

Hedge Fund Industry: The Darwinian Implication of Capacity Declines

“In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed.” –Charles Darwin

We wanted to write a quick note to highlight a number of recent media stories about capacity declines in the hedge fund industry. No surprise, negative absolute performance has led to the closing of funds due to an inability to pay employees and an increase in investor withdrawals that have led to a cost structure that is no longer manageable for many general partners.

Specifically, the Options Group estimates that “hedge funds may cut 20,000 workers worldwide this year.” This is on top of the estimated 10,000 job losses in 2008. The primary driver of this is hedge fund closures, which hit roughly 920 funds last year, or almost 12% of the industry.

An article on Bloomberg by Kathy Burton yesterday discusses the implications of the industry decline when it comes to hiring. She quoted our good friend, Hank Higdon from Higdon Partners, the preeminent investment management search firm in the world, who said: “Hiring activity is much reduced and it’s going to get worse.” For anyone in the industry, this isn’t totally surprising. We are hearing stories of people working for free for periods of a quarter or more as a trial employment period. This idea of actually having to prove yourself was unheard of less than a year ago.

The upshot of these capacity declines is that hedge funds will once again become the bastions of entrepreneurism they once were. Some of the best and largest money managers in the world, started as very small shops with limited assets under managements, sometimes in the single digit millions, firms like SAC, Third Point, Atticus, Bridger, Harbinger, Citadel and others come to mind. These firms are now some of the most prominent and durable in the industry, and manage assets in the billions, but have shown the wherewithal to grow and thrive at a much lower asset base.

The benefit of building your business from such a small base, and by the sweat of your own labor, is that you fully understand all parts of the business and investment process, and you can very easily adjust to changes in the market. While 2008 was an incredibly challenging year for hedge funds, undoubtedly 2009 will be a year in which Darwinian rules take hold. Those funds that have been able to prosper through the cycles will continue their dominance. The upstarts will no longer be blessed with multi hundred million, or in some cases billion, dollar launches, but will have to make due with $25 - $50MM at launch. Ultimately, overtime, this will make them stronger managers and the hedge fund class of 2009 will likely be a strong one indeed.

Daryl G. Jones
Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next