I am on vacation all the way through the September 16th... So my skeptical insights will come back online next week :)

I don't think that history necessarily repeats itself with a 100% certainty, but before I left on vacation last week for the first time in my investing life I felt quite confident that I am not going to miss out on any "huge gains"...

Back in SFO during the Money Show, Jon Markman shared one of his "technical" slides with me and while similarities with the behavior of the major indices in 1981-82 and 2007-08 were already striking, the continuation of the pattern is so scary that I now almost believe that there is something to it :)

FYI. In my current opinion we are still tracking "on target" for a continued decline that should develop in a manner similar to that during the last few months of 1981 and early 1982 with potentially 10-20% downside from here... (second blue square on the graph)...

"Old times" never come back and I suppose it's just as well. What comes back is a new morning every day in the year, and that's better."
George E. Woodberry

I came from a prolonged three week vacation earlier this week with a stomach virus, and thought that I had it bad, but after looking at the market action from the last three weeks I understood that my stomachache is nothing compared to what employees of Lehman, Fannie and Freddie must have felt when their entire net worth evaporated in a matter of weeks or days...

Anyway, today's post is going to be very short- simply complete reshuffling of the MSN Strat Lab portfolio and explanation for some of it's losses to-date. First off, as anyone who has followed my MSN posts during the last year knows- I usually don't let my losses accumulate into high double digits except for one or two "conviction" picks (in this round these were intended to be CHNG and GEOY), so anyone looking at my portfolio should have been wondering what happened to my portfolio as it is simply loaded with double digit losers...

Unfortunately, MSN portfolio manager does not allow for automatic trailing stop losses and with my internet coverage being very spotty I only have had a chance to check my mail and MSN portfolio twice, so no wonder that losses accumulated quickly from 2-3% when I left to 12% when I came back...

Due to the earlier production issues several positions/trades that I intended to make last month did not go through (buying a fairly large position in ultra short emerging market ETF (EEV), solar investment in STP and selling off some of my emerging market exposure positions). But the interesting thing is that almost all of my calls from last month were right on target- emerging markets fiasco, Russia's cliff diving, energy sell off and AAPL's problems so hopefully some of the readers read them and took some corrective action on their own...

Unfortunately for the Strat Lab portfolio, I did not have a real chance to put in any trades for almost a month now, and thus the quantitative results here at MSN are quite different from the qualitative "ones"... Reading through my journal's articles, one could relatively easily figure out when some of the missed trades were intended to happen. On the other hand some of the last short trades, that I thought did not go through due to the unavailability of cash, actually did happen as it turns out and I got punished again...

All-in-all, my fund is now sitting firmly in a double digit loss position and is currently an almost certain "underdog" for the remainder of the contest...But I am not giving up as one might have had by now and intend to completely overhaul it with an intention of trying to close the gap as much as possible...

I am starting today by closing all short positions with a 2% trailing stop loss from market open and some of the losing long ones and will look to reinvest the cash into "riskier than usual" picks during the next several days... The situation in the market while illogical on the surface, is such that due to the numerous hedge funds experiencing liquidity issues, "usual short suspects" might very well be the best "short term longs" for at least a few weeks.

Stay safe out there, Vad.

More to come quite soon...

This is the most bazaar thing I ever heard... I can't believe we call ourselves a "capitalist" society :) I mean why would we even let to sell stocks at all, let's only allow to buy and hold...

SEC Plans to Temporarily Ban Short-Selling

From WSJ.com

WASHINGTON -- The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.

SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.

"Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him"
Dwight D. Eisenhower

In my opinion, we have now officially passed the point where return to the "raw capitalist" functioning of our entire economic system was still feasible... I don't know what exact form will the next phase take yet, but the current system is officially over, finished, done, caput or whatever else you want to call it! The week of September 15th 2008 will not only go down as one of the most defining moments in the history of the United States, but my son will probably spend as much time reading about the consequences in the history books as I did about the Second World War...

Forget the small potatoes of "moral hazard" from Bear Sterns and Fannie/Freddie bailouts, or the "unofficial" existence of the "Bernanke/Greenspan" rate cut put option for the US stock market- the new "mother of all moral hazards" has been formed by the Paulson/Bernanke pair... Not only they changed the rules in the middle of the stock market game by de facto banning all short selling, but they also committed to put up an unprecedented $700B in taxpayer's (mine and yours) funds at risk just to prevent the "collapse" of "entire financial system"...

What a load of cr.p... I mean let's be real here - how did we come to a point where the mere fact of a relatively small by historical measures decline in equities of 20%+ is such a widespread cause of panic, anxiety and outright despair? Heh? Give me a break- stock markets might have had a down year, so, oh my gosh, let's ban all short selling?! Are you kidding? Really, what do you think will it lead to? More restrain by the greedy bankers? Or maybe it will help to identify the "true" prices of financial stocks? Yea, right... May be we should just do what Pakistanis did and put a clear floor on the S&P index? Let's make it a 1200- it's a nice and round number!...

So don't worry, the government is there to save us all! They'll print more money and force us and our children to pay for it... Last month, as a "rational" person I doubled my contribution rate to the retirement accounts because the time of "blood in the streets" is usually the best time to buy, but today I am seriously questioning whether I need a retirement account at all... By the time I retire several decades from now, the system as we know it, likely won't exist at all because it simply can't!

We simply cannot to continue bailing every "too big to fail" corporation, print more and more money and keep raising the national debt limit forever... At some point we will have to start paying down/reducing that debt and that could only be really achieved by two main means- higher inflation and/or higher taxes... And neither bodes well for my eventual retirement "nest egg"?! So while I certainly appreciate the "Paulson's" gift in the form of 8% two-day appreciation of my 401K I also know it can't and won't last... I don't yet know what the alternative is but I'll work on that in the nearest future, for now we need to simply figure out how to deal best with the cards as they have been dealt to us by the Paulson and Co...

Stay safe and cheers, Vad
skepticalcapitalist@gmail.com

"Instead of complaining that the rosebush is full of thorns, be happy that the thorn bush has roses"
Anonymous

Enough whining for now, with my vacation now over and stomach virus gone it's time to do a little "facts check" before plunging back into the regular "skeptical" mode...

Rereading back my articles from the last two months it seems as I most definitely gotten some/most things right overall and thus while my "orphaned" MSN Strat Lab portfolio has not done well while I was gone out of country, the actual analytical part seem to have done much better...

1. Russian equity market fiasco unraveled even faster than I expected, and certainly proved that my skepticism was justified despite the "cheap valuation" objection from several readers ...Russia's market is cliff-diving and it's not Olympics...

2. Emerging markets got crushed much worse than US, and I still expect that to continue in the weeks to come...Emerging weakness of emerging markets...

3. Oil and other commodities have corrected drastically and even the former seemingly indestructible momentum "darlings" like Potash have proved that nothing goes up forever...However, most recent bailout proposal could lead to the reversal of "strong dollar" trend and thus some of the commodities could actually do quite well in the short term.
Energy "Crisis"? in Graphs

4. Value has most definitely kicked momentum's b.t during the last 5-6 weeks and that's only the beginning in my opinion. The new market direction's motto should be something like "boring is good!" I think cash rich, diversified, boring businesses (like MSFT, GE, ITW, BRKA, INTC etc ) will do better than their high tech/high multiple counterparts (AAPL, VMW etc). Momentum vs. Value- Where Next?

5. Goldman Sachs's (investment banks )decline has once again matched/exceeded my expectations and as the results from their most recent quarter showed there could be more pain to come. The era of Wall Street is now officially over and super leverage days of the past are not coming back! Neither Goldman nor Morgan Stanley, in my opinion, should/would be allowed fail, but they also can't survive in a "pure" investment bank form as today- deposits rule the world! Will Goldman Sachs get burned by O&G?; Why Investment Banks are not Cheap...

6. BLS's initial estimate of job losses did prove too conservative and thus TrimTabs has been once again proved right :) Is BLS understating the "true" job losses?

7. AAPL's share price has certainly turned into the right direction and while the precise cause for this decline might not be specifically "missing" iPhones, my overall thesis/conclusion still seems sound and on target. Unbiased opinion on AAPL or case of the "missing iPhones"...

8. Small cap stocks have continued to outperform their large cap counterparts until recently but now seem to be reverting back to the negative trend... I am still sticking with my argument that this phenomenon has been driven predominately by short covering and thus large cap stocks will do better in the next few quarters. Time to think small... Or is it really? Plus some retail ideas

So all-in-all, I am now fired up, satisfied and ready to go back to blogging :)
Vad at skepticalcapitalist@gmail.com

"For fast-acting relief, try slowing down"
Lily Tomlin

It is simply hard to imagine how does anyone, who has anything to do with asset management whether he/she is a trader in a large hedge fund or a risk officer even at "conservatively managed" financial institutions, mange to feel safe and/or secure going to bed every night. The continuing "global deleveraging" process combined with the "consistently" unpredictable flow of "silly" government intervention made the routine "hedging" task virtually impossible... I still don't think that SEC and Co fully realize the real impact their "sporadic" actions (like banning short selling for example) make on activities of the same companies they are supposedly "trying to protect"?

Instead of identifying and putting in jail the "evil" rumor spreaders responsible for some of the recent turmoil, SEC instead has now virtually outlawed one of the most "vital" functions of normal markets- "fair value/price" discovery by making the "liquidity" the valuation criteria oin the short term... Remember the impact of "hedging mismatches" investment banks reported during the most recent quarter? I think in hindsight, "these" write offs will look tiny and miniscule compared to what's coming...

Remember, very few big players in today's financial world make pure "equity" bets. To the contrary, it won't be at all unusual for a large hedge fund for example to make a short bet on a financial sector and simultaneously go long commodity or currency futures contracts. I wonder if regulators ever even heard about the "law of unintended consequences"- introduction of the massive "unpredictable" externalities like "$700B bailout" or "short selling ban on financials" will lead to completely unpredictable distortions/"blow ups" in other sectors... by changing the rules so drastically in the middle of the "game", they completely disrupted the entire financial "ecosystem" and introduced additional volatility to even the more stable companies in virtually every industry...

Do you think yesterday's $20 jump in the price of crude was a result of supply/demand mismatch? I certainly don't - the answer is likely to be much simpler and we'll probably hear about it in the news quite soon- someone blew up once again in a liquidity crunch triggered by the outrageous volatility... Whether it was a commodity/macro focused hedge fund or an energy trading operation of some utility company we don't yet know, but events like this are not a good thing and usually lead to more fear in the market place, more volatility and thus to lower asset prices...

No matter how much opposed one might be to the RTC-like "bailout", I think that if it does go through, which in my opinion is now virtually guaranteed due to the upcoming elections, bank stocks would almost certainly benefit and go higher, especially given the fact that Bernanke envisions paying "above market" prices for most "toxic" assets...

"The Fed chairman said he favors buying the assets based on their "hold-to-maturity" value, which would require an estimate to be made of what each security will eventually be worth as payments come in over the years.

"If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits," Bernanke told the Senate Banking Committee. "First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down."

How will they determine the "true" hold to maturity value is beyond me, but this certainly sounds like a good deal to bank investors and could also generate significant asset management fees to the other financial services players like BLK, AZM, BX etc...

I still don't understand why would the preferred stock of clearly "too big to fail" institutions like C, GS, WFC and MS is still selling at such a huge discount to the par value? Look at the list at http://quantumonline.com/ScreenedTable.cfm. I believe this could be a temporary phenomenon driven predominately by liquidity, and thus very well could represent a continued buying opportunity...

P.S. It also means that US dollar's rally might be seriously overdone and interest rates should be heading higher...

Stay safe out there,
skepticalcapitalist@gmail.com

Short selling ban continues to produce unexpected blow ups in various sectors- convertible securities market is one of them...

As reported by WSJ
That could also explain why so many preferred securities in the financial sector have been beaten up so much over the last few weeks.

In convertible arbitrage, short selling -- the sale of borrowed stock -- is not a bet against a particular company's fortunes, but rather an actively managed hedge. The combination of long and short positions is essentially neutral to moves in the underlying stock but will profit from the stock's volatility. The SEC rule banning short sales of financial stocks makes that arbitrage impossible. While most nonfinancial stocks still can be shorted, the effect of the ban is rippling through the entire convertibles market, according to traders and money managers.