The Dow Jones Industrial Average is down 6% from its high of 10,725 on January 19th and down 3% since the beginning of the year. This means the Ithaca Experiment portfolio is up approximately 12% from the high on January 19th - a nice run, but nothing to get excited about because it is still down 34% from the initial investment in July of last year. I've been juked out before since the market began running in March of 2009, but think this is the long awaited correction I've been writing about. The question for you to consider is do you think this is a pause in a bull market run or that pull back in a bear market rally that I believe in? Because January was a down month, I think we have to revisit an earlier post I made in December that highlighted the January Barometer. The following quote is supplied by Wikipedia: "The January Barometer is the hypothesis that stock market performance in January predicts the performance of the rest of the year...Historically if the S&P 500 goes up in January, the trend will follow the rest of the year. Conversely if the S&P 500 falls in January, then it will fall for the rest of the year. Since 1969 this trend has been repeated 32 of a possible 39 times.".
I think the odds are in my favor that this will be a down year. The January Barometer just gives added ammunition to my thesis that the damage is not done yet and we will retest the lows of March 2009, if not go considerably lower once Uncle Sam's stimulus programs are finished. In fact, the January Barometer could be a near-term catalyst and accelerate the timeline for that 10% -20% correction I have been looking for because the smart money will start to get defensive if it isn't already. I don't mean to sound naive about my losses, they are real and they do bother me, but within 2-3 months, I could be back in the black. It doesn't take too long when you are leveraged as much as I am. So for the mean time, I will continue to put my holdings on ice and wait it out. To refresh your memory, the ETFs I currenlty own are ProShares Ultra Short S&P 500 (SDS) and the Direxion Small Cap Bear 3X Shares (TZA). I realize this portfolio is a high-wire act without a safety net, but as PIMCO's Mohamed El-Erian frequently says, the market is on a sugar high and once the rush wears off, there is no telling how far down it will go.
Saturday, January 30, 2010
Wednesday, January 27, 2010
Too Much Monkey Business
Joseph Stiglitz is the 2001 winner of the Nobel Prize in economics and recent author of Freefall: America, Free Markets and the Sinking of the World Economy. With a pedigree like that, I expected a lot out of the book, but feel he did too much armchair quarterbacking and moralizing to make this a very good read. Sure, the denizens of finance have feathered their nests with some of the TARP money and Mr. Stiglitz and I both think that something should be done about it, but he tended to grandstand too much about the sandbagging the bankers gave us. This is not to say the book is without merit and I like the way he advocates for the under privileged, but this guy is a Nobel Prize winner. I wanted more from someone of his stature. Despite his ankle biting at all the shortsighted behavior on Wall Street, he does come out with some great observations like: "Only executives in financial institutions seem to have walked away with their pockets lined - less lined if there had been no crash, but still better off than, say, the poor.".
Stiglitz really gives it to the banking tycoons with both barrels: "The bankers gave no thought to how dangerous some of the financial instruments were to the rest of us, to the large externalities that were being created. In economics, the technical term externality refers to situations where a market exchange imposes costs or benefits on others who aren't party to the exchange.". In a later chapter he expounds on this issue once more: "When gambling - speculating - on corn, gold, oil, or pork bellies didn't provide enough opportunities for risk-taking, they invented 'synthetic' products, derivatives based on these commodities. Then, in a flurry of metaphysical ingenuity, they invented synthetic products based on synthetic products.". Freefall leaves nothing in doubt as to where it stands on the issues: "The world had changed, or so the financial whiz kids had convinced themselves. They thought they were so much smarter, so much savvier technologically.". And finally: "Bankers are (for the most part) not born any greedier than other people. It is just that they may have more opportunity and stronger incentives to do mischief at others' expense.".
Mr. Stiglitz offers some solutions to the problems the banking system is experiencing, like reinstating the Glass-Steagall Act or something to the equivalent (which the Obama administration has attempted to do last week with the Volker Rule), but never quite convinces me he is the authority on the subject because I've read it all before from different economists. And this is the problem with Freefall, it's all been said by some of his colleagues in a more definitive way. When I'm reading a finance or economics book, I'm looking for ways to increase my portfolio and although Stiglitz cautions about the imminent collapse in commercial real estate, lingering problems with residential real estate and credit card debt, he really doesn't go far enough. You really have to slog through a lot of material to get to what you are looking for and to me, that's just not good enough. Unless you are an academic, I would skip this one.
Stiglitz really gives it to the banking tycoons with both barrels: "The bankers gave no thought to how dangerous some of the financial instruments were to the rest of us, to the large externalities that were being created. In economics, the technical term externality refers to situations where a market exchange imposes costs or benefits on others who aren't party to the exchange.". In a later chapter he expounds on this issue once more: "When gambling - speculating - on corn, gold, oil, or pork bellies didn't provide enough opportunities for risk-taking, they invented 'synthetic' products, derivatives based on these commodities. Then, in a flurry of metaphysical ingenuity, they invented synthetic products based on synthetic products.". Freefall leaves nothing in doubt as to where it stands on the issues: "The world had changed, or so the financial whiz kids had convinced themselves. They thought they were so much smarter, so much savvier technologically.". And finally: "Bankers are (for the most part) not born any greedier than other people. It is just that they may have more opportunity and stronger incentives to do mischief at others' expense.".
Mr. Stiglitz offers some solutions to the problems the banking system is experiencing, like reinstating the Glass-Steagall Act or something to the equivalent (which the Obama administration has attempted to do last week with the Volker Rule), but never quite convinces me he is the authority on the subject because I've read it all before from different economists. And this is the problem with Freefall, it's all been said by some of his colleagues in a more definitive way. When I'm reading a finance or economics book, I'm looking for ways to increase my portfolio and although Stiglitz cautions about the imminent collapse in commercial real estate, lingering problems with residential real estate and credit card debt, he really doesn't go far enough. You really have to slog through a lot of material to get to what you are looking for and to me, that's just not good enough. Unless you are an academic, I would skip this one.
Sunday, January 24, 2010
Duck and Cover
The market corrected about 5% the last 2 weeks and that's a significant haircut. I don't know if this will be the 10%-20% correction that's been percolating for some time, but the clock is ticking. Resistance levels have been breached and assets may be steamrolled if you are long. I needed this pull back. I've been sweating bullets as the market reached nosebleed valuations the past six months. I may sound cavalier about the losses the Ithaca Experiment portfolio has experienced since July of 2009, but this is real money we are talking about and it is a concern. After all, who likes losing money? But the question has been bandied about as to how long this correction will last. It's anybodies guess, but I'm of the belief that if the market keeps losing ground this week, it will be a domino effect for securities. This is a big week for earnings, so hang onto your hats.
Now what if you are on the long side and think the economy is in a V shaped recovery, that this 5% haircut is merely a bump in the road? Where do you find the casino stocks investors have been bidding up the last 10 months? I would look no further than Investor's Business Daily. William O'Neil has been publishing Investor's Business Daily 5 times a week since the early 1980's and is also the author of How To Make Money In Stocks among other books. He is strictly a momentum player using volume spikes and technical analysis, two techniques I don't utilize, but many do and quite successfully. The main reasons I read Investor's Business Daily is to see what IPOs are on the horizon, to monitor the hot stocks and most importantly, they have the best articles on information and medical technology bar none.
To write in depth about Investor's Business Daily would take a book, so I'll try to do the best I can with a Cliff Notes version here. Firstly, it is a newspaper geared for traders more than investors, but if you take the perspective of a long-term investor, you can find eons of stocks that you may not be aware of trading at discounts. Investor's Business Daily doesn't cover stocks under $10, so you are immediately limiting your downside because stocks under $10 are priced in that range for a reason. The newspaper also devotes a great amount of attention to foreign ADRs that trade on the New York Stock Exchange and NASDAQ. This is important because it enables you to discover securities that are easily traded and are more transparent in hot markets as opposed to going to an overseas exchange. Another nice feature of the paper is its daily listing of the hot and cold sectors in the market. Jim Cramer likes to say that 50% of a stock's movement up or down is based on its sector rotation and with Investor's Business Daily, you can either buy individual stocks in a hot sector or purchase that specific sector's corresponding ETF to take advantage of areas that are running up.
I don't read Investor's Business Daily every day, just the weekend edition because so much of the information they give is geared toward traders and it gets redundant if you are not trading every day. But in the weekend edition, they list the IBD 100, the top 100 movers in the market based on their proprietary ranking system. This ranking system includes an amalgamation of relative price strength, earnings growth, volume and profit margins. You can discover some gems in this list, but beware, most of these stocks are not for your widows and orphan fund. They run up fast and I've seen many can't miss securities get cut in half by being short on an earnings call. If you are a subscriber to Investor's Business Daily, you also have access to their Web site where you can screen for investments. I have never used the Web site, but if you are interested, they offer a two week trial for both the print and Internet version of the paper. Although I am short the market, I still read Investor's Business Daily every weekend to keep my watch lists up-to-date in anticipation of what I may decide to invest in when I jump back into long positions. Used in conjunction with Value Line makes for a very powerful investing resource.
Now what if you are on the long side and think the economy is in a V shaped recovery, that this 5% haircut is merely a bump in the road? Where do you find the casino stocks investors have been bidding up the last 10 months? I would look no further than Investor's Business Daily. William O'Neil has been publishing Investor's Business Daily 5 times a week since the early 1980's and is also the author of How To Make Money In Stocks among other books. He is strictly a momentum player using volume spikes and technical analysis, two techniques I don't utilize, but many do and quite successfully. The main reasons I read Investor's Business Daily is to see what IPOs are on the horizon, to monitor the hot stocks and most importantly, they have the best articles on information and medical technology bar none.
To write in depth about Investor's Business Daily would take a book, so I'll try to do the best I can with a Cliff Notes version here. Firstly, it is a newspaper geared for traders more than investors, but if you take the perspective of a long-term investor, you can find eons of stocks that you may not be aware of trading at discounts. Investor's Business Daily doesn't cover stocks under $10, so you are immediately limiting your downside because stocks under $10 are priced in that range for a reason. The newspaper also devotes a great amount of attention to foreign ADRs that trade on the New York Stock Exchange and NASDAQ. This is important because it enables you to discover securities that are easily traded and are more transparent in hot markets as opposed to going to an overseas exchange. Another nice feature of the paper is its daily listing of the hot and cold sectors in the market. Jim Cramer likes to say that 50% of a stock's movement up or down is based on its sector rotation and with Investor's Business Daily, you can either buy individual stocks in a hot sector or purchase that specific sector's corresponding ETF to take advantage of areas that are running up.
I don't read Investor's Business Daily every day, just the weekend edition because so much of the information they give is geared toward traders and it gets redundant if you are not trading every day. But in the weekend edition, they list the IBD 100, the top 100 movers in the market based on their proprietary ranking system. This ranking system includes an amalgamation of relative price strength, earnings growth, volume and profit margins. You can discover some gems in this list, but beware, most of these stocks are not for your widows and orphan fund. They run up fast and I've seen many can't miss securities get cut in half by being short on an earnings call. If you are a subscriber to Investor's Business Daily, you also have access to their Web site where you can screen for investments. I have never used the Web site, but if you are interested, they offer a two week trial for both the print and Internet version of the paper. Although I am short the market, I still read Investor's Business Daily every weekend to keep my watch lists up-to-date in anticipation of what I may decide to invest in when I jump back into long positions. Used in conjunction with Value Line makes for a very powerful investing resource.
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