Friday Slough

It is Friday afternoon and the market's have again been very volatile. It was a strong start this morning as the marktes received a deluge of solid data; consumer spending defies the economic slowdown, incomes are up, and the Chicago PMI set a whopping record, jumping from 47 to 63 (largest historical monthly jump); however, inflation (Core PCE) was up 0.3%, or 2.4% yoy (about as expected).

The Chicago PMI number is what is surprising. How does the manufacturing index jump so much in a single month? Was it extremely warm in Chicago in March? Possibly, but we still don't know why this came out so hot.

The morning news crossed the wires and the selling began shortly thereafter when the US government posed tarriffs on Chineses importing paper goods (10-20%). That will mean higher prices for Chinese importers, yet it also means that we are trying to cut into the trade deficit with China. In fact it is interesting to note:

"The action reverses 23 years of U.S. trade policy by treating China, which is
classified as a nonmarket economy, in the same way that other U.S. trading
partners are treated in disputes involving government subsidies."

Oh well, life goes on for the Chinese. Life goes on in America. As the markets are holding steady near the breakeven point, I don't see a whole lot of change happening near the end of the day, unless of course traders decide they don't want to hold on to any long positions over the weekend (could be likely) with geopolitical tensions as they are and oil prices continuing to hover near YTD highs.

That's it for today and I hope everyone enjoys the weekend. I am headed off on a six hour drive to southwest CO to Silverton, CO. I'll leave you with this.

"One Lift Servicing Heaven" Silverton, CO (www.silvertonmountain.com)

My Other Blogs

I have been writing for almost a year, but mostly for two other blog groups. One is David Kosmider's www.stockweblog.com and the other is Aaron Day's www.commoditytrader.com. Both of them have some great market insight for investors, traders and anyone interested in learning about the markets, but I have decided to start my own blog where I can express my thoughts a little more freely. If I feel like talking about something other than the irrational markets, I can go ahead and post about that damn weekend trip to Silverton, CO (actually, I'm going this weekend and can't wait).

Anyway, here is a link to the articles I have written for these two websites. Enjoy the read and leave me a few comments if you think any of them are itneresting. All of them are more technical than I plan on writing here.

Rocking Wall Street

Gary Marks is by no means average, let alone another average hedge fund manager। Marks is a successful musician, and you can see the unique approach he has to the investment industry when he shows up to give market commentary to CNBC while wearing a blue bandanna. In fact, from the pictures that i’ve seen, he looks like he’d fit in quite well in Sturgis. He has taken his music background and developed a unique approach to the hedge fund industry since 1999. As incomparable as Marks is to anyone else in the industry, when I was recommended by “the humble analyst” John Mauldin to read “Rocking Wall Street” written by Gary, I had to jump in and immerse myself into the book.

”Rocking Wall Street” is not for the average reader, no investor। It is directed toward the high net worth individual who is not conecrned with fickle everyday purchases. Instead these individuals are looking to generate returns with their capital for retirement and even looking for capital preservation for generations to come.

First, a little bio on Gary Marks। Marks is highly regarded in the investment industry. In 1999, he began a hedge fund of funds firm called Sky Bell Asset Management which he still runs as CEO. Today, he is a multi-manager specialist and has assets under management of over $300 million, a respectable size, but still small compared to some behemoths. He has also excelled in the music industry, most recently releasing his 10th CD, “A Whisper Can Change the World” in February 2007. He has taken his lessons in the music industry and transposed them to the hedge fund industry by creating a unique approach to preserving capital and investing with other managers.

His book is written in an extremely one-on-one manner as he provides insight from his daily routines and interaction with clients। The book is based on four main strategies:

1. Emotional Controls
2. Knowing the Difference Between Market Stats and Market Hype
3. Hedged Portfolio Construction
4. Planning for the Future and Seeking “The End Game”

Throughout the book, Marks uses his personal experiences with clients and combines a narrative over these conversations. His explanations on each interaction with clients provide a real-life insight into what goes on behind closed doors of a fund of funds manager and how intricate the process can be due to personality differences in client-manager relationships. Marks walks the reader through hedge fund definitions, diversification, and portfolio construction for the high net worth individual (although this can be transferred to the everyday investor if you read between the lines). One of the most effective “scared straight” tactics he uses throughout the book is the debilitating effects of losses vs. gains.

For example, if you return 50% on $100,000 you have $150,000. But if you
lose that same amount (50%), all of a sudden you are left with $75,000 or a 25%
loss even though the percentages never changed. Losses are difficult to
overcome, yet that is the nature of the business.

As marks continues to educate the reader delicately, he leads us to “The End Game”। Essentially, this is when an individual has reached a point in his/her life where they have enough capital to live a very high standard of life. They have enough capital to not take certain risks even though a loss of X amount of capital or a double up of X amount of capital would not change their lifestyle. This individual has reached “The End Game”. At this point, the individual should be looking for capital preservation and to provide for generations to come (if that is the choice the individual makes). It is an interesting point and one that is too often overlooked as we see American’s trying to keep up with the Joneses.

Gary Marks continues to excel wherever he puts his mind to work. Whether it be managing client’s capital creating musical works of art or even writing though-provoking books. He has integrated several skill sets into the financial industry and into a book that is a reasonably easy read for anyone with a financial background. Many people will look at this book as biased toward a select few high net worth individuals in the world; however, while reading this book I found it a great look into the inside track of what has been called the sexiest industry in the financial world. Derailing all traditional rules for success in the financial industry, Marks makes his mark.

Jim Cramer Shoots Himself in the Foot With Another Wacky Interview

It seems as if everyone now knows who Jim Cramer is; host of CNBC's cult-like show, "Mad Money", co-founder of TheStreet.com and a former well-known hedge fund manager. If you haven't noticed, he is extremely adamant about letting the smaller investor play with the big boys. But if you haven't seen this clip of Cramer on the show, "Wall Street Confidential", then you have missed out on his hypocritical comments (click here to see the 10 min clip).

I am miffed about how this guy could go on TV and actually say some of the stuff that he says. First of all, any person could go out and pick a portfolio of stocks and do as well as many money managers in the investment wolrd that get paid to do it. I'm not saying that the average person is as good as the professionals, but financial markets are fickle and can make a genius look average and an average person look like a genius. It's the nature of the game.

However, Cramer takes it several steps further. In fact he gets on a TV show, Wall Street Confidential, and essentially pleads guilty to stock manipulation.

"You know, a lot of times when I was short at my hedge fund—when I was
positioned short, meaning I needed it down—I would create a level of activity
beforehand that could drive the futures. It doesn't take much money. Similarly,
if I were long, and I wanted to make things a little bit rosy, I would go in and
take a bunch of stocks and make sure that they're higher. Maybe commit $5
million in capital, and I could affect it. What you're seeing now is maybe it's
probably a bigger market. Maybe you need $10 million in capital to knock the
stuff down.

But it's a fun game, and it's a lucrative game. You can move it up and then
fade it—that often creates a very negative feel. So let's say you take a longer
term view intraday, and you say, 'Listen, I'm going to boost the futures, and
the when the real sellers come in—the real market comes in—they're going to
knock it down and that's going to create a negative view.' That's a strategy
very worth doing when you're valuing on a day-to-day basis. I would encourage
anyone who's in the hedge fund game to do it. Because it's legal. And it is a
very quick way to make money. And very satisfying.

By the way, no one else in the world would ever admit that. But I don't
care. And I'm not going to"

Jim Cramer said it's illegal, but in fact this is ludicrous. Yes, it's legal
in the sense that anyone can go in and short a stock or bid a stock up, but then
he continues to say something that is in fact, illegal:

"Now, you can't "foment." That's a violation. You can't create yourself an
impression that a stock's down. But you do it anyway, because the SEC doesn't
understand it. That's the only sense that I would say this is illegal. But a
hedge fund that's not up a lot really has to do a lot now to save itself.

What I used to do was called— If I wanted it to go higher, I would take and
bid, take and bid, take and bid, and if I wanted it to go lower, I'd hit and
offer, hit and offer, hit and offer. And I could get a stock like RIM for
maybe—that might cost me $15 to $20 million to knock RIM down—but it would be
fabulous, because it would beleaguer all the moron longs who are also keying on
Research in Motion.

So we're seeing that. Again, when your company is in survival mode, it's
really important to defeat Research in Motion, and get the Pisanis of the world
and people talking about it as if there's something wrong with RIM. Then you
would call the Journal and you would get the bozo reporter on Research in
Motion, and you would feed that Palm's got a killer that it's going to give
away. These are all the things you must do on a day like today, and if you're
not doing it, maybe you shouldn't be in the game."

Now why would you say such a thing? Why would Jim Cramer, who has a cult-like following from his tv show, say that he attempts to manipulate a stock price because he needed to make money. Yes, Wall Street is a cut-throat game, but to admit this on TV could be a bad move. Actually, he admitted that this was a bad move. From his website, he issued an explantion (click here) that "when I was a hedge fund trader in the 1990s, I played fair, and I did nothing that violated those laws." Yet if you scroll back to the beginning of this article, you notice that he in fact admitted to doing such things as "You know, a lot of times when I was short at my hedge fund—when I was positioned short, meaning I needed it down—I would create a level of activity beforehand that could drive the futures. It doesn't take much money. Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they're higher."

I have a lot of respect for Jim Cramer as a trader, but I have no respect for him as a TV figure and the manipulation that he has on everyday investors. It's almost a sick game to him. "Hmmm...how many people can I manipulate in this world without it affecting my everyday life. That sounds like fun today." Instead, listen to your guts and not some guru who has admitted to and denied manipulating stock prices in the same week.

Until next time, Enjoy the show!

Skills Like This (The Movie)

I have a friend here in Denver who had some extra capital to put to work and he has been putting it into different side ventures. One recent venture was to help finance a movie called, "Skills Like This". It was filmed right here in Denver and Arvada, CO.

I haven't seen it yet, but I have heard great reviews. It was recently shown in Austin at the SXSW Film and Music Festival (which I went to my freshman year of college at the University of Texas). I hope it does well, so check out the trailer when you have a chance.

Five Day Rally, For Real?

Just looking at the charts for the S&P 500 today, I am a little surprised at the move we are seeing so far today. We are coming off of a down week last week, but nothing too surprising given the circumstance that the market was trading off. Since a new low was made last Wednesday at 1364 (and a subsequent reversal rally that day), the market has rallied nearly 50 points (3.5%) from those lows. That is a pretty substantial move in a market that reading the media, you would have thought the world’s economies were crumbling. Quite to the contrary, world markets look to have stabilized, although it could very well be a head fake in another move lower. The Shanghai Index, which fell 9% on February 27th, has regained 5.2%. Hong Kong’s Hang Seng index has regained 3.1% in the past five trading days and even the German Dax index has increased 3.7% in the last week. These are all great rallies, but what is the core reasoning behind the move?

Let’s focus on the U.S. since that is really what we know most about. First, last week was an expiration week; therefore, historically it has a bullish bias. Could that be the main reason for the market’s gains? The follow through the first two trading days this week has me thinking that something else is behind the move.

The data that has been presented in the past week has been mixed at best, so this might not be the greatest catalyst. On Tuesday, retail sales came in at +0.1% vs. +0.3% expected, while sales ex-auto were -0.1% vs. a +0.3% estimate. These are weak and the downtrend in consumer spending has continued (see chart below, click to enlarge).

Wednesday is what I believe could have been a key reversal day, yet it was the same day that Asian markets were down 2-3% and European markets were down 1-2% respectively. It looked like the morning weakness was based on overseas trading and the subprime mortgage mess, but midday, the markets reversed. Why? It is possible that all the sellers were washed out and the bulls took control, but there was no real catalyst to the move. With inflation numbers out the next two mornings, it could have been ugly. When the PPI and CPI report came out slightly hotter than expected the markets continued to try and push higher, but the end of week volatility and expiration closed the markets near 1400, or about the same point the key reversal day closed its interesting day. No change for the last two days of trading for the week.

That brings us to yesterday and today. Yesterday, the morning gap of 10 points was never filled in throughout the day as the market traded higher just as overseas markets had done the same morning. The slow grind upward lacked both volatility and the presence of sellers. Why wouldn’t the sellers have come in at any point and started pressuring the market? It could be because they are waiting to hear what the Fed has to say on Wednesday during the FOMC announcement. They are expected to keep rates at 5.25% (a 98% chance, according to the markets), yet their statement may have some indication of the latest subprime meltdown. If the statement is upbeat, it will be good news for the bulls, but if it has any tone of worry, we may see the sellers come back to play and drive the S&P back to its lows near 1364 or even lower.

Take a look at the chart below. You can see the market is sitting right at the thick red line, which is one I have drawn as a resistance area. Technically, it is very strong as the red line indicates both a prior resistance area and a 38.2% retracement using the February highs and the first low made in March (see below, click to enlarge). This number is critical as it also happens to come into play during the FOMC meeting. It could very well be a re-test before breaking lower. We will see what happens tomorrow afternoon, but keep in mind the intermediate trend is still downward, even with a 3% gain in the past five trading sessions.

Source: Briefing.com, eSignal

Uncomfortable Market Thoughts

I have just a few thoughts on the market today. The market has been acting quite suspiciously and I am not too comfortable with this. Some of the activity may well be due to today’s expiration and the typical bullish bias during expiration week, but I believe investors (the market) have ignored some pretty stern “warnings” over the past few days.

The sub-prime lending issue is an isolated event, but it has further implications in the housing market, which ultimately has an effect on the health of the economy. The decrease in unemployment over the past few years can be mainly attributed to the housing market. If the housing market continues to weaken (as it easily could), then the economy will feel the ill effects in the form of lost jobs and lost growth. The economy is already slowing as seen in both manufacturing numbers and earnings guidance. Throw in slightly higher oil prices, inflation pressures, global tensions/risks, the “yen carry trade”, hawkish comments from Alan Greenspan and investors that have seen their egos battered for better or worse and we have a market that might just pay attention to the economy’s health.

A side note on Greenspan: Now that he is out of the public office as
chairman of the Federal Reserve, he feels as if he can more freely talk about
the economy and his views on certain risks. In fact, groups of banks and
institutional firms pay a hefty price tag for his opinions at conferences and
meetings. Let it be known that he does see risks in the economy, specifically
the housing market as he noted in a March 15th speech mentioning that “if home
prices go down from here, I think we’ll have problems”. Maybe this is his
irrational exuberance speech from the 1990s. Is it going to be a time that we
look back 6 months later and said, the warnings were there, why didn’t we see
this coming? I guess we’ll see.

Although Wednesday was a technical key reversal day (hitting new lows at 1363, then bouncing and finishing substantially higher at 1387). A 10% correction may not have been made quite yet, but may be in for a little rough and tumble ride over the next few months while the housing market, inflation and global tensions play out even further. False rallies, false bottoms and higher volatility is what I see in the coming months.

Source: eSignal