Sunday, September 16, 2007

September 16


The above is a photo (not a good one) of my neighbor's water wheel taken in April.

This week was a positive week for the market--particularly strong TH and FR, but on light volume. As you've heard ad nauseum, Tuesday--09/18) will be a critical day. I'm quite sure that there will be something to both delight and disappoint a great many. I do not pretend to know what it is. I found Jeffrey Saut's commentary interesting. Why don't you listen to it? See link in Info Mosaic.

Gary Kaltbaum and others are fond of saying that it is not the news but the REACTION to the news that matters. While this makes perfect sense, I think that you have to modify your interpretation of that action through understanding whether or not the market participants are net long or net short. I've mentioned this here before because of my surprise at counter-intuitive moves in stocks. Just keep in mind that if in a stock (or a market) participants are net short expecting negative news to cause negative price action and the news somehow smells more fragrant than expected, then you'll get short covering. Short covering provides massive upward thrust in prices. Watching short covering rally in a stock is as exciting as watching July 5 fireworks.

In order to ACCURATELY gauge the temper of that reaction, you have to know if people (professionals) are net long or net short the market or the particular stock that you are following. Crappy news IS crappy news, but if the crappy news isn't odiferous enough, you'll witness a rally that will make you scratch your head. The key is to watch for subsequent action. Much of this week's positive action was due (purportedly on CNBC, but it makes sense) was due to short covering. There was one fellow saying that he would be shorting hand over fist this (last) week into the Fed decision. I'd be a little afraid to do something like that. Most of the short positions I have taken were just during the day--I'm too much of a weeny to hold overnight.

I must say that SEED and MIND have been very poor performers. I'm hanging doggedly on. I expect MIND to recover. SEED, I'm not sure about, but I'm holding. Selling seeds to hungry Chinese seems like a good bet long term.



I read with interest about the gold carry trade which I must embarrassingly admit to not knowing a thing about. I know that many follow with great interest all aspects of gold and fiat currency and the like. Personally, I like have a Fed, and it seems that de-linking currency from gold has enhanced global trade. I'm not disputing all of the ills that can go with it--but in all likelihood it isn't going to change. Nevertheless, much energy seems to be expensed in the dispute of the ills, of the current system. To this uneducated eye, it seems to be more of a good thing than a bad thing. I'm not inviting discussion, just voicing an opinion that I don't have the energy to be disabused of!

If you have time, do listen to FSO's 1st hour. There is a discussion about the gold carry trade which you can also read Michael Kahn's article here if you are a Barron's subscriber. Essentially, central banks would lease their gold out to dealers who would then sell it. The dealers give the banks money which the bank then invests in income producing assets. The dealers then sell the gold (which they are leasing, not owning) which is a short sale--similar to your borrowing shares from your broker to sell short. At certain points in time, none of them opportune, your broker may ask you to cough up the shares.

Like most carry trades, when there is stasis, everyone is comfy and things work in accordance to the expectations of all parties. But stasis is never a lasting thing be it love or money, and this situation is no exception. Now that gold is starting to ramp, then a bank who has leased it at, say, $500, would most likely like to have it back so that can least it at $700 (or whatever the price might be). Well, I'm not sure how much gold has been leased, but if the bank comes knocking on the doors of the dealers/short sellers then guess what happens? There's a buying frenzy. And whenever there is a buying frenzy that means prices go up. But when the buying frenzy subsides, prices go down UNLESS, there are sustained fundamentals to justify the new price.

I think that one of the most useful things I've ever read is that both upward and downward moves are often overdone. One can arbitrage that in the short term, because in the long term, price always gravitates to fair value. You might want to try to develop a practiced eye for (1) identifying candidates for short term ramping or dumping; (2) quickly doing some recon to determine the reason for it; (3) reviewing the subsequent price action; and (4) making some evaluation probes with some of your speculative money to take a short term position--either shorting or buying to arbitrage the over-reaction. Being familiar with a bevy of names to understand their business and basic stock action goes along way toward tilting the odds of success in your favor. But you must be both knowledgeable and quick and of course being lucky helps too!

A bone or two for you to chew on:

HERO seems to be breaking out of a price channel. I like this stock. They purchased TODCO which I owned. Lots of insider buying, good fundamentals and good technicals. You might want to put it on a watch list. I own this stock in my non-taxable account.



I did pick up some Fortress Investment (FIG). I have no idea what this will do, but it looks like more upside than downside. At the very least, the shorts appear to be getting squeezed! (Lots of shorts in HERO too).

I'm off to enjoy this beautiful day. I walked/ran with my puppies--for about 3 miles which is good for me. They love these walks/runs so much, it provides me with a good incentive to get moving. The weather makes it easy to shrug of lethargy that settles in when it is so hot outside is saps you of all your energy. I love to be out--even when it is very cold. I'm a big believer in high-tech fabrics--both for hot and cold weather activities. One has much more flexibility in moderating his/her comfort when it is cold than hot.







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1 comment:

Anonymous said...

Thanks for the post about Hero. I bought Todco 2 weeks before the announced merger with Hero, held for a few more weeks and got out with about a 10 point gain. My broker at Davenport mentioned it about 2 weeks ago but I never took up a position again. Will revisit my notes, thanks again.

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