October 2013 How to Get A Head in This Business I wish to begin this letter by thanking all my LinkedIn contacts who have been endorsing me for various skills. Anyone who has seen my profile lately now knows me to be proficient in portfolio management, market strategy, hedging, risk management, entrepreneurialism, square dance calling, trading, and leading small cannibalistic tribes in Africa. On the Side: Market Valuation {Note to Securities Regulator: I am kidding about the cannibal stuff. I do not eat people. In fact, I keep kosher. I do have contacts who are head hunters. Also, I require a segue in order to say, “these two cannibals are having lunch together. The one turns to the other and says, ‘Here, taste this and tell me: Does this clown taste funny to you?’”] In last month’s issue of the Leading Hedge, I mentioned that if you wanted to own shares of Twitter, you would have to buy them privately; the stock did not trade on any public exchange. So of course since then the company files to go public (IPO) and trade its share likely on the NASDAQ. The market rallied followed the announcement that Laurence Summers was withdrawing himself from contention for the position of Federal Reserve Chairman. Summers is considered to be hawkish as regards monetary policy. He is been seen as likely to put a rather quick end to the Quantitative Easing Program. The likelihood that he would be the next Fed Chair was being discounted by financial markets; hence the rally when this turned not to be the case. Of course, Mr. Summers’ opinions should be taken seriously. If he believes the economy would be better served by the shuttering of QE, and he turns out to be correct, what the market is cheering about today could turn out to a source of gloom down the road. As for the indicator itself, we are still mildly in overbought territory. Historically, the market doesn’t stray too far from the GDP trend line. As with all empirical observations, however, recent history should outweigh more distant history in drawing inference. Notwithstanding, if history IS a guide, then the continuation of favorable monetary should lead to one of two possible outcomes: 1) that such stimulus will finally have the desired effect on GDP, in which case the market will reflect a more reasonable valuation, or 2) the market will have to correct to restore historical ratios. Why now? Likely this has to do with the recent performance of Facebook, ascending to all-time highs, not to mention the similar rise in LinkedIn. Companies that want to go public would like to do so when the stocks of companies that are already public in their sector are performing very well. This reflects a strong demand for shares in that sector, and helps insure that the company issuing shares can price them higher than would otherwise be the case. I recall that, in 1993, there was a very strong demand for shares in the oil & gas sector. So many companies went public then. Notwithstanding the above, the issue price was kept in line by the sheer number of new IPOs, which meant much competition for the investor dollar. In fact, some of the new issues that came out were priced so attractively that the fund company I was with at that time was able to boost the return for our unitholder by investing in them. That year, our equity fund returned in excess of 120%. When contemplating buying shares in an Initial Public Offering (IPO), there is the general rule. If you can buy all you want, you don’t want any. If you can’t buy any, you want all you can buy. The meaning: Tight supply coupled with high demand almost always leads to higher prices. So what to do? Call up a broker and tell him or her that you wish to buy a small amount of the shares. Say 100. If you are told something like, “I’m sorry, but I only got a very small allotment which I gave to the first client who asked (read: a better client than you),” thank him or her, quadruple your order and call another broker. If the first broker simply laughs at you over the phone, hang up abruptly and do whatever it takes to get an allotment from other brokers. I my case, I threatened to come down to their offices and sing “My Yiddishe Moma” repeatedly until I was allotted some shares (this works in many life situations). You can try something different, like, for example, letting slip the “fact” that you come from a long line of head hunters and cannibals… The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting. Page 1 Keep on Truckin’ Trader Radar… Internet Stocks …or, “Keep Truckin’ On. It’s often a useful exercise to look at which stocks and/or sectors top performing mutual funds have been buying. Funds send out quarterly reports to their unitholders containing, among other things, a list of their holdings. Those of you who read this newsletter with any regularity have undoubtedly encountered the occasional spelling mistake, or typo. It happens. I am, however, so prone to it that even my blood is Type O. So spelling mistakes are in my blood. It just lets you know that I am human when others have doubted that. But how you get “Mullins Trucking” when you meant “Micom”? That can’t happen unless…well, unless you’re me. Well, actually, it can when you are trying to spell a stock symbol rather than the company name. That’s how you end up owning shares of a company you’ve barely heard of in your portfolio, rather than one you’ve spend days analyzing. Fortunately, Mullins Trucking performed better than did Micom during the period held. It’s often better to be lucky than smart. Spelling mistakes happen, but seriously… According to Investor’s Business Daily (investors.com), these top funds have been feasting on stocks of internet content providers like Facebook, LinkedIn, Priceline.com, Google, and a bevy of others. What the article doesn’t tell you—but I will—is that it is the very interest in these stocks that make those that purchase them better performers. To use a highly-simplified example of what I mean, suppose you wanted to buy 10,000 shares of XYZ stock. Your broker tells you that 1000 shares are offered at $11.00, 1000 shares at $11.10, 1500 shares at $11.20, 2000 shares at $11.30, 2000 shares at $11.35, and 2500 shares at $11.40. We would expect that, in general, the higher the price the more shares offered (why?). So if you buy these 10,000 shares you will have paid a total cost of $112,900, assuming 2¢ a share commission. But the last price the security traded at was at $11.40, and valuation of all shares in the total position in a given portfolio are usually based on the last price it traded at. So just by buying your position you are already “up” 1% on the entire position. Now imagine what could happen when there is a surge in institutional demand for shares of all stocks in a particular sector. This is why we monitor price and volume change: in order to get a feel for when institution investors are warming up to a particular stock and/or sector, thereby getting in before they do so in full force, and, perhaps more importantly, begin the stampede out. Incidentally, because buying shares generally causes their price to rise, it has been known to happen that portfolio managers will buy shares at the end of a quarter in order to artificially inflate their return for that quarter. Tis the season: According to our friends at EquityClock.com, the following seasonal patterns are or will soon be in force: th Consumer Discretionary (Starting October 28 ); Health care (until October th 18 , don’t bother); and Informational Technology (already begun, you have until January). EquityClock.com also delivers seasonal chart patterns on companies ahead of their earnings announcements. One of more useful resources. The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting. Page 2 Bonds signal south: TLT’s, the 20-year U.S. Treasury Bond ETF, has gone from buy to sell on our daily trading model. Not so, or not yet, on our weekly model, but expect it to follow suit: Out of Options: I had lunch the other day at the home of someone with whom I hadn’t spoken to in quite some time. In the course of normal conversation he informed me that, although not a trader by profession, he did use to trade options. He told me how he was able to spot patterns in the prices of certain securities and therefore was able to predict the direction, in most cases, of their next move. Options were then used to increase the size of the return when the next move occurred as expected. I say “use to” because he doesn’t trade them anymore. He lamented that the price patterns that he could once detect were no longer evident, that supercomputers were detecting and pouncing on the opportunity to the capture the gain of a predictable price move long before any human possibly could, that is, within a couple of nanoseconds of the opportunity appearing. Of course, supercomputers have been a part of the trading scene since the time when the only option my friend ever considered was what to do about a zit. Although this newsletter caters mainly to investors rather than traders (though trading skills do give even investors an edge), it’s worth pointing out that, as a general rule, the more traders there are using a particular computerized trading routine (or algorithm) the less effective that algorithm becomes. This is why these trades tend to be proprietary rather than being available to the general trading public. But “algo” traders look for nickels and dimes, and make money—those that do make money—by executing on small margins and large volumes. Therefore, those of us who don’t trade on an hourly basis are not affected in any meaningful way. The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting. Page 3 To Einstein-Proof the Economy The following is quoted from Boston College Professor of Economics Laurence Kotlikoff, as it appeared in the September 28, 2013 edition of Forbes: And while Bernanke says this is all to keep down interest rates, there is a darker subtext here. When the Treasury prints bonds and sells them to the public for cash and the Fed prints cash and uses it to buy the newly printed bonds back from the public, the Treasury ends up with the extra cash, the public ends up with the same cash it had initially, and the Fed ends up with the new bonds. More Einstein quotes: Great spirits have always found violent opposition from mediocrities. The latter cannot understand it when a man does not thoughtlessly submit to hereditary prejudices but honestly and courageously uses his intelligence. A person who never made a mistake never tried anything new. Anyone who doesn’t take truth seriously in small matters cannot be trusted in large ones either. Logic will take you from A to B. Imagination will take you everywhere. Intellectuals solve problems. Geniuses prevent them. Memory is deceptive because it is colored by today’s events. Yes, the Treasury pays interest and principal to the Fed on the bonds, but the Fed hands that interest and principal back to the Treasury as profits earned by a government corporation, namely the Fed. So, the outcome of this shell game is no different from having the Treasury simply print money and spend it as it likes. And: I hope you’re getting the point. Having addicted Congress and the Administration to the printing press, there is no easy exit strategy. Continuing on the current QE path spells even great risk of hyperinflation. But calling it quits requires much higher taxes, much lower spending, or much more net borrowing (with requisite future repayment) from the public. Yet weaning Uncle Sam from the printing press now is critical before his real need for a fix – paying for the Baby Boomers’ retirement benefits – kicks in. It is becoming increasingly obvious, if not obvious already, that the paradigm of the current administration is to increase short term gains, even at expense of longer term prosperity. This helps wins elections, which are never more than two years away, and by the time the “long term” roll around, it’s no longer the problem of those responsible for its creation. A text book example of using the same thinking to solve a problem that was used to create it. The nice thing about investing is that is equally possible to make money in declining markets as it is in rising ones. Not easier, just equally possible. There is a benefit in just knowing this. It helps us consider the possibilities of declining markets long before they happen. This makes us adept in defensive posturing. The market may indeed edge higher despite yes another crisis pertaining to budget funding and raising the debt ceiling. If it does, it will have done so in a market environment that reflects increased risk. Which party will be a political pumpkin by Halloween? The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting. Page 4 THE MARKETS… The graphic below depicts the S&P 500. The values are weekly, and it’s starting to perform weakly. FEATURED MODEL PORTFOLIO This model portfolio does not boast the best return of all those we follow, nor should it. It focuses on earnings and dividend growth, and may answer the call for more stability and yield in this volatile environment. The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting. Page 5 HAPPY HALLOWEEN!! End of Stock Clearance Back in the July 2013 edition of The Leading Hedge, I listed some of the fictitious jobs I’ve held en route to becoming a Portfolio Manager. Due to overwhelming lack of demand, I thought I would include those that were not on that list. • I went to work for a company that makes medical electronics, in their product development department. My first idea was for a device for heavy sleepers, those who don’t wake up even to an alarm clock. My idea was for a timer-equipped defibrillator. I was told to CLEAR! out. • But I wanted to stay involved in electricity. So I went to work for the local Hydro distributor. Uh, remember the great blackout of 2005? Well, suffice it to say that it wasn’t my “current” job for too long. • Desperate for work, I even took a job as a department store Santa Claus. Even there I was given the ol’ heave Ho-Ho-Ho. • Got a job fixing bicycles. After one day, it was me who was two-tired. • I did once get a job in a library. One day I was quietly asked to leave. DISCLAIMER This newsletter is meant to provide the reader with a general view of our market outlook and investment philosophy, and is not to be construed as providing specific investment advice or recommendations. Such advice and/or recommendations should only be provided by a competent advisor and based on knowledge of the client’s investment parameters and risk tolerance. • I even tried working as a model. Unfortunately I was only able to get hired by an Indian tribe. You see, they were carving this totem pole and.. Although not current registered, Sheldon Liberman was formerly a registered Portfolio Manager, Investment Fund Manager, and Exempt Market Dealer, in Ontario and other Canadian jurisdictions. He may be contacted at 647.896.2424 (Toronto), 646.340.2000 (New York) or at sheldon@sheldonliberman.com. Information contained in this newsletter are from sourced believed reliable; however, the author, editor and contributor(s) assume no responsibility for any inaccuracies The Leading Hedge – October 2013 Bottom Line: Early sell signal triggered. Breach of 10 wk. MA to confirm but not waiting. Page 6