Month: March 2012

Browsing the Groupon stream this morning, I came across @RaginCajun’s essential post entitled Bad Beat in which he lays out his thinking and action around his $GRPN position in after hours on Friday on the news.

He writes,

I blew out my shares after-hours at $17, taking a dollar hit on my shares. Normally, I do not partake in after hours trading, but because we begin a new quarter Monday, I feel it is important for me to start with a clear head. Secondly, accounting issues always = sell. This is my golden rule.

My apologies to anyone following me in this trade. I am all out.

First, its so easy to trumpet winners, but I find I learn much more about the transparency and integrity of traders by how they communicate losses.

Second, young traders – there is nothing in this game more difficult and more important than managing losses. Nothing.

Please take note how the Cajun thinks through and behaves.

He takes the loss quickly and without hesitation, limits downside, sticks to his rules gained from experience no doubt, and anticipates his future emotional state well before game day on Monday.

This is how you do it kids and keep yourself in the game.

You can find the full post at the link below which you may want to print out and tape to a wall near your trading turret.

Bad Beat, The Ragin’ Cajun

 

 

Doug Kass has been following the housing market for longer than most of you reading this have been alive.

His first job on the street was at Kidder Peabody as a housing analyst where he penned research with quill on parchment by candle light.

Housing is a long cycle industry so the years studying the space serve him and his readers extremely well.

If cycles run, bust to bust, approximately 18 years, then having closely studied multiple of these cycles as they occurred is uncommon. Even more so for guys who have skin in the game and who have profited from them. So Doug recalls in detail not only the 89-90 bust and recovery but the boom leading to it.

As such, I follow closely what he has to say about housing and hold in high regard his view of where we might be headed here after, perhaps, the greatest bust in the history of real property.

On December 27, 2011, Doug came out bullish on the sector. He wrote,

A noteworthy surprise is that the residential real estate market shows surprising strength. The U.S. housing market becomes much bifurcated (in a market of regional haves and have-nots), as areas of the country not impacted adversely by the large shadow inventory of unsold homes enjoy a strong recovery in activity and in pricing. The Washington, D.C., to Boston, Mass., corridor experiences the most vibrant regional growth, while Phoenix, Las Vegas and areas of California remain weak. The New York City market begins to develop a bubbly speculative tone. Florida is the only area of the country that has had large supply imbalances since 2007 that experiences a meaningful recovery, which is led by an unusually strong Miami market.

On the chart above, I have highlighted where the PHLX Housing Index stood at the time of his prediction for the year still battling with the 200DMA.

One quarter in and the call looks great, with the index almost 30% higher and trading soundly above the 200DMA but there is still huge work to be done.

More recently, in a piece published March 28, Doug updated his view,

The housing market’s shadow inventory of unsold homes is starting to clear, certain areas of the country are experiencing signs of more robust activity, and, despite low levels of new-home production (based on historical data), homebuilders are even regaining pricing power in several geographic regions.

Stated simply, the U.S. residential real estate market is about to launch a broad and sustainable mutliyear recovery. And, from my perch, the share price strength in housing-related equities is telling the real story of an improving and self-sustaining home market that could continue through the balance of this decade.

With respect to our elders, it is a notable forecast.

$XHB $TOL

 

 

 

 

 

 

I am watching the action in $VVUS this afternoon and it is staggering. I first took note of it around 2:40PM when it became a Trending Ticker on StockTwits and just as the stock began ripping higher.

Here’s the intraday chart for your perusal:

It reminded me of a run in I had with $DSCO some years ago, a stock that is still wreaking havoc on those who gamble in the biotech space today.

The company was scheduled to recieve news from the FDA regarding its drug Surfaxin which is used to treat infants with respitory problems.

Playing these types of stocks was not in our playbook at all but it just so happened that my partner’s wife at the hedge fund was one of the top pediatric pulmonologists in the world.

She told us that this drug was for real and that it would be much needed and much used so we bought shares.

Some days later when Surfaxin did not receive approval but an approvable letter, the stock got killed. I don’t remember the exact series of events but I do recall that there were also persistent production problems with the drug and the volatile selling was relentless.

I think we took a 20%+ loss.

There was no one more qualified to provide insight than the person we had in our corner.

It didn’t really matter though because the sets of variables involved are so complex and idiosyncratic that playing the news was still just a gamble.

 

…noise is what makes our observations imperfect. – Fischer Black

News Flash: Bankers are pigs.

That’s a riot.

Here’s another one…. birds fly…

Yesterday’s NYT piece by Greg Smith drilling $GS is sublime noise.

It is sublime because it has the perfect combination of elements to catch the attention of the media and public and fuel endless debate and rehashing.

It is noise because there is no significant fundamental information in it and it only distracts rational investors from making good decisions.

$NYT only published it to capture your attention so they can sell advertising.

It reminds me a lot of the Bank of America controversy around debit card fees. Remember that one? Everyone was piling on $BAC. It is a bank we love to hate and jump on anything negative. This was seen as one more dumb decision by a bank responsible for the crisis and terribly out of touch with America.

Well, if you bought into the teeth of that sublime noise on $BAC, you are making 50% plus on your money in less than 6 months.

But my point here is not to buy $GS into the current noise festival. It is more this, if you are trading on the story, be aware that there are others out there who are trading off of information and not noise and likely they are eating your lunch.

We are all just looking for the next big thing to worry about.

We’ve finally had our Greek credit event (love that euphemism “event”). It was ridiculously well telegraphed and now, collectively, we will get hung up on the next shoe to drop. Will it be the price of gas? Iran? Spain? Portugal? Inflation? Deflation? …

We have been firmly conditioned to attend to the negative after 12 years of being beaten about the head with bubbles, terrorism, war and financial crises.

Meanwhile, a host of great American companies have ignored all the negativity and are quietly doing what America does best – building businesses at home and across the globe and cultivating great brands. Many of them are trading near or making new all time highs.

Here’s a partial list, please add to it in the comments….

Nike, Disney, Apple, Discovery, McDonalds, Chipotle, Mastercard, Visa, Costco, IBM, Starbucks, Coca Cola, General Mills, Caterpillar, Exxon, Intuit, Philip Morris, Smucker and Tractor Supply Company

When things are tough, people have a tendency to focus on what’s wrong and ignore what’s right. We come to expect the worst.

This post is just a friendly reminder that there is plenty going right in this country and plenty of companies that are kicking butt. Best to focus on them I think whether you are an investor, entrepreneur or student.

It will not be our politicians who pull us out of this decade plus long national morass. That system is broken.

Instead, It will be some of the best brands in the world born and built here at home.

*Almost forgot to add that Fender just filed their S-1 and will come public this year under the ticker $FNDR. Another great American brand!

My 5 year old loves the charts and can recognize trends.  The beauties are not hard to spot. He is a permabull too which I am thankful for and seems about right for his age.

He’s most interested in the things he gets like Disney, Cocoa and Orange Juice Futures and International Speedway Corporation.

Perhaps when he approaches adolescence and rebels he will hate markets but for now he’s into it and gets that we can buy and sell a part of the company that owns Marvel superheros ($DIS) and that there is a chocolate market ($CC_F) and that the price people are willing to pay for it fluctuates.

A few months back, he asked me where they make Cheerios.  We began talking about the General Mills factory in Buffalo, NY and I researched it a bit – quite an operation.

“Dad,” he said, “people will always eat Cheerio’s,” which I thought was hilarious and true.

We took a look at a long term chart of General Mills and needless to say, the trend is pretty clear to both of us.

While Cheerio’s is only one product in a huge set, $GIS steadily grows revenues, throws off cash and pays a healthy dividend which trends similarly to the stock price.

General Mills Dividend Chart by YCharts

I’ve begun accumulating $GIS in my children’s accounts and plan to reinvest dividends over time. I think its a good play for the kids with a long time horizon.

He’s uber bullish $ISCA as well but we will just watch that one for now.

 

Traders trade against the expectations of others and, especially over shorter periods of time, future value matters less than what others are willing to bid.

I found this Michael Jordan 1984-85 Star rookie card listed on eBay for 2,299.99$. It is not mint but in great condition (Grade8). I am sure a version in mint condition is worth much more.

I am not a trading card expert and I have no idea how rare this card might be but it is in great condition, 28 yrs old and the rookie card of arguably the best basketball player ever. I offer it for some perspective…

A month ago today, Yair Rozmaryn bought Jeremy Lin’s signed rookie card for 1,000$. 2 weeks later, he sold it on eBay for 21,580$.

From what I understand, this is already a rare card being the 17th in a series of only 25, signed and in mint condition.

Perhaps Lin will become one of the greatest to ever play the game, lead the Knicks to numerous championships and this card will be sold by nuns some years from now for 250000$ or more.

But for now, this strikes me as a classic case of noise trader arbitrage in which Rozmaryn astutely paired his cost against the potential price amid the tide of an emerging public fervor.

Great trade.

(Hattip to David Shvartsman who shared this pic of the Mickey Mantle rookie card and discussed this topic with me last night.)

*Long Lin Puts

 

 

People use StockTwits in different ways. People share trades, setups and charts, crowdsource breaking news in real time and post valuable news and commentary links.

Some also share process and experiences while trading and investing.

I love this one because the process tweets serve as a log for the trader posting them and for others to observe and learn. What was I going through when this occurred? How did I handle this trade and what was my thinking, feeling and market behavior while this trade or event was afoot.

Recently, Xavier Larrea shared a message on the stream that was insightful, generous and honest. He was describing what happened and how he felt being ahead by a lot early in the day and then giving much of it back (all in 140 characters or less!).

It went like this:

@jxlarrea is expressing regret over giving back the majority of his nice early gains over the course of the day. This has happened to everyone. His logging it is honest, universal, valuable to introspection and potentially valuable to others on the stream who see this and have experienced similar give backs.

Think of the difference in experience from someone else who is losing in the morning and finishes the day +900$.

Same outcome, very different experience.

How this frustrating emotional experience might affect traders is very different and based on individual differences in coping with the myriad of stressors involved with trading.

Some are harder on themselves than others. Some brush it off and move on while others ruminate and bring the baggage with them into the next trading day. So the adaptive coping strategies I provide below are not about how to not feel regret as much as preparing for the situation and having a plan.

Setting Portfolio Stops for Short Term Traders

Poets muse that feelings come first while reason and behavior follow.

This is sometimes the case but often it is not, especially in instances where we are practicing a craft such as trading that is challenging and where success demands run counter to our reflexes and instinct.

In the case of coping more adaptively with situations in which we are giving up portfolio gains, we must start with trade behavior management. We don’t need to worry so much about getting rid of the frustration and regret experiences and the negative affect accompanying them.

The strategy in this case is to enact trailing stop rules for the portfolio just as we would a single stock trade.

This is especially useful for shorter term traders who take less overnight risk and where there is higher relevency to p/l over shorter time frames.

Before the trading day begins, the trader will need to establish rules based on the situation which suit the size of the account and the average value at risk.

So let’s say I am a trader who, like @jxlarrea, is up 6k early in the day and my average daily p/l is 2k or less. I am suddenly up 3x my average while only 90min into the trading day.

At twice my average p/l, I might enact a trailing stop rule that ends my trading day if and when my p/l falls to or below my average. I will then go hit golf balls or engage in some other constructive activity.

In addition, for every 1k increase in my p/l from there, I will raise my trailing portfolio stop by 1k.

The details of this example are somewhat arbitrary. Traders must judge for themselves where the daily portfolio trailing stop is. Aside from the size of the account and average p/l, one must also factor average account volatility into the equation. As such, this is similar to rationally setting trailing stops on individual trades.

As we gain experience as traders and make the difficult ones explicit so that we are aware of them, we gain an opportunity to define contingencies so that we are prepared for an additional situation set which occurs on occasion and that affects our emotions and performance.

The Portfolio stop is one contingency for one situation set.

The beauty of enacting a strategy here is that as time passes and you learn to more automatically respond to the situation in a planned, adaptive manner, the emotional effects (regret and frustration) should also subside.