Side Street

Get a Good Pitch to Hit

Ted Williams was almost surely the greatest hitter of all-time. He was a two-time MVP, led the league in hitting six times and in home runs four times, and won the Triple Crown twice. A 19-time All-Star, he had a career batting average of .344 with 521 home runs, and was inducted into the Baseball Hall of Fame in 1966.

Williams was also the last player in Major League Baseball to hit over .400 in a single season (.406 in 1941). Ted's career was twice interrupted by service as a U.S. Marine Corps fighter-bomber pilot. Had his career not been limited by his military service - especially since it was in his prime - Williams would likely have hit over 700 career home runs and challenged Babe Ruth's record.

During spring training of his first professional season, Williams met Rogers Hornsby, who had hit over .400 three times and who was a coach for his AA team for the spring. Hornsby emphasized that Ted should always "get a good pitch to hit." That concept became Williams' "first rule of hitting" and the key to his famous and innovative hitting chart (shown below).

The concept is a straightforward one -- it's easier to hit a pitch that's belt high and right down the middle than one at the knees and "on the black." Investors should be mindful of this concept too and always seek a "good pitch to hit."

In part, getting a good pitch to hit mean focusing on approaches and sectors that have the best opportunities for success. These include momentum investing (see here and here, for example), including highly quantitative (algorithmic) investing based upon momentum (such as managed futures). Another area for potential outperformance is low beta/low volatility stocks. This surprising finding (since greater return is generally connected with greater risk) has been deemed to be the "greatest anomaly in finance." Significantly, this approach works well in the large cap space, where closet indexers predominate. Moreover, despite rational "copycat risk" fears, there is good research providing reasons to think that this anomaly may well persist. Looking at this opportunity on a risk-adjusted basis only makes it more attractive.

The mid and small cap sectors provide more opportunities despite some liquidity constraints. International equities tend to provide the best opportunities due to the wide dispersion of returns across sectors, currencies and countries. Indeed, the SPIVA Scorecard demonstrates that a large percentage of international small-cap funds continue to outperform benchmarks, "suggesting that active management opportunities are still present in this space." Moreover, managers running value strategies outperform and do so persistently, in multiple sectors, especially over longer time periods, although lengthy periods of underperformance must be expected and survived. In the current secular bear market I also encourage the use of portfolio hedging.

I wish to re-emphasize, however, that success in this arena is extremely hard to achieve and success achieved through good asset allocation can be given back quickly via poor active management. That is why I prefer an approach that mixes active and passive strategies and sets up a variety of quantitative and structural safeguards designed to protect against ongoing mistakes and our inherent irrationality. I want to be most active in and focus upon those areas where I am most likely to succeed. I also want to be careful to seek non-correlated asset classes (to the extent possible) in order to try to smooth returns over time and to mitigate drawdown risk. For advisors, surviving in this business can be a major challenge. Succeeding by actually providing clients with real value is that much more difficult. It demands the bravery to incur much greater risk - but career and reputation risk rather than investment risk. For individuals, it requires the bravery to go against the crowd. Ultimately, investing is a zero sum game. In other words, all positive alpha is financed by negative alpha. It's a mathematical certainty.

Value surely exists, but it can be very hard to find. In the equities markets I recommend starting by being very selective -- getting a good pitch to hit. I suggest using active investment vehicles within portfolios for momentum strategies, focused (concentrated) investments, in the value and small cap sectors (domestic and international), for low volatility/low beta stocks, and for certain alternative investments. Passive strategies can be used to fill out the portfolio to provide further diversification. When you don't have a good pitch to hit, don't swing. When you do, hack away.

THE BLOG: http://rpseawright.wordpress.com/2012/11/28/get-a-good-pitch-to-hit/

Lumber Says Homebuilders Are a Buy

Most home builders reported earning a couple of weeks ago and were soundly pummeled by investors. It happened to Beazer Homes, $BZH, D.R. Horton, $DHI, KB Home, $KBH and Lennar, $LEN. Some down over 20% now most are recovering but have not yet clawed back half of their loss. Only Lennar is back to pre-earnings levels. When I think of building homes, the first thing that comes to mind is lumber. So how did that do over this period? Taking a look at the chart for random length lumber, it made new highs heading into these reports and held. Digging deeper it

Random Length Lumber $LB_F

broke above an ascending triangle and has been consolidating there since October 31st. You may recall that this was the day the markets opened after Hurricane Sandy, but this move was not caused by the Hurricane. It started 3 weeks earlier. From a technical perspective the break higher brings a target of 480, or nearly 44% higher. New highs in lumber, and targets 44% higher? If this does not suggest that the recent pullback in Homebuilders is a buying opportunity then I do not know what is.

THE BLOG: http://dragonflycap.com/2012/11/28/wed-am/

Two Brazilian Short Ideas From Jim Chanos

Continuing our series of notes from the Sohn London Investment Conference, next up is Jim Chanos of Kynikos Associates who gave a presentation entitled 'Brazil: Resource Rich, Not Riches."

Negative on Brazil

For those unaware, Chanos runs short-biased hedge fund Kynikos Associates. As such, it should come as no surprise that at the event he presented 2 short ideas both with ties to Brazil: a metals and mining company, as well as an integrated oil and gas company.

The general theme of Chanos's argument went beyond these two short ideas, though, as he suggested that Brazil was generally an unfriendly place for investors in a similar way to his recent portrayal of China as a roach motel.

He said that like China, Brazil has a system of state capitalism which leads investors to subsidize state aims at the expense of investment returns. In Chanos' view, both China and Brazil operate the wrong form of capitalism which leads capitalists to 'get the bad end of the stick'.

Short Vale (VALE)

He said that the company appears cheap to value investors but in his view it is a value trap. His main thesis on this name was that iron ore itself is over-valued. Readers will recall that Greenlight Capital's David Einhorn said to short iron ore recently at the Great Investors' Best Ideas event.

Chanos argued that Vale is too dependent on China's demand for iron ore. Demand might be about to fall and besides China is building more of its own iron ore plants. There are very few barriers to entry.

Short Petrobras (PBR)

This isn't the first time that Chanos has been negative on the Brazil state owned oil company as we've posted up his past negative commentary on PBR.

The Kynikos founder also feels Petrobras is a value trap and he also highlighted that:

• It looks like a value story trading on EV/EBITDA 2013 5.3x but it's not
• It has massive reserves of oil
• The government owns 64% of Petrobras so they cannot charge the full market price for oil and gas because of government interference
• They have a poor record of exploiting reserves

We've also posted up some of Kynikos' other short positions that have been revealed.

For the rest of the hedge fund presentations from this event, head to notes from Sohn London Investment Conference.

THE BLOG: http://www.marketfolly.com/2012/11/jim-chanos-short-vale-petrobras-sohn.html

Booms and Busts Happen More Often Than You Think

When stock markets crash, you can't pick up a newspaper or turn on the television set without someone writing or talking about it. The economic implications are clear, and therefore it deserves the press. But the price action itself is pure. The psychology behind it and the reversal in sentiment cannot be denied. So we need to keep in mind that although in some cases there is a ripple effect into our daily lives, other price crashes don't necessarily have those repercussions. But it doesn't mean that the price action isn't exactly the same.

Here is a chart of 6 popular booms and busts in stock markets that have certainly made headlines over the years. We can see a lot of similarities in the behavior of these markets:

But crashes don't HAVE to come in stock markets. They also don't HAVE to come in absolute values. They can come in other assets classes and they can come in one market relative to another. One market crash, that I believe is still in the process of crashing is the Crude Oil to Natural Gas Ratio. While averaging about 10:1 since 1990, this market hit 54:1 this April and has been declining rapidly ever since. Last week we hit new 52-week lows of 22:1 in this market and we don't see any evidence of the crash coming to an end yet.

Here is what the chart currently looks like:

Source: The Greek Stock Market Collapse In Historical Perspective (PragCap)

THE BLOG: http://allstarcharts.com/booms-and-busts-happen-more-often-than-you-think/

Tiger Global Reveals New Groupon (GRPN) Stake

Chase Coleman's hedge fund firm Tiger Global Management has revealed a new position in Groupon (GRPN). Per a 13G filed with the SEC yesterday after market close, Tiger Global has disclosed a 9.9% ownership stake in the company with 65 million shares.

According to Tiger Global's most recent 13F filing, the firm actually started their position in the third quarter as they owned 1.3 million shares as of the end of September. However, they've obviously ramped their stake up considerably since then. The 13G disclosure was filed due to portfolio activity on November 9th.

Groupon's Struggles

Shares of Groupon (GRPN) have been targeted by short sellers ever since its IPO as the company has struggled to gain footing. Shares are down 87% since it came public. And, with good reason.

The company originally started out in the "daily deals" space offering consumers deals on various products and services in local areas (an industry that has practically no barriers to entry). Amazon.com invested in fellow-daily-deal-site LivingSocial and recently had to write off $169 million of their $175 million investment.

Groupon has amassed a large audience, but as the company has matured, they've flailed around with other ideas, trying to grasp on to a business model.

For instance, Groupon also entered the highly competitive payments industry when it launched 'Breadcrumb,' a point-of-sale system targeted at restaurants to allow them to run their business smoother.

They also expanded with "Groupon Goods" where they acquire physical items, hold the inventory, etc. This segment has boosted revenues, but not necessarily profits.

Additionally, the company recently opened a physical concept store in Hong Kong as it attempts to provide a place for customers to buy and redeem products.

Some investors have called for founder & CEO Andrew Mason to step down. Short sellers, on the other hand, love him as he doesn't seem to care about profitability. Insiders currently own just under 56% of the company.

Why Buy Groupon Now?

The main question here is why is Tiger Global buying now? Did it finally become too cheap? As of the end of September, the company had $1.2 billion in cash and a market cap of only $2.2 billion. Keep in mind that Google once offered $6 billion for Groupon a long time ago.

But as MicroFundy pointed out recently (his whole piece is worth reading), if you focus on the details, Groupon has $1.2b in cash and equivalents, but "$573m of that is owed to merchants and another $245m is set aside for things like refunds & subscriber awards. All in all, when you look at the company's balance sheet, their current assets only exceed their current liabilities by a little more than $300M (or .47 per share)."

Tiger Global is known for making savvy internet investments (buying a stake in Facebook back when it was private being their most notable). Perhaps they see GRPN as cheap? Perhaps it's a potential takeover target? Who knows, this is all speculation on our part.

A Few Other Hedgies Bought GRPN Too

John Thaler's hedge fund JAT Capital also purchased shares of GRPN in the third quarter. According to their most recent 13F filed with the SEC, JAT bought over 9.4 million shares.

Even if JAT managed to buy GRPN at its lowest point in the third quarter (and assuming they still own it), they're still down on this position. The news of Tiger's entrance, though, has boosted shares over 9% today.

Soros Fund Management also disclosed a position in GRPN in their Q3 13F filing: 2.5 million shares. While these funds owned GRPN as of September 30th, there's no way to know if they still do.

There's also no way to know exactly how many hedge funds are short the stock since they're not required to disclose this. However, in our conversations with various portfolio managers, there have been quite a few shorts in this name for some time. And looking at Groupon's short interest, it appears as though 36 million shares were short as of October 31st, with that number peaking at 55 million back in July of this year.

So as shares of Groupon have slid continuously, will Tiger Global's new big stake stop the bleeding? It has, at least for today. What happens in the future remains to be seen.

THE BLOG: http://www.marketfolly.com/2012/11/tiger-global-reveals-new-groupon-grpn.html

Invest in China.....Or Just Its Government

This recommendation is popular recently. The change in leadership in China and what some see as the an attractive stock chart in the ETF $FXI, iShares FTSE China 25 Index (below) are some of the reasons for this view. And in fact the FXI is confirming a reversal higher with the Relative Strength Index (RSI) bullish and turning up and a Moving Average Convergence Divergence indicator (MACD) that is improving.

But what does 'Invest in China' really mean? Buying the FXI is not really buying the Chinese market. The ETF actually has a 57% weighting to Financial Stocks and its Top 10 Holdings, accounting for 61% of its total assets, include 5 banks, 4 energy companies and China Mobile. Looked at another way, this ETF contains the top 25 companies in China. Buying the FXI is not investing in China, it is investing in large cap state controlled entities in China. If you look at the broader Shanghai Composite, $SSEC, containing every A and B share traded in China, it is quite a different story. The Composite has been in the most recent bear trend lower since May. At best you might be able to argue that it is consolidating sideways. Either way this is not a time to buy. Until it

breaks back over 2150 there is nothing bright about its future, and the bearish and downward pointing RSI and negative MACD concur. This divergence has existed since that run lower in the broad market in May. The ratio chart below shows a clear rising channel favoring the FXI over the Composite. The large State run enterprises outperforming the smaller, more market driven companies. What does that tell you about the broad Chinese economy? You still want to 'Invest in China'? Maybe instead the mantra should be invest in the Chinese Government.

THE BLOG: http://dragonflycap.com/2012/11/20/invest-in-china/

Short Term Bounce - Engaged

As stated late Friday all the necessary components for a short term bounce were triggering except for a high over the previous day's high... but it was close enough for government work. A point here or there in the closing 5 minutes would have done the trick. It is funny how the news often fits the market, and what I mean by that is that comments out of government Friday morning set stocks off just at the point they needed to, at the 61.8% Fibonacci retracement on the S&P 500.

It was actually a bit trickier than that as that level was reached around 10 AM, the market had its cursory knee jerk bounce off and then looked to be poised to roll over yet again in the 11 AM hour, undercutting the early morning lows (and 61.8% retracement)... which would have been a very bearish development.... right before the news conference in D.C. set stocks aloft.

This morning we are following that reversal with a big move in the premarket which is no surprise -- looking back at 2012 the lion's share of the gains have come in the overnight market due to headlines (mostly out of Europe this year). The sharpest rallies come within the context of selloffs, so this move should be fast and furious. Which is of course why people are constantly trying to catch the falling knife during the downtrends. Of course the bigger issue is what is left after these oversold conditions are worked off.

Earlier this year during the April/May correction the move down was roughly the same amount of time but sharper in descent on the S&P 500. (the NASDAQ has been about as bad this time around). That correction transitioned into a very herky jerky June and July which were very difficult to prosper in as there were massive headline moving events. If you remember there was a period back then where something like 7 out of 21 sessions were up (a 1:2 ratio of up to down days), but those 7 sessions were so strong (coming on gap ups mostly) that the market was up during that period of time. That was definitely an atypical way to begin a leg of a rally.

If one believes "that" was the bottom (Friday) then there still needs to be a lot of evidence created by the markets in the coming weeks. Almost every sector has been blown to pieces and most individual stocks of the "growthy" type are very damaged technically. If one believes this is simply an oversold bounce, there should be some nice shorting opportunities coming in the week(s) ahead as this bounce runs its course.

As for the news, of course this fiscal cliff is the only thing people are talking about but I find it hard to see anything other than the typical kick the can down the road in the lame duck with some sort of tiny "down payment" to debt reduction that will mostly be accounting tricks, and then some promise of real progress "next year". Par for the course with the politicos. Hopefully something substantive and long lasting actually does develop in 2013 because the D.C. crowd is really causing headaches for the rest of the country.

While last year was a major exemption (worst Turkey week in many moons), generally this week has a positive bias to it as volume is light and some professionals take off early. With the mood over the fiscal cliff "brighter" (for now) it seems this year might be more typical than last. As for economic data not much out there outside of some housing data today and Tuesday. Flash PMIs for China and Europe released overnight Wednesday (note Chinese markets at 3 year lows!). Markets will be closed Thursday and close early Friday.

THE BLOG: http://marketmontage.com/2012/11/19/short-term-bounce-engaged/

Grace Under Pressure

After several years of blogging I have found that in these types of markets, with opinions strong and scattered as to the imminent and longer-term direction of the tape, readers find my work to be of the most value when I provide technical and behavioral analysis as objectively, concisely, yet thoroughly as I can.

Pictured below is a chart of the NYSE McClellan Oscillator ("NYMO"). The McClellan is a simple market breadth indicator tool. Generally speaking, when it is above 0 it tends to indicate bullishness for stocks, and below 0 it indicates bearishness. However, extreme readings can indicate overbought or oversold conditions. Above 50 is considered to be overbought, while below -50 is considered oversold.

Currently, the NYMO is -92.31. Clearly, the market is now oversold. Of course, just as overbought can easily become much more overbought than seems reasonable in bull runs, so too can oversold stay that way and become more so.

Thus, in order to get a better grip on current odds and probabilities, I am presenting the weekly timeframe of NYMO here so that you can compare current oversold readings to prior (deeper) bull market corrections we have seen since the March 2009 bear market bottom.

As you can see, every other deep correction we have seen since 2009 has formed at least some type of tradable bottom when the NYMO knifed down under -100. There are four prior instances when this happened-The 16% summer 2010 correction, the 20% summer 2011 swoon, the Thanksgiving 2011 shakeout lower before the Q1 2012 rally, and then the 11% correction this past spring/early summer.

Of the four prior instances, Thanksgiving 2011 is obviously the most applicable in terms of seasonality. Note that, unlike the other examples, there was not much of a subsequent multi-month grind following last Thanksgiving's final shake.

As I noted on my video recap for Thursday, barring a complete crash a sizable gap-down sets up a more pronounced snapback rally trade than does the type of pop-and-drop-and-grind-lower action we have seen of late. Incidentally, a huge gap lower would (highly likely) push the NYMO well under -100.

THE BLOG: http://ibankcoin.com/chessnwine/2012/11/15/grace-under-pressure/

Don't Like the Data -- Then Ignore It

Technical analysts and traders use a broad array of tools to search the playground of securities for patterns, areas where consolidation and reversals occur and other measures, attempting to gain an edge to trade. Sometimes the data that we review can be so extreme that it distorts the analysis. One way to deal with that is to ignore it, pretend it did not happen. I have done this in the 30 year chart of Copper ($HG_F, $JJC) below. Just drew a big black spot over it like it was classified. Yeah, I hear you screaming blasphemy! And to appease those hard core technicians that feel the need to throw up now, or worse, stop reading, how about just considering it a false break down. When you take this approach to Copper it looks rather bullish. After the break out above the long channel of consolidation from 1988 to 2004 it has been building a new rising channel since early 2006. And more recently since 2010, this channel has been tilting higher.

Copper historically has been used as a barometer of economic activity, so as we look at this how do you resolve the dichotomy between this chart and what the economists are predicting? Actually it is not so hard to rectify the two. With the move lower throughout 2011 and no real bounce, this chart does reflect a lowered economic activity expectation. But the chart itself is also sitting near the rising trendline support just as the situation in the broad market and the forecast for the future are heading towards extreme negative sentiment. Could it be that Copper is ready to foretell or a reversal in both sentiment and the market soon? Watch the support line and make your own judgement.

THE BLOG: http://dragonflycap.com/2012/11/15/thurs-am/

Yes, We're Oversold -- But Where's the Emotion?

I keep harping on this "emotion" aspect of the selloff -- there has been really none to it, as the selling has been orderly if persistent. Except for a few sessions losses have been quite contained at the index level even though a lot of individual equities have been hammered tremendously. In a way this is the opposite of when a healthy market sees sector rotation -- one group rallies, then rests, and another takes the baton and so on. The same has been happening but to the downside. Need there be an "emotional" type of "pukey" selling to mark at least a short term bottom? Nope, but it would make it easier to identify a short term reversal.

With all that said we are now seeing some substantial oversold readings in some supporting indicators. That need not mean things cannot get more oversold -- it just serves as a warning that a sharp short term reversal can happen anytime. That said the action yesterday was just as bad as Friday's when a sharp intraday rally was decimated -- at least Friday's could be blamed on the speech by Obama, whereas yesterday's was just out of the blue. It remains an environment only for daytraders or those with multi year viewpoints.

This morning we open to (wait for it) futures up. This after what is called a bearish engulfing "candle" yesterday on the S&P 500 chart. Ironically just hours before the close it was a bullish engulfing candle but that is how quickly this market is moving. Engulfing simply means the entire previous day's range was surpassed...

At this point we seem to be creating a new bear flag -- as I wrote entering this week the bulls do not want to see sideways consolidation action down here but that is what appears to be happening.

Here are a few of the indicators showing levels of oversold on long term time frames:

Percent of S&P 500 stocks over 50 day moving average -- during the 2010 and 2011 euro crisis flare ups these reached super extremes; if you exclude those any reading in the 20-30% range would be considered oversold. It is now just below 30. (again it can get worse)

NYSE McClellan Oscillator -- since the Draghi "whatever it takes" bottom in late July any reading near -40 was a buyable event. Of course it can get to -60 to -80, and in a few extreme cases >-100.

Other items such as the VIX (use with salt) and put call ratios also don't show super bearishness here as a strange calm has characterized the selling.

This is why an "emotional" purging from here would give some clarification. It would take these oversold readings to extreme levels and offer some kindling for an oversold bounce that even bears want at this point. Instead we get the drip drip drip with continuous morning gap ups that only are faded. Of course outside of those playing a short term bounce, there is little positive here in the market as the intermediate outlook has darkened technically.

Overnight Europe reported some awful factory order data, whereas Cisco reported decent earnings (via price cuts and cost cutting) yesterday after the bell which seem to be the reason for this morning's bounce. Keep in mind we have the FOMC minutes this afternoon -- while most would expect some language about new expansion plans to replace the expiring Operation Twist (otherwise the Fed believes it would be "tightening"), the market reaction when that is announced will be interesting. Especially in light of a market that has been selling off constantly since QEInfinity was announced. Will the typical Pavlovian response show up yet again today or have people finally learned a lesson? As an aside, potential future Fed head Janet Yellen was on the wires yesterday talking about easy policy out to 2016... frankly it looks like we're simply Japan-ized at this point and we might as well make it a full decade (2018) of zero rates.

THE BLOG: http://marketmontage.com/2012/11/14/reaching-oversold-but-without-emotion/