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Pair Trades and the Search for Absolute Returns

Long Zions Bancorp/Short Piper Jaffray

This was my first pair trade recommendation in early November last year, and it's performing as expected. Zions (ZION) is up 12.3%, and Piper Jaffray (PJC) is down 1%. That is exactly the type of performance you should expect from a long and short. Considering the bullish environment in stocks, the most impressive feat of the trade is the loss in Piper.

The conditions in regional bank are improving. At the same time, Wall Street is struggling to generate profits. This particular trade should be maintained by investors going forward.

Long Verizon/Short AT&T

Both Verizon (VZ) and AT&T (T) have moved higher benefitting from the boom in smart phones. The long position, Verizon, is up more than AT&T, making this a winning trade.

I expect that outperformance to continue with Apple's iPhone now available on the Verizon network. Rightly or wrongly, the perception is that Verizon is the stronger network and that will benefit longs here for the foreseeable future. Maintain this pair trade.

Long Target/Short Whole Foods

This grocery pair trade, offered up in mid-November, has been a complete disaster. Shares of long position Target (TGT) have lost more than 15% since the time of recommendation in mid-November, while short position Whole Foods (WFMI) has gained 17%. Losing on both sides of the trade is not the outcome you want with a pair trade.

That said, I would keep this trade intact. With commodity prices much higher the premium grocery sector is not long for this environment. Target should perform relatively better from here given the consumers desire for savings.

Long Ford/Short General Motors

Both Ford (F) and General Motors (GM ) took a step back since mid-November. Both positions were down more than 15%, with Ford being the big loser down 18%. That outcome should not be a surprise given the heady gains in 2010 for the auto sector.

Going forward, I am still comfortable with my preference of Ford over General Motors.

Long Microsoft/Short Yahoo!

In a battle of two tech giants that have been slumbering for much of the new millennium, both Microsoft (MSFT - Get Report) and Yahoo! (YHOO) lost value since I offered this trade in December. Unfortunately, Microsoft lost more.

Yahoo! is down just under 10%, and Microsoft is down more than 12% since Dec. 3. Such performance indicates a continued preference for other tech names such as Google (GOOG) and Amazon (AMZN). Microsoft should be doing better given its resources, but that is not the case. Yahoo remains in a difficult competitive position to Google. Its best hope is to be bought by a larger player or financial buyer.
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