SLB + DE are gone; welcome XFN

Just a quick note, today we leave the energy and Ag, and go with the Cdn banks.
Go low interest rates!

We Can Have Our Freedom...

The sad saga of the US banking system continues even if the convulsions of the past 8 months have seemed to ease. The investing environment seems to change as officials in government and at the big banks keep changing the rules. There have been several articles of late documenting the Fed and Treasury's role in the Bank of America take over of Merrill Lynch last fall. The evidence so far is quite damning and at the very least we know that there is at least one rat lying and perhaps all of them are rats.

A good summary of the latest can be found from Bloomberg of which the last line reads: We can have our freedom. Or we can have our systemically failure-prone financial institutions. We probably can’t have both.

I'm not sure our future is quite that bleak, but I'm also not ready to call the bottom of this market. For sure the economy is still contracting based upon employment and other indicators, but the question remains whether the stock market has seen its lows.

This kind of BS with ex-bankers calling the shots lends no confidence to the markets, and without evidence of real reform, I can't see a sustainable rally.

GM: "This time, they mean it"

I almost cried laughing after reading this from the WSJ. Thank goodness for these distressed bond traders and vultures. We wouldn't have a market left without them!

Any investors with knowledge of General Motors Corp.'s bonds won't be shocked to learn that the company is going to miss a bond payment - the market has been forecasting a bankruptcy for months. The concern is what the words "GM" and "default" together will do to investors who are not intimately aware that the auto giant's bonds are trading at less than 10 cents on the dollar. "People don't understand where these bonds are trading; this is not new information," said Doug Forsyth, who manages about $3.75 billion in high yield and convertible bonds at Nicholas-Applegate Capital Management. "From a manager's perspective this is par for the course, but it makes headlines and spooks some people away." To be sure, as Forsyth pointed out, GM is a miniscule part of the high-yield market now.

Most traders have long written the company off, and articles about a prospective bankruptcy have been part of the news flow about the company since at least last year when the company appealed to the federal government for help. Large GM bondholders were already aware that the company was planning on missing a big interest payment, according to a person familiar with the thinking of the ad-hoc committee that holds just under half of the company's bonds. The person said they knew the June 1 government deadline for a restructuring plan wasn't a coincidence; the government didn't want the struggling company to spend $1 billion to keep servicing its debt. Much of the market has long been following that line of thinking. Portfolio manager Greg Hopper of the Artio Global High Income Fund said that at this point most of the holders of auto-related debt are professional distressed investors and know what they're getting into.

Still many of GM's bonds traded down Wednesday afternoon, implying there were still some hopefuls out there. The company's $3 billion 8.375% bond offering due 2033 recently changed hands at 9.1 cents on the dollar, according to online trading platform MarketAxess, down 0.81 cents for the day on 10 trades. As much as 20% of GM's $28 billion in bonds are held by small investors who haven't already read the writing on the wall. Many of them won't have been able to trade out of their bonds and will only take losses if the company defaults. "If it does default I think you're going to see a profound reorientation in Middle America," said Richard Peterson, managing director of hedge fund MarketPsy Capital LLC. "It's going to have ripples throughout the investing public."

GM Chief Financial Officer Ray Young - who told reporters that the auto maker had no plans to meet the June 1 interest payment - may have done investors a favor by reminding everyone of the harsh reality ahead. "People should be getting the sleep out of their eyes and seeing it's over," said Marilyn Cohen, president of retail bond investment manager Envision Capital. "I would imagine they're going to file any minute...Not making a payment - it's going to show them that this time, they mean it." Next week will be the one to watch to see how the projected GM default will play out. GM's Young said the company will launch a debt-for-equity exchange in coming days - it has to do so by May 1 to avoid a filing.

Yep, they mean it all right!

Diversification and Decoupling

"Diversification works on the way up when we don't need it and it fails us miserably on the way down, when we do,"

I just like this quote from the article below :)

World markets start trading on their own

We mentioned the term "decoupling" several times in our discussion over the years and I thought this was a good insight to keep in mind going forward.

Wells Fargo and signals

Ever since this market downturn started, we've all been looking for signs of the bottom. There's been a lot of mixed signals, fake gov't assisted rallies, and lots of noise, but the news of Wells Fargo's profits based on plain old mortgage lending is the first truly good news for me. I don't want to go all CNBC/Cramer on the club, but I'm going to call the bottom on March 9! (recorded on the blog for posterity as a prescient call, or ridicule). We all need to make a stand at some point to make money in the markets. I am personally going to take on more beta and look for alpha sectors.

Up until Thurs, we were doing well with the QQQQ for GS/Lulu trade, keeping up with those two with lower risk, but then those high beta stocks really worked on Thurs to the tune of +10%. I think DE and SLB has (and will) keep up during the panic buying phase of the market recovery, but as I mentioned before, I think there will be new market leadership. So let's look for that.

Post-Bubble Valuations

One of the lessons learned from the tech crash in 2000 and the emerging market crash in the mid-90s (I learned lots), is that the bubble sector which used to enjoy a premium valuation during the bubble, then suffers a discount afterwards, sometimes for a very long time! One could argue that tech and EM valuations are still quite cheap relative to their growth rates (PEG). The fast money has moved onto their next hot sector and they don't want to be associated with a perceived losing sector.

Over the past decade, we've seen technology become a bigger part of our lives, from cell/smart phones to ipods to GPS to online shopping and high speed wifi. But on the whole, you've lost money holding onto tech stocks like MSFT, INTC, IBM, AMZN, EBAY, CSCO, even though they've produced huge earnings every year. Only a very few names like AAPL and GOOG have made any money for investors.

That's not to say you cannot make money in these sectors, it usually involves trading into bear market rallies (like RIMM :). buy and hold however, doesn't seem to work well. So I would be a seller of SLB and DE into the next rally. That may be weeks or months away, but I believe there will be easier ways to make money in a post-bubble world. I just have to figure out where.

Fundamental analysis: part 2

I knew a banking analyst in school and he would spend all day, every day for years, researching the Cdn banks. He would buy CIBC during the up swings in the markets and delta hedge on the down days by shorting BMO. This is the level at which we should know the stock in order to beat the pros. Now, as individual investors can study a sector or two because we have some interest or affinity in that topic and possibly beat the analyst and markets. I've felt that way about some tech and retail since I work in that area, and I suspect Des, you feel that way about energy. But to think that we can choose a stock in every sector is laughable at best and possibly delusional! :)

Since we are not day traders, we start from a macro thesis and work our way down to sectors and possibly stocks. But if we do not have the knowledge to delta hedge a given stock, we have no business buying it; the pros will eat us for lunch! It's gambling, it's not investing. During a bull market, it is very easy to confuse a stock's beta with alpha, thinking you were clever enough to beat the sector/market (trust me, I've been there); a bear market exposes an investor's true alpha. I feel I have let down my guard as the "risk manager" of the group so I pledge to be more vigilant going forward. From now on, any stock suggestion will have to address "what is the alpha risk, and what is a delta hedge?". This should be the minimal hurdle if one has truly done their fundy analysis.

QQQQ update: I see it lagged XLK today because CELG took down the biotech sector which is 20% of index. I actually like the biotech exposure, since we are starting to see big pharma buying out biotechs trying to find some growth as their pipeline dry up. So I'll reaffirm QQQQ, until further declines :)

What about DE?

With our recent QQQQ buy, we're $78 in the hole again?!?! Etrade must be fleecing us on the exchange rate. If we're going to sell SLB anytime soon, we should also sell DE. They move very similarly, and I don't see a scenario where DE diverges from oil and commodities. Selling either would not really give us much to buy anything new, but together they would net about $4300 Cdn, which should be enough to take a position in the next item.
Arash suggested add more funds to take bigger positions. I'm OK either way. If we have an investment thesis to buy something, then we can add cash, otherwise, I'm playing in my TFSA.