The Intelligent Trader; The Long and Short of It - April 27, 2008

The market over the past month has been on a tear. When our indicators went to OFFENSE a while back, I was deluged with emails asking me why I was not heeding the sage wisdom of the all-knowing talking heads. In my defense, all I can say is this: when the “Money Honey” and the rest of her friends tell me to do something, I will continue to ignore them and listen to the indicators. The reason is that the indicators have a better track record and they don’t have an agenda.

Click here to read the rest of this week's Intelligent Trader; The Long and Short of It ...

RAC
The Intelligent Trader

The Death Cross

From time to time, people ask me why I like to sell short stocks. It’s simple – I want to be able to make money regardless of the direction of the market, interest rates or the dollar. Period.

We all make money “Buying Low” and Selling High”. I just believe that you can do it in any order that you choose.

Have I made money? I have and when you look at today’s market conditions -- the plunging dollar, soaring unemployment, record home foreclosures, uncontrolled government spending and massive consumer debt -- I’m confident we can improve on those results.

One of the screens that I use from time to time is called the “Death Cross”. This set up is simple – all you need is 2 moving averages – one long term and one short term. Some folks use the 50 and 200 day moving averages. I like the 18 and 50 day moving averages.

You get a death cross signal when the shorter term average moves under the longer term average. If you get heavy volume to accompany this, you have a pretty nice trade on your hands.

Be forewarned. This strategy is not for everyone and it is not a long term trade. I normally hold my shorts for a week or two at the most.

So the next time you are looking at your charts or hear a company reporting less than positive results – take a gander at the moving averages. You may have a nice trade on your hands.

Until Next Time,

RAC
The Intelligent Trader

Wachovia's Loss a Grim Sign for Banks

Selling Stocks Short; April 15, 2008

Saw this in the paper - makes for some interesting reading. We're not out of the woods yet which means there is life on the short side.

RAC
The Intelligent Trader

Wachovia's Loss a Grim Sign for Banks

NEW YORK (AP) - The shocking first-quarter loss at Wachovia Corp., a company long viewed as a relatively conservative player during the mortgage boom, suggests that 2008 will be at best a rebuilding year even for the nation's better-positioned banks.

Results this week from large banks such as JPMorgan Chase & Co., Citigroup Inc., Washington Mutual Inc. and Wells Fargo & Co. should shed more light on how much fixing-up the industry has to do. So far, it's not looking pretty—and that means fewer loans for consumers, skimpier dividends for shareholders and more job cuts.

Wachovia's $393 million quarterly loss was accompanied by a 41 percent dividend cut, plans to eliminate 500 jobs in its corporate and investment bank, and a move to sell $7 billion worth of stock. Many banks have already tried to raise cash through stake sales—Wachovia itself raised $8.3 billion earlier this year, Citi has raised about $20 billion, and WaMu has raised $5 billion, just to name a few.

Read the rest

Selling Stocks Short; April 14, 2008

Selling Stocks Short April 14, 2008

Last week the Dow gained more than 3%, the S&P was up more than 4%, and the Nasdaq picked up almost 5%. And all that came in the context of weak economic news, the worst employment number in years, and a newly slumping dollar.

Even though the indicators are on offense, bear market rallies are sometimes the strongest and the sharpest that we see. While the talking heads are getting everyone back into the game, it’s important to realize what is really going on. In times like these, it makes sense to sit still and watch what’s going on.

Since I live and die by my indicators, I am not primarily on the long side. That said, I am still looking to short the USD/JPY (forex) on rallies.

Hang in there – we haven’t seen the bottom yet.

RAC
The Intelligent Trader

Selling Stock Short - Soros and the Demise of the Dollar

Every once and a while, I stumble across something that holds a lot more meaning than you think it would. I pulled this piece from the NY Times. Read this once and then read it again - this time between the lines. Then think about the implications.

I'll be back later to put my 2 cents in on this.

RAC
The Intelligent Trader

April 11, 2008
The Face of a Prophet
By LOUISE STORY
The New York Times

George Soros will not go quietly.

At the age of 77, Mr. Soros, one the world’s most successful investors and richest men, leapt out of retirement last summer to safeguard his fortune and legacy. Alarmed by the unfolding crisis in the financial markets, he once again began trading for his giant hedge fund — and won big while so many others lost.

Mr. Soros has always been a controversial figure. But he is becoming more so with a new, dire forecast for the world economy. Last week he rushed out a book, his 10th, warning that the financial pain has only just begun.

“I consider this the biggest financial crisis of my lifetime,” Mr. Soros said during an interview Monday in his office overlooking Central Park. A “superbubble” that has been swelling for a quarter of a century is finally bursting, he said.

Mr. Soros, whose daring, controversial trades came to symbolize global capitalism in the 1990s, is now busy promoting his book, “The New Paradigm for Financial Markets,” which goes on sale next month.

And yet this is not the first time that Mr. Soros has prophesied doom. In 1998, he published a book predicting a global economic collapse that never came.

Mr. Soros thinks that this time he is right. Now in his eighth decade, he yearns to be remembered not only as a great trader but also as a great thinker. The market theory he has promoted for two decades and espoused most of his life — something he calls “reflexivity” — is still dismissed by many economists. The idea is that people’s biases and actions can affect the direction of the underlying economy, undermining the conventional theory that markets tend toward some sort of equilibrium.

Mr. Soros said all aspects of his life — finance, philanthropy, even politics — are driven by reflexivity, which has to do with the feedback loop between people’s understanding of reality and their own actions. Society as a whole could learn from his theory, he said. “To make a contribution to our understanding of reality would be my greatest accomplishment,” he said.

Mr. Soros has been worrying about the fragile state of the markets for years. But last summer, at a luncheon at his home in Southampton with 20 prominent financiers, he struck an unusually bearish note.

“The mood of the group was generally gloomy, but George said we were going into a serious recession,” said Byron Wien, the chief investment strategist of Pequot Capital, a hedge fund.

Mr. Soros was one of only two people there who predicted the American economy was headed for a recession, he said.

Shortly after that luncheon Mr. Soros began meeting with hedge fund managers like John Paulson, who was early to predict a crisis in the housing market. He interrogated his portfolio managers and external hedge funds that manage his fund’s money, and he took on new positions to hedge where they might have gone wrong. His last-minute strategies contributed to a 32 percent return — or roughly $4 billion for the year.

The more Mr. Soros learned about the crisis, the more certain he became that he should rebroadcast his theories. In the book, Mr. Soros, a fierce critic of the Bush administration, faults regulators for allowing the buildup of the housing and mortgage bubbles. He envisions a time, not so distant, when the dollar is no longer the world’s main currency and people will have a harder time borrowing money.

Mr. Soros hopes his theories will finally win the respect he craves. But, ever the trader, he hedges his bets. “I may well be proven wrong,” he said. “I would say that I’m the boy who cried wolf three times.”

Many of the people Mr. Soros wants to influence may view him with skepticism, in part because of how he made his fortune. In 1992, his fund famously bet against the British pound and helped force the British government to devalue the currency. Five years later, he bet — correctly — that Thailand would be forced to devalue its currency, the baht. The resulting bitterness toward him among Thais was such that Mr. Soros canceled a trip to the country in 2001, fearing for his safety.

Asked if it bothers him that people accuse him of causing economic pain, his blue eyes dart around the room. “Yes, it does, actually yes,” he said.

Asked if those people are right to blame him, he says, “Well no, not entirely.”

No single investor can move a currency, he said. “Markets move currencies, so what happened with the British pound would have happened whether I was born or not, so therefore I take no responsibility.”

Mr. Soros, came of age in Nazi-occupied Hungary and has for decades longed to write a masterpiece that might put him among thinkers like Hegel or Keynes, said Michael T. Kaufman, who wrote a book about Mr. Soros. “He spent years writing papers and letters to people, but everyone ignored him,” Mr. Kaufman said.

But when Mr. Soros became rich, people began listening. He also started giving large sums to charities, and in Eastern Europe, as the Soviet Union crumbled, he distributed copy machines to encourage free speech in his native Hungary. So generous was Mr. Soros with his money that “Sorosovat” became a new verb in Russian, loosely meaning to apply for a grant.

He continues to be one of the top givers to charities around the world, and has given more than $5 billion away through his foundations.

Yet even Mr. Soros acknowledges that many economists still slight his theories.

“I am known as a hedge fund manager and I am known as a philanthropist, and it’s very hard for, say, academics to accept that a hedge fund manager may actually have something to say about economics,” Mr. Soros said. “So that has been difficult for me to overcome.”

But Joseph E. Stiglitz, a professor at Columbia who won the Nobel for economics in 2001, said Mr. Soros might still meet success. “With a slightly different vocabulary these ideas, I think, are going to become more and more part of the center,” said Mr. Stiglitz, a longtime friend of Mr. Soros.

Mr. Soros’s firm, Soros Fund Management, has been through several turbulent years. Stanley Druckenmiller, his longtime No. 2, left in 2000, in part because he was tired of the constant media attention Mr. Soros attracted. (Mr. Soros credits Mr. Druckenmiller for the winning gamble on the British pound, saying he added the encouragement to bet more money on the trade.)

Several outside investors also left, and Mr. Soros overhauled the company as more of a wealth management tool for his own family and related charities. Mr. Soros said in 2000 that he no longer desired returns like the 30.5 percent his fund returned on average, after management fees, from 1969 to 2000.

In 2004, Mr. Soros tapped his oldest son, Robert, to become the chief investment officer, despite Robert’s reluctance.

At that time, Mr. Soros, was busy trying to turn public opinion against President Bush. He donated $27 million to anti-Bush organizations and traveled the country speaking out against the president. This time around, he is less involved. He endorsed Senator Barack Obama but kept his distance from the campaign trail.

Robert Soros, 44, who once claimed his father based his trades not on grand theories like reflexivity but rather on his back pain, never shared his father’s enthusiasm for the markets. “When you’re a billionaire’s son, you’re less hungry than when you’re a Hungarian immigrant,” one former Soros Fund Management executive said.

Even so, the Soros fund performed well under the younger Soros, and as recently as last June, it was up 10 percent for the year, according to a letter to investors. At the end of July, Robert stepped down from his head investment role, just before his father returned to trading. Robert and his brother Jonathan remain deputy co-chairmen, under their father, the chairman of the fund.

This week, Mr. Wien illustrated the knack of Mr. Soros for timing with an old story. In 1995, Mr. Soros asked Mr. Wien why he bothered going to work every day. Why not go to work only on days when there is something to do?

“I said, ‘George, one of the differences between you and me is you know when those days are, and I don’t,’” Mr. Wien said.

Selling Stocks Short; April 8, 2008

The Intelligent Trader; April 8, 2008
Selling Stocks Short

I had the opportunity to meet Doug Kass several years ago at a hedge fund conference hosted by Jim Cramer. I had been following his research for some time and found his writings to be both thoughtful and engaging. He is one of the best, if not the best, short sellers in the marketplace.

RAC
The Intelligent Trader

Doug Kass: Recession Will Run Deep
Blog post originally appeared on RealMoney Silver on April 4.

Will Technicals and Sentiment Continue to Trump Fundamentals?

7:38 a.m. EDT

Thus far, the market's internals are better than after the two previous one-day wonders.

Specifically breadth has remained positive, and volume has subsided into the two-day aftermath since Tuesday's soaring stock market. Sentiment remains another constructive element to the investment mosaic, gauging by the 10-day CBOE put/call ratio -- though lower than the recent peak, it still seems elevated and at levels that have typically been associated with market strength. Moreover, ISI's survey of hedge fund exposure is unchanged over the last four weeks.

Beyond the financials' dead-cat bounce (my view), the prior market leader -- namely, the materials sector -- seems to be the current and possibly future market leadership group.

With the technicals and sentiment, thus far, in relatively sound condition, here are some critical questions for your consideration:

1. To what degree has the market's decline discounted the current economic weakness?

2. How long will the domestic economy remain shaky?

3. And to what degree will it contribute to disappointing corporate profit growth?

I am still mildly bearish on the near-term prospects of the market and a little more bearish on medium intermediate-term outlook.

We Are in a Recession.

Soros Sees More Downside to US Market

Sell-Stocks-Short; April 3, 2008

April 3 (Bloomberg) -- Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound.

``We had a good bottom,'' Soros said yesterday in an interview in New York, referring to the rally in stocks and the dollar after JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. on March 17. ``This will probably not prove to be the final bottom,'' he said, adding the rebound may last six weeks to three months as the U.S. moves closer to a recession.

To read the full article: Soros Sees Additional Market Declines After Temporary Reprieve

RAC
The Intelligent Trader

Closing GM Short

Selling Stocks Short; April 1, 2008

The market strength this morning is a bit much and I think it's time to pull the plug and nail down our profits on General Motors (GM). We closed it at $19.72 giving us a pretty respectable profit.

As of right now, The Intelligent Trader Long-Short Portfolio is 100% net long. Our indicators tell us that we're on OFFENSE and we'll heed those for the time being.

RAC
The Intelligent Trader