November reads and trades

Damodaran on why Twitter is worth half of current price

Whatsapp/FB merger agreement:

Buy Nikkei Div futures (rather than Nikkei futures)

Hedge Funders see Argentina boom inevitable post-Elliot issue, YPF seen best way to play rebound:

Go long shipping stocks:

Short UK Grocers (Tesco, Sainsbury):

Apollo - Short select US credit:
“All the danger signs are there of a future crisis." The vehicle, run by John Zito, will focus on so-called event-driven shorts, such as leveraged-buyout candidates and companies with regulatory risks, as well as companies with flawed business models or those facing competitive pressures. It will also ferret out corporations that would suffer from a slowdown in global growth, such as mining companies or those with exposure to emerging markets or China, according to the presentation.
It cites target returns of more than 50% if a 2008-type financial crisis occurs, and gains of about 1% to 3% in a more benign economic environment.
The document for the fund, which was started nine months ago with Apollo’s capital, cited Genworth Financial Inc , Getty Images Inc. and high-yield ETFs among potential money-makers. Genworth could be susceptible to real-estate risk in Australia and Getty faces “substantial competitive pressure,”.

Glenview long long term Monsanto:
"In a utopian world we would all be able to shop with hedge-fund managers and Hollywood stars and pay whatever we wanted at Whole Foods. In the real world, we do need to increase the food supply and GMOs unlock the key to that,” he said, referring to genetically modified organisms."
Also still long Humana to play ageing demographic trend

SBG latest comments on MTN

• MTN: we d/grade to HOLD (R270) on valuation: We make slight upgrades to earnings (FY15 +1.4%, FY16 +2.5%) and price target (R270 from R246) on tweak to Iranian revs, and higher cash balances from Nigerian towers sale - but total 1yr return +10% not enough to continue to justify a BUY (needs >20%). MTN 1yr fwd EV/EBITDA 7.9x compares with historical average 6.1x, PE 17.7x  vs long-term average 15.8x

3 most reliable indicators of an impending bear market

(1) "The two primary causes of a bear market are either an economic recession or some kind of financial crisis.... Generally, credit conditions deteriorate and you can get a financial panic; and you don't necessarily have to get a recession from that, but the panic in financial markets and credit markets is enough to lead to a bear market. But, traditionally, most bear markets occur because of a recession. So, those are really the two areas that I monitor: number one, what's the probability of a recession on the horizon and then, number two, what is the health of the credit system?" 
Indicator: Recession Probability Models (e.g. Logit Probit)

(2) "The credit market, in my opinion, is kind of the boots on the ground in terms of the financial markets. If you think about banks, they have a very keen eye on the economy. They're the ones making loans to businesses, to consumers—they make loans to other banks—and so when they begin to get a little uneasy, they require higher interest rates. This leads to rising interest rates relative to a risk free rate like the treasury and you begin to see those spreads widen just before a recession."
Indicator: Bloomberg US Financial Conditions Index "

(3) In addition to economic activity and overall credit market strength, Puplava also likes to monitor corporate profit margins, which have peaked and signaled trouble before every single recession for the last 50 years. Today, he says, they're at all-time highs. Until corporate profit margins shrink, the credit markets show signs of stress, and the risk of a recession increases, Puplava says the probability of a major peak or bear market crash at this point still remains low.
Indicator: Corporate Profit Margins

Source: http://www.advisorperspectives.com/dshort/guest/Cris-Sheridan-140515-Major-Correction.php

Options Chain Analysis

How to read an Options Chain
https://www3.nd.edu/~newsinfo/pdf/2008_05_08_pdf/How%20to%20Read%20an%20Options%20Chain.pdf

Restructuring Option Chain Data Sets Using Matlab
http://www.wpi.edu/Pubs/ETD/Available/etd-042910-154228/unrestricted/baker.pdf

Vulnerable Nasdaq stocks

Considerations for screen:
a) Price/Revenue:
b) Price/Book Value
c) Price performance over 1 and 3 years
d) % away from 52wk high


Stocks to consider:
Netflix:
http://seekingalpha.com/article/2150673-netflix-is-the-risk-understated
"Long NFLX May/Sep 275 put calendars and long April wkly 350-380 call spread as a hedge."

http://seekingalpha.com/instablog/2033311-gvlassis/2833863-surge-in-nasdaq-volatility-and-vix-vxn-ratio-implications

Salesforce
Splunk
Workday

Pandora
Tripadvisor
Vertex Pharma
Alexion Pharma

Micron
Cognizant

Potential Screeners:
http://news.fool.co.uk//news/investing/2011/09/07/introducing-the-google-finance-stock-screener.aspx
http://news.fool.co.uk//news/investing/2011/07/19/try-these-strategies-for-deep-value.aspx

Latest Reading

Soros buys lots of SPX puts
http://blogs.marketwatch.com/thetell/2014/02/17/soros-doubles-a-bearish-bet-on-the-sp-500-to-the-tune-of-1-3-billion/

Felix Zulauf is bearish
http://felixzulaufblog.blogspot.com/2014/02/felix-zulauf-warns-of-another.html

Lee Ainslie interview:
On portfolio positioning: "In terms of sizing, our average long is roughly twice the size of an average short at Maverick and our long portfolio is more concentrated than our short portfolio. This construction allows us to maintain net long exposure typically between 30% and 60%. The greater diversification of our short portfolio reflects the riskier nature of these investments and that these positions turn over more frequently, so having a deeper bench of such investments is helpful."
On valuation: "So while we place great emphasis on valuation in our investment decisions, valuation alone should never be the driver of either a long or a short investment ... I believe it is important to identify a catalyst that should benefit the valuation ... The most commonly used valuation metric at Maverick is sustainable free cash flow in comparison to enterprise value." Read more: http://www.marketfolly.com/2014/02/lee-ainslie-interview-columbia-business.html#ixzz2tbnBoDHb
On what he looks for in deep dives: "The most critical factor that we're trying to evaluate is the quality of management - their intelligence, competitiveness and, most importantly, their desire to create shareholder value."

Vitaliy on not buying struggling retailers
http://www.institutionalinvestor.com/blogarticle/3306063/What-I-Learned-at-the-Mall-about-Investing.html
"These retailers were on the wrong side of fashion trends, the businesses were not fundamentally broken. yet they all had cash heavy balance sheets and no debt, which bought them time to turn around the business. and the turnaround is always ugly."

http://www.crossingwallstreet.com/archives/2014/02/the-single-best-metric-evebitda.html
https://beta.tradingfloor.com/posts/volatility-changes-affect-your-position-sizes-45834
https://www.fidelity.com/viewpoints/market-and-economic-insights/why-earnings-growth-could-continue

Why one shouldn't be too bearish on crude oil now

From January 2014 PIMCO commentary:

Curve has switched to predominantly in backwardation.
Annual roll yield is 5% now.
Therefore you can pick up a 5% return and get exposure to inflation or geopolitical risk. 

More on Hedge Funders (and analysts) - Feb 2014

Marc Faber:
Likes USTs (believes US growth is overstated)
Short Russell 2000 (massive outperformance of small caps)
Short Mexico
Not keen on Singapore REITs

Ray Dalio
Thinks US is in a period similar to 2004 or 2006, low growth boring years.
Think Southern Europe woes will continue for some time
Think China is a bubble, but its not clear how the adjustment will take place
Subscribes to a 'new normal' perspective
Foresees a EM crisis, and think India is positioned worst.

Kynikos shorting themes: 
boom-that-goes-bust (subprime crisis, anything credit driven)
consumer fads (Crocs)
aggressive accounting (Enron)
structurally challenged businesses (CAT)
stock buybacks (usually a sign of weakness, e.g. IBM, Oracle, Honeywell)

Fred Goodwin (now State Street, previously Mr Prop at Lehman)
US to have recession in mid-2014
Thesis: recessions occur in cycles of every 5 years. We're due now
Also, fiscal tightening of 1.75% drag. 2/3rds is tax increases, 1/3rd is decrease in spending
Not clear how big the -multiplier on tax increases could be. Perhaps 2x-3x
The only reason US is doing ok is due to dissaving. Once savings pattern normalises, consumption will slow down

2013 Notable Trades:
Glenview healthcare stock picks
Paul Tudor Jones buying Gold puts
Tepper buying SPX calls after Sep pullback in stocks
Soros shorting JPY
Owl Creek going long Nikkei
Paulson buying insurers, real estate and banks

Hedge Funders - 2014 Update

Bill Fleckenstein thinks equities are expensive and is keen to short, but only when the bond vigilantes are unhappy with accommodative monetary policy (indicated by rates consistently above 3%).

Both Felix Zulauf and Hugh Hendry think the current market resembles 1997.

Hugh looks through 113 of DJIA price data. The current period most closely resembles 1928, 1982 and 1998 (looking at last 500 trading days)
The 1998 EM crisis led to easy monetary policy, providing the last euphoric leg to the rally.
Hugh thinks EM will suffer a crisis again, due to neo-mercantilist policies in EM, procyclical as the policy works when DM imports, but suffers problems when DM don't want to buy from EM anymore.
Hugh says that Japan boomed from 1970 to late 1980s due to authorities wishing for a weaker FX rate, so that imports remained competitive. FX being weakened by too much money, combined with strong economic growth, led to the massive bubble in Japan in the 1980s.
"In 2004, China's cheap land, cheap labour, cheap money, cheap everything, produced high returns on capital and trade surpluses with the rest of the world which encouraged investment inflows into the country. That, as Charles Kindleberger noted, is the kind of combination that "almost always" leads to an increase in the country's currency and domestic asset prices." This is usually normalized through rising consumption and stronger FX, which leads to less exports. But China artificially suppressed the FX rate. The US countered the Chinese policy through QE, which has led to a stronger yuan and more Chinese consumption.
Hugh proposes a rule - go long SPX when 10yr TIPS breakevens are higher than 200dma
The more QE there is, the less China grows, so they invest more in GFCF, which leads to more capacity, which leads to more deflation. QE cycle is repeated!

Hugh then goes on to talk about long periods of underperformance. US stocks up until 1941, Japan in the 1980s, gold in 1980. Silver took 31 years to take out prior high. Oil took 24 years to take out high. Hugh seems to feel that Japan has paid its penance and is due for a boom.

His trades are:
Long DM stocks, Short EM stocks
Long Nikkei, Short JPY
His essential thesis is 'bad is good, don't fight loose monetary policy'.

Lastly, this anecdote:

"Back in 2008, with world equity markets in turmoil, I purchased a one-touch 40k Nikkei call option for which we paid $300k. I could envisage the yen strengthening substantially and triggering a corporate shock as Japanese household names buckled under the duress of currency appreciation. I also bought a lot of credit protection. And sure enough, in 2011 and for the majority of 2012 the yen strengthened. Japan recorded its largest manufacturing bankruptcy and a number of prominent household names, the giant electronic businesses, saw the cost of insuring their debt sky-rocket. For instance, Sharp rose from a spread of around 100 in January 2012 to over 5,900 in October of the same year. The Japan iTraxx Index for five-year protection, however, only flared to 220 (from around 100 in 2010) and so our hypothesis that much of corporate Japan would buckle under the weight of yen strength proved unfounded. That was a shame but nevertheless, this "crisis-lite" was sufficient to produce the political intervention that we had envisaged. The most senior policy makers at the Bank of Japan were unceremoniously removed from office and monetary policy was set, instead, very loosely, propelling yen asset prices higher. The stock market leapt by 60% on the news and the currency weakened by 20%. And, as the chart below of the Japanese five-year break-even inflation expectation reveals, one should be long their stock market. We still value the one-touch at our purchase price today, and with the market approaching 16k and trending higher, who is to say where it will trade in April 2018? If it touches 40k, get $5m."

Felix is short China stocks, long USTs, long gold.
He likes USTs and gold due to extreme bearish positioning.
USTs bot at 3%, to be sold at 2%.
He recommends going long gold through call options on gold miners.
He thinks everyone is long Nikkei and long USDJPY, so if you want to short the yen, do it against another FX.
"China can technically kick the can down the road again and stimulate the economy once again. But something would have to give. You cannot try to reflate a bursting credit bubble AND keep your currency stable. Either you keep the currency stable but then interest rates will rise dramatically as it happens in good old fashion credit crunches. Or you inject enough liquidity into the system to prevent the credit crunch and rising interest rates but then you have to sacrifice your currency. It's hard to get data but we believe that China relies on substantial foreign funding flows. If this dries up, we believe FX will be protected first, so we foresee a credit crunch. We'd play the credit crunch through the HK banking sector. "

on late 1990s comparison:
"If we are right with our view, then we could see a similar situation as in the late 90s. Back then, the US imported disinflation or even some mild deflation because of the events in Asia and Russia. This led to a decline in Treasury yields and after a short but sharp correction in US equities, the bull market entered its final phase. Hence, it would make sense to expect a big correction sometimes this year, probably starting in winter/spring, not the least due to concerns about earnings. 50% of the S&P500 earnings come from overseas and as other currencies weaken against the Dollar and some economies slow more than expected, estimates have to be cut and the market could sell off."

Old article on Cooper Neff

Stumbled across this today.
Cooper Neff was the options quant prop trading unit of BNP Paribas.
One of the first notable quant shops.
Their disdain of fundamental analysis I think is misplaced and unfair.
What it does make me feel after reading the article is that quant models can flag interesting situations, which would lead to fundamental analysis. This, combined with technical analysis, is the ideal, in a perfect world without capacity constraints. 

On Bubbles

First point - Summers and here

We need bubbles: 

"So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s."

Disagreement with Summers theory, here.

Second point - Greenspan

Bubbles are the byproduct of well-executed monetary policy management:

"I used to discuss the issue at the Fed, “What do we get by being very successful in forecasting?” And I say a bubble. In fact I think the evidence probably is conclusive that a necessary and sufficient condition for a bubble is a prolonged period of economic stability, stable prices, and therefore low risk spreads, credit-risk spreads."

And on the 1994-1995 soft landing policy, and how it led to more speculative activity:

"Because our actions failed to knock the economy down despite a 300bps increase in the federal funds rate, it elevated the long-term asset value expectation. If that is true, and I raise it as a hypothesis because I don’t know how you could prove it one way or the other, it is saying that our very efforts made the situation worse. And the notion that you could calibrate monetary policy to suppress a boom against the human nature bubbling up has no factual basis."

Exxaro, lesser followed stories

Stumbled across a Tronox case on an US-based distressed investing blog.
Does this portend some upside for EXX:SJ?
Reorg Research Analysis: Judge Gropper Rules Anadarko's Kerr-McGee Owes Billions in Damages for Tronox Spinoff

Also stumbled across an old article on the Paraguayan asset of CIC. Will this destroy EXX MinSands, and RBM?
Titanium Find in Paraguay May Be World’s Largest
US company begins tests on world’s largest titanium deposit