Ming Lo Investing

Trader’s Corner: Anatomy of a Short-Term Bottom

Posted by admin on June 22, 2011  |  No Comments

I started my investing with a bias toward fundamentals.  It seemed to make so much sense.  Yet the more I study the markets, the more important technicals seem to be.  I don’t advocate complete reliance on technicals, but I find knowledge of technicals very useful.

For the last two months I’ve been wondering where the bottom would be.  In my last post, I called for a preliminary bottom at 1250-1257, between the Japan bottom and the 200-day moving average.  I also projected a short-term top of around 1301-1322, between the 150-day and the 100-day moving average.  This week, we got both.  In addition, we’ve defined a short-term trading range of 1257-1300.

Take a look at the attached chart (click to enlarge).  Often, when looking at these situations, a daily chart is very helpful.  On the chart, we clearly see the low of 1258.07 and the high on 1298.61.  But what I find most interesting is the shapes of the top and the bottom.

Notice that at the bottom, we have one bounce off 1257, followed by a very definitive run upwards.  Relatively speaking, this is a strong bounce.  In contrast, at the top, we have several runs at breaking 1300.  The many failed attempts to break 1300 were an indicator that we would head lower, and we did, as soon as Bernanke’s speech confirmed the market’s worries.  There were no surprises in Bernanke’s speech – interest rates were to stay low, QE2 would end, the Fed sees temporary factors holding the economy back, inflation is under control and employment is frustratingly slow.  In addition, the GDP target for Q2 was downgraded, to no one’s surprise.  But there was a sense that the market might be weaker than originally expected, and for that reason, an undertone of worry.  Ostensibly, the lack of QE2, and the resulting rally in the dollar caused the downturn in the markets.  Still, technically, with the many failed attempts to break above 1300, it was unlikely that we would continue upward.  Bernanke simply comfirmed the market’s fears.

Yesterday, I nibbled on some stocks just in case we headed toward 1322, the 100-day moving average range.  Today, with the failure at 1300, I reversed almost all my trades from yesterday.

I still hold to my comments from my last post, that this is a short-term bottom and trading range.  A drop into the 1225 – 1250 range is still very possible.  Here’s a broader view of the S&P 500:

I am long the SPY for some clients.

Trader’s Corner: Playing the Citigroup Reverse Split (C)

Posted by admin on May 15, 2011  |  No Comments

Citi’s effected a 1-for-10 reverse stock split on May 6, 2011.  Because it was a Friday, the first effective day of trading was Monday, May 9, 2011.  Immediately the stock dived, and it’s not yet clear whether the dive is over.

Now it’s obvious how Citi should have been traded.  Beforehand, it was less clear.  Lots of comments both ways – that retail investors would sell, that institutional investors would buy, that historically the experience had been mixed.

Yet no one said what is really clear now: the trader should have sold beforehand because the reverse split (1) eliminates the floor on the stock; (2) there’s no immediate catalyst to cause investors to buy, least of all the $0.01 dividend; and (3) we’re entering a weak period for stocks and for financials.  In the medium- to longer-term, the stock may rise.  But before that, the air under the stock is looking pretty empty.

I am long C.

Marketwatch: The Rolling Correction Continues

Posted by admin on April 18, 2011  |  No Comments

As we enter week two of earnings, the market continues to be in correction mode.  But it’s different from what we usually think of.  Most of time, we think that we’ll get a 5-10% correction; we try to get out beforehand, and when it’s over, we put our money back into the market.

This time, it’s not so clear.  We’ve had the 7% correction from the recent S&P top of 1344 to the Japan bottom at 1247.  We now sit at about 1320, so you could say that we’re recovering, but a deeper look at individual sectors would make you wonder.  Financials, which were the first to correct, are selling off even more as we move further into earnings season.  Tech was the next to correct, and if tech companies guide conservatively for Q2, there might be further downside there too.  Tech companies have not yet reported, so there’s no way to know if we’ve overcorrected or if we have more to go.  Last week, oil sold off because of Goldman’s call to take profits.  Oil, and energy and commodities, may be range bound for a while: the continued pressure on the dollar and QE2 would support this sector, but demand destruction, continued tightening in China and rising rates in Europe could limit further upside.

To get confirmation of all this, all you have to do is to look at the charts.  Financials (XLF) and tech (XLK) look terrible, and technically, both look like there could be more downside (both charts have a series of lower highs).

As noted, the chart of the energy ETF, the XLE, looks indeterminate.  There’s been a correction off the highs, but we have a higher low (than the Japan low).  So it may be range bound for a bit, between these two markers.

In contrast, retail is doing well, a fact that puzzles me and pundits alike.  And what pundits haven’t been talking about: consumer staples, pharma and biotech have been doing well – ridiculously well.  Take a look at the following charts:

To be honest, I missed the rallies in these sectors.  Retail and consumer staples will be hit by higher input costs, I thought.  And frankly, I still think they will be when their earnings are announced.  Plus, I would think that their Q2 guidance will be conservative.  So this looks to me like a temporary rotation.  As for pharma and biotech, they’ve completely missed the rally that started last September, so some catch up would be possible.  Plus, pressure from Washington may be receding.  Still, that doesn’t mean picking the laggard always works.  Utilities, represented by the XLU, continue to flatline.

That’s the current state of things.  So what next?

- I think financials will be weak for a while, basically because there are very few catalysts coming up.

- For tech, it depends on earnings and the outlook for Q2.  However, I would be surprised if many tech companies were aggressive going into Q2.

- Energy could be range-bound.  There is definite support on the downside.  Upside will depend on earnings reports.

- I would be surprised if higher input prices did not affect earnings for retail and consumer staples.

- While pharma and biotech are likely inexpensive, budget pressures in Washington may create a cloud over the sector.

When you add it all up, it makes me cautious.  I find it hard to imagine the market making new highs if financials and tech continue to lag, and energy is range bound.  Retail, consumer, pharma and biotech cannot carry the market, further upside may be limited.  So until I see  change in the conditions, I’m more likely to sell rallies to gain cash.  I am likely to buy (or buy the dip as I’ve been advocating) as things get cheaper.  Of course it’s very difficult to pick a bottom in any situation, but a series of low-priced buys would be good enough.

Trader’s Corner: A TBT Trade

Posted by admin on September 14, 2009  |  No Comments

I’ve long advocated a trade in the TBT. The thesis has been straightforward: over the long-term, money will have to come out of Treasuries. In times of fear, investors buy Treasuries because it’s the safest security, even though interest payments are very, very low. At some point, risk appetite will come back, and those investors will sell their Treasuries. The TBT is short Treasuries.

This is a long-term trade. The issue is, of course, that in the short term, this trade has a lot of variability. So let me be upfront, this trade is not for the beginner or the part-time player. This is really for someone that takes the time to understand what’s going on in Treasuries.

In the short term, the TBT should see a lot of variability. Given the market’s tremendous run since March, there has been growing fear of a correction. If that occurs, then the appetite for risk will recede and investors will go back into Treasuries. This has already occurred a somewhat, and the TBT, which was as high as the high $50s, is now trading at $46. A run up into the end of the year will cause the TBT to rise, a fall in markets will cause the TBT to decline.

Given that, the TBT can also become a trading vehicle. Again, this is not for novice players, be advised.

If you watch the TBT, it has, in recent months, fallen immediately after the sale of the 4-week Treasury. Then it has risen until the 30 year is sold, and has immediately retreated as soon as the results of the 30-year Treasury auction has been announced. That’s because people expect demand for short term Treasuries to remain high. So the short has performed well, and the TBT retreats after the 4-week Treasury sells well. Then the possibility that longer term Treasuries will not sell well infects the markets, and the TBT rises. In recent weeks, this fear has been unfounded. Fear of a correction has actually caused the longer term Treasuries to sell well. As a result, the TBT retreats after positive 30-year results have been announced.

So here’s the short-term trade hypothesis: buy the TBT after the 4-week auction, and sell just before the 30-year auction. Again, this is for active traders who understand the risk, not for novices. As always, put a stop loss in somewhere around your acquisition price to prevent pain from sudden downward moves.

I am currently long the TBT.

Trader’s Corner: AIG – Playing the Walking Zombies

Posted by admin on August 29, 2009  |  No Comments

If you’ve been watching the markets at all, you will undoubtedly have heard that AIG has had a massive run. It was not long ago that the stock was trading for a little more than a dollar. So the company engineered a 20-for-1 reverse stock split, meaning that if you at 20 shares valued at $1.00 each, you now had 1 share valued at $20.00.

On June 30^th, the company proceeded with the reverse stock split and the new shares started trading at $23.20 – the equivalent of $1.16 before the split. Within days, the stock plummeted and stockholders cried foul. By July 10, AIG had fallen to $11.74. The press had a field day, and the chorus of “who thought that one up?” was loud and persistent.

But then something curious happened. After drifting in the $11.00 -$13.00 range for almost a month, the stock took off, hitting $22.00 on August 5, 2009. No big deal, many said. After all, $22.00 was equal to $$1.10 on a split-adjusted basis. But the stock kept going up, hitting $28.70 within days. A few days later, it had drifted down to $23.42. And then, the stunner – the stock took off, hitting $50.23 today. Some are saying that AIG could hit $100 soon.

So before going on, let me state clearly why I’m even bothering to look at this. Let me say straight out, I’m not recommending this stock and if I were managing a client’s portfolio, I wouldn’t even mention it. But I think there’s a lot to be learned about the markets here, and I’m always interested in seeing what the logic might be behind the behavior. After all, someone, somewhere, is making these decisions. So mainly, it’s about seeing what we can learn. A secondary reason is that we will see similar situations come up again – Citi is looking at a reverse split, and that might be just around the corner.

Now a couple facts for context. There was a huge short interest in AIG. Even as of August 15, 24 million shares were sold short. As of today, the stock has a total market cap of $7.25 billion, even after the run to $50 a share. That’s far, far outweighed by the $180 billion of credit that the government has extended to the company. In late July, Catherine Siefert, an S&P equity analyst, estimated AIG’s common tangible common equity at negative $336.62. In Q2, reported early August, Siefert thought that tangible common equity had inched into the black, but that was due more to accounting than to any change in fundamental value. Still, the trading in AIG is rampant, and according to CNBC, it’s the retail investor at work: the average number of shares traded is 219.

So given all these negative facts, why the climb in AIG stock? Reasons are swirling, including talk of a debt-to-equity swap, a new CEO, promises by the new CEO to slow down asset sales. I find all these explanations unsatisfactory. What makes much more sense to me is that traders are taking advantage of short sellers squeezed into a corner.

Consider this. If you had a lot of money, you would buy shares of AIG and drive the price up. The short sellers would have to cover, driving the price up further. And you would buy the shares knowing that if the stock starts to move up quickly, other day-trading buyers would jump in, and the short sellers would have no choice in the matter. That would spark the move up. After that, the momentum guys would jump in. And more short sellers would cover. And more momentum guys would follow, too. And then, the retail guys would jump in. And then you would sell. If you had lots of money to play with, and were close enough to the markets to react quickly, this would be a pretty good formula for making some dough.

One precedent to support this theory: look at Citi before the conversion of government debt early this year. Everyone knew that Washington would convert their debt (actually, preferred shares) into common, flooding the market with shares and diluting existing shareholders. Short sellers piled in, so much so that it was pretty much impossible to find any more shares to short. The government’s conversion rate had been announced, and a little math would value Citi in the $2-3 range. Despite all the short interest, the stock climbed to the $4 range, squeezing the shorts. Months later, when the government converted its shares, Citi eventually drifted back to the $2-3 range in July. Somebody made a lot of money squeezing the shorts.

So does AIG go to $100? It’s within the realm of possibility. Keep in mind that $100 is only $5 pre-split. Still, it’s a risky game. AIG could go to $100, or it could go to $10. And at some point, the run has to end. Those that got in early will take profits, and that will put significant downward pressure on the stock. Also, many bought AIG when it was a $3-4 stock. So as AIG rises to the $60-80 range, a lot of those players will be looking to exit. I think AIG has some more to go, but somewhere in the $70 or greater range, it could swing the other way.

A lot of people wonder why you would buy a stock that is worth nothing when you do the math. Someday, the government will make a decision about what to do. But frankly, that day could be a long way off, and forcing a reconciliation of the books anytime in the near future would just put a huge loss on the government’s books. No one wants to do that.

So in the meantime, AIG is a big trading vehicle. And something else to notice: the move in AIG comes when other options have been exhausted. The good stocks have had their move and have stalled. Take Goldman Sachs, best in breed: it’s stalled in the $160-165 range for several weeks now. The market is not ready to take the “good” stocks such as Goldman any further, and so it’s picking through the trash.

If this interpretation of AIG is correct, then we should see similar action in Citi if it does a reverse stock split. We may also find similar action in other forsaken zombies, Fannie Mae and Freddie Mac. Perhaps the moral of the story is that even in trash, there’s some opportunity. Time will tell.

Ming is long Citi and Freddie Mac, and has no position in AIG or Fannie Mae.

Trader’s Corner: Taking Some Dips in the EWT

Posted by admin on May 6, 2009  |  No Comments

EWT. So today I took another dip, this time into EWT, which is iShare MScI Taiwan. Simple idea, really. China can now invest in Taiwan, which should bring a lot of money into the market over the long term.

Generally, I don’t like ETF’s, I prefer individual stocks. ETFs tend to average out returns, as opposed to picking out the leader in a group, whose return should exceed the group. Still this is a country play, and a fundamental, structural change in how much money goes into this market.

Stress Tests. Once the stress tests are done, I have a hard time seeing what can drive the market higher, so it may very well be time to consider fading the rally.

Trader’s Corner: Taking Some Dips in FIG, MA

Posted by admin on May 6, 2009  |  No Comments

Tuesday, May 5, 2009 – 3:10 PM

Fortress Investments

So today I took a dip into FIG, Fortress Investment Group. Admittedly I’m a bit later than I want to be, but this thing is moving ridiculously fast. Tomorrow, Fortress has it’s earnings call so we’ll have a lot more information on how it’s doing.

So the thesis on Fortress would be this: if you believe the worst is over, and that Fortress can make money buying assets at a discount, they they should do very well over the next few years, and even the next year.

The stock got hammered because it was a private equity play, and we all know what happened there. It was as low as the $2 range because in january, significant redemptions lowered their assets under management. Mark to market hit their books, and some of their companies had debt problems.

To believe fortress will do well, you have to look favorably on these factors:

1) the redemptions have stopped because the market is no longer staring at a downward spiral.

2) the companies that they’ve invested in have debt situations that are manageable. We’ll get more info on this tomorrow, but in their last earnings call, they said they’ve taken care of a lot of it.

3) they will be participants in the TALF, meaning they will be buying assets with government backing for a heavy discount. If we assume they’re pretty smart guys, they should come out making a profit. Regardless of what happens with the stress tests, these guys should be busy buying assets at a discount.

Fortress is a bit on the speculative side at the moment. Truth be told, earnings tomorrow is a toss up. They could beat, or there could be problems we don’t know about. The argument for beating is that a lot of the market has beat, and similar firm Blackrock is doing really well; the downside is that some other asset managers, like Legg Mason, reported today and didn’t do as well as expected. Still at $6-7, I don’t mind nibbling at FIG and being speculative.

Looking Past the Stress Tests

I still can’t tell you which way the market will go with the stress tests. Everything could be priced in, the market could use it as an excuse to take profits, or the sideline money could come in. In other words, I can’t tell. I’m inclined to think that there won’t be any huge sell off because we know that the stress tests will be positive, and recent buyers won’t have a reason to sell.

So I’m looking past the stress tests, and the only trade I see is being in the survivors, and especially those that will repay the TARP first. That puts Goldman and JP Morgan in front. Goldman, as I’ve said, I definitely like going into the stress tests. I can’t see how they’d come out badly, and the worst case I can see is profit taking. JP Morgan should do well also, and both are in discussions to repay TARP. Jaime Dimon has said discussions will start as soon as the stress test results are released. Morgan Stanley hasn’t said much about paying back the TARP, but there’s been no sign that they need to raise capital, and their fundamentals are fine, other than commercial real estate on their books. Also, Morgan Stanley has broken resistance at $26. On dips, I like all three, but in order, Goldman, JP Morgan, Morgan Stanley. Of couse, I’m watching Wells, BAC, C and USB carefully. I have positions in all except Wells.

There may also be a play in Bank of America if a conversion does not occur. Currently, the possibility of government conversion of preferred is priced in, at least in part, I would argue. If that doesn’t happen, BAC should move.

Mastercard

A few days ago, Mastercard was down as much as $13, from $183 because it lowered full year estimates. Today, it’s back at $183, which tells you how much the market likes mastercard. Put it on your radar screens, buy on any dip. I bought a little at $170, thinking I’d buy a little more if it went down more. Well, it didn’t.

Playing the Secondary Offering

We all know that there will be banks, and other firms raising money over the next several months. For the last year, there has been a play in secondaries. The most familiar case might be Goldman; it raised money at $123 or so around earnings time. For a moment, it drifted down to $120 or so before the secondary, and down to $115 after the secondary. Since then it’s climbed to $135 today. So the simple play is this: the secondary stock offering will drive the price of the stock down because of dilution. Usually, it’s occurred within a day or two of the announcement. The trade is to buy going into, or just after the secondary, because the stock recovers. You can only do this if the successful secondary stock offering is a sign of strength. Meaning that the company isn’t raising money out of weakness. Recently, Northern Trust (NTRS) and US Steel (X) has done the same, and both have a seen a quick rise in the stock after the secondary. Dow Chemical (DOW) just announced a secondary today, I wouldn’t trade that one because it’s coming out of weakness, not strength.

I am long FIG, GS, MS, JPM, C, USB, MA, . Those are my thoughts for the day,

ming

Trader’s Corner: FASB 157x II – Buy the Rumor, Sell the News

Posted by admin on April 2, 2009  |  No Comments

Trader’s Corner: FASB 157x I

Posted by admin on April 2, 2009  |  No Comments

Thursday, April 2, 2009 – 12:03 AM.   Much is being said about tomorrow’s mark-to-market (let’s call it M2M for short).  I think it’s likely to pass.  And I think it will help banks, although it will not be a cure-all by any means.  

Trader’s Corner: A Little Window Dressing

Posted by admin on April 1, 2009  |  No Comments

Wednesday, April 1, 2009 – 1:15 AM. So today’s market caught people by surprise. Most expected Tuesday action to follow Monday’s 254-point on the Dow. Instead, the Dow ended up 86.90 today, and at one point the market was up almost 200 points.