Fundamental Trading Diary

Fundamental analysis of the capital markets

My Marketocracy Fund Performance

My Markeocracy fund has had a fantastic run so far this year.  My last 6 months of performance puts me in the 97th percentile of funds managed there.
My Fund's Performance

My Fund's Performance

I’ve taken the past two weeks to do some reorganisation of the portfolio in anticipation of some downward movement in the market.  It’s still a rough time to be a bear.
Here are my holdings:
  • AEA (Advance America) is a national payday loan company.  This is one of the few outright longs I like in this economy.
  • SKF vs HDB, MTU and KB — American financials vs Asian financials spread trade.  This is for the long term.
  • OIL (GSCI Crude Oil Total Return) – the underlying commodity can go to $25, but it also can go to $100.  It is impossible to argue that it will closer to the former in the next 5 years.
  • TBT (UltraShort 20-year Treasuries) is another long term bet.  Despite the Fed printing 1/3rd of this year’s projected deficit, the yield is still pushing 3%.  Perhaps the Fed is allowing it to rise so that it may attract some foreign capital before pushing the yields down again.  I jumped into this far too early in November by underestimating how many long dated bonds the Fed was going to buy.  I am reducing my exposure to this position in the coming days.
  • QID (Nasdaq 2x Inverse) is one of the few short term trades I’m taking.  I think there is 6 or 7%  on the downside, much like Marc Faber predicts.
  • GS (Goldman Sachs) knows exactly what it’s doing.
  • DV (DeVry) does vocational education, and this is where people go when they are unemployed.  Their enrollment continues to rise, and it’s just going to continue.  I’m going to be increasing my small position in this company.
  • WAB (Wabtec) – geez, did I recommed this?
For the future, I’m looking to acquire gold and silver at better prices.  If the 10y yield drops back down around 2.5%, I’ll increase my bond short exposure again.
It is tough to say what the direction of the US stock market is.  Financial services make up the majority of our economy, and the government has currently shown a willingness to out-right subsidise it.  This is not something that continue without other parts of the economy cracking.  They are playing a gigantic game of chicken.
While the fundamentals deteriorate, the government is simply giving money to corporations.  That will make their stock price go up.  To profit, you have to make more direct and specific bets.  Find the guys holding the bag on risky consumer debt who won’t get bailed out – think high yield bond funds like HYP.  I’ve yet to determine the best target there.  The crux of it is that it’s not good to go short someone who the government will hand money.

April 30, 2009 Posted by | Uncategorized | Leave a comment

Marc Faber

Let’s examine Marc Faber’s recent history:

3/24 7:00 PM: “The US stock rally may have more legs”. The S&P 500 is +7.75% since. “We can go to around 880 on the S&P”. We’ve hit 875.63.

3/30 8:44 AM: “Rapidly growing countries have setbacks from time to time,” Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong. “I think we’re going to test the lows again, but over the next two years, it’s probably a good time to invest.” EEM (Emerging Markets ETF) is +7% since.

4/4 12:23PM: “From here on, the government bond market will fall. In other words, the trend will be for interest rates to actually go up.” TBT (UltraShort bonds) is +3% since.

4/7 6:30AM: “Rally Will Go On, After a Correction” The S&P 500 fell -2.4% that day, and is +6.63% since.

4/7 6:30AM: “But I have been buying some banks here and there, for a trade. If I look at Citigroup, it dropped from 57 to 1 dollar. It is around 2.5 dollars now and can easily rebound to 5 dollars a share.” Citigroup is more than +45% since.

4/13 6:00PM: “You have essentially a government that gives financials free money at the expense of the taxpayer. With this free money, they may actually have decent earnings in the near future.” Citigroup, Goldman Sachs and JP Morgan (the largest US banks) all “surprised” on the upside.

4/17: “The market very near term has become somewhat overbought, and the correction should essentially follow, but I doubt it will go and make new lows in the intermediate future. The lows in early March at 666 in the S&P will hold, and we’ll have another push up into July.” We shall see…

He’s been knocking them out of the park.

April 18, 2009 Posted by | Uncategorized | Leave a comment

Sector Fundamental Analysis, Pt. 1

Preamble:  I initially wrote this on April 5th.  It takes a long time to do research and articulate it.  I am releasing what I wrote, and will release further sector research later.  Positions:  Long XLV, Long XLU, Short XLE, Short XLK, Short XLB.  Portfolio +1.68% since established on Monday.


After a spectacular March, valuations are all over the place.  The S&P 500 has turned overwhelmingly into a growth index.

Sector % of S&P 500
Information Technology 17.98%
Health Care 15.28%
Energy 13.02%
Consumer Staples 12.8%
Financials 10.81%
Industrials 9.71%
Consumer Discretionary 8.77%
Utilities 4.32%
Telecomm 3.98%
Materials 3.33%

The stock market is now dominated by Information Technology and Health Care, which now make up 1/3rd of the US stock market.  They will be a very strong determining factor of future stock index performance.  Naturally, the financials are probably the strongest determinant.  They are the focus of trillions of dollars in government spending, and their leverage and integration with every other part of the economy makes them an automatic focal point of economic analysis.

Information Technology

This sector hasn’t climbed to nearly 18% of US stock market capitalisation through fundamental growth so much as not being quite as badly beaten as their counterparts in other sectors.  On January 19th, 2001, the IT sector peaked at the height of the dot-com boom with 24.41% of the S&P 500 market capitalisation.  Strengthened by continually easing monetary policy, the financials took the torch from the tech companies.  As the tech boom imploded, capital fled to banks, who were able to translate equity gains into greater and cheaper borrowing for their risk arbitrage business.  This shift caused the financials bubble, which eventually pulled the economy and stock market out of the 2001-2002 recession.

The question I pose is whether the emergence of IT is our saviour, like the financials were 8 years ago.  I put the following points for consideration:

  1. The deregulation and fractional reserve model isn’t available to companies in this sector
  2. American technical knowledge is mostly realised through Asian manufacturing, and although there may be IP agreements in place, the diminished political strength of the USA along with the enhanced political strength of China probably means that foreign manufacturers will simply take what they’ve learnt and sell it themselves.  Asus is an example of this.  They have gone from producing components and hardware for Western companies (Apple MacBooks are produced by an agreement with Asus) to brand and resell to producing their own wide range of consumer electronics products.
  3. The profit margins are likely going to thin out dramatically as consumers and businesses get squeezed more

The top contributors to the IT sector are computer hardware (26%), systems software (19%), semiconductors (12%) and internet service & software (9%).  The rest is comparatively tiny business.


This industry is dominated by Big Blue (NYSE:IBM).  Their reputation, generally recognised quality, political connections and existing accounts likely put them in a good position moving forward.  As government expands, it is probably safe to say that government accounts at IBM will do the same.

Apple (NASDAQ:AAPL) is far more exposed to fluctuations in consumer spending.  Despite excellent products and a rabid following (I am typing this on my much loved MacBook), they are having an increasingly difficult time selling their expensive computers and consumer devices.  That said, they have no debt, more than 25B in cash, and a towering profit margin of nearly 15%.  Compare this with our next largest company in this industry, Hewlett Packard (NYSE:HPQ), who have a profit margin of just 6.78%.  This is an excellently run company, but they are consequently no bargain – currently trading at 20 times earnings.  Their tremendous profit margins will allow them to cut prices, but I don’t think they will be anywhere near the biggest beneficiary of the new and yet unallocated capital, which will likely be put into companies like IBM, Hewlett Packard and Dell (NASDAQ:DELL).

Hewlett Packard is somewhat of a fusion of IBM and Apple business models.  Their low profit margins and relatively high debt to cash (12B in cash, 20B in debt) have them in a relatively precarious long-term situation if the economy continues to tumble.

I see this industry generally outperforming the broader market for the next 6-18 months due to new government spending.


The 800lb gorilla Microsoft (NASDAQ:MSFT) MRQ showed 20B in cash, 2B in debt, and a 28% profit margin.  With their political ally controlling all branches of government, a seemingly unshakable monopoly in every country, every government and every business for operating systems & productivity, it seems to deflect attacks on every market it serves.  It has been steadily gaining market share on its chief web service software, Apache.  It went from approximately 20% of market share to 35% — mostly to the detriment of Apache — in 2008.  Both have retreated slightly since to smaller competition.  Their real bread and butter, of course, is the operating systems and Microsoft Office.  At a P/E of 10, you get a growth stock at a value stock multiple.  This company has challenges, but it has more than enough advantages.

Google (NASDAQ:GOOG) remains somewhat of an enigma.  The market believes more great things are yet to come of it as it still sells at a towering P/E of 27.79.  It already has had three rounds of job cuts, while hiring out mostly in overseas offices.  They remain quite profitable (margin of 19%), have 15B in cash and no debt.  Google might get a lot of secondary business from people who are downgrading from Microsoft Office to Google Documents, Microsoft Exchange/Outlook to Google Mail (Google Mail does integrated corporate calendar), and from more expensive advertising mediums to Google Ads, so it might be at least temporarily insulated from recession.

Oracle (NASDAQ:ORCL) continues to steamroll along.  Larry Ellison is shamelessly embedded into delivering products to the US government.  After its low of 8 bucks in May of 2002, it’s increased more than 100%, and currently at $19.29 – just shy of its 52-week (and 7 year) high of $23.62.  Big government means big profit for this company, and their fairly rich valuation of 17.41 means the market already knows that.  This might not be the right time, but this is the right stock.

Communications Equipment

With big government and infrastructure spending in vogue, I’d expect to see quite a lot more deployment of Cisco (NASDAQ:CSCO) hardware.  They have good profit margins (19%), but sinking overall business (-27% YoY earnings growth).  They are in a healthy financial position to take advantage of their opportunities, though, with $29B in cash and $6.85B in debt.

April 9, 2009 Posted by | Uncategorized | Leave a comment