Week 52 Performance...Happy New Year, ending the year where we started

With all of the volatility this year the SAP 500 almost to the penny ended where it began.  It started at 1257.64 and ended at 1257.60.  From it's high in the beginning of May of 1370.58 it dropped to it's low of 1074.77 on October 4th a swing of 295.81 points or 21.5% only to recover to the ending value of 1257.6 an increase of 11.7%.  When you actually look at the chart  for Q4 it looks exactly like a roller coaster ride from Cedar Point for those of you who may visit the amusement park.


As far as the the yearly performance of the DreamWorks Capital Management portfolio we finished in the red by -3.88%.  Just a few months ago we were up by over 2%.  Owens Illinois (OI) and Green Mountain Coffee Roasters (GMRC) were the main driver of the poor performance.  It also didn't help to try to short the market either as our leveraged double short ETF the SDS finished down -10.74%.


Our loss was almost equally split between our long portfolio and our options portfolio with Disney the big winner there as they continued to perform but offset by the implosion of First Solar.  Weak demand, potential lower industry subsidies, and competitive price pressure from Chinese solar manufacturers all hammered the stock which was one of the worst performers in the S&P500 losing 63.22%.


Forward looking I expect to see continued volatility continue throughout the first half of the year based upon what occurs with the European financial crisis.  Europe has dominated markets and trading for most of the year especially the second half and I have no reason to believe that this will change until a hypothetical solution is crafted.  The second half of the year brings the US presidential election which could potentially drive additional uncertainty.  I think that a win by the Republican nominee likely Mitt Romney would be a reason the market rallies and volatility comes down.  A win by President Obama could bring continued uncertainty with markets as regulation which has been welled documented by small and medium sized businesses as their biggest issue as far as excess costs and job destroyers will remain intact as part of the administration's domestic policy.


So what does this mean at the end of the day?  I see more of 2011 in 2012.  Defense will likely be the best offense so that means we will likely carry an excess amount of cash and wait for stocks that fit out thesis to go on sale.  I have a few long-term strategies based on the health care and agriculture industries which I believe you should take a long view approach to but even  then you have to be nimble enough to protect profits.  Remember in 2008/2009 correlation among most asset classes and industries came to one which meant most assets lost their value as the markets went down.  Even the best long-term plan can become insolvent.


On those notes this is likely my last post for 2011.  Again I would like to thank everyone he has started this journey with me here at DreamWorks Capital Management.  If you get a chance review the post from yesterday Find What you Love the 2005 commencement address that Steve Jobs made at Stanford.


"Stay Hungry. Stay Foolish"

Find What you Love

I know that this story received a lot of coverage after Steve Jobs' death but I think that it is apropos to take another look at his 2005 Stanford Commencement Address title "Find What you Love" as we close the year down.  I typically take a look at this several times a year since seeing it back in 2005.  Weather you like Jobs or even Apple for that matter I believe is indifferent if you focus on some of the messages he was trying to get across:

1. "Your time is limited, so don't waste it living someone else's life."
2. "Don't be trapped by dogma — which is living with the results of other people's thinking."
3. "Don't let the noise of others' opinions drown out your own inner voice."
4. "Have the courage to follow your heart and intuition."
5. "Stay Hungry. Stay Foolish"

I'm personally glad that I finally decided to do what I loved this year and start this firm DreamWorks Capital Management.  I enjoy the time I spend working on these posts each day/week, researching new strategies, and most important helping people achieve their dreams.  None of this would be possible without focus, hard work, and great support from my wife.  I waited a long time before deciding to start this journey and now I am excited to see where we go.

Abramoff Names Name

Here is an additional interview that Jack Abramoff gave in mid November on CNBC.  Mark Hana Formerly at Fund My Mutual Fund now at Market Montage provided some additional commentary on his sight.  All of this is enough to make you sick.  No wonder why no one trusts anyone in Washington.



Here is the link to FMMF for addition comments

My Teach is an iPad

I'm always interested in new trends in education probably because I have kids of my own now but also due to my interest of finding more efficient ways to learn.  Education for me didn't end after undergrad and has just continued with me.  I'm interested in how to retain more information and what tools are available to do so in the most efficient manor possible.  


This article in the WSJ My Teach is an iPad explores the new realm of alternative schools specifically online and the impact it has not only on the individual students, but parents and the school districts themselves.  I personally believe that any form of schooling is what you make of it weather your sitting in an actual classroom and staring at a computer device.  You have to have some drive, ambition, and probably most important interest in what you are learning about in order to make your educational experience the most rewarding.


Here are some highlights from the article

• In a radical rethinking of what it means to go to school, states and districts nationwide are launching online public schools that let students from kindergarten to 12th grade take some—or all—of their classes from their bedrooms, living rooms and kitchens. Other states and districts are bringing students into brick-and-mortar schools for instruction that is largely computer-based and self-directed.
• In just the past few months, Virginia has authorized 13 new online schools. Florida began requiring all public-high-school students to take at least one class online, partly to prepare them for college cybercourses. Idaho soon will require two. In Georgia, a new app lets high-school students take full course loads on their iPhones and BlackBerrys. Thirty states now let students take all of their courses online.
• Nationwide, an estimated 250,000 students are enrolled in full-time virtual schools, up 40% in the last three years, according to Evergreen Education Group, a consulting firm that works with online schools. More than two million pupils take at least one class online, according to the International Association for K-12 Online Learning, a trade group.
• A few states, however, have found that students enrolled full-time in virtual schools score significantly lower on standardized tests, and make less academic progress from year to year, than their peers. Critics worry that kids in online classes don't learn how to get along with others or participate in group discussions. Some advocates of full-time cyberschools say that the disappointing results are partly because some of the students had a rough time in traditional schools, and arrive testing below grade level in one or more subjects.
• The growth of cybereducation is likely to affect school staffing, which accounts for about 80% of school budgets. A teacher in a traditional high school might handle 150 students. An online teacher can supervise more than 250, since he or she doesn't have to write lesson plans and most grading is done by computer.
• In Idaho, Alan Dunn, superintendent of the Sugar-Salem School District, says that he may cut entire departments and outsource their courses to online providers. "It's not ideal," he says. "But Idaho is in a budget crisis, and this is a creative solution."
• Other states see potential savings as well. In Georgia, state and local taxpayers spend $7,650 a year to educate the average student in a traditional public school. They spend nearly 60% less—$3,200 a year—to educate a student in the statewide online Georgia Cyber Academy, saving state and local tax dollars. Florida saves $1,500 a year on every student enrolled online full time.
• For individual school districts, though, competition from online schools can cause financial strain. The tiny Spring Cove School District in rural Pennsylvania lost 43 of its 1,850 students this year to online charter schools. By law, the district must send those students' share of local and state tax dollars—in this case $340,000—to the cyberschool. Superintendent Rodney Green, already struggling to balance the budget, cut nine teaching jobs, eliminated middle-school Spanish and French and canceled the high-school musical, "Aida."
• In the end, virtual schooling "comes down to what you make of it," says Rosie Lowndes, a social-studies teacher at Georgia Cyber Academy. Kids who work closely with parents or teachers do well, she says. "But basically letting a child educate himself, that's not going to be a good educational experience." The computer, she says, can't do it alone.

You are the 98%

The enclosed piece You are the 98% posted on The Last Psychiatrist website is another viewpoint of the continued struggle between the have's and the have's not.  Expect the whole debate between all sides involved in this great discussion to really come to the forefront this coming year as it reaches it climax with the presidential election in November 2012.  You're already getting a sneak peak of this action now as the Republican party goes through the process of selecting its candidate.


Here are a few points that I found interesting

• "We are the 99%." Rarely does a slogan perfectly capture the zeitgeist, the ethos and the pathos, each word a passionate announcement of a popular uprising.  And neither does this one. It is, however, an important piece of propaganda.  It sounds like the enemy is Wall Street, but observe that the slogan doesn't point to an enemy, it defines the group.  The slogan is a twist on an old fascist standby:  select a minority enemy, and create an impression of opposing unanimity.  Once done, the leaders of the group have the powerbase to do what they want, making it impossible for anyone in the rest of the 98% to disavow this madness.  When it all goes down you will be too terrified, or too busy, to dissent.  
• What you don't realize about those pictured as "the 99%"--what they have in common is not that they are young or college educated or indebted or white females, but that they were willing to put a picture of themselves on the internet, fully of the belief that they stand for something worth being pictured for.  Bad move.  You think marching on Wall Street gives you power, a voice; but it is a wholesale surrender to the media, you have signed a waiver allowing them to use your image any way they want, and they will tell the rest of us what to think of you and titrate our exposure and emotional responses, all while feeding us with marketing for the very things that got us into our predicament.  The income disparities, the education pyramid scheme, the personal and public debt, the anxiety, brought to you by Revlon and the makers of CNN.
• "Marching gets our message out."  No it doesn't, it gets CNN's message out.  "We don't watch CNN, we use the internet."   Yet given the infinity of the internet you still surf the same 5 websites, looking for and finding exactly what you want, like a baby playing peekaboo in a mirror over and over and over and over and over and over and...  
• Take a look on how the media portrayed the latest Washington snafu of the payroll tax issue.  The media played it up as a tax cut when indeed it was a tax holiday.  The payroll tax wasn't cut it was merely postponed.  It is all about framing the message the way you want it in order to get the reaction you are looking for.

What's in Your ETF?

Have you ever wanted to really know what's in an ETF?  For those of you that may not dig to deep into the detail  this may be a good overview for you.  What you think you may be buying maybe isn't what you are actually buying.  Or, what you want to diversify to or track an index to might not be quite the fit you are looking for.  Case in point one of the largest ETF's the USO which tracks the prices of futures contracts of WTI (West Texas Intermediary) crude oil rather than the spot prices.  The funds NAV then becomes the change in the near-month futures contract price.  The issue becomes if you want to track actual prices this is not the vehicle to do so.  You also have the issue with oil prices between the premium paid for Brent vs. WTI.  


Here is the full article What's in Your ETF by David Pett at Financial Post a Canadian financial website.

• With the sovereign debt crisis throwing Europe’s banking sector into disarray, fears have swelled that banks underwriting the derivatives will become insolvent. Amid increasing counterparty fears, synthetic funds in Europe had redemptions of US$1.86-billion in October, while physically backed funds attracted US$3.11-billion, according to a report by BlackRock Inc., the world’s largest provider of ETFs.
• While many ETFs offered in Canada and the U.S. employ derivatives that carry counterparty risk, the number of swap-based ETFs on either side of the border are few and far between, with the vast majority holding physical securities to get market exposure.
• There are only two ETFs in Canada – Horizon Beta Pro’s S&P/TSX 60 Index fund (HXT) and Horizon’s S&P 500 Index ETF (HXS) – that use a total return swap structure in Canada to replicate stock indices. In the U.S., meanwhile, there are no synthetic ETFs and recently the U.S. Securities and Exchange Commission SEC decided that it would put a hold on any new exchange-traded funds seeking approval that planned to use derivatives to achieve their investment objectives.
• Howard Atkinson, Beta Pro’s CEO and chairman of the Canadian ETF Association, believes regulation is already extremely strong in Canada, and addresses the issues that have become a concern in Europe. He says swap-based ETFs can be attractive to investors because they are generally lower cost than physical ETFs, offer fewer tracking errors, and are taxed as capital gains with the added benefit that foreign investors are not required to pay withholding taxes.“Every decision you make is a trade off to some degree,” Mr. Atkinson said. Here you are trading off the remote possibility of a small loss due to counter party failure, for the almost certainty of better tracking, lower cost and better tax treatment.”
• In Canada, ETFs are regulated the same as mutual funds and like all Canadian investment funds, the counterparty to any total return swap must maintain a minimum credit rating equivalent to the following for each applicable credit rating service: DBRS rating of A, Fitch rating of A, Moody’s rating of A2, and/or an S&P rating of A. Swap-based funds are collateralized to a value of at least 90% of the fund’s assets, with all investor collateral placed in cash or cash equivalents.
• By contrast, Europe’s synthetic ETFs are also subject to the 90% rule but the collateral will typically be stocks, bonds and other liquid securities, and may not necessarily have anything to do with the index the fund aims to track. In other words, Japanese small-cap stocks could theoretically be used to collateralize an ETF of European large caps.
• The bigger concern is that the quality of that collateral is variable and may include things like unrated corporate bonds, which may be difficult to sell in the event of a market downturn, or worse sovereign debt from the eurozone’s periphery.  While the variable nature of many collateral pools has given some investors and regulators pause, for the most part, those concerns are only valid for the European market, said David Nadig, the director of research at IndexUniverse, an independent ETF news and research site.
• To the extent that there are concerns in North America, Mr. Nadig thinks investors should focus on one of three things: exchange-traded notes or ETNs, securities lending within funds, or leveraged and inverse ETFs, which are considered a separate category of ETFs in Canada and regulated as commodity pools.  ETNs are unsecured, unsubordinated debt notes that carry the largest potential counterparty risk, said Mr. Nadig, because the entire value of the note is based on the credit of the underwriting bank.
• “If that bank goes under, investors join the line of creditors with other bond holders,” he said. “Lehman Brothers, for instance, had two ETNs outstanding when it filed for bankruptcy. Although the products had minimal assets, anyone left holding those notes on the day the firm went bankrupt lost nearly all of their money.”  ETFs, along with many mutual funds may also actively engage in share lending activities, a process of loaning out the securities held within a fund as a way of generating extra profits for the shareholders.
• “Unfortunately, there is currently very little disclosure around this process, from how much of a fund is lent out at any given time to how the collateral posted in the transaction is invested,” he said. “Rules and regulations for securities lending are tougher in the U.S. than they are in Europe, leaving investors generally exposed to little more than overnight market-movement risk, but still, increased transparency would be beneficial.”
• Ultimately, counterparty risk is a cost of doing business, says Terry Shaunessy, a money manager at Shaunessy Investment Counsel, who uses ETFs to build portfolios for clients.  And like any type of investment, he thinks investors need to understand what they are buying and then weigh any risks, counterparty or otherwise, against their investment objectives.

WHAT’S IN YOUR ETF?

iShares S&P/TSX 60 Index Fund (XIU/TSX): With more than $11-billion is assets under management, XIU is by far the most popular of Canada’s 222 ETFs, which represents $41.3-billion in total assets. It is a physically-backed fund that invests in the stocks that make up the index that it is tracking.

Horizon Beta Pro’s S&P/TSX 60 Index Fund (HXT/TSX): One of only two synthetic ETFs offered in Canada, these funds do not buy the underlying securities directly, but use a total return swap structure that maintains 100% of its assets in cash as collateral for the swap which changes daily in value to reflect 100% of the positive or negative performance of the TSX 60. The sole counterparty is National Bank of Canada.

SPDR S&P 500 (SPY/NYSE) and Powershares QQQ (QQQ/NASDAQ): SPDR S&P 500 is organized as a unit investment trust, which prevents it from reinvesting dividends, holding securities not in the index such as futures or lending securities. The fund follows a full physical replication strategy, holding virtually every stock in the index. QQQ is similarly structured, holding all of the stocks in the Nasdaq 100.

Claymore U.S. Fundamental Index ETF C$ Hedged (CLU/TSX): This fund employs a physical replication strategy similar to XIU, in this case buying the underlying shares of the FTSE RAFI U.S. 1000 index. The fund then engages in a forward contracts with a counterparty to hedge it’s U.S. dollar exposure back to Canadian dollars. Any agreements are guaranteed by the exchange or clearinghouse that hosts the trade. Tracking error risk can occur with some currency-hedged products that hedge once a month because new inflows are not accounted for.

Horizons Beta Pro NYMEX Crude Oil Bear Plus ETF (HBP/TSX): This fund generated $147-million in net sales this past October, second only to XIU. Like most leveraged and inverse products, it relies on derivatives to gain exposure to the market. In Canada, leveraged products typically use Canadian stocks as collateral, with the counterparty involved in the construction of the equity basket to ensure the most liquid assets are being used.

Ultra S&P 500 ProShares (SSO/NYSE): This U.S.-based leveraged fund holds on to its cash collateral for index swaps it uses and therefore their principal faces no counterparty risk. The only danger from banks and other financial counterparties collapsing is that the fund may lose part of its promised return.

United States Oil (USO/NYSE): tracks the prices of futures contracts of WTI crude oil. The fund’s net asset value, thus, isn’t tied to spot prices, but rather the change in the near-month futures contract price.

Full disclosure I own shares of USO in my personal accounts

Week 51 Performance...Merry Christmas

Merry Christmas to all.  I hope that everyone is having an enjoyable holiday season.  I know that this first Christmas with my triplets has been interesting and sleepless.  However we are extremely fortunate to be spending this Christmas at home rather than at the NICU as we did last Christmas.

Speaking of enjoyable the markets made another favorable turn forward this week.  If anyone knows the real reason why please write in.  The fund was up 3.3% over the previous week which was led by the option side of the portfolio led by the upswing in Apple.

Usually the week before the New Year is a coin flip between up and down as I had noted in an earlier post.  One thing you can bet on is light volume and when you have light volume markets can swing wildly in either direction.

Why Volatility May Be Here To Stay

As we start to close down the year it's easy to look at charts of the DOW, S&P 500, or any other US stock market index and see the wide swings throughout the year.  Ironically the S&P 500 for all of it's movement is on pace to finish just where it started 1257.

There are a plethora of reasons of Why Volatility May Be Here to Stay and this article on Morningstar points out a few.  Europe seems to be the over riding reason in my view as to why we will see volatility continue.  Stocks trading according to fundamentals is getting lost in the European financial crisis noise not to mention the constant and consistence Washington politics.  However I think we could be setting up for some severe weakness in the beginning of the year as retail sales could come in lower than expected and profit margins weakened as retailers slashed prices in order to get people back in the doors.

Robot Workers Take Over Warehouses

If you ever wonder where some of the jobs have disappeared to in the last two jobless recoveries (2000-2001 & 2009-2011), ask the robots.  It's no secret that companies must be creative when trying to reduce costs.  You can see that clearly in the past decade as the productivity rate has skyrocketed.  Quite simply companies are able to do more with less.  You and/or your neighbor may no longer have a job but the products on Amazon just keep getting cheaper and this article from CNN titled Robot Workers Take Over Warehouses is a valid test case.  Not only do companies want to reduce and eliminate waste the first on top of their list is non-value work.  The activities in which workers have no direct contact or impact on actually producing the product a.k.a warehouse associates.


Here are some highlights from the article

• As employee No. 400 at the dot-com, he knew that it simply cost too much to fulfill online orders. Labor was the killer cost: Employees had to go pick out products on shelves before they could be packed into boxes, and those minutes cost money. "That 89 cent can of soup was costing us $1 to get it into the tote," Mountz remembers.
• While working at his next job at a consumer electronics company, the "eureka moment" suddenly hit: What if products could walk and talk on their own? You could design a completely different kind of warehouse. And you could staff it with robots.
• Bain Capital Ventures wound up investing $5 million immediately in Kiva and then an additional $15 million more over the next three years. But before striking a deal, Agarwal introduced Mountz to people he knew at Staples and Walgreens. Then he watched the inventor present his plan.
• A "startup kit" of robots would cost $1 million to $2 million, and a large warehouse operation with 1,000 robots costs $15 million to $20 million. Setting up the software and grid systems inside the warehouse requires six months of planning, simulated modeling and testing. Then logistics managers must be trained before handing them the keys to the operation.
• Today, Kiva Systems is profitable. Backed by $33 million from investors, the Boston company has 240 employees, a list of prominent customers and revenue of more than $100 million, according to Mountz. He says sales grew 130% last year, and that Kiva is hiring 20 to 30 people each quarter to keep up with demand.
• Of course, the infiltration of robots translates to fewer new warehouse jobs. But it's not all bad news for workers, Mountz says: Kiva's system lets retailers double or even triple productivity, freeing up resources for other investments.
• The robots also make for a more pleasant work environment, says John Ling, logistics vice president at Crate and Barrel. The 50 people who now pack 2,000 boxes a day alongside 50 robots at Crate and Barrel's Tracy, Calif., warehouse spend their days in a better lit, cleaner operation with no noisy conveyor belts, he says. The robots eliminate much of the mundane physical labor employees once did to retrieve products off shelves.
• Customers are also benefiting: Packages can now be shipped the next day from that operation, an upgrade from a system that previously took two to three days to get an order out the door.

Boy can these people trade

This is a follow up to the posts last month regarding Congressional legal insider trading.  Mark over at Fund My Mutual Fund had this  video post from CNBC which coincides to the previous pieces on 60 Minutes.

The fact is that even one to two months later this issues has really quieted down.  I had read or heard something that some members of congress were still trying to get legislation past which would curtail to some degree the insider activities of our elected officials.  Haven't seen a bill passed yet

On another note I want to say congratulations to Mark Hanna on the launch of his fund after 4 1/2 years after he started  Fund My Mutual Fund.  Mark has been a great lead for me in order to achieve my business goals of starting DreamWorks Capital Management, this type of style of financial blogging/commentary, and to eventually launch my own mutual fund.  We'll be following Mark closely and wish him continued success.

What Caused the Financial Crisis? The Big Lie goes viral.

Barry Ritholz lead at the Big Picture blog site regularly referred to hear at DWCM is also a weekly contributor at the Washington Post.  Last month he penned an article called the  What Caused the Financial Crisis? The Big Lie Goes Viral .  In it he goes on to describe the new paradigm that the financial crisis was caused by issues and events that were not true.  In it he quotes NYC mayor Michael Bloomberg he stated “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”  There is certainly enough blame to go around for the crisis but what I am worried about the most is that lessons have not been learned and business continues on as usual.  


Ritholz states that he is "an investor focused on preserving capital and managing risk. I’m not out to win the next election or drive the debate. For those who are, facts and data matter much less than a narrative that supports their interests."


He goes on to outline a very good synopsis of the crisis which follows below.  Agree or disagree Barry is trying to state the facts and start a new shift towards what he calls "The Big Truth".

●Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).

●Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to high-yield mortgage-backed securities. Nearly all of them failed to do adequate due diligence before buying them, did not understand these instruments or the risk involved. They violated one of the most important rules of investing: Know what you own.

●Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch. They had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.

• Derivatives had become a uniquely unregulated financial instrument. They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims.

• The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very little room for error.

•Wall Street’s compensation system was skewed toward short-term performance. It gives traders lots of upside and none of the downside. This creates incentives to take excessive risks.

• The demand for higher-yielding paper led Wall Street to begin bundling mortgages. The highest yielding were subprime mortgages. This market was dominated by non-bank originators exempt from most regulations. The Fed could have supervised them, but Greenspan did not.

• These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to get creative with underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.

• “Innovative” mortgage products were developed to reach more subprime borrowers. These include 2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages.

●To keep up with these newfangled originators, traditional banks developed automated underwriting systems. The software was gamed by employees paid on loan volume, not quality.

●Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998. This allowed FDIC-insured banks, whose deposits were guaranteed by the government, to engage in highly risky business. It also allowed the banks to bulk up, becoming bigger, more complex and unwieldy.

●Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks. Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates skyrocketed.

According to Barry, "The previous Big Lie — the discredited belief that free markets require no adult supervision — is the reason people have created a new false narrative."  I tend to agree with him on that point.

Week 50 Performance...where did the Santa Claus go?

It was yet another painful week for the fund as we dropped 4.9% vs. the previous week led by Green Mountain and Owens Illinois to the downside.  GMCR's brewer purchase commitments, a leading indicator of anticipated demand, declined 43% for the calendar year-to-date through September and 64% in the second half of its fiscal 2011 year.  This was subsequently followed by a research report from Stifel Nicolaus & Co. note, which said demand for Keurig brewers is on the decline, with imports of the coffee-making machines down 28% in November after being up 44% through the first nine months of 2011.  We went from being up 1.4% to down 21.5% this past week.  So goes the story of being in a momentum stock.


The market from a technical market has been breaking down since the beginning of the month.  We missed our opportunity to get out of some positions such as GMCR as noted above and although the market is down it isn't down enough to start positions that are on our watch list.  I fully expect the market to muddle along for the rest of the year, possible get a Santa Claus rally this week and into the last week of the trading year and once we flip the calendar to 2012 a down market to continue.  


I'm already seeing and reading stories on how retailers are extending hours going into these last few shopping days until Christmas.  For example Toys R Us has announced they will be open 112 hours straight until 10PM on Christmas Eve.  Ever since Black Friday which seems to set a record every year, consumers have yet to return to the stores.  To draw them back in expect retailers to cut prices to entice shoppers back in which will lead to margin erosion and possible earning misses in the Q1 2012.  

Dow Jones Industrial’s Biggest Daily & Intraday Moves

Since I continue to talk about volatility quite often I found some data that Barry Ritholz had posted from Andrew Horowitz of the Disciplined Investor.  Here is the link to the Big Picture post

First are the biggest net intraday moves, only a couple since 1987 but notice all of the ones from the Fall/Winter of 2008


Next, best net gain/losses since 1901, getting warmer


Finally Best/Worst %  gains and loses since 1901.  Surprisingly none but this is probably like to the absolute increase in size of the market.  For example back in the 30's when the DOW trades in the hundreds it doesn't take much to really move the markets from a % point of view

Jack Abramoff: The lobbyist's playbook

This could be just the begining of additional outrage against our politicians.  You may say that he is just gaining some publicity for his new book but new research released this week says something different.  In a study stock investments by members of the House of Representatives were able to exceed the market’s gains by more than 6 percent a year. An earlier study on Senators had found that they were able to beat the market by 10 percent, owing in part to their ability to delay or block legislation by filibuster.

"The idiot's guide to buying a congressman" as he joked was one of his possible book titles.  From what I understand there are several member of congress that have been trying to get a bill through that would eliminate what amounts to insider trading by congress and their staffs.  What does it say when you cannot get enough support to get this type of legislation passed?





In a seperate piece on 60 minutes, Steve Kroft reports that Rep. Spencer Bachus (R-AL), now the chair of the House Financial Services Committee, bet against the market in the days before the 2008 financial crisis hit — after getting 'apocalyptic briefings' from Fed Chairman Ben Bernanke and  then-Treasury Secretary Hank Paulson.

Week 49 Performance...expect more volatility

Another week of grinding along with everything based upon European decision makers.  Again I did not add any new positions this week as I worked on shoring up the watch list with the plan to start making some transactions when I can see further clarification in the markets which may or may nor come.  The next few weeks I would expect to become very volatile in both directions as mutual fund and hedge fund managers try to squeeze out positive gains while other people will look to dump stocks for tax purposes.  Throw in the uncertainty that continues to be Europe and retail sales being a bit beleaguered after the hot Black Friday weekend and you could have a very potent drink.

When you peel back the layers of the current performance what stands out to me is that of the 12 stock (or long) positions 8 are in the black (positive) while only 3 are in the red (negative).  The problem lies in the fact that the three losing positions make up a greater % of the stock portfolio.  The same can not be said of the option portfolio in which case I have made some bigger moves which have not gone in our direction.  However most of the options are longer dated so we have time to see how the story will actually play out.

Happy Birthday Triplets

Today is an extremely important day in our family as our triplet babies turn 1 year old.  What an amazing year it has been watching them grow, finding a way through sleepless nights, and most importantly just being healthy.  Being in the NICU with them for the first 5 to 6 weeks of their lives was very stressful but we also saw many families whose situations were much tougher than ours.  I always try to remind myself to count my blessings and that there is always someone out there who has it much tougher than I do.


So on that note as I have said from day one my sources for posts can come from anyone and anywhere.  My wife sent me this link earlier in the week and I thought today would be fitting to share it with those other dads out there (also applicable to moms as well).  Here are 50 Rules for Dads with Daughters from dates to diapers.


Happy Birthday Aiden, Andrew, and Madison (aka Brady, AP, and MJ)

Is an Ivy League Diploma Worth It?

In my continued quest to determine if a college diploma is worth the money comes a piece from the WSJ Is an Ivy League Diploma Worth It?  I personally believe that the cost of an education is in a bubble no different than a stock market or housing bubble.  The question is when and how does it pop?  College debt now totals more than personal credit card debt and even if you file for bankruptcy guess what you cannot erase those college loans.


I strongly encourage parents with young children to begin the planning process of saving for an education but also take into consideration the value proposition that college may or may not provide depending upon what your child wants to do with their life/career.  College is an extremely expensive place to "find" yourself these days.

• More students are choosing lower-cost public colleges or commuting to schools from home to save on housing expenses. Twenty-two percent of students from families with annual household incomes above $100,000 attended public, two-year schools in the 2010-2011 academic year, up from 12% the previous year, according to a report from student-loan company Sallie Mae.
• The approach has risks. Top-tier colleges tend to attract recruiting visits from companies that have stopped visiting elsewhere. A diploma from an elite school can look better to many recruiters and graduate schools, as well. And overcrowding at state schools means students could be locked out of required courses and have difficulty completing their degrees in four years.
• There is little question that having a college degree gives candidates an edge in the job market. The unemployment rate for people with a bachelor's degree was 4.9% last month, compared with 10.5% for high-school graduates with no degree, according to the Bureau of Labor Statistics.
• But a degree from a private college also is expensive and piles on debt. The average debt load for students who took out loans hit a record $27,200 for the class that graduated this year, says Mark Kantrowitz, publisher of student-aid websites Fastweb.com and FinAid.org. That comes as general per capita debt reached $47,260 in the second quarter, a figure that has been dropping in recent years, according to the Federal Reserve Bank of New York.
• But Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers University, says graduate outcomes often have more to do with major and how a student takes advantage of networking and internship opportunities, than with school choice.  Important point here as careers pay varying amounts along with varying degrees/requirements of education

Week 48 Performance...what a barn burner

Well the week started off like a rocket with an almost 500 point up day in the DOW and with even bigger % gainer in the other markets.  I feel like a broken record but Europe was the driving factor early in the week as once again plans of a solution gathered steam over last weekend.  By the end of the week the focus was on the jobs report which was basically in line with the private sector delivering 140k new jobs and the public sector cutting 20k for a net addition of 120k.  As many economists point out this is still not enough growth in jobs if a sustained recovery is in the works.

What was most interesting to me regarding the jobs report was the decline in the unemployment rate due in large part to the drop in the participation rate which indicates that a larger amount of people have given up looking for full time employment.  As congress once again debates extending unemployment benefits those utilizing those benefits can continue to sit home and collect their checks.  Not that some people aren't in need of the support but where do we begin to draw the line?  How can we physically afford to keep extending the benefits as budget deficits spiral out of control.

From a Fund perspective our performance was up 1.9% week over week.  There was no activity this week as I continued to be a watchful participant from the sidelines not know where this market may end up.  December is a dicey month as managers who are trailing their indexes try to chase performance in order to bridge their gap while others are selling losing positions in order to take advantage of the tax loss.  Not sure if the Santa Claus rally has come early this year or not?

A Glimpse Into The Future-Why I’m Optimistic

I picked this post up from the Upside Trader, one of the people that I follow on StockTwits.  The piece is actually written by a guest, Mark Garbin.  Mr Garbin in his piece found here which is pretty long gives a very good overview of the current banking crisis and what it mean to the various players including the bank themselves, governments, and of course the ordinary citizens.


As I note you can read the full version here but here is one piece I wanted to highlight;

• Where does this leave Mr. & Mrs. Six-Pack?  We can take a cynical view that they’re going to continue to be royally screwed; or we can give the flick to that devil on our left shoulder and try to see how a family/individual can take advantage of this situation.  First, recognize that most banks don’t want your deposits.  They are liabilities that put cash assets on the balance sheet i.e. more capital required.  They DO want more wallet share.  The tremendous emphasis on cross selling is what drove and continues to drive banks like Wells Fargo; set by the strategy of Richard Kovacevich and continued by John Stumpf.  This is where individuals can benefit.  By concentrating business in a very limited number of banks, the global middle class can become more important to those institutions.  They just have to be careful that in deposit products, they don’t run afoul of money in excess of government guarantees.  Secondly, yes you will have to pay more for financial planning BUT at least you’ll have some.  This is a sorely underused capability and very much needed in this world.

Why GDP Is Like GPA

Have your doubts about the significance or validity of the GDP calculations?  Well if so you are not alone as this NPR piece discusses.  Calculating all of the production in this let along any country is a daunting task even when things do have a price tag on them.  What makes trying to calculate gross domestic product even more difficult is all of the unseen production that goes untallied.


Just like your GPA wasn't the end all be all to measure your academic performance neither is the GDP calculation when it comes to measuring the productivity of an economy.  I'd say it is even more difficult today after the great recession and you have more people working and performing jobs off of the books.


If you ever wondered who actually put out the GDP figure it is Steve Landefeld at the government's Bureau of Economic Analysis.


Why GDP is Like GPA

• "It was designed to do exactly what it does today, which is to pull together all the diverse pieces of economic data," he says. "Some of which are going up, some of which are going down, some of which double count one another — into one comprehensive and consistent picture of what is happening to the economy."
• "The share going to the top 1 percent as we talk about it today has grown," Landefeld says. "That has made the simple average of GDP per capita less meaningful to the average person. It's a real number, but it perhaps doesn't refelct what people are seeing in their personal economic situation."
• If you buy a tomato, that increases GDP. But if you grow a tomato — if you spend hours watering and weeding — that doesn't get included.  If you pay a nanny to take care of your kids, that's GDP. If you stay home to take care of your kids, that's not GDP.
• Environmentalists like to point out that industries can boost GDP by doing damage to the environment. Herman Daly, an economist at the University of Maryland, points to the Gulf oil spill. BP spent billions on clean-up.  "All of the expenditures on cleaning up the oil spill were then added to GDP," Daly says. "Now that's asymmetric accounting. You're not counting the negative, and you're adding in the positive."

The Genius of Jobs

By now you all know that Mr. Walter Issacson is the author of the Steve Jobs autobiography.  Mr. Issacson was also the author of the Ben Franklin and Albert Einstein autobiographies a remarkable writer and I encourage anyone to take a look at his work.  I have yet to complete the Einstein book although I have started and haven;t touched the Jobs book yet.


I am a firm believer that there is something to be gleamed from these extraordinary leaders no matter what generation they were from.  As a side note I am still trying to decide if I should go Mac for the first time vs. PC


Some points from the NYT article

• Mr. Gates devoured science books as a vacation pleasure. But then something else occurred to me: Mr. Gates never made the iPod. Instead, he made the Zune.  So was Mr. Jobs smart? Not conventionally. 
• ...he was a genius, his success dramatizes an interesting distinction between intelligence and genius. His imaginative leaps were instinctive, unexpected, and at times magical. They were sparked by intuition, not analytic rigor. 
• Trained in Zen Buddhism, Mr. Jobs came to value experiential wisdom over empirical analysis. He didn’t study data or crunch numbers but like a pathfinder, he could sniff the winds and sense what lay ahead.
• He told me he began to appreciate the power of intuition, in contrast to what he called “Western rational thought,” when he wandered around India after dropping out of college. “The people in the Indian countryside don’t use their intellect like we do,” he said. “They use their intuition instead ... Intuition is a very powerful thing, more powerful than intellect, in my opinion. That’s had a big impact on my work.”  As Einstein said, “Imagination is more important than knowledge.”
• Both Einstein and Mr. Jobs were very visual thinkers. The road to relativity began when the teenage Einstein kept trying to picture what it would be like to ride alongside a light beam. Mr. Jobs spent time almost every afternoon walking around the studio of his brilliant design chief Jony Ive and fingering foam models of the products they were developing.
• The ability to merge creativity with technology depends on one’s ability to be emotionally attuned to others. Mr. Jobs could be petulant and unkind in dealing with other people, which caused some to think he lacked basic emotional awareness. In fact, it was the opposite. He could size people up, understand their inner thoughts, cajole them, intimidate them, target their deepest vulnerabilities, and delight them at will. He knew, intuitively, how to create products that pleased, interfaces that were friendly, and marketing messages that were enticing.
• China and India are likely to produce many rigorous analytical thinkers and knowledgeable technologists. But smart and educated people don’t always spawn innovation. America’s advantage, if it continues to have one, will be that it can produce people who are also more creative and imaginative, those who know how to stand at the intersection of the humanities and the sciences. That is the formula for true innovation, as Steve Jobs’s career showed.

The Best Investing Advice? Maybe Not the Conventional Method

Interesting piece from the NYT regarding investment style and management.  The point here is that you have to be flexible with your trading strategy.  Various trading themes come in and out of favor and having the ability to adjust is critical.

I have never expected the DWCM portfolio would fit neatly in a defined Morningstar style box.  I believe that one our invest anywhere style and strategy is one of the advantages that sets us apart from other funds.

From the article

• The study was based upon 306 funds that were founded before 1989 and still exist. They all invest broadly with various styles and none concentrated on one sector. The data spans 21.75 years, from Dec. 31, 1989, to Sept. 30, 2011. The performance of the funds was measured against the Vanguard S.& P. 500 Index Fund, which had annual returns of 7.65 percent during that time.
• The best-performing funds over time were not necessarily the ones with the lowest fees, run by the best-known managers or focused on any particular strategy, according to more than 20 years of data.  This bodes well for an upstart firm such as DreamWorks Capital Management
• The top-performing mutual fund in the study was the FPA Capital Fund, which invests in small- and midcapitalization stocks, generally defined as companies with market capitalizations of $300 million to $10 billion. It had an annual return of 14.43 percent, and it beat the index 15 times.
• The best manager against the benchmark was Bill Miller, chairman and chief investment officer of Legg Mason Capital Management. His Value Trust fund outperformed the benchmark in 16 of the 22 periods of the survey. Yet it ranked only 187, with an annualized return of 7.37 percent. This was lower than the benchmark.  Mr. Miller was just recently forced out of his fund management position at Legg Mason after an incredible run.
• One reason star managers fail over the long term is that they become known for a particular style of investing that may go in and out of favor. DAL’s research found that no one style was dominant for the whole period. But funds focused on small- and midcap stocks did perform the best over this period.  Again having the flexibility to be able to shift styles and investing strategies would be beneficial in order to maximize returns and even reduce risk.

The Stock Market…A Language Never Too Late to Learn!

Howard Lindzon, founder of StockTwits posted this about a month ago.  Most people will tell you to not look in the rear view mirror.  However at times I need to look back before I can look and move forward.  What strategies worked, which ones did not.  Was I right with that trend, how much credibility can you put in those reports?  Hopefully you see where I am going.


When you look at the craziness and I mean absolute craziness of the markets this fall including November which way do you turn next in these headline driven markets?  There are more questions than answers but as Lindzon points out looking at the class half full and surrounding yourself with good people is always the best strategy.


From Lindzon

• As usual, it pays to look at the world with a ‘Glass is Half Full’ attitude and find mentors ON the web and in life that are flexible, and inspire, not those off the web, on Wall Street and in government that conspire and fake it.
• Start using the tools of the web and stop listening to the television and you too might find a few shekels in your future.
• I would be pretty bearish if Jon Corzine and Donald Trump teamed up to start a Real Estate and Commodities Firm.

Chart of The Day - Netflix Downfall

Take a loom at the Netflix chart courtesy of Bespoke.  I can recall many a hedge fund manager shorting the stock on the way up and eventually got out because the pain was just too much.  It goes to show that even the best of investment strategies no matter how sound must be able to stay solvent which at times is not as long as the market is willing to bear.

How Quickly the Mighty Can Fall

• From its IPO price of $7.50 to its closing high of $298.73 reached on July 13th of this year, the stock was up 3,883%.  Since July 13th, the stock has fallen from $298.73 to its current price of $66 -- a decline of 78%. 
• There's a common market saying that "you should never become married to a stock."  There's no doubt that there are a large number of investors out there who are married to NFLX and have riden it all the way down because they just can't divorce themselves from it.  The proper play is to set a stop price to sell the stock at a certain threshold (5%, 10%, 20%, etc.) that takes all emotion out of the trade.  If it's too difficult to stick with your set stops, then trading just might not be for you. 

Correlation Inflation

Correlation is an extremely important factor when building portfolios and hedging risk.  Correlation is the relationship between two variables and explains how they move together or move apart.  Correlation range between 1 (perfect positive correlation) to -1 (perfect negative correlation) while 0 would mean no correlation at all.

One of the issues we have had over the course of the past decade is how asset classes have started moving together meaning their correlations are moving towards 1 which is trouble for someone trying to diversify assets.  Correlation was because a huge ordeal during the 08/09 crisis as people who thought that they were diversified when they held assets that were supposed to move in the opposite direct of the stock markets ended up going the same way which was in a downward trend.

The Capital Speculator has put together some additional charts one how correlations have started to come together


Correlations have also risen for REITs and U.S. stocks in recent years, with a similar story describing the relationship between commodities and U.S. stocks. A notable exception: correlations between U.S. stocks and U.S. bonds have fallen lately (as depicted by the red line in chart below).