Traderbill’s Financial Markets Weblog

…that is the sound of the cash register as the bottom fisher’s throw money at this market. Someone is making money and it appears to be a few wise hedge funds. On a historical basis the gains are not at all impressive but they are positive. Note TB said “a few,” not many, not most. TB has an inkling that one of these may be James Simon’s Renaissance Funds which are scientifically modeled and boast of not having a single Wall Streeter on board. Run by all academics, more accurately, using models created by academics, and run by computers, these algorithmic models, trade without emotion. That their flagship Renaissance Technologies Fund ($27B), and the smaller Medallion Fund ($45B) have been two of the top performing funds since inception in 1982 and 1989 respectively, attests not only to their modeling ability but their reaction to changing market conditions and cloning by others. Time will tell if it is still working. Simon’s noted last year that had they not updated their models they would have had about 20% worse performance and they were in the soup last August but pulled back out of it. That is what discipline and a lack of emotion can do…if you have the right model.

1. The Top Ten. One of the first thing Bloomberg users tend to do it hit ‘TOP,’ the top ten financial news stories on BB, top 5 Worldwide stories, and a couple of opinion stories. TB had noted that the overnight Globex market tends to react to these and a friend, who has been looking, hoping, and praying for a bottom here, mentioned this to TB yesterday. Certainly, breaking stories while the US markets are open move the markets (economics of late is an exception as it is generally ignored of late), but these set the tone in Globex futures for the market opening…sometimes it sticks, sometimes it doesn’t.

Today may be a test of that as banks, insurers and mining companies traded up in Europe overnight on higher earnings and higher forecasts. But are the European financials indicative or predictive of what is happening to US companies? For one thing, they don’t have a weak dollar hindering foreign investing and that alone could cause US money to migrate to foreign stocks…note that Sterling is almost $2.02 overnight and the Euro is above $1.58 while the Yen is safely ensconced below (above) 100 with their fiscal yearend approaching Monday. No, TB feels that our problems are different due to the composition of our banking system, one that is built on ‘retail’ deposits with the smaller banks who are caught in a squeeze as the Fed cuts rates yet if they cut their CD rates commensurately they will lose money to capital needy big banks and other alternatives.

Here are today’s  key top 10’s”

1. ConAgra agrees to sell commodity trading unit to Ospraie for $2.1B…interesting…why do this?

2. Fed may emerge from crisis, Bear rescue with more influence at SEC expense - this is what TB has been saying where a politically governed SEC (3 GOP, 2 Dems plus one vacancy, GOP Chmn), has failed its responsibilities…naked shorts, uptick rule, etc. IMHO.

3. US economy probably neared recession if fourth quarter as housing sank….probably neared???

4. Oppenheimer’s Whitney says Merrill Lynch, UBS to post losses this quarter (see #2 below) 

5. Grassley says he’ll probe whether Paulson pressed Fed on Bear Stearns rule…HE’s a Republican!

6. King ‘behind the curve’ on interest rates, former policy maker Julius says. BOE needs 1/2 point cut. 

7. Taleb outsells Greenspan as Black Swan gives worst turbulence…this book is the bible for what we are experiencing here…the outcome that is so off the charts it is ignored…as should be Greenspan.

  

2. Analysts. There are two guys on CNBC who grate with TB and make him want to destroy his monitor (aside from the already disclosed Barteromo, Kudlow, Cramer and consultant Wesbury); Forbes writer Dennis Neal and the baldheaded guy that screams and overpowers everyone else on the panel as if he knows everything…a jerk as far as TB is concerned.

In the top 10 category above, Oppenheimer analyst Meridith Whitney has been hot! She predicted that Citi would be forced to cut the dividend and has been hounding financial stocks incessantly…and more importantly she has been right, so when she warns on Merrill and UBS today, TB heeds them. Most street analysts are worthless as TB sees it and have not even asked the question that if we are at a bottom for financials (or the broad market for that matter), where the replacement revenues will come from since the most profitable sectors, all related to housing and mortgages, are history. Whitney hasn’t even finished filtering through the flotsam and jetsam let alone need to worry about revenues. Markets do not go sideways…at least not for long especially when you have volatility which Bernanke and others thought was behind us has once again reared its ugly head (bad for long term investors but potentially good…or bad…for traders). So Dennis Neal, who it appears has never put a dollar of his own money at risk, says she lacks credibility because unlike reporters she doesn’t have confirmation from within the companies…hello Dennis you twit…reporters don’t forecast they report on past events…that is your problem and while you always are bull you speak more negatively than TB. Also, Neal has been trying to call a bottom in financials for the past month…unsuccessfully need TB add? Would a reporter have found the problems in Equity Funding? Wall Street firms that went to them and were assured that analyst Ray Dirks from a boutique firm (as is Oppenheimer) was wrong. There are exceptions in investigative reporting but they did not rely on the company for confirmation. Notably the Wall Street Journal reporters (despite contrary opinions by the editorial staff) on Mike Milken which eventually sunk Drexel Burnham, and Fortune reporter Bethany McLean who blew up Enron management’s claims. But Dennis Neal clearly is not in this camp. He also likened Whitney today to Morgan Stanley’s Stephen Roach “who has been wrong on markets for the last 5 to 10 years.” That, Dennis, is not possible as he had to be right part of that time given the cycle we have been in over that timeframe…for the record Roach is bearish and warns the we need to look to Japan for what can happen and especially to their demographics for what is to come if we don’t react properly to this crisis. We need more Roach’s, Whitney’s and McClean’s…not Dennis Neal’s. TB also lauds the Bloomberg staff for independent thinking including Graef Crystal, Caroline Baum, Jonathan Weil, and TB’s Brit friend Mark Gilbert. It doesn’t matter if one is right or wrong…what matters is if they think and they make you think!

3. ETF’s. Yesterday, TB omitted the segment on ETF’s and the uptick rule, but corrected it on the blog. ETF’s should be, for reason TB has mentioned in the past and contrary to opinions expressed on CNBC, that they are a derivative of sorts, in that they replicate an index they do not mimic it. Therefore, there is no predictable correlation to a change in the price of an ETF and the underlying securities in the index, except over time. Tracking error is provided by the sponsors so you know if they are doing what they say they do. Furthermore, buying or selling large blocks of ETF’s is done in a third market sense directly with the traders who will cross them without it appearing on screens. This is important and occurs with large blocks of stock also as it filters what could have a significant effect on the market yet might be for reasons unrelated to stocks. Compare to the municipal market which used to operate in a veil of secrecy but trades are now required to be reported within minutes and as we saw on February 29 when muni’s tanked and the long bond rallied by more than 3 points, transparency is not always a good thing…in the short run. TB wants to reiterate some key points you need to know on ETF’s if you are going to use them as part of your portfolio strategy:

1. Fees. They should be low and most are less than 25 basis points…compare to funds that can run 1% or more. Also note that you are only paying 1/365 of the fee per day so you are only paying for the time period you hold them unlike funds which are taken out monthly or quarterly.

2. Tax Efficiency. By ‘harvesting’ losses they for the most part (iShares has reported no gains or losses on over 250 funds since inception), you avoid the problems with mutual funds…the worst being getting a capital gain when the value of your fund is plunging.

3. Transparency. Most post their positions weekly or more frequently…iShares updates daily! This is important because before you invest you need to know what is in the portfolio, especially if you invest in several ETF’s or mutual funds that hold the same security…Citigroup (C) immediately comes to mind.

4. Correlation to your other investments, including other ETF’s. Some ETF’s will accordingly increase your exposure to stocks you already hold and defeat your objective. This is particularly true of HOLDERS which are investment trusts with the percentages balanced at inception but then become overweighted with the winners and underweight losers if you buy later…some of these may have percentages as high as 20-25% in a single stock.  

These are not all of the considerations but hopefully they are the most important ones. ETF’s are a great way for an investor, especially top down (economic fundamentals vs. bottom up, company fundamentals), investors who don’t have time to try to pick the right stock in a sector. It is far easier to get the sector right than the right stock…especially in these trying times. Jim Cramer argues they provide mediocre performance which in some cases is true…certainly not energy these day…but they also dampen some of the volatility and also provide diversification for investors in corporate and municipal bonds while reducing fees and providing instant liquidity.

Don’t take any wooden nickels!

All the best,

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are.merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC March 27, 2008