Are Hedge Funds Now Worthless on Average?

Provocative post title, hehe :-)) I was doing some financial reviews and saw that my core indexed holdings returned 17.1% in 2006. I call them the "Krypto Fund" after my dog, Krypto, who is paid dog biscuits to push the key on my keyboard to do the asset reallocation. The Krypto Fund excludes all my active trading, long-term "alpha" stocks & my commodity trading returns; it's purely diversified index funds and gold & silver. The CS/Tremont Hedge Fund Index showed a return of 13.86% for 2006 - not so good versus the Krypto Fund. The difference between the Krypto Fund return and the hedge fund index return is accounted for the huge fees their management slurps down. This isn't really surprising since the huge number of hedge funds and their trillions really can't beat the averages anymore - they are part of the averages. They just churn & churn & feed at the trough. Spare me the comments how SAC & some others are super - no doubt they are. So was Peter Lynch in the mutual fund universe. Superstars in investing, like supernovae in the universe, do exist, but they are very few and scattered sparsely around in space & time. QED.

India

India seems to be super long term bullish story. India has favorable demographics, many people speak English, the government seems to have moved away its prior hard core socialism, and its growth is excellent and seems to be in the early phases. The government is spending on infrastructure that will generate growth. India is a democracy with a 50+ year track record and a court system (not perfect - which is?) that draws much from British traditions. S&P raised India's sovereign debt rating to investment grade overnight, bringing it in line with Moody's and Fitch; hence India is no longer split rated. I have a substantial "alpha" investment in India-oriented stocks in the amount of 5-7% of core holdings. [For me, an "alpha" holding is over and above the core indexed assets. I'll write more on this technique later.] A good place to get information on India-oriented stocks is http://www.globaltechstocks.com/ where Jay and Lovaii provide insight and current information. There's good insight on many tech stocks from Jay and on option trading there from Adam, too. Also see http://in./finance.yahoo.com/ for pricing and other news.

Congress' Ethanol FUBAR?

So Congress in its wisdom has put on large ethanol mandates & subsidies & protective tariffs, causing huge corn demand. Corn has run from the lower $2 level to over $4. The all-time high for corn is around $5.50 in the summer of 1996 (some cash markets hit $6). Corn stockpiles are tight as last year's crop was hurt by drought. So a BIG 2007 crop is necessary - farmers are expected to expand acreage significantly. Let's do a "gedanken" experiment. Suppose we get a cold, wet spring and planting of this big crop is delayed, or maybe even some planned acreage expansion doesn't occur. And suppose this late crop gets hit by major heat in the crucial pollination phase in late July (late crop pollination period gets pushed into late July-early August heat) and has trouble. Some good forecasters see a long, hot summer. How high can corn go? Well, $5.50 would be easy - I figure $10 might get hit. What would happen? Corn is a crucial element in the food chain affecting meat, pork, chicken, sweeteners, cereals, etc. Massive press coverage would be shrill, that's for sure. The "blame-sters" would be out in force. [I have long corn & deferred livestock futures positions I am trading around, plus DE common stock I expect to hold awhile.] [PS: Writing this column made me realize I needed a way to make more if this scenario is realized - I bought some December Corn calls way, way out of the money.]

Gold Trade

You know I'm long term bullish on gold. The chart (April futures) looks promising for trade, as an intermediate term ascending triangle combined with a possible "second mouse" setup from the pullback the last few days from the breakout line. The beefers were adding to their net long position in the latest Commitment of Traders report as of 1/23 (Tuesday), but are not close to an extreme. So I bought some April gold this AM early. Whenever the beefers are playing, there's risk they might hit gold on a dollar play. (I wonder why they do that, why not just play the dollar if you are a dollar bull?) So watch your stops (or mental sell points) - you can always re-buy later.

Big Business in the Tank II

How sweet it is! A few days after my post on big business colluding with environmentalists to pump global warming to stifle competition, another aspect of their efforts to stick their hog snout in the global warming trough is revealed. The Wall Street Journal on page A10, upper right, January 26, 2007 issue points out that most of the big business collaborators have alternative energy divisions and investments that need government protection and subsidies. I am very happy to see my instincts confirmed.

Hillary the Grifter

I suppose it's no surprise that Hillary was deeply involved in the payoffs for pardons scandal of the last days of hubby Bill's administration. Thanks to Investor's Business Daily (page A18, 1/29/2007), I found out how her brother Tony Rodham seems to have gotten a VERY favorable "loan" of $109,000 from a felon who miraculously received a pardon from Bill. Very good terms on that loan - no payment ever required. A tiger never changes its stripes - Hillary received a $100,000 payday scantily disguised as cattle futures trading profits over 25 years ago, and her trail of corruption has never stopped.

Buying a Stock on Good News

A super stock trader posted this trading tactic in a chat room a couple years ago - he said others should pass it on so here it is. (I used it this morning successfully for CAT on its earnings report.) If a stock has significant news AND you like the news & want to enter a position, watch the opening five minutes. Take the high of that five minute bar and subtract the prior day's close. Then compute Fibonacci buy points using the 23%, 38%, 50% and 62% retracement levels (I use two digits for simplicity). Subtract from the five minute bar high price mentioned. These are your buy limit prices. Allocate your desired position according to your risk & perception of getting the stock you want, placing limit orders. This morning I just used the 50% level as I already had a 1/2 position & the stock is very liquid. I got a good fill on the bid side very quickly & could have gotten more about 30 minutes later. Put stops as you need them if you are a short-term trader, possibly at the prior day's close. There are two other ways to do this that seem to work OK, too. I'll post those later. (This can work for commodities, too, sometimes on a multi-day basis.)

"Second Mouse Gets the Cheese"

Jeff Cooper is one of the few stock writers with real value. His books, "Hit and Run Trading" and "Hit and Run Trading II" have many fine patterns that often work for day trades or for setups for month trades. He used to write a newsletter (I hope he starts another one) where I read about his concept of "second mouse gets the cheese". This pattern has great applicability in a market like this one, where trillions of $$$ in beefer trading funds await to hit any breakout. Yesterday seemed like that to me - the S&P break out up was hit hard by the perma-bears and trading beefers. (For explanation of "beefer" see my first post in January 14, 2007.) There was no clear fundamental news indicating a change in the economic trajectory.

So the first mouse gets hit by the trap & the second mouse gets the cheese. Analogously, the first break buyers get hammered by the beefers and the second break sticks. Time will tell. So far, nothing has changed in my outlook.

Global Warming

The global warming propaganda machine keeps pumping out more sales pitches to scam the public - the "news" is full of them lately. The gullible or lazy or just busy might figure it must be true if "everyone" believes it, or if Hollywood makes a movie about it or PBS puts on a TV show. But some people take the time to analyze, audit and critically review the claims and models and data. Yes, I wrote, "analyze the data". Some people do check it. Sort of makes sense - after all, would you invest in a gold mine without having experts - good, independent experts - check the mining data? Remember Bre-X?

See http://www.climateaudit.org/ for a massive compilation of data analysis and review. Some people also check out how the "policy makers' summaries" are written that the press parrots relentlessly. See http://motls.blogspot.com/ and skip down a little past the quantum gravity sections to the heading "IPCC AR4". See http://www.cei.org/pages/ait_response.cfm and click on "Read the Book" or download powerpoint presentation for a deconstruction of the AlGore movie.

There is NO "proof" that human activity is causing, or has caused the current level of warmer global average temperature. The earth was warmer about 1,000 years ago when no SUVs existed. Computer models have thousands of free parameters and poor physics about critical atmospheric components, yet still are UNABLE to model temperature changes over the past 100 years at a level that a good stock chart reader would accept. The 100+ year chart of model predicted temperature changes vs. the data is laughable - not even a fool would put trading $$$ on such predictions if it was a stock trading/ investing model. So why are we putting the world economy in the hands of its pumpsters?

Outlook for Stocks

The S&P 500 broke upward out of a five week bullish continuation pattern yesterday. The Nazz needs a couple of closes over 2,500 to similarly break upward. It's a bull market until something changes. The leg from mid-summer until mid December (or mid November for the Nazz) was a reversal of the May-June bearish correction that was based on fears the Fed would kill the bull. Since the June Fed meeting where a pause was signalled, consistent economic news has confirmed that inflation had topped, moderate growth was continuing, and the Fed did NOT kill the bull. The housing slowdown has not infected the rest of the economy.

This move might be the start of a new leg up - or a "second phase" (to borrow a rugby term) - as participants realize that earnings are OK and economic growth is on a sustainable track. As long as core inflation year-over-year does not tick up, fears of any new Fed rate hike should be held down. New core inflation year-over-year declines could bring on disinflation-induced PE multiple expansion. I think this will happen and we will have a 20% up year for the S&P. Time will tell.

For now, until something changes, the bull market is intact. I am holding long & strong on 150-200% margin, as I have been since mid-summer.

End of the World

I used to be an investment banker on "The Street", working mostly in corporate finance specializing in secured debt. Many moons ago one of the lawyers we relied on for excellent papers and fine advice gave me the following humorous language (based on language for a paragraph in a Deed of Trust for secured debt documents) -->>

"47. End of the World. Upon the occurrence of the End of the World before full payment of the Notes and all other indebtedness secured hereby, the Notes and all other indebtedness shall, at Beneficiary’s option, become immediately due and payable and Beneficiary shall have all of the rights and remedies provided by this Deed of Trust or as otherwise available under applicable law or other forms of justice. For the purposes of exercising such rights and remedies, Beneficiary shall be deemed to be aligned with the forces of light and Trustor shall be deemed to be aligned with the forces of darkness, regardless of Trustor’s and Beneficiary’s actual ultimate destinations, unless and until Beneficiary shall elect otherwise in writing. "

We always enjoyed this and marking it up to include certain parties with the "forces of light" or "forces of darkness". By the way, Beneficiary is the lender and Trustor is the borrower - you can see that our lawyer represented the lenders :-))

Breakfast, etc.

I'll write more about breakfast in general later, but today's gave me a chuckle. I had smoked salmon, organic yoghurt, three organic figs & an organic banana . The funny part was how my two dogs charged upstairs to my office to plant themselves next to my desk when I picked up my tray. They LOVE smoked salmon & I always give them each about five small pieces as I eat it. Once they have five, they leave. You see, they have learned how to count to five. They remind me if I leave a piece out, too.

Grrrr. "Davos"

All this reporting on the "Davos" meetings really infuriates me. These cossetted reporters hobnob with the rich & powerful & pump their "ideas" and "thinking". Don't film clips of fat cats drinking champagne and eating hors d'oeuvres served by waiters in fine livery make you feel warm? Grrrrrrrrrrrrrr.

Davos is a bunch a rich and / or powerful people trying to get richer & more powerful, colluding to push people around and suck more money and resources from them, like a bunch a leeches. Somehow the so-called solutions always have more powerful governments and bureaucracies. There are exceptions, but they are few.

Gold

This post is a little late, but I can't post all my previously developed thinking at once when starting a blog. I am extremely bullish on gold and silver. I look for gold to hit $1,000/oz at least and silver to hit $20/oz at least in the next couple years. I am not relying on some apocalyptic theory, but on physical supply and demand. For gold, supply from mines is dropping and central bank sales have slowed to manageable levels. Central bank sellers in Europe are being balanced by central bank buyers in the emerging markets. Physical demand in India and China is growing as their people gain wealth. For silver, the US government stockpile is gone and new industrial uses of silver are being found. Film was always recycled so its decline is partly balanced by less recycling supply. Printing digital photos uses silver, too.

I keep 5-10% of my investable net worth in gold and silver. My physical gold is mostly in American Eagles and my silver is mostly in bars. Right now, I am at 10%. I also own some gold stocks and play the swings in futures ("buy dips, sell rips" tactics).

By the way, in an apocalyptic event, this gold & silver might be a life-saver. I keep some pre-1964 silver coins in bags for small trading in an "end of civilization" scenario.

Lyndon Baines Bush

I like to refer to W as Lyndon Baines Bush, a name that better indicates his massive failures. W aka Lyndon is a cluster case of missed opportunities. Lyndon has been an extremely poor war leader being unwilling to do what it takes to WIN. He presided over massive spending increases, much wasted on "earmarks" aka bribes. Hmmm. He also is from Texas, has a dignified wife and two daughters, and is wealthy. Lots of similarities between him and the original Lyndon.

Big Business in the Tank

So why is it news that big business supports regulations to try to control climate change? These regulations will put up a huge barrier to entry for any new competition. Big business wants to lock in profits and margins. So they collude with environmental socialists. Nothing surprising here.

Superb Comet

Comet McNaught has provided superb views in the Southern Hemisphere - check out www.spaceweather.com/comets . If it had been visible in the US, I guess the news outlets would have overwhelmed us with coverage. So much for the so-called "world news".

Regulatory Insanity

Sheesh. I just heard that regulators intend to let hedge funds - beefers - trade ETFs with 85% leverage, vs. the traditional 50% margin. That is absolutely nuts. These beefers are going to use it to smash sectors down and manipulate stocks. Whoever is doing this is a fool or knave or both. Grrrr.

North Korea gangsters

I saw The Wall Street Journal article today online about how the Nazi SS had forgers counterfeiting British currency and late in the war, dollars. This immediately reminded me of North Korea's ongoing counterfeiting operation with US dollars. The article made the point that in addition to being mass murderers, the Nazis were also common criminals. So North Korea has that in common with the Nazis, too.

So why does anyone expect a regime of gangsters to follow any agreement on a piece of paper ?

Oil

In early August 2006 the oil market hit a short term peak as a confluence of shocks hit the market: Israeli-Hamas trouble, Israeli-Hezbollah fighting, Iranian nuclear fears, hurricane season approach, plus the ongoing Nigeria and Venezuela problems. With all these fears, prices hit $80 and ran out of buyers. I believe that fear-based buyers had just all bought all the protection and inventory they needed. Oil inventory levels were high worldwide. How much disruption inventory protection is needed? It seems like there was enough in August 2006.

The oil markets have been sliding every since on fear dissipation/rationalization of inventory levels.

In my opinion, the rapid fall in the first two weeks of this year has been caused by (1) asset allocations away from oil and commodites; (2) commodity index rebalancing; and trend following commodity fund selling. There were no big buyers to offset these large sellers as no short-term bullish news occured. Also, OPEC resolve is being tested by traders. Since yesterday's comments by Saudi Arabia indicates they will not be a patsy for other OPEC cheaters and bear all the cuts; traders saw less risk of quick near-term OPEC action.

Winter seems to be returning with vigor and one good forecaster has the overall winter being near normal, with early warmth to be offset by oncoming below normal cold.

Demand numbers in the US show continued year over year increases. India & China continue to increase demand.

The recent drop will scare exploration teams causing them to be more conservative in selecting drilling projects.

I am re-mounting crude trading positions, averaging in slowly. Weekly XLE chart shows a higher high and a higher low, IFFF the current level holds. So long term oil stock plays are still on - keeping all for long-term capital gains. If trading these, follow the "buy dips, sell rips" method. This is a dip. The asset allocation moves should be finished now after two weeks.

Do Earmarks = Bribes ?

Let's deconstruct a Congressional "earmark" inserted in favor of a constituent group.

An earmark is a mandated expenditure of public money for the specific benefit of known constituents of one or more Representatives or Senators (let's call them, "Congressmen", for short). For example, an article in The Wall Street Journal recently mentioned an earmark that an environmental group desired - namely a "bridge" for large animals to cross an Interstate highway.

So some Congressmen put an earmark into an appropriations bill directing public money to be spent for this project. The environmental group was very happy, so it was reported. Presumably they will support the Congressmen responsible, either with contributions or favorable publicity & comments or with campaign work, either for the Congressmen or against their opponents.

Does this seem reminiscent of a "bribe" ?

In hard sciences, sometimes one can determine information about the inherent mechanisms by looking at the inverse of a process.

Suppose a private person spends money to fix up a Congressman's country home. And in turn, the Congressman inserts favorable legislation into a bill that the person wants. Hmmm .... that's certainly a bribe.

So since the inverse process is a bribe, characterizing many or most "earmarks" as bribes seems very logical and correct.

QED.

Big Evil Funds

To understand stock and commodity markets, you need to know who are the important participants. Today the principal ones are index funds, hedge funds, Street proprietary trading funds, mutual funds, the active public, and the inactive public.

For fun and because the classification works in explaining market activity, I group hedge funds, active trading mutual funds and the Street proprietary trading operations together as the Big Evil Funds. Long Term Capital Management was one, as was Amaranth until they blew up; Janus of the 1990s was one, too. I'll going into the "evil" appellation later.

For now, imagine a large group of wild elephants at a water hole. They drink & drink & drain it, then they stop around in the mud for awhile to decide what direction to go to find another water hole. At some point they decide which way to go, and they are off in a stampede to another water hole. If they get there and it's small or dry, they stomp around more & then go off in another direction. You can see the metaphor at work.

The action in the stock & commodity markets since the first of the year is a fine example of the big evil funds at work. I call them "beefers" - derived from "Big Evil Funds" shortened to BEFunds, hence "beefer" - since "beefer" has humorous secondary meanings. Besides being a country term for cattle - hence the herd stampeding, etc. - see the Urban Dictionary for more.

Early in the year they rolled into tech stocks & out of energy. then after a few days - as they realize tech water hole was too small - they all barge out of tech & mill around. Some barge into retail, some back to energy. Always they are searching for more water. The press daily comes up with nonsense about the "market" thinking one thing and then another. Trying to put reasons on this action is silly - it's just beefers searching for a trend, milling around, stomping in the dust. Don't get confused by trying to rationalize this kind of action.

[By the way I started this post on Jan. 14 and finished today, Jan. 22 - I'm learning how the blogger dates posts and wanted to clarify the timing of this post.]