Thursday, December 17, 2009


one of the behavioral finance ideas about mistakes people make says that most investors mindsets are skewed by recent history -- they lose perspective and will often extrapolate recent experience into the future regardless of whether that makes sense or not. Consider the VIX and Rosenberg's comments about it. In fairness to him he is an economist not an options person.

but he recently made comments about the VIX spending a lot of time next year between 30 and 40. The problem is that makes no sense unless you expect sharp declines and a huge increase in the volatility of the market -- i.e. daily up and down moves north of 2%. A VIX of 21 is very close to its lifetime average so insurance is not cheap.

historical volatility is running significantly less than implied volatility so the VIX is currently most likely overpriced by several percent in terms of what the actual volatility will be in the next 30 days. in other words to justify the current level of the VIX we need to see a sharp increase in volatility. what is even more strange is the VIX futures were recently at a 4 point premium to the cash VIX -- so the difference between the VIX futures and recent actual volatility is at least 10 percentage points. wow.

I figure as long as that volatility premium is in place or folks are talking about a VIX of 21 as saying there are cheap puts available, its bullish for the markets.

that said, I'm not sure I expect the move to 1250 by mid january that was written up in Barron's this last weekend. I've also seen the end is here type of writing -- Kass went "all in" on his short position this week -- huh? is it really that bad right now that all in short is the right posture. he did this wednesday so Thursday's decline is great but he didn't say anything about covering shorts so I assume he ended today still all in. wow.

Also read a lot of comments about consolidations or tight ranges end with the prior trend in place -- i.e. everyone expects the market to break out its just a matter of time. then Thursday's decline hit -- perhaps that changed enough minds but chances are most still believe it. yes I do too but I'm not in any hurry either --

I am starting to think we will simply widen the range up and down rather than break out. so add 25-50 points on to each end and that is what I'm thinking about (say from 1025 to 1170). that way we can stay within a range for that much longer and frustrate as many market players as possible.

Thursday, December 10, 2009

Boring like I said

I posted the market would likely be range bound or boring last time -- dec 2nd is the date stamp but I had been meaning to write that comment for at least a few days prior. looking back it turns out that the SPY has been in a $2 range from 109 to 111 since November 9th. The IWM has been between 58 and 61 since about that time. Dubai Friday is the only time the market has been outside those ranges. great time to have sold premium -- question is how long can it last? can it last through expiration? would be nice. Can it last through the end of the year? possibly. We were oversold recently but couldn't rally -- now we are overbought and can't really fall. Last note I said I thought it was more likely we have a pull back rather than a big rally -- now I'm not so sure.

The SMH getting to $27 or breaking out from the range it had been in since early August either means one or two things -- rotation continues as the energy/basic materials area has gotten whacked while tech/semi's outperformed or it means the range of the market will be resolved to the upside. We are still over bought so its likely we meander longer but I don't think we will see a decline below 1080 -- at least this year.

One reason the upside was capped is because we are hitting the half way point from the lows to the highs (roughly 666 and 1565). The QQQQ's hit that point around $40 -- late July is when the index first got to that level and it took until early-mid sep for the index to really break free of the $40 level. We first got to the 1100 area around mid oct and then had a sharp pull back to the 1025 level. We have been back around 1100 since early November. So in comparison to the QQQQs the SPX has spent about the same time -- break out could happen now if we got the momentum. I'm thinking it will be another week or so before the overbought condition is worked off but next week is expiration week -- lots of folks have sold premium and are sitting on fat profits. that means any movement outside of the range that has been in place will lead to options sellers panicking -- adding fuel to the rally. I think the highest probability is we don't break out of the range but if we do -- expect a pretty good gain.

one reason why I don't expect us to break the range? weakness in financials.

ERII -- the stock popped partly due to an upgrade from Baird and partly due to their buying one of their competitors -- someone with a similar device that works best in smaller plants. The device is lower cost and not as energy efficient but the lower cost is what matters for the smaller desalination plants. this expands ERII's market into an area that is less impacted by financing troubles. Also Pump Engineering already has a business outside of water -- they sell to nat gas processing plants. ERII has talked in the past about taking their ceramic tech and energy recovery ideas to other industries but nothing yet -- this gets them started. a big deal. water is a great place to be but if you can leverage existing tech to get into other markets that's a great growth and margin booster. I'm hoping to get long some more if it can pull back towards $6 -- so far the most it has pulled back is to $6.40 maybe. but the market hasn't had a down day either -- we'll see.

Wednesday, December 2, 2009


Do you remember the beginning of Jaws the movie? The woman is swimming in the water out to the bouy at night and suddenly her head gets jerked under water but she pops back up quickly wondering what had happened. eventually she is eaten and one of the great movies begins. Was Dubai the first head jerk and the market is about to get eaten with a big decline as everyone realizes there is a massive world wide commercial real estate collapse coming?

The only thing that makes me concerned is a sharp jump in CDS spreads for various countries including the US and some emerging markets I believe -- I'm getting this second hand so I'm not sure how accurate the info is. Rising CDS spreads is not good -- may suggest a more significant pullback is coming.

my own thought on commercial real estate has been that there is too much money waiting in vulture mode -- prices won't get to where many are hoping and assets will get dealt with as new capital is put to work. many in real estate would say that is a ridiculously optimistic and naive view. Probably true but my thought is it won't be as bad as the bears think.

have you seen the semi's? they are rallying again but so far just to the top of the range. At some point they are going to break out because its not double ordering. CY has certainly done well.

in the near term I expect the market to be boring as can be -- although if I had to pick a direction it would likely be lower -- internals aren't too good and sentiment is more bullish than it has been in awhile -- not enough in my mind to signal the end of the rally but enough to see a pull back. on the other hand if you see what happened last week -- Dubai -- at most about a 3-4% drop in the SPX led to about a 30% jump in the VIX --- so people buying puts like crazy on a small decline. I figure the weak internals and bullish sentiment and the fact that we are still near the half way mark between the lows of march and the highs of 2007 means the upside is capped for now. The rush to puts on any decline means the downside is likely capped too -- at least for the moment.

a few other stocks I am monitoring -- BLUD -- after we sold this one they ran into FDA and DOJ troubles and the stock got crushed into the teens. business still doing ok. story hasn't changed -- the secular story is the switch from manual to automated testing. its not a great secular story in the sense that unit volumes for the industry aren't growing a lot but the valuation is attractive for the quality of the business and the consistency of the blood transfusions.

LMNX -- sells testing equipment used for proteins and nucleic acids -- they have a deal with Techne actually. their system handles multiplexing -- running multiple tests on multiple samples. ILMN has a competing platform called bead express but the key to LMNX is the installed base -- about 6000 units vs. only a few hundred for ILMN. That's a lot of systems to drive consummable sales. the growth story is about getting as many tests approved on the system as possible to drive usage and more system sales. their system has particular advantages in certain types of tests -- that's what you do leverage your strengths. they have missed earnings the last few quarters but its primarily a function of their model -- they have little visibility into what partners are doing with consummables so its not surprising that they struggle to give guidance they can beat -- their fate on a short term basis is in someone else's hands. TSRA fixes this problem by reporting revenues 1 quarter in arears -- something LMNX should think about. the other issue is they have not seen as much operating leverage as everyone wants. to me its in the stock given how poorly the stock has performed. remember there are 2 kinds of companies -- those with problems and those with problems everyone knows about.

CVA -- while the hoax of global warming is finally coming out (I can't think of a more complex system then our climate -- one which we have very little accurate data on relative to the total set of data (millions of years) it is the ultimate in human arrogance to assume we know anything about our impact on temperature), I still think there is potential for certain alternatives like Covanta, which is actually 2 businesses in one -- waste management services and power generation (incinerator for garbage). europe is a much bigger user of waste generated electricity so we have a lot of catching up to do. CVA has ops overseas too but I suspect they have more opportunity in the US given the low penetration. Its profitable, and the valuation on a cash flow basis seems reasonable. they do have a lot of debt which is worrisome -- initial answer is they also have a lot of cash flow so its manageable but I want to do some more digging. the chairman is Sam Zell and one of the largest owners is that marty guy from third avenue value -- noted deep value investor. is this a deep value? only based on growth projections but I think its still attractive. On earnings basis its nearly 20x so it doesn't look good relative to something like Waste Management that is much cheaper or even MCD -- which is low teens for such a franchise company with a 3.5% yield. need to do more valuation work. i like them better than Waste management -- don't trust the numbers there and the electricity side is very small. I am a big believer in the growth of electricity demand.