Intelligent Speculator

Back in December, during the mostly volatile trading months that ended 2008, when I was approached to join this stock picking contest, I was quite unsure about how to play it. I usually do picks based on specific valuations that can be closed weeks later. But this time, our picks were for the entire 2009 year. Like the other competitors, I was to base my picks on what I expected for the year. Was it going to be a rally back to the 2007 levels or would it be more pain in the financial markets?  You can see the post with my picks here.

Without further wait, here are the results for Q1, I am obviously very happy about my 1st place but also about being the only one in positive territory:

And the results of my 4 picks:

Turns out that the first quarter saw a little bit of both. Overall the market is down with the S&P500 dropping from 903.25 to 796.08 (-11,86%) and I would say that played in my favor. I was a little surprised I must say at how aggressive the other picks were with lots of leveraged ETF’s, and small companies that would be bound to have a solid bounce back if the markets went along. But instead, I went for 2 broader picks as well as 2 companies I thought were clearly undervalued.

USO and GLD were clear plays on gold and on oil. I’d say that both picks were correct and I’m happy with the 4.35% return of GLD for Q1. What I had not anticipated was the contango effect’s drag on USO and its inability to match the return of oil over the first few months. I am hoping that does not keep up and that USO can pick up more steam in the upcoming quarters.

As for the internet plays, I seem to be clearly wrong on Ebay and still have trouble believing how low of a valuation it is getting, I really think the stock will bounce back unless a major player launches a competitor to Paypal, their online payment division. The stock is down 12,24% though which is not too far from the market’s return and something I can live with. The pick that has put me at the front so far is clearly Baidu(BIDU), the Chinese search engine that continues to dominate despite great efforts put forth by both Google and Yahoo. At the time, Baidu had just gotten slammed because of reports it was accepting advertising for “fake” pharmaceuticals. My opinion was that the markets had killed Baidu too much ignoring that the company operates in China, far from the much more severe US regulations. Even Google does things in China it would never dare doing in the US, it is just a different environment. The 35,25% return is obviously above my expectations and at this point, I’m hoping more out of Ebay than Baidu for the next 3 quarters….

Upcoming shortly will be reviews by other members of the contest, I will add links as they are published so stay tuned!

Over the past few months, the US government through the Fed, the Treasury and other federal entities, has been buying up companies, gaining control of entire industries and all along it has downplayed 2 words: Socialism and Nationalisation. Of course, both words spark huge fear not only to the markets but also to its own population. The government insisted it did not want to run any of these businesses but rather simply let them survive. And for a while, it looked like that might happen…

But in the past few weeks, the US government has gotten on the road to invalidate contracts signed by AIG and has now asked GM CEO Rick Wagoner to resign. I’m not saying these were not the right picks, or that they were. But it is still interesting that the US government is now clearly calling shots in the insurance business as well as the US automakers. And with control over several big banks, it is becomming clear that the US government is calling some shots in that industry as well. And all of this happened in a matter of months. So let’s not try to imagine where it will get if things do not improve in the next few months.

Now many questions will arise from such a role of the government. First off, as these institutions become “political”, can the government actually let them fail? Or does it become too much of a political liability to have a “public failure” of a federal rescue? And also, when will the government actually step back and let the private sector take over? We all know that the government is generally far from effective compared to the private sector and that has been proved in the US more than anywhere else. But it is also known that once the government gets involved, it has a difficult time letting go and that is what I am personally more worried about.

The Obama administration has already been criticised for not coming up with enough clarity and answers… imagine what it will be when they will start writing insurance policies, designing new cars and developping new “green cars”. Oh and there are many, many companies waiting in line to be managed by Washington.. no end to this tunnel in sight.

Just when you though that maybe ETF’s were perhaps starting to lose a bit of their “in” factor, a new class of ETF’s has been unveiled that could restart the whole trend. In Canada, “Betapro” ETF’s are high volume ETF’s that are usually leveraged and track known indexes such as commodities or stock indexes. Now, the company behind those is launching “alphapro”, a class of ETF’s that would track the trades done by “guru’s” of finance. Of course, the idea behind it is to be able to generate alpha.

The first launch will be an ETF that will trade according to Dennis Gartman’s trades. Gartman is well known across the markets for his daily newsletter that is sent out and does commentary about the markets in general as well as specific comments about most asset classes. He then gives out specific trades that could in theory be replicated. Of couse, doing so through this new ETF has many advantages, mainly the time saved, not having to look every day for the trades and also of course saving the cost of the newsletter which is very expensive.

The question of course is how well such guru’s will be able to perform. Much has been said about the inability of investors to beat the market consistently. It will be very interesting to see if these ETF’s that will track the best of the best, will be able to do so.

As well, there will probably be many investors that will try to arbitrage between the ETF’s return and the underlying trades. For example, when Dennis Gartman will be sending out his newsletter and for example saying that he wants to buy Gold. If the ETF becomes important, you will have a great number of investors that will know that the ETF needs to buy this position, which could make the price go upward. It could create a drag in returns and will be interesting to follow. Of course, this effect already exists because his newsletter is so spread out that the market knows many investors are following these trades. But having an ETF track these trades could make the effect greater.

In the end though, I am impressed with this new idea, which has the potential of creating a great deal of new interest and activity in the ETF field. There are surely many more great ideas to come…

Ok ok, maybe the question is not clear. Of course, Twitter will need a business model in the future. But how soon will that happen? Can Twitter go on for a few more months or years before actually trying to generate money? There has been a lot of speculation lately about possible ways that Twitter could use to generate money including a good one I read yesterday on the Wild Investor here.

Of course, Twitter will eventually need to turn all of those users and “Tweets” into money but in my opinion there is no hurry. Being a very simple service, Twitter has few expenses. Mostly, you would think that Twitter has server expenses. But with few spinoffs to date and little to none paid advertising for their service, they have few capital requirements. I would draw comparisons to Google from a few years ago when it had one and only one focus: search. And even then, Google had a lot of expenses related to research. Compared to that, Twitter really has very little expenses. And because of that, it can go a long way with its $55 millions of funding. In my opinion, as long as Twitter is experiencing rapid growth as is the case currently, they should remain as easy, as simple and as clean as possible for all users, and yes that does mean no advertising and no section for paying members only. They should have only one focus right now and that is “growth”.

Of course, to say that brings us back to the dotcom bust and how businesses received money without actually having a business plan or a way to generate cash. I am not saying that Twitter should have no plans. But for now, those plans could remain possibilities only. Think Twitter will not be able to generate cash? Think again. Rival Facebook has received almost 10 times more in investment money with not much more to show in terms of a business model. Facebook has of course started to show ads and show investors how they could get a return on their investment. But I don’t think Twitter should change course until it gets a lot more users, a lot more mainstream attention and until it becomes a lot more thirsty for cash.

When it runs out of potential investors for long haul, Twitter will know it is time to start moving on its ideas to generate cash. It certainly will have gained a lot more attention by then and might be able to start putting up ads without worrying about users fleeing which on any internet project, is always a worry, especially social networks where the “masse” phenomenon is very powerful.

Have you been standing on the sidelines for the past 10 days? Sure you were probably proud a couple of weeks ago to say that your investment fund was all cash, but if that was the case, then I’m sorry to tell you that you have just missed the biggest 10 day return since 1938.

The market is now up 22% from its low and it seems like there was no way to get it wrong as all major components and sectors advanced in the past 2 weeks. Only today, the S&P 500 advanced more than 7%, an incredible feat no matter what the circumstance.

Of course, the title of this post was chosen to get some reactions but it is also because we are very surprised of this rally. We had long positions but it is still very surprising to see the market rise so much. Let’s face it, in terms of the economy, there is little to celebrate and so there is little hope of rising corporate earnings. So we are not entirely certain what is causing this rally. Is there a little less uncertainty about the direction of the Obama economic team? Yes, to an extent and of course this helps the markets. But enough to justify such an advance? Certainly not in my opinion.

Last week, I had two trades go against me and I was hoping to be able to survive for the cutback but that was not meant to happen it seems. On Thursday’s close, i reached the stop loss on both trades and as confirmed Friday morning, closed back both positions. During Friday’s action, both positions came back and I would have made back 50% of the loss had I remained in the market but in trading (as I will wrote more about in the future), I believe discipline in closing trades is as much part of the success as is the trade in itself. And so sticking to my stops is not only important, but crucial in fact. It gives an opportunity to rethink about the situation with less emotion and determine if a trade still makes sense without the desire to simply go for a homerun.

And in this situation, I still think that Friday’s closed trade on Priceline vs Blue Nile makes sense. I did miss a part of Friday’s actiuon but I really do not see much downside from here. Blue Nile has not given much in terms of news that would indicate its recent surge is warranted. Priceline is under pressure because of Expedia’s recent promotion but as i have believed and have also read in research from Citi, the impact on Priceline’s bottom line is likely to be very limited.

On December 17th I entered this trade and made 30,46% while last week’s trade ended up losing 22,76%. I’m still up on this pair and no I am not stuck on this pair but simply find it a very interesting trade in these economic conditions.

You can refer to last week’s post about this trade here, much of the arguments I had then still stand.

In fact, the story is probably even more true on BlueNile as it was the top internet retailer in terms of stock performance last week, with not much to explain it as traffic is still down and its pricey items still look to be going through tough times with the economy in this recession/depression.

It wasn’t a good week for us in the markets, but we still had a good time looking over the web. Many interesting readings, here are a few of my favourites:

Wealth Strategy: Track your Net Worth – excellent motivating article by MDJ about how to track and improve your financial situation

Zach agrees that Blue Nile(NILE) is overvalued, check out Blue Nile – Pricey and dangerous

Is UK going bankrupt or Is It just another witch hunt? by TheFinancialBlogger

Wild Investor presents the State of Microsoft

We also found two great carnivals:

hosted by Penny Daily

Carnival of Personal Finance

Well, unfortunately, today was no different and two trades will have to closed this morning:

As of yesterday’s close:

GOOG-VCLK: -23,0%

PCLN-NILE: -21,55%

This brings down the performance of 2009 picks to 3.25% on average per pick, which is not bad, but certainly a lot worse than even 1 week ago! Oh well, I should be making a new pick on Monday, hopefully will get back on the right track!

By most measures, Google is the internet giant and perhaps even the company that represents technology the most. And it seems like in every arena, Google is thriving and gaining market share not only through its great marketing, but also, quite simply because its products are generally of superior quality. The most obvious example is search, where Google has been the leader for years with the brightest and richest doing their best to catch up without any success to show for. Unless of course you consider slowing down your market share losses… And even in newer areas such as news and more importantly mobile, Google is gaining grounds on established rivals and looks about as unbeatable as Microsoft seemed a decade or so ago.

There is one surprising area where Google is not putting up much effort or able to have much of a presence; the social internet. It is surprising because it is the most discussed topic in many arenas. Google’s efforts in mobile are very understandable and logical. Its lack of effort in social media is not. Facebook and Twitter have gained significant size and have huge momentum making it difficult, even for Google to play catch up if it enters the game. Of course, Google does have such a website in Orkut. But how many of you have actually heard of it? Sure, if you are located in Brazil or India, then you do know about it and perhaps have a profile. But with no offence, that is not exactly where the battled will be played out.

There have been rumors about Google being in discussions with Twitter for an acquisition, Google has politely said it was not shopping for now. Of course, in many ways, such a deal would not be surprising. Think about how Google purchased Youtube to instantly gain the lead in online video. But it is playing a dangerous games, as other rivals (including Facebook) could snap it before. And before you ask, Facebook is partially owned by Microsoft so its doubtful Google could do much if that happened. So it is surprising to see Google put up so little effort in social media despite it being snagged as the next big thing by many.

Does it really matter?

Google execs are smart, so you would think that if they are not spending energy on social media, it is because they do not consider it a key for their future. They have even went out of their way to clear that in their opinion, Twitter has no viable way to enter the search market. Who are we to doubt Google but I personally do not agree with this. Having millions of users and helping them connect with their family, friends, lost friends, loved ones, favourite artists, favourite brands. There is surely value in that. And in many ways, when Google says its goal is to organize the world’s information, you would think that Facebook, Twitter and others would have an incredible amount of data that could be used in many commercial and non-commercial ways. Already, Twitter has started to make headlines because it is now increasingly used by politicians in the US to communicate with citizens. Isn’t that critical?

I think Google is simply too big to ignore and even take a risk on this. Considering the costs involved, Google should either get serious about buying Twitter or put some serious energy in Orkut before it’s too late. We do not know how Facebook, Myspace and Twitter will evolve but there is no doubt that they have increasing power and knowledge about an increasing proportion of the world’s population, and that should not be ignored.

For most investors, the past few days have been great to watch with the S&P 500 up over 17% in the past 7 trading days, quite impressive! However, our own picks have been struggling this week, mainly two trades, the PCLN/NILE trade has been going through some tough times as Blue Nile surges forward. I recommend checking out Zach’s post about Nile’s recent rise. I think and hope he will turn out right!

The other trade that has gone through tough times is Google vs Valueclick. Again, I’m comfortable with the position but with it being close to my stop loss, I’m hoping for a rebound today to keep this one going and not have to close a first losing trade in 2009!