Financial Losses Illustrated

Cool graphic showing who has lost the most in this financial mess: NYTimes

Nasdaq 1999 Versus Shanghai 2007

Chris Perruna has a great chart up that I wanted to share, comparing the Nasdaq bubble of 1997-2002 to the current China bubble from 2004-2008. Eerily similar charts. But, that's what happens when you've got a bubble.

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Source: Chris Perruna

Market Update

Wanted to take a second to post up a few things I'm seeing in the market and around the financial blogosphere. Firstly, Apple (AAPL) has reached its second major level of $120. Earlier, I wrote about AAPL at a critical juncture when it was trading $150. If you caught the break to the downside, you made a quick and easy 30 points. Now, I want to put it on your radar screens again as it has reached an even more important support level of $120. You can buy the dip and stop out below the lows of $115, or whatever your rules say about placing stops. The market is extremely oversold and the fear indicators are starting to head higher. But, that's not to say we can't go even lower. I'd say try to play AAPL from the long side here. But, if it takes out your stop, swing it to the shortside because AAPL will have violated a major support level. The technicals are really your only guide to the market right now as fundamentals and logic have been thrown out the window a long time ago.

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Secondly, I want to again highlight the great work my man Stewie is doing over on his site. In addition to the fear indicators I wrote about yesterday, he's got an update posted today, comparing fear levels to the last bear market we saw in 2002. As you can see from the chart, tradeable bottoms have been put in when the VXO has hit 50 or so. And, as he effectively points out, the VXO can get as high as 50 on numerous occassions. So, don't necessarily expect this to be our only trip to levels this high as the credit crisis and lagging economy continue to play out. Addditionally, he points out that the 52 week low list is now extreeeemely long. Check it out.

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Thirdly, I want to point out an opportunity in Natural Gas (UNG). Commodities have been hit hard, we all know that. But, with the chart sitting where it is, I think its worth a play here because it offers some solid risk/reward and a very clearly defined stop. Plus, I still think natural gas is poised to benefit in the future as I wrote about in my piece about how to play energy for the intermediate and longer term. The Pickens Plan has been gaining ground and even if it does not succeed, it certainly has helped at least raise awareness about natural gas as an alternative. Turning to the chart (brought to my attention by Steve Puri), we see a very clear level of support at $33 in the United States Natural Gas fund (UNG). Now, in the past, I've stated that there is no such thing as a triple bottom. So, we'll see if that statement holds true as this will be the 3rd time UNG has tested support in the $33 region. The horizontal line drawn below represents your line in the sand. If it stays above the line, you get long. If it breaks the line to the downside, its time to get short. The market is crazy right now so make sure you use a tight stop whichever way you decide to play it.

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Lastly, I want to point out an excellent study by Rob Hanna over at Quantifiable Edges. Basically, he's looked at huge market selloffs/tradeable bottoms in order to identify which names typically benefit the most from the rally that results from the tradeable bottom. And, since I feel we're getting closer to that event, I thought it was relative to point out. Rob has noted that basically, the stocks/sectors that held up the most in the downturn typically do not benefit the most in the ensuing rally. His study from the January selloff/bounce indicates that names which survived the selloff such as Walmart (WMT) or Johnson and Johnson (JNJ) only rallied modestly in the ensuing bounce. But, as he points out, names/sectors that were beaten down hard such as Home Depot (HD) and General Motors (GM) rallied substantially when the time came. Now, that's not to say that the consumer staples like WMT and JNJ didn't rally as well, because they did. But, in the context of the rally, they underperformed. So, simply put, think of it as a role reversal. Once the market capitulates and then rallies, the past underperformers become the outperformers and the previous outperformers now become the laggards. Make sense? I highly recommend checking out Rob's January study here and follow up here.

Sources: Stewie, Steve Puri, & Quantifiable Edges

Gauging Fear in the Markets: Put/Call Ratio and Volatility Index (VIX)

Two fear gauges many people use in the markets are the Volatility Index (VIX) and the Put/Call Ratio. And, both are getting close to levels that historically signal the intense fear in the markets we've seemingly been waiting forever for. Why are we waiting for such fear? Because it typically marks an opportunity.

First, my man Stewie has a great Put/Call chart up illustrating the historical levels of the ratio. As the ratio reaches 1.20, you can see that it has coincided with market lows/tradeable bottoms. So, while the market is down big and there is some level of fear... there is no true panic yet. The assumption would be that we are well on our way to true panic and levels of 1.20 on the Put/Call Ratio. If this becomes the case, I would look to start buying a few names for a trade at the very least. Don't ya just love buying when there's blood in the streets? As the chart illustrates, those levels on the ratio have marked tradeable bottoms (but not THE bottom). This is pure chart candy right here:

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Secondly, VitalTrends has the historical Volatility Index (VIX) chart posted up for us. Typically, as the VIX blasts past 30, a strong level or fear sets in. And, once you get as high as 35-37, panic and capitulation often occurs. Now, that's not to say that we could always go even higher on the VIX and reach even new levels of fear. But, historically, a VIX of around 37 has been a tradeable bottom as it marked intense fear and capitulation. If you were to overlay this chart with a chart of the market, you would find that those spikes in the VIX would coincide with tradeable bottoms in the market (but not THE bottom).

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The point of gauging fear? Opportunity. Should panic truly set in, we should have a very tradeable bottom on our hands (emphasis on 'tradeable,' as this is not THE bottom). We'll see what happens.


Sources: Stewie and VitalTrends

Hedge Fund Tracking: Moore Capital Management's 13F Filing (Louis Bacon)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

Time to continue the Hedge Fund tracking series! If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners here, Bret Barakett's Tremblant Capital here, Peter Thiel's Clarium Capital here, Stephen Mandel's Lone Pine Capital here, Lee Ainslie's Maverick Capital here, and John Griffin's Blue Ridge Capital here, and Boone Pickens' BP Capital here. This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Additionally, the majority of the rest of the funds I follow are macro funds. And, since 13F filings only detail equity holdings, we're left with a bit of a problem. Macro funds typically employ strategies that encompass many financial markets. Be it commodities, currency, futures, foreign markets.... you name it. So, these funds are much harder to track. Since they are not required to disclose positions held in those markets, we only get to see their equity holdings. But, at the same time, I still find the information useful because many of these funds have numerous large equity positions which give you a broad sense as to what their strategies may be.

So, first up in the macro hedge fund tracking series is Moore Capital Management. This $10 billion group of hedge funds is ran by Louis Bacon, the famed trader and risk manager. He comes from the group of "offspring" of the legendary Commodities Corp. Bacon emerged as one of the great macro traders alongside the likes of Paul Tudor Jones (Tudor Investment Corp), and Bruce Kovner (Caxton Associates). And, interestingly enough, Bacon helped get his firm off the ground when Paul Tudor Jones stopped accepting capital from investors and instead turned them to Bacon's firm. Returning 31% annually since inception in 1990, Bacon can be very proud of his flagship fund, Moore Global Investments. But, it doesn't stop there. His returns have shown little correlation to the stock market and low volatility. He is the definition of a risk manager. Bacon credits his risk management skills to the futures markets, where he learned to be sensitive to market action. And, he learned such skills at an early age. While getting his MBA at Columbia, he used his student loan money to trade. And, he lost it all. Clearly, he learned a lesson he would never forget. Such a lesson stuck with him as he worked various jobs in the financial industry before eventually starting his own firm. And, in his first year managing Moore Capital Management, he returned 86%. Bacon strives to identify long running macro trends. While he has a longer-term macroeconomic view, he won't let that stop him from making money by trading around the position in the mean time. If you want to hear some insightful thoughts from Louis Bacon himself, head over to my post on Hedge Fund manager interviews. So, now that we've got a background on Bacon and Moore Capital Management, let's take a quick look at his portfolio highlights.

Keep in mind that this is merely a brief summary of Moore's top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of portfolio
1. Chesapeake Energy (CHK) Common + Calls - Nearly quadrupled his stake to bring it to his firm's top holding
2. Freeport McMoran (FCX) - Only slightly increased his position
3. Petrohawk (HK) - Massively increased his stake
4. JPMorgan Chase (JPM) - Tripled his stake
5. QQQ Trust (QQQQ) - New holding this past quarter
6. Petroleo Brasileiro (PBR) - Slightly increased his stake
7. Qualcomm (QCOM) - Massively increased his position
8. Lehman Brothers (LEH) - Increased position by 600% (Market value $100 million at the time)
9. Water Resources ETF (PHO) - No change in position
10. Electronic Arts (ERTS) - Nearly doubled his position
11. Phillip Morris Internation (PM) - New position this past quarter
12. Merrill Lynch (MER) Puts - From 25,000 shares to 2,625,000 shares (Market value $83 million at the time)
13. Google (GOOG) - New position this past quarter
14. Sandridge Energy (SD) - Doubled down on his stake
15. Hewlett Packard (HPQ) - New position this past quarter
16. Max Capital Group (MXGL) - Stayed flat (added literally only 4 shares)
17. Marathon Oil (MRO) - New position this past quarter
18. Sotheby's (BID) - New position this past quarter
19. Coca Cola (KO) - Doubled down on his stake
20. Potash (POT) - Sold off a little over 20% of his position

At the time of the filing, Moore Capital Management's total equity portfolio totalled around $4.4 billion. So, I just want to re-emphasize that since they are a macro fund, they obviously have the majority of their positions in the commodity, currency, futures, or other markets. But, at the same time, they still have a sizable chunk of money in the equity markets.

In terms of major moves, it's quite clear to see that Bacon was very Bullish on natural gas, adding heavily to the likes of Chesapeake (CHK), Petrohawk (HK), and Sandridge (SD). Come the next round of 13F filings, it will be very interesting to see what Bacon did with his natural gas holdings, seeing as how the prices have fallen dramatically. Was he partly responsible for the sell-off, or did he get caught in the downswing? We won't know for sure until November, where we can see just how risk management savvy Bacon really is.

Other notable changes to his portfolio include many new positions started in technology over the past quarter, including The Q's (QQQQ), Google (GOOG), and Hewlett Packard (HPQ). Also, he added to his already existing position in Qualcomm (QCOM).

The last thing I want to point out in Moore Capital Management's portfolio is their massive addition to positions in Lehman Brothers (LEH) and Merrill Lynch (MER). And when I say massive additions, I really do mean massive. Bacon had really miniscule positions in these two names and over this past quarter ratcheted up his stakes hardcore. He increased his position in LEH by 600% and in MER by 10,000%. Assumming he still holds those positions, he is massively underwater in them. Because, after all, Lehman is facing Liquidation, as I just recently wrote about here. But, we won't know what he was trying to pull with these positions until November.

Needless to say, there are some interesting names in this portfolio. But, it will be much more interesting to see what Bacon's done with these holdings come November. We already knew hedge funds (and macro funds in particular) had a rough July, as I noted here. And, it's easy to see why, with the heavy commodity exposure many of them had. What we don't yet know is how they've rebounded (if at all). Overall though, I think Moore Capital Management has some great positions poised to benefit from longer-term running macro themes that we will see unfold in the coming years. Because, after all, Louis Bacon loves focusing on the big picture trends.


Moore Capital Management's full 13F filing listing every position can be found at the SEC.

Writedowns, Losses, and Capital Raised

Amid all the financial chaos, I thought it would be a good idea to post up a simple chart breaking down the financial landscape in terms of writedowns, losses, and capital raised. From Bloomberg, you'll see how institutions are looking in terms of raw numbers: writedowns/losses versus capital raised. One institution in particular I want to point out is HSBC (HBC): $27.4 billion in writedowns and losses, but only $3.9 billion raised. They by far have one of the more lopsided ratios. Now, we obviously know that this simple chart does not tell the whole story, but I thought it was worth highlighting.

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Full disclosure: At the time of publication, MarketFolly was short HBC via puts

Warren Buffett's Portfolio Performance

The great folks over at Bespoke Investment Group have a compilation of how Warren Buffett's portfolio holdings are performing this year. Overall, he actually looks to be in pretty good shape relative to the market. Take a gander:

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Source: Bespoke Investment Group

Lone Pine Capital (Stephen Mandel) Files 13G and Discloses 6.8% Stake in Dolby Labs (DLB)

Filed today in a 13G filing with the SEC, Lone Pine Capital has disclosed a 6.8% stake in Dolby Laboratories (DLB). This is a brand new position, as it was nowhere to be found in their most recent 13F filing where they disclosed their portfolio holdings as of June 30th, 2008. And, if you missed it, you can check out the rest of Lone Pine's holdings from that most recent 13F which I analyzed in full here.

Lone Pine is an $8 Billion fund that has returned over 25% annually ever since its inception in 1997. Why is Mandel worth following you might ask? Well, he served as a consumer/retail analyst for Tiger Management back in the day for legendary investor Julian Robertson. Robertson's proteges/right-hand men have been nicknamed the "Tiger Cubs" and many have started their own funds. So, not only has Mandel learned from one of the best, but he has put up some very solid returns himself. Mandel is well versed in the ways of finding undervalued companies and his funds typically like to sniff out solid companies with good management that are trading below their intrinsic value. Just this past year 1 of his funds was up 34% before fees while another was up 32% before fees. His track record speaks for itself. And, not to mention, he learned from one of the greats in Julian Robertson. However, as I wrote about here, Lone Pine has had a rough 2008, where their Lone Cedar Fund was -5.38% year to date (as of the middle of July '08).

You can view the full 13G filing over at the SEC.

A Discretionary Retailer Trending Higher: Quick Chart

Just wanted to take two seconds in this bloodbath of a day and point out a chart that is trending higher. And, surprisingly enough, it comes from the consumer discretionary sector: Aeropostale (ARO). While ARO might be one of the few discretionary retailers actually performing well in this environment, there are plenty of names that are not. So, set up a pairs trade or just play the channel straight up; your choice. The chart really speaks for itself. Stop out on a downside break of the channel.(click to enlarge)

Donald Coxe Market Thoughts

Donald Coxe of BMO Financial Group (their Global Portfolio Strategist) is out with his Basic Points of September 2008. Donald has repeatedly been right on with his thoughts regarding the macro investment outlook side of things. If for some reason you've never heard of him, then here's your chance to check him out now. The piece in its entirety is linked below (which I highly recommend reading). But, since everyone is pressed for time these days, Prieur du Plessis has done an excellent job of summarizing Don's thoughts. Below is Prieur's summary of Don Coxe's thoughts:

1. The two most important forces in equity markets since July 13th have been powerful strength in financial stocks and pathetic weakness in commodity stocks. Since they have been inversely correlated for more than a year, investors should assume that the commodity stock bear market will continue until the financials roll over. The F&F bailout is merely the second act in a tragedy that has an unknowable number of acts to come.

2. When the financials do roll over, gold and gold mining stocks should move swiftly back into favor. Inflation remains above central bank target levels in the US – and in many other countries across the world. And any return to pronounced weakness among the bank stocks will be strongly bullish for gold.

3. With OPEC’s token production cut failing to impress the markets, oil prices will fall further. It won’t take more than a few days of even 750,000 b/d of production above consumption to drive oil prices down. Conversely, any outbreak of civil strife in Nigeria that affects offshore production could have a sudden upward price impact. We expect oil to trade in a range of roughly $80 a barrel to roughly $130 a barrel next year, but we have no great confidence in that forecast. We are more confident in predicting $150 oil within the next three years, as the next global economic recovery unfolds.

4. Barring an early killing frost, this year’s US corn group will be a barn-buster. What next? Corn is in modest contango for the next two years’ crops. Because contangos are so unusual these days, and because grains have such high producer/consumer participation across the curve, this is to us a sign that farmers and users are believers that high corn prices are here to stay. That means the fertilizer, seed and equipment stocks are cheaper now, relative to forward corn prices, than at almost any time in the past four years.

5. The pullback in oil prices and the dramatic bank rescues should have been enough to send the S&P back into bullish mode. It needs to break 1310 on the upside to take away its bearish condition.

6. The real yield on the Treasury 10-year is now a negative 145 bp. On a two-year hold, this means there could be more endogenous risk in nominal bonds than in most blue-chip non-financial stocks. The rush out of TIPs into Treasurys is doubtless driven by the unwinding of F&F exposures, but the long Treasurys are now seriously overvalued.

7. The biggest near-term upward surprise in commodity prices could be natural gas if (1) the sunspots don’t reappear, and (2) the historic correlations of gas to oil reassert themselves.

8. The Canadian dollar is being hit by the commodity price plunges, deterioration in the trade account, the worsening economic outlook in Central Canada, and the uncertain outlook in the October election. Whether Tories or Liberals win in Ottawa, Canada’s fiscal situation will continue to be superb compared to the US, particularly if Obama wins. We remain very positive on the loonie as an alternative to the greenback.

9. US election campaigns can be excuses for bold acts by foreign adventurers. Although President Bush was a non-person at the Republicans’ Convention after he gave his brief speech by satellite, he’s going to be President for four more months. The world should hope that rogue states think about that before deciding that Washington will be too distracted by the election to do anything about a surprise attack or invasion.

10. We have no clear idea how long it will be before we can look back to today’s prices for commodity stocks and say, “Wow! I wish I’d loaded up then!” We remain certain that day is coming.

A big thank you to Prieur du Plessis over at investmentpostcards.com for presenting such a succinct summary of Coxe's thoughts. And, I highly recommend taking the time to read Mr. Coxe's entire piece as found in his .pdf file, which you can download here. Lastly, another thank you goes out to Commodity News and Mining Stocks for originally posting up the link.

Lehman Brothers Liquidation Looks Likely

Undoubtedly, you already know this news. Lehman Brothers (LEH) will file for bankruptcy protection, as they couldn't seem to sell themselves this weekend. Additionally, Merill Lynch looks like it will be bought out by Bank of America for around $25-30 a share ($29 a share offer being voted on). Lastly, AIG will be restructuring. If you want more info on all this than you can handle, just head to any major financial publication, as the news is all over the place. I'm not here to regurgitate this news. Instead, I want to turn my focus to a way to possibly play this madness. In the event that LEH does liquidate, the following stocks will undoubtedly trade lower. Why, do you ask? Well, because they are some of LEH's top holdings.

The List

• General Electric (GE)

• Pfizer (PFE)

• Target (TGT)

• UBS (UBS)

• Linn Energy (LINE)
  

• GLG Partners (GLG)
  

• Merck (MRK)

• Microsoft (MSFT)

• Chicago Mercantile Exchange (CME)

• Bank of America (BAC)

• Apple (AAPL)

• Flagstone Reinsurance (FSR)

• Wellpoint (WLP)

• Walmart (WMT)

• Exxon Mobil (XOM)

• United Health Group (UNH)

• Google (GOOG)

• Johnson & Johnson (JNJ)

• Baidu (BIDU)

A few names from the list I want to highlight: Firstly, Bank of America (BAC) has been actively involved in all the talks this weekend and for all intensive purposes it looks as if they'll pick up Merrill Lynch (MER). I think the market sells off BAC simply because MER is not in the best of shape, and it looks like they'll be overpaying for the deal. If MER needs to be rescued, BAC could surely pick them up for much cheaper than where they're trading now. So, BAC could trade lower for this reason (along with the fact that oh yea, they've still got the whole Countrywide Mortgage mess to worry about). Then, if Lehman Brothers liquidates their BAC shares, you can guess where that name is headed: lower.

Secondly, as I wrote about here, Apple (AAPL) isn't looking too hot on the technicals right now. It looks about ready to really breakdown, since it hasn't responded well to support levels. If LEH needs to liquidate their large AAPL position, this only presents more headwinds for AAPL.

Thirdly, Walmart (WMT) appears on this list and I want to point this out for investors who have wanted to get in this name. If LEH liquidates its WMT position, this will present an opportunity for those who want to get long WMT on the thesis of the American consumer trading down for cheaper items, which WMT supplies. I've written about this thesis numerous times, notably here and here. So, watch that name for any major dips. Also, I'd throw Johnson & Johnson (JNJ) as a possible name to buy off of any LEH liquidation weakness. They are firing on all cylinders and their consumer staples line-up works well in this mess of an economy. Keep in mind though, that things undoubtedly will be crazy this week. So, don't rush out and do something stupid. And, if you feel the need, keep it small. There will undoubtedly be opportunities from this. But, this is a huge mess just waiting to unravel. Watch the Volatility Index (VIX), and watch for panic and capitulation. Special thanks to "The Fly" over at ibankcoin.com for posting up this list of LEH top holdings.