AFRICA - Open for Business

I saw the clip of a movie on Africa, open for business on AfricanIndex.com.
It is a worldbank sponsored documentary showcasing 10 African Entrepreneurs from 10 countries, showing what is possible.
you can also check it out at - http://www.africaopenforbusiness.com/featured.htm

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Bye Bye Goldman, Uncle Ben Blues

Thanks to Uncle Ben's omnious comments, Goldman Sachs has now broken the rules, which is, down 3% and you are gonners.
In my guts I will not want to sell this stock, I think it is a good holding and the performance of the underlying company has not been bad either.
But this is the reality of the discipline of trading that I am trying to learn in the game (CNBC contest), have a simple set of rules, stick to them and trust your guts.

A lot of things I have been reading lately, leads to the conclusion, independent thinkers and travellers win, even if they don't win on other people's measurement, they win having done it their way.

Mundane Report:
I am still top 25%, wilth only about 45K gain in my porfolio, which means people are not gaining that much more. However, due to the selling rules I am now sitting in ~50% cash, which means I have to go shopping again, maybe by the weekend.

If you have a strategy for reading how the market is going to perform one or two weeks out, please share :)

~S

On Business Cycle and Consequences of Short Squeeze (Part 3)

There are peculiar lesssons for the unbeliever in Armstrong's proposition...I have tried to pin point three lessons learned and they are presented below:

Points for Your Personal Finance
1. Get more defensive in investment style. Cash flow more than growth or relative PE will now counts more for stocks. Companies (especially the Large Blue Chip) that have benefited from the mind boggling profit of the past few years and have used little or none of it will benefit from a greater interest rate and better market position to punish the small speculative plays that have depended on cheap money to stay afloat. Many companies will fail like those sub-prime lenders like NEW and NFI have shown, and it is useless staying in the path of a moving train. Back to basics like Fundamental, Value and Large Cap investing will win going forward.

2. Reduce high interest rate debt. The era of cheap money is truly over. As regulators tightens, so will other rates tighten up on consumers. Credit score will matter more going forward than ever.

3. Build emergency savings account and/or Roth IRA that doubles as one. The dollar will ultimately crumble under the weight of debt, but intervention is not unlikely. This will drive its rate upwards overnight causing a desperate short squeeze on the dollar--cash will then become king. Understand that the net effect of this is continuing rise in interest rate for the least credit worthy...so only an interest earning account is positioned to capture its net benefit.

Props

DonCasiragi regularly contributes to Nigerians in America, a site that publishes smart columns by a few dozen dynamic authors.

Restrategize, Reload or Stick to your guns - CNBC Contest

Top 24, this weeks performance -1.13, total portfolio return 1.17%.
This week was not pretty with loses across the board, I had to cut my loses on some of my position, that were loosing more than 3%.
Overall, the more I learn about the game, the more I am conviced my strategy is not optimized to win. However, my goal is to learn, so we'll see how we do next week, and if we need to tweak the strategy.

On Business Cycle and Consequences of Short Squeeze (Part 2)

Misinterpretations
We will start where we left off...on the Misinterpretations of Armstrong’s theory of business cycles.

Often, it is easy to snarl at this unorthodox theory that takes the boom-burst cycle from within our control into the realm of some natural cycle. On due consideration, we will realize however that Armstrong talk of Business NOT Economic Cycle. While the stock market correlates more with business cycles, it is a forward predictor of the state of the economy and economic cycles. Hence even though the economy was strong between 1999 and 2000, the stock market crashed in anticipation of the quick recession (correction) of 2001-02. Same can be said of the strength of 1994-95 in the midst of very bad economic indicators. Hence the stock market is not an absolute measure of economy: it is better used as a predictor of how the economy will perform in the near future as investors (always thinking of themselves as smarter than the average Joe) always want to pre-empt economy weaknesses or strengths.

However, stock indexes are more closely co-related with business performance: we have no better proof than Wall Street’s obsession with quarterly reports and earnings estimate and the far long lasting impact of a quarterly report on stock pricing than those weekly economic indicators that are usually shaken off as soon as their forward economic ramifications are swallowed. Hence, Armstrong’s analysis (a product of analyzing the market) can only suffice for actual business cycle not economic boom or bursts which is a lagging function as far as stock market performance is concerned. In addition to this, a peaking of a singular self driven factor relative to the rest generally result in a spasm across board which jumpstarts a boom or a recession.

Current Business Cycle Dissected
The questions we should ask are: did we have a business cycle up until Feb 27? What are the unintended consequences driving the “turn” in that business cycle? What/ when is the next business cycle and what consequences does it have on our personal finance?

Of course, there was a business cycle on the offing especially since the end of 2002. Since then, the stock market have been hitting new highs every quarter courtesy of a number of reasons chief amongst them being: Cheap Money (read low interest rates), high corporate profit and BRIC (I prefer CRIB) Boom which opened up a considerably huge market in highly populated China, India and Brazil. The net consequential effect of all of these was a booming housing market and net overall increase in wealth and spending in the internal economy.

What are the factors external factors and unintended consequences driving the turn? Like any good balanced natural cycle, the same thing responsible for the boom is responsible for the burst. In this case, cheap money have made the internal economy soaked in high public deficit spending (ask those drunk legislators in DC) and the escalating home value has caused your neighbor to borrow all the equity off his property putting your own portfolio at considerable risk (ask holders of NEW and NFI stocks that have fell 80% since January whether they were credit bingers too). In addition to all of these, we have the New Communist (sorry Democratic) Party in Congress that is determined to stifle China, and promote protectionism all factors that will drive huge private equity buy outs(where the big boys are) and low risk taking and Feds insistence on driving up rates to negate those and other extreme corporate action.

What has peaked?
Remember the one trick pony argument of Armstrong which I deduced in the last post as: “a peaking of a singular self driven factor relative to the rest generally result in a spasm across board which jumpstarts a boom or a recession” Hence, what singular factor will peak this year and cause the correction that is all but assured?

Naturally, I realize this factor is not going to be plainly obvious but deducible from the immediate impacts of such spasms. One that however seems to stand out is the flattening out of corporate profits; there is no doubt that corporate profit have been growing with no commensurate re-investment (may be due to Sarbanes-Oxley and/or limited growth opportunities). This eventually results in high cash on books, and saturation of growth room. This results in eventual profit flattening and a consequential inability of financing houses that have previously been willing to extend credit to speculative entities to do so again. Erstwhile, they had made these speculative credit offerings on the believe of a healthy balance sheet going forward that will more than adequately cover the debt or possibility of a buy out by one of the blue chips with a lot of cash on hand and no growth room. What a flat profit margin will do is to induce a waiting game by the blue chips that are cash rich to buy the speculative in fire sale bargain instead i.e. a buyers market instead of the current sellers’ market phenomenon. The spasm of flattening profit is then felt first on the credit side not on the balance sheet and eventually in the buy out/ M&A field where a lot of killing has been made in the past few years. This is exactly what we see in the failings of the sub-prime lenders and the effect it is having on big dogs like HSBC and Credit Suisse.

Week in Review - CNBC Contest

Thanks Don, T and Ira for your comments.

I ended the week in the top 20% (2.33% return), and my plan is to spend the weekend, pruning my positions.
How?

1. Sell anything with close to 3% loss ( here, I hope to learn the discipline of sticking to strategy)
2. Buy anything that looks like a sure win for the next week and better than the worst thing in my portfolio.

Based on Ira's and Don comments, that this is a momentum game and not a strategy play, I would need to consider buying LEND and Sell CRM down 1.63%.

Hmnn, LEND - everybody and the kitchen sink is playing the sub prime game, and I can't quite figure out how to research the fact that the momentum/upside will be there.

CRM - fundamentally is good, and my thesis may hold over 10 weeks, the question is where will we end the week.

Decision, give it a day, do more homework on LEND and the sub prime sector as a whole, are they oversold? Is there a basket to diversify risk?
Gas is almost $3 in myneighbourhood, what is the outlook for oil and gas, next week.
In addition, I am at about 10% cash, which is where, I will like to be to be able to take advantage of a sudden downturn if it happens.

Top 20% is not bad for simply wanting to learn. So as not be a pig, it is do nothing weekend.

Cheers!

Last of the shopping spree - CNBC Contest

First, I should report that I am now in the top 25%. Not surprising.

I suspect the main reason is because I am not full invested, I still have about $400K fake cash left. Therefore, it is time to go shopping. My strategy this time is to do a market sweep because 60% of a stock performance is based on its sector. I included 2 of Cramer's recommendations - after doing my homework of course.

So here are the picks and the reasons:
Goodyear Tire (GT) - token purchase a la Cramer
Medco Health (MHS) - ditto, although the Healtcare sector is somewhere in the middle, the stock did not stand out
Next, I try to buy a bucket of minerals with XLE, but you can't buy anything but stocks, so I chose the following as a substitute.
Phelps Dogde (PD) - Mining stood out in analysis, and may be in consolidation mode
XOM -oil is up this morning ($61/barrel), might as well pick the granddaddy of them all
AMD - 52 weeks low? what? I am taking a risk on this one, will do more research this weekend to determine if it really needs to be here
Diageo (DEO) - worst of the worst, here I was going for a pick in a sector that is not doing well now, I intend to pick the best of the worst, ROX, however its capitalization is too small for CNBC, so I settled on DEO.
Wayeheurser (WY) my token NW stock is actually in a good sector, the only big name in the tree sector.
AIG - a worst of the best approach due to capitalization pick, alternative to VTKI

I should be almost as fully invested as I set out to be by now, so expect more sporadic postings on prunings et al.

CNBC Challenge - What I hope to learn

Currently ranked top 4% with a one day $10,430 gain, I feel pretty cool for a minute. [ I know there are at least 80,000 people in the competition] however, this is probably as high as I would get. Why? I realize that to win in this kind of competition one has to use an extreme strategy.
An effective strategy will be, some like buying the lowest stock price that is available (you can't trade penny stocks), that you think, will go up the highest in the next day or two, be fully invested and dump it, when you have your gain.

I may be wrong, but we'll see. What I hope to learn though is - what kind of return can one get from an aggressive/safety strategy. Slightly diversified, but go for battered stocks and dump anything that looses more than 5%.

Todays Trades & Why
CRM (Salesforce.com) - Software as a Service is huge and I expect some recovery from recent beatdowns.
CSL (Carlisle) - A secret hedge fund, try to get a clean image, something tells me these guys have something up thier sleeves
NXG (Northgate) & OXY (Occidental) - now that it is all about subprime lenders, time to get into Natural resources

My goal is to be 85-95% fully invested, so I still have some more shopping to do. I will keep y'all posted and do post your own trades.

On Business Cycle and Consequences of Short Squeeze (Part 1)

This is a three part series I have written and broken up for ease of assimilation. I have tried to write it in layman language and leave out the lingoes to make it accessible to all- feel free to seek clarification of term usage as it intended meaning might be lost in the simplification.

Sometimes in September last year, I had come across an article by Martin Armstrong - a former high profile Wall Streeter now in jail indefinitely on contempt charges. In that article, the lifer and eccentric had argued that the “economy” grow and burst in predictable cycles and even though he relied on back testing more than numerical analysis, he came up with 8.6 years cycle. I saved the article and laughed it off especially given the reputation of the writer (now in jail of course). However, I noted that the next turn (major or minor) predicted by date was February 27, 2007- just few months away.

I only remembered I had saved some Nostradamus like article on Thursday the 1st of March when I dug in my archives and came up with Armstrong's article. I was more than stunned to observe that he was bull’s eye accurate. True to his prediction, the market has since experienced feverish jitters since that date. More so, his track record of predictions speaks for itself. Hence, I took it upon my self to perhaps read the article again, and come up with a new interpretation untainted by my lack of objectivity the first time around.

The Gist
The core gist of Armstrong’s hypothesis was business cycle and the boom-burst cycle occasioned by an externally driven cycles either exaggerated by intervention or a lack of it. Indeed, he postulated that given his 8.6 year cycles and the mini-quartet cycles in-between them, the total number of days (3141) was a function of pi, thus confirming its natural periodicity (one of those eccentric calculations or approximations that will befuddle engineers and mathematicians reading this). But on second read, beyond these quick approximations and weakness of the Armstrong hypothesis I found a particular unexploited abyss: it is nearly almost impossible to correctly interpret or apply this hypothesis. But at each turn, the consequences of these holes were the strengths and abiding infallibility of the ultimate calculation of the 8.6 years he came up with. It is my intention to glean the misinterpretations of his gist and its consequences in my next posting. Feel free to pore through the article, and highlight the “weaknesses” you spot.

Trade Stock with Play Money - Win a Million Bucks

The CNBC stock trading competition is on once again. And this time instead of a maserati, you get a cool million dollars.
Trading in a down market for quick gains, is essentially crap shoot, however, I think one can learn a thing or two about the market.
This is to encourage you to join the game. I will blog about my choices and why and I hope you can join me too.
First trades -- 1000 shares of Goldman Sachs (GS) and 1000 shares of Sears Holding (SHLD).
Why? GS is the best managed brokerage; and SHLD is an investment holding company disguising as a retailers. More importantly, I expect both to rebound once the market has hit rock bottom.

Happy Trading!

Trade African Equities

If you add a risky stock into a portfolio that is already risky, how is the overall portfolio risk affected?
a. It becomes riskier
b. It becomes less risky
c. Overall risk is unaffected
d. It depends on the stock
Answer - it depends, whether the risky portfolio and risky stock moves in the same direction.

I am sure you have heard about the meltdown in the US stock market yesterday triggered by a down day in China and other factors. An important thing to note is the fact that African market including the JSE (Johannesburg Stock Exchange) was not affected.

This is a reason to invest in African equities!