Greg Weldon on CKNW Money Talks

Greg Weldon of WeldonOnline shared his views on CKNW yesterday at 9AM. If you have never subscribed to his money monitor, metal monitor or ETF monitor, I strongly recommend you give it a try via the free trial. Greg is one of the few independent financial analysts I respect. He correctly predicted this crisis long before our government officials, central bankers and financial media got out of their denial. He provides extremely specific short-term and long-term analysis.

Here is a quick summary:

  • We are not out of the woods. The stock market has lower to go even though we may see bear market rallies in the order of 20/25% with the U.S. election “acting as a catalyst of hope”. What we are experiencing is a reversal of a 40-year credit expansion. The U.S. consumer is howing increasing sign of stress: more unemployed, longer unemployment, much more partially unemployed. There is no sign for a major wealth reflation on the horizon.
  • What to do from a personal investment standpoint: Be much more personally involved. The old investment models like the buy and hold mentally don’t apply anymore. Be more flexible, diversified and have a nimble investment approach. Be involved in all asset classes, globally and be much more specific. Long in some assets and short in others at the same time.
  • So far the massive efforts of central banks haven’t been very successful, so we don’t know if this situation will end up into hyperinflation or ugly deflation.  There is still a lot of fire power held by central banks, so we can expect a much bigger effort in terms of monetary policy (see upcoming G20 meeting mid-November).
  • At some point, if/as more and more bail-outs are provided, the credit-worthiness of the U.S. could be questionned.

Portfolio update

Since my last post on April 1st, I have been adding shorts to my portfolio (SDS, DOG, SKF, SCC, SZK) little by little and liquidating my long stock positions. I sold GOOG at $533 on the 18th and AAPL today at $161 ahead of the earnings. I think the short-term rally we have seen in the recent weeks is coming to an end as investors start to realize the good 1st quarter earnings are not necessary a reflection of things to come. Regarding AAPL specifically, I think that the analyst consensus has moved too quickly to Apple beating by a huge margin the expectation, and most of these expectations are built into the price. This is the only reason to me that can explain why a single downgrade to NEUTRAL by AMR was enough to take more than 4% in one day off the recent high reached yesterday. Everyone is expecting a big profit jump and any piece of bad news may have a huge impact. I’m expecting good results but a conservative view of the rest of the year, i.e. Apple will say that they are not recession-proof, which is precisely what I believe is priced in right now. In other words, I think the risk of going down (to $140/$130) is much higher than the chance of going up ($170/$180) tomorrow. Depending on what I read, I may decide to re-establish my long position in AAPL, but for now, the dowside risk is too high.

I share MacroMan thesis of long large caps, short mid caps, to the extent that large caps are typically those making a lion’s share of their money outside the U.S., and I am planning to adjust my mix of shorts accordingly. I’m also looking into buying a Brazilian stock ETF to bet on the continued growth, leverage of the commodity boom, and overall decline of the dollar. I will try to buy in the lower $80 of EWZ if the end of the short-term U.S. rally takes with it EWZ.

I’ve also restored a position in IAU (Gold) and FXY (Yen) as the dollar fall seems to never end and I’m starting to lose completely my naivety, and starting to accept that the Fed or Teasury or any other Bank in the world is just completely powerless against what I can just describe as a growing global belief that the U.S. has lost its shine, and it will take long, very long, or an industrial miracle, before it wins it back, if it ever does.

I am now ~22% shorts, 13% cash (Yen), 47% Cash (USD), and 18% Gold. My portfolio is overall +8.11% YTD in USD and before taxes, -0.45% YTD in EUR. Pretty sad…

Portfolio update

Today’s rally was probably a combination of bad news not as bad as usual, and the beginning of the new quarter. The day after my last portfolio update, gold continued to decline abruptly and seeing the cracks in the bull market, I used a small Gold rally I saw as temporary to liquidate my IAU positions with a small profit on Wednesday 26. I am happy I did (I should have sticked to my initial thought that the commodity bull market is taking a deep breath). I did the same with my FXY at a small loss. I have been since then ~20% stocks (mostly AAPL and GOOG) and 80% cash USD, expecting both a short-term rally in the USD and also a short-term rally in equities, explained by market participants thinking that the worst is over, or that the Wall Street crisis won’t affect Main Street as much as priced in.AAPL did well the last month and a half (+20% since the mid-February low) and I am happy to have held on. I entered at around $135 and I’m now well in the red (+10%). This is partly thanks to the general recent market enthousiasm and partly thanks to the rumors around the 3G iPhone and of price reductions of the current model. I think the latter will be a great move. I don’t understand why Apple hasn’t been democratizing its offering with entry products that more people can afford, especially at the time we are now clearly entering a slow down. I think a sub $300 iPhone will allow people with a lower budget than current owners to finally get what they wanted for more than a year. BTW, did you know that Brazil taxes 100% imported electronics, making the MacBook Pro a >R$ 10K-12K luxury almost nobody can afford.Anyway, I’m still bearish for U.S. equities for the rest of the year, but I know that bear markets don’t go in a straight down line, and that we might be experiencing a temporary bull market. As a resuslt, I am going to watch more carefully the action tomorrow and the rest of the week. SKF (ultrashort financials) was down almost 15% today, SDS (ultrashort S&P500) was down more than 7%, which tells me that it might soon be time to buy shorts again. My portfolio is up 6.5% YTD in USD, and -0.6% in EUR.

Notes on Jeff Nolan’s Software VC Outlook for 2008

Jeff NolanBryan Stolle of Mohr Davidow Ventures wrote this piece on investment opportunities in software for this year. Here are my takeaways:

  • An innovative business model (ex. SaaS) is not enough. Focusing on solving an urgent, valued, critical business problem first and using/combining known models that fits well the solution requirements is the key of any successful venture. For instance, some companies like SaaS ease-of-setup but they don’t like having their data in the cloud. Their need can be answered by combining SaaS model with the appliance model. I think this should be particularly seducing to the ultra-conservative financial services industry.
  • Actual operations globalization and decentralization of improvements (“IT consumerism”) is a driving force behind new software investments. I wonder if that goes with corporate culture finally moving from a Stalinian management style to actually applying survival-of-the-fittest strategies to management, operations and innovation issues: instead of a management by committee where a handful of people that are not users are tasked with choosing a software product for the whole company, actual users can pick products from the Web for free, start to use them, integrate them with internal products, add new functions, have other easily build upon. In the end, the picked product(s) is the one that is most used and driving most user satisfaction and efficiency.

Portfolio update

Before I start my comment on the day, I wanted to say that I should have probably waited Monday to close the positions I closed Friday. The Bear Stearns crisis drove the Yen, Swiss Franc, Euro, Gold and shorts financials to new highs. But who could have predicted this! Jim Cramer actually recommended Bear Stearns last Monday – What a joke, this show.

As for today, another spike (DJI +420.21) that MacroMan was prudent to not qualify, hesitating between calling it the latest sucker’s rally or as the short-term bottom. As far as I’m concerned, it did not convince me, and it offered me the opportunity to buy some SKF (-15.42% today) and FXP (-9.26% today) and some FXY (-2.19% today).

My portfolio is about 60% USD cash, 15% Yen cash, 20% stocks, and about 5% shorts. My YTD performance is 4%.

Gold (IAU) was down -2.76% today, which is probably explained by this part of the Fed statement:

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.

I tend to share this opinion, although the main reason for the drop today is most likely the momentary lapse of reason of the markets that this 75pts cut will bolster confidence in the U.S. financial system’s ability to absorb the current crisis. Nouriel Roubini agrees with the idea that Gold price will be under pressure in 2008 as a result of the recession’s reduction of long-term inflationary pressures.

As a result, I will adopt a wait-and-see stance with regards to Gold in the short-term. By the way, a chart I like to monitor.

Portfolio update

Since the beginning of the year, my portfolio has mostly be betting on a further fall of the USD (long FXE, FXY, FXF, IAU i.e. short dollar), demise of the U.S. banking system (long SKF i.e. short banks), fall of speculative markets (FXP i.e. short Chinese markets) and resistance of a few companies like AAPL or GOOG with a following of highly-satisfied proselytist buyers/users at 30%/40% of their 52-week high. Apart from these two stocks, which I have acquired recently at respectively ~$135 and ~$431, this has just been a continuation of my 2007 bearish stance on the U.S. dollar and U.S. financial system.

I’m still a long-term bear on the U.S. dollar and U.S. financial system, but I believe that this may change in the very short-term. Now that the Dollar has fallen to a 12-year low versus the Yen, and record low against the Euro, oil is at $110 and gold at $1000 (from $650 in early 2007!), I think the danger of a downward spiral is becoming clearer by the day, and many of our “leaders” are freaking out, especially when cracks are starting to appear some high-flying names like Bear Stearns. As a result, I’m expecting in the next few weeks a massive coordinated action from central banks, with the objective to support the dollar (read “desperate attempt”). I don’t think this will have much more long-term success than the last attempt by the Fed, which propped up for a day the DJI by more than 400 points and which I used to buy more of the above, but in the short-term, it may have a dramatic effect on whoever is a U.S. dollar and U.S. financial bear.

If I look at the recent attempts, which were mostly based on a “news effect”, this attempt may actually be carefully coordinated over time, in a way that maximizes desperation of dollar bear speculators and changes the pyschology of the market (there is a lot of irrationality in currency markets). Anyway, I’ve decided that I’m not willing to bear the risk of a short-term spike in the dollar value and have cancelled fully my dollar bearish positions today and I’m adopting a wait-and-see, roughly 80% USD cash 20% stock strategy (expecting good surprises from AAPL and GOOG).

Let’s see what happens.

Disclaimer: This is not an investment advice.

Beating AAPL and DJIA with the Yen

Since I last recommended investing in the Yen, FXY, an ETF that tracks the Yen, has increased by 4.58%, primarily driven by the unwinding of the carry-trade. Bloomberg noted that the Yen is now at its 4-month high. The Yen has broken the support level of 118 Yen for 1 USD.

I have restored my long position this morning, expecting a slide of the market indexes today in light of the PPI release and a further slide tomorrow after the release of the CPI, which I expect to be slightly higher than expectations.

In comparison, AAPL has increased by only 3.66% in the same time frame, and the Dow Jones Industrial Average has decreased by 4.28%.

I think I know now which currency Warren Buffet has been betting on.

Investing in the Yen (2)

Since I last recommended an investment in the Yen, FXY – an ETF tacking the Yen – has gained 3.7%. That’s certainly not much compared to the 20.23% gained by AAPL, but still much better than the pretty much flat Dow Jones Industrial (-0.54%).

So, I’m pretty happy with my 3.7% return over 1 month, and in light of the incertainties of next week, I have sold my stake in FXY and locked my profits.

Where are we going from now? I am not as confident as I was one month ago. If the credit crunch worries and the equity sell-off continue next week, we’ll inevitably see some more gains of the Yen over all major currencies, but whether the sell-off will continue is hard to tell right now. The action on Monday 7/30 will be interesting to watch before taking new positions regarding the Yen.

Investing in the Yen

There are many reasons why the Yen may be a good long-term bet:

  • If you see the Yen as a share of Japan, Inc., it is a country where unemployment is at a historical 9-year low, whose population is one of the most educated in Asia, with the biggest savings rate in the world (and one of the main creditors of the US), and whose yield curve is pointing to an increase in interest rates.
  • It is undervalued by 21% with regards to the US dollar according to the Economist’s Big Mac Index shows.
  • The undervaluation of the Yen has a lot to do with the “carry-trade”, a process that will surely revert as soon as the yield of US assets, particularly equities decreases, or as the Bank of Japan increases its interest rate once global inflationary pressures gives them some comfort.

Note that this last point makes the Yen a particularly good hedge against the fall of the US equities as this graphical comparison between the Dow Jones Industrial Average and Yen/USD conversion rates shows (when the DJI decreases, the Yen increases, most notably during the late February mini-crash).Note: As I wrote this article, the last 5 days have seen a relatively large decrease (-1.13%) of the US dollar agains the Yen.

If all this does not convince you, consider that according to sources mentioned in this Financial Times article, “One object of Mr Buffett’s affection could be the yen”

Investment vehicles

One simple way to invest in the yen is the CurrencyShares Japanese Yen Trust (FXY), which is roughly equivalent to holding Yens on a Japanese deposit account. In addition to the appreciation or depreciation, the trust may pay a monthly interest to shareholders based equal to the Bank of Japan Overnight Call Rate minus 27 basis points, minus the Trust’s expenses. Note that under Internal Revenue Code section 988, gains or losses related to an investment in FXY will be viewed as ordinary income or loss for U.S. federal income tax purposes.

Another way is to invest in Japanese stocks. I don’t believe that companies traded on US market through ADRs are very attractive in the face of a raising Yen: the US is typically a very large market for them and a raising Yen’s weigh on their exports would offset any effect of the exchange rate on their share price.