Comments, SRS, and Shorting

Well no crash today. You know if you do not follow markets in depth it is hard to have an appreciation for what has happened the last couple of days. You look at the big indices and your like well nothing is much going on. My stock is up a little bit or down a little bit. That is not where the story has been. It has been in the debt and treasury markets. What has been going on the last two days are 1987 type moves. It is really just mind boggling!! The only really shocking thing to me is that the equity market did not follow or blink which is another reason why you should try not to guess the short term moves of the markets. As said yesterday you had the largest decline in the treasury yield in one day since 1987. You had a max exodus (panic) towards short term treasury paper. The safest of the safe. Like I said you have to be a market nut to appreciate it or really understand the magnitude of what happened. The equity market could have very easily followed suit but did not. Why? Well who knows. I am starting to think more and more that the big drop over the last month not counting the financials was simply the buyout premium getting taken out of stocks. With junk bond spreads non existent and complete lack of covenants there were essentially no company who was not a potential target. As a result you had a large premium in every stock as a buyout candidate. Now that it is gone and the market has corrected. So is the market done going down? Everyone who reads this knows my opinion but my guess is the market may be done moving seriously down for awhile. I think the market really needs to see this credit crunch affecting economic numbers to show that next years earnings are not what the market thinks they will be to move the market seriously down from here. Once again though I guarantee you my short term batting average of market prediction is as bad as a monkeys. Be wary of false rallies and know your stocks and know your fundamentals and forget how the market moves in the short term.

A couple of you have asked about SRS. If I lose money on this it is because I bought something I never could get my arms completely around which should be rule number one. I have searched hi and low and still cannot find what is exactly is in that index and how many stocks are in the index etc. I like the concept of the trade and will probably continue to hold it. As previously said I was already high on short exposure and so made it a relatively small position. Not that worried about it and we shall see what happens. Just a reminder my only purpose in mentioning stocks or trading ideas on here is because it helps me think things through. This is meant to be an idea generator platform only, not a buy sell recommendation platform. Many of you shoot me many different ideas weekly and I love it. I usually end up going with 1% of the ideas given to me after doing my own research but I love getting them. Investing is an art. So I mentioned MWA over a week ago. I still have not added to my position though I indicated that I may. I love the stock but have been just watching it. It is down. I am excited that it is down because that means I can buy the same assets cheaper. That will probably be a long term hold for me and though I own some all things equal I would like it to drop 50% so I can load up the boat at a ridiculous price. I mention that because you have no idea what I am doing within the portfolio or how I am trading around it. My art stroke may be completely different than when I first mentioned it So do your own research, stick to your program, look at my ideas I may briefly talk about and send me your own ideas.

Which brings me to shorting. Shorting is an integral part of my portfolio and something I somehow seem to be fairly good at despite how difficult it is. First I do not short to hedge!!!! Never have and never will. If I want to hedge I will invest in indexes or mess with options on individual holdings that I have (I do this some). I short only to make money. So many people short a large group of stocks to have short exposure for their portfolio and it seems worthless to me. If I don't make money on a short I consider it a failure. Second I never short on valuation alone. Let's say a stock is selling for $50 bucks a share and I think its intrinsic value today is $25. Great short right? WRONG! If that is the only reason you short it I think that is a horrible idea. First what will keep it from going to $75 or $100 and become even more overvalued. Second it could hypothetically stay at $50 for five years until the intrinsic value finally reaches $50. Valuation plays a part but my shorts are more event driven / theme driven. This whole homebuilding bubble has been a great theme driven play for me. It seemed obvious homebuilding was in bubble stage in the summer of 2004 when I started studying it. Didn't touch it until we already had a strong move down and it seemed obvious that the bubble was over. January 06 I started shorting homebuilders (Most were already down 20% plus). October 06 I started shorting subprime banks. March 07 I started shorting Alt A banks and July 07 I started shorting I-banks, rating agencies, and mortgage insurers. I did some research on valuation but it was more on understanding the big picture. Often times I am woefully early. My shorts in October 06 went up 20% as well as my March 07 ones. I hung in there and have been handsomely rewarded. I like shorts where the upside really is only 20 to 40% (not my upside, the stocks move up). That is where valuation comes in. I do not want to be shorting something that could potentially move up 50% or 100% so I like to already see bad news versus trying to predict bad news but where I believe alot more bad news is coming. So Jan 06 the slowdown had already started occurring. If I had tried to short when I first noticed the bubble in July of 04 I would have gotten killed. If it has that potential (the 50 to 100% move up) but the probabilities are really low I may play deep in the money puts but will not short it outright. So for instance I think I mentioned Moody's yesterday. That was a theme driven short. When I shorted it, it was selling at peak multiples. I really felt that the potential upside in the stock was very limited. I felt like I knew we would not see any great news out of borrowing land (may not see any bad news but wasn't going to see any great news) and so felt the upside in the stock was very limited. It was a great risk reward scenario in my mind. I mentioned if there was that upside I play puts. One such success is Heelys. Here I had the potential of it moving up 50% and it actually did after I shorted it. I did tons of research and looked at the numbers and thought I saw no way they could keep their growth up and felt like growth may turn negative. When I do this I usually only play deep in the money puts. I do not like speculating even with shorting. I want to be in the position that when the put expires to be able to exercise it and stay short the stock. I also hate paying premiums for options. I did this analysis with Crox as well and numerous times passed on it. So this Heelys Crox thing I think you can chalk up to luck that it worked out so well versus skill. Next themes? Well at this point if I could short the U.S. economy I would. I really think we have great odds of entering into a least a small recession. It really seems the next natural step in something that has followed a text book bubble scenario. Since you can't do that the next target for me may be luxury companies. I have taken a long look at Coach (COH). Not a recommendation and I may or may not short it. Just thinking the luxury goods market may be the next mover down. In shorting I am also much more likely to hedge my position with an out of the money call. I hate losing money even with shorts and might hedge 20 to 40% of it. Sometimes I don't just depends. Anyway as mentioned above investing is an art. To me shorting is one paintbrush out of an arsenal of many that I like to use.