October 2006

I read a while back that there is a 4 step hierarchy in terms of what drives markets. The first step is liquidity, then flow of funds, sentiment, and microstructure indicators (i.e., microeconomics or technical analysis). The basic idea is that everything flows from liquidity, and that liquidity is the largest of all influencers. The liquidity environment (expansion or contraction) is the mother-trend and is the “rising tide that raises all ships” when expanding.

I decided to take a look at liquidity trends over the last few years, and maybe in the process compare the current environment to the last (only) soft landing in 1994 as well as the recession in 2000.

Since the bulk of my investments are in index funds, fed regularly by scheduled payments based on a pre-set asset allocation, it probably sounds strange when I express concern about taking profits and shifting my asset allocations. Obviously, rebalancing is essential to maintain appropriate asset allocations according to my plans, but a little over a month ago I performed an action that seemed to fall outside my asset allocation strategy. Jason has requested that I explain and expound upon my actions. (more…)

Dealboard I recently subscribed to the NY Times’ Dealbook daily email service, and they have a really nice feature called Dealboard. The dealboard is in the emails every day, but I can’t seem to find it on the website anywhere (to be honest, I didn’t try that hard).

The image to the right is the Dealboard from October 5, which highlights the various takeover situations that they track.

The first one on the list is the takeover for Harrah’s (HET) by the Apollo group. The spread of $5.71 is how far the current market price ($75) is below the potential buyout price ($80 and change). The $5.71 spread works out to about a 7% difference, showing that the confidence in the buyout is certainly not as high as it could/should be.

If you were into arbitrage and thought you could get an edge in trading these acquisition targets, this is a pretty decent place to start. At the very least, it is good to keep on top of the acquisitions and how the market is reacting to them…

All the spreads here are positive (which may be by design) but there are a few cases out there where the spread is negative — implying that the market expects an even higher buyout offer sooner or later. That’s the case with one of my holdings NovaGold (NG) — Barrick Gold (ABX) is trying to buy it for $14.50 per share, but NG is currently trading at $15.79.

Today’s rally of the DJI and S&P500 was broad and strong.? 27 of the 30 DJI were up, 450 of the 500 S&P500 were up.? This is one indicator that things are very bullish in the short term.

Nassim Nicholas Taleb (author of Fooled by Randomness) was apparently linked to the Amaranth situation:

I did not directly hedge Amaranth?s books or exposure to blowups when I was in Greenwich ?I never worked directly with them though I shared offices with the group. I hedged a fund?s large exposure to Amaranth (or its predecessor) so long as it were exposed to their risks (before Amaranth got involved in commodities).

You can read more here (scroll down). I always find it interesting to see what people hire consultants for — in this case to help hedge a counterparty’s risk when dealing with exposure to Amaranth or Mother Rock.

I was just doing a quick review of the markets, and Gold was certainly not the only commodity that was squelched today… Crude oil was down 3.8%, silver down 5.1%, copper down 4.2%.

The interesting thing is that Natural Gas started the day down quite a bit (around 3%), but rallied into and after the close to finish up 2% for the day. Here is the 30 minute chart to see the price behavior intra-day. While the rest of the commodities were struggling just to pare losses, natty gave a pretty noticable divergent performance. Zooming out to the daily chart for NatGas, it looks like we could have the beginning of a trend change, especially considering how little the drag the rest of the energy/commodities didn’t stop natgas from posting a decent day.

I found a decent index (XNG) that tracks 15 natural gas producers. The XNG finished the day down 2.6% despite the 2% gains in the natgas futures. Likewise Canadian trust companies that are heavily weighted towards natural gas reserves (like AAV) finished the day down ~5%. If there are a couple more days of strength in the futures market, we could see some of these stocks turn around.

As the Dow is trying to close at a new high, it looks like Gold wants to tuck tail and run.

As I feared, it looks like Gold is going to take a stab at the support in the $560 range… today it is off over 3.5% or $22 and is trading at $581 (December basis). Gold Stocks (HUI) are off by over 6% right now. Normally a market would gradually grind its way down over several days or even weeks, but apparently Gold is in a hurry to go down.

It looks like my last post on the topic was a little early, even though I did lay out the possibility of this drop. My advice stays the same as before…

I should also mention that although gold stocks make up a very small portion of my portfolio (less than 10%) they are responsible for over 90% of the daily volatility across the entire portfolio. They are also responsible for most of the profits, so the volatility is not in vain… but it can be stomach churning if you’re not prepared for it.

I just read this interesting piece on how the Goldman Sachs Commodity Index (chart) was recently “tweaked” and could have caused a bit of a ruckus with some of the indexers who would have had to shuffle their investments. The short version: the recent selloff in oil and unleaded gas is a side-effect of indexers shifting to follow the new, lower weighting of unleaded gas in the index.

The author of the piece thinks that the timing was political, though I am not convinced.

After briefly reviewing interest bearing accounts lately, I have to say b’bye to ING Direct shortly… Here are the other rates out there that I found more appealing (all rates are APY):

ING’s rate of 4.4% is certainly nothing to sneeze at… In fact, compared to normal retail banks, it is still pretty good. Wachovia can offer up to 3.55% in a money market account, but you have to deposit ridiculous amounts of money to get that rate — us mere mortals would earn between 0.25% and 2.48%. And ING is certainly not the fly-by-night operation that you can typically find sporting the highest rates on Bankrate.com… but then again, HSBC is a much bigger financial institution with a market cap in excess of $210 billion.

Even though ING used to lead the pack in high yielding money market/savings accounts, it’s now a lagger in this high interest paying competition. I plan to keep my account open in case they decide to lead again, but the majority of my savings will go elsewhere…

I found a blog the other day that is worth a comment… StockCoach’s Corner is a guy’s blog where he is detailing his trading activity, including every position he has, and the current portfolio value ($742,000).

I also found a guy with a blog called Irregular Payments, who has a much more humble account size (~$45k), and is more geared towards him dealing with his personal finances than investing…

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