Stick to Your Guns
Research for Online Investors

by John Dalt

4/07/11

You have to admire a trader that can stay with a trade or “stick to your guns,” so to speak.  We also admire professional traders that manage their risk carefully.  Occasionally, headlines tell the story of those that don’t do either very well.

Philippe Jabre manages the $6 billion Jabre Capital Partners hedge fund.  Right after the earthquake hit Japan, he rushed in to buy Japanese stocks.  He thought he would make a quick profit on the rebound.  The problem was the Nikkei stock average fell another 13%.  When his losses equaled 5% of his assets, he sold.  You can guess the next sentence.  THE MARKET REBOUNDED TWO DAYS LATER.

Hey Phil, read MarketToday.  We have Investor Resource articles about asset allocation, stop losses and managing risk.  What the heck were you thinking?  Oh, by the way his hedge fund made 4% last year!  4%!  That is a smaller return than every one, or any combination of our premium services we offer, and we don’t charge 2% of assets and 20% of profits.

This morning we recommended a short position against Netflix (NFLX) if it traded above $240 to our SwingTrader subscribers.  We didn’t get to open the trade…yet.  I saw an interview with a hedge fund manager, Glen Brecken.  He was beating the table that NFLX was a scam.  I have watched NFLX as the stock has the reputation for chewing up short positions.

Here is the thing.  I spent 10 years in the video business.  The accounting abuses that can be used to manipulate the books in these operations are legendary.  In the 1980’s the IRS came out with specific rules regarding depreciation rules for pre-recorded video tape.  But, there are still loopholes.  There is nothing that scares me away from a long position in a stock more than rumors of an accounting scandal.  Conversely, accounting scandals are some of the best short candidates in the world.  Investors run for the hills, after hitting their sell buttons on any kind of accounting shenanigans.

Here is a case in point, APWR.  We sold APWR in the long-term portfolio last year for $18.15. We had bought it in 2009 for $8.00 and were able to record a nice 126% gain.  This company is a real jumper, but they careen from one problem to another.  They lose orders, and then delay shareholder meetings.  It is going on again now; the stock closed yesterday at $4.23  Chinese companies are notorious for more under the surface than you may see, and APWR suffers from bad investor relations.  I don’t know if there are problems at the company, but they could do a better job of communicating their story.

The Hedge Fund manager that was beating the table on NFLX being overvalued was short the stock.  He is convinced it is going to $20 per share.  He is short at $107…the stock closed yesterday at $239.97!  Mr. Brecken, we have some articles in Investor Resources that may be of interest to you.

One short play that I have high conviction in is the UNG, the natural gas ETF.  We shorted it at $10.50 on March 8 in the SwingTrader.  It rose, we shorted it again on 3/17 at $11.00  It rose some more.  We wrote our subscribers that we would consider shorting again at $12.00, but did not.  Luckily it didn’t quite reach that point, because I was starting to question the wisdom of my conviction.  I knew there was plenty of natural gas, but I also knew the natural gas market was moving higher on emotion over the Japanese earthquake and tsunami.

Traders believed that natural gas would see increased demand if countries moved away from nuclear power generation.  That all made sense, but it takes months and years to build generating plants.  The UNG tracks cash prices with current month contracts.  There was no logical way for current demand to increase enough to lower storage and increase spot prices on a sustainable basis.

We stayed the course, but WE DIDN’T BET THE FARM. Our Natural gas short position only represents 20% of our trading portfolio (2 positions X 10% each). Even when we were down a combined 9.7% on a one day spike, it represented less than a 2% loss in our trading portfolio.  Today, UNG close at $10.62...we are profitable.

That is risk management.  That is money management.  That is trading.  What these other guys are doing is none of the above.  If you would like to trade the market using money management and always controlling your risks, we invite you to join SwingTrader.

The mailbag:
Excellent early warning of the likely consequences to our investments when the Fed takes away its "punch bowl."  It's gonna happen. What fared well when they took it away last spring (4/23/2010 to 07/01/2010)?  Gold? Oil? REITS? Small Caps? Emerging Markets?  Something fared well.  Also, what's likely to collapse; that is, what should we short?—subscriber J.R.

John’s reply:  Everything was red.  The proverbial baby with the bathwater.  When markets start down, everything gets sold to raise money for people on margin.  So gold, silver, crude oil, commodities will all get hammered, then we need to have the fortitude to step in and buy.  Last year I got too scared and waited for 1010 again rather than buying at 1040 which was the first support.  Blue chips will hold the best; the riskiest assets will get hammered along with those that have had the largest gains.  The big gainers getting hammered is similar to the gold silver problem, everything gets sold to raise money.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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