The Davian Letter Blog

Thoughts on the New Movies "Futures Exchange"

BarbarianCapital — Thu, 11 Mar 2010 23:11:51 -0500

There is this new "futures exchange" coming which will enable seemingly anyone to bet on the box office receipts of new movie releases. The article was in today's NYT's Media section. The exchange will be based on the existing successful "Hollywood Stock Exchange" (HSX) but with real money. Both are managed by Cantor Fitzgerald and the new project seems to be generating a lot of publicity in today's world of "crowd sourcing" and "crowd wisdom." Is it really such a great idea?

Let's follow the money and look at the participants:

(1) Studios/insiders have a substantially better view of how a movie would do by the time it is released than does the general public. How? They prescreen heavily, make adjustments, sign distribution deals, determine the marketing budget, follow the buzz, and so on. Personally, would you trade against them? Per the article, the studios are allowed to trade "within limits" whatever this means. The fact that they have not been able to "lay off box office risk" with insurance companies (risk pros) ought to tell you something about how great of a deal this is: the informational asymmetry is staggering. Not only that, but also, unlike a wheat producer selling weather risk, the studios CAN affect the outcomes. If this is not moral hazard, I do not know what is. If the studio buys enough "protection" on movie X, guess what, they will cut the marketing budget and # of screens!

(2) Cantor operates the exchange, and is probably interested only in ramping up the hype to attract the largest number of "investors". Cantor certainly does not care if anyone makes money, they just want volume. The President speaks of a "wide audience": quantity of participants is inversely proportional to their quality. I do wonder if there is a level of responsibility here that is ignored: stock brokers have to ascertain that the clients' risk profile matches the investments. How would Cantor do that? Would they accept credit cards? PayPal? Bets from people under 18? Is the whole thing structured as a "futures" exchange in order to avoid gambling regulations? This kind of bets are likely to be seen on European bookie lists, and I personally see no difference between "investing" in a certain outcome for a movie vs. "betting" on next year's SuperBowl champion. Is a win there taxed as a short-term capital gain? Are the losses deductible? And so on.

(3) The public: this is the tuna. The public has no informational advantage over the studios. Look at regular stock investing/trading. Even with huge amounts of publicly available information, audited financials, historical track records, and so on regarding potential stock investments, study after study show that the average active market participant underperforms the market. Compare that to investing in a completely unknown endeavor (a new movie): what are the chances that the average participant will be successful? I am sure that there will be widely publicized "success stories": these will be exceptions. The only market participants that will consistently make money are (1) the studios and (2) the exchange owner.

Think of it this way: the exchange owner charges rent. The studios have a deck of cards that they can look at in advance and place bets accordingly. The public can place bets without seeing the cards. Who do you think will win here?

I am all for markets for ideas, like InTrade, where one can instantly observe the crowd wisdom, even when it is very wrong (like the Great Hillary/Rudy Race of 2008). But it seems to me that on this exchange, the odds are stacked very much against the individual participant.

I will leave you with a quote from Howard Marks, found in his October 2006 memo: "Since I moved to Los Angeles in 1980, my friends in “The Industry” have been unanimous in one piece of advice: never invest in movies. Yet The Wall Street Journal of April 29 carried a story headlined, “Defying the Odds, Hedge Funds Bet Billions on Movies.”

For decades, movie studios have gladly accepted millions of dollars from a group
of investors collectively dismissed as “dumb money”: deep-pocketed dentists, oil
tycoons and other wealthy individuals eager for a piece of the glamorous but
high-risk game of film production. But the biggest influx of money in Hollywood
these days is coming from sharks, not suckers: hedge funds, private equity funds
and investment banks.

Take the example of “Poseidon,” which was co-financed by hedge fund-backed Virtual
Studios. It has brought in gross revenues of $180 million worldwide since May against its
production budget of $160 million, meaning that after the deduction of at least half the
revenues for distribution charges, advertising costs and exhibitors’ fees, it’s still a big loser."

(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)

Position Card for 3/10/10

ZMoose12 — Wed, 10 Mar 2010 00:26:07 -0500

This week has started off slightly rocky, as the markets are currently consolidating and many stocks are indecisive. To me, we have the potential to go either way - if I had to pick a camp, however, it would be the bulls. My boy @RaginCajun from iBC is thinking the way I currently am, seeing that his latest post is titled, "100+ Easy Points to Go." The rest of this week should be extremely interesting, with the main Economic event I will be watching coming out tomorrow at 10:30am ET (EIA Petroleum Status Report).

MMR @ 17.50 - Profit Target @ 19.25, Stop @ 17.10
MTW @ 12.28 - Profit Target @ 13.50, Stop @ 12.00
CENX @ 14.84 - Profit Target @ 16.10, Stop @ 14.10
RDN @ 10.84 - Profit Target @ 12.15, Stop @ 10.55

Until then, good luck and BE PATIENT!!

Friday A.M.T. Review for March 5th, 2010

Airelon — Fri, 05 Mar 2010 22:48:32 -0500

"Discipline is the refining fire by which talent becomes ability." - Roy L. Smith

Here is the "Friday Review" video, that will review my investing and trading efforts for the last week, based off of comments in last weeks "Airelon's Market Tactics".

Position Card for 3/5/10

ZMoose12 — Fri, 05 Mar 2010 16:59:18 -0500

This past week was indeed a wild one, as I kick off the month of March +2.69%. Basic Materials continued to run the market up 5.2% for the week, with the Industrial Goods sector taking second (+4.6%) and the Financial sector scooping up the Bronze (4.0%). As I tweeted less than an hour ago, if Monday continues to push higher into the afternoon, I will most likely begin to take profits from my current positions to free up cash for a possible pullback. At this point in the market, I personally feel any 2-5% dip that occurs will be bought up big time and will have a slingshot effect on the market, shooting it higher. All we can do now is wait for Monday with excitement and optimism!

MMR @ 17.50 - Profit Target @ 19.45, Stop @ 17.10
MTW @ 12.28 - Profit Target @ 13.50, Stop @ 12.00
JBLU (short) @ 5.14 - Profit Target @ 4.85, Stop @ 5.30
CENX @ 14.84 - Profit Target @ 16.10, Stop @ 14.25

Have an incredible weekend with family and friends - if you're on the East Coast enjoy the weather!

S.E.C. Charges Psychic With Securities Fraud.....I feel so much safer!

ex_wirehouse — Fri, 05 Mar 2010 11:24:36 -0500

Have been taking some time off from blogging as I focus on doing more of what pays my bills and less of what is great fun and enriching but some what superfluouos. Recent events just sort of dragged me back kicking and screaming.

I read with an initial chuckle the bust of the Psychic stock picker Sean David Morton(beware people who go by all three names!). Part of me thinks you deserve what you get for giving money to crystal ball reading money manager, and part of me firmly believes it has only slightly less credible than most of the advice handed out by the mainstream financial machine. I gues my greatest IRE is reserved for the fact that the Venerable SEC always seems to nab the real big threats out there. Perhaps the 6 million dollar ghost whisperer stock picker can get the same jail cell once occupied by Martha Stewart. Recall Martha was breaking rocks for a boneheaded conversation with her lightweight broker regards rumors of drug approval and selling a fractional holding while drinking mimosas enroute to a Mexican holiday. The history of the regulators in general seems littered with rescoursces spent chasing the tiniest of miscreants while the real scams that have hobbled the entire financial system go unadressed.

Bernie maddoff all but rented a billboard in Times Square proclaiming his miss deeds, and many tried to point this out, yet the mother of all ponzis went on for a generation, ultimateley wiping out legions of philanthropic organizations and wealthy families alike. How about the credit rating agencies who put there AAA imprimatur on trillions in worthless securities that were then peddaled off globally and brought us to the abyss? Apparently the regulators were preoccupied fretting over social media to notice Wall Sreet in general who's cottage industry of manufacturing and selling unregulated Credit Default Swaps that castrated AIG and helped Greece hide its debt and now threatens to destabilize the Eurozone and global economy in general. I can only assume that the regulators were far too busy prosecuting the gypsy stock picker who catered to former summer of love earthy crunchy types, and their staggering $6,000,000, to notice some of the most egregious transgressions of a generation. Good Work Guys, really great work. I feel so much better now that the mennace of the "I see dead people" stockpicker is off the streets. Looks like a trend up day in the markets, due to a stick save by the 70,000 census workers hired and a slightly less worse jobs number.

Good Trading

Providing Liquidity

anthonydavian — Thu, 04 Mar 2010 12:16:00 -0500

The creation of stock.ly has caused me to develop a profound interest in vc backed pre-ipo companies. Some of the most popular names in this space is Facebook, Twitter, Digg, Zynga, Tesla Motors, just to name a few. One aspect that has had me utterly intrigued is how one values these companies. Valuation is very important for several reasons.

One, investors need to now how much of the company they are getting for their investment or later, they need to know how their investment is doing. This becomes even more important when a company decides to IPO, like Tesla is currently in the process of doing.

Secondly, the founders or those that came on early SHOULD have many shares in the company. When you are a start up, common stock is a currency to the company and many times the company will trade common stock for services. The valuation of the company is important to the people that have taken common stock as this shows how much value they have helped to create.

There has been a website that has caught my eye over the past month or so and they are helping to provide liquidity to the private placement market. The site is called sharespost.com and I have to applaud them for what they are doing. Not only do they help to match up buyers and seller, they are using these transactions to help find natural valuation levels. Today sharespost took it one step further and created a valuation index of venture-backed pre-ipo companies. This index uses several factors to help create valuation levels for these companies. I encourage you to visit their site and explore, but I have also included a screen capture below.

Do you think there will ever be a market for these kind of assets? Is so, who will be the first? Love to hear your comments in the discussion bar.

Note: sharespost.com did not provide monetary or any other type of compensation for this blog post. I just happen to think they are doing a kick butt job.

The Evil Inflation "Monster" and Accompanying "BLS Boogeyman"

Airelon — Thu, 04 Mar 2010 08:25:23 -0500

"We live in the golden age of data. You can convince yourself of anything, and there is enough data out there now, in anything right now, to find a statistically signficant relationship proving absolutely anything in either direction for anything you want." - Paul Kedrosky

I have a couple of dear friends, who live in Columbus. They are recent transplants to the area, as they once lived here in Michigan. The husband, Mike, or "Mikey" as we affectionately refer to him … he's a sports nut. Basketball. Baseball. But especially football and hockey. He watches teams, trades, salary caps, coaching across the nation. Now of course, as we're from Michigan … there is the constant “Michigan vs. Ohio State” rivalry. I would feel better about writing this entry, if Michigan's team was in better shape … but I digress

We visited them last year, and naturally, the topic turned to sports. He revealed an interesting little phenomenon. He was amazed to discover that it was as if people in Columbus are unaware of sports outside of the Ohio State Buckeyes. He's attempted … numerous times to discuss even the Cleavland Cavs, or the Toledo Mudhens, or even Columbus's own NHL hockey team with his neighbors. He revealed to me, that within two sentences, they will turn the sports conversation back to the Buckeyes. It's as if, that's all they know.

Americans are sort of the same way when it comes to inflation.

I'm not sure what it is about American's specifically, but they seem to have some love affair with inflation. Even if inflation is barely perceptible, they are foaming at the mouth. And they seem to want it that way. When I'm in Prague, or if I'm in London, I can talk with friends about policy economic modeling or quantiative capital restructuring. If I try that with many Americans? Within a couple of sentences, they've reverted back to the “evil manipulation” of CPI numbers and inflation. With many of them, if you even remotely follow CPI numbers … you must be an 'unsuspecting sheep'. You've been 'lulled into sleep' because you believe the 'evil manipulation' that is CPI.

Ok, but I wanted to talk about paradigm shifts in economic modeling.

As subscribers to Airelon's Market Tactics are aware, I do not believe we have seen deflation in asset prices. Indeed, since February of 2009, I've been very public that those economies lucky enough will slide into a long, prolonged period of stagflation. So deflation in asset prices? Absolutely not. You can't have stagflation, and deflation acting concurrent to one another. The concept is ludicrous. I say this starting out … in order to avoid me from being grouped with the group that still rails on and on about the dangers of 'deflation in asset prices'. The Federal Reserve has saved us from that particular nightmare for the time being.

Naturally, that does not mean we have slid out of the problems, and growth inflation is back. But I am often shocked to learn how many people want to rail on and on against deflation while discussing inflation? They seem to have no concept of the difference between deflation and a deflationary trap. Nor do they seem to understand the inescapable nature of the trap. And since about August of 2008, the economy has become muddled within a deflationary trap. But the deflation in asset prices was halted around January of 2009. We've managed to eek out just a small amount of inflation since then. But usually, these are the same people that do not seem to understand that much of the repurchasing programs means that a portion of money supply has decreased as that deleveraging causes an automatic conversion on possession of the asset and destroys the liquid means of representing that asset. It's basic conversion. Not that money supply charts are completely and utterly worthless. There is some demand data that can be gleaned from them. But then again, many of these folks believe that we should go back to the gold standard (which if I may say with all respect, is ludicrous), or that quantitative easing is “printing money”; as if the Federal Reserve actual printing press is cranking out more dollar bills and throwing them out into public at large.

Briefly, on that topic … it's funny how whenever the mainstream news media talks about Quantitative easing, they show stock film footage of money on a printing press. Do people really believe that for the sake of the news story the camera crew hoofed it out to the local Bureau of Engraving and Printing?

Regardless … there are many ways to study inflation. And yes … CPI is one of them.

It's not as if the “government is hiding the price of food and oil” with the CPI report. It's out there for all to see. There are government regulated exchanges out there, and we can all watch the speculation on future delivery prices of oil. Nor have I ever seen a CPI report released by the BLS with a claim that “inflation is down”. Every single BLS report I've ever seen released on CPI has this little phrase: “less food and energy”. That evil government manipulation. I must be a sheep for reading those numbers.

Or maybe it's just I know how to look at the CPI numbers.

By means of CPI, I am fortunate enough to have a measurement of inflation without the noise of food and oil. Because then I, along with other economists can study how the producers (PPI) are adjusting their strategies and pricing, how much of the shock they are absorbing, before passing that rise in price to the consumer; without the incessant noise of food and oil. I can look at price structure on a much more intimate level.

I really don't see how the BLS or government is 'hiding' anything. Politicians on the other hand … well, that's a different story …

As I stated earlier, there are many ways to study inflation. CPI is one of them. You can also look at the real time markets, commodities that are approaching FND and accompanying spread to the spot market, with the yield curve and exchange rates. It's high frequency data, out there for all to see. The government tells us in each and every CPI report is “less food and energy”. If you wanted to reproduce CPI and include food and energy, that would be pretty easy to do as well.

But please … dear lord … whatever you do, do not try to turn to just pricing assets on your own as they sit on the shelf or on your local parking lot. There is a billion different ways such data could be picked apart, because there are a million ways to model data.

(Paul Kedrosky with a ton of good discussion regarding statistical modeling)

Paul Kedrosky of Infectious Greed and Matt Davio @misstrade from miss trade.

Hops- volatile & expensive: downside for SAM?

anthonydavian — Wed, 03 Mar 2010 18:47:33 -0500

It’s been a long time since I blogged, but BarbarianCap struck a thought process in my head that I wanted to explore and put on paper. In his latest blog post, Barbarian walks us through his own inflation metrics he tracks. One section of his metrics glosses over beer prices and this sparked a discussion in the chat bar about beer prices.

Beer at it’s core is composed of four simple ingredients: barley, hops, water, and yeast. The German’s love beer so much that they passed a law in 1516 called Reinheitsgebot, known to most Americans as the “Bavarian Purity Law.” This law stated that the only ingredients that should be used in the production of beer should be water, barely, and hops. Most outstanding breweries to this day abide by this law, although majors do not as they use corn and rice for large parts of their fermentables.

Barley is plentiful in America and through out most parts of the world and can be planted and harvested by machinery. This allow barley and grains prices to stay relatively low when compared to hops. Outside of beer production, hops have very little value to most other people. Certain hops can only thrive in certain parts of the world, creating a finite supply potential. These factors along with others help keep hop prices higher than barley.

Climate change is being cited as a potential threat to certain hop strains and the most notable hop in jeopardy is the saaz hop. This is the hop used in Pilsner beers and was made popular by the infamous Czech brewery, Plzensky Prazdroj and their Pilsner Urquell beer. If climate change is already threatening the saaz hop, which other hops will follow?

Along with these factors there has been a simple demand explosion for hops over the past 15-20 years as the craft beer market has exploded. As the craft beer market has exploded, so has home brewing one’s own beer. This is a past time I enjoy and I can attest to the high price of hops. These breweries and home brewers create styles of beers that require vastly more amounts of hops on a percentage basis than anything Miller or Bud are producing.

With hops as an expensive and volatile part of the brewing process what would I think about a possible invest in a company like SAM? The Boston Beer Company makes high quality beers that use significantly more hops than most other breweries. Not only do they use a lot of hops, they use many different kinds of hops, including noble hops from Germany, etc.

In tomorrow’s blog post I will examine SAM and how the hop situation can possibly set this company up for a short position. Stop back tomorrow for the follow up.

More On Inflation

BarbarianCapital — Wed, 03 Mar 2010 15:29:17 -0500

As I mentioned in an article not a long time ago, inflation has been a favorite topic for barbarians ever since Rome started debasing its precious metal coins. I just wrapped up my annual inflation tracking survey and I would like to share the results with you, along with some commentary.

I track a number of pricepoints in several general categories: consumables, housing, transportation, education, financial assets, clothing and healthcare. To get an accurate picture of the price changes, it is important to track the same item unit price across for the year: be it a gallon milk, gas or a credit hour at a university. I do not weigh the baskets or the items to get an "alternative" CPI number but will highlight a few points in the data set.

Consumables Section:

Food: of 52 items, 26 were up (range 1.90-50%), and 11 were down. Excluding produce items (those should be looked at over longer cycles due to crop variance), leaders were Domino sugar (up 33%), Bud Light (up 23%), M&M's (21%), pork chops (17%) and Lenders frozen bagels (15%). At the bottom, again ex-produce, ribeye steak (-14%), Crisco vegetable oil (-13%), Cheerios and Corn Flakes (-10%ish). The average increase was 3.30%, and the median 0.95%. I fail to see widespread "food deflation". Both General Mills and Kellogg increased cereal pricing last year so there might be some givebacks there.

Household and personal care, over-the-counter medicine: of 14 items, 4 were up and 1 (Tide detergent) was down. On the other hand, Charmin tissue was up 21% (yes, calculated on a per sheet basis) and Huggies Newborn diapers were up 6.7%. All OTC was flat year-over-year. Tracking prescription drug prices is much harder due to scarcity of information and the changes in various plans year-over-year, so I did not even try: I just looked at various Tylenols, Benadryls and the like.

Transportation Section:

The MSRP on the cheapest 4-door Chevy compact stayed the same. So did a one way Chinatown bus ticket from NYC to Washington DC. On the other hand, nationwide gasoline for the year is up 42%, diesel is up 29% and NYC subway single ride is up 12.5%. There was deflation in new cars for most of the year, between the incentives and the stupid stimulus- which increased the prices for the people looking to buy used-, so you might have benefited from that if you were in the market. However, for most drivers, the people that did not score on a new car, there is inflation.

Education Section:

You always hear that education is getting more expensive, so let's look at it. 2009 was a year of deflation according to the official government CPI. Someone forgot to tell that to the members of the self-congratulatory ivory tower establishment. Harvard increased its tuition by 3.5% and Stanford did by 3.75%. But wait, those are the elite schools, who cares about them? Well, SUNY increased resident tuition by 5.47%, SUNY room and board is up by 5.62%, and the University of Minnesota-Twin Cities, increased its resident tuition by 7.24%. No deflation for these folks, by far. If Obama wants to stimulate education, the affordability does not start with more loans and guarantees, but with taking a serious look at how these pig troughs operate and the financial damage they do to our youths.

Healthcare Section:

Gathering pricepoints on healthcare is very difficult, in part because there is absolutely no transparency in pricing. I used several state-level databases to track state median billed prices for hospital procedures. Of the ones that got updated over the last year, normal newborn costs are up 11%, psychoses hospitalization is up 13% and minor bowel procedure without complications is up 27%. Heart failure and shock billing was down 15% in the one state that I tracked that. You can look at your insurance premium, copays, benefit cuts and figure out what your healthcare inflation was. Nevermind the time spent filing forms and being on hold with some clueless insurance adjuster. Here, like with education, I fail to see deflation.

Housing Section:

Housing is the only segment where there was deflation along all pricepoints that I tracked. The most recent NAR single-family median price is down about 1% versus a year ago: this includes the $8k stimulus effect so the real deflation is deeper. Of course, this only helps if you are in the market. Rents (tracked 2-bed apartments in 3 major cities via rentbits) are down in the teens for all three cities. Again, helps only if you move. Interestingly, the national average kWh electricity and cf of natural gas are both down, 2 and 11% respectively. However, this does not mean that your bills are down: the increase in delivery charges and other fees probably gobbled up the cut on the actual energy units.

Clothing Section:

Clothing is not easy to track, either, because fashions do change. So I had to stick to the basics from one vendor here, WalMart, to have a consistent year-over-year read. 6-pack boxers were up 0.3%, cheapest jeans were up 37.5%, single t-shirt, up 22%. Basic work shoes were down 7%. Again, I do not see deflation here. I am sure there are "good sales" with deep markdowns here and there, but what I am trying to do is have something that can be compared consistently year over year.

Assets Section:

On to everybody's favorite part, assets. Well, assets also got very expensive over the last year. A big chunk of that is timing, of course, as we had a major market low last year at around this time. So what has been happening? The S&P is up 30-40%+, gold 20%, oil about 100%, copper 130%, DBC (a wider commodity measure) 21%. 30-year mortgage rates are down marginally. CD yields are down 17% for the 3-year. What does this mean? This means a very strong asset inflation over the last year. If you view your savings as an "expense"- which it is in a way- then your dollar this year will not go nearly as far as it did last year. Not when measured against gold, oil, or stocks. A big part of Greenspan's failure was ignoring asset prices in his view of inflation. Do not do that: there is rampant YoY inflation in financial and some hard assets. Whether this is due to them being mispriced a year ago or due to money supply growth or something else is obviously a matter of discussion. Also, if you were all-in last March, asset inflation is actually good for you.

So, there you have it. There is no deflation if, over the last year, you: ate, used toilet paper, drove a car, saved/invested, used healthcare or education, or bought clothing. There was deflation if you moved to a new apartment, bought a new car or a house. I already wrote about "personal rate of inflation" a few weeks ago: this basket might not be anywhere near your basket, but I think it is a wide enough data set for one to get at least a binary answer as to whether there is inflation, despite the official statistics.

(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)

Going Postal: My Mission to Bankrupt the U.S. Postal Service

dasan — Wed, 03 Mar 2010 11:07:10 -0500

I plan to bankrupt the U.S. Postal Service with extreme prejudice. And paper companies, too. This is not just a passive/aggressive way to get revenge for all the verbal abuse I've taken from New York post office employees. This is what I call the "Digitization of Everything."

If you have seen the news lately, the US Postal Service wants to get rid of Saturday delivery. I'd like them to get rid of all delivery. Almost everyone I deal with: banks, cable company, AT&T, ConEd, they all want me to convert to "paperless billing." I finally relented. I'm already reading kindle books and online newspapers - why not stop paper bills, too?

Think about it: MorganStanleySmithBarneyEFHuttonTravelers&Co. produces my statements using digital software. They take that nice clean file and print it out on expensive high-speed printers. They stuff it in a big thick envelope and have someone fly or truck that to the local mailman, who takes all day to sort that crap in my apartment building. I get the paper document, and throw it away because 1. I don't have room for it, and 2. I have already seen a PDF of it online if I wanted to. My broker for my personal account said the branches estimate they spend $250 per year per account doing this nonsense. Think of the cost to the environment!

I know that old habits die hard. But I foresee a future in which almost everything that CAN be digitized, WILL be digitized. And a lot of things that you think CAN'T be digitized today, probably will be digitized as well. Warren Buffet famously said when the internet first came around, he, Bill Gates, and a bunch of smart guys sat around a room thinking of what would be a business that would be perfect for the internet. Despite Buffet's ownership of a huge insurance company, GEICO, none of them realized at the time the impact the internet could have on insurance.

If I could short the Post Office, I would. Just for hating their customers alone. I jest - I would short them because they will get decimated by digitization. They are already, with mail volume down about 10% from a year ago. Who else is vulnerable?

This brings me to Netflix (NFLX). I am stalking this company to short like a tiger stalks the herd of zebra, waiting for one of them to stumble. I really want to short these guys. They remind me of PALM. The management is so promotional. Unfortunately (for shorts) everyone decided to hole themselves up in their living rooms for 2 years and do nothing but rent DVDs. There really is no cheaper entertainment per hour than watching Netflix DVDs. So subscriber growth has been phenomenal. Growth forgives a lot of sins, and masks a lot of problems below the surface. (Remember AOL? I guess I'm showing my age).

Consumers have quit buying DVDs - they finally get it - why store all these $9.99 plastic discs on their shelves when they really don't watch them more than once anyway. (I think the only DVDS I've watched more than once were Pulp Fiction, Finding Nemo and Caddyshack, but I digress). Consumers now realize the value proposition of NFLX -why buy the cow when you can get the milk for $8.99 per month in a red envelope? The next step will be for consumers to realize they don't even need to get a plastic disc in the mail in order to watch a movie.

NFLX thinks it can transition to a streaming model while keeping the "all you can eat" model. I don't think they can. Movie studios already have a love/hate relationship with them, and do not want to give away their content so NFLX can stream it for free. Somethings gotta give - and meanwhile, AMZN, Apple and recently even Wal-Mart have decided to jump into the movie streaming business. (NFLX may deny it, but I'm guessing the day Wal-Mart bought VuDu was not a happy day at NFLX). Even Netflix's traditional competition, cable operators with their crappy VOD offerings, are getting better everyday.

However, like my PALM short, I don't like to short stocks that are going straight up. I'm still small enough that I don't need to be early on shorts like the brilliant Chanos. He says he often has to short earlier than he would like because otherwise it's too hard to get shares to sell short.

You may think I'm a short-seller by my curmudgeonly nature, but the truth is I hate shorting stocks. Like PALM, I've been content to wait on the sidelines for a while as NFLX stock has soared. I KNOW this baby is a short just like I knew CROX was. However, I also saw many carcasses of smart investors who shorted CROX too early.

I have done a ton of work on NFLX and have tracked all of their metrics, which I will disclose sometime. For today, though, it's clear that some of the shine is coming off the rose at NFLX.

NFLX is starting to get downgraded – Merrill, Kaufman, and Susquehanna all cut ratings today on NFLX. The firms all cite the sky-high 28x valuation which is high for an 18% grower, and the new WMT VuDu threat. Merrill says NFLX needs to nearly triple its sub base by 2015 to justify the current share price of almost $70. I love concise statements like this - they crystallize the ridiculous valuation better than a high p/e does.

However, shorting a stock based on valuation alone is a fools' errand. Technological obsolescence, industry shifts, or accounting shenanigans are needed for the short to work. Then, when one or more of these factors are obvious to the Street, everyone can crow about the high valuation as the stock collapses.

Like GameStop, most major video game publishers, the paper book industry, and especially the US Post Office, NFLX will be radically affected by the "Digitalization of Everything." I just see this future so clearly, like Paul Muad'Dib of Dune, hopped up on melange saw the impending jihad. Why can't everyone else?

Is there any doubt that magazines, movies, photos, music, newspapers, and video games will all be delivered digitally via a wireless web, to a handheld device of some sort in the near future? Is this so hard to grasp because we are stuck in our thinking, or is it because we are experiencing "future shock" and we don't really want things to change?

Position Card for 3/1/10

ZMoose12 — Mon, 01 Mar 2010 17:02:11 -0500

Welcome to March! If you read this month's first TMO prior to the market open today, you should have been completely prepared for the action that occurred and you most definitely should have taken advantage of a couple of breakouts. The market definitely looks as though it could go higher, and until I think otherwise, I will continue to catch bullish breakouts.

RDN @ $9.79 - Profit Target @ $11.80, Stop @ $9.40
ATPG @ $18.35 - Profit Target @ $20.00, Stop @ $17.45
MMR @ $17.50 - Profit Target @ $19.45, Stop @ $16.90
FCS @ $10.72 - Profit Target @ $11.40, Stop @ 10.40

Good luck with the rest of the trading week!!

A Morningstar Swing Trade Strategy that Performs Well in all Markets

MDabbles — Sun, 28 Feb 2010 13:47:09 -0500

As an active trader, I manage risk largely through position sizing. In other words, my "casino money" comprises 10 % or less of my total portfolio. The remainder of my portfolio is very conservatively managed.

In the past, position investing served me well. During the early 90's, you could take a buy and hold position and be reasonably well assured it would perform well over the long run. This approach does not do so well today, as uncertainty in market environments throughout the world has created a choppy investing environment. Even the so-called "safe haven" vehicles like gold and bonds require constant vigil today.

Nevertheless, I am constantly searching for a relatively safe haven to park some passive money. Recently I have been experimenting with a mindless system that will automate a passive portfolio -- all I would have to do is just wait for a signal and buy an equity when I get the signal.

As a day trader that actively uses candlestick and chart patterns for my entries, I have become interested in the morningstar candlestick pattern. According to Thomas Bulkowski ( the Pattern Site ), the morningstar is a 78 percent probability bullish reversal pattern that ranks number 12 out of 103 patterns in performance. The downside is that it ranks 66 out of 103 candlestick patterns in frequency, so it is not a daily occurrence.

I chose to back test a morningstar swing trade strategy over a 9 year period using a high return on equity (ROE), low price earnings to growth (PEG) screen sample from Finviz. The screen produced 44 US stocks for my sample base. The rationale was to pick under priced, high performers which theoretically should show resilience over time. My controls were the S&P 500 index, and the top largest market cap equities in the S&P Index. I also set up exit parameters for an absolute stop, profit targets, and trailing stops which would kick in after a target was met.High return on equity, low PEG stocks were chosen on the theory that they will spring back with resiliency.

This Finviz screen kicks out 44 US equities.

My back testing was accomplished through the Zignals web site (Zignals). This site has recently added (beta) a strategy engine which will let you back test as far back as the early 2000's various strategies based upon a slew of technical and fundamental parameters. The strategy tester does have some quirks -- for example, the trailing stop is not real-time intra day. Even though I receive an email alert intra day when the trail stop is hit, the actual sell will not happen until end of day. Also, the data is static - the 44 companies stay the same even though over time you may have some net additions or subtractions.

So if I go live with this scenario (which I plan to), I would probably manually execute my stops and I would revise the equities as the dynamics change.

The results of my study were impressive, as shown below.

As you can see, the high ROE low PEG morning star group performed positively and consistently over the entire period that the S&P DECLINED -- plus 170% versus minus 16 %. The other morning star control group, the top 50 cap S&P equities, also performed positively, although not as well as the high performing ROE sample.

So I have developed and published a morning star trading strategy using the high ROE base of 44 stocks on Zignals that I am going to go live with using the following parameters:

I chose $35,000 as my available capital and a position size of $5,000. because I really don't need any more. With this strategy, I would likely have no more than 3 or 4 positions open at any one time. Of course, I could make the position size whatever I wanted.

I set a stop of 10% (yes, I know that sounds like a lot, but this pattern rarely fails, and this stop percentage gave me the best results). I also set a trailing stop of 5 % to kick in after a target level of 15 % was met. I set an outright sell target of 26%. I set a daily limit of 30 days to re-buy each equity to prevent whipsaw.

I back tested this strategy to 1/4/2005. The results, again, were impressive:

2005: 10.11%
2006: 32.87%
2007: 28.31%
2008: 0%
2009: 25.00%
Total Period: 137.66 %

Here's an example of two trades on the same equity, CBI that occured in this strategy:

A couple of notes on this strategy:

It is slow, meaning you could go weeks without a buy or sell. But this is OK for a passive, high return approach to swing trading.

The morning star pattern, while very reliable, does and will break down occasionally. It is important to note that no pattern will hold up during a general market sell off.

The beauty of this strategy is that if the market does correct, I will be mostly in cash and will have a number of opportunities that will come to me on the next upswing in the market.

I'll post my trades when I start this strategy.

Happy Hour #45

anthonydavian — Sat, 27 Feb 2010 16:01:03 -0500

JohnWelshPHD stopped by Happy Hour Friday to school all of us in biotech stocks. He is a great guy and a great trader. We cover a ton of companies including MDVN, IMMU, ALXA, ANDS, SQNM.

Has Verizon Purposefully Pushed Palm to the brink?

bnkr0 — Fri, 26 Feb 2010 20:46:36 -0500

Hear me out on this.

Back in July of 2009, Verizon was talking about coming out with its own App Store for smart phones. Did they? I don't know, and I don't feel like looking into it.

Here's what I do know:

- Anecdotal evidence suggests that Verizon Stores have been pushing the Droid and not the Pre

- Google Voice poses a threat to all wireless carriers.

-a Verizon press release hit the wires today promoting Palm Pre Apps

Has Verizon been trying to bully Palm into some sort of V-CastAppStore agreement that Palm wasn't interested in?

I'll admit it seems a little far fetched, and it would most likely be a breach of contract to discourage sales of Palm's smartphones in order to gain a bargaining advantage. Most contracts for the sale of goods include a good faith and fair dealing clause, requiring that both parties act in good faith when they are selling another party's goods.

Even if that was true, it would be difficult for Palm to prove that Verizon intentionally hindered the sale of Palm's phones to gain an advantage. This doesn't mean it didn't happen.

It makes sense that Verizon would target Palm because:

1. Palm couldn't afford to sue Verizon even if they wanted to.

2. At this point (short of some other miracle) Palm needs Verizon to drive sales in order to succeed.

3. Even if Palm cried foul, what would they do? Sell those Pre and Pixi Pluses on Sprint? (hah).

4. Verizon can afford it.

Even in the impossible situation where Palm could both afford to sue Verizon, and prove that Verizon violated a good faith commitment - Palm's damages would be limited to the harm that Verizon's breach caused; that is, Palm would only be able to recover expectation damages plus the additional costs that the breach exposed them to. Any damages that Verizon would be required to pay Palm for such a breach would be a drop in the bucket for them. Even if it approached 1 Bil, which would be insane, it would only be 10% of VZs Net Income from 2009. Multiply that by a generous 10% chance of Palm succeeding in that type of action, and Verizon could easily bear that 100 Mil risk. If you multiply that by the actual chance that Palm would recover in such an action (0%), it's a no-brainer.

I'm most likely crazy. But there's atleast a 25% chance that something I said here is right.

That's all.

Oh, and I should have bought Palm puts instead of calls, that's what I get from ignoring the smarter people who write for Davian Letter.

-Banker Zero (I'm not a hero.)

Friday A.M.T. Review for February 26th, 2010

Airelon — Fri, 26 Feb 2010 19:21:32 -0500

"Ride your winners, and keep your losses small" - Market Mantra

"When you are staring at a trade, where you are sitting on profits three times greater than your risk? You have already 'ridden' your winner" - Personal Axiom

Here is the "Friday Review" video, that will review my investing and trading efforts for the last week, based off of comments in last weeks "Airelon's Market Tactics"

At this point, the Model Portfolio of Airelon's Market Tactics is up 39.4%

No, that massive slide in Hogs that I talked about in the newsletter is not represented in the above numbers, since I didn't take that trade. But still ... awesome time for those that were short Lean Hogs.

If you haven't seen my money management playlist yet, you can find it here ...

Edit: Saturday, 12:29 pm on 2/27/2010 - I just noticed that I was looking at the wrong chart for the meat market. I was looking and had Live Cattle up on the chart. Lean Hogs was still a great short up until Wednesday, as the other trades, but broke down after that. I'll also talk about this little mistake in my "Week in Review" podcast at the daily blog; as it highlights and underscores the danger of shadowing people on Twitter.