Dave Landry's Market in a Minute - Monday, 12/2/13

[Thierry Martin]

Dasan was one of the original members of the financial Twitter gang and had also been one of the better early investment bloggers. He doesn?t write very often these days but when he does it?s typically because he has something insightful to pass along.

Back in the day, Dasan had spent a bunch of time with portfolio managers from SAC Capital during the interview process. While he didn?t end up joining the firm, he did come away with several important notions about running money like a hedge fund.

Here is one of those lessons, on the right and wrong ways to utilize the short-selling toolkit:

4. SHORTING INDICES. Many fund managers think they are great stock pickers. Actually, we all do, by definition, because we are charging people for our great skills- otherwise they could cheaply invest in an unmanaged index. But these same managers decide they will pick the longs in the fund and then use an ETF to short against the longs, as a ?hedge.? WTF kind of backward thinking is this? So you can pick what stocks will go up, and not the stocks that can go down? Does this make any sense? Then the clever among this group will argue with you that because the market goes up over time, it?s important to spend time on longs and ?hedges always lose money.? NONSENSE. Even in a bull market there are stocks that are going down. (Do you need examples? IBM, ?Big Blue,? the bluest of the blue chip techs, is down 8.5% as I write this, versus the NASDAQ up 33% for the year.) I?ll tell you what- if you want to play with indices, and you tell me the market goes up most of the time, I will suggest that you LONG the index and spend all your time finding individual name shorts instead. Did your brain just blow a fuse? Let me suggest the best approach and that is pick longs and shorts and never short an index. If you don?t have enough shorts, because ?Shorting is hard? and all that, then go re-read RULE NUMBER ONE.

The above-referenced RULE NUMBER ONE and the rest of his takeaways can be found at the author?s blog, linked below.

Source:
Idea Velocity, what I learned from SAC (Dasan)

[Thierry Martin]

Now is the time to check out cool stuff for the holidays including: Chris Hadfield?s An Astronaut?s Guide to Life on Earth.

Quote of the day

Jeffrey Gundlach, ?Look at the dichotomy this year between high-yield bonds and emerging-market bonds. High-yield bonds are up 6% or 7%, but emerging-market bonds are down 6% or 7%. That?s a pretty large swing in the value proposition.? (Barron?s)

Chart of the day

[Thierry Martin]

Top clicks this week on Abnormal Returns

Thanks for checking in with us this weekend. Here are the items our readers clicked most frequently on Abnormal Returns for the week ended Saturday, November 30th, 2013. The description reads as it does in the relevant linkfest:

Another bear throws in the towel. (The Reformed Broker)
Big TV wants to get even bigger. (AllThingsD)
The case for REITs. (John Authers)
Retail investors are back. What next? (The Reformed Broker)
Why it is hard to beat the market?s own asset allocation. (Capital Spectator)
William Bernstein, ?When the intelligent investor does some trimming back, he usually feels like a dummy for the next year or two.? (IndexUniverse)
At least someone is making money on the short side. (Zero Hedge)
A long-term positive signal for equities. (Charts etc.)
How to buy gold and silver at a discount. (The Short Side of Long)
Howard Marks says markets are rich but not bubbly. (Pragmatic Capitalism)


Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.



The post Top clicks this week on Abnormal Returns appeared first on Abnormal Returns.


Abnormal Returns

[Thierry Martin]

I talked to a friend of mine this past week who?s nailed just about all of the hottest trades and the best-performing stocks of the year so far. But his returns are far below what you would think they?d be given the names he?s involved with (LNKD, FB, TSLA, GMCR, Z, CELG etc). He thinks the main reason for the drag on his performance is because of the mind-boggling amounts of entries and exits. His resolution for 2014 is to react to less inbound information and to be a bit more tolerant of short-term fluctuations.

After chatting, I was reminded of this Warren Buffett gem from the 2005 Berkshire Hathaway Letter to Shareholders:

?Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac?s talents didn?t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ?I can calculate the movement of the stars, but not the madness of men.? If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.?

No doubt about it.

It?s rare to encounter an investment environment in which more is more and an increase in decision-making is of any benefit to the decider.

Don?t let the sound of your own wheels drive you crazy.

[Thierry Martin]

A long holiday weekend is a great time to catch up on some items that we passed up on during the week. Also check out this holiday deal on a Google Chromecast including a $6 credit for use on Google Play. Thanks for checking in.

Investing

The latest memo from Oaktree Capital ($OAK) chairman Howard Marks. (Oaktree Capital)

An interesting paper: US Inflation and Returns in Global Stock and Bond Markets. (DFA via IndexUniverse)

An interview with Jon Stein of online money manager Betterment. (RIABiz)

Finance

Does Nanex get it right on the flaws of high frequency trading? (Bloomberg)

Under what conditions are markets efficient? (China Financial Markets)
A history of the first real options trade. (Turnkey Analyst)

Economics

Joel Mokyr talks with Russ Roberts on the fallacy of economic stagnation. (EconTalk)

Insight into why the poor tend to make poor choices could lead to a more robust economics. (FT Alphaville)

Business

How the Pritzker famliy broke up its vast holdings in an orderly way. (WSJ)

Italian candy maker Ferrero SpA has no plans to go public any time soon. (WSJ)

Startups

What have we learned from 23andMe? (Pando Daily)

Priceonomics and the business of ?structured data crawling.? (TechCrunch)

On the great unbundling of venture capital. (Dave Lerner)

An interview with Marc Andreesssen. (Fortune)

Technology

The triumph and tragedy of IBM?s ($IBM) OS/2. (ArsTechnica via @fmanjoo)

How Yahoo ($YHOO) went from technology-leader to laggard. (GigaOM)

Meet the Amazon ($AMZN) whisperer. (Fast Company)

Food

Skim milk is awful. (The Atlantic)

The technological search for an egg substitute. (WSJ)

Booze

Some surprising innovations in beer can design. (Quartz)

America loves really expensive bourbon. (Businessweek)

Young Americans are on the margin drinking less alcohol. (The Atlantic)

Health

The power of a daily dose of exercise. (Well)

Sleep therapy could play a role in helping ease depression. (NYTimes)

Psychology

Why are first-person shooter games such ?absorbing experiences?? (New Yorker)

Good luck if you think you are immune to advertising. (Aeon)

How to raise thankful kids. (Slate, Motherlode)

When superstition works. (WSJ)

Higher education

College is not just another ?consumer purchase.? (Big Think)

How academia behaves like a drug cartel. (Slate)

Sports

Will Tim Tebow ever play in the NFL again? (SI)

All hail the new world chess champion. (Time)

Why top golf recruits are choosing to go to cold-weather universities. (WSJ)

Grooming secrets of the NBA. (WSJ)

Now former hockey players are suing the NHL over head injuries. (NYTimes, Grantland)

Books

An excerpt from Gregory Zuckerman?s The Frackers: The Outrageous Inside Story of New Billionaire Wildcatters. (WSJ)

[Thierry Martin]

For investors looking to buy stock in a clothing retailer, it would normally be a no-brainer to consider stalwarts like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), well-known dollar stores, or other discount merchandisers.

But things aren't normal, and they haven't been for years.

Since the economy just can't seem to shift into a higher gear, I'd avoid Wal-Mart and the other types of clothing outlets I just mentioned. Their sales come mainly from middle- and lower-income consumers, the people who have suffered most in the years since the financial crisis and who continue to see their spending power dwindle.

Rising costs, stagnant or shrinking wages, and lousy or non-existent benefits are squeezing these groups hard, Wal-Mart and other discounters could well be facing years of erosion in revenue and earnings growth rates.

At this point, for example, Wal-Mart's sales are growing at only about 3% a year, from around $406 billion in 2009 to just over $473 billion now. That's pretty anemic compared with 2004 through 2008, when sales rose at a healthy 7.9% clip. The way things are going, I wouldn't be surprised if annual sales and profits at Wal-Mart and a lot of other discounters stagnated completely or even began to contract.

In this economy, I'm much more optimistic about a far smaller but well-established and more specialized apparel outlet with more-profitable customers. At this company, sales have actually accelerated since the financial crisis, climbing almost 8% a year from about $8.6 billion in 2009 to nearly $12.5 billion currently. That's even better than the solid 6% growth rate of 2004 through 2008.

A key reason this company has been doing so much better is that it caters to higher-end customers who base their purchasing decisions mainly on quality, fashion and service -- not price. And they can shop that way because, well, they're generally better off than middle- and lower-income consumers.

The company I'm referring to is Nordstrom (NYSE: JWN), which began as a shoe retailer in Seattle in 1901. Today, it positions itself as a provider of "affordable luxury" -- high quality without too much extravagance.

[Thierry Martin]

Random Thoughts


The market had a little pre-holiday cheer.

The S&P didn't set the world on fire but did manage to close at all-time highs.

The Quack looked better. It gained well over ?% to close at multi-year highs.

The Rusty also managed to tack on over ?%. It closed at all-time highs.

Internally things looked pretty good. This isn't a shocker with strong Rusty. Many areas remain in trends and at or near new highs such as Defense, Regional Banks, Conglomerates, and Health Services.

The sideways Semis put in a decent rally. They appear to be trying to break free from their range.

Once again, selected Solar did well on Tuesday (we are long TAN).

I tried to come up with something new to say but then realized with the market continuing to make new highs, there's not much new to say. With that said, it's a cntrl-a, cntrl-c, and a cntrl-v:

So, things are looking pretty good. Should we buy with both fists? Well, since the methodology requires a pullback and the indices and most sectors are right at new highs, I'm not seeing a lot of meaningful longs for this cycle (yet). On follow through and a pullback we will. When markets are banging out new highs, it's a get ready to get ready for me. In the meantime, you want to manage existing longs. Take partial profits as offered (see Layman's for money & position management planning) just in case the market does not follow through. On the short side, I'm still seeing a few that are setting up. Avoid getting too bearish but if you really really like a setup, then take it. See my 11/26/13 column for a philosophical discussion on this.

Futures are firm pre-market.

Shortened session today which is notorious for being then and choppy. So, pick your spots carefully.

Click here to watch today's Market in a Minute.

Best of luck with your trading today!

Dave