Dow’s Up but Trades are Scarce, Worrying Bulls

While investors might be excited that the Dow is close to rising above 11,000 for the first time since 2006, technical analysts warn that there could be trouble on the horizon. Worrying the analysts is the low volume of trading activity. Usually, during a bull market, you see rising volume along with rising prices. AP with the story:

“It worries a lot of us,” says Wellington Shields’ Frank Gretz, a technical analyst who specializes in pinpointing market levels at which stocks might suddenly rise or fall. He wonders whether the volume signals that the rally could soon peter out, like the big surges that preceded steep declines in the 1930s in the U.S. and in Japan more recently.

Louise Yamada, a 29-year veteran of technical analysis who heads an eponymous firm in New York, says she’s not just concerned but confused.

“Why is the market going up?” she asks. “You usually don’t see advances without volume.”

Thoughts on Apple’s iPad

Although most analysts predict that the iPad will not add much to Apple’s bottom line for the fiscal year, most see the device evolving over the years into an important earnings source for the company. Here are some reasons why demand might pick up for the iPad in the coming years.

Videogames

Neil Young of iPhone game maker Ngmoco predicts that the iPad will attract gamers and reduce the time they spend on consoles and PCs. It is expected that iPad games will sell for significantly less than traditional console and PC games, further increasing demand. In addition, iPad will most certainly gain a dominant market share in the handheld gaming device market.

E-readers

Amazon.com Kindle’s e-reader has dominated the e-book reader market, but that seems like it is about to change. Priced at $259, most analysts agree that Amazon must cut its price to around $149 to prevent consumers from paying up for the full-featured iPad. The one downside for Apple is that the iPad’s screen brightness might make it harder for some people to read versus the Kindle.

Textbooks

Here is where I think there is huge potential for the iPad. If the iPad, or similar devices, are popular enough, many colleges might adopt e-textbooks. E-textbooks would definitely defeat traditional textbooks in the features department as many would be expected to have interactive graphics, video, etc.

Video

The attractiveness of the iPad’ screen could lead people to turn to it as a video-viewing device. Netflix might launch a free iPad application allowing its subscribers to access thousands of movies and TV shows.

Netbooks

Although current netbooks are cheaper than the iPad and have more features (i.e. Adobe Flash), the keyboard-free touchscreen of the iPad might convince buyers to move away from netbooks and towards touchscreen devices.

Bernstein Reasearch hardware analysts Toni Sacconaghi predicts Apple will sell 5 million units in the first 12 months. Sacconaghi doesn’t see the iPad contributing much to the bottom line in the short-term, but sees it picking up long-term. He expects iPad to add less than 2%, or 15 cents, to Apple’s earnings for fiscal year.

As for me, I’ll be waiting on the sidelines to get my iPad. Without multi-tasking or a webcam, it makes little sense to make the plunge now.

Jim Rogers: Gold Will Go Higher

In an interview with Bloomberg television, Jim Rogers stated that he believes commodities will continue their bull run in the coming years. Specifically, he stated that he expects gold to climb higher. Rogers hinted that institutional demand for gold is still weak, which could change in the coming years.

Rogers: “I spoke in Prague recently and we did a survey of the room and there were 300 major money managers from all over the world [and] 76% of them had never owned gold. Can you imagine that?”

Although we are short-term bearish on gold, due to the stagnant growth 0f money supply measure M2, we remain long-term bullish.

The Role of Short-Selling in Markets

In the chapter “Short Selling” in the 1935 edition of “The Securities Markets”, Wright G. Hoffman wrote:

One of the most essential functions of organized markets is to reflect the composite opinion of all competent interests. To admit only opinion looking to higher prices is to provide a one-sided market. To bring together an open expression of both long and short opinion is to provide a two-sided market and…a better reflection of prevailing conditions will be shown in the price structure (pp. 398-399).

Michael Burry on Buybacks

In this Silicon Investor post from 1997, Michael Burry warns about companies using buybacks for publicity purposes:

Precisely why I wish to evaluate companies
in the midst of proven buybacks. Small
marginal companies have taken to using
buyback announcements as a publicity
stunt to support their stock. More often
than not, the buybacks do not materialize.

When they do, they end up not retiring
the stock and placing it in the
corporate treasury, which is of marginal
use to shareholders. Everyone should
be aware of this trick, as you point
out.

Spin-offs show demergers are staging comeback

Keep your eye on spin-offs. FT with the details:

In a still nervous economic environment, companies in a demerger have the advantage of tending to perform well regardless of which way the overall market is moving, UBS and Deloitte research shows.

Nevertheless, the spin-off part of the business often performs better than the larger parent, according to research from Thomas Kirchmaier of the London School of Economics. One reason for this is the demerger throws light upon parts of the business that were hidden to investors beforehand.

Companies that take longer than nine months to plan their demerger generate at least two times more value than those that take less time, achieving an average 20 per cent increase in their share price, according to Deloitte.

Neil Sutton, head of corporate finance at PwC in the UK, says the logic of a successful demerger must be that the valuation of the “sum of parts will be more clearly seen by the various different investor groups than as a conglomerate”.

Demergers have also tended to be more successful where the split in businesses is clearer cut and better thought out.

Michael Burry on Buffett’s Strategy

Michael Burry, in this post from Silicon Investor, discusses how the small-time investor can tweak Warren Buffett’s approach to investing to increase the chances of success.

If there’s one thing I’ve learned from Buffett, it’s that styles can be tweaked for the better. Lord knows I don’t generally invest like him.

Let me explain something about the “new lows” though. Buffett talks to management. He knows the companies intimately, and he knows the competition intimately before he makes a decision. He is an excellent judge of character in CEO’s. When a factor in the company’s success turns south, don’t you think that he finds out about it through these contacts?

I don’t have any of that. I have the 10K. I don’t sit on any boards. I can’t buy enough shares to influence the board’s or the executive decisions. What I do have is the knowledge that when a stock makes new lows, the people that do have that knowledge for some reason have decided not to provide buying support at a place where in the past they have provided solid buying support.

To try to emulate Buffett perfectly without his full complement of skills and advantages (which I do not have, but any of you here might for all I know) seems foolhardy. So I take something else from Buffett – the willingness to improvise new investment parameters as fits my situation.

Michael Burry on Shorting

In this post from Silicon Investor, Michael Burry offers his insight into shorting and short hedging.

The traditional argument is that only those with enough capital to short for the long term can consistently make money. Ok, but if so, then what is the actual return on the at-risk TOTAL capital. If one must have “enough capital” to tolerate a 300% loss on a short position without hurting too much – and being able to maintain the position- then the 100% maximum profit on that position won’t amount to much more than an incremental percentage return on actual available capital even if it does occur.

Where is that excess capital (the capital that allows you to maintain a long-term short position) best deployed to maximize the total return on capital? IMO, assuming that none of us can time markets well (an assumption that I feel is very valid), the best place for that capital is in long positions. At least then you’re hedged with the odds of your own good fundamental analysis with you on both sides.

Interestingly, I’ve found that even a small short hedge (I’ve been up to 10%) position against a long portfolio can be amazingly effective during a general downturn – along with an obligatory gold position and a solid oil position.

Michael Burry on Profit-Taking

In this post from Silicon Investor, Michael Burry explains his philosophy on profit-taking.

My general rule is to hold for 50%, then reduce my position back to its original size if it is still worth holding, or sell all if the position is no longer competitive with other potential positions.

But what I do with quick 30-40% gains is an art, not a science. I take into account the technical characteristics of the run-up as well as potential fundamental reasons to get a picture of the durability and quality.

I’m perfectly willing to buy and hold, but if there is a 30-40% run in a short time that I consider a trading gain, I’ll take it. If I just bought a stock, chances are it was competing with other stocks for entry into the portfolio just two weeks ago. If it has now run 40% in two weeks, and the other potentials haven’t, well then I definitely will take into account the new relative value disparity.

And if a stock hits new lows, I’ll usually sell it unless the dividend is particularly outsized or the valuation particularly outrageous.

Michael Burry’s Three Investment Principles

We’re still working our way through Michael Burry’s Silicon Investor archive. In this post, Burry comments on the increasing difficulty of implementing a pure Warren Buffett-type strategy and states the investment principles that have worked for him.

My feeling is that the market has already figured out Buffett’s ways. They’ve been analyzed to death. And the obvious Buffett companies have been accorded to the proper valuation. It will be difficult for Buffett, indeed…But then, it is this multiple expansion in Buffett companies that got him his return to date.

Being contrarian above all else has been my number one most successful principle. The second principle is knowing when to fold on a contrarian play. The third is not being afraid of tech stocks.

In another post, Burry comments on the benefits of diversification and technical analysis.

My pitch for diversification to 15-20 value stocks: something will be moving up for you on average.

I have a rule that I sell when a new low is hit. But I also have a rule to either add more or sell the position when I’m off 33% since initiation. No waffling. When a stock trickles to a new low, despite the fundamentals I’m going to exit. The reason being it can turn into a New Holland, Deswell, Fruit of the Loom or Champion, and a screaming bottom might be in the works later. But when a stock falls 40% through its old lows in one day on 35X average volume with 8 broker downgrades, a technician would be paralyzed and sell. A value investor would find it an opportune place to buy if the original fundamental story is intact. This is just my pitch for how a minimal degree of technical analysis doesn’t hurt and can help.