3SOF

Good morning

Obviously I feel frustrated about the Main's results this year and my inability to act sooner, so I've been thinking about ways to improve or at least stabilize things.

Today I'll sell SYX because the stock fell 2.9% yesterday and I thought it would hold up fairly well until Monday (the ex-dividend date). Give or take $1, it doesn't matter much where I'll sell since I'm losing 48% already.

But I have a problem with the other 9 holdings. You see, they're special situations, each stock has its unique reasons for going up over the long term, regardless of the state of the US or global economies. Let's make a brief summary of each investment story:

CIMT - This is a $23.6 M market cap Israeli company. The company's fundamental trends are very positive and the stock is cheap. It operates in a niche market (Computer Aided Design/Computer Aided Manufacturing) which is worth about $900 M a year. CIMT will have revenues of about $40 M - $50 M in 2008. The company has been growing through organic growth and acquisitions. I believe they'll reach numbers over $100 M in revenues in two to three years time and will achieve a 15% net profit margin (meaning about $15 M in net income). If one attaches a conservative earnings multiple of 10 to this expectation, CIMT will be a $150 M market cap company, which is 6 times more than what it is now. I expect this to happen in two to three years time and have no reason to suspect it won't happen, even with all the swings in the US economy.

IMMR - Haptics will be present in most electronic devices in the near future. A person needs to feel what it is touching, not just seeing and earing. IMMR has 700 plus patents protecting its intellectual property and has licensing agreements with giants like Nokia, Samsung and LG. Most mobile devices will have touch feedback technology in one or two years. This will happen regardless of the US or global economic cycle. IMMR will see its revenues and profits rise and the share price, which is currently very cheap going down to almost net cash levels, should rise.

ASTI - If you believe in the future of alternative energy, especially solar energy, then ASTI is a pick with very high potential. It is unique in its space, since it is ready to produce flexible thin film modules in a grand scale. It also has two $100 B plus partners ready to distribute its products around the World. If one thinks the buildings and houses of the future will be build using a Building Integrated Photo-Voltaic (BIPV) material, then one should own ASTI for the long term. This will happen regardless of the US or global economic cycles. If Oil keeps going higher, electricity costs will also rise and solar will be a need, not a luxury. Not just because of the environment, but because of the economy and the necessity to cut costs.

SDTH - Chinese people will demand for more tires, paint, PVC, plastics and paper. SDTH makes a product, NPCC, which partially replaces the natural resources used to manufacture these goods. These natural resources (rubber, oil, wood, etc) are rising in price, therefore NPCC's need is also rising. The company is also undergoing an international expansion phase which is just starting. SDTH is a play on the growth of the Chinese consumer which will inevitably happen, those people have been saving more than 40% of their personal income for many years.

CHME.OB - This stock could have a powerful macro story (also it is incredibly cheap from a fundamental standpoint), but because it is an OTCBB stock, investors don't have any confidence to buy it. CHME.OB needs more time and continuous good results to show it's a real company. I have just 3.1% of capital in this penny stock and I'll keep holding it.

UTVG.OB - Another one with a perfect macro story, the growth of tourism in China. Fundamental trends and valuation are very attractive. But the company has poor internal controls and that coupled with being an OTCBB took it down sharply. But I think these are short term problems, over the long term, the business opportunity is great and UTVG, being a US traded company, will ultimately prevail in this market sector which I expect to grow very fast. This is regardless of the US or global economic cycles.

SIX - SIX has been under a bear market of its own for 10 years. Americans may not buy many LCD televisions or computers in 2008, but they surely won't lack money to spend a weekend in an amusement park with their families. The company has been under a turnaround plan with insiders buying heavily recently. I trust this company's management and believe the turnaround will be successful, which will put SIX's share price around $6 in 12 months time, in my current view.

OPMR - There will be challenges, but OPMR is trading at a fraction of revenues and closer to net cash levels. I believe in robots in our lives and prefer OPMR, as a toy and consumer electronics company, than JAKK or MCZ at this point. My hands aren't exceptionally strong on this stock, but I remain a believer and think the business isn't all that dependent of the economic cycle.

DROOY - Sure, I'm a bull on $GOLD, but most gold mining companies are very overvalued by any metric. DROOY actually looks quite cheap, because the company has been losing money, because it has a higher than average cost of production. But with $gold around $1,000 oz I see DROOY earning $1.5 - $2 EPS in 2008, making it the most attractive gold company around. I just wish that the Rand doesn't rise too much versus the USD, because DROOY receives in USD and has expenses in Rands and that can hurt profitability. But I don't think these changes will have a very material impact in DROOY's operations. I have to dig more on this subject, though.

Given all this I would like to keep holding all these 9 stocks, leaving me with just 37.63% of cash available to fight the general market's downtrend, by either shorting stocks or making short term trades.

I've been studying stocks to go short, but I find it so difficult ... the real bad stocks can't be sold short by most of you ... and it seems that every time one stock is heavily shorted it has a strong rebound to clean up the bears. Making short term trades would be hard to follow and because I'm handicapped by the impossibility of making intraday decisions, it would be difficult to perform.

I just would like to keep holding my stocks for the long term and at the same time protect capital from a further deterioration in the general market. Basically stay neutral on the direction of the market and concentrate myself in the unique investment stories that I have. 

The way I see things going the FED will fail in its efforts to revive the economy (the market is telling me this, even though I thought differently before). The FED is creating more USD to lend to banks, not give. That money has to come back to the FED, it has to be paid. So it is just a temporary fix that allows banks to keep things going and keep pressuring consumers to pay their debts. And I'm sure consumers will ultimately pay, one way or the other, sooner or later, them or their descendants, they will pay. However, in this process, something will be lost and that's going to be the problem for the future: consumers will lose their appetite for credit. They'll value financial stability and health more than owning a bigger or better house, more than owning a great car ... in the end, peace of mind will rise as the most valuable "asset", instead of material things.

It may take several years for consumers to clean up their personal balance sheets and start viewing spending heavily as an option again ... this makes me think about another issue, which is, how could the public come in and bid this market higher if they, as a group, don't have any savings or more credit capacity? From where would the money come from?

One could think international investors, but with the USD falling sharply day by day ... they lack the incentive. There's negative return.

As for my "Global catch up thesis" the problem is that it may be too late, since on a PPP basis China already is the largest economy in the World.

I guess the SPY will just break down below the $126 level and there's going to be a panic throughout the spring and summer ... it appears we're not in a 1990-91 type of situation, but more like a 1973 situation, when the S&P 500 fell 50% in one year, going back down to the 1970 low. Inflation adjusted the S&P 500 fell more than 80% ... it was really awful, and unfortunately it may happen again.

Given this, I thought about shorting the SPY or the QQQQ, or both. I don't like those inverted Pro-Shares funds, which go up when the market goes down by double amount, because they can't accurately do that, unless they keep selling an higher and higher amount of shares ... the base would have to grow more than arithmetically. Then I started thinking that what I have are all small caps, so why would I hedge my small cap exposure by shorting large caps?

I concluded that I should short the Russel 2000 Index, which is composed by small caps (but larger than the stocks I have, since they are the 2000 smallest of the 3000 largest US companies). There's a very liquid tracker stock for this Index, which ticker symbol is IWM (it had a volume of 92.6 million shares yesterday).

I would like this short to perfectly hedge the Main's long exposure, but since I have 62.37% of long exposure and just 37.63% of cash available, I'm going to have to use some leverage.

If I sell short 3800 shares of IWM I'll be more or less perfectly hedged and that's what I'll do today.

I'm sorry for taking so long to do this ... I was wrong on the general market direction.

David, on my account I cannot sell stocks short. Is there an alternative I can buy that will equal shorting IWM? I remember there were some trusts that traded opposing SPY, QQQQ and Russel2000, just don't remember which ones.

Thanks!

I found this on Smart Money:
"The Amex list included the very liquid iShares Russell 2000 Index Fund (IWM:  66.52, -0.78, -1.15%), whose volume topped 16 million shares on Tuesday. The large number of failures to deliver shares on open trades implies there aren't enough shares available to meet trading demand — including demand from short sellers to borrow shares."

Quote from: berloga on March 13, 2008, 09:13:04 AM
David, on my account I cannot sell stocks short. Is there an alternative I can buy that will equal shorting IWM? I remember there were some trusts that traded opposing SPY, QQQQ and Russel2000, just don't remember which ones.

Thanks!

Yes, there's the Pro Funds UltraShort Russel 2000, ticker symbol is TWM.

It traded 9 million shares yesterday. Just beware with the calculus because this is supposed to go up by double amount the Russel 2000 goes down (or down by double amount the Russel 2000 goes up), while my short sale will perfectly match (in an inverse way), the Russel 2000. This is actually a way of getting leverage without leveraging your account ... I don't know if I'm making myself understand.

Quote from: Houlahan on March 13, 2008, 09:17:20 AM
I found this on Smart Money:
"The Amex list included the very liquid iShares Russell 2000 Index Fund (IWM:  66.52, -0.78, -1.15%), whose volume topped 16 million shares on Tuesday. The large number of failures to deliver shares on open trades implies there aren't enough shares available to meet trading demand — including demand from short sellers to borrow shares."

Yes, but since then there was a very strong up day with 117 million shares traded and yesterday there were 92.6 million. I think there won't be any problem in selling this short, but let me know if there are any problems (in case you try to short and can't do it due to whatever reason).

Anyone wishing to short the market using a basket of inverse funds can check out:

http://www.bearmarketcentral.com/mutualfunds.htm

I've been toying with the notion of getting a number of these funds as I am convinced that the overall market direction for some time to come is downward.

I guess I'm a contrarian in the ST, cause I've been selling off my hedges and hunting what look like bargains (I hope). I think my hedges have already served their purpose, for me anyway. GL.

David,
I will not be following you with this recommendation of shorting right now.  I am sticking to my statement on the "cave in" message board last week.  I will have a better picture soon.  I believe you should have hedged the fund sooner by finding a few precious metal or commodity stocks that look attractive.  I asked you on the message board on February 20th about looking into GRS, even after I bought it ( I still own it ) and never got a response.  Maybe it would not have fit your criteria to buy it but it has done well for me. Anyway I may follow you soon but not for a while I think it may be the worst time to be shorting right now.  It sounds like I am the only one left who thinks we will be at new S&P highs over 1600 by middle of next year. I am selective buying stocks now.  I am not immune from being wrong and we Will know in the fullness of time.  To all good trading and health.

Poli

Quote from: Houlahan on March 13, 2008, 09:17:20 AM
I found this on Smart Money:
"The Amex list included the very liquid iShares Russell 2000 Index Fund (IWM:  66.52, -0.78, -1.15%), whose volume topped 16 million shares on Tuesday. The large number of failures to deliver shares on open trades implies there aren't enough shares available to meet trading demand — including demand from short sellers to borrow shares."

That should tell you right there to stay away from shorting it. Shorts are now very late to the party, IMO., except maybe on oil. Nearly all the analysts are also very bullish on oil prices and I'm just about ready to short it myself or buy DUG.

BigSully1,

I am in agreement with your last post.   Good trading and health to you.

Poli

I agree about buying DUG. I'm no expert,but don't you short what's been going up? Shorting the market in Oct would have been a contrarian call,but the right one. What's the right one now? The best trades are the hardest to make.

I must say I like today's market action for the first time this year.  Seems like some "real" buying going on....and not just short covering.

Quote from: poli on March 13, 2008, 12:30:51 PM
David,
I will not be following you with this recommendation of shorting right now.

David is not shorting the market but rather removing the systematic risk.

If the stocks 3SOF is holding perform better than the market we will do great whether the market goes up or down.

Pretty smart if you believe you can beat the market but don't know which way the market is going  

Quote from: soxguy on March 13, 2008, 02:38:07 PM
I agree about buying DUG. I'm no expert,but don't you short what's been going up? Shorting the market in Oct would have been a contrarian call,but the right one. What's the right one now? The best trades are the hardest to make.

Yes you're right soxguy about very hard to go against fear (or euphoria) and the masses, but many times the right thing to do. Oil over $1.10 has brought in a whole slew of new buyers now, the analysts are pumping and I expect  them to be wrong soon, although they may get another big spike first. I usually wait for such an extreme, an extreme much more than I could ever believe could happen, but I feel it's close and have started a  position in DUG, will probably finish filling ftommorrow.  Options expiry tommorrow.

Quote from: kslifka on March 13, 2008, 03:14:48 PM
I must say I like today's market action for the first time this year.  Seems like some "real" buying going on....and not just short covering.

You might be right Kslifka, but IBD says a follow through day should come no sooner than 4 days after a rally attempt in order to discount short covering. Tommorrow will be the 4th day. Also options expiry tommorrow.