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Last week, I noted that the Nasdaq was on the cusp of a breakout. Well, breakout it did, and with a number of tech stocks in my portfolio, I had one of the better weeks of the year. That, dear reader, is the way most money is made in this miserable market. Weeks and months of waiting and occasional small losses punctuated by a few spurts of big return.
The outlook remains promising for the short "stuff yourself til you pass out and watch football Thanksgiving trading week." What I find most encouraging yet frustrating is the news that on both the Federal front and in California that tax revenues are up and the deficit blues are not so bad.
The frustrating part is that this budgetary windfall – projected to be merely short term – will provide our politicians with further encouragement to engage in fiscal irresponsibility. Check it out: The latest Congressional bill has significant cuts in student loans but even bigger tax cuts so the net is negative on the budget. Earth to Washington, with China and India kicking our butts, the only way are kids are going to be able to compete is through better education.
The Week Ahead: Cruise Control
With a short week, this market will run on cruise control, with little news or data to drive things along. Look for the U-Mich sentiment numbers to be a harbinger of Xmas shopping. Thanksgiving weekend sales will also be important for action the following week in the market. A good Xmas season will give legs to this rally.
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Peter's Portfolio: Shorts and Longs
Let's start with the bad news. ARTX came out with a report that basically said its signature product for protecting Hummers in Iraq has been a failure. The stock tanked and I cut my very small holding. Plus, there is a slow leak in CPTCQ.OB that will only be addressed when the "Q" comes off the stock symbol. (Delay on this is not a good sign so beware.)
Now for the good news. AIRN, AMKR, GIGM, LVLT, QQQQ, VISG are solid technically and moving nicely. SVA recovered some of its lost mojo – but still showing signs of technical weakness. Holding ASTM, DSS in the Godot portion of the portfolio.
Added ALVR after spotting small mention in Barron's and was rewarded with a nice little mid-week pop. Will wait for a slight pullback to double up….
Hedging Your Bets With Matt
Davio
In a recent article in the Economist, the columnist Buttonwood goes off on a hedge fund rant that provides a useful vehicle to explain just what hedge funds do and why, contrary to Buttonwood, they do not need more "transparency."
Let's start with the question: Do hedge funds hedge? Proper ones - absolutely. They either hedge their own portfolio or act as a hedge as part of a larger diversified portfolio.
The cited studies look at the entire hedge fund universe, and the conclusions are neither surprising nor disturbing. Skill is rare, by definition, therefore the AVERAGE hedge fund will not be skilled or have impressive returns. Long/short equity is the most crowded and most easily implemented/copied strategy; any study gets skewed by the vast swathes of honest but unskilled managers in that space who are beta dependent rather than alpha generators.
Regarding performance, the target is to make an uncorrelated source of return at limited risk; and many funds ARE going to deliver that this year, as usual. The "brouhahas" she mentions are not at the heart of hedge fund land, they are at the periphery.
In this regard, no industry trend is a straight line and a temporary hiatus and a few redemptions are trivial. Sure some strategies are crowded, but many are not and others have yet to be discovered. Once the three-year equity bull and twenty-three year bond bull markets end, the stampede into hedge funds will be bigger than ever.
Then there is the transparency issue. She calls for more, but we would argue that transparency is the enemy of performance.
Why? Because profitable arbitrages and strategies disappear as soon as others started finding them. Accordingly, investors must choose - performance OR transparency - because they are not going to get both. If it is in the public domain, we question the viability of FUTURE returns. Keep the secret sauce, secret or start underperforming T-bills.
Finally, pro investors and advisers regulate their invested hedge funds to a far greater degree than ANYTHING the SEC can do. The coming regulations will have the following results: fewer start-ups running innovative strategies, lower returns across the board due to management distraction, European and Asian funds kicking out US investors just as those markets now offer the best opportunities, the same amount of scandals as before and, of course, compliance officer bar tabs in the six figures.
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