Permanent Shutdown

I'd like to announce my permanent hiatus from the blogging scene. I've utilized the blog to leverage my knowledge and show my passion for the business, which has served me well, as I've learned from this experience a great deal and made a few contacts along the way. It is time now for me to concentrate on school and other important tasks that require my attention.

Also, during my blogging tenure I made a few posts and comments I'm not proud of, so I'm terribly sorry if I offended anyone, it was never my intent.

I would like to thank everybody who has ever visited the blog, made a comment and/or subscribed. Your time and visits are greatly appreciated. Wish you all the best.

Sincerely,

Yaser

The Monday Edition- Fixed Income Strategy For This Week & Speculative Trade (ENCY)

I've finally got some spare time, so thought I'd share my thoughts on one wild week we're going to have.

• The price action in the US 10-year Treasury yields last week was extremely bearish as the bull channel in place since the 1990s was broken, when 10-year yields passed 5.03%, compromising the lower highs (as evident in the chart below). The relevance of this bull channel should not be underestimated as it reflects a period when the Fed was able to lower inflationary expectations in the US economy.

• The failure of the 10s to find sufficient buying interest to maintain the longer term trending pattern is indicative that longer term inflation expectations may no longer be contained in subsequent cycles if the data continue to firm up, the core inflation data don't come down fast enough or the unemployment rate fails to rise.
  
  
• How do we trade it? (please refer to the chart) First, if I ignore the break in the longer term trend, I would look for resistance at the brown line 5.20-.25% near term range in the 10s, and the next logical resistance would be at 5.5% the resistance in 2002 and 1999. With the break of the longer term bull channel, price action may not be confined in the trading range and risk remains to further market deterioration in coming months.

** Please look at the chart for two possible scenarios in the coming week.

• This week the markets have to digest vital data such as the CPI and Beige book. With a solid gain in retail sales ending marginal support to the view that a housing recession has failed to curb American consumers spending. That’s a message that the Beige Book should send as well.
  
  
• Ben Bernanke’s latest comments coincide exactly with the week ahead’s most important release, CPI. Note that core CPI has been limited to 0.2% or less in 9/10 preceding months, and the bond market would take obvious comfort in a benign 0.1% core reading.
  
  
• A lot of damage has already been done, but the market looks defensive at this juncture. Should US economic activity not slow significantly, the odds are high that the shorter end of the curve will begin to price in Fed tightening and that both short and longer term yields will head higher (scenario 1, as depicted in the chart).

That's all for this week.
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BTW: If you've got room in your portfolio to speculate with take a look at ENCY (Highly Speculative)- ENCY's lead product Thelin has an FDA decision date of June 15, 2007. ENCY's main focus is on cardiovascular diseases. Thelin is already marketed in Europe and recently received a Canadian approval.

It is highly likely Thelin will receive FDA approval. One potential problem for ENCY is Gilead has a similar drug up, Ambrisentan, for approval three days later and allegedly better than Thelin. However, if ENCY gets the nod you can expect the stock to pop 20-30% at least.
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Buy MNT (Short-Term Trade)

• Rationale: 1) With 16% of its float sold short, or 6,537,400 million shares, with 4.3 days to cover and average daily trading volume (3m) of 888K, it will take 7.36 days to cover the entire position.
  
  
• 2) On a fundamental level MNT is turning around, evident by the fact that inventory levels were 150-170 days for the quarter ending May, vs. 200 and 548 days in 06 and 05. Furthermore, efficient mgmt has led to a shrinking cash conversion cycle, 110 days from 150 and 400 in 06 and 05.
  
  
• 3) On April 20th, MNT plunged 5 points on lowering guidance 07 guidance, which I believe was overly excessive. Why? Having an earnings surprise average of near 20%, analysts I believe got overly bullish.
  
  
• On May 16th, MNT announced expectation of higher sales in 08. It is possible that management is playing the UPOD- Under Promise Over Deliver, game, seen as they have 96% profit margins and close to 12 bucks in cash per share with little debt, and quarterly earnings growth of 50%+
  
  
• 4) While I'm a fundamentalist first, I do look at charts. MNT, on a 3-year chart, is forming a double bottom. If you look at the annotated chart attached below, it is clear that such drops have been buying opportunities.

• Reward/Risk: 2.5 to 1. The average 5-year multiple for MNT is 35. Currently it's trading at 32, and taking the FY 08 (ending in May) EPS estimate of 1.3, I come to the price target of 45. I would place my stop loss at the 52-week low of 38. This trade would give me a potential 5 point upside and 2 point downside.

Ok- I'm serious about my hiatus! Don't want to get in trouble!

Stamp duty China impacts 1991-2005

Yes, I know I'm on a hiatus, but that doesn't mean I can't take a minute out to re-print something useful I received in the e-mail from someone who would rather not be named.

• Oct. 1991 - The Stamp Duty was cut from 0.6% to 0.3% - SHCOM (market index) gained 20.7% in the following month;
  
  
• May. 1997 - The Stamp Duty was raised from 0.3% to 0.5% - SHCOMP lost over 30% in the following month;
  
  
• Jun. 1998 - The Stamp Duty was cut from 0.5% to 0.4% - SHCOMP gained 2.65% on the day of the announcement;
  
  
• Jun. 1999 - The Stamp Duty on B-share was cut from 0.4% to 0.3% - SHSE B Index gained over 50% in the following month;
  
  
• Nov. 2001 - The Stamp Duty was cut to 0.2% for the whole mkt - SHCOMP gained over 1% in the following mth.
  
  
• Jan 05 - The Stamp Duty was cut from 0.2%-0.1% - SHCOMP gained 4.3% in the following mth.

Hope all is well.

Y

Featured In Globe & Mail

It is my first time in the Globe & Mail, which is Canada's NYT, and first time in print (no online version). I'm thankful to God, GM and everybody else who takes time to come here. I'll sure miss you in the next few months due to my hiatus. Feel free to e-mail me to chat about the market, in the mean time will try to get permission for "Monday Edition" posts. Thanks!

Blogging Hiatus: Internship Time

For this summer, I had some good offers, thanks to God, from Barclays (Dubai), UBS (LA) but I chose a firm in the HF industry.

I posted their name and a few clients, but have been advised by a friend to take it down, for now.
Anyhow, if you know me, feel free to e-mail and I'd be happy to tell you. Besides, if you're a regular here, I'm going to be posting it sooner or later in my resume and talking about them in the future.

I'm going to seek permission to do my "Monday Edition" post, as that is sent to my institutional contacts, however, if I don't I apologize.

Hedging w/ Futures & Options: Bullish, Bearish & Neutral Strategies

As you know, we're in the third year of the presidential cycle, which on a historical basis has been quite bullish for the markets.

1. The DJIA has risen 24 times and fallen 5 times in the 29 third calendar year of the Presidential Cycle since 1891.
   
   
2. The overall, average gain for the 29 third calendar years is 12.31%, with the 16 Republican presidencies averaging gains of 5.12% and the 13 Democratic presidencies averaging gains of 21.14%. (Source: Stock Traders Almanac)
   

So far confirmed, there will be 196 companies reporting in July and about 30 in August. For the options and futures spreads mentioned below I've chosen an August expiry so we can benefit from the full swing of July earnings report and not suffer from time decay.

Lastly, to keep things simple, each spread below is calculated with the assumption of just 1 contract, options and futures. (Source of prices: CBOE & symbols: Y! Finance)

Hedging w/ Futures & Options: Bullish, Bearish & Neutral Strategies

• 1) Buy CBOE Volatility Index (VIX). Why? On February 27, 07, the VIX experienced the biggest ever 1-day move in % terms in its 17-year price history, as the VIX rose by 64% in one day to close at 18.31 and the S&P closed down -3.5%. Over the 17-year period from 90 through 06, the spot VIX price changes have had negative correlations with the S&P 500 in terms of daily returns (-0.66) and monthly returns (-0.61).
  
  
• If a portfolio manager had had an allocation of even a small portion of a stock portfolio to VIX futures prior to Feb 27, some or all of the 3.5% loss on an S&P 500 stock position could have been offset by the gains on a long VIX futures position.

• 2) Reverse Calendar Spread: One would buy a short-term future and sell a long-term future (bearish strategy).
  
  
• Trade Rationale: RCS would be used primarily when one is expecting a bullish market trend to deteriorate into a bearish trend. We would be looking for the longer-term contracts and the near-term contracts to converge in price, something that would happen if the VIX Index rose quickly and the futures contracts did not follow.

Current: VIX 13.34. Buy Aug07 VIX Futures: 14.79 | Sell May08 VIX Futures: 15.5 | Credit of= 0.71

If we had done a similar strategy prior to Feb 2007, we would have covered some of the long portfolio loss.

Historical example: VIX: Feb 15, 07 vs. March 2nd, 2007

• Feb- VIX 10.22 (close to historic low). Buy May07 VIX futures: 13.39 | Sell Nov07 VIX futures: 15.08 | Credit= 1.69
  
  
• March- VIX 19.63 (fastest rise). May07 VIX futures: 14.93 | Nov07 VIX futures: 15.03 | Spread narrowing: 1.59, resulting in profit of 1,590 per contract and successful hedge against market downfall.

• 3) Bear Call Spread: Purchase of an ATM or OTM call option on the underlying asset while simultaneously writing an ITM call option on the same underlying asset with the same expiration month (bearish to neutral).
  
  
• Trade Rationale: If the underlying instrument fails to drop beyond the strike price of the out of the money short call option, the profit yield will be greater than just buying put options. Able to profit even when the underlying asset remains completely stagnant.

Buy to open 151 August SPY call (SYHHU.X for $4.8) and Sell to open 148 August SPY call (SFBHR.X for $6.9)

Maximum Reward= $6.9-$4.8= $2.1
Maximum Risk= Difference in Strike - Net Credit = 3-2.1= 0.9
Break Even= Lower Strike + Net credit = 148 + 2.1 = 150.1

• Disadvantage: There will be no more profits possible if the underlying asset drops beyond the strike price of the short call option.

• 4) Bull Call Spread: Purchase of an ATM or ITM call option on the underlying asset while simultaneously writing an OTM call option on the same underlying asset with the same expiration month (bullish to neutral).
  
  
• Trade Rationale: When one is confident in a rise in the underlying instrument but is also worried that profits may be low if the stock should rise only very moderately or remain stagnant for an extended period of time. It is also a way of buying call options at a discount by selling the out of the money call option at a strike price beyond that which the underlying instrument is expected to rise.

Buy to open 151 August SPY Call (SYHHU.X for $4.8) and Sell to open 157 August SPY call (SYHHA.X for 1.99)

Maximum Return = [(Difference in strikes - Net Debit) / Net Debit]
[(157-151 - (2.81)] - 2.81
-) 3.19-2.81= 0.38 x 100= 38%

Maximum Risk = Net Debit = 2.81 | Break Even = Lower Strike + Net Debit = 151 + 2.81= 153.81

• Disadvantage: There will be no more profits possible if the underlying instrument or stock rises beyond the strike price of the out of the money call option.

Win A Copy Of Bank Asset & Liability Management

I'm delighted to announce that institutional readers (please e-mail me from your corporate e-mail) can win a copy of 'Bank Asset & Liability Management' by Moorad Choudhry (Head of Treasury at KBC Financial Products, derivatives arm of KBC Bank).

BALM is a reference book for those involved, or becoming involved in, or becoming involved in, commercial banking and/or money markets. It describes products and the art of ALM, which includes money markets trading, risk management (including interest-rate risk and credit risk), regulatory capital management, and securitization.

You can win the book, 5 copies available, by answering two simple questions. Please e-mail me at yaser AT yaseranwar.com, no comments accepted.

1) Which university is Mr. Choudhry a visiting professor of?

2) Name one other book by Mr. Choudhry.

** Please be cognizant the participants will have their e-mails sent to Wiley (promotions@wiley.com.sg). However, there is nothing to worry about as the Wiley rep. has assured me they value privacy highly, and participants will be kept up to date about similar books, something they can opt out of on their request.

Thank you!

Closed-End Funds To Consider- UTF, SRO, ESD

I've compiled a list of closed-end funds selling at a discount that you should consider. Besides looking for funds selling below NAV, I looked for companies which have are rated at least 4/5 from Morningstar, have a good 3 year track record, and have share prices that have done well in 07.

Please be cognizant that the average CEF trades less than 50K shares on a daily basis, but 2/3 presented in here trade above 100K and 1, which I felt was good enough to mention, trades 97K.

1) Cohen & Steers Select Utility Fund (UTF)

4-star rating with Morningstar's above average return and risk profile. Dividend Yield: 4.5% Discount to NAV approximately 13%. Expense Ratio: 1.28%

Sharpe Ratio: Vanguard Total Mkt Idx (VTSAX) 1.17 | Cohen & Steers Select Utility (UTF) 2.21 (the higher the sharpe ratio the better)

Beta: S&P 1 | UTF 0.21
Volume: 149K daily (average 3 month)

Total Shares Outstanding x Closing NAV: 43.32 x 32.64= $1,414 million
TSO x Closing Price: 43.32 x 28.19= $1,221 million
Total Net Assets= $1,799 million

Why the discount? The only reason I can think of is due to the 31% leverage the mutual fund employs. Besides that, this is a fund to own, as the chart below illustrates.

I checked if UTF underperformed the market in 07 but it has done pretty well, up 13%+ so far. So we've got a double digit performer with lower risk than the market and consistent three year performance selling at a discount.

The chart is the best out of all three presented in this analysis, click here to see it.

2) DWS RREEF Real Estate Fund II (SRO)

4-star rating with Morningstar's above average return and risk profile. Dividend Yield: 8%, Discount to NAV approximately 11.5%. Expense Ratio: 1.05%

Sharpe Ratio: Vanguard Total Mkt Idx (VTSAX) 1.17 | DWS Real Estate II (SRO) 1.66

Beta: S&P 1 | SRO 1.23
Volume: 143K daily (average 3 month)

Total Shares Outstanding x Closing NAV: 38.5 million x $21.76= $838 million
TSO x Closing Price: 38.5 x 19.35= $745 million
Total Net Assets: $1,213 million

Why the discount? Similar to UTF, the reason I believe is due to the 28% leverage it employs. Also, the volatility of SRO is .23% higher than the S&P, 1.23.

I checked whether SRO underperformed in 07, so far it has been up 7.9%. Given the 8% yield, consistent distributions and discounted valuation, I believe this fund should be considered if you're looking for yield and playing one of the hottest sectors, REITS.

Click here to check out the chart (forming a double bottom).

3) Western Asset Emerging Markets Debt (ESD)

4-star rating with Morningstar's above average return and risk profile. Dividend Yield: 6.7%, Discount to NAV approximately 13%. Expense Ratio: 1.02%

Sharpe Ratio: VTSAX 1.17 | ESD 1.98

Beta: S&P 1 | ESD 0.14
Volume: 98K (traded 140K on latest close, avg. 3 month)

Total Shares Outstanding x Closing NAV: 28 million x 21= $588 million
TSO x Closing Price: 28 x 18.39= $515 million
Total Net Assets: $602 million

Why the discount? In my opinion it's due to the risk of being categorized as an emerging market fund. So far this year SRO has been up about 4.35%, has three year returns of 13%, which are not bad given it's low volatility.

The chart looks good too, click here to view it.

Is It Time To Buy Gold? (Updated 2 pm)

There's a ratio I like to look at for timing buy/sell decisions in Gold. This ratio, Gold/Oil, helps to identify overbought and oversold opportunities for gold. The chart below shows buying gold when the ratio is 8-10 usually pays of due to it being oversold and consider selling over 20.

Right now the ratio is at: 663.80 - 66.27 = 10.02 (rounded)

UPDATE 2:30 PM- This chart courtesy of Jim Wyckoff shows a bearish wedge forming in gold- it's always good to have contrary opinions, as it allows one to reassess

Jim Wyckoff- June gold futures have just recently formed a potentially bearish rising wedge pattern on the daily bar chart. Following last week's sharp losses, the market has seen a few sessions of tepid short covering and bottom-fishing by traders.

This minor corrective bounce has formed the rising wedge formation on the daily chart. Bears would gain solid downside technical momentum by pushing and closing June gold futures below strong chart support at last week's low of $654.10 an ounce.

For the bulls to gain some fresh upside technical momentum, they would need to push and close June gold futures above solid chart resistance at $667.50. Gold bulls are keenly worried about the recent rebound in the value of the U.S. dollar versus the other major currencies. Continued appreciation of the greenback is likely to spell doom for the gold market bulls.

However, recently there has been talk about the US$ rising short-term. Typically gold goes up when US$ loses value, but will it be a double bull this time round? Hmm. Here's a good analysis from Decision Point.

The U.S. Dollar is trying to turn up for the fourth time since it topped in 2004, but this bottom looks more promising than the prior three. While the long-term trend is down, this bottom is the third confirmation of the descending wedge formation, a technical configuration which normally resolves to the up side. This wedge is also a long-term formation, so the direction of a breakout has long-term implications.

In the short-term we have a PMO (Price Momentum Oscillator) buy signal, generated when the PMO crosses up through its 10-EMA. Also, the price index has broken above the short-term declining trend line. Medium-term we have a positive divergence as the PMO has been making higher highs corresponding to lower price lows.

On the long-term chart below we can see other positive signs. Most important is the long-term support zone between 78 and 80. There is no guarantee that the support will hold, but we have to view it as being in the plus column. Assuming that the support does hold, the bottom that will result will form a double bottom that spans over two years. Like the wedge formation, this will have very positive long-term implications.

Bottom Line: Let there be no doubt, the trend is down in both the medium- and long-term (our trend model is still bearish on the dollar), and it is too early to assume that a change in trend is taking place; however, there are plenty of reasons to begin nursing some positive expectations.

Thoughts On UK- Policy, Deficits & More

• Gordon Brown eagerly awaits June 27th, when Tony Blair will step down as Prime Minister. The initial policy impact of a change in leadership will likely be minimal, as the Chancellor has been the architect of the administration’s economic and fiscal measures.
  
  
• On the international side, Gordon Brown appears to support a strong relationship with the US. So far sentiment is moving in opposite direction, as public support for British presence in Iraq continues to drop, though it is equally evident that there is not strong support for a major strengthening of ties with the EU.
  
  
• Fiscal consolidation remains a pending issue. UK's deficits, second largest after the US, will likely hover close to 3% of GDP through 08 thanks to the recent strengthening of the British pound.
  
  
• Despite the BoE’s concerns regarding possible strains on economic capacity, government spending still shows no signs of being effectively reined in, as Chancellor of the Exchequer Gordon Brown’s prime ministerial ambitions may be limiting the extent of fiscal retrenchment.
  
  
• The ratio of government debt to GDP has been rising steadily since 01 and is approaching 45%, still substantially lower than that of other major European Union members.
  
  
• While such a debt burden is manageable, the administration’s reluctance to achieve significant deficit reductions during periods of economic growth limits the leeway to react swiftly to any economic downturn without damaging the government’s balance sheet.
  
  
• The household sector poses the largest risk to the economy. Its record-high debt burden, closely linked to an earlier rapid rise in housing prices (equivalent to about 150% of disposable income). The adverse impact on debt-servicing capacity of sluggish growth in household incomes has been intensified as a result of rising domestic interest rates.
  
  
• Personal bankruptcies are soaring. The jobless rate on a claims basis has been holding steady at 3%, not much above earlier cyclical lows.
  
  
• Although consumer confidence remains subdued, net household borrowing continues to grow at a monthly rate of close to 1% despite the gradual rise in borrowing costs.
  
  
• Employment conditions are still favorable (unemployment rate remains at 5.5%), but some weakening may become evident as the labor-intensive services sector slows.

The Monday Edition- Latin America Outlook- Part 1: Brazil & Argentina

Current account surpluses, debt reduction, commodity prices and steady capital remittances remain drivers of exchange rate stability, attracting yield-hungry and aggressive growth investors.

The key countries in Latin America have opted to implement alternative exchange rate regimes, but the majorty have deepened the process of de-dollarization, and occasional interventions in Brazil, Argentina and Peru in times of uncertainty.

** All figures in US$

Brazil:

• Brazil (Real GDP is expected to come in at 4.2%) has embarked on fostering the use of the local currency in international financial transactions and to deepen the process of de-dollarization under way. So much so that they will increase the issuance of real-denominated debt securities in external and local jurisdictions in an effort to complete the buildup of the local currency yield curve.
  
  
• The goal of investment-grade status remains a top priority for Brazilian leaders (External debt as % of GDP and % of Exports of G&S will be reduced (04 to 07, US$): 33 bn to 15 bn and 198 bn to 100 bn, respectively). The country’s export boom (Exports are set to reach 155 bn in 07 from 96 bn in 04) has translated into large trade (47 bn) and current account surpluses (14+ bn) in 07.
  
  
• The outstanding contribution of the Brazilian export sector in the context of excess global liquidity searching for high yielding security investments has created a virtuous cycle in the country’s external finances. The accumulation of FX reserves, soon to reach 150 bn, will remain strong as the central bank continues its precautionary buildup of US dollar-denominated assets.
  
  
• The real has been appreciating since 03; massive capital inflows and impressive trade results have been major drivers of this performance. FDI inflows, so far have exceeded 18 bn, will continue to reflect the bright economic and financial outlook in Brazil. The country’s leaders acknowledge that the most effective shield against exogenous shocks is sustainable low-inflation export-driven (L.I.E.D.) growth.
  
  
• To compliment L.I.E.D. the Banco Central do Brasil (BCB) will maintain its policy of reducing interest rates to bring monetary and inflation trends more in line with economy standards by executing well-timed interest rate cuts; the benchmark overnight SELIC rate will likely hover around 11%, and CPI is likely to increase but to a manageable annual rate of 4% by end of 07.
  

Argentina:

• The economy is gradually shifting onto a slower growth path after a period of rapid expansion. Real GDP is expected to grow by about 7.5% this year, following an average of 9% YoY over the past four years. A very favorable external environment for commodity exporting nations on the back of strong Asian demand and a sharp recovery in local consumption (following the 00-02 depression) has allowed the economy to record high economic growth.
  
  
• Argentina’s external debt stands at about 109 bn, 51% of GDP, down from 112% in 04. The sharp reduction in public sector external debt servicing obligations coupled with the robust post-recession recovery also led the economy to record fiscal and current account surpluses, which limited the country’s need to access external sources of financing.
  
  
• However, the fiscal outlook is gradually deteriorating on the back of widening provincial deficits and rising indebtedness, especially thanks to energy. Strong growth and price controls are increasing domestic energy demand, making it imperative to obtain access to foreign sources of energy. Adjustments to the price of Bolivian natural gas, together with supply cuts to Chile, also hint at pending problems on the energy front.
  
  
• Public debt may be adversely affected by rising inflation, as a large portion of tradable government securities is indexed to inflation. The Argentine economic and political authorities have voiced their willingness to restructure debt obligations owed to government creditors grouped under the Paris Club (the latter requires a programme endorsed by the IMF).

Risks

• A comprehensive cycle of presidential elections will be completed at the end of October when Argentines go to the polls. The quality of governance remains poor, fuelling the rise of authoritarian governments across Latin America.
  
  
• Recent events in the US sub-prime market, the spike in energy prices as a result of heightened tensions in the Middle East and the risk of unwinding of yen-funded carrytrade investments are all reminders of the inherent risks associated with emerging market investments.
  
  
• The US attempt to re-engage with key countries through a high-profile presidential tour of the region has failed and deepened divisions amongst countries.

Charity Is Important: Three You Can Donate To Right Now!

"It is important that you give back." While we've all been told that, truthfully how many of us actually act on that? There are hundreds of charities, no thousands, of them out there trying to make a difference one way or the other.

It is important for us to donate, be it $5 only, on a consistent. And we can all afford $5 per month. If we can tuck away money in our IRAs, RRSPs etc., are we so inhuman we can't afford $5 per month to a charity? I don't think so.

I've selected three of my favorite charities, by religious affiliations, that you can donate right away and help some one!

For Muslims- Hidaya Foundation is the best one. They've recently launched "No Orphan Without Education" program and for $30-50, you can make someone's life better. Click here.

For Christians- Christian Children Fund is a pretty good one.

For Jews- Jewish Life Network is one of the oldest and best one's I hear, and hey! it's run by a former hedgie, legendary one that too- Michael Steinhardt.

I've no affiliations with any of the three whatsoever. If you donate, I hope you're rewarded 10x that, Amen!

Sincerely,

Yaser

Thank You FT Alphaville

Just recently FT Alphaville started a blog roll and had me alongside 21/22 excellent blogs. So this post is a "Thank You!" to their editors for deeming my blog worthy of their time.

Much appreciated!

Yaser

Managed Accounts- What You Need To Know

Recently I got an e-mail from a lawyer dealing with documenting fund of fund financing who wanted to know more about- Managed Accounts. I liked what I said, so here's a re-print w/ few exclusive additions.

Under the managed accounts platform, funds are invested in segregated accounts, each of which is managed according to a particular strategy by a ABC hedge fund manager within pre-defined limits.

The manager’s authority typically is a limited power of attorney that grants the manager the ability to place and liquidate trades, but not the ability to move cash into or out of the account or to link the account to any other account. A trust controlled by a custodian is one particularly effective means of protecting the account assets from any improper transfers or account linkages by the manager or any other party.

An external fund administrator is responsible for all hedge funds administration activities. The funds administrator (i.e.- Anson Group) interfaces with the prime brokers and receives information on trades and positions.

The funds administrator is then responsible for pricing all securities using independent sources such as Bloomberg, Reuters and independent market makers and for calculating the NAV of the managed accounts on a daily basis (for more complex positions like illiquid closed end funds or credit derivatives it's done on a weekly, maybe even bi-monthly basis). This approach provides investors with position-level transparency, performance monitoring, liquidity at NAV, tax efficient structures and flexible asset allocation.

Where/how it holds its assets?: Usually with the Prime Brokerage(s). The job of the funds admin is to monitor the positions and keep the investors abreast of the traits in italics above. For example- Amaranth was supposed to be a multi-strat HF, but they increased their bets in Nat Gas.

If there was a funds admin- they would have told investors "these guys are deviating from their strategy!" and the alarm bells would go off. Most FoFs, the good ones anyway, watch the aforementioned traits like a vulture eyeing its prey or a trader keeping tabs on his positions.

How subscriptions/redemptions work: Typically, it will take approximately a month or longer for hedge funds to return assets after the effective redemption rate. Moreover, many hedge funds will withhold 5-10% of the assets until the completion of the annual audit.

Many offering memorandums will allow for the implementation of a gate on the maximum amount of total investor redemptions during each redemption period. The purpose of a gate is to prevent unusually large redemptions from disrupting the portfolio.

If imposed, a gate will prevent investors from redeeming more than a minority of their holdings. The problem with a gate is that by definition it will be implemented precisely at those times when many investors want to redeem.

For example, if a fund witnesses an unexpectedly large loss, leading to many of its investors seeking to redeem, the imposition of a gate would significantly reduce the amount each investor could redeem.

The implementation of penalty charges for redemption during the first year of the investment are becoming increasingly widespread, and the amount of these penalties are increasing. It is now quite common to see funds specifying a penalty of 3%-5% for redemption during the first year. Moreover, many funds now impose penalties beyond the first year of investment as well.

The Major Advantages of a Managed Account:

1 ) Daily Transparency—A managed account allows for daily position level transparency and monitoring.

2) Daily Independent Pricing—A managed account makes it possible to independently price a portfolio daily.

3) Better Liquidity Terms—Managed accounts typically provide much more favorable liquidity terms than the counterpart funds. Monthly liquidity is the norm rather than the exception.

4) Control of Cash Movements—If structured properly, a managed account will prohibit the manager from any involvement regarding cash movements in or out of the account; the manager's sole responsibility is limited to the investment of the portfolio.

5) Insulation of Account from Fraudulent Linkages—The managed account will belong to the investor or a proxy for the investor—a structure that makes it impossible for an unscrupulous manager to fraudulently link the account to any other account without investor knowledge (recall the NFL dudes who were duped for millions?)

6) Minimal Lag between Liquidation of Investment and Return of Cash—In a managed account, funds are normally returned promptly upon redemption, in contrast to the approximate month or longer delay that is common in hedge funds. There are also no audit holdbacks for managed accounts.

7) Accounts Can Be Customized to Minimize Assets Held in Cash—Many hedge fund strategies utilize only a fraction of their assets under management to meet margin requirements. Managed accounts can be structured to be more cash efficient.

8) Portfolio Exposure Information—Position level transparency allows for estimating the exposure sensitivity of a portfolio to a range of market factors and conducting stress tests for various events.

Major Drawback

Managed Accounts are being utilized mostly by second, third-tier managers who find it necessary to disclose as much as possible to attract investment dollars. If you look at the most notable hedge fund launches, Jabre Capital Partners to Carlyle Group's Hedge Funds, they are not managed accounts, far from it.

Partly because the best hedge funds are self-regulated in a way no regulations can comprehend of doing. After all, you don't reach the ranks of consistent, double digit returns without excellent risk management policies.

Central Banks- A Macro View

Capital flows into emerging markets, driven by a combination of expected stock market gains, currency appreciation, and in some countries high interest rates, have been of increasing concern for central banks. Across the emerging market countries, FX reserves surged by $209 billion to $3.2 trillion in first quarter of 07 after a $216 billion increase in the last quarter.

Authorities struggling to grapple with large capital inflows would welcome some dampening of risk appetite. Meanwhile, lower export growth, modest inflation, and accumulated real currency
appreciation make central banks less willing to accept further nominal appreciation.

This already prompted heavy capital controls in Thailand, controls that were faintly echoed in prudential or monetary measures in China, Korea, and the Philippines. Vietnam also is reportedly looking at imposing capital controls.

The relative weakness of the yen only exacerbates the pressure on Asian central banks, especially in Korea, Malaysia, and Taiwan, to counter currency appreciation. The conflict for Asian central banks would be far less daunting if investors lessen their asset demands.

In the EU region, the ECB will likely hike again in June by 25 basis points. Chances of further hikes exist, if GDP and/or credit growth fail to moderate, but the ongoing appreciation of the euro limits those risks.

What's Up With Calpine (CPNLQ)?

Fundamental Picture:

WSJ's Head On The Street column had a good article on Calpine, so I'm going to reprint the necessary excerpts.

Plugging Into Calpine

"Calpine recently told the U.S. Bankruptcy Court for the Southern District of New York that it is considering raising money, possibly from private-equity firms or others, as part of its strategy to emerge from bankruptcy court this year.

There even is speculation of buyout interest in the company, the nation's largest owner of natural-gas-fired power plants, in terms of megawatts of capacity -- and that could make its shares even more attractive.

The company's price/earnings ratio is far below that of the independent power sector as a whole, with Calpine trading at 17.6 times its estimated per-share earnings for 2007, compared with 35 times for the sector.

Since filing for Chapter 11 in December 2005, Calpine Chief Executive Robert P. May has been selling assets and patching up the balance sheet. The company has sold eight power plants, using the proceeds to cut debt by $1.2 billion, and it has renegotiated seven power-sales agreements to improve its position by $1.8 billion. It has eliminated about one-third of its creditor claims so far, and has cut staff by a third.

Calpine's prospects have rebounded, in part, because of dimming prospects for the construction of coal-fired power plants by others due to fears of global warming and stepped up regulation.

Future carbon-limiting rules would be fine with Calpine because it doesn't own coal-fired generating plants on which restrictions would be toughest. It operates 66 clean-burning gas-fired power plants, which emit only 40% as much carbon dioxide as coal-fired plants, and 19 geothermal plants that tap the Earth's heat to make electricity.

Of the 20 top power generators in the U.S., Calpine emits the least carbon dioxide. That means it could benefit from new regulations because the rules would likely force other generators to charge more for electricity to cover greenhouse-gas compliance costs, making Calpine's power more competitive by comparison.

With coal plants looking iffy and new nuclear plants perhaps a decade away, "You have a situation where plants like Calpine's look like the only alternative for at least the next five years," said Daniele M. Seitz, analyst for Dahlman Rose.

The value of Calpine's portfolio is rising. Generating capacity that was valued at about $400 a kilowatt two years ago now fetches about $650 a kilowatt of capacity.

Another plus for Calpine is the example set by other generators that have emerged from bankruptcy protection. NRG Energy's stock price has soared to about $80, four times as much as it fetched in December 2003, when the New Jersey company emerged from Chapter 11. Stock in Mirant has doubled in price since it reorganized in 2006. The Atlanta company recently said it is seeking a buyer."

• Investors should be cognizant that Calpine reported better than expected results on May 9th, 07. Net loss was $459 million, 96 cents EPS vs. loss of $589 million, $1.23 EPS last year.
  
  
• Sales rose 19% to $1.6 billion for the quarter ending March 31, said Calpine, which operates 25K megawatts of generating capacity in 18 states and sells power to the wholesale market. CPNLQ said it benefited from a $246 million gain on asset sales as part of its restructuring activity.
  
  
• Given the environment-friendly nature of CPNLQ's business, management's push to concentrate on core areas of operations through restructuring, and the political aspect of Democrats controlling the senate and likely hood of winning the White House (recent polls favor Democrats), legislation to curb greenhouse-gas emissions looks quite realistic.

Technical Analysis

As you can see in the daily chart, CPNLQ has responded well to Fibonacci levels. Right now it's retraced 38% of it's recent move, and thanks to the aforementioned positive story in the WSJ, the stock traded higher yesterday.



This is a weekly chart. The Fib magic seems to be working well. If you look the volume on the weekly time frame, it looks a lot more bullish. Also note the hammer formation, which typically signals a trend reversal.



My problem with CPNLQ is ever since it started its retracement, the stock has not seen a high volume up day. As you can see from the chart below, the red arrows point out increased distribution than accumulation. The next few days are key for the stock, I would like to see how CPNLQ trades.

Ideally, I'd like it to break the trading range highlighted below on good volume. I'm not trusting today's move because of the WSJ article.



One of the positives I really like is that the stock has seen buyers step in each time it has approached the 50-day MA. This shows that traders still believe in the stock.

Therefore, considering the fundamental aspects highlighted in bold above and the stock being bought at the 50-day MA, tells me the bullish story is intact. This is one to watch very carefully for upcoming developments.

** My bullish stance should not be construed as a buy signal.

Time To Buy NYSE Euronext (NYX)

Fundamental Picture

• High margins and return business with secular drivers. NYX's valuation does not fully reflect strength or persistence of growth. NYSE's recent merger with Euronext will enable it to benefit from Cost synergies arising from consolidating platforms and pools of liquidity, giving members of the exchange access to worldwide markets and equities.
  
  
• A combined NYX will add new products and distribution capabilities, alongside reducing dependence on human capital. NYX recently will be firing about 1/3rd of it's workforce and here's where the Archipelago merger helps NYX be more electronically efficient similar to Nasdaq.
  
  
• Furthermore, my conviction level has increased after noticing Third Point, run by the activist Dan Loeb, has taken a position in NYX. I would also like to go one step further and speculate that Atticus Capital, run by the superstar Tim Barakett, will or has taken position in NYX.
  
  
• Why? Atticus has a position in Deutsche Borse (Mr. Barakett has been pushing DB management to make better decisions- WSJ article) and had one in Archipelago before NYX bought it out. Hence, given the NYX discount, I believe Atticus will find value if shares remain at this level or drop further, as the secular bull market in world wide exchange stocks seems no signs of ending.

Technical Picture

As you can see in June and September 2006 NYX completed its double bottom, coincidentally this occurred on its 50-day MA. It is evident from the chart that institutional funds came in and bought the stock.

Similar to 06, we're seeing this double bottom form right now in NYX.



Is the selling done? I think so. Below is a weekly chart which shows NYX has closed in red every week since April. Why? a) due to it's stock run up, b) because of news that top 8 brokerages will be forming an alliance to bypass London Stock Exchange's fees, hence the market feared this will happen with NYX too, considering it has raised prices recently, c) innovations like GSTruE (GS Tradable Unregistered Equity OTC Market) and d) downgrades by Goldman Sachs, Banc of America and JP Morgan.



In the chart below is a pattern I like to call 1-2-3, which shows a bullish picture. Also, notice over the past two weeks selling pressure in NYX has declined.



Conclusion

Considering the positive fundamental and technical picture, I'd like to recommend this stock as a buy.

The Monday Edition- Singapore a) Govt.'s Public Policies & Investments, b) Economy, c) Main Risks.

This week I talk about Singapore's: a) Govt.'s Policies & Investments (pro-business growth), b) Economy (6-year unemployment low, bankruptcies falling and growth drivers) and c) Main Risks (severe slowdown in US IT imports).

• Singapore, Asia's second richest country after Japan with a GDP per capita of about $27K, has witnessed stellar performance in it's equity capital markets thanks to robust economic growth (7.9% in 06 and 5-6.5% expected in 07). The reason(s): Singapore's pro-business growth stance through tax cuts and infrastructure investments. We're seeing a significant shift in government policies which will result in further economic development.
  
  
• A corporate tax rate of 18% closes the gap with Hong Kong and will lift foreign investment (Corporate tax rate: 24.5% in 02 to 18% 07-08). While Consumers may be hit by the 2% GST hike, the government has hinted that personal tax rates could be cut further in the future to maintain competitiveness and attract foreign talent (Personal tax rates: 26% in 02 to 20% in 07-08).
  
  
• Recently, Singapore's unemployment rate, 2.7%, fell to a six-year low in the first quarter (strong growth especially in construction, up 7%). The government allocated US$ 264 million to 'The Workfare Income Supplement plan' and plans to allocate about US$ 5.5 bn in total to strengthen the social security system.
  
  
• Furthermore, the government is focused on higher-education, R&D spending alongside Housing & Development Board upgrading. The government has made the workfare plan permanent, acknowledging the need for more automatic help for the lower-income group. The measures have paid of as the latest numbers indicating new bankruptcies have dropped for the second month in a row to 6.4% YoY basis.
  
  
  
  
  
  
• The government unveiled aggressive infrastructure investment and development expenditure plans (expected to increase by 16.5% in 07 following two consecutive years of cuts). To enhance the living environment and cater to a larger long-term population target, 6.5 vs. 5 million previously, the government will spend a total of US$ 13.17 bn over the next 10 years to enhance its land transport infrastructure.
  
  
• Besides Electronic exports, growth drivers are: Real Estate, Oil Rigs (Singapore is home to the world's number one and two oil-rig builders, whose business has boomed as rising oil prices led oil firms to boost exploration efforts. The two together have over US$ 10 bn worth of orders) Transport and Financial services, have cushioned the impact and reduced its vulnerability to the tech cycle.
  
  
• So far the Monetary Authority of Singapore is maintaining its Singapore dollar policy stance but intervening heavily to stem the Singapore dollar’s strength on the back of strong capital inflows. The government is raising civil service pay to reduce staff turnover and retain talent.
  
  
• The MAS issued a warning pertaining to deferred payment schemes, which may increase risks to property developers and banks. The Singapore yield curve could further flatten as more investors accept the reality of a structural down shift in the interest rate environment and renewed flattening bias in the US curve.
  
  
• In the most recent Economic Development Board (EDB) survey: Electronics firms (Singapore's main export) were the most upbeat with a net weighted 38% expressing confidence the business environment will be better on expectations of a pick-up in demand.
  
  
• A net weighted 22% of firms in the services sector project better business conditions in the six months to September, up from the 18% recorded in the last poll, which was for the period January-June 07.
  
  
• Singapore's property sector is undergoing a boom, fueled by demand from wealthy foreigners and high-income professionals for luxury units. The property sector was the most upbeat in the services industry, with a net weighted balance of 61% confident business will get better.

Main risks

• a) Since a good portion of Singapore's exports are electronics/IT, a severe slowdown in US could hurt the economy. b) So far MAS has kept an accommodative policy towards interest rates, but an excessive tightening or rhetoric could result in an extreme pull back given the run of the stock market.

That's all for this week, thank you.

BBH Update

Recall on May 4th I posted patterns that were developing in BBH. My intention with this post is just to show that following chart signals for channel trading work. It's always great to have such patterns as the signals are somewhat predictable, though one has to be a little flexible and patient.

Before: May 3th Chart



After: May 11th Chart, dropped 7ish points



Synopsis:

1) Negative divergence in RSI and 2) making higher highs in price but lower highs in volume. Keep an eye out for a buy signal around 170-3.

Double Buy DIS and TNH - CAL Technicals

TNH

• Not sure if you've been following my TNH buy recommendations, April 11th and 26th, but the stock is up 27 odd points since the first time. I still think the old analysis is valid and the strong accumulation goes to show the validation of the idea. One of the reasons I've been quite bullish on, besides the ones mentioned in the links is the strength in TNH around Feb 27th the down day.
  
  
• If you peruse the historical prices, you see it falls 4 points on 27th, then it is snatched up quickly by institutions and has 2+ up days to follow. You see the rapid pace of money flow? This shows it was valuable one to watch.

DIS

Disney reported on May 8th so I'd like to mention a quick word.

• Media Networks benefited from stronger than expected results at Cable Networks, grew 11%, excluding the $85 mn in incremental deferral revenue. which offset weaker results at the Broadcasting segment, which included an estimated $20-$25mn in losses related to the Disney-branded MVNO.
  
  
• DIS has a significant opportunity over the long term to capture higher margin online advertising revenue across its vast array of branded content. Going forward higher margin online revenue could begin to have a positive impact on Disney’s operating margin and EPS.
  
  
• Digital media revenues are still in their infancy and are relatively small financial contribution for DIS but over the long term there are multiple platforms where the company can benefit from higher margin services, including across properties such as Disney.com, ABC.com and ESPN.com as well as from mobile content, online gaming, and movie downloads.
  
  
• This is more of a long-term investment

CAL

Let's start of with a 6 month chart. As you can see, there is a top like head and shoulders forming in CAL. It's no surprise that with oil bouncing of lows in Jan, the inverse relationship is working with quite a bit of perfection, resulting in CAL trending downwards. The right shoulder is forming and as you can see volume is not coming in.



On to a yearly chart. As you can see from box 1, there were about 3 above average volume days from September to December, which led to momentum towards the upside. Now, a similar formation is happening in 07, but reverse.



While I've been holding puts ever since the right shoulder 46 level, I'm going to be keep a very close eye on the 50-day level for CAL. Why? As evident by the chart, the 50-day level has lead to accumulation in the past. The same time last year, August, Oil started its downfall. Amaranth and lack of hurricanes, ring a bell?

The Monday Edition- Beneficiaries of China's Consumer Spending

In this week's report I breakdown: The Catalysts For China's Consumption Growth (increase in PPP, consumption boosting policies etc) and Beneficiaries of Consumer Spending (PG, BIDU, MCD, LVMH etc.). Thank you in advance for your time!

Catalysts For Growth: Consumption Boosting Policies (Tax cuts and increase in PPP)

• There are three key drivers of the increase in Chinese consumers appetite: economic growth, rising income per capita and currency appreciation. The per capita income in China has grown from $280 per year two decades ago to over $5.6+K (PPP method, Atlas method= $1.5K).
  
  
• China's population of 1.3 billion+ translates into consumer dollars going in cars, houses and electronics. Measured on a purchasing power parity basis, China in 06 stood as the second largest economy in the world after the US, although in per capita terms the country is still lower middle income with 130 million Chinese below international poverty lines.

• Private investment and enterprises alongside consumer spending have been blossoming resulting in a Chinese economy that is more robust and stable than it has ever been. Why? China has made several changes that should help boost consumption, such as:
  
  
• 1) The threshold at which income tax kicks in was doubled to USD$200/month, which means people at the lower end of the income scale, who spend more of their extra income, will have more to spend.
  
  
• 2) The elimination of the agricultural tax nationwide will likewise give rural residents more disposable income. Previously, rural residents had to pay the tax regardless of income or profit.
  
  
• 3) Civil servant wages are expected to rise this year, in connection with reform of the civil servant pay system, according to Premier Wen Jiabao's Government Work Report.

• "Over the next ten years, estimates range from anywhere between 150m to 300m people! Such a rapid urbanization represents one of the most dramatic population shifts in History. It presents China with both challenges and opportunities.
  
  
• Around 80% of China’s growth in the past ten years has come from its cities. Over that period of time, China has added nearly 200 ‘new’ cities. There is little doubt that China’s urban migration requires massive capital spending: housing, schools, sewer systems, power plants, transport system… all need to be built if China is to avoid its cities spurring shanty-towns such as Cairo, or Calcutta."** GaveKal Ad Hoc Comment 'Part 1: Why We Remain Bullish' Wednesday, April 4th, 2007

Beneficiaries of Consumer Spending

• 1) Coca-Cola (KO) has held a rather commanding and consistent position in the non-alcoholic beverage segment in China in the past three years. Coca-cola retains its strong popularity among non-alcoholic beverages and is consumed most in Shenyang (38%), Guangzhou (34%) and Xi'an (36%).
  
  
• Coca Cola consumption spread relatively evenly among the different age groups, with the 50-59 age bracket having the highest share of 29% and the 20-29 age bracket having the lowest share at 25%. Another play would be Global Bio-chem Technology Group, which is a major syrup provider to the growing cola market in China.
  
  
• 2) Procter & Gamble (PG) is well positioned in household and personal care products through its Pampers brand in diapers and its Olay brand in skincare products.
  
  
• 3) With the acquisition of the PC division from IBM, Lenovo owns the top PC brands in China and became the third largest global PC-maker, selling around 8 million annually in China alone. In China's PC market, Lenovo commands a 35% market share, double that of Founder, which comes in at second place with 14%.
  
  
• 4) LVMH is best positioned in the luxury goods segment through its Christian Dior brand in perfumes and Louis Vuitton in leather goods. Swatch Group has a very dominant position in the premium watch segment through owning the top three brands: Longines, Omega and Rado.
  
  
• 7) In the Internet space, Sina Corp is the strongest franchise in Chinese portals, Tencent Holdings in chat rooms and online games through its QQ brand, Baidu in search engines and Ctrip.com in online travel.
  
  
• 8) China is the world's largest cell phone market with a 450 million cellphones in use there now (source CNN Money). Mobile phone handsets is dominated by Nokia, Motorola and Samsung Electronics.
  
  
• 9) McDonald’s owns 750 restaurants in China. It plans to build another 250 by the opening ceremony of the 2008 Olympics, and half of these new restaurants will be drive-thrus vs. less than ten MCD’s restaurants in China have drive-thrus.
  
  
• 10) Singapore Airlines with its positive recognition in China, looks well positioned to benefit from the overseas travel trend of Chinese and Intercontinental Hotels Group. IHG, the largest hotel operator in the world, is building 11 new hotels in China this year. Overall, they plan to build another 61 hotels in China before the end of 2008.
  
  
• 11) China Construction Bank is benefiting today from its first-mover advantage in the mortgage business, but ICBC has used its strong customer network to claim the leading position in both debit and credit cards.
  
  
• 12) Commencing in 1988, the new Chinese interstate network should total 175K km by 2050. To reach its goal, China will have to lay more than 3K km of highway every year for the next 44 years. J.D. Power and Associates estimates vehicle sales in China will double over the next three years.
  
  
• Denway Motors, a Chinese car manufacturer currently in a joint venture with Honda, a play on the growing ability of Chinese workers to buy automobiles. Restrictions on low-emission, economical cars have begun to be eliminated in areas such as Shanghai, which should boost sales.

That's all for this week, thank you for your time.

Analyzing General Motors (GM)