Wednesday, 30 June 2010


The Raven had a very good day, and pretty much all of his net short on the close. He does have to however admonish himself for not sticking to some risk limits and targets, although his decision to overide them was profitable, it was perhaps not the wisest decision, hopefully he'll learn from it.

It is rather interesting to watch the way that $BP traded today, it looks to the Raven as if it traded with a negative beta today, however thats just his optics, rather than a proper analysis, but it would confirm his suspicion that the short interest is now rather significant and with weaker players who'll get squeezed sooner or later.

The Raven noted a comment yesterday from MarketFolly that $MDT had seen some insider buying, having a look at the stock its rather 'boring' but at a not too unreasonable valuation, on a BREVE valuation its got ~25% upside. It also passes his proprietary earnings manipulation test rather well. The residual charts look quite interesting to the Raven as well;

His current thinking is to divide his maximum position size into 5 clips, and add them progressively as we approach where the residual low is, putting one clip on tommorrow morning, another clip with the residual down a further 3.5%, then 3clips at the low, leaving a soft stop 5% below the residual level low. Getting to that point would be a loss of 7%+5% on the first clip, 3.5%+5% on the next clip and 5% on the remaining three, so a total loss of 35.5% on a risk unit, therefore for each 1% of total portfolio loss he is prepared to accept he should be willing to risk 2.8% of his portfolio as per unit position size, giving a maximum position size of 14%.

He'd also like to give a little explanantion of his thinking as to how many % of the total portfolio he would be prepared to lose; as a very rough and ready back of the envelope calculation to highlight the process. He expects to win with this strategy 80% of the time, winning 21% and losing 35%, giving him a net of ~10%. Now the Kelly Criterion would imply that one should bet the "expectation"/"odds" as a percentage of your bank roll; for $1 of risk, one would make a return of $1.86 (using american odds ie. including your stake in the return), your expectation would be $1.29 so that would imply betting ~ 70% of your capital, which is WAY too high. Suffice to say though that he is comfortable that risking 2% of his capital in this trade is below the KC limit, and within his other portfolio limits.

It could be quite quiet tomorrow so the Raven thinks it might be a good time for him to do some deep research on the name, perhaps it'll be an even bigger trade.

some initial thoughts on a busy day..

Its a relatively busy trading day today, given its the end to a rather eventful month and quarter, so BR only has a few comments to make and note, even if it may be slight repetition;

$BP - the Raven has been looking at where he'd want to short this stock again today as he's now flat. News flow on capping the spill and its potential cost seems to be a little quieter, and there is now more speculation on how much its assets are worth. With bullish case EV's of around $200bn you get to a price of 345p or $31.05 (for the US ADR = 6 UK shares *1.5055). He's not a chicken entrail reader, sorry, chartist, but he thinks a pull back up to 382p could happen in the short term, depending on what the short interest is in the stock. So from 365-385p range the Raven will be looking to scale into a short again.

The Raven read quite a good speculative piece today about China by TeamMacroMan; it highlights how hard it is to make any sense of the any of the official numbers, but that if you look at sentiment for financial conditions, its a pretty ugly picture, and that fits with the Hugh Hendry, Chanos type hypothesis that China is a rather large bubble on the cusp of bursting, or perhaps it has already and we're just waiting to hear the pop in the West.

just a quick look at the stocks residual chart pattern is interesting (ie. a chart of the stock performance adjusted for a beta hedge).

Its interesting to the Raven because it appears to have missed out on the rerating that $SNDK has been given over the last few months, conference call yesterday was apparently weak, and the seem pretty cautious about their outlook. It does have an absolutely cheap motivation, but doesn't appear to be going anywhere in a hurry.
The Raven will have a little review of the UK macro position tomorrow when things are quiet, however if one doesn't wish to boil one's blood then perhaps not reading the Guardian is a good idea. Given this "newspaper" supported the LibDems in the election and is "left-wing" it feels justified in running a headline claiming that the Budget is set to destroy over 1 MILLION JOBS! SECRET TREASURY INFORMATION... PANIC, PANIC, THATCHER DUN IT, CUTS, PAIN, HYSTERIA.

All that headline articles such as this show is a distinct amount of prejudice, poor journalism and a lack of understanding of the underlying economics. Several facts that are neglected;
1) nominal cash terms there will be an increase in government spending over the period of the parliament
2) the same report that said that 1.3mm jobs will be lost, also said that it will CREATE 2.5mm jobs, so if the Guardian had chosen it could have reported 1.2mm jobs CREATED BY NEW BUDGET.
Ironic that the last government justified wild economic forecasts with the response that they "didn't want to talk the country down", yet in opposition they use half the facts to create a deliberately misleading picture and use that to undermine consumer confidence.

Tuesday, 29 June 2010

a short update.

The Raven has had a pretty decent week back in the saddle, generally being bearish has paid off. He's also made some good single stock calls, his longs like £BSY, $DD have outperformed their hedges, shorts like $AXP look like they are starting to breakdown.

The Raven believes that there are a lot of endowment type investors ie. investors that are using a 10-12month moving average to time their investment in the SPX500 and other equity indices; those averages were at the 1085-1100 level and he's been expecting selling to accelerate as we came closer to month end if we were below these levels. Tomorrow being quarter end could be pretty ugly as there doesn't seem to be much buying interest in the market out there. He's going to stay short and look to cover at most half of his position tomorrow over the day - but that depends on the volume profile and what the price action is like. He'll be a liquidity provider at the right price and odds.

He also noted some interesting comments by Team Macro Man, noting that fixed income markets and gold appear to be giving very different signals. Fixed income markets have seen longer term interest rates falling, this being a response to "European headwinds" one would imagine, and the belief that austerity measures and weak growth will neccessitate lower interest rates for longer. On the other side of the sovereign (what a great pun), it appears that investors in gold believe that ulitmately the action of keeping interest rates lower for longer will be more loose money hence real assets should rally. The Raven has lost enough money shorting gold this year to just leave this one alone for the moment, he thinks its a bubble, and the best way to trade this is going to be after it pops. He's seen enough adverts advertising how retail investors can get 30x leverage on their gold investments to know that its frothy. He's not going to short it again unless it crosses the 100d ma, increasing at the 200d ma and the 250d ma.

Returns from trendfollowing alpha's have been a bit of mixed bag, partly because of the squeeze and reversals in some trends earlier in the month, however they appear to be back on track. The Raven has looked at adding some better filters and money management to the system to try and improve the risk reward, however he doesn't want to compromise on robustness.

He took a good chunk out of $MU on the short side today, it had been pumped into earnings and looked pretty frothy given the market and how aggressive the whispered numbers were. He covered at the 8.73 level. If it does a lot more volume and breaks its resistance it'll be interesting to see where it ends up, its got a relatively cheap valuation versus the sector and improving fundamentals, so it may well become a good buy.

He had a quick scan over his M&A universe, really nothing to be done in that space at the moment by the classical look of things. He does however remain relatively bullish on UAUA post merger, he's keeping an eye on it; its not quite there yet.

It was quite interesting today to see the reaction to BP rumours. The JPM analyst put out a bullish "note", well actually it was literally a fictional piece, based on the idea that XOM would look to aquire BP at some point next year. He does point out more seriously that XOM could buy BP and potentially detoxify the situation if they can get a handle on the liabilities, and that they'd be buying a much lower rated asset. He notes that the company could pay up to 700p without the aquisition being earnings dilutive.

It certainley is interesting to hear valuations on the stock that are not talking about $400bn of liabilities. The Raven has done his own work, he thinks the size of the liabilities are likely to be more like $75bn.

Now today the dicussion has switched as to how much BP's assets are really worth. The Raven would argue that its all very well for JPM to look at different measures, but it seems strange that the market wouldn't apply some sort of uncertainty discount. using BP's old BR's EV to cashflow multiple we get to a stock price of;

BP currently has debt a BR debt measure of $47bn. It has operating cashflow-capex ~$10.6bn, putting that on a very high mutliple of ~20.7 = EV of $219, take off $75bn for the spill, $47bn of debt and you'd be looking at a stock price of ~345p. About 15% above where we are trading, hardly a screaming buy, or a decend margin of safety. Even if you take the better spill estimates JPM were coming out with at the beginning of the spill and put it on the old multiple you're talking about 507p, you're looking at a 40% discount to perhaps the most bullish possible scenario. Alternatively if you look at the fact that the credit market is pricing a high likelihood of default then we're talking about -100%. The Raven has been short, which he covered most of this morning when it appeared that the XOM rumours were gaining traction. He'll probably look to put on more shorts if it squeezes up.

Where would he buy it for a long though? well actually he'd buy the credit instead at this sort of relative pricing. As stupid as this sounds, but he thinks it'd be a buy more at the 130p level, but if its trading there, then for sure the market and media are going to be coming out with a lot more aggressive estimates for the spill costs, so obviously that value would probably be lower. As arrogant as this sounds, it does appear to the Raven that T2 and Whitney Tilson have got in way too early, especially as he doesn't feel that many pension funds have dropped the stock, or those div yield players have kicked it out of their funds, that would be significant selling pressure of a size that wouldn't be able to be absorbed by traditional short term liquidity providers, or hedgefunds, so it should produce a relatively high risk adjusted return just because of the size.

Wednesday, 23 June 2010

a non-EUR rant

Well the Raven thought that he would feel the need to rant about the EUR, but that's not such a big urge today, Mrs. Raven has been bored by it several times already this month.

However, the Raven did read an 'interesting' interview with Vic Niederhoffer today (VN as he won't be able to spell it correctly twice) based on the premise of interviewing people that have been spectacularly wrong. Indeed VN has been wrong, in huge size twice, blowing up his fund in 1997 and 2007 after some huge gains. One might speculate that he'd have learnt or been in denial, however he instead had some strange analogies to make and basically wished he'd taken less risk.

Traditionally the Raven would mention the Kelly Criterion at this point and may well do as an appendix, but his main point is in conjunction with another lame article (whose title he has already forgotten) that was essentially a collection of 'good trader habits'.

This article certainly didn't deviate from the well trodden and essentially useless path of stock phrases and ideas. "let your winners run, cut your losers quicker, don't get emotional and bet the right size". These sorts of articles frustrate the Raven as they portray investing and speculating as a simple rule based skill that is applicable across lots of asset classes, time frames and regimes, which it just isn't, as anyone that is going to be successful for a long period of time should recognize. Now the Raven dislikes empty criticism that doesn't replace or better that being criticised, so in that vein;

1) Sound risk management is key

Now that doesn't mean having fancy systems or whizz bang models necessarily. That means the hard non-formulaic work of making sure you don't bet too much of your capital, that you realize what you're betting on and how much you can lose, how quickly and in what scenarios. Also kicking the portfolio with random ideas, historical ideas, likely scenarios, the kitchen sink, anything you can throw at it and making sure that you can live to fight another day. Now for the ironic glib formulaic statement; correlation is ephemeral, and if a hedge can hurt you when you need it help you, it probably will. As is a realization that other people are thinking exactly as you are, so don't rely on liquidity to get you out of your book, that my friends is a recipe for an offer only market, Oshkosh truck size spreads when you do find a bid and a PB that has a penchant for s&m.

2) Don't bleed to death

This second point is really point one again, however its for those investors who are "smart", i.e., skeptical of the market, who predict 9 out of 2 crashes. The Raven once heard a very glib quote, 'we don't believe in VaR or any of those statistical risk metrics, we realize how flawed they are, we understand what risk is, and the amount of money you can lose". You may think this is precisely right, especially in absolute space terms, however risk is more like not being able to play the game again, and in a roaring bull market as an absolute fund returning L+100bps will rapidly lose the firm capital and your ability to bet, heaven forbid you really loaded up on protection and lost money, well then you can guarantee that you'll have your capital pulled before your cheap options pay off to make you the next Paulson.

Its interesting that VN says in his interview that in general people are too skeptical or too gullible and that he believes he is the latter. One would have to agree given the fact that he's blown up spectacularly twice after huge performance. The Raven agrees, however both of these problem characteristics tend to cause blow ups and bleed outs because of not paying enough attention in just making sure that you're still around to trade tomorrow, and next week, and next year, etc, etc.

Monday, 21 June 2010

back in the saddle;

Today was the first day back on the perch for the Raven since the LO arrived 10 weeks ago; perhaps a chronic lack of sleep and circadian rythm will be positives for a skeptical trading style? or maybe not so much.

He would review his position notes if he was feeling ultra disciplined, he's not, that and the fact that the world has changed rather drastically in 10weeks mean that his portfolio has radically changed twice. Currently he's long a few UK stocks, a long and short a couple of US stocks, long some bund, short the CAC40 and Eurostoxx, with no volatility, fx or commodity positions.

in no particular order;

Bsky B; Newscorp has made a bid of 700p for the stock, its trading at 705p, management have said they'd look at offers above 800p, its 100d ma pre-bid was 563p and closed at 600p.

Now the Raven had a quick look at this, ok Newscorp have a big stake already so there aren't going to be any other buyers coming out of the woodwork, (however that didn't stop Pepsi recently having to bump its bid for its bottling groups), so its not going to get silly. BUT even at 800p the Raven thinks Murdoch is being a wiley old croc, the cashflow on this asset has been rock solid, its blown its competition out of the water so that it only has the government to fear rather than competitors. The Raven as a Virgin Media customer because he's not aloud a satellite at his flat really can say there is a massive difference and that he'd switch back in an instant based on service, content and value for money. In terms of valuation, well the Raven doesn't think 800p is out of the order (in fact he thinks 900p is more like it).

Dupont; now he doesn't feel as comfortable with this long as it doesn't have a near term catalyst, but it is relatively cheap and he thinks its turned the corner for earnings last quarter. He thinks that it should be well over $50 a share and closed at $38.41. Its next earnings are towards the end of July, so he's just put this on really small, looking to increase over the next couple of months. He does however want to avoid buying too much of this if it starts to tank into earnings, firepower for the day before and enough rope to hang himself will probably be essential in doing a SNDK.

Nedbank; the Raven has no position currently, because he sold it when it was bid up on rumours that Standard Chartered would buy it from Old Mutual. Its still an attractive business in a growing market, however it really doesn't fit with his skeptiscm for financial at the moment, or more precisely doesn't fit enough at this price.

Next; its just recently popped up on the Raven's radar (primarily because he was looking at ASOS). Now this has no catalysts at present BUT it does look pretty decent in terms of valuation, the Raven would like to kick the tyres and have a look at some of the stores as he hasn't really been clothes shopping for years. Its priced with almost no growth and the Raven really doesn't think the UK consumer is going to be that badly hurt. Once we get past the budget and the bluster, people will begin to realize that its not all doom and gloom, the government is taking the tough actions and there will be growth in the future. Ok some public sector jobs will be lost, and government spending will be lower, but for most households this IS positive. It will provide a large deflationary or disinflationary force in the UK, which will the Raven believes keep UK interest rates lower for longer, and stop the BoE from unwinding its QE. As such a large proportion of UK households are on floating rates, this really does make a difference to their disposable income, and he doesn't believe that the fundamental spending nature of the UK consumer has been bludgeoned to death just yet. Its trading at a BEVE (a Raven proxy for EV/ebitda) of 7, Marks and Sparks is trading at 8.5, Tesco at 8, Sainsbury at 8 and HnM at 19. The balance sheet looks pretty good, margins seem healthy, management seem fine. The Raven thinks there is at least 20% upside on discount valuation to start, and probably another 20% if his macro scenario plays out. So he's got a good clip on.

PUB; he's still got a position in this, although he's hesitant using the word still as he's sold 70s and bought 60s a few times in the last few weeks. Viz-a-viz is aforementioned UK consumer punt, PUB looks like pretty good value against book value. It appears Einhorn agrees, who's the Raven to argue (he hit his own hubris alarm bell there).

BP; well he's spent a lot of time looking at this and following the situation. In short, given the size of the liability, risks, etc, etc the Raven wouldn't pay more than 150p a share on a punt in small size. Its not at that level yet.

Firstly Obama has been a total tool for trying to turn a ecological disaster into positive PR. There was absolutely no need to compare it 9/11, that was both disrespectful and weak, as was his attempt to turn the issue into a childish and divisive international spat with one of the US's closest allies, only today the UK has seen its 300th casualty in Afghanistan.

Hayward has made the situation no better, his apparent lack of concern, lack of media savvy and insensitive comments are naive at best, reckless for a CEO earning a fortune from shareholders who've lost billions more than the estimated cost of the disaster thanks to piss poor managment. He doesn't appear to have had a clue as to what happened, hardly appropriate for someone supposedly tech savvy. Of course BP should pay for damage that it has caused, but the Raven is very skeptical of a firm putting money into an indepent escrow account for government to hand out as compensation, its hardly as if you're handing over the cheque book to an institution know for its fiscal responsibility.

But at least both guys got their lives back this weekend, time for baseball, golf and a spot of sailing, its not like they have well paid powerful jobs. Mere mortals work weekends, especially when they are under pressure.

the Raven will be moaning about the EUR tomorrow.. and probably the day after that..

and the day after that..

and the day after that..