Random Rants and Market Ideas by Brandonf

There are so many potential setups tonight that I am dizzy.

Lets take a look at what has been happening. For some time the Nasdaq has been deteriorating. We have started to see the internals act poorly and the leading stocks such as DELL, INTC, MSFT etc and the leading sectors in the Nasdaq such as Semis, internets and biotechs have been breaking down and looking terrible. I'm of the opinion that the Nasdaq has now entered its own private bear market. I don't think it will be anything like the 2000/2001 bear market, that something that occurs every 20/30 years, but never the less I think we have a bear market. Light volume bounces in technology will provide us with selling opportunities.

Next commodities. I think that the commodity related groups have also topped out for the time being. Over the last few days they have just gotten killed. I have been saying for several days now that there is not a single real commodity bull left in the market, that all of the people in that market are closest bears. That has come to fruition, more so than even I thought it would.

I have been talking about my performance now for the last few days. As anyone reading this blog knows I have been losing a bit of money over the last few weeks. This is very typical for me near tops/bottoms in the market. Since 1998 when I began trading full time there have been 26 points that I consider to have been intermediate term tops or bottoms. I have been profitable on two of them, one was by accident and the other was just barely..so I know my limits..and one of them is that around tops/bottoms I don't make money. So, what I do is I go defensive and I preserve my clients capital. I do a great job in that regard. Over the last several days the Russell2000 (which would be my benchmarket) lost nearly 6%, the Nasdaq lost 4 or 5%, emerging markets got killed, commodity stocks got hammered etc etc. Many of the people who I talk to that manage money have lost 10% in the last few days, which IMHO is not really acceptable if you want to call yourself a professional money manager..but thats just my personal opinion.

I will say that I think that topping/bottoming process is done now and the market will be moving. It's going to be a very difficult market..why? Because we have a real split tape which I will be discussing here in a minute. I expect though that over the next several months now I will get back into gear. I'm tucked in tight and playing defense..and in doing so I will out perform. I will keep doing what not many others are willing to do, post my equity graph.

Lets look at what is working. When the market pulls back its an excellent opportunity. How so? Well because over the last several months EVERYTHING has been near new highs..even the crap. JUNK JUNK JUNK has been near highs. We have a lot of bull market wonder kids out there right now. At any rate, with everything up near new highs, its kind of hard to isolote what is truely leading. Well, thats not the case now. The market got nailed, and so its a very simple matter to look at stocks and see which ones are holding up, which sectors are getting money flow.

Which ones are? Media, Insurance, Banks, Airlines, consumer goods, utlities and pharma. Also, the pullbacks in the DOW and S*P500 AT THIS POINT are nothing to worry about. A lot of names in the above mentioned sectors and groups are giving us some great looking charts. Some examples of stocks I am watching include BAC, JCP, SOV, ALL, CB, PRU,WFC, WM, DIS, CMCSK, DTV, HNZ, ALL, RHI, RX, BBT, K, AGP, PTV, WCN, CAL, TXU, RX, AES. There are so many others I am dizzy.

The short side. I have my email box full of emails from people asking me which oil and steel stocks people should be shorting RIGHT NOW. Well..let me say this..if you short them right now your as smart as the guy who bought them last week. All the risk in the world is in shorting these stocks right now! Does that mean I think they are done going down? Far from it, I think they are in a bear market, however many of these names like EOG, CHK, SUN, NEM, LIHRY, PAAS, etc etc are down HUGE over the course of the last few days. Are they going lower? I suspect so, however not just right now. We are now very extended to the downside. Look for a low volume bounce. If you get a bounce in these type of names over the last few days on light volume, jump all over it on the short side..but right now its nothing but risk. NOTHING BUT RISK.

If you don't catch anything else from reading my rants and raves here I want you to pick up to pay attention to RISK. RISK is the single biggest thing in this game because you can have all kinds of plans to get your wife the house on the hill, to put your kids in the finest schools and get yourself the hottest car..but if you go broke you wont make a dime tomorrow or the next day to pay for that crap! The first question you gotta ask yourself is what am I risking. Unfortunatly 99% of traders first say oh man look at how much I can make. Its like the little kid chasing his basketball out into the road and then getting run over by a truck. Dont be like that...look both ways..its that simple.

The market is in a tough spot. Please do not play lose with this. There are all kinds of people out there screaming about buy buy buy. To be kind, they dont know what they are talking about in most cases. I could be less kind but I wont. There are some nice setups, pay attention to them..its silly to be all one way in the market, but right now your #1 concern, more so than ever needs to be DONT LOSE MONEY. Play it close to the vest, play it small. If you cant do that yourself, if you are having a hard time, find someone such as myself who can and will do that for you.
 
I am currently in cash in my equity accounts, however as I look at the market there are some themes starting to play out, so I will be stepping up and picking up some shares. The market is, in my opinion, going to remain rather difficult, so I would encourage you to play wtih caution. It's ok to be in cash, CASH IS A POSITION!

Right now though as I said I see some themes coming about that I want to play with a bit. Very small. On the longs I'm going to commit a cumulative total of around 20% of my account, and on the shorts I'm going to commit about 30%. That will leave me with 50% of my account still in cash. I suspect it will remain there for some time.

here are the orders i have in. (if there are gaps the order will not get executed on the open, I wait for the first pivot high/low and then a breakout of that)

ABI long above 29.50 Stops under 28.80

ABK long above 83.50 stops under 82.50

SNY long above 49.25 stops under 48.20

MMM long above 87.35 stops under 86.20

ALL long above 57.90 stops under 56.00

HRH above 41.10 stops under 40.70

V above 35.80 stops uinder 35.40

AZN long above 55.20 stops under 54.35

V long above 35.80 stops under 35.40

GSK long above 58.50 stops under 57.80

AHS above 21.60 stops under 21


SHorts are

YHOO under 30.60 stops above 31.25
LUV under 16.13 stops above 16,.35
ALK under 37.40 stops above 38.50
MUR under 49.80 stops above 51.40
OIH under 151 stops above 156


----

Please note that when and or if these stocks actually setup I will be looking at a number of other factors including other stocks in the sector, volume and the overall market. THis means that these price points could trigger and I may not enter, or I might enter before the setup or after the setup. This does give a good idea though of what I am likely to be doing. RISK IS VERY HIGH RIGHT NOW. My priority is the preservation of capital which I am doing well. I was just looking at my performance for the year on a relative basis. Had I invested 100K in various places, how much do I have today.

Nasdaq 100 $98,352
S&P400 Midcap Index $105,761
S&P500 $103,316
Russell2000 $109,067
Dow Jones 30 $106,638

ME, Brandon Lee Fredrickson $113,158. Certainly there are people out there making more than me (Amy Sue Cooper for example) but I am very happy with what I'm doing thus far. Looking at my equity graph is like watching grass grow, there is nothing exciting other than continued profits. Thats exactly how it should be.

Additional group stuff. I am looking for a bit of a bounce in semi's and internets. Should that happen i'd like to sell into them. Again small, RISK is key right here. There are times that you have the ball and it is absolutly irresponsible to be totally defensive. However, there is another side to that coin and there are times when you would not be living up to your obligtations if you just chase returns.
 
Since the beginning of April the Nasdaq has been trading in a manner suggesting it has been in its own private bear market, making lower lows and lower highs, declining on heavy volume and rallying on light volume. The leading stocks in the Nasdaq have looked like the backside of a heard of elephants for some time, with names like DELL, MSFT, INTC, DELL, AMZN and EBAY pushing lows. For the last several weeks now I have been urging caution, but also giving the rest of the market the benefit of the doubt. Well, no more!

I suspect that the rest of the market has joined the Nasdaq and we are at the start of a bear market across the board. What this means is that stocks are going to continue to sell off, that rallies are going to offer SELLING OPPORTUNITIES. It means that the majority of investors and traders are going to be getting their heads handed to them on an UGLY platter. The perma bulls will be drug on TV to you that everything is ok and there is a firesale. I don't know how much lower the market will go, however I'm as sure as I can be about something when it comes to the market that we are heading lower. Possibly much lower, and maybe for some time to come. Now, I realize that bear market is a scary word to some of you, purhaps the only one you have seen was the historic bear market that started in March of 2000. That bear market, like the rally that came before it, was a once every 20 or 30 year thing, I doubt we are in for something like that again. However, some area's have gone nuts and those who arrived late at the party are going to suffer the same as they did with the Internet.

For the last several years commodity have rallied sharply. We are only now starting to see headlines "Commodity Prices Poised to Move Much Higher" WHAT? Do you realize that less than 10 years ago Oil was selling for under $10 per barrel and that most metals are up 50% or more in the last few years. They are poised now to move much higher? Well what the hell is it that they spent the last few years doing? Anyway. :)

Lets look at a few things. First I want to restate that we are in a bear market. It is no longer confined to the Nasdaq and it's friends in techland. You can add the commodity related stocks, you can add the brokerage stocks, you can add transports, you can add Western and especially Eastern Europe. You can add Korea and India and the entire emerging market complex. Soon Japan, Brazil, Latin America and China are going to arrive at the dance and then the real fun is going to start. The only sector I am seeing positive action in at this point is insurance. For whatever reason Berkshire Hathaway looks pretty strong too. We will talk about strong stocks here in a minute.

The Bush Admistration has a weak dollar policy, stated or not. Realize what a weak dollar does to you. It's great for multinational's, not so great for the average American. Why? Well lets just look at one thing, Oil prices. Oil is quoted in dollars and as the price of the dollar goes down oil gets cheaper for everyone else and more expensive for us. People are finally waking up to the fact that there is real inflation (I know, I know, I know, if you don't include Healthcare, Education, Housing, Food or Energy things are peachy!..I'm glad to know it. When I decide to move into a cave and become a hunter/gatherer I will throw a party) Interest rates continue to move higher, and while the market thought the end was in sight, that rug has been pulled out from underneath it. The housing bubble is starting to do what bubbles do, cause pain. Personal example, my own house here in gorgeous Sarasota and the Venice Golf and Country Club could have been sold for about 15% more six months ago than it can be today. It also could have been sold in about 3 weeks, now it could take something like 6 months. JOY! As new inventories build and rates continue to go up this problem is going to compound in the formerly hot markets, and people who's interest only loans are coming up for refniancing are going to be in the "HOUSE OF PAIN" BLEH :) China is slowing down. The Chinese have become very concerned that the growth rate there is much too higher. They are now in the process of engineering a slow down. If they engineer that slowdown to such a point that it becomes a full on recession the entire world is going to catch China's cold because in some ways China has become even more important than the United States at this point.(No their economy is not bigger than ours etc etc..but China is where the growth is, thats the point I am making).

Now there are a couple schools of thought as to what to do. Some people of course continue to be bullish. Those people will be bullish if the market is down another 20%, another 30% or another 50%. Well, purhaps when it is down 20% they will all the sudden wake up and say oh wow this is an OFFICIAL BEAR MARKET, but I suspect if I have a 20% drawdown before I wake up to the fact that there is a bull market my clients would not be too happy with me and I may not have a viable business as a result. So, my own preferance is to be on top of things. Call me crazy. Those who continue to be bullish will look for the fundamentally strong companies that have sold off sharply, so you will see them coming out and advocating that you buy names like RIG, BHP, FCX, GOOG etc. I'm not of that school. It works for some people in a bull market, but honestly I can not even get it to work for me then, so it's not likely to produce favorable results for me now.

I want to look for a few things. First of all let me say that there will be stocks to buy. As Cramer says, "there is always a bull market somewhere" and he is right. If you want to see an example of this look at homebuilders, that bullmarket started near the end of 2000 during the time that the overall market was in a total melt down. I myself do have a small list of stocks that I will look to buy. However, I want to caution again that we are in my opinion at the start of a bear market. Let me be clear that THERE IS NO SUCH THING AS SUPPORT IN A BEAR MARKET. It can go lower than you think it can or will and take a lot of your hard earned money with you. You have to play DEFENSE. One good thing about such a strong sell off though is that it does allow you to isolate truely strong stocks. Some that I am going to be watching include HANS, TWGP, IMCL, CMG, SAFT, BRK.B, CPB, NWS.A, WYNN, TQNT, and MORN. I will not commit more than 25% of my total account equity to longs at this point though. There are times to be very aggressive in the market, even to use margin. This aint one of them tims folks.

So if I'm not real bullish and don't want to do much buying I must want to SELL, right? Well yes and no. For the time being we have come down so far, so fast that in the short term I actually think that the short side carries more risk than the long side, and that says something. There are a few, very few, stocks that I could see putting on short positions in right here, but for the most party we need to wait. Many of the former leaders are down 10%-15% or more in only the last few days. After a move like that stocks need to rest. This occurs when the stock either goes sideways or rallies. When some of these names rally for a few days key in on volume. The ones that move sideways or barely move up at all, and do that on low volume are the ones you will want to short. Once that happens I will commit generously to the short side, but again right now there is NOTHING BUT RISK in this market.

I want to conclude with this bit of food for thought. CASH IS A POSITION! It's very easy to get caught up in the excitment of a market with over 10,000 names to choose from. It's easy to buy into the lie that your broker wants to sell you that "there is always something to trade". Thats true, there are always commissions to be paid, but there are times were the risk to reward balance is in favor of risk. Right now I do feel this to be the case. It won't last long though and I suspect that with in a week there will be more activity than you can shake a stick at. In the mean time consider that you may not have been born to pay commissions and its a good idea for you to keep your own wife and kids happier than you help keep your brokers. I don't have anything against brokers, mine is a great guy..but my wife and my finances are more important to me than his are and right now my own best interest is not served by being real active. CASH IS A TRADE, IT IS A POSITION.
 
Over the last three or four years a bubble has been building that rivals the dot com madness of the late 1990's. This bubble has been off in the corner out of view to most people. This bubble has now grown to epic levels and I think that the guy with the needle is closing in on it. That bubble I am speaking off is Hedge Funds and other Private Placement instruments.

If you are a participant on Wall Street you are probably one of the few people in the country that has noticed this bubble as its built. You have also already been directly effected in a number of ways by this bubble, and you are going to see even more soon as it unwinds. Lets have some fun with numbers.

Over the last several years the alternative investment industry has turned into a +$2 Trillion monster (yes that is TRILLION, with a T) that now rivals mutual funds, pension plans, insurance companies and the like in terms of assets and influence on the street. As the bubble has gotten bigger and bigger more and more people, less and less qualified, have poured into the industry determined to strike it rich "running money". In the early 1990's if you had more than $100 million you were an important player in the industry and people would return your phone calls. Today it takes at least that much to be seen as a fringe player in the industry as there are many funds that run billions, even tens of billions of dollars now. If you are a sub $50 million you are basically looked at like you have a hobby, in the late 80's and early 90's this was a significant amount. Its simply amazing.

As the industry has continued to create wealth for managers more and more people have come into the game and started their own funds. People who in the past would have built a career at a Bear Sterns or a Goldman are able to raise a couple hundred million when they leave those firms. Even a guy like me, who has built his business off writing newsletters on the Internet, can get tens of millions as more and more investors and institutions jump on the hedge fund band wagon. As this has happened you get more and more unqualified people who do not add any real value to the market come in and try (and often succeed) to make their millions. It's been said that the run up in NYC Real Estate is largely a reflection of the money the "hedgies" have to throw around and try to impress each other with.

I talk to people every day, private traders, hedge fund managers, analysts, even a few mutual fund managers. I would defiantly say that six or seven years ago I was defiantly more impressed with the people I found myself talking too. Maybe it's a matter of now having some more experience, but I must say that when a 21 year old who's only qualification is that he goes to Yale and likes to "dick around in the market" is able to raise $10 million and start a hedge fund, something is wrong. The 21 year old, by the way, has generated some nice returns "dicking around", he did 40% in 04 and 65% in 05, but it comes at a cost. In this very short period of time he has had 8 drawdowns in excess of 20%, and one drawdown, which is now trying to work his way out of, that came in at 71%.

The returns, lets look at that. May was just an ugly month across the board for hedge funds. Most of the people I talk to have been pissing and moaning about what a terrible month it was, and now the reporting services are also starting to reflect that as May's numbers are reported. As a group Global Macro funds lost around 25%, many who specialize emerging markets are said to have lost as much as 50% IN MAY. A lot of funds gave back about half of their gains FOR THE YEAR in the 23 trading days that were May 06. Most funds lost something on the order of 3 to 6%, which does not sound like a lot until you consider that most hedge funds are shooting for returns of 15/20% or so per year.

I think that the ramifications of May are going to be felt for the rest of the year. As a group (there are a lot of specific exceptions) hedge fund managers have started to become a very unimpressive group of sheep who follow each other around. If the guy beside you is buying you might buy too because if he makes money and you don't you will look bad, and if he looses money you know that everyone else is going to have been doing the same thing and so you can say well everyone else lost too, what was I to do? Of course what you were to have done is your own work which has a chance to create value for your partners, but maybe I am asking too much of the Ivy League clones who run most funds today. To have an original thought means to take a risk of standing out, and standing out to the upside is ok, but standing out because you took a chance and happened to have been wrong is downright dangerous, so they simply don't take those kind of chances.

Since so many managers gave back a good part of their gains for the year I suspect that they are just going to sit back and try not to give up the rest. That's what I would do, and I tend to try thinking for myself every now and then. They get paid on ABSOLUTE and not relative performance, so it is important to preserve the gains. It's especially important to the NY Hedgies who have to impress each other with fancy cars, Barbie Doll wives, big houses in Greenwich and the Hamptons and $50,000 per year private preschools for Junior Gecko. Given that they have given back so much in so short of a period, and the markets are rather uncertain now do not expect them to be stepping up.

The end result of the fact that the typical hedge fund manager is not adding any value to the portfolio of his partner's is that the partners will eventually leave. I got an email from my Bank offering me a savings account yield of 4.56% if I deposit at least $77,500. Places like Interactive Brokers are offering notes that are paying 5%, and the yield on corporate issues is going higher as well. In the end sophisticated investors are going to realize that they can get decent returns at no risk in the credit markets without having to pay some hedgie 2/20 to do what every other hedgie is doing. As the redemptions start to come in the market is going to have a heck of a time, as current guesstimations are that the hedge funds are now doing 1/3 or so of the average daily volume on the exchanges.

I think that over the next year or so what happens with hedge funds is going to be one of the most significant factors in the performance of the overall market. And that would be all for this show folks.

Brandon
 
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