In-Cog-Nito

Interestingly enough, based on Friday’s closing prices, overall the Amazon long is up $133, while the Overstock short is down $133. This is including commissions in the cost basis. So in essence, in a down market, the pair returned zero, which ain’t great, but I’m not going to cry over it.

Friday morning, Overstock took a hit due to the pricing of their secondary, but made up ground because the stock is thinly traded, and can be volatile. This is just cloak and dagger talk on my part, but I also think there is vested interest to keep Overstock above the secondary pricing because if Overstock traded below the secondary pricing before the secondary, then you hose the people buying the secondary.

I think the best chart that captures my thinking with the Amazon/Overstock pair is this chart via Yahoo Finance showing their respective returns over the past year. Amazon and Overstock more or less tracked each other until mid February when CEO Patrick Byrne bought 620,000 shares on the open market to get back at hedge funds shorting his company’s stock. Smart move you can say. He owns 5 million shares, so if he gets a short squeeze out of it, it ups his value in paper. In this case, he spent $12 million to squeeze the shares, as of Friday, up $12 give or take. On paper, since he owns 5 million shares, his paper value went up by 5m x $12 = $60 million. If someone came up to you and said, pay me $12 million and I’ll give you $60 million back, you’d take that trade any day wouldn’t you? I certainly would. A higher stock price also allows his company to raise more money, in this case, through their secondary. Overstock is raising $36.6 million in the secondary by issuing 1.2 million shares priced at $30.50 a share. If they issued 1.2 million shares at $20 a share, they would only get $24 million.

Which brings me back to the chart. Looking at the Amazon/Overstock returns over the past year, they more or less tracked each other until mid February. In my opinion, the run up in Overstock is manufactured. Overstock is up 150% over the past year, while Amazon is up about 32% over the past year. That’s quite a spread given the relative strengths of their businesses. My thesis is that the spread between Amazon and Overstock will close.

I also did some simple back of the envelope charting using my trusty Windows paint. I know I know, a little ghetto, but I like to keep things simple. It doesn’t take much to chart really, just a program that lets you draw a straight line.

Looking at its chart, Amazon seems to have found some support in the year long uptrend, around the $41 range. The last low is higher than the previous low, which is another good sign. If Amazon bounces, there’s overhead resistance around the $46 to $47 range on the trend line.

Looking at Overstock’s chart, I think the run-up is broken. I think there’s support in the 28 range since it’s where it double bottomed in March. I think there’s also support at $30 since the market likes round numbers, and the $30.50 range since they want to keep this above the secondary price. Below that, support doesn’t kick in until $22 on the trend line, and around $20 where Overstock was before the squeeze.

There is always debate over charting and whether it’s of any use. I can tell you that traders use it. And a good part of being successful in investing is to be able to guesstimate what other people want to buy or sell. A good analogy I’ve heard for investing is the TV show Family Feud where people try to guess what the most popular answer given by the crowd is. Charting is an attempt to make sense of the price action in stocks. It’s about recognizing and making sense of patterns, the simplest of which are up or down. So in that sense, it’s useful since patterns tell you what people think of a stock over a period of time. If you want to get fancy, people have come up with all sorts of patterns over the years. I tend to stick to the basics, since I find it useful. There’s also expensive software you can use to chart and screen patterns. But again, it’s worthwhile to the extent of how useful it is. Some people trade based on the charts alone. On days with no news, charting is sometimes the only thing shedding light on a stock. I tend to use charting as a validation of the investment thesis or underlying fundamentals of a company. So simple is best in my case.

At the time of writing, I am long AMZN, and short OSTK.

Zapped by TASR

Ok, that was stupid.

The funds have cleared and I was itching to short this market. It always feels the worst seeing the market move without you, particularly when you’re waiting to enter.

My first trade was to short 100 shares of Taser (TASR) at $26.71. The chart is broken, it’s over-hyped imo, and holding up during the downdraft. So I figured it’s worth giving it a shot. No dice. I got stopped out at $27.75. So a hundred bucks down the tube. Back to an earlier discussion in the comments section, stop losses are important with volatile stocks. Sucks to learn the hard way, but hey another mistake you can learn from me.

Amazon/Overstock Pair

So licking my wounds, I put on a new trade, this time a pair trade long Amazon (AMZN)/ short Overstock (OSTK). I got 100 shares of Amazon at $41.65, and shorted 150 shares of Overstock at an average of $32.05.

The idea behind pair trades is that you try to minimize market volatility and instead rely on stock picking abilities. You don’t care whether the market goes up or down, you just want your long to outperform your short. In this case, I’m betting that Amazon.com will outperform Overstock.com. Ideally, you want your pairs to be in the same industry with similar volatility. So if the market completely tanks, the decline in your long will be offset by a similar gain in your short. In a perfect world, your long will go up, and your short will go down, but in a perfect world, I’d be an NFL quarterback.

My thesis behind the Amazon/Overstock pair is that Amazon has upside in a rally, but Overstock has less upside. In a market meltdown, I’m betting that Overstock has more downside than Amazon. So the main thesis on this trade is more technical than anything else.

Fundamentally, I’m betting that Amazon has more clout than Overstock. Amazon’s gross margins are in the range of 22-24%. There are worries that Amazon will sacrifice their gross margins to gain market share. But compared to Overstock’s 10% or less margins, Amazon has the upper hand in this category. Look at their products, Overstock.com is just that, they sell stuff people didn’t want to buy – and their savings aren’t *that* good. I use Amazon, I love buying from Amazon. It’s not the most scientific of reasonings, but it’s a good place to start.

More later, my day job beckons.

Update: I changed the symbols in my post to the name of the company to make it easier to read. It’s a mental shortcut that makes it easier to type up too.

Overstock priced its secondary tonight at $30.50. It’s one of the catalysts I was looking at since more supply on the market generally puts a cap on a stock at least for the short term. It will be important to see how the stock trades after the secondary, particularly if it can hold the secondary’s print price.

Here are the latest efforts in the In-Cog-Nito Needs Money Fund.

Ameritrade sucks, don’t use them. They may be fine once you get up and running, but the initial process to get up and running is too slow for my taste. The main complaint I have is that they won’t let you short stocks without the funds clearing. And with ACH transfers (they claim it’s fast in their ads), it takes a good five days for the funds to settle. Starting without the ability to short in this market is like boxing with one hand tied behind your back; it takes away half your arsenal. Their interface is also too cluttered for my taste. I was a huge fan of Datek when I first started: clean web interface, excellent value in terms of commission costs and margin interest, fast and responsive customer service. Ameritrade bought Datek a few years ago. I tried also going the route of re-opening my old Datek account. It was nice to see my old trading history still preserved there – a stroll down memory lane. Other than that, being a part of Ameritrade, their customer service seemed to have gone down hill as well. Obviously, I’m a more demanding user than your average investor, but it never hurts to have the best available tools at your disposal eh? So learn from my first mistake, don’t go with Ameritrade.

I opened an account with Scottrade today, and so far so good. They remind me of what Datek was about five years ago. Clean interface. Good fast service. Super easy forms – they have the shortest options form I have seen of any brokerage (1 page). Their web interface is something else. Technology and competition have really upped the ante in what is available to the general public in terms of information, execution, and trading tools. One nice bonus is that you get free Dow Jones real time news. It’s not really that important for most investing purposes unless you day trade, but it’s nice to have nonetheless. Seven bucks a trade and relatively low margin rates are more pluses.

The positive of not getting up and running fast is that it’s a week off to get up to speed on the feel of the market. I’ve set up a free trial subscription to Realmoney.com – part of Jim Cramer’s Thestreet.com. It was my go-to site for news when I first started. They still put out good articles, but Cramer seems to have lost some of his luster – i.e. his performance isn’t that good now, based on his Action Alert Portfolio. My biggest thing is that Nortel (NT) makes up about 6% of his portfolio. It seems Nortel’s comeback was based on accounting shenanigans. I remember one of Cramer’s constant sayings years ago was that he kept a post-it on his screen saying accounting troubles = sell. Seems he is not keeping to his own advice, and it’s hurting him. Scott Moritz over there is still putting out good articles, primarily because he seems to be a natural skeptic, or at least he writes with a healthy dose of skepticism – something you always want in the market. One thing I really don’t like about Realmoney.com now is that they try to nickel and dime you on all their services. If you want to read articles from so and so, you have to pay this much each month. It’s good for their business obviously, especially if the writer has built up a loyal audience. But it’s quite a sticker shock for new investors. The best thing I liked about them back then was that a newbie can get strong opinions, and everything they had to offer about the market for twenty or thirty bucks a month. An excellent value proposition. But if you want everything now, it’s going to cost ya.

So what to do? One thing I liked back then was the Yahoo message boards on stocks. They’re easily available and are strong opinions for free. Most of it is garbage, but I like to think of them as pre-cursors to blogging. People literally write whatever they’re thinking, and if you take it on the merits of their arguments backed up by facts and links to relevant articles, it’s useful. The main thing, as with all news, is you have to pick up the ability to filter out the good, and toss the bad. Don’t get me wrong, message boards shouldn’t be your main source of information. But there’s more than one way to look at it.

A couple of stock specific thoughts: VIP and MBT are getting hammered. Their charts aren’t too pretty. I would let it play itself out before going long on these two.

BOBJ (I pronounce it Bob-Jay): I’ve been itching to short this one. Their being a French company is reason enough. But the chart ain’t too pretty, and it looks like they’re starting to have some accounting problems. They’re a business software firm, and from what I know, software firms tend to be aggressive in their revenue recognition to boost sales. BOBJ has close to 80% gross margins, but only 1% of their revenues make it to their bottom line. This says to me there’s a lot of waste going on. The SEC has an informal probe with regards to their deferred revenue, or backlog. It won’t be a fast short, but it’ll be interesting to see how it plays out. I’m guessing if there’s smoke, there’s a fire somewhere.

Cheers.

Excellent speech by Don at The Conspiracy to Keep You Poor & Stupid. Proud to say, one of the smartest people I know.

The McKinsey Global Institute estimates that the volume of offshore outsourcing will increase by 30 to 40 percent a year for the next five years. Forrester Research estimates that 3.3 million white-collar jobs will move overseas by 2015. Gartner estimates that by the end of this year, 1 out of every 10 IT jobs will be outsourced overseas. Deloitte Research estimates the outsourcing of 2 million financial-sector jobs by 2009.

These aren’t even really “estimates.” They’re forecasts. No, they’re S.W.A.G.’s — stupid wild-ass guesses.

Remember, these consultants are the same geniuses who said, four years ago, right about the time when the NASDAQ was at 5000, that Internet traffic would grow at 90% a year forever, and that by 2002 every American citizen would have digital video-on-demand beamed via low earth orbit satellite to his cell phone. Hey, if that were true I could be watching “Friends” right now.

Let’s get real. Suppose Forrester is right, that 3.3 million white-collar jobs will move overseas by 2015. That’s eleven years, folks. That’s 300,000 jobs a year, or 25,000 a month. Today there are 130 million jobs in the United States.

So the cost is 2/100 of 1% of jobs each month. Don’t worry about it. On average the US economy generates job growth 10 times that much every month.

But it’s not just that even the wild-ass guesses are actually quite small in the grand scheme of things. The worst part of it is that these forecasts inevitably just look at costs, and never benefits.

The thing with writing about politics is that statistically you’ll piss off half the people all the time. So I thought I would go to something more controversial – writing about investments. Nothing gets people going as when they have an economical stake in something. If you’re right, you’re on top of the world. If you’re wrong, you’re a bum and no one listens to you. That’s one thing I love about the markets, it cuts out all the b.s. and boils it down to what matters and what doesn’t.

Speaking with Jonathan, there aren’t many blogs about investing. Ventureblog is a good one, but it’s not very actionable unless you are also a venture investor. There are plenty of “model” portfolios out there, but they’re not very actionable either unless you have a cool million or at least $100k to throw around. To me, it always looked like a cop out since the writer can always point to the high performers in the portfolio. They can say, “Well Joe, if you had invested in ABC like I said on 1/1/95, you’d be doing pretty well.” To which, someone might say “gee thanks a-hole, I invested in XYZ like you said on 1/1/96 and lost my shirt.” Diversifying is well and good, but you gotta have enough assets to diversify in the first place. Way back when, when I first started investing, I’ve always wondered what an average Joe like me can do with a few thousand bucks scraped together.

So let’s start a little experiment. I will personally invest $5,000 in the market and keep an online journal of what happens. It represents my entire liquid net worth, so it will definitely have my undivided attention versus some academic exercise without consequence. Who knows, it may be the shortest investment journal in history – ie blow it all on one trade and call it a day. Otherwise, it’ll be a good learning experience all around.

Let’s go get’em. Ding ding ding…