Economics & Finance

David at Tradingmarkets.com was nice enough to set me up with a free account to use at their trading site in exchange for mentioning them if I use their ideas. Nice trade I thought, Thanks Dave. It’ll be interesting to see what they have to offer. From the looks of it, it’s oriented towards short term traders, which sometimes I am. The thing to remember with news sites is that the most important factor is the filter in your head. Take the good, chuck the bad. Easier said then done, but nice to keep in mind nonetheless. There are plenty of investment ideas out there, the key is to know how to make use of them.

The portfolio performed fairly well today, with the long Amazon/short Overstock pair doing what they’re supposed to do. Amazon is down 2.2% while Overstock is down 5.5% for a net gain of 3.3%. Dollar wise, the OSTK short position is a little bigger than the AMZN long position, so it’s a nice bonus. Ideally you want pairs to make money in any market. You give up some of the upside on up days to hedge against ugly days like today. Overall, the portfolio is up $107.50 including all commission costs (we’re rich!).

Amazon seems to be keeping above its support I charted out yesterday. Hopefully it will hold.

According to the prospectus, Overstock will distribute shares to the bidders in its secondary auction on May 18, which is tomorrow. They didn’t mention a time frame, however, if they handle it like other secondaries it should be during the trading day.

The thing to watch is of course how the trading progresses after the secondary. This is where that Family Feud analogy comes into play. What do the bidders on the secondary do with the stock after they receive it? Do they flip it at the open? Do they keep it on and hope for the best?

It’s an academic exercise, which is to say it’s useful until the shooting starts. But it’s always fun to play out scenarios. Since I have a vested interest (I’m short OSTK), obviously I play out the ideal scenario first. As of close today, the bidders of the secondary are in the money. OSTK closed at $31.04 today. The secondary is priced at $30.50. Flip it at today’s closing price, and you have a free 54 cents courtesy of W.R. Hambrecht & Co. Ideally they will be nervous. The market is topsy turvy, and that 54 cents instant profit starts to look not too bad compared to the red on their screens. If OSTK opens up anything, I would guess there’s a temptation to sell. They know more supply will be on the market since not every bidder for the secondary will hold. Why not take a little profit? Ideally it will break the print price of the secondary. If it does, then the bidders on the secondary will feel hosed. Ideally they will then want to contain the damage, and flip it ASAP.

That is of course, the ideal scenario.

What’s the worst case scenario? Nobody sells from the secondary. The print price holds, and OSTK goes up. The market rallies, and OSTK gets squeezed. This is hopefully where that AMZN long comes into play. I call it bounce insurance, i.e. if the market bounces, you capture some of that upside.

One rule of thumb I like to follow with scenarios is that usually, you take the best case scenario, take the worst case scenario, and somewhere in the middle is what will happen. Simplistic, but again I like to keep things simple.

Can’t wait to see what happens tomorrow.

Long AMZN, short OSTK

Good articles by Pat Buchanan and Ann Coulter

Good counter point by Larry Kudlow

Talk about rising from the dead. Nortel (NT) smoked estimates and reported its first full year profit since 1997 and the stock is on fire. I didn’t think they would make it, but lo and behold they did.

I do not hold any positions in NT stock.

So one of my clients is a venture capital fund in Silly Valley (my name for Silicon Valley). And being that I use to be in the high tech investing game, it’s a nice trip down memory lane.

Remember back in the day when they said it was a good idea to buy a basket of stocks in a hot sector, and needing only one of them to become the next Microsoft for the whole investment to pay off? Well, boy did these guys ever – they’re the real deal. The fund began with $100 million, and one of their first investments was an early round investment in ABC Networks for $5 million. Five years later, at the height of the tech bull market, they distributed shares in ABC Networks to their partners (cashing out in VC speak) with a gain of over $625 million.

Think about it for a minute. It’s the same as buying shares at $1 and selling it at $126 for a gain of $125. That’s a 125x return on the original investment. In percentage terms that’s a 12,500% return over 5 years, or roughly a compounded return of 265% per year over 5 years for their investment in ABC Networks. Overall, the original $100 million fund made over $850 million in capital gains for its investors. Or to put it simply, they turned $100 million into almost $1 billion. Takes your breath away doesn’t it?

Capitalism at its finest.

Note: Names and figures have been changed due to the information being privy to the fund and its investors. The figures used are fictional. However, I’ve maintained the magnitude of the figures for illustration purposes.

As a side note, there’s plenty one could critique – i.e. the market was a euphoric bubble, the investors may not have sold once they received the shares and rode it down, we’ll never see a market like that again, etc, etc. I wanted to give an inside peak at a VC, what can go right, and a reason why people invest in venture capital funds. Hope you enjoy.

Update: I forgot to mention, the standard fees the GP would charge to manage a fund is in the ballpark of 2.5% of capital committed per year and 20% of profits.

Update2: Here’s a good article about Google and its relation to the IPO/VC world.

Over at The Corner, Mark Krikorian suggested spending funds Bush earmarked for job training on “immigration enforcement” at work sites. The idea is to make cheap immigrant labor less available, and thereby to make domestic ex-convicts more attractive to employers.

But how about streamlining immigration procedures instead? If immigrants will work for lower wages than ex-convicts, artificially restricting the labor market to benefit ex-cons amounts to an indirect and inefficient subsidy. Krikorian ignores the costs to business, and hence consumers, of immigration restrictions that drive up labor costs.

He also ignores the possibility that employers prefer immigrants for many jobs at a given wage level. In that case the better course of action might be to eliminate, or at least lower, minimum wage rates that price less-productive and higher-risk workers out of jobs.

It’s obvious that most immigrants come to this country because they want to work, but we shouldn’t forget that American employers want to hire them. It should be easier for hard-working immigrants to come here without first spending years jumping through bureaucratic hoops.

Prison reform is a separate issue. Ex-convicts may be made employable via training programs (as Bush proposes), by lowering the minimum wage, or even by directly subsidizing employers who hire them. Attempting to increase demand for ex-con labor by driving illegal immigrants — many of whom are illegal mainly because it’s prohibitively difficult and time consuming to become legal — out of the labor market, is a poor alternative.