a reversal of sorts

Big news out of Washington, DC. The rule mandating registration by hedge funds was overruled today on appeal and sent back to the SEC for a 'reworking'. So now registration of funds is not required? The panel that originally voted for this required registration was quite divided on it and the final vote was 3-2. The dissenters and opponents have been very loud in their disagreement ever since the rule came into affect. The court obviously took their position and ruled to overturn the rule requiring registration.

To quote Reuters:
SEC Chairman Christopher Cox said that his team will reevaluate their approach to the hedge fund industry after the US Court of Appeals for D.C. smacked down their rule requiring registration as "arbitrary".
"The SEC will use the court's decision as a spur to improvement in both our rule-making process and the effectiveness of our programs to protect investors, maintain fair and orderly markets, and promote capital formation."

How will this affect smaller funds that are governed by state entities and/or funds with less than 15 investors? Here's a blanket statement to cover that question too:

"Hedge funds do not need to register under the Investment Advisors Act of 1940, a US Court of Appeals in Washington, D.C. said today. The court found that the SEC rules requiring hedge funds with more than 15 investors to register were arbitrary and struck down the rule.
The US Court of Appeals for the DC Circuit is considered one of the most important and prestigious appeals courts in the US. It rarely spanks the SEC so hard, so this case is definitely a big deal."

Happy weekend.

DJIA 10,989.09

NASDAQ 2,121.47

SP500 1,244.50

maneuvering the chop

last week was choppy. By anyone's definition, choppy is what is was...however, with the all the intra-weeks rumblings, we pretty much closed the week where it started.

The Street dot com's 'before the bell' email this morning mentioned the art of shorting stocks and the benefits of long/short funds. Since the retail investor is now armed with the tools to make money to the short side, this means we are probably heading straight up. Stay tuned for all the gory details.

Friday's closing numbers:

DJIA 11,014.55

NASDAQ 2,129.95

SP500 1,251.54

all about perspective

look at the most common indices (dow 30, s&p 500, and the nasdaq composite) on long term charts of at least 3+ years and one gets a sense of how far we have come and how far we could possibly fall. Although the indices have broken their near term trends (3 to 6 months), things are just beginning to look sketchy on the medium term trends (1-2 years) and if one were to take a step back and view the overall trends of the markets over the last 5 years, the markets continue to make higher highs and higher lows; the true definition of a ‘bull’ market and an upward trending one. For example, even with the hard sell-off the nasdaq has experienced in the last month, it still has not (as of this entry on June 14th) made a lower low. Until it breaks the low of October 2005, (which may happen here shortly), this market has not made lower lows since the autumn of 2002. How long do bull markets last? It may be a good time to find the answer to that question. Of course, the relativity of this point matters only when considering the investment time frame. For classic long-term ‘buy and hold’ investors (those that were lucky enough to have made it through 2000-2002), the performance and opportunities of these markets will mean something entirely different than the goals and opportunities of the short term (less than 6 months) investors. Also, long-only investors will be viewing the charts differently than the investor who can take both long and short positions. Perspective and strategy can make the same object look entirely different depending on where one stands. As the current hype continually circles above the carcass that is the current market environment, one only needs to pause, take a step back and look at the bigger picture to realize that maybe things are not quite that bad after all. Having said all that, there sure was a boatload of money to be made to the short side the last month.

some rules of the game

well with the May sell-off continuing into June, one may want to re-visit several topics that can help with risk management and protecting profits. I came across a story by Barry "Ritz Hotel" Ritholtz who write articles over at realmoney dot com. In a recent article, he provided 10 lessons that can be learned in down markets. Here are his rules (with my comments added after) :

1. cheap stocks can always get cheaper - a good thing to know if you don't/can't go short, that's why fundamental valuation is 'fundamentally' flawed. Cheap is only cheap if one buys it at a good price relative to what others are willing to pay for it. Buy an item on sale at the store, you think you got a good deal. Go back to the store again next week to find the item you bought on sale has been marked down again and discounted even deeper. All of a sudden, the 'good deal' you got last week doesn't look all that good.

2. macro issues matter - as mentioned in an earlier entry, there is lots of news/noise out there that can get in the way of the true cause for profit or loss in a stock (the price). However, global and even market-wide conditions can affect the way one constructs a portfolio, i.e. net long or net short? cylical stocks or defensive stocks?

3. oversold markets can become more oversold - great thought, there is a saying, the markets can stay irrational longer than one can stay solvent. Just when one thinks that the market cannot possibly go any lower, it goes lower. Never say never, a stock can go all the way to zero. Many higher fliers over the past 6 or 7 years have done just that.

4. support & resistance don't always hold - one can use support and resistance as great stops, but if those levels are violated they provide great opportunities to take the other side of the trade.

5. investors have short memories - look at the vc industry, some say the dollars are flying around again like back in the day. Look at The Goog, some liken that type of trading action to the SDLI's and QCOM's of the late 90's/early 00's.

6. a major shift is a subtle process - one can have a very profitable long-only portfolio but as the tide slowly shifts, the profits erode and soon one can find themselves managing a portfolio of breakevens. It didn't happen overnight but was a very slow and unassuming erosion of price levels and often the inside fundamentals. With a balanced portfolio of strong long positions and weak short positions, one can be better positioned to manage a major shift over time.

7. stop losses are lifesavers - probably the most important rule. If one sells or covers all their losing positions as soon as the limits are hit, one will never have 'loser' positions in the portfolio. Warren Buffett once said the #1 rule in managing money is to never lose money. The second most important rule is to refer back to rule #1.

8. money management is crucial - position size, downside risk, stop limits based on price levels or stops based on percentage of puchase price, sliding stops on profitable positions, how to add into a postion or scale out of a position. All are factors to consider when entering and building on existing positions.

9. when your timing is off, step away - no one can have a winner trade everytime, if the losing trades far outnumber the winning trades, take a break, step back and look at the screening process. Are stops too tight, are you fighting the trend, are you impatient? All things that could be contributing to a rough patch. Remember when you are trading and not picking winners, the only ones making money are your brokers and the party on the other side of the trade. If confidence is shot, one thing to remind yourself is that you can't lose any more money if you don't trade. Evaluate, review, but always stick to the stops and don't sacrifice a position because you don't want to be 'wrong' again.

10. smart people do dumb things - even good money managers make costly mistakes, learn from the mistakes of others and if you do commit a error, whatever you do, don't repeat it.

Regardless if the markets bottomed out on Thursday and we head up from here, or if the slide continues throughout the summer, it is always good practice to review the rules and lessons of portfolio management.

Happy Friday.

DJIA 10,891.92

NASDAQ 2,135.06

SP500 1,252.30

up?

The markets actually look like they might have a positive week, first time in a few weeks. I guess all the short covering and knife-catching is bound to add up every once in a while. Do we extend this current week's rally or continue the recent downtrend? Stay tuned.