On Tuesday, I had the pleasure of spending a perfect Minneapolis day on a golf course with Charles Kirk of THEKIRKREPORT.COM. Charles was the first person to link to HedgeFolios and I greatly appreciate all the traffic that originated with him. His site is one of the few that I regularly read and for me, the greatness of his work is the ability to sift through all the financial stories and present the meaningful ones with easy to use links. There is a lot of useless and misleading information that affect stocks and Charles helps me avoid that and focus on the good stuff. The day was spent banging around the little white ball, getting to know each other, talking about the market and issues surrounding running sites like ours. Overall - an excellent day. By the way, I tore up the score card and vowed to not disclose the scores from the Stock Blogger Open, but I will tell you that Charles won by a few strokes.

In my previous post, I suggested that Hurricane Ernesto would give us a small opportunity to quantify the extent of hurricane speculation in each barrel of oil. Based upon my rough assessment, it looks like $2 (or roughly 3%) is a good guess. Oil went up about $2 last Thursday on fears that Ernesto was going to hit the oil assets in the Gulf of Mexico. Then, on Monday, when we knew that the path had changed and oil rigs would not be targets, oil declined $2. I know this is a pretty blunt analysis, but in my opinion, it is about as close as we can get to pinpointing a speculative figure. And by the way, I still haven’t found a way to justify the claims that $20 / barrel is related to speculation, so I am going to stick with an estimate of 3% for the component coming from hurricane fears. I know this isn’t as dramatic as what you may hear on the financial media programs, but I think it’s reasonable. As for the portion relating to terrorist fears and war disruptions in major oil producing countries, I have no clue what the speculative premium is and hopefully we will not find out.

Since oil has declined about 10% over the past 3 weeks, I am personally going to thank the oil speculators for being the sole reason that we are seeing lower prices. NO, not really - I am just kidding and trying to point out how absurd it is to assign all the blame or all the credit for changes in oil prices to the effect of speculators. Supply and demand may seem too simplistic or boring to other commentators, but until I see evidence of something else, I am going to stick with the simplistic and boring approach.

Since 2004, there’s been a lot of discussion about how much the price of a barrel of crude is related to speculation from traders rather than fundamental changes in supply and demand or other causes. Much of this debate is coming (of course) from the politicians, many of whom have spent their lives in public service rather than having expertise in professions such as economics, corporate finance, or investments. So consider the source, but don’t underestimate their intelligence.

In this case, I happen to agree that some of the oil price is related to trading speculation. That’s what traders do and it’s a bad rap to blame them. They may be exploiting a trend, but that doesn’t mean they created it. Let’s face it, most of the cost of oil is related to good old-fashioned supply and demand. Supply is tight, there are several legitimate risks for it getting tighter (Hurricanes, Iran, Venezuela, Nigeria, etc.), refinery capacity is constrained and global demand is increasing. For their part, politicians have done very little to help and the constant energy battle between the Republicans and Democrats since the oil crisis of the 1970’s has helped to put us in the danger we now face, not to mention the years ahead. I haven’t heard much debate about how many dollars in each barrel are related to political incompetence, but that’s really tough to quantify so I’ll leave it alone.

While I have heard figures as high as $25 of each barrel is blamed on speculators, I doubt that it is that high. I look at it in two components. The first is the geopolitical risk from something like Iran shutting off its own supply (doubtful), or disrupting Iraq’s supply (likely) or blocking the Straights of Hormuz (possible for a short period.) When many of those items became more prevalent in the news the past few weeks, oil has actually declined. So where is the speculative bump? Even the supply interruption from BP’s Alaska pipeline fiasco had little more than a one-day increase of about $2 that has decreased to a point where we are now $2 lower than before the shutdown was announced. Problems in Nigeria? Those hardly hit our headlines and it’s tough to see any speculative movement from them.

The second component of speculation (or at least an opportunity to speculate) is the fear of hurricanes. For the entire hurricane season, we haven’t had a chance to evaluate how much speculators would spike the price of a barrel. Thankfully, the summer driving season is largely over and that will help avoid a bigger problem. However, it now appears that we may have a chance to wake up on Monday morning and see how much play a hurricane will provide. It seems Ernesto has a chance to grow over the weekend and possibly break into the Gulf of Mexico. That would be spooky timing with the anniversary of Katrina! Anyway, if it happens, it should help quantify the portion of the speculative premium related to hurricane risk.

I do agree that there is a portion of spot oil prices relating to speculation. But I see these factors being very short term and the amounts to be grossly exaggerated. There are two sides to the trading pits - speculative buyers and speculative sellers. If oil declines, will consumers and politicians thank the speculative sellers as much as they blame the speculative buyers? Not going to happen, and it shouldn’t (and neither should traders be tagged with causing $10, $15, $20 or $25 per barrel.) I just cannot isolate a fixed dollar amount so I will leave it up to others to blindly throw numbers around.

“Mr. Sunshine” - I got that one from my former boss and it wasn’t because of my sunny disposition towards the market. Oh well, I have been called a lot worse. I recently watched CNBC’s “Fast Money” and while I liked the show in general, I get tired of hearing all the nicknames (The Risk Doctor, The Admiral, The Negotiator, The Lone Wolf). I guess it’s just part of the game at CNBC - home of “The Brain” and “The Money Honey” but it really strains the credibility of their content. To me, nicknames should only be reserved for the greatest in their profession like sports stars Babe Ruth and Magic Johnson and when you say their nickname alone, you should immediately know who is being discussed. In the investing world, some of the most famous have had nicknames such as Warren “The Oracle of Omaha” Buffett and Alan “The Maestro” Greenspan and I wish it would stay limited to a select few. But since it appears to be catching on, you should really come up with one of your own, just in case you are asked to appear on CNBC!

I look at about 5,000 charts each week so I don’t hesitate to think of myself as a technical analyst. But, today, when I hear over and over again on CNBC that market technicians are bearish, I wonder - am I missing something? After all, I am not bearish and it bugs me to hear statements of generalities that suggest every member of a group is one thing or the other. When it comes to technical analysis, you can count on ten chartists looking at the same squiggly lines and seeing ten different pictures. And while it is often said that “Great minds think alike…” so do stupid ones. I’d rather not be associated with either group at the moment and would prefer not to hear general comments that suggest that all technical analysts are bearish. Some of us are and some of us are not.

Last week was strong regardless of the attempts to downplay it or suggest there was not enough volume to validate the move. I heard some commentary that our failure to take out the May highs was evidence of a rally that was running out of gas. I laughed at that one because I much prefer a steady climb than a spike, especially since the market finally broke through and closed above some pretty heavy resistance at 1300 on the S&P. And if we are going to be critical of light volume moves, then today’s miniscule full day volume was worthy of major suspicion. All I ask is for you to apply a healthy dose of that suspicion to about every general statement you see or hear, even if they should accidentally find their way onto this site.

This market is facing challenges from many fronts - geopolitics, oil, potential hurricanes, rate speculation, etc. At any time, one of those factors could send us lower. However, at present, things are looking pretty good to me and I am not going to talk them down. I’ll let you know when I change my mind and you can be assured it won’t be part of some anonymous general statement.

****Performance has been updated through 8/18/06 - please read through the following disclaimer and find the updated figures at the end of the post.

Before I discuss Hedgefolios performance, I want to cover myself with some cautionary language.

So here goes:

Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to Hedgefolios. That part is easy given that Hedgefolios is entirely free right now, but when I start accepting subscriptions - the same nonsolicitation clause will apply. Regardless, you should be very hesitant to rely on any newsletter’s performance figures unless they are audited or verified by an outside party. To be as transparent as possible and remove any question of Hedgefolios credibility, I am hoping to have audited performance figures by the end of 2006. Until then, you need to be aware that any performance figure on Hedgefolios is NOT in compliance with the CFA’s AIMR Performance Presentation Standards and does not net out any transaction costs such as commissions or management fees. They are not a total return calculation as I do not include dividend yields or any compounding factor. These performance figures cover a hypothetical portfolio of the entire Hedgefolios stock universe with an equal weighting of each security. The calculation is simply the cumulative total of all gains and losses from the signals during the period in question.

All this being said and under those parameters, Hedgefolios performance for stocks:
2005, the Hedgefolios performance was +19.99% vs. +3.00% for the S&P 500 index
2004, the Hedgefolios performance was +31.19% vs. +9.00% for the S&P 500 index

As the year goes forward, I will update this post periodically to let everyone know how Hedgefolios is doing.

UPDATE: Hedgefolios stock performance for 2006 year-to-date (through 8/18/06 close) was up 13.94%. Over the same time period, the S&P 500 index was up 4.33%.

Peter Lynch is well known for the investing maxim “invest in what you know.” Obviously, it worked extremely well for him and hopefully for all the investors who read his books. There are a bunch of great stories of watching what hot trends your kids are getting into and following that through to a purchase of the related stocks. Or investing in the industries related to your profession, etc. etc. Unfortunately, the “invest in what you know” concept is unidirectional. So here is my new investing principle - “Uninvest in what you know.”

Lately, I have been experiencing a few issues around my house that involved unbelievably bad customer service. I only wish I had them recorded so I could play the audio / video and give the AOL and Comcast examples a run for their money. Once I calmed down, I thought about Peter Lynch and Barry Ritholtz of The Big Picture blogging fame. If you have never read Barry’s stuff or seen his appearances on financial tv, you are missing out(that was one of the only recommendations you’ll see from me.) Anyway, in March, Barry wrote a piece about a terrible experience with Dell’s customer service. Dell’s problems have been well publicized in the following 4 months and the stock has declined about 25% since his post. I should have listened to Barry and changed my signal immediately. Instead, the HedgeFolios signal is off 27%.

So when I ran into my recent problems with Echostar (DISH) and a subsidiary of Tyco (TYC), I came up with this new investing- or should I say “uninvesting” principle. Consider uninvesting by shorting or selling stocks of companies that are not living up to your expectations. You should still think about all the other implications (tax, diversification, etc.) and talk with your financial advisor, but there are times when all the fundamental and technical analysis should take a backseat to common sense.

In my previous post, I expressed a lot of concern about downside market risk despite holding out hope for a decent finish during the last two days of the week. That was before the British terrorist plot was disclosed and I was really fearful that it would act as a negative catalyst to put us over the edge. Amazingly, Thursday held up and Friday was not too bad either. When I reviewed the signals this weekend, the situation had improved substantially since Wednesday’s post. I guess I should stick to my plan and avoid looking at charts midweek.

Regardless, I am still concerned about downside risk in this market. Volume has been disappointing and except for today, each rally has been met with enough selling to wipe out the gains. Three weeks ago, I was contemplating several things that could give the market a bullish impetus. I am amazed by what has happened with those forecasts and it’s not that they almost all came true (still waiting on North Korea talks and oil in the $60’s.) What is amazing (at least to me) - is that despite the Israel / Hezbollah ceasefire, FOMC rate pause, and better-than-expected earnings season, the market has not responded well to any of it. However, I am keeping my head up and if nothing else, I am impressed that the bears have only been able to negate the gains rather than accelerate losses.

It wasn’t long ago that the spin on PPI and CPI by the bulls was that they are lagging indicators and really shouldn’t be given much weight. Oh how things have changed…. today’s PPI was given a lot of weight (more than “peace and pause”) and the rally held all day. Now for the final act - the CPI tomorrow is likely to move us in a confirmed direction. If it is consistent with the PPI or at least not indicative of increased inflation risk, I expect the market to move higher and in a way that finally gives credit to the “peace and pause.” On the other hand, if the bears are given one more reason to negate today’s gains, then the downside risk that still nags me will make me wish I had changed more UP signals this week. As it was, I gave about 3 times as many new UP signals than DOWN. Keep your heads up tomorrow.

I don’t like writing posts like this, especially not in the middle of the trading week. I try not to be dramatic and I am going to hold back in this post too. But, I just spent many hours reviewing charts and I am stunned. I have never seen so much deterioration over a few days. I believe there is a tremendous amount of risk to the downside in this market. This situation was not apparent to me when I did my signal work 3 days ago and having this appear so rapidly is concerning. I try to avoid commenting on the market until I have a complete set of weekly data and I went back and forth about writing this post. However, I am making this exception.

Since mid-June I have been less pessimistic about the market and in fact, the HedgeFolios Timing Indicator went positive on July 10th. I have come to trust this indicator when the market has a week that I was not expecting (either up or down.) Maybe it was the pathetic reaction to the FOMC decision or the increasing geopolitical tension or the Alaska oil problem, but I am struggling to put on the rose colored glasses. If the market week would have ended today, I would be changing approximately 750 signals to DOWN. Fortunately, there are two days to change the way things look and I hope that happens.

I have no preference on market direction, but I like to be right and given that I currently have a positive market bias, I would prefer not to see a significant decline. However, I have no ability to impact the market and will take whatever it gives me. We just had a very good earnings season (much better than I had expected) and we finally got the pause and dovish commentary from the Fed. But the market did not respond positively and that is much more important. If we do not stabilize soon or get a strong bullish day, I fear a massive decline. Not a “one-half percent per day” kind of decline over several days, but something more like a 3% day. As much as I like to be right, I’d rather be wrong in this case. Good luck out there.

BMY is doing it. GM did it. OSTK did it. BVF did it. Skilling and Lay did it. Hey, what a great idea! Everybody’s doing it so why not me? Whenever I screw up in life I am going to blame it on short sellers and while I am at it, let’s just be more specific and blame it on hedge funds who are selling short. Yep - I am being cynical (again.) I just cannot stand the idea that a company can point fingers at short sellers when there are fundamental and technical reasons for their stock declining. And whenever I hear this excuse, it really causes me to question what else is wrong with the company that we don’t know yet?

In BMY’s case (and the other examples too), it’s almost laughable that they don’t think it was credible for people to be selling their shares. Plavix is the second best selling drug in the world and about 30% of BMY’s sales. The fact that they thought it would be ok to pay Apotex money to keep its FDA approved competitor off the market might have been a clue. Yeah - I know - BMY is claiming that somehow those mean short sellers had inside information about the anti-trust investigation into this agreement before it was disclosed to the rest of us on July 28th. They point to the doubling of short interest from June to July 11th.

So here’s a question - why are they only complaining to the NYSE today? If they and the rest of us noticed this increase in the short position when it was published on July 11th, then why not complain then? And if not then, why not on July 28th when the Apotex deal was revealed? Why wait until today? Here’s my theory - people love to hate shorts, but only when the shorts win. BMY went up marginally from mid-June until mid-July when this short position was being amassed. When the shorts lose or get squeezed, there is a joyous (almost sick) gloating that goes on. However, when the “dark side” wins - then it’s time to play the blame game. Investigate away!! Maybe you’ll find that there were numerous legitimate reasons to sell the stock, not buy the stock or short it.

One last note on this subject for now. Hedgefolios has had a DOWN signal on BMY since 5/22/06 (before the period in question!!) From that date until July 27th, I was wrong and did not complain that the “long buyers” had inside information that was unfairly causing the stock to go up. And, NO, I didn’t have any inside information about their payoff to Apotex. Just good old fashioned analysis that said this stock had more downside risk than upside potential. And if my signal contributed to one mean short selling hedge fund borrowing 1 share to sell, then I am proud in a somewhat gloating kind of way. My apologies to the BMY longs of course. But let’s not be confused about the real issue here - this company is in danger of losing about 30% of its revenue. Shorts have nothing to do with causing that.