Despite having a great time in Mexico, I had to come back to reality. Before I left for my vacation, I was amazed by the extreme bullish readings I was getting and decided to see how it played out rather than trying to guess whether it suggested a continuing rally or whether it was a contrarian indicator (see previous post). Obviously, the failure to break through 1380 and the reaction to GE’s miss makes it look like those bullish levels were of the contrarian variety. However, I haven’t seen evidence that the rally ended. Note that I never saw proof that a “bottom” had formed near 1275 either. The only thing we know for sure is that the sideways pattern I call “The Plain of Pain” is still in place. I still have a bullish bias but if we do not hold 1320 this week, I suspect that will change. The bulls better get all hands on deck to defend their turf.

I get really tired of hearing about how bad news being ignored is such a definitive bullish sign. The reality is that those sentiments are very short term and are subject to change in the negative direction just as quickly as they appeared. It is possible that bad news can be ignored and that is certainly positive IF the bad news slows down, or IF it is just more of the same. But for this to lead to a real bull move, the bad news needs to turn to good news at some point and we cannot have new bad news in areas we had not yet been able to ignore.

For far too long, the bulls have been saying “yeah but” about earnings. They say - “Financial stocks have had big losses, “yeah but” just look at earnings ex-financials.” Okay, so now investors may have been desensitized to writedowns / financial losses (see Wachovia) but telling everyone how wonderful earnings are in the non-financial world creates a whole new set of expectations. If earnings season for non-financials follows GE’s lead, this market is not likely to hold up.

In 24 hours, I will be relaxing in Mexico. Maybe it’s my enthusiasm for taking a week off or maybe it’s something else, but HEDGEfolios has never had more bullish readings. The HEDGEfolios Timing Indicator and HEDGEfolios Signal Indicator are at such extreme levels that I cannot assess what I think it means. When I see something I’ve never experienced before, I tend to reserve judgment and just let it play out. An unbiased mind thinks the clearest. With 86% UP signals, I am obviously not well-hedged to the possibility of a downward move, but I always just take what the market gives me. Right now, it’s ridiculous levels of bullishness. If this reverses, I will be quick to follow and I suggest that you pay close attention with ultra-tight stops and any other form of risk management. While I won’t be doing any analytical work this week, I will enjoy watching how this plays out. Hasta la vista!

There was a 1950’s game show called “The Name’s The Same” that was a takeoff of “What’s My Line?” The idea was that 3 celebrities on a panel had 10 questions each to guess the name of the contestant who shares a name with a famous person, place or thing. I wasn’t alive back then, but if they did the show today, I could be a contestant. Despite making numerous attempts on this site to disclose that I am not the famous “Michael Steinhardt” who ran a very successful hedge fund from 1967(when I was 1 year old) to 1995 and who is now the chairman of WisdomTree Investments, the confusion continues. In fact, lately it has gotten worse. Michael is a very common first name. Steinhardt is not a very common last name. However, it is possible that two people could have the same combination and it is possible that they both could have a passion for stocks. For the record we do have different middle initials. So one more time … I am not him, he is not me. If you are reading this blog because you want to hear from the other guy, please question why you would think that Michael would run a site like this. I started HEDGEfolios to provide a public track record of my ability to simultaneously manage over 3500 stocks similar to a large long/short hedge fund.  He’s already run a hedge fund and if he wanted to run a new one next year (like me) then he wouldn’t need to do what I have done to attract capital.   I write to share my thoughts on the markets and portfolio management - not his. I owe him an apology if he has to deal with anyone that ignorantly assumes he made the comments coming from me. Michael has to do nothing to prove his ability, he did that already. He made a name for himself in this business - one of the greatest investors of all time. The name’s the same…I’ll do it my way…but it’s time for me to do the same.

This was my question - “What are the impacts of the TSLF haircuts on the mark-to-market requirements for the collateral that is being offered, especially as it relates to the first quarter accounting period that will end within the first 28-day window?”

This was the NY Fed’s reply - “We do not disclose this information as it is a term of trade between the counterparties. Standard Value-at-Risk methodology is used. We follow industry practice as we do for all haircuts on Fed programs.”

I do appreciate that I got a response. However, it wasn’t too insightful. Since I was not a counterparty, I am not entitled to know what the “term of trade” is. Furthermore, I have no idea what “standard” means. There aren’t too many standard things going on in this business right now. As for “value-at-risk” - two of those three words are challenging for the banks lately. I think they can handle “at.” Can they value anything? Do they understand the measurement of risk? The last line was the best though - “industry practice”? Given the questionable practices that got us into this mess, having the Fed following what the industry is doing should tell you why we are where we are and where we are probably going.

I shouldn’t be surprised really. In today’s testimony before Congress, Chairman Bernanke didn’t seem concerned that the Fed took the word of Bear Stearns when it valued the “collateral” the Fed was backstopping with $30 billion, now $29 billion. I am confident that “standard value-at-risk methodology” was used and the Fed followed Bear’s industry practice.

My question still stands. I’ll look for answers elsewhere. I doubt I will ever ask them another question. I learned my lesson, if nothing else.

I will be taking some time off from April 5th through April 14th. I need it. BAD! And more importantly, I suspect you need some time off from me. Consider this good practice for when I permanently withdraw from this blogging thing. The database will be updated using this Friday’s closing prices(April 4th) rather than Monday’s open(April 7th) so there will be no interruption in the service. Next week, I am hoping to squeeze in a few meetings in New York but other than that - there will be no work for me. I will limit my market watching to 15 minutes per day (if any) so I will have no basis for meaningful posts. I will be on a private beach somewhere in Mexico trying to regain some sanity. I’ve been so busy with the markets, HEDGEfolios, charity work and setting up my future in fund management that I haven’t been making regular progress on the book I am writing. With the help of more than a few cervezas and margaritas, I hope to pump out some pages. Enjoy your vacation/holiday from me.

HEDGEfolios year-to-date stock performance for 2008 (through 03/31/08 close) was up 6.22%.

Over the same time period, the S&P 500 index was down -9.90%.

At the end of March, the HEDGEfolios universe consisted of 3,454 stocks.

Commentary: At the end of one of the most difficult quarters in market history, I am pleased with HEDGEfolios performance. During the month, HEDGEfolios increased bullishness to end March with 78% UP signals vs. 68% at the end of February.

• 2007, HEDGEfolios performance was +21.78% vs. + 3.55% for the S&P 500 index
• 2006, HEDGEfolios performance was +25.54% vs. +13.62% for the S&P 500 index
• 2005, HEDGEfolios performance was +19.99% vs. + 3.00% for the S&P 500 index
• 2004, HEDGEfolios performance was +31.19% vs. + 9.00% for the S&P 500 index

Disclaimer: Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to HEDGEfolios. These performance figures have not been audited or verified by an outside party and are NOT in compliance with the CFA’s AIMR Performance Presentation Standards. They don’t net out any transaction costs such as commissions or management fees and 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.

“The market looks forward, not backward.” I freaking hate that saying. GO AHEAD AND LECTURE ME about how the market is a discounting mechanism. I’ve been through quite a few classroom lectures while getting my degrees in finance. Additionally, I have given some lectures as an adjunct professor where I had to discuss this as part of foundational finance curriculum. I understand the discounting theory and the math involved. However, the statement is grossly misused and misunderstood.

If you like it, go ahead and use it. But I wonder how anyone benefits from it. Does it help avoid losses? Does it guarantee gains?

When something good happens, it is immediately in the past. Yet, many people look fondly on the past. When something bad happens, it is also immediately in the past. However, it is not irrelevant. You can choose to ignore it at your peril. And I suggest that you can ignore it successfully today, if you were able to forecast it accurately 6 months ago. Why six months? It’s relatively arbitrary, but today I heard some smartie use this line and say the market looks forward by 6 months, so 6 months it is. Today, when investors are bidding up UBS 14% because it supposedly put $19 billion of writedowns behind it, can you say for certain that 6 months ago you forecasted today’s loss? If you did, then go ahead and ignore it. If you are now looking forward with certainty that there will be no more writedowns from the $31 billion in mortgage-backed securities still sitting on UBS books, then ignore it. I have no idea how to do that but if you do, you have every right to keep repeating that markets look forward, not backward.

Does the market discount optimism as well as it discounts negativity? Listening to the bulls, you will likely come away believing that any discounting of a bad economy or bad corporate profits in the future is irrational and excessive and flat out wrong. How many times in the past 6 months have you heard that the worst was behind you? Or that the banks wrote down more than they needed to?

Here’s the key point. The market should look backward. It should try to learn from the failures of its previous attempts to look forward. It should also try to learn from the successes of its previous forward estimates. The market DOES look forward. That’s a given. But it does not do so with the accuracy that the statement implies. Sometimes the market looks forward and fails to see the dangers in front of us. We’ve done that 6 months before the market peaked in 2007 and 2000 and at many times in history before a crash or bear market. The market DOES look forward, but in this recent decline, there has been a constant attempt since it began to look forward to happy days.  Except for me and a few other people criticized for being negative, most market participants did not look forward with accuracy about market risks before this decline.   The market did not look forward accurately a year ago or 6 months ago.  I have no belief they are looking forward with accuracy today.  Now that today’s big rally is over, it is in the past.  Are you looking forward?

UBS AG and Citigroup Inc., the biggest banks in Europe and the U.S., rose in stock market trading on investor optimism that their reports today on fixed-income losses may represent the low point for earnings.

That’s a good summary of today’s market action. AND IT’S THE OPENING LINE FROM STORIES ON OCTOBER 1, 2007 - EXACTLY 6 MONTHS AGO (please click here).

On April 1st it seems surreal to discuss the old line about “fool me once, shame on you…” We’ve done this more than once and more than twice. Each time big losses get announced, the fools will try to convince you that this is the last one and this is the “kitchen sink.” Okay - I got it.

I love practical jokes and I’ve done quite a few April Fools stunts over the years.  But when it comes to finance and investments, people losing money because of a prank is not funny.  It takes so little to spike the market on rumors and whether it’s meant to generate a laugh or not, bloggers and the media need to consider their responsibility.

Many people(not just politicians) complain about oil companies making so much in profits. The assumption is that these profits are bad, especially when consumers are struggling to fill their tank. It used to be that $3 per gallon of gasoline would really get people whining. And yet, their consumption behavior didn’t change. Now, it seems that $4 is the new threshold of pain. There is some price level where Americans will reduce their consumption, but we are not there yet. So on a day when Congress is showing their desire to determine which industries are allowed to have earnings and which profit margins are “excessive”, I could not pass up the opportunity to rant. What would the politicians and populist Americans say if gas was at $4 per gallon and oil companies did not have profits? Are consumers more angry about gas prices or oil industry profits? Be grateful the oil companies are profitable with gas above $3.30 per gallon. If we ever get to the point where consumers cannot handle gas prices and oil companies cannot be profitable at those levels, we will be in very bad shape.  The same goes for any other product.