Mark Gomes'  Instablog

On days like this, most people say, "Ugh! I'm losing money on my longs!!". I look at it as "Ah! I'm making money on my shorts!!".

When I make enough money, I like to take some off the table. With the market down heavily today, I'm making a lot on my shorts. So, the question becomes, "Exactly HOW should I cash in some chips?".

The obvious answer would be to cash in (or more accurately "cover") some of those shorts. That's not my answer though. Instead, I leave my shorts alone and buy more shares of the cheapest stocks I like best (assuming that they are down as much as the market is).

RNWK is a good example. The stock is currently down 10-cents to $3.30 (-2.65%, close to the NASDAQ's -3.14% move today). However, RNWK has $3 in cash. If you exclude that cash, you could say that RNWK's Enterprise Value (stock value minus net-cash) is down 10-cents to 30-cents, which is down 25%. I'll happily take that discount.

Usually, when I buy a stock, I will also increase my short positions to protect me against market declines (a prudent fear over the past decade). However, I also wanted to lessen my shorts, because they've made a lot of money today. Those two needs offset each other, so I do nothing with my shorts and simply buy a little more RNWK.
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Another thing I like to do on days like this is to buy companies that have already been acquired, but where the deal hasn't closed yet. M&A deals have to close, just like when buying a home.

For example, if a $7 stock gets acquired for $10, the stock will immediately jump to $9.75 and then slowly make its way to $10 as the closing date approaches.

On days like this, many of those stocks will go down along with the market...but if the deal is still going to close, that makes no sense! Each day that passes gets us closer to the close-date, so each day should see the stock get closer to $10. When that doesn't happen, it eventually has to play catch-up...so I use some of my cash on the sidelines to buy stocks like that and sell it when it catches up.

Today's example is DBTK. DBTK was acquired for 10.55, but the deal hasn't closed yet. The stock was 10.54 on Thursday, but has since dropped with the market to 10.47. That doesn't seem like a lot, but that's almost 1% in 3-days. That's about 75% annualized...and that annualized return is yours for the taking by buying the stock today and waiting for it to recover.

Your only risk is that the deal falls through, but that almost never happens. Just to be safe, always check the news to make sure the stock is simply down with the market and not for some reason related to the deal. In DBTK's case, that's not the case...so I'm buying that today as well.

Similarly, I like buying more MERFX (The Merger Fund) when the market is down. On days like this, the merger fund will drop because it owns companies that have been acquired, but where the deal hasn't closed yet (they probably own some DBTK). When those stocks rebound (or when the deal closes) the value of MERFX rebounds as well. So, down days are perfect for buying MERFX.
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These are little moves that produce small profits, but it's nearly free profit Over time it adds up!

Q&A

Q) Mark - are you shorting particular sectors?

A) Good question. I generally don't pick specific sectors. Instead, I short the S&P (via SSO) to get broad exposure to the average stock.

I also short the Russell 2000 (via UWM) to bet against the average small stock. Most of my picks are smaller companies. In a way, I feel that I have own an all-star team of small stocks. Shorting UWM is like betting against the average small stock. This way, to make money, all I need is for my all-star team to do better than the average small stock. This is a great strategy during dicey times like this.

FYI, smaller stocks also tend to do worse when the market drops. As such, I'll short extra shares of UWM when I think the market is at a very high risk to drop...like now.


My Current Portfolio

This is my portfolio as it stands this morning. I am also short a large quantity of SSO and UWM, as I mentioned above. If you want your portfolio to be as short as mine is, take the total value of the stocks you own (a.k.a. your longs, divide that by 6 and short that amount of SSO; also, short that amount of UWM.

If you CAN'T short, you can get similar protection by BUYING that amount of SDS and TWM. SDS and TWM will short the S&P and Russell (respectively) for you. They don't perform quite as well as true shorting, but when the market is dropping, it's much better than nothing.

FYI, you'll notice that I've added a couple columns. "Cheap" means that I think the stock is cheap...but that doesn't mean that the timing is right to buy it. The "BuyNow" column covers that base.

Ticker	Company	Price	Position	Cheap?	BuyNow?
OCNW	OCCAM	5.99	9.7%	*	*
NOVL	NOVELL	5.96	7.7%	*	*
SDBT	SOUNDBITE	2.89	5.8%	*	*
IGOI	i-GO	1.54	4.5%	*	*
RNWK	REALNETWORKS	3.36	4.1%	*	*
BVSN	BROADVISION	11.96	2.3%	*
SNIC	SONIC SOLUTIONS	8.46	1.6%		*
MDRX	ALLSCRIPTS-MISYS	16.53	1.6%		*
LAVA	MAGMA DESIGN	3.08	1.6%
ZHNE	ZHONE	1.59	1.5%	*
OPWV	OPENWAVE	2.16	1.4%	*	*
EPAY	BOTTOMLINE	13.41	1.3%		*
VTAL	VITAL IMAGES	13.05	1.3%	*
DWCH	DATAWATCH	3.07	1.1%	*
QADI	QAD	4.38	1.1%	*

Cheers,

G.
 

An important secret to getting richer is NOT getting poorer. In other words, protecting your money during times when the stock market is overvalued makes a BIG difference.

For example, let's say you had $100,000 invested in the NASDAQ on January 1, 2000. If you just left it there, you would have less than $57,000 left, as of this morning.

However, if you took your money out of the market for just HALF of the 2000-2002 drop and half of the 2007-2009 decline, you would have over $250,000 today -- over 4x more than people from the example above...and that's if you simply stuffed your cash under a mattress during those drops. If instead, you shorted stocks during those times, you would have $1,000,000.

It's not as hard as you might think. All you have to do is see the writing on the wall and act accordingly. Looking at the two market crashes referenced above, both were precipitated by asset bubbles (Internet stocks in 2000 and housing in 2007).

The formula is simple. When money flows like water, people party like it's 1999...and the bigger the party, the bigger the hangover.

Why do you think the "Roaring 20s" was immediately followed by the "Great Depression"?

Think about it.

With that, here are a couple of sobering, but critical articles to read.

http://seekingalpha.com/article/212123-the-third-depression?source=article_sb_picks

http://seekingalpha.com/article/212090-what-happens-when-the-monthly-jobs-report-goes-negative?source=yahoo

My most immediate concern is that unemployment benefit extensions appear to be coming to an end. This is troubling news for nearly 10 million Americans, who are currently receiving unemployment insurance in some form. It is also troubling news for the rest of us. If 10 million people suddenly have less money, the rest of the country will suffer.

This comes at a time when census work is coming to an end (if you've been hounded by census workers, you're probably thinking "good!" -- however, the end of the census means the end of work for over 1 million people). In addition, home-buyer incentives have expired, the impact of stimulus money is starting to wane, and Europe is wrestling with a debt crisis.

With all of these factors in play The government can help to avoid a double-dip recession by lowering interest rates or providing more stimulus. However, interest rates are essentially zero already. Meanwhile, stimulus has become a dirty word. With elections around the corner, additional stimulus may have to wait until next year.

By then we could be too close to the cliff to slam on the brakes.

As a result, I am back to increasing my short positions. I am also reducing the NUMBER of stocks I own, but owning more of the stocks I like best. In particular, I just bought more shares of OCNW. I think that's a good move at its current price of $6. Their business will be driven be stimulus money for the next 2-years, so a double-dip recession will hurt the company much less than most. In fact, I expect its revenues to grow nicely regardless of what happens to the economy.

Cheers,

G.