Josh Stern

Companies With The Most Analyst Attention & Affection

When analyst's change their ratings it tends to move stocks. So ideally one would measure stock performance in some window starting just after whatever analyst condition is being measured. In contrast, you give YTD statistics for stocks that are all buys but they were not all buys at the start of the year.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

You should take off 12% for CDWC numbers before the buyout. Also, I don't understand the point of comparing it only to NSIT unless you are actually doing a paired trade, and here is another important number: Operating margin - NSIT 2.52%, CDWC 6.35%. That's a world of difference in either mail order or retailing.

I'm not saying CDWC was a good buyout value; but IMO it wasn't a good example to make a general point about shorting based on valuation.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

I understand from the clarification above that you mainly picked CDWC to short because you were negative on the computer industry and felt CDWC to be one of the most overvalued stocks there. Clearly that is a lot different than shorting based on valuation per se, though I'd argued that CDWC doesn't stand out as overvalued (forward P/E less than 20, ROA of 15%, trading at less than 1x sales is not super high valuation compared to, say, the disk drive manufacturers that also sell a commodity).

Re: LEAPS vs. Short - obviously depends on the goal and the option pricing and other market conditions. For something like this where the goal is to hedge and "out of the money" doesn't mean much since it could go down 75% and still be overvalued, I liked LEAPS better.

Analysts - I pay attention to analyst earnings estimates, but regard their buy/sell ratings as a mildly contrarian indicator - i.e. prefer to be long something less loved and short something more loved in terms of buy/sell ratings, since the only future upgrades or downgrades matter in terms of affecting the price.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

IMO, a good starting place for a discussion of a short position is a thesis about the expected return from the position and why one believes in that thesis. Since a high percentage of shorts are put on as hedges (either for the trader or for someone else), one can't assume that the trader's expected return for holding the position L length of time is better than a money market return over that period (or that it is even positive). So I am saying that your rational for shorting CDWC was missing from your article. Did you expect a meaningfully positive return from your short or was it just intended as a hedge for other positions in the computer hardware industry? Surely valuation per se wasn't the main basis for the trade because you didn't pick one of the most overvalued stocks. My example is that, by contrast, I've attempted to pick one of the most overvalued stocks but still regard my trade as a hedge rather than something with positive expected value.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

The concept "Don't short without a catalyst" is repeated so commonly that it is a cliche. But I honestly don't know why someone who was shorting based on valuation would focus on CDWC when there are so many more absurd valuations everywhere one looks. As an example, consider CCI - it is absurdly overvalued (price to sales of 11.5X and losing money), overleveraged, has no economic moat, decling GAAP and operating income, yet it continues to rise like a moonshot. I've got LEAP puts on it but only think of them as portfolio insurance against a market meltdown, not something I actually expect to make money on.

Think Carefully Before Macro Hedging Your Life/Work/Oil Exposures

Financial planners for the middle class are becoming increasingly sensible for several reasons: 1) increased life expectancy and duration of post-retirement years, 2) increased range of cost effective uncorrelated investment options (not just about stock vs. bond allocation anymore), 3) lots of research showing the relative importance of saving habits vs. income level in determining retirement wealth, and 4) central bank policies emphasizing low inflation as well as recent home price increases decrease the significance of residential real estate as an implicit equity investment hedge. I didn't read Shiller's article, but the advice you mention does at least make sense as part of some financial planner's recommendations.

Small Cap ETFs In a Large Cap Economy

I've long been a fan of equal weighted rather than market cap weighted indices, and I use the ValueLine arithemetic index as my benchmark - finance.yahoo.com/char...=^vay;range=my;compare...

But the disadvantage of equal weighting in the small cap space is the sheer numerosity of banks and other financials which results in an "overweighting" to financials by naive strategies - this is undesirable not because it differs from the S&P500 weighting but because it needlessly reduces statistical diversification. There is definitely room in the market for passively or quantitatively managed small cap funds that simultaneously work to optimize the Sortino ratio of the overall portfolio based on stastistical and/or industry diversification.

Lowe's Is Becoming Enticing

I had the very same thoughts about a year ago, but I didn't buy LOW because I was worried about housing. I was sort of right then about the fundamentals, but wrong about the net effect on the stock (it's up). Now I'm still worried about housing where meaningful price declines (as opposed to slowing growth) are just starting. There's potentially a triple whammy effect on LOW: 1) homeowners feel less wealthy, 2) homeowners estimate lower ROI for each home improvement dollar spent, and 3) the people fixing up homes to flip and sell them are out of the market now.

GlaxoSmithKline's Avandia: Trouble or Not?

I've wondered whether Sciele Pharma (SCRX) would get a bump off this story for their competing drug Fortamet but haven't seen any market sign of that so far. MD's are getting a lot more aggressive about treating Type 2 Diabetes precursors and other obesity related conditions, so this is an attractive place in the pharma sector.

Stocks Up, Dollar Down -- Should U.S. Investors Care?

Investors should definitely care...the question is how much, and why?

If it is only the Polish Zloty that is gaining 20% in one year against the dollar, then the amount they should care wouldn't be much more than any random 20% gaining stock pick that they missed (and maybe less than that if they didn't have a convenient way to invest in Zloty). But if we are talking about larger, multi-year moves in lots of world currencies against the dollar, then not only are the missed opportunities much larger, but there is also a much greater expectation for dollar denominated inflation to buy goods they care about, reducing the inherent value of gains in their actual portfolio.

Diversification over the effects of changes in the value of global currencies, economies, and economic sectors all make good sense.

What Readers Say About Seeking Alpha

I wanted to suggest that you should consider developing a section on investor tools. I would like to hear about the tools different investors think are worthwhile and see others' responses in the comment format. Also, this would seem like a natural targeted advertising opportunity for you.

Discover Financial Services: The Promise of Morgan Stanley's Spin-off

You should comment on the long term effect on Discover from the increased competition for its signature cash back feature - e.g. from Capital One.

Is Confidence in the Economy Warranted?

It's really hard to argue that the current rally is fueled by investor confidence in the U.S. economy. Instead I see a) companies that sell basic materials doing well in both business and valuation up because of international demand, b) companies that export doing better than forecast because of international demand, c) ADRs that are not primarily U.S. based doing well, d) continued unwinding of positive effect on earnings and dividends of favorable U.S. corporate tax treatments from last few years, e) continued positive effects from low interest borrowing rates over the last few years, f) low rate of labor cost increase due to international competition and outsourcing, and g) relative lack of compelling alternatives for parking investment cash.

The list above is not supposed to make a bull case; just saying that investor confidence in the U.S. economy may not have much to do with anything.

The Case Against Leveraged ETFs

Re Rydex:
So far SSO is underperforming Rydex Dynamic S&P. It seems like both the redemption factor with mutual funds and the creation factor with ETFs complicate things, making me wonder whether a traditional closed end fund 2X fund wouldn't make more sense.

Re: percentage of NAV in options/futures. Even if it was only 5% at a time, since the cost of borrowing is embedded in the bid/ask spread, we need to know the annual turnover percentage of the derivative position to figure out how it effects the annual cost percentage of the ETF. Consulting Morningstar for the Rydex Dynamic S&P 500, they list the cash percentage for RYTNX as 9.4 %, the annual asset turnover as 19%, and the expense ratio as 1.69%, but it's not clear exactly what those first two stats mean.

E*Trade Total Client Asset Gain Trails S&P500 In April

ETFC has heavily promoted its roster of good cash mgmt. options over the last year - e.g. 5% savings, free high interest checking, etc. I'd guess that retail investors lagged because they were significantly in cash. ETFC makes money on interest spreads with the cash, and more funds currently in cash also means more trades are required to reinvest. Besides all that, it is possible to debit Fed and State taxes directly from ETFC brokerage accounts...taking those things all together, I would be cautious about interpreting this as bearish for ETFC income.