Archive for April, 2010

*Blue Plate Special* Portfolio 4-23-10

Friday, April 23rd, 2010


Stocks in blue are more speculative issues. See 4/21/10 blog for complete fund details.

*Blue Plate Special* Portfolio 4-22-10

Thursday, April 22nd, 2010


This fund commenced yesterday. See yesterday’s blog for complete details.

New Portfolio: The BPS Portfolio

Wednesday, April 21st, 2010

Five years ago I designed and managed a portfolio based on the technical criteria that I use to generate my daily Blue Plate Specials (see column on the right). It was a long/short equity only portfolio, meaning no funds, ETFs, futures, or options were allowed. It returned an uncompounded average of 40% for a year. I thought it would be interesting to reconstruct such a portfolio so that my readers could see how to use the information in the Blue Plate Specials for their own portfolio management.

My second goal is to find out how such a portfolio will do in the current market environment. Will I be able to return 40% this time?

Portfolio guidelines
My portfolio guidelines are as follows:

1. A bull market is defined as when the S&P 500 index is above its 40 day (exponential) moving average; a bear market is when it is below it.

2. Every day during a bull market, 10 stocks will be selected as long plays. These longs will be selected from the following lists:
 *  Breaking out to new highs (on higher than normal volume)
 *  Breaking out to new highs on lower (than normal) volume
 *  Breaking out (on higher than normal volume)
 *  Breaking out on lower (than normal) volume
 *  Low-priced leaders
 *  Speculative leaders
 *  Darlings of the Day

3. Of these long picks, at most only 3 can be chosen from the Speculative list. (This is to limit portfolio risk.)

4. During a bull market, no stocks will be shorted.

5. Each portfolio will be automatically closed out at the end of 11 trading days. Individual stocks will be closed before that date if they trade through their stop/losses. Stop/losses will be entered at the time of purchase and will be based either on support levels or if there are no appropriate or apparent support levels, a percentage value will be used based on their average true range (ATR).

6. Stocks will be selected based on technicals only, although if a major upcoming fundamental event has the potential to adversely affect near-term value, that will be taken into account (for example, a highly anticipated earnings release which, if not met, would send the stock plummeting).

7. During a bear market, the long portfolio will be closed and a short portfolio initiated. Up to 5 short positions will be selected from the following lists:
 *  Breaking down to new lows
 *  Breaking down

8. Only stocks over $5 will be shorted.

9. During a bear market, no long positions will be held.

[Important Note: For those of you who are not comfortable taking short positions, just stay in cash or cash equivalents (money markets, etc.) during bear market periods. ]

10. The management of bear market portfolios will be the same as in the bull market case except with a more vigilant eye as to maintaining stop/losses. If the market moves violently against a position, it will be immediately closed out to prevent further loss. (The short side is trickier to manage than the long side because of increased volatility.)

11. All positions will be equal dollar weighted which I think is the least risky approach. To minimize risk even further, I’ll be taking half positions on the short side unless volatility rises above 30 where I’ll then put on full positions.

12. No commissions or trading fees will be used in the calculations as the impact of these has differing effects based on the total value of the portfolio and on the actual commission costs.

Other criteria
For management purposes, I’ll be starting out with $1000 per long position. This gives a starting value of $10,000 per portfolio per day. Since at most 11 portfolios will be managed at any given time, that means that the total starting value will be $110,000.

Buy prices will reflect the price at the time of placing the trade. Note that right now this is a virtual portfolio but every effort will be made to simulate actual trading conditions. Market orders will be used except in the rare case of those (usually) speculative stocks with low trading volumes where limited orders will be put on. In this case, a virtual trading platform will be used to simulate the actual trade. (I’ve used this before and it works very well. When a real trade of similar size gets executed at the limit price, the virtual trade is also executed.)

The total portfolio will be rebalanced on or near the 15th of each month. If there’s a net gain over the previous month, then the extra monies will be equally distributed to the subsequent daily portfolios. For example, if a profit of $11,000 is realized the first month, then the total value of the daily portfolios will be $11000 giving each position an initial value of $1100. Similarly, if there’s a loss incurred, the position values will be downsized accordingly.

Portfolios will be published here daily and a running log of total portfolio returns will be kept. I’ll need to create a new spot on the website for these features, but for right now the daily portfolio will be published here in the blog section.

Here are today’s long picks (the last three in blue are the more speculative stocks):


Trade of the Day: Royal Bank of Scotland (RBS)

Friday, April 16th, 2010

If you could name a winner in today’s Goldman Sachs’ fiasco it might just be the Royal Bank of Scotland (RBS). Severely beaten down in the credit crisis, the stock has been slowly rebounding off a double bottom. (See daily chart below.)

And the picture is getting even rosier for the bagpipers. Today, not only did the bank receive price target increases by both Morgan Stanley and Bank of America/Merrill Lynch who said that it sees the company turning a profit this year and doubling in value over the next two years, it also benefited from holding ABN Amro, a victim in the Goldman fraud. Who would have thought an acquisition that nearly ruined the bank during the credit crisis two years ago requiring the largest government bailout in history would be an asset today?

Today’s share price is the level-water mark for the British government who said that it’s in no rush to sell its 84% stake in the bank. And why should they? With positive comments from major investment houses and a compelling stock chart, I wouldn’t sell, either.

A doubling of the current $15 price gives a $30 target, the stock’s pre-crash price. This is not an unreasonable goal considering that the stock debuted here as an ADR (American Depository Receipt) in 2007 at $70.

Options plays
The stock is optionable. Nov 20 calls are currently priced around 40 cents per contract and might make an attractive, inexpensive mad money bet. The Nov 17.5 call is a less risky bet but you’ll pay more for it.

A more conservative play would be to write out of the money covered calls as the stock rises. You could also sell an at the money bull-put credit spread and use the credit you receive to buy long-term calls. [Note that options plays are legal in retirement accounts, but you must be cleared to trade them by your broker meaning that you had better know what you’re doing.]

Every cloud has a silver lining; you just need to know where to look for it. Happy haggis!

RBS Chart 4-16-10

From junk bond king to fund-raising prince: Michael Milken still knows how to raise capital

Monday, April 12th, 2010

Milken Conference

Spring in Los Angeles is punctuated by three high-profile events: the Academy Awards Ceremony, the LA Marathon, and the Milken Global Conference.

Of the three, the Milken Global Conference is the least well known due, in part, to the fact that it’s only been around for thirteen years. But that perception is beginning to change as it continues to attract high-profile participants culled from government, business, and the media. The conference is always held in Beverly Hills at the end of April (April 26 – 28).

Headliners scheduled for this year’s conference include California governor Arnold Schwarzenegger and his wife Maria Shriver, financial journalist Arianna Huffington, media mogul Sumner Redstone, breast cancer activist Susan Love, tennis great Andre Agassi, and Harvard economist Nouriel Roubini along with a slew of CEOs from major corporations and investment firms. The Milken Global Conference is considered by many to the be western equivalent of the World Economic Forum held annually in Davos, Switzerland.

Because of its high-profile nature, this event attracts those interested in networking and advancing their careers so naturally the price of doing some power glad-handing doesn’t come cheaply. This year’s admission ticket is $4295, up $300 from last year. The 3000 available slots at this price have already been filled (as of this writing) but if you want to pony up the $6000 annual membership fee to the Milken Institute, you can still get a seat.

The other way to go is to become an event sponsor, and this year there around 70 of them. Many of the sponsors have current dealings with the Milken Foundation or are spearheaded by former Milken colleagues, employees, or cronies. Each panel breakout session requires a sponsor. According to a conference insider, the sponsorship cost per breakout session comes with a minimum $50k price tag (I’m betting that the high-profile keynote events cost considerably more), and there are roughly 160 scheduled sessions as counted from the program.

This yearly conference is the major fundraiser which supports the activities at the Milken Institute. These activities include analyzing global capital markets, identifying regional economic dynamics, applying financial innovations to social, political, and economic challenges, investigating health trends, and accelerating the introduction of new disease treatment therapies.

One would expect that maintaining these loftly pursuits would require a fairly sizable chunk of change. To that end, let’s see how much Milken is able to raise via his Global Conference:

Admissions: $12,885,000 (3000 x $4295)
Sponsorships: > $8,000,000 (160 x $50,000)

Total: > $20,885,000

Raising a minimum of $20M via a single event is nothing short of phenomenal. But hey, when you’re dealing with the guy who helped revolutionize the capital markets, conquered prostate cancer, and whom many folks consider to be the brightest bulb on the Christmas tree (Hanukkah bush?), one wouldn’t expect anything less.

[Photo source: Milken Institute on Facebook]