Week 3 Performance Update and CERN Moves

Go LIVEROCKET! Up 9.4% since inception 3 weeks ago
Portfolio Performance to date: 9.4%
Weeks since inception: 3
Week 3 is a holiday week. The portfolio matched the broader market for the week and added 1.5% to the portfolio value.

For the 3 week period, the broader market is up 3.1% (Dow) ~3.9% (S&P).
Liverocket is up 9.4%.
We are well over our target of exceeding the broader market by 2% per month.

Getting Ready to Make Some Trades
I think we need to look at some stocks in the portfolio and decide if they are getting overbought. And, if so, how to manage.

Getting Short
In simple terms, short interest is a sign that investors think a stock is heading down. Investors borrow and sell shares in a gamble that the stock will get cheaper and they can buy it back cheaper. Every stock has short sellers. Some stocks have more than their share, and that inevitably distorts prices.

Imagine that you borrow a gas tanker when gas was $50 a barrel, then you sold it. You thought gas would go down, but it goes up to $70. You have to buy that same amount of gas back at $70. If a lot of people are doing the same, a scramble is on to find enough gas - and demand drives prices.

The same hold true for stocks. Short sellers get nervous and start to unwind their bet by buying shares. That adds more fuel to the stock price and sends the price higher. Which in turn touches off a stock price inflation cycle.

Let’s look at Hansen (HANS) which is NOT in our portfolio. Hansen scored big with its high sugar, high caffeine drink called Monster. I owned and recently sold HANS because I just don't see accelerating growth. I don’t think these drinks are a fad – they’ve been around Japan and Europe for almost 20 years. I see limits to the niche market growth. It is now worth ~13% of Coca Cola, which is obvious exuberance for a company that has ~0.5% of Coke's sales.
Hansen's short ratio toda is 34%. That is: of the total shares available for trading, 34% have been borrowed and sold short. That's a $550M bet that the stock will drop. And the bet keeps growing not just in dollar terms, but more importantly in the amount of shares being sold short.


Stock Price Growth from Speculation
Some of the stock price growth comes from new investors and momentum players. But most is from short sellers caught out. They bet big against Hansen and now need to buy Hansen stock to cover. They are responsible for the demand that drives much of the price.

Typically, these situations play out with the stock spiraling upwards until a breaking point is reached and the price collapses. After all, the demand for the stock is not an investment demand but the opposite.

Short selling in LIVEROCKET portfolio
Jetblue (JBLU), Cerner (CERN), Blue Coat (BCSI) all have short interest >10%. The one that concerns me most is Cerner with a 28% short ratio.
That’s a big bet against this company. It begs the question: is Cerner stock price growth coming from short interest? Because if it is – we need to prepare an exit.

In reviewing the data, I don’t see major disconnects between the price and the underlying fundamentals. I do see that the price is high, but no more than other growth companies and certainly not like Hansen. In other words, I don’t see warning signs. And they are in a major growth market: IT integration in the healthcare industry. GE is making significant moves into this market – a sure sign of growing recognition of the growth opportunities.

At the same time, betting against the market is not necessarily a winning strategy. Let’s lock in our gains by setting the Stop at $93.

BCSI $41
PWR $13
WFMI $140
GILD $51
CERN $93
MRVL $52
JLG $42
GYI $89
JBLU $17.5
DESC $9

The Stop levels lock in profit at 6 out of 10 stocks. The gains would be slight at this point, but it shows that we are now in the money.

Iran Blowback Part 2 and BCSI

Iran is up to no good
Hezbollah attacks Israel not more than a day after I raised the idea that Iran and its proxies would stir things up. This absolutely reinforces my message: Iran related activity could escalate into market impacting behavior.

Worrisome
The recklessness of the staged attack is alarming. Israel knew the attack was forthcoming: publicly warning Hezbollah for the last few weeks. Nevertheless, Hezbollah assembled hundreds of fighters to launch 100 mortars per hour for 5 hours. Had they succeeded in kidnapping Israelis, the outcome would have been as follows. The Lebanese government army could do nothing to free the Israelis, essentially embarassing them and setting the stage for a Hezbollah takeover of Lebanon. Additionally, such disruption would reinforce the Syrian message that they are necessary for maintaining calm in Lebanon.

In effect, the incident would have blocked Western efforts to transform Lebanon and, more critically, distracted from the current pressure on Syria and Iran.
It indicates the level of Iranian and Syrian desperation. It suggests that more attacks are likely and that Iran is beyond sabre rattling.

Prepare for turbulence
Set Stops on all stocks. It will be hard to know when this may turn into a market impacting crisis. Expect that most stocks will be cashed out.
Expect volatility. Stocks will bounce up and down for a while. If oil supplies from Iran look to be affected, expect things to trend more down than up. Stocks will bounce up and down in 3% cycles. Those cycles will probably be short term in nature - 1 week long. Three strategies
1. Sit out until a bottom is established
2. Jump in at a low and weather the volatility
3. Play the volatility by jumping in when stocks tank and jumping out when they rebound.

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BCSI is coming back
As previously stated, the price drop last week was a fabulous buy opportunity. We got in at $39.5. It is up to $45.5 today. Whoever followed my advice is sitting on a 10%+ gain in one week.

And this is a great time to revisit the value of setting Stops. We bought at $50 and set a stop of $45. This was triggered. We then bought back at $39.5. The Stop capped our downside and let us get back in at a much lower price. As a result, despite a 20% stock price drop ($50 to $40), we are ahead.

Blowback from Iran?

I will keep my social/political thoughts to myself. But I can't help but wonder if I'm seeing a pattern - and if that pattern will affect the market.

The subject is Iranian efforts to get the bomb and counter-efforts to block them. Put aside whether they are or are not trying to get a bomb (they are). Focus instead on what could happen at the UN and what the impact will be.

Bush trip to China a Smoke Screen?
Usually high level trips like these achieve concrete goals, already hashed out in advance. Economic prizes are awarded, political concessions made. China announced more airplane purchases, but nothing else that I know of. It's like the agenda is vague.
Meanwhile, this trip follows hard on the heels of China's Premier visiting the White House last month. And now this week Russia announced it's concern with Iranian nuclear ambitions.
I think Bush is lobbying China hard. He has removed Russia as a potential veto threat on Iranian sanctions. That leaves China. China can hide behind Russia no longer. China no longer has wiggle room. Handling North Korea will be harder if it lets Iran get away with the same thing.

What next?
Sanctions. Economic sanctions. No direct market impact, but psychologically, it shows the US picking another fight. That's a potential market shock. And Iran has a history of threatening and retaliating (albeit through proxies). Iranian spies have been caught throughout the West in some strategic locations with video cameras, scouting out locations, one might say. They are sending a message: we can strike back. We have many willing proxy groups in Iraq, in Lebanon, in Europe, and in South America. I believe the recent bombings in Iran by unnamed Arabs were a message back to Iran by the Western Allies: we too can hit back.

How it could Play Out
One scenario is that Iran will play ball, choose a slower path to nuclear weapons, and maybe throw some Al Quaeda guys out as a sign of good faith. Syria has been taking that tack the past few months by kicking out some Palestinians and Iraqis.
Or, Iran will direct their cells to stage terror attacks in Iraq, Europe or elsewhere. Or they will practice sabre rattling and say "no." Both of these paths will lead to sanctions.
The market will drop, and that will be a major buying opportunity.

In any case, the drama of a UN showdown will affect oil prices (fears over oil supply disruption) and cause general market nervousness.