Thursday, August 9, 2007 0 comments ++[ CLICK TO COMMENT ]++

Random Thoughts for the Day

When it comes to some ideas and thoughts running in my head, I'm not sure if I should post seperate, longer, blog entries or lump them into one post. For now, I'm going to post once a day with seemingly random thoughts. I'll mention whatever I find insightful. You won't find general market commentary here, unless I find it worthwhile (other sites can do a better job of providing the general picture).

Market-neutral Hedge Funds Failing

Another big sell-off today but it came off big rallies in the last two days. As is typically the case with these broad-market sell-offs, almost everything is in the red except the Japanese Yen. I have maintained for a while that gold (including bulliion) is not safe during a market sell-off. Today is an example of gold selling off sharply along with the broad markets. Historically gold has had negative correlation with equities but that hasn't been the case in the last few years. The central banks in Europe and Canada also injected liquidity into the markets today.

Anyway, the point I was going to make is that market-neutral hedge funds have been running into problems. I don't know much about hedge funds but these funds are supposed to go long as well as short securities at the same time. In essence they are supposed to do well during up, as well as down, markets. Obviously this hasn't been the case. This is surprising to me because the present markets are supposed to be their strength. They underperform during bull markets (they do) and they underperform during bear markets (short funds or bond funds can theoretically beat them) so what's the point in anyone using them?

Given all the heavy swings in the market (1%-2% changes almost every other day), I think we may be at an inflection point. This could be the battle between the bears and bulls to decide whether we will enter a bear market. I'm bearish and think we will enter a bear market.

Japanese Stocks

I finally set up a Yen account and am ready to buy Takefuji (TSE: 8564). I have an interesting situation on my hands. If we enter a bear market in the US, the Yen will likely appreciate while the Japanese economy and stocks do poorly. I wonder if the Yen appreciation will off-set the Japanese equity market problems. I still like Takefuji regardless but I am curious to see how this plays out.

I mention this because currencies can sometimes move big. The Canadian dollar moved up sharply against the US$ this year. I have most of my holdings in US$-denominated stocks so I am actually negative for the year in C$ terms even though I'm marginally positive in US$ terms. I wonder if I'm going to get the opposite case with the Japanese stock.

Should I add to Delta Financial (DFC)?

DFC has been very volatile lately (just like all mortgage lenders). I am still not sure what is going to happen. There is a possibility of this company going bankrupt but it's all murky right now. I'm not sure what management is doing right now (no press releases after delaying the earnings call). The stock dropped around 40% today (from yesterday's closing price, which was already a 40% drop from peak) and then recovered all of it (you can see how volatile this stock is).

My guess is that DFC is facing margin calls. I suspect that management is trying to secure sources of lending. Some posters on some message boards speculate that DFC has 6 months of capital if the sources dried up. If that is correct then I suspect that DFC is nowhere near bankruptcy. This is probably why management did not say anything. They probably want more time to resolve these matters. If DFC is almost bankrupt, I think management would have announced their sourcing difficulties and/or halted the stock.

As crazy as this may sound, I'm thinking of adding to DFC. Or should I wait? My position right now is way too small (2% of portfolio) so it will have no meaningful impact on my portfolio. There is no point holding such a small position IMO. I need to increase it or I shouldn't have even taken such a small position. I can also wait until we hear what management has to say and then increase the position (since the thesis of the investment is that this will be a survivor, and this isn't really a bet on trying to pick a bottom).

I wonder what Mohnish Pabri is thinking? Is this his Berkshire Hathaway (recall how Buffett's Berkshire Hathaway, the original textile mill, was a disaster)? Does he have to take an active role in this company? Or is Pabri buying through all this turmoil and uncertainty? Someone has been scooping up the shares today (amazing that DFC finished +2.74% when there was a big sell-off in the markets).

Tags: ,

No Response to "Random Thoughts for the Day"

Post a Comment