What’s in the Szelhamos Portfolio?








 


I’m not really sure what exacty happened on Monday, but I’m not about to complain. Not when the Dow goes up 275 points.


What's it all Mean?Here’s to anarchy. Sometimes it’s just pointless to try and figure out what it all means. Just go with. Remember the courtroom scene in Animal House? “Don’t stop him. He’s on a roll.”


The general theme today was one of disconnects. Sometimes my lack of understanding and sophisitcation is the source of perceived disconnects.


Not today.


The day started with the futures pointing toward a 100 point climb at the opening bell, probably based on the absence of a European meltdown over the weekend and an orderly start to their Monday morning markets.


So far, so good.


When the bell rang the S&P 500 just jack-rabbited out of the gate. But in the meantime, the Dow was barely up a single point. Not to overly simplify, but everything else being equal, there’s generally an 8 to 1 ratio between S&P 500 moves and the Dow. Obviously on days when a Dow component, such as Hewlett Packard crashes, that ratio is off, or if trading in a specific stock is delayed, the ratio may be temporarily imbalanced.


But today, there was no great standout in either direction. Just a 90 to 1 ratio.


You could tell that Jim Cramer and Melissa Lee, on the NYSE floor at the time were perplexed, but it took a while before anyone said anything about the seeming discrepancy. No one likes to look stupid or not in command of what’s going on around them.


Finally Cramer, who’s not terribly shy about opining, correctly ventured that something was wrong with the price reporting going into the calculation of the index.


Disconnect #1. But that was resolved within 15 minutes and before you knew it, the Dow Jones was up 90 points, putting it right in line with the S&P 500, which was about 11 points at the time.


Before trading, the morning started out with what I like to refer to as the “You’re paying me alot of money to give you good information based on solid research, so here’s the bad information” Disconnect.


Research firm, Sanford C.Bernstein, based on its in-depth and proprietary research, analysis and information came out and lowered its price target on poor Goldman Sachs to $185, down from about $230.


That’s a huge drop.


But still, it’s about double Goldman’s current price.


I should mention that in it’s own humble opinion the Sanford C. Bernstein Research firm, referring to itself in the third person, claims that “Sanford C. Bernstein is widely recognized as Wall Street’s premier sell-side research firm.”


If they can help me sell Goldman Sachs for $185 right now, they’re really everything they say they are.


That’s what I call sell side.


The next disconnect is an everyday kind of occurrence, the kind that is often referred to as the “What you talking about, Willis?” Disconnect.


That occurs when seemingly intelligent people look at the same information and come up with wildly different interpretations.


Today it was the announcement that the world’s greatest value investor, Warren Buffett, seems to believe that his own Berkshire Hathaway shares are inappropriately priced.


He proposed a large buyback of his Class A and B shares.


I owned the Baby Berkshire shares when the first appeared a couple of years ago. Held them through a couple of options cycles and picked up some decent premiums, but never found the reason to repurchase shares once they were assigned from me. That’s not typical for the way I manage my holdings. I like buying shares back, albeit at lower prices.


The controversy comes as one school of thought chimes in that Berkshire must be a roaring buy now that Buffett has put out the buyback plan and demonstrates confidence in his company, which itself is just a mirror of our own economy.


The other school thinks that this is a really bad sign, since it means that the famed value investor isn’t seeing any other good values out there.


Initially ignored were the two caveats. Shares would not be purchased at a price greater than 10% of Berkshire’s book value and no repurchases would take place if cash on hand fell below $20 billion.


Also overlooked was that the last time Buffett announced a buyback about 11 years ago, there was no buyback.


He did get shares to move up nicely today, though.


Corollary disconnect? Sure, some people can nuance the truth and not be called on the carpet for misleading others.


On the international scene much ado was made of the fact that the royal Housee of Saud, the ruling family of Saudi Arabia announced that women will be given the right to vote and run for elective office.


What they didn’t say was that there was still no way for them to get to the polling place, unless their husbands provided appoval and transportation.


Also, women can’t run for King.


Disconnect between expectations and reality. Have you seen that one before.


For me, the biggest disconnect was a very pragmatic one and has me as perplexed as those on the floor of the NYSE were at the opening bell.


For yet another day, gold and silver were brutalized. Gold had another of those $100 round trips today.


Remember when gold and silver were so easy to understand? Remember when they obeyed that inviolate 35 to 1 ratio?


No more. They more in opposte directions all the time and that ratio is a thing of the very distant past.


If you’ve been reading the blog, you know that I hold shares of the ProShares UltaShort Silver ETF (ZSL). The one that moves inversely to the price of silver and is leveraged to boot, at about 2 to 1.


A month ago, I started to wonder if the price of silver were to soar would the relationship between the Silver tracking ETF (SLV), which actually holds silver bullion,  and the UltraShort breakdown. Afterall, the price can’t get less than zero for the UltraShort, while the metal can keep soaring forever.


Funny thing. That didn’t happen.


Instead today, as silver fell, a reasonable personwould have expected ZSL to move in the opposte direction and by twice the amount.


Instead, there was a little  disconnect between SLV & ZSL pricing. By little, I mean big. SLV went down 0.7%, and ZSL went down 5.1%.


Wait that must be a typo. I must have meant that ZSL went up by 1.4%


If only it was that easy. Whatever happened to perfect pricing?


I posed the question on Twitter and one responded that it was related to the hike in margin requirements that was announced this past Friday.


Sounded good, until I check back to May 2011, the last time the margin requirement was increased. On that day the moves were big, but perfectly in line with the script. Silver fell big and ZSL climbed even bigger.


But the day’s trading had even more examples.


Eddy Elfenbein, of Crossing Wall Street, pointed out that at one point in the trading day the VIX, a measure of volatility that rises as the market falls, was rising, even as the S&P 500 was soaring.I don’t recall the precise text, but his usual tone is one of humor and fact, a nice, but rare combination.


Also known as a disconnect.


Of course you can have Disconnect #3 applied to that disconnect. All you need is to find an analyst who recognized the incongruity between a rising VIX and rising S&P and state that he believes that the VIX is a more reliable measure.


And you know, that wasn’t hard to do, because people will say anything to get air time, especally knowing that no on remembers anything said more than a fruit flies half-life ago.


“I’ll go with the VIX’, after which point the S&P nearly doubled and the VIX decided it was the mixed up one and finally corrected its course to close down nearly 5%.


Helping to restore my faith in correlation was the market’s action upon hearing news that the EU and ECB were diligently working on the European debt crisis.


Upon release of that news, the market showed the VIX who was Queen for a Day.


Of course, the market’s reaction to that news would indicate that the fact that they were working diligently on a solution, was in itself a surprise.


So what does this all mean?


To me it means that the individual investor is just as likely to read the market correctly as the guys from Bernstein. The difference is that the individual investor cares more and is more tentative in making decsions and taking actions, because for them, it’s not play money. It’s the real thing and it’s theirs.


Today I just took the opportunity to pick up more shares of Freeport McMoran and Halliburton. I also sold call contracts on some of my Freeport, Textron and Sallie Mae shares.


Then I used the premiums to pick up more Sallie Mae shares and promptly sold calls on those, as well.


That’s the real meaning of all of this, making Einstein’s observation that the greatest miracle in life is that of compounding.


Amidst the confusion and the lack of rational thought, some things are just universally true.


 


 


 









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Copyright 2011 TheAcsMan