Updated MANDA Holdings

Since my last update, two companies have completed their mergers: ANL on 2/18 and PSD on 2/6. Note that a prorated dividend of $0.04448/share was paid on PSD.

Needless to say that because of the uncertain market and credit climates, M&A activity has come to a virtual halt which is the reason for the paucity of portfolio holdings. At least the fund is operating in the black, but there's still the wild card of Dow Chemical's acquisition of Rohm-Haas. There's been no news from Dow as to what they're going to do but not closing the deal is costing them $90 million a month. Dow recently slashed its dividend and cut 5,000 employees as part of their cost-cutting efforts.






(Click on table to enlarge.)

The Holland M. Ware system for making millions in the market

Are you wealthy? If so, are you tired of watching your investment returns shrink? Fearful that your money manager is a crook? Worried that you'll have to give up your private jet and a few vacation homes?

Well, my friend, fret no further because now it's possible for you to take the matter into your own hands and generate $millions$ in the market in just a short time.

Sound too fantastic? Believe me, it's not. And it's so simple even the E*trade baby could do it!

Introducing the Holland M. Ware no-brainer “Get richer quicker!” system
In this system, you'll learn how Georgia-based timber baron Holland M. Ware recently pocketed a cool $7.5M and possibly more on the stock of Forestar Group (FOR), a Georgia real-estate holder and developer also involved in mineral and timber royalties. You'll also see how Ware's attorney, David Cook of the Jacksonville, Florida law firm of Foley & Lardner, netted $1.1M by riding his coattails.

Here's how they did it and how you can do it, too.

1. Purchase over 5% of a company's stock at a depressed value.

Below is a chart of Forestar.




















The company made its public debut at the end of 2007 near $23. A month and a half later it made an all-time high of $29.49. After that, it hung around in the high-teens to mid-20s range, but it wasn't until late September, 2008 that it finally broke below $15. It sank like a ship's anchor until it hit bottom in November at a price of just under $3. Ware and his attorney begin accumulating shares in the company during this time period, according to three SEC Schedule 13d filings dated 2/12/09, 1/22/09, and 12/19/08.

Holland Ware: Purchases over 2.6 million shares for $14M between 11/30/08 and 1/5/09.
Purchase prices range from $3.50 to $9.00; average cost/share = $5.35.

David Cook: Purchases 231,500 shares for $1.5 million between 10/31/08 and 1/20/09.
Purchase prices range from $3.36 to $9.00; average cost/share = $6.10.

2. Make an offer well above the average price you paid for your stock but still below what the company is worth. (If for some reason the board actually accepts your offer, you can always rescind it. Maybe that's one reason why Ware's attorney was involved.)

On 1/22/09, Ware makes an unsolicited offer to buy Forestar at $15 per share, much higher than the average cost of his stock but well under historical price levels. The next day Forestar stock jumps to $12, 30% over the previous day's closing price of $9.24.

3. Start dumping your stock at inflated prices while the board considers your request.

Both Ware and Cook begin selling their shares starting 2/4/09.

A couple of weeks later on February 11th, the Forestar board rejects Ware's offer because it “significantly undervalues” the company. That day, Ware unloads more than 1.2 million shares of Forestar stock.

Ware's last filing with the SEC on February 12th showed that he had sold all but 444,230 shares for a total sales price of $21.5 million leaving a net profit (so far) of $7.5 million. We don't know if he's sold the rest of his shares, but I can't think of a reason why he'd want to keep them. Assuming he did sell them in the next few days at an average price of $8.90 (the middle of the price range), he'd gain another $4 million giving him a total of $11.5M yielding a nifty return of 80% in a little over two months. Looks like he can afford to keep that jet.

As for his lawyer, the same SEC document shows that Cook had disposed of all of his shares for a total of $2.6 million. This leaves him with a gain of $1.1 million for a return of over 70%. Sure beats trying cases for a living!

Caveat
Be aware that the SEC could view this as stock manipulation, but the onus of proof is on their side, not yours. It helps that Forestar has significant timber holdings which Ware could use as the main argument for his acquisition offer. It's also interesting to note that on the very same day that the Forestar board denied Ware's offer, they also announced their commitment to increasing shareholder value by doing a share buy-back, slashing debt, and selling some 175,000 acres of timberland. Interesting, no? Maybe Ware can use the proceeds of his Forestar stock transactions to buy this acreage at firesale prices. Could that have been his intent all along..?

As an extra bonus
If you purchase this product today, we'll throw in Holland Ware's strategy on how to save millions in taxes. Here's how it goes. In 2007, Ware took advantage of a loophole in Georgia state law that exempted charitable institutions from paying property tax. What he did was to donate over $100M in timberland to his anti-animal abuse charity (aw!) that up until then had only $300,000 in assets. Unfortunately, the state legislature didn't let him get away with it, but I think if he could have been a bit sneakier he might have been able to pull it off. (See January 27th blog for more info.)

Can we tempt you further?
Okay, if you're still not convinced to buy this product we'll throw in the names of some top-notch white collar criminal defense attorneys just in the event something goes wrong. But nothing should. This is a time-tested formula used by Ivan Boesky and many others, so why not give it a try? You have nothing to lose but your reputation as being ethical but when was that ever a criterion for making money on Wall Street?

Danger Will Robinson!

A quick note on the state of the market. As we saw in my January 26 blog, the market at that time was at a critical juncture with the major indices testing major support levels. Well, folks, today we're right back down there and unless there's a significant turnaround in the last hour of trading, we could be looking at a complete market meltdown.

Generally lauded by technicians as a leading market indicator, the Dow Transports, the DTX, has broken major support at 290. The VIX, the volatility index, gapped up over 12% today--also a bearish sign. The XLF (the financial SPDR) and the RKH (the Regional Banks Holdr) are both testing their all-time lows.

Apparently, the fact that Japan, the world's second largest economy (still?), suffered the worst quarterly decline in 35 years along with the Empire State Manufacturing Index coming in at its all-time low didn't help the already sour mood on the Street where most folks believe the stimulus package will do anything but.

So, what should we do besides wring our hands? My recommendation is to move your longs into cash, if you haven't done so already. For the time being, cash is king. Gold is also looking very attractive and the gold ETFs have been stellar performers over the past couple of months. The most heavily traded pure gold bullion ETF is the GLD but the GDX which represents the gold miners is also worth a look. If you're heavy into gold, I'd suggest a mix of both ETFs to reduce your sector risk.

The more risk tolerant can buy LEAP put options on the DIA, the Dow tracking stock, or the SPY, the S&P 500 tracking stock. Remember that an increase in volatility also inflates the price of options, so a bear-put debit spread (buying the higher strike and selling the lower one) would help to offset that. An at-the-money or slightly out-of-the-money bear-call credit spread can bring cash into your account. For most of the near-the-money strikes, options are very liquid on both of these instruments. (Note your broker's margin requirements regarding these plays.)

That's about it for now. Just wanted to give everyone this important heads-up.

More on the dangers of leveraged ETFs

This wasn't supposed to be the topic of today's blog but in doing research that will now appear in Monday's edition I stumbled upon a very interesting video on Morningstar that backs up my observations made in Tuesday's blog concerning the dangers of leveraged ETFs. If you've never heard of Morningstar, they're the guys who do the mutual and ETF fund ratings. They have an excellent (and addicting) site that I don't visit often enough but when I do, I usually spend far too much time.

To continue, at the bottom of one page was a link to one of their videos (shown in two short parts) entitled “Returns at these ETFs Could Shock You.” Intrigued by the dramatic title, I watched them both, and am glad I did for they expand upon Tuesday's blog and explain in detail about the dangers of leveraged funds—the double longs and the double shorts and employ graphics to show how that even a sideways fluctuation in the market (due to extreme volatility) can produce significant losses on both the long and short sides.

In doing their research, they said these leveraged ETFs perform as stated in their prospectuses. Performances over one day mirror +2x/-2x that of the indices they track.

Their recommendations were that if you can't monitor nor afford to trade these ETFs on a daily basis, you'll most likely not be happy with your returns. My take is to look at the historical charts and compare them their underlying indices or comparable funds. If there's a divergence, stay away, and do make sure that the fund has a long enough track record—at least a year as well as over a period of abnormal volatility (like now).

I'm thankful for this diversion because the article I had intended for today wasn't nearly as cheery nor as easy to research as I thought. And I wouldn't want any of my readers to be bummed out over Valentine's Day.

Here's last year's Valentine image sent out from Bernie Made-Off. Have a lovely one!

Correction and addendum to Tuesday's blog

As many of you know, I'm a contributor to SeekingAlpha, a website that is a compilation of many financial viewpoints dedicated to helping investors and traders gain insight into the financial markets. I feel especially honored to have my work included as their readers are savvy, sophisticated, and well-informed. Their ranks span the home investor to the institutional portfolio manager, analyst, and trader. In short, they're good and they know what they're talking about. And when they comment on my articles, I listen.

The DUG is out
I had several great comments concerning Tuesday's blog that I feel I should address here. The first one concerns the makeup of the DUG, the double inverse oil and gas ETF. I was wrong in my assumption that the fund tracks the price of oil and gas. I tried to find the fund holdings but since neither MSN Money nor Powershares, the ETF's fund family, listed any I erroneously assumed that it was tracking an index.

This is not the case. The Dow Jones Oil & Gas Index that it tracks is made up of oil and gas producers along with oil equipment, services and distribution companies. In short, the DUG is based on equities not the commodities, and as such I was essentially comparing apples to oranges. (Well, maybe lady apples to Rome Beauties as we're still talking about the performance of the oil and gas sector.) That was my mistake.

The DTO is in
Right now there are 131 ETFs involved in natural resources. I have ten on my oil and gas list which I must admit hasn't been updated in a while, so I missed the DTO which is a double inverse fund that came into being last June. It's specifically designed to track the spot price of oil* and is the correct fund to use if you're really bearish on crude. You can see from the charts below that the DTO does indeed accurately mirror the inverse movement of the USO, the US Oil Fund.





Since oil peaked on 7/11/08, the USO has lost almost 80% while the DTO has gained more than 800%! Wowie!

Why the DUG is bad and the DTO is good
In Tuesday's blog we saw that market volatility is a major influence on the DUG. So, how come volatility isn't an issue with the DTO? The difference here is that the DUG is based on an index of stocks while the DTO is based solely on the price of oil and is thus independent of the volatility that affects the equity markets.

Summary
Thanks to the acumen of those who commented on my article I was able to make this important correction. On a side note, I did receive a very misogynistic comment (from a fellow alum no less!) about how MIT is letting too many women graduate, among other things. A friend of mine who is in the media said that you know you've finally arrived when you get flamed in print. I guess Tuesday was my coming out party.

*The PowerShares DB Oil Fund (Symbol: DBO) is based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Oil Excess Return™ and is managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and is intended to reflect the performance of crude oil.

Note that the DTO is not optionable.

Beware the short and ultrashort ETFs!

What's the difference between a long ETF and its short counterpart? Theoretically, the price chart of one should inversely mirror that of the other, but as you can see from the charts below that is definitely not the case here.

The first chart is of the USO, the US Oil Fund. (The chart of the US Gas Fund, the UNG, is similar.)



The fund peaked July 11, 2008 and has fallen more than 70% since. Wouldn't it have been nice to have had a crystal ball so that you could have seen this coming and then done the opposite like, say, buy the ultrashort oil and gas ETF?

Let's examine this scenario and see what would have happened. Here's a chart of the DUG, the double-short oil and gas ETF.



The DUG did rise after oil began to implode. It returned more than 140% from July 11 to its peak price reached on October 10, 2008 where it formed a one-day island reversal (an evening doji star in candlesticking). No matter how you look at it, this is a bearish sign. The price turned around and fell 68% since then, but so did the USO. In fact, the USO has only fallen 60% since that date!

So what gives? Shouldn't the DUG be trading through the roof instead of scraping the basement floor right now? That's what one would expect. To clear up this mystery I went to the Proshares website where they explained why their short and ultrashort funds don't always perform the way they should.

There are two reasons for this.

The first, they say, is that their funds are designed to return their stated returns on a daily basis only. Here's their explanation: “Leveraged and short funds can be valuable tools for investors who want to manage their exposure to various markets and market segments. But investors considering these funds should understand that they’re typically designed to provide a positive or negative multiple of an index on a daily basis and not for greater periods of time. As a result, fund returns will not likely be a simple multiple (e.g., 2x, -2x) of an index's return for time periods longer than one day.” No kidding!

The second reason they claim is due to market volatility: “Additionally, investors should recognize that the degree of volatility of the underlying index can have a dramatic effect on the longer-term performance. The greater the volatility, the greater the deviation will be of a fund’s longer-term performance from a simple multiple (e.g., 2x, -2x) of its index's longer-term return.“

In fact, it's this second reason that explains much of the discrepancy between the two charts. Let's look at the market volatility index, the VIX.



You can see that the VIX has had quite a profound influence on the behavior of the DUG—much more than even the oil and gas index that it's supposed to track! Actually, you could almost use the DUG as a proxy for the VIX—who would have thought?

Lessons learned
There's a couple things that I've learned from this exercise. The first, and most obvious, is not to blindly assume that just because a fund says that it tracks the inverse or double the inverse of an index means that over the long haul it actually will. Because of this, one should be very careful of using these instruments as hedges, especially in highly volatile markets.

You learn something new every day. Class dismissed.

Sector summary

Banking
Lately, CNBC has been squawking about how well bank stocks have been doing lately in anticipation of the stimulus package. Sure, many of them have rallied recently, but their charts for the most part hardly scream "buy!" As proxies for this group, look at the charts of the financial spider, the XLF, and the regional banking ETF, the RKH. (In the interest of saving space, I'm only showing the chart of the RKH, but the XLF chart is very similar. )



You can see that the price has been channeling downwards. A breakout above this channel and above its $60 resistance on strong volume would be the signal to go long in this group.

Materials
The financial media has also been crowing about the comeback in the materials sector. Say what??? One certainly wouldn't get that idea by looking at the PYZ, the materials ETF. It's been doing a lot of nothing for the past several months as you can see if you look at the charts of its top ten holdings. The only bright spot in that group is the gold miner, Newmont Mining (NEW).



The PYZ has been channeling between $17 and $20. If it eventually manages to fill its exhaustion gap at $24, then that's the time I would be convinced of a turnaround in the materials.

Utilities, Energy, and Agribusiness
The utilities (UTH), energy (XLE), and agribusiness (MOO) sectors have been in the process of consolidation for months. They all sport similar charts, so I'm only showing that of the energy spider, the XLE.



Upper resistance on the XLE is at $53; for the UTH it's $100, and for the MOO (don't you love that symbol?) it's $30 and change. A break through these levels would be bullish.

Drugs & Health Care
The charts of the biotechs (BBH), health care (XLV), and the pharmaceutical companies (PPH) have also been consolidating and they are all threatening to break overhead resistance anytime now. Resistance levels for these sectors are as follows: BBH is $180; XLV is $27.50; PPH is $63.

Gold & Silver
Lately, the precious metals have been among the better performers. The GDX tracks the gold miners, the GLD holds gold bullion, and the SLV tracks silver. (Note that the SLV is a new fund and has only been around for two months.) Of the two gold ETFs, the GDX has been the hands-down winner lately, more than doubling in value since its October low. (GLD has "only" recovered 30% since then.)



The GDX needs to clear $39 resistance to continue its upward progress.

Consumer Staples & Consumer Discretionary
There are many sectors out there that look ugly, but I was mildly shocked to see consumer staples, the XLP, among them. The usual thinking is that in tough times people still need to buy food and toilet paper but apparently this time is, indeed, different. This sector has been consolidating, too, but to the downside rather than to the upside. It's sitting right near it's local low at $22 and I fear that a break through that will spell disaster for this group.



Interestingly, the chart of the consumer discretionary sector, the XLY, is better but not by much. The ETF is currently trading just over $20, two bucks above major support.

Internet Technologies
The charts of the internet ETFs are looking as if they're poised to break out of their consolidation patterns. You can check out the charts yourself: Internet (HHH), Broadband (BDH), B2B (BHH), Internet Infrastructure (IIH). Most of these are thinly traded so bear that in mind when entering a position. It's a good idea to use limit orders in these instances. For an overall look at this sector, check out the XLK, the Technology Spider. It's been consolidating in the $16 range; a break above $18 would be your signal to start taking long positions.

Summary
You can see from the above charts that the financial media may be over-hyping the recent gains in some of the these sectors, especially in financials and materials. The future direction of the market will depend on how successful the stimulus package will be in putting money back into consumers pockets and confidence back into the financial system. Until then, there's nothing wrong with keeping your cash stashed under your mattress.