Annie F. - Freshman Equities Trader

Yesterday we covered our short FXE in the financials book when it was down about 80 bps. Right now, the FXE is down 2.12%. Lesson learned: sit on  your hands when you have a gut feeling and don’t leave the trade just to book some profit.

Below is a drawing, or should I say doodle I did when the market was quiet yesterday. Typically, the saying is to sit on your hands when you’re in a trade with your risk parameters planned  or simply when the market is dead. When this is the case, why not release some stress and take a ball-point pen in hand and draw freely. I come from a family of doodlers, as my mom’s artistic background has influenced us to subconsciously draw in our free time.  While not quite Picasso, I find my doodlings to be pretty wild. I’ll be taking bids through tomorrow on the below picture. Thank you Zach for snooping around my desk and leaking the art to show the meaning of patience in a dull or stupid market.

The finacials book performed as it should. Up slightly on the day, lagging the SPX by 25 bps. Or should it have? There is no market direction because of the uncertainty in our economy. The market is already cheap and, there’s been no really good substantial news and volumes have teetered to its lowest levels of the summer. Therefore, it’s a gamble that the market will go down when that’s all it’s really wanted to do lately. Tomorrow is a big day as Zach described the FOMC will have its quarterly interest-setting meeting. Interest rates can’t go any lower so the only news the street is waiting on is what type of quantitative easing strategy the Fed will take in order to stimulate the slow job recovery and poor consumer sentiment. One QE method is open market operations which is primarily done through purchases of financial assets such as bonds and corporate bonds from other banks or financial institutions. By engaging in open market operations, the Fed is essentially electronically adding money to their account. Tomorrow we will hopefully review the Fed’s latest balance sheet to analyze QE scenarios.

As we enter the slow weeks of August, there’s less news and earnings to chew on especially for financials which report earlier in the season and Congress going on break doesn’t add an juice to the market either. The only lurking piece of data out there is how companies will perform amongst all the new financial reform rules. Now that most of earnings are behind us, executives of big banks and financials institutions will have to seriously take into consideration bottom line impact. J.P. Morgan Chase & Co., which unofficially kicked off the season July 15 with a better-than-expected bottom line, raised questions about the near future for itself and the rest of the industry because of lower revenue, fee income and net interest income. Where will cost-cutting come into play and what strategies will banks take? GS, MS and C are already in talks to spin off their trading groups. According to CNBC GS could announce GSPS spin out as early as tomorrow. If this is the case we should see some action in financials even if the unemployment numbers don’t shake things up.

 Over the last few days I’ve read some of Ace Greenberg’s “Memos from the Chairman”, a book we have in our library. The memos are written by CEO and Chairman of Bear Stearns addressed to company personnel throughout Greenberg’s tenure at the firm. I find the memos quite entertaining and appropo to today’s financial climate. Greenberg creates a fictional character named Haimchinkel Malintz Anaynikal, who is the dean of economic philisophy in his mind that give out words of wisdom pertaining to how a company can achieve success. Most of the memos discuss the company’s progress as it tries to grow and compete amongst the bigger trading groups on Wall Street. Haimchinkel Malintz Anaynikal speaks most of cutting expenses to improve the bottom line. Most of the advice surrounds the notion of cutting costs, specifically office expenses. So all of Bear Sterns follows the advice and limits their use of paper clips, reuses envelopes and switches from FedEx Mail to US Mail among many other cost-cutting tactics. Financial companies affected by the new regulatory environment will need to start considering the wise words of Haimchinkel Malintz Anayniakl if they strive for continued growth.

Two quotes I particularly like from the Memos: ”thou will do well in commerce as long as thou does not believe thing own odor is purfume”

“when you’re working in a large group, there is bound to be a person or two who is not your exact cup of yogurt”

So my prediction this morning was wrong. Scratch that. The WSJ staff must be working their reverse psychology magic.  The financials performed exceptional today with the XLFs closing up 2.55%, outperforming the SPX by 30 basis points. As you can see in the chart below the Financials have performed the strongest out of all the sectors over the last week, up 3.4%, beating the following sector by almost 100 basis points. Our financial book underformed the market returning 0.96% due to our short position on FXE. Our biggest winners were JPM and BAC, which are also the biggest positions in the book right now. I made some money trading DB and GNW, trading around them on the R4 buy signal. Today’s quiet market allowed for a slow grind higher, however I didn’t take enough of a shot on the long side. I missed out on a couple trades in JPM as my bids were never hit. If tomorrow’s action is similar to today, I know I will get a position earlier on and be more aggresive on the pull ins.

Being that we held onto Gaiam, Inc. (GAIA) for over six months and sufferred a hefty loss in the stock whose business revolves around the rather disputed and popular topic on the desk known as yoga, I thought it was about  time to offer some sympathy for the poor guy.  For a while, there was a saying on the desk that “Gaia is going Highah”. Not so. Even though we no longer have a position, we have scheduled a formal talk on the insecure beast tomorrow when the market is quiet.

Gaia is in the business of lifestyle media and offers many products in the LOHAS market. LOHAS stands for Lifestyles of Health and Sustainability and it targets the emerging Concsious Media market. Their biggest revenue generating item is Fitness and Wellness DVD sales, of which they control 42.5% of  US market share. Gaiam caters to yoga enthusiasts with products such as yoga mats, dvds, apparel and accessories. In terms of profitability, GAIA’s income increased five-fold from 2005 to 2007, then posted a loss in 2008 and has since picked up business in 2009. The growth of Gaiam’s business is very in line with the yoga industry as spending and participation increased 134% in yoga from the years 2001 to 2007 (there has yet to be statistics published from 2008 on). If the yoga industry continues on its trend post the economic recovery than GAIA may have a change to continue on a profitable path. As a business located right above a yoga studio, we tend to bring up the subject of yoga quite often (too often for a trading desk , if you ask me) and there is much debate as to wether yoga is the latest fitness fad or if it’s the real deal. Currently you can find doctors recommending it, insurance companies paying for it, fortune 500 companies offering lunch hour yoga and you can find CEOs of major companies hooked on it. I’ve compiled a factsheet on the yoga industry that includes spending trends, demographics and an industry outlook, which will be posted to the website.  Even if I wasn’t so into yoga and new of only the basics, I think yoga is here to stay. GAIA, on the hand, might not be around much longer if it sticks to its core business model of fitness DVD sales. For starters, if GAIA wants to compete, it’s got to buy out the company JADE YOGA  for probably a large sum of money and it also has to start competing with LULU apparel.