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Capture Future Trends: China, Inflation, Petroleum
By Glen Bradford
I became a peak-oil believer this year after reviewing the facts, my point estimate being early 2012 when everyone realizes we are in descent mode. For those keeping track, the top started in 2004. That said, energy costs are going to rise. Also, with global governments printing record amounts of money and future inflation mostly unavoidable, lots of investors seek protection in Gold. I’d like Gold if I didn’t think I could get higher returns elsewhere. So, I’m looking into oil companies located in the country with the marginal competitive advantage of lower production costs, China.
To say China Integrated Energy (NASDAQ: CBEH) has been growing top and bottom lines in the last 3 years would overlook how they’ve grown their top and bottom lines over 5-fold in 4 years. Maybe that doesn’t seem like much to you but let’s take that in the context that Global GDP historically grows at 3% and compare this to CBEH’s mind numbing 50% CAGR. It’s growing at more than 10x GDP growth. Funny thing here is that it’s priced as if they aren’t going to grow anymore. Oh, but wait — they’re guiding for this growth to continue and recently even raised guidance? Look, the best way to avoid loss in stocks requires that you pay a little and get a lot and this is one way to do just that.

China Natural Gas (NASDAQ: CHNG) is growing at a little bit slower growth rate than previously mentioned China Integrated, but they’re running stronger profit margins.

Gushan Environmental Energy (NYSE:GU) is a company that was recommended to me when I polled my readers about peak-oil. Since oil prices have come off their highs, the price of biodiesel has also come down significantly, crushing the profit margins of Gushan and sending them into the red. The stock price has followed suit and dropped from around $15 to around a 52-week low of $0.70, where it rests now. Note that in the three years 2006-2008, they averaged around $275M RMB or $40M USD in profits on increasing revenues. They currently trade at a $121M market cap assuming 166M FD shares. Assuming oil prices return to their recent highs, I believe that this could be one of those turn around plays you wish you knew about.
China Petroleum & Chemical Corp (NYSE: SNP) has also experienced the effects of lower petroleum prices, but is still operating well in the black. It’s crazy to me that you can have a multi-billion dollar company trading at such a steep discount to their intrinsic value. I believe that if you factor out the oil price spike of 2008, you’ve got a growing company priced for no growth. Granted, the growth rate isn’t huge, but that should be offset by the sheer size of the company. Larger companies have a tendency to hover closer to their intrinsic valuations than micro-caps.
I’ve updated my estimates for a company I’ve covered several times before, Longwei Petroleum (AMEX: LPH). When you break it all down, my numbers come out to non-GAAP $0.85 EPS in FY2011, which started 1.5 months ago. I’m also forecasting enough cash on the balance sheet to finance potential expansion similar facilities of a cost around $50M by mid-October — even without the warrants.
I want to do a quick brief on this widely misconceived notion on the premise that there are value stocks and there are growth stocks. That’s entirely the wrong idea. The value of future discounted cash flows is a function of their growth rate. Along the same lines, the intrinsic valuation of a company is a function of its future perceived discounted cash flows. All other things equal, a growing company should have a higher valuation than a company that isn’t growing. If you’re smart, you’ll blow this misnomer out of the water with me and buy growth companies at cheap valuations. Growth also protects you against loss because if the stock price goes against you and the company is still growing and you bought at a cheap valuation, eventually the stock price will catch up to that cheap valuation and you’ll be ahead again.
Lastly, if you follow me, I encourage you to add Zack Buckley to your list at least for the next couple months as he is traveling through China visiting a majority of my favorite companies.
Disclosure: Bradford and his investors were long LPH at the time of publication.

Quickly ramping production to meet current and anticipated demand
Confident in our ability to deliver record performance in 2010.
Q3 looks good, Q4 will be better: not unlike the comments to Zack Buckley — and this shouldn’t surprise anyone following the story. Zack’s notes are at the bottom.
“We are also very excited to begin fulfillment of our large scrap supply contract over the remainder of the year.” Going to try to deliver the entire $100M contract by the end of the year. I don’t expect them to do so.
“We are aggressively looking to add other steel customers to our scrap operations and anticipate adding additional customers as we move forward to 2010. We also intend to execute on our plans to add a second facility to increase our capacity should our sales warrant it as we move through 2010.”
Downward revised guidance:
$180M Top Line
$10M Bottom Line
1M metric tons
500K metric tons
60% capacity
300K metric tons
$110-$130M revenues – just recycling,
$25M Q1 Q2, Top line to do: $155M Q3, Q4
Better than $25M in trading Q3, Q4

Shareholder structure:
14.7M shares as of June 30, 2010
1.4M $5 warrants
1.5M $7.50 warrants
=
17.6M shares fully diluted

Given guidance:
$150M
10.5M
7-8%

Forward Calculations: In 2009, they did 86M Revenues, $5M net income.
If they expect 60% for the rest of this year adds $120M in revenues
Their assumptions of 300K metric tons of recycling yielding $110-$130M in revenues puts per ton prices at $400/metric ton
at 7.5% net margins:

Given that they have done $25M Q1Q2 Top line that implies $155M Q3Q4, out of which $120K comes from recycling and $35M comes from their trading business

They also haven’t made any money for the year and are forecasting $10.5M in profits in 1/2 a year at 60% capacity of their new recycling facility.

This is equivalent to $0.596/share in just half a year.

So, normalize this and run it into the first half of 2011 to get a FP/E and you get $310M Revenues — $23.25M net income — $1.32/share

if they hit 100%, that’s $70M + $400M = $470M revenues, $35.25M net income, $2/share

the upside here is if they ever run at 100%, which sounds likely as they are already guiding that they have plans to add an additional facility, possibly starting before EOY

for each recycling facility they build, it adds up to $1.70/share.

The current stock price is $4. forward p/e of 3 at 60% utilization.

The current stock price is $4. forward p/e of 2 at 100% utilization.

The current stock price is $4. forward p/e of 1.08 at 2 plants 100% utilization.

note that they have identified the issue in procuring supply. this implies that demand apparently is huge?

————————————————————————————————

Zack’s Notes:
China Armco Metals (NYSE AMEX:CNAM) began operating a scrap metal recycling facility this year and is also an iron ore distributor.

Q – How are earnings looking for the rest of the year.

A – 2nd quarter – no response; 3rd quarter – should be strong; 4th quarter – should be stronger than third quarter

I was able to talk with the CNAM representative after the conference on the first day, and he explained that CNAM would be changing several things with their company in the next year, including the auditors. He also pointed out to me that the only potential issues with the new scrap metal recycling factory is not the demand for the metal, but actually the supply of metal for the factory. I was worried that the demand would not be there for the factory, but he said demand is very high, so they are focusing on supplying scrap metal, which is more difficult.

————————————————————————————————

Another thing still in the air out there:
CNAM – Dear Mr. Bradford,

Thank you for your inquiry on China Armco Metals regarding Crisnic Fund. The company is releasing the following statement in regards to Crisnic Fund’s press release on August 9, 2010 at this time:

Kexuan Yao and China Armco Metals denies the statements made by the Crisnic Fund SA in its August 9, 2010 press release. Mr. Yao has been in discussions with the Crisnic Fund to return 1.3 million shares of his China Armco Metals stock he pledged to Crisnic Funds SA as collateral for a loan that was never completed. Following unsuccessful efforts on Mr. Yao’s part to resolve the dispute, Mr. Yao intends to take legal action against the Crisnic Fund and other individuals involved in the transaction to recover his shares of China Armco Metals stock and damages and vigorously defend any action by the Crisnic Fund.

Should you have any further questions, please let me know.

Best regards,

Lillian Wong
U.S. Representative
China Armco Metals, Inc.
954.363.7333
———————————————————————————-
CONFIDENTIALITY NOTICE: The information contained in this e-mail message and its attachments is intended solely for the use of the individual(s) to whom it is addressed and may contain trade secrets or information that is the confidential information of China Direct Industries, Inc. and its subsidiaries. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this e-mail is strictly prohibited. If you have received this communication in error, please immediately notify me and destroy the original message. Thank you.

From: Glen Bradford [mailto:globalspeculation@gmail.com]
Sent: Tuesday, August 10, 2010 5:17 PM
To: ir@armcometals.com; Info@ArmcoMetals.com
Subject: Spam> Crisnic Fund

Came across this information:

http://www.newswire.net/newsroom/index.php/permalink/69140.html

Crisnic Fund entered into a loan transaction with Yao secured by 1,300,000 shares of common stock of China Armco. The shares were transferred by DWAC transfer into the account of Crisnic Fund and were purportedly freely tradeable and available for sale. In reliance on the transfer, Crisnic Fund wired $1,000,000 to Yao. In truth, Yao had defrauded Crisnic Fund, the Company’s transfer agent, and possibly even the Company as to the nature of the shares. As a direct result of these actions, Crisnic Fund has been damaged not only with respect to the funds wired, but with respect to business activity at the broker, the clearing firm, the transfer agent and with respect to its business reputation in general. The litigation seeks damages in excess of $5,000,000 for these matters.

Securing a $1M loan with $5M worth of stock. What seems to be the problem? They are suing for $5M for this?

I was just curious if this was a real suit or it was fake or if you’ve even entered into a loan transaction with the Crisnic Fund.

Do Not Lose,

Glen Bradford
CEO ARM Holdings LLC
VP China Growth Partners
www.glenbradford.com
www.armholdingsllc.com
www.chinagrowthpartners.com

None of the above is intended as investment advice. I can’t guarantee the information I gathered is from an accurate source. I may buy or sell any stock or security without prior notice.
Disclaimer: http://www.glenbradford.com/disclaimer.php

China Growth: We Just Don’t Care

By Glen Bradford

Well, now, well, you know look. I’m not going to deviate here, I am not going to deviate. And even if this thing just blew away the numbers, I don’t care! I’ve got to be disciplined. Don’t trust anything in China. Sound familiar? I just wanted to cover a few stocks that I’ve been following that could blow away the numbers and nobody would notice. “If a tree falls in a forest and no one is around to hear it, does it make a sound?” I want to go on record and say that all of these stocks will independently trounce any market average or unleveraged ETF in the next 5 years. Diversify and multiply your portfolio. Also, put me on record predicting 100% average return in the next 12 months. My words of caution: don’t be afraid of making lots of money for being right.

China MediaExpress Holdings (NASDAQ: CCME) is blowing away earnings. My calculations put this at a 10-bagger if it ever gets fairly valued in the next 5 years. Also, I don’t see much downside risk. Traders are concerned that great news does not cause great price appreciation. Meanwhile, I’m ecstatic! Given the two times to buy at a certain price, before the great news or after the great news, I’ll take the sure bet: after the great news at the before news price. But, don’t forget about the consensus: “I don’t care. I don’t care if they just blew away numbers. I don’t care if I could make 1,000% in 5 years. I don’t care if it can grant up to 3 wishes, even if one of those wishes is a guarantee not to lose money.”

On June 1^st, Skystar Bio-Pharmaceuticals (NASDAQ: SKBI) was at $8.71 at which point they filed to raise capital. Since then, the stock has fallen 25% and the company has withdrawn the registration statement at the end of June because the CEO believes that the price is too low to justify expanding at this price instead of operating cash flow. Finally, a CEO that gets it! And, the stock has done nothing since then. But, the consensus: “I don’t care! US Treasuries are the best. Why? Because they’re US Treasuries. Can you tell me how? Sure. I can put in my money and get it back.”

China Armco Metals (AMEX: CNAM) is a company that has been sinking 10-yard birdie puts and has fallen roughly 75% from 11 to 3. The CEO bought shares at $5. Institituional investors placed at $6.50. You can get it for $4. How’s that sound? But wait: “I don’t care! Gold is the best. Inflation is going to happen and gold will go up at least 10%. I don’t care if CNAM prints money and is backed in lines of credit. My eight year old likes gold.”

China Biotics (NASDAQ: CHBT) has only fallen since reporting 62% revenue growth and forecasting 50% growth into 2011. My put this at “hyperconservative.” If that’s not an understatement, I don’t really know what is. Chorus: “I don’t care! It doesn’t matter if they are growing at 50% and are cheap. I need expensive corporate debt now, please. Can you waive the transaction fees? Hello?”

Prevailing sentiment is just that. See where things are going and get there before they do. Sentiment will change to incorporate reality eventually. How long do hot models in the corner of a club go uncourted by single dudes? Not very long. How long will stocks from the fastest growing, sexiest economy in the world, China, remain undervalued and ignored on the US Stock exchange by profit motivated investors?

It’s funny to me when the cheapest companies in the world get cheaper. Nobody understood them to begin with. Why should more people understand them enough to buy them, now? A dirty secret of asset management these days is that the perceived to be “safest” investments are actually the riskiest. Risk comes from overpaying, and joining crowded trades is the best way to ensure this outcome and this is encouraged by the positive feedback loops of intermittent success of asset managers that are measured by immediate relative performance. More and more people are moving out of stocks into bonds, even US Treasuries. Inefficiency bothers some people, but I try to make the most of it. As I’ve always said: “Uncertainty will certainly work for me.”

Disclosure: Bradford and his investors are long China MediaExpress, Skystar- Biopharmaceuticals, China Armco and China Biotics.

I found myself laughing out loud earlier today. Do you ever believe in something enough to stake your entire life on it? I didn’t think I did either, but that’s exactly what I’ve been doing. I’ve even been advised to seek psychological counseling, but didn’t pursue it because I believe in statistics. It bothers my friends and family to know that I’d rather spend my time undressing financial reports than in bed with a super model.  Yeah, I’m crazy.

I went through the routine motions that I was the stereotypical path for success till about age 22. I was a 3.9 at Penn High School, 3.9 Purdue Industrial Engineer — working for GE to pay for college — and then something clicked. My experience pursuing an MBA turned from a crisp classic corvette weaving down the Transfagarasan on a warm summer night into a slow motion head on collision. I became addicted to the academically destructive habit of questioning underlying assumptions. Nothing was safe. Unfortunately or fortunately, depending on if you’re my teacher or my investor I was positively reinforcing another habit — Thinking for myself.

I would say that a lot of things amaze me, but everything makes sense when you’re looking at it from the right angle. It’s just that this is a rare skill to have.

I’m only interested in learning about things that I can use. I’m terrible at crosswords, random trivia, and Jeopardy. I specialize in avoiding things I suck at.

Inefficiency bothers some people, but I try to make the most of it. Up till about age 20, I was told that for the most part I sucked at writing. I didn’t really like reading books. I still don’t like reading those types of books. I like reading manuals, financial reports, economic statistics, and musings of millionaires/billionaires. I figure, they ought to know something that I ought to try to learn. Anyway, somehow I write for the largest financial publication in the world now. I guess it’s in the family, as my dad enjoyed writing sports for 25 years and my uncle was an editor at the local tribune. My dad even wrote a few books that I haven’t read. It’s worth noting that I’m not even concerned that I don’t feel bad about this. Reading about women’s sports just isn’t making the top of my to-do list. Is there such a thing as Financial Humor? That’s something that I should start doing. I bet I wouldn’t suck at that. I giggle when stock prices go down. It’s funny to me when the cheapest companies in the world get cheaper. Nobody understood them to begin with. Why should more people understand them enough to buy them? There just is a shortage of intelligence out there. Everyone enjoys joining the crowded trades and losing money. Plus the really smart people out there know that this is possible and just wait for lower prices anyway. Others’ panic is their profit. What does really cheap mean to me? P/E of about 0.25 and growth.

I’d try to write a book, but I just can’t dedicate that much time to completing something. That’s why I like stocks. Once I convince myself that I should buy them, I don’t have to explain my reasoning, I just buy. The edge goes to those who can get the right answer in the least amount of time. I was terrible at showing work throughout engineering and math classes. Sometimes, I’d have to reverse derive the question from the answer… just to have stuff written down in the “show your work” section of homework/exams.

Those who preach diversification as a risk control

measure are essentially hedging their fundamental ignorance of their

own holdings. – Michael Lauer – Stock Market Wizards by Jack Schwager

I think a lot of successful traders are unemotional, hardworking, and

disciplined. Ironically, I find myself lacking on each of those counts. I

get very emotional; I really don’t work that hard; and I’m not as disci-

plined as I should be.

The problem is that their approach depends on the “greater fool”

premise. [It's okay to buy a stock that is grossly overpriced, as long as

you sell it to someone else—a greater fool—even higher.] This

process always ends in tragedy for those left holding the bag, which in

this case will likely be mutual fund investors.

So you’re saying that many individual investors who believe they

have placed their money into the most conservative stock funds

are unwittingly holding high-risk investments.

Absolutely. What started out as a conservative, passive investment

strategy has metamorphosed into a “greater fool” investment pyramid.

When this situation begins to unravel, the losses will be horrific.

Remember,

I’m seeking pricing inefficiencies, not high-quality companies. In

fact, as a direct consequence of my methodology, my typical long

position will be a company that has had some difficulty, while my typical

short will be a universally admired entity.

I think of myself as a reasonably courteous person. If an investor

called and asked me why I owned a certain stock, I would probably

tell him. But in the process, I would certainly be wasting my time,

Any investment approach that is dependent on stock market direction

for profitability is doomed to mediocrity. Any investment approach

that is heavily reliant on accurate forecasting or involves the purchase

of high-expectation stocks is inherently risky. Market supply and

demand forces create spectacular pricing inefficiencies. All that is

required for successful investing is the commonsense analysis of

today’s facts and the courage to act on your convictions.

They used what they called “a-pig-at-the-trough” approach. If you

found a stock that you liked and wanted to buy you had to convince

one of the other people to liquidate one of their holdings to make

room in the portfolio, just like one pig has to push another pig out of

the way if he wants to get a spot at the trough.

The assets of the fund were growing rapidly.

Stock investing is not an exact science. The greater the number of

useful things you can look at, the greater you increase your odds.

Do you also mean to imply that you don’t use charts or Wall

Street research?

I never looked at a chart for 99 percent of the stocks I bought for our

funds.

Some

of my research analysts have good friends who are sell-side analysts

and have seen them pressured to recommend stocks they didn’t like.

I usually don’t get excited about winners; I’m

too busy looking for the next trade.

You can’t be afraid to take a loss.

How would you rate the quality of Wall Street research?

Not very good.

For what reason?

Most analysts don’t have a logical reason why a stock should be at a

given price. As long as the company does well, they don’t care what

the price is. Typically, if a stock reaches their target, they will just

raise the target, even though the fundamentals haven’t changed.

What did you learn from your experience in losing all your

money?

I realized that no one was going to do it for me; I had to do it for

myself. My broker still got a commission, but I was sitting there

broke. Incidentally, although I didn’t realize it then, I now fully

believe that losing all of your money is one of the best things that can

happen to a beginning trader.

Why?

Because it teaches you respect for the market. It is much better to

learn the lesson that you can lose everything when you don’t have that

much money than to learn the same lesson later on.

I guess that implies you are not an advocate of paper trading for

beginners.

Absolutely. I think paper trading is the worst thing you can do. If you

are a beginner, trade with an amount of money that is small enough so

that you can afford to lose it, but large enough so that you will feel the

pain if you do. Otherwise, you’re fooling yourself. I have news for you:

If you go from paper trading to real trading, you’re going to make

totally different decisions because you’re not used to being subjected

to the emotional pressure. Nothing is the same. It’s like shadowboxing

and then getting in the ring with a professional boxer. What do

you think is going to happen? You’re going to crawl up into a turtle

position and get the crap beat out of you because you’re not used to

really getting hit. The most important thing to becoming a good trader

is to trade.

The key is to know when to do nothing. Most

people, even if they have a winning strategy, will not follow it because

they lack discipline. For example, everyone knows how to lose

weight: you eat less fat and exercise. So why are most people overweight

(assuming they don’t have a medical problem)? Because they

lack discipline.

Most people prefer to forget

about their failures instead of learning from them,

You need to have a plan for every contingency.

The most important contingency plan is the one that will limit your loss it you are wrong.

Normal human tendencies are traits that cause you to do poorly.

Therefore, to be successful as a trader you need to condition abnormal

responses. You hear many traders say that you have to do the

opposite of your gut response—when you feel good about a position,

you should sell, and when you feel terrible about it, you should buy

more. In the beginning that’s true, but as you condition yourself for

abnormal responses, somewhere along the line you become skilled.

Then your gut becomes right. When you feel good, you actually

should go long, and when you fell bad, you should sell. That’s the

point when you know you have reached competency as a trader.

What did you do after you graduated college?

I decided to go to business school, which allows you to put off the

decision of doing anything for another couple of years.

(Failing out of college, not getting a job, etc.) It was something that I psychologically really wanted to happen.

Although he liked science, he was disenchanted because the career scientists

he observed were forced to spend much of their time seeking

grants instead of doing research.

Do you ever go net short?

Ninety percent of my success is clue to not doing things that are stupid.

I don’t sell winners; I don’t hold losers; I don’t get emotionally

involved. I do things where the odds are in my favor. Shorting stocks

is dumb because the odds are stacked against you. The stock market

has been rising by over 10 percent a year for many decades. Why

would you want to go against that trend?

Any advice for novice traders?

Don’t confuse activity with accomplishment. I think one mistake

novice traders make is that they begin trading before they have any

real idea what they are doing. They are active, but they are not

accomplishing anything. I hardly spend any time trading. Over 99

percent of my time is spent on the computer, doing research.

If John Bender is right about options*—and, given his performance, there is

good reason to believe he is—then virtually everyone else is wrong. Bender

asserts that the option pricing theory developed by Nobel Prize-winning

economists, which underlies virtually all option pricing models used

by traders worldwide, is fundamentally flawed. This contention is not

just a theoretical argument; Bender’s entire methodology is based on betting

against the price implications of conventional option models. Bender

places trades that will profit if his model’s estimates of price probabilities

are more accurate than those implied by prevailing option prices, which

more closely reflect standard option pricing models.

What did they get for backing you?

Initially, 50 percent of my profits. I eventually bought them out.

There are a lot of similarities between gambling and trading, although

gambling is a bad term.

Because?

Because it implies that your results depend on luck. The people that

I’m talking about look at poker or backgammon as a business, not a

game of chance. There are a few things that are essential to success

in both trading as well as playing gambling games as a business. First,

you have to understand edge and maximize your edge. Second, you

have to be able to deal with losing.

I don’t mean to suggest that Black and Scholes made stupid

assumptions; they made the only legitimate assumptions possible, not

being traders themselves. In fact, they won the Nobel Prize for it.

Although, to be honest, that always seemed a bit strange to me

because all they used was high school mathematics. All my trading

operates on the premise that the most important part is the part that

Black-Scholes left out—the assumption of the probability distribution.

Why do you say with such assurance that stock prices don’t even

come close to a random walk?

As one example, whether you believe in it or not, there is such a thing

as technical analysis, which tries to define support and resistance levels

and trends. Regardless of whether technical analysis has any validity,

enough people believe in it to impact the market. For example, if

people expect a stock to find support at 65, lo and behold, they’re

willing to buy it at 66. That is not a random walk statement.

Even though you manage a quarter of a billion dollars you seem

to keep an incredibly low profile. In fact, I’ve never seen your

name in print. Is this deliberate?

As a policy, I don’t do interviews with the media.

Why is that?

My feeling is that it is very difficult for a money manager to give an

honest interview. Why would I want to be interviewed and tell the

world all my best investment ideas? Let’s say I am a fund manager

and I have just identified XYZ as being the best buy around. Why

should I go on TV and announce that to the world? If I really believe

that is true, shouldn’t I be buying the stock? And if I am buying it,

why would 1 want any competition?

Don’t accept anything; question everything.

Actually, there is really no way to prove that is the case. All you

can ever demonstrate is that the specific patterns being tested do

not exist. You can never prove that there aren’t any patterns that

could beat the market.

That’s exactly right. All that being said, I grew up with the idea that, if

not impossible, it was certainly extremely difficult to beat the market.

And even now, I find it remarkable how efficient the markets actually

are. It would be nice if all you had to do in order to earn abnormally

large returns was to identify some sort of standard pattern in the historical

prices of a given stock. But most of the claims that are made by

so-called technical analysts, involving constructs like support and

resistance levels and head-and-shoulders patterns, have absolutely no

grounding in methodologically sound empirical research.

But isn’t it possible that many of these patterns can’t be rigor-

There are three variations of this theory: (1) weak form—past prices cannot be used lo

predict future prices; (2) semistrong form—the current price reflects all publicly

known information; (3) strong form—the current price reflects all information,

whether publicly known or not.

ously tested because they can’t be defined objectively? For example,

you might define a head-and-shoulders pattern one way

while I might define it quite differently. In fact, for many patterns,

theoretically, there could be an infinite number of possible

definitions.

Yes, that’s an excellent point. But the inability to precisely explicate

the hypothesis being tested is one of the signposts of a pseudoscience.

Even for those patterns where it’s been possible to come up

with a reasonable consensus definition for the sorts of patterns traditionally

described by people who refer to themselves as technical analysts,

researchers have generally not found these patterns to have any

predictive value. The interesting thing is that even some of the most

highly respected Wall Street firms employ at least a few of these “prescientific”

technical analysts, despite the fact that there’s little evidence

they’re doing anything more useful than astrology.

Even if there’s no change in the fundamentals?

Oh sure. I always tell my traders, “If you think you’re wrong, or if the

market is moving against you and you don’t know why, take in half. You

can always put it on again.” If you do that twice, you’ve taken in threequarters

of your position. Then what’s left is no longer a big deal. The

thing is to start moving your feet. I find that too many traders just stand

there and let the truck roll over them. A common mistake traders make

in shorting is that they take on too big of a position relative to their

portfolio. Then when the stock moves against them, the pain becomes

too great to handle, and they end up panicking or freezing.

You have had quite a run—years of mammoth returns and a sizeable

amount of capital under management. Are you ever tempted

to just cash in the chips and retire?

A lot of people get scared and think that since they made a lot of

money they’d better protect it. That’s a very limiting philosophy. I am

just the opposite. I want to keep the firm growing. I have no interest

in retiring. First, I have nothing else to do. I don’t want to go play

golf. You know the old saying: “Golf is great until you can play three

times a week, and then it’s no fun anymore.” Second, I enjoy what

I’m doing.

One procedure I introduced at S.A.C. seven years ago was to go

around the room and have each trader promise his results. In the

early years, I got a lot of resistance from just about everyone except

Steve Cohen, who was always very willing to promise an extraordinary

result. It took a long time lor people to accept this process, but now it

is ama/ing how much it has become part of the company culture.

If you are not reaching your target, it forces you to focus on

what you are doing wrong or what you may not be doing that you

should.Sometimes when people reach their target and nothing happens, they

stop paying attention to whatever the commitment was to get there.

This explains why some people begin to lose after they succeed.

When someone achieves his goal, the question

is often, “What now?” My answer, which is based on comparing

athletes who have won gold medals with those who haven’t, is to set

up another target that will provide a challenge. The gold medal winners

are always stretching for a goal that is uncertain.

Failing to redefine the goal can limit success.

One trader came to me and said, “When I’m winning, I keep winning—

I can do no wrong; when I’m losing, I keep losing—I can’t do

anything right.” The solution was to create the same state of mind

when he was losing as when he was winning.

When he is on a winning streak, he is fearless, intuitive,

and makes the right choices. When he is on a losing streak, he needs

to visualize, remember, and feel those same positive traits so that

when he comes into the office, he has the same attitude toward his

trading as when he is in the middle of a winning streak.

Any other examples of personal flaws that prevented a trader

from reaching his full potential?

One trader who runs a large hedge fund is never willing to buy a stock

at the market; he is always trying to bid it lower. As a result, he misses

a lot of trades.

What is another example of a behavioral pattern that was holding

a trader back?

One trader selected his stocks fundamentally and then scaled into

the position as the stock declined. Even though he had chosen to

enter his positions by averaging down, when a stock got back to even,

he was so relieved that he would often get out.

Disagreed with the following – A disagreement requires a reason, my reason is in ()

Now consider two money managers: one only buys stocks and is up an

average of 25 percent per year for the period while the other only sells

stocks and is up 10 percent per year during the same period. Which manager

is the better trader? Again, this is a nonsensical question.

(Well, the guy that made 25 percent was the better trader; 25>10)

Funny Blurbs

Had you had any experience before?

Not picking stocks.

Then how did you get a job as a portfolio manager?

I didn’t have a whole lot of respect lor him as a portfolio manager.

I’ll tell you one story that is a perfect example. During the time I

worked for him, junk bonds had become very popular. Henry had a

friend at a brokerage firm who offered to give him a large account if he

could manage a junk bond portfolio. We had no clue. Henry gave us

all a book about junk bonds and told us to read it over the weekend.

The following Monday we began trading junk bonds

Another hedge fund manager I interviewed who also does a lot of

short selling said that the value of audits on a scale of 0 to 100

was zero. Do you agree?

Yes.

Even if it’s a leading accounting firm?

Oh yeah.

LPH Old LPIH Guidance Analysis
I’m updating my guidance based on the slides:

http://www.redchip.com/visibility/conferencePages/newyorkJul2010/PowerPoints/Day1/LPH/LPIH.ppt

http://ih.advfn.com/p.php?pid=nmona&article=43550936&symbol=OTCBB:LPIH

These are my estimates, I have not talked with the company. I am part of the private placement on October 26, 2009.
My fully diluted share count, based on the latest guidance for the last 2 months and my carryforward estimates, including my calculations using the black-scholes option pricing model… here’s the key takeaways.
1. The shares in escrow subject to the make good, those are shares that I have been advising my investors that we may get — at this point, i’m relatively confident that we won’t get any of those. Yes, this sucks for me. I thought that I could be getting some free shares but unfortunately June/July sucked for this sector, the uplist came late, etc. etc.
This works to the common shareholders’ advantage,
so, my fully diluted share count is now
21+21+.1=42.1 mgmt shares+.1+12.5+13.5+30.4=98.6M shares fully diluted
also note that these diluted shares would include cash proceeds of roughly $30M going to LPH (Warrants)
so, they guided for $73M of net income in 2011,
across the fully diluted shares this is $0.74 EPS (their estimate)
Total revenues for the two months ended May 31, 2010 were $72.9 million, up 128% from $32.0 million for the same period last year. Gross profit for the two-month period was $15.4 million
72.9M*12/2=$437.4M
Press Release Source: Longwei Petroleum Investment Holding Ltd. On Monday May 17, 2010, 6:55 am The company reaffirms its previously stated guidance for the fiscal year 2011 financial results projecting Revenue for the fiscal year ending June 30, 2011 of $494.7 million with Adjusted Net Income of $73.0 million and GAAP Net Income of $57.3 million. The projection for Adjusted EPS is $0.71 and GAAP EPS is $0.56, respectively
shucks, let’s run with that, because i can’t remember specifically what crane’s guidance was except that 10% net margins were likely too low, but that conversation was like, a year ago. note their guidance for net margins is 14.8% now
thus, it looks like redchip guidance has lpih growing revenues about 14% from may production to june production and then no growth for the entire 2011.
optimistic? not really. sure the profit margins are what i would target, but based on the additional storage facilities that just need a little bit of changes to hold fuel and add to the business flow —i’m going to assume that the fuel storage grows on a monthly basis by 5% a month. and net margins of 15%
so there is my guidance $0.97 for 2011 non-GAAP adjusted for warrants

——————————Addendum——– 8/14/2010

hmm, looks like you’re right and i’m wrong.

with certain insiders of the Company who placed an aggregate of 13,499,274 shares of the Company’s common stock into escrow

Series A Convertible Preferred Stock, No Par Value, 14,000,000 Shares Authorized, 11,092,925 and 0 Issued and Outstanding as of March 31, 2010
and June 30, 2009 (Liquidation Preference of $12,202,218 as of March 31, 2010)

Common Stock, No Par Value; 500,000,000 Shares Authorized; 87,552,711 and 81,852,831 Issued and Outstanding, 13,499,274 Shares Held in
Escrow Subject to Contingent Future Events, as of March 31, 2010 and June 30, 2009

13,499,274 warrants

87,552,711+13,499,274+11,092,925
=
111.9M shares

readjusts my estimate to

$0.857 EPS for 2011

FP/E of 2.33

An Alternative Portfolio Insurance Policy

By Glen Bradford

What Does Portfolio Insurance Mean? “A method of hedging a portfolio of stocks against the market risk by short selling stock index futures.”

Let’s settle for just hedging against market risk. Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.

So let’s assume that the stock market goes down 50%. Granted, this is unlikely to happen with the seemingly inevitable monetization of the deficit. What’s going to happen to the foreclosure market? Do you think more people will be able to afford their homes? Do you think that interest rates can get any lower to finance homes at lower monthly payments? Do you think that the economy would improve? Probably not. All signs point to more foreclosures, short sales, etc. The only way that I see out of this trap is to print enough money to justify these higher prices. We’re on that road but it’s going to take a while.

While we wait, I advise taking a look at default, foreclosure, short sale servicing companies to hedge against the market risk. Fannie Mae (NYSE: FNMA), Freddie Mac (OTC: FMCC), and Bank of America (NYSE: BAC) are going to need these services badly. As for right now, it is my understanding that there are temporary industry-wide problems. Rumors indicate a mortgage moratorium that is supposed to end by the end of Q3.

The Dolan Company (NYSE: DM) is trading with a forward P/E of around 9.10, suggesting earnings are going to increase over 50% YOY. They acquired DiscoverReady in November of last year and in my opinion historical operating income instead of historical net income should be used to forecast the future in this case.

Altrisource Portfolio Solutions (NASDAQ: ASPS) is trading with a P/E above 20, is getting upgraded by analysts, and recently acquired The Mortgage Partnership of America (MPA). That said, note the rough $3.2M in EBITA that was acquired through the MPA and the more than doubling in properties under management from January through March of 2010.

Lender Processing Services (NYSE: LPS) just pulled off a growing quarter amidst a quarter impacted by sluggish industry trends. Trading at an estimated P/E of 9.10 for 2010 makes this one inexpensive as well.

DJSP Enterprises (NASDAQ: DJSP) recently captured Richard D. Powers from Altrisource. They’ve also been pummeled down over 60% from their 52-week high, have over 1.4M shares short, have lowered their 2010 guidance, and by my metrics are trading at a forward P/E of 3.8.

As home prices go down, insuring your home becomes less expensive. As stock prices go down, buying an insurance policy the traditional way becomes more expensive. You can play the traditional game or you can come up with one that works better. I remember my trip to the Chicago Board Options Exchange (CBOE) specifically for the cognitive disconnect described above.

Disclosure: Bradford was long DJSP Enterprises at the time of publication.

So, from an investor standpoint, the catalysts now include:

1. 1.4Million shares that Shorts need to buy

2. I believe Stern still has some buying power out there, and he was buying as high as $6.33

3. Timios Acqusition (at this point the acquisition is priced to fail)

4. Two unmentioned banks ramping up their merged foreclosure processing (which is odd because publically these banks reportedly finished merging in December 2009 — where one of my cynical investing friends suggests that DJSP has lost them as a client — that’s the negative side)

5. Q2 is over

6. The ending of the mortgage moratorium (120 days max started like… 2 months ago I think?)

7. Q3 is on

8. Potentially Signing an REO Client

One detail though I would reiterate, DJSP has not lost the client in question. (As far as I can tell).

Disclosure: Bradford was long DJSP Enterprises at the time of publication.

I’ve quantified the types of risk previously. http://www.thestreet.com/story/10507493/1/emphasize-bad-risk-when-investing.html

To him who has ears, let him hear.

Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative. Thus, risk isn’t bad. The objective is to manage risk. Ideally, you would avoid the bad risk and surround yourself with the good.

I’m no expert at this myself, but it’s at least a frame of reference. Understanding the cognitive biases of yourself and others will enable you to exploit weaknesses and command strengths. I’ll start with a real life example. If a desire is to be employed, the two outcomes to either stay at home all day or to go out and look for a job, one would entail more risk than the other, but the good kind. That is, of course, if you actually go and look for a job. Your trip could be the bad kind of risk if you find yourself lost in a local pub around closing time as it is my belief that nothing good happens around then.

So, I want to talk about risk in investing and this likely doesn’t surprise you. I want to describe how the market creates huge inefficiencies and how the awareness of how these come to be can make you a lot of money, and I for that matter. Confirmation Biases enable people to determine causality in situations of total unrelatedness. Fear is an emotional response to a perceived threat. For the most part, when people decide to buy a stock, they don’t consider the possibility of being able to purchase more at a lower price. They are much too optimistic and figure that they are likely buying at what a year from now will be the 52-week low. When the stock price starts to go down, it is only natural to question your investment hypothesis, as the perceived threat of losing investment capital increases. What’s ironic about this, is that it’s backwards from actuality. It is my belief that the best investors in the world increasingly question why they want to own something as the price appreciates, that is to say as it becomes more valuable.

Lower prices for the same thing is indeed less risky (the bad kind of risk). I would say that this is surprisingly against what is considered common sense, but as mentioned earlier, confirmation biases enable people to determine causality in situations of total unrelatedness. Systematically, you can create mathematically sound proofs with incorrect underlying assumptions and, well, I’m a firm believer that you can get people to believe pretty much anything — especially when they want to believe it themselves. I’ve found that simply by asking the ‘forbidden questions,’ or the questions that may coincidently discredit institutional wisdom — you may accidently develop a perspective to how things actually work and not how everyone would prefer them to work.

Money is usually made by selling things for more than you paid for them. Some would argue that that is the objective, but I’ll settle for simply not losing money, with the added objective of exposure to good risk, as much as I can get of it. All things considered, prices are the lowest when the fear of loss due to ownership is the greatest. The idea being to sell before someone else sells and the next available price is lower. Naturally lower prices encourage even lower prices given the overwhelming psychological factors that signal fear, which begets more selling. The good news is that if the underlying fundamentals are in tact, eventually the people who live by this creed will run out of shares to sell, and then they will run out of shares to short. As long as the fundamentls are sound, buyers will eventually step in and take it from the sellers at lower prices. That’s the system. How do you beat it when everyone else is predisposed to losing large amounts of money? Well, you plan accordingly. Markets don’t beat most people; they beat themselves. You establish axioms that will enable you to take full advantage of how things work.

1. Prices can always go lower, so be ready. Lower prices usually precede bad news.
2. As the price of comparable opportunities decrease, so does the opportunity cost of holding what you hold.
3. You may have held the most undervalued opportunity in the world, but as the prices of other things decreases, those opportunities may become the most undervalued opportunities in the world. Sometimes selling at a loss is part of a long term profitable strategy.
4. Don’t be afraid of a big move to the upside.

http://wefe5433.blogspot.com/

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http://wefe5433.blogspot.com/