DARK HORSE HEDGE – Won’t Get Fooled Again

DARK HORSE HEDGE – Won’t Get Fooled Again

By Scott Brown at SabrientIlene at Phil’s Stock World

The change, it had to come
We knew it all along
We were liberated from the fold, that's all
And the world looks just the same
And history ain't changed
'Cause the banners, they are flown in the last war

I'll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play just like yesterday
Then I'll get on my knees and pray
We don't get fooled again, no, no

-The Who

Last night, America attempted to tell Washington that it is time run this country smarter and better, and so now we “meet the new boss.” Unfortunately, it is the same as the old boss, only dressed up in different colors. We are not expecting to see the reform we need for real economic recovery without ongoing risks of future bubble-busting events.  I have been through these promised changes enough to “get on my knees and pray…..We don’t get fooled again” but know otherwise.

As Phil notes in today's article "Benny Drops the Big One!":

After putting over $2Tn into our Dead Parrot Economy since the crash and getting no response, Bernanke is upping the ante with another $600Bn round of Quantitative Easing ON TOP OF the ongoing $250-$300Bn round of POMO commitments for a total of about $110Bn per month dumped into the economy between now and the end of Q2.  This represents a 10% increase in the money supply over 8 months and, therefore, a planned 10% decrease in the purchasing power of your dollar-denominated assets or, to put it bluntly – a 10% tax on everything you own.

And Zero Hedge writes:

Only known prescription is infinite amounts of soon to be defunct paper currency.

Side effects include WSJ rumor leakage, frontrunning, mass corruption, trade wars, protectionism, crony capitalism, hyperinflation and revolution.

More of the same medicine that hasn't helped the economy yet, as Mish notes:

There has been little job creation, no increase in R&D, no increase in bank lending. The only case for stating "effective again" (before round II even started I might add) is stock prices, commodity prices and junk bonds are all up.

How long can that last with no benefit to the real economy?

So apart from the elections where we go through the motions of choosing representatives, the unelected Federal Reserve made its QE2 announcement renewing its commitment to bestow favors on Wall Street at the expense of Main Street.  The Fed announced it will sink $600 billion into government bonds in hopes of finally driving job growth.  Many "experts" worry that even another $600 billion isn't enough.  Others argue that the plan could backfire leading to inflation and further weakening the dollar.  It is worth noting that even with this bold move by Fed most economists are forecasting unemployment at the end of 2011 to be 9.6% or exactly where it is now.

Speculating as to why the Fed is engaging in more quantitative easing, Pragmatic Capitalist concluded: "The only logical answer is that QE2 is really just another case of the Federal Reserve proving that this is a country centered around the bankers, by the bankers and for the bankers. [my emphasis] Before you brush me off as some conspiracy theorist please consider the evidence."  We're not brushing him off.  But we're practical too. From an investing standpoint, we don't know whether QE2 will drive the markets higher as Ben Bernanke wishes, but we see it as a possibility. Because we don't know, when we review our positions, we try to be detached from our biases about which way we think the stock market SHOULD go if there is any connection left between it and the economy.

We started Dark Horse Hedge on July 1, 2010 with a goal of helping longer term investors learn how to achieve better returns using Sabrient’s time-tested long/short approach and Phil's yield (option) enhancing strategies. By its very design, the VIRTUAL DHH portfolio manages risk by combining long and short stock positions and several option strategies. It is currently tilted approximately 1:1 long:short. Because of the portfolio's long and short exposure, we expect periods where some positions significantly outperform other ones.

Dark Horse Hedge re-tilts the long/short balance from time to time based on market momentum using options and other tools to achieve the desired tilt.  Recent market strength gives us an opportunity to rebalance some of the positions over the next week or so.  The first of our changes is to sell DLX on Thursday. Deluxe Corp. (DLX) was added to the virtual  portfolio July 26, 2010 at $21.81 and closed today at $21.85.   DLX has dropped out of the top quantile of Sabrient rankings and therefore we will take this opportunity to replace DLX with a stock we like more at this time.

SELL Deluxe Corp. (DLX) on Thursday, November 4, 2010.

So, what do we want? Earnings, that are growing, and we'd like to pay as little as possible for those earnings.  Arrow Electronics (ARW) seems to fit our model perfectly.

Arrow Electronics, Inc.. Arrow Electronics, Inc. (Arrow), incorporated in 1946, is a provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions. Arrow serves over 900 suppliers and over 125,000 original equipment manufacturers (OEMs), contract manufacturers (CMs) and commercial customers.

Finishing four consecutive quarters of beating analyst estimates and most recently doing so soundly with $1.08 versus $1.01 estimate, ARW is now looking forward to the next quarter of $1.18 and a 5 year growth rate of 18.15%.  The current p/e is 7.15 and we like our stocks to have a higher growth rate than p/e and even better when it is nearly 150%. Nearly all of the analysts following ARW have raised their estimates in the last 30 days.  ARW is what we look for in a long position and therefore we are adding ARW to our VIRTUAL DHH portfolio on Thursday.

BUY Arrow Electronics (ARW) on Thursday, November 4, 2010.

And enjoy some music.

Dark Horse Traders' Hedge, Ilene