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Sunday, February 03, 2013

YHOO Sold by Dan Loeb -Third Point


There are some interesting things to learn about market behavior, earnings, institutional activity and more in YHOO's recent trading action.

It was reported late Friday hedge fund icon, Dan Loeb of Third Point sold 15% of his stake in Yahoo, 11 million of 73 million shares over the last 2 days, leaving the firm holding 62 million shares. During those last 2 days YHOO traded +62.5 million shares not including dark pool markets.

The fill on the order ranged from $19.68 to $19.70, assuming an average of $19.69, that's $216,590,000 or about $216.6 million dollars.

What Loeb does is important because as I have demonstrated many times, the hedge fund crowd is not much different than the typical sheep, they flock together for the very simple reason of not wanting to stand out of the crowd which sounds counter-intuitive, but if you are making several million or several hundred million dollars to manage a hedge fund, it's a lot easier to justify underperforming the market with 90% of other funds by a similar margin than it is to be down twice as much as the average fund, the fund manager's first and foremost concern is his or her own survival, keeping that paycheck so few will stray on their own looking to outperform at the risk of underperforming the crowd. It just so happens that Loeb is one of the leaders that other hedge funds follow.

A little about hedge funds, as you might know they aren't available to most people unless you are a Accredited Investor; according to the SEC's Rule 501 of Regulation D, for the average individual to be eligible to participate in a hedge fund as an accredited investor, they must:

Have individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;

  1. income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  2. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

In other words, most people don't pass the test. Furthermore, since in their most basic form (there are some ways around this) hedge funds can be formed to allow up to 99 investors or 499 (depending on how they were structured) and as I said, there are ways around this, but the gist is, even if you are an accredited investor, you stand a very low chance of being taken on by some of the more popular funds if you only have $500,000 to invest as they have a limited number of slots available, they'd much rather take on a trust investing $10 million dollars.

Assuming you are part of a hedge fund, the standard fees are 2 and 20, that's a 2% management fee of the mount invested per year to cover normal expenses and another 20% incentive fee, so if the fund makes $100k for you this year, they take $20k of that in incentive fees and the 2% of your AUM.

Some funds charge even higher fees of 3+% and nearly 50% incentive fees, most have a high water mark meaning they don't collect incentive fees until a new high is made for performance, but in many cases the 2% fee of say a $1 billion dollar AUM fund still generates $20 million a year.  

Performance of Hedge Funds...
With approximately 8,000 funds out there, the top 10% have made +30% returns during 2012, 33% have lost money including such notable managers as John Paulson who foresaw the Housing collapse. Paulson's flagship fund lost -17% during the first 10 months of 2012 and an amazing -51% in 2011 which literally effected the price of GLD as investor redemptions had to be funded and GLD was the only profitable position of Paulson's top 5.

The HFRX, widely used measure of Hedge fund industry returns shows the industry returning 3% over  the last year vs the S&P's +18% return, hedge funds are no longer seen as the slick, trendy investment of the rich and famous and many are now turning to their long term track records (when things were better) and trying to sell long term performance. With the exception of 2008 when both fell hard, the S&P has outperformed the H.F. industry for 10 consecutive years.

The leaders...
As mentioned, Loeb's Third point is a leader that many funds follow as well as David Einhorn who has moved the markets by simply giving an interview or voicing an opinion, you may remember him recently as being tied up in the HLF short vs Short Squeeze scenario that kept us away from the trade after some early initial profits. While Einhorn's Greenlight Capital had a double digit return for 2012 that was reduced in December to a year end  +8.6% return on losses in AAPL and gold, another leader, Loeb and Third Point's Ultra fund (which uses significant leverage) gained 33.6% for the year.

Throwing around their clout...
You probably recall the HLF trade, Bill Ackman's Pershing Square Capital very publicly revealed their large HerbaLife short in December which sent the stock down and earned the fund +5.8%, saving their year with a 12.4% gain.

In 2011 Einhorn did the same by revealing in October a large short against Green Mountain Coffee, sending shares down and helping Einhorn end 2011 which his fund spent most of the year in the red, with an end of year +3% gain.

Back to Yahoo..

Obviously these managers use tactics (if you saw the Cramer video none of this is a surprise) like making positions publicly know which is something they'd never do unless it was seen as beneficial, so does this spell trouble for YHOO? Quite possibly, but there are some other interesting things of note about YHOO that I wanted to point out as I talk about them a lot, but it's rare to be able to show you real data that backs up what we know about the market from using 3C and following underlying trade.

 First, here's what YHOO looked like the next day after they posted after-hours earnings, a big gap up and a sell-off. Why? YHOO earnings Beat!

As I remind you again and again, it's not about what you did, it's about the sentiment toward what you'll do moving forward and Yahoo's immediate future guidance was a bit on the lighter than expected side, retail chased the earnings beat, smart money sold the highs as it doesn't look like YHOO is going to top this quarter, at least the soft guidance doesn't inspire confidence and Wall Street is all about sentiment, NOT VALUE.

 As far as Loeb's sales between $19.68 and $19.70, you can see the two days in question have a lot of volume while Loeb was selling, the white trendlines represent the area he was selling in to, check out price action and see where he was selling, also note the very flat price action which I always tell you is where we most often see institutional accumulation or distribution.

 As for YHOO's trend and much of the market is the same, my Trend Channel held the trend up for a $28.5% gain before the Channel gave a stop out. You will NEVER sell at the top with the Trend Channel, but it is not arbitrary, it keeps you in the trend until something changes and self-adjusts to each stock's own personality and recent behavior, when something changes, it stops out and usually for good reason. While the channel would prevent you from selling early and leaving a lot on the table with an arbitrary decision to sell,  you'd have left about 5% on the table assuming you played it pretty well, but this is also the most volatile area, the trend was the easy money.

Here we see the price gain of 32% with the 10-day ATR (average True Range) increasing 42% which it should with higher prices, but as prices got more volatile and crossed below the 20 day average as well as the Trend Channel, the maximum 7.6% gain if you bought at the bottom and sold at the intraday high for the range saw an additional 35% increase in the ATR over the same period, the bottom line, a lot more volatility for far lower gains. This is EXACTLY why I trust the trend channel and take the stop and don't worry about what happens next, the easy money is made, the scraps left over are at much higher risk.

Here we see YHOO and a weekly VWAP (Volume Weighted Average Price). You can see clearly that retail chased prices higher after earnings as they only care about the beat and don't understand it's guidance that really matters, Wall Street may have even helped push the bid/ask up in AH so they could sell during regular hours at much better prices and sell they did (light blue is extended trading, dark blue is regular hours). The next day YHOO fell straight down and remained under selling pressure as it was sold every time it approached the weekly VWAP.

The daily VWAP during the last two days of last week as Loeb was selling averaged around $19.73 the first day and $19.68 the second day. Remember I told you that Specialists on the NYSE and Market Makers o the NASDAQ are often used to fill transactions like these and the VWAP is their target, if they fill better than the VWAP they get additional business, if they fill away from the VWAP, they aren't likely to get repeat business. 

 What seems to be clear on this 60 min 3C chart of YHOO is that there was an inclination toward distribution even before earning and certainly on the gap up the next morning.


As far as Loeb's selling, we see early Thursday what I think is Market Maker accumulation to absorb supply and send prices higher to fill Loeb's order. The Market Maker was obviously given very specific instructions as the order was filled with a TWO CENT SPREAD! That's 11 million shares sold with a 2 cent spread. Do you think you could do the same with just two 100 share orders? No, that's no coincidence.

Final thoughts...
Beyond what I've already clearly laid out, some things to think about?

1) What is Loeb really up to? He still has a sizable position and wouldn't want to knock it down whether  he wants to sell the rest of it or keep it. My gut feel based on the charts is there's going to be a bounce that will be sold in to.

2) As I always mention, it is flat ranges where we most often see institutional activity, these also tend to be the most boring parts of the trading day, but they are when you need to be most alert.

3)The reason they are flat is because orders are being executed and they are as you can see, filled at specific price points, you don't want a lot of volatility a a middle man trying to fill an order at such a specific price and in such large size.

4) The size! Remember how many times I have told you that institutional accumulation and distribution are in large size, they need demand or supply to pull it off, this is why head fake moves are so common, to create that demand or supply needed, it's nothing like us selling a 100 or 1000 share order, we are talking millions of shares, that requires time, patience and manipulation of the market like the head fake moves. I'd bet if Loeb wanted to sell the rest of his position, he's want to do it at higher prices, but maybe he wants to add to his position at lower prices, as Cramer made clear, hedge funds don't do anything "That resembles the truth".

5) Hedge Funds flock, it doesn't matter to us whether they are right or wrong on their entire trade, but if they are all moving in one direction, we want to move in that direction and make money on their flocking, whether they are selling at a loss doesn't matter to us, as long as we can benefit from the direction they are flocking in.

6) Consider my plea for patience, that's your edge over Wall Street, we can turn on a dime and clear out an entire position in minutes, they take days, weeks, months and sometimes years in putting together or selling positions. Think about how our trade size gives us advantages they don't have.

7) Even as Cramer candidly admits, stock prices have nothing to do with value, it's all about sentiment, so sentiment indicators are important to pay attention to like the recent multi-year record long positioning, the recent flocking of dumb money BACK IN TO the market, there are reasons for this, think about how dumb money can be used with headlines such as "Dow 14,000" and think about the strength of trend 1 vs the length and duration of tend 2 and how dumb money and sentiment have recently behaved.

8) Look at how price was acting as Loeb's position as liquidated, notice in most cases in the area he was filled, there was intraday demand, something needed to move that amount of shares. In other words, as I always say, "Price is deceiving".

9) Remember changes in trends or character precede changes in trends and volatility is one of the most obvious. Think about how volatility has been extremely low recently and how that's an enticing and friendly market for dumb money to re-enter the market after having been scared out of it, think about volatility increasing now and think about why dumb money might be needed right now and how they created an environment that was very appealing to dumb money.

10) Nothing is as it seems, this is why I follow underlying trade, MACD can be great, but if price is a deception, than every indicator based on price is also deceiving.

11) most amazingly to me is that 11 million shares can be sold in 2 days with a 2 cent spread. As we saw many times the last few weeks, intraday trade is important, the last one was the QQQ weekly contracts (calls) bought Thursday that expired the next day, but because of underlying intraday trade we still made +50% in less than a day.

I'm sure there are good individual lessons for each of you if you just take a look at the chart. I'm already thinking about how a volatility indicator can be a great trend tool and maybe even trading system.



Brandt Uses Worden's TeleChart and StockFinder 5 Exclusively


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