Trader's Thread 01 (May 08 - Dec 08)

[kennynah]

i agree that the 1st 1/2hour...lousy time to buy but great to sell into...especially in the 1st 30 mins...and last 1/2 hours can be the most volatile... can be best time to buy into...especially into a tanking market...

((edited : changed 3mins to 30 mins...))

[winston]

Certainty -- by Bill Kraft

Ever since I began trading I have encountered many statements seemingly made with great certainty. I have heard people say that a specific stock price is going to jump up on the earnings announcement. It didn't. I have heard people say that the only way to make money in the markets is to buy and hold. It isn't. I have heard people say that no trader can make money trading. That's just not so. Maybe the one saying that takes the cake is "It's going to come back."

The truth is that little, if anything, is certain in the markets. A few things that seem to be pretty close to certain are:

Some trades will lose

Every trader or investor will make some emotional market decision(s)

It is difficult to remove emotion from trading decisions

No strategy is perfect

The more knowledge and experience a trader gains, the greater chance he gives himself to be successful

Sometime you will cut your profits and sometime you will let your losses run even though you know you should do the opposite

I have an unconfirmed suspicion that those whose personalities work in terms of beliefs in market certainties like "it'll come back," or "there is only one way to make money in the markets and that's to ....," or "there is no way anyone can make money trading" are less likely to be successful than those who simply accept that there are no real certainties.

Of course, I am speculating and many may disagree, but I am guessing that those who pronounce "certainties" may be too rigid to accept the vagaries of market movement and may have difficulty in seeing alternative ways to deal with situations. Again, it is just my speculation, but I believe that those who are less rigid, who are able to reverse positions or who are willing to adjust strategies when they encounter a changing or unpredicted situation are more likely to succeed in the long run.

A "buy and hold" investor, for example, is bullish by nature. Essentially, their argument is that if they buy stock in a fundamentally sound company, the stock price will go up over time. Over what time is not ordinarily defined, but from a long term historical perspective, the argument is sound though it certainly has many exceptions.

For example, if we look at the Nasdaq Composite (COMPQX) we see that it is up relatively substantially since its low in 2002, yet it is nowhere near its high in 2000 and it is currently trading at approximately the same level as it did 10 years ago in 1998. The results, therefore, for a "buy and hold" investor would be quite different depending upon when they made the decision to buy.

Would it be worth the trouble to learn to trade the market in both directions? An investor could have traded bullish strategies on the COMPQX as it rose from 1994 to 2000 and then traded bearish strategies from the break in 2000 until 2002 or 2003 and then climbed aboard the bull again into 2007.

The whole move up from 1994 to 2000 was approximately 4300 points; the move down from 2000 to 2003 was about 3750 points and the move up from there to the present about 1200 points. While the bullish buyer in 1994 would have about an 1800 point gain today, the trader who used strategies to trade both directions, even if he captured only 50% of the moves would be up over 4600 points over the same time. Certainty that buying and holding is the only way to go could have been costly in that scenario.

Please understand that I do accept buy and hold as a very viable strategy. I just believe there are many other strategies, including ones to benefit from bearish moves, that might be worthwhile for each of us to consider. In my recent book, I examine a number of these strategies and emphasize the importance of money management and risk control. Understanding and using these concepts may very well add to your trading abilities if you are willing to accept the proposition that certainty in the markets is, most often, illusory.

[winston]

Mastering the Art of Tape Reading (Part 1)
By Kunal Vakil

What is the Time and Sales Window?

One of the most valuable tools that you can use to confirm or deny or your day trading positions is the time and sales window, aka the "tape". The tape details order flow or money flow in a particular security by displaying all transactions that have been executed.

While each broker may provide different data points, time of trade, price, size, and condition (executed at bid or ask or between) are common data points displayed by this window.

How to Use the Time and Sales Window

The two basic principles of any technician's arsenal are price and volume; understanding the interaction between the two is paramount to successful day trading.

Tape reading involves both, and if used correctly, dramatically increases the odds of your trading working out. Your goal with tape reading is to follow the money. Strong order flow activity at key support and resistance levels will give you clues as to whether the breakout is for real or not.

Trading with the time and sales window requires trading with patience. You cannot go out and buy or short a stock because you see the tape speeding up a bit. You need to be aware of support and resistance levels and also combine the message of the tape with price pattern formations.

The speed of the order flow can be extremely fast and confusing; it requires quite a bit of practice in order to get used to understanding the true message. Remember, every stock is a different story and tends to trade differently.

It is wise to review the way in which the tape trades for a couple of minutes before entering a trade. Reading the tape requires you to train your eyes to scan for changes in character. Let's discuss a few of these key changes that you should take note of:

Size

Let's start with size. The size of the orders coming through will help you decide if there is conviction behind the price action you are seeing. When putting on a trade, you typically want to see a flurry of buy or sell orders that have greater than 300 to 400 shares in size.

There is no concrete rule; it is more of a visual cue that your eye gets trained to recognize. Many times I will see great technical setups in stocks that trade low volume. I stay away from these setups as the message of the tape is not as clear, and this lowers my odds of a winning trade.

Order Speed

The speed of the orders is another key component to the message that the tape is giving you. Typically, when stocks breakout through support or resistance levels, not only will the size of the orders go higher but you will see the tape start to speed up. This gives you an indication that there is an interest in this stock at this level and that the interest is larger than a couple of small traders buying or selling.

Order Condition
Order condition refers to which side of the bid/ask spread the trade was executed on. When we go long a stock, we want to see many orders being executed at the ASK. Conversely, when we go short, we want to see orders being filled at BID.

[winston]

Mastering the Art of Tape Reading, Part 2
By Kunal Vakil

In the first part of this series, I reviewed a few basic principles of tape reading. Now I want to discuss some of lessons I have learned throughout my years of trading that I think you will find helpful when analyzing the tape.

Which stocks are best to trade?

I have received this question many times; I only trade the most volatile stocks of the day. These stocks are the ones which will provide you with strong volume and large interest from the public. They also provide strong and fast moves, resulting in larger profits. Remember, we need to see speed in the tape and that requires a stock with public interest.

Does the Tape Work Better During Specific Times of the Day?

In my experience, the answer to this question is YES. I typically only trade the first 2 hours of the day. This is when the most volatility is present in the market and also when most of the trending moves are made.

Typically, lunchtime becomes very choppy and has a different group of traders who are buying or selling for different reasons than in the first hour. I am not ruling out trading after lunchtime; however, my results have been less than stellar when I attempted to do so.

Tape Reading with Level 2

The level 2 window provides the trader with an edge. It will show you the sizes of the orders in the market makers book. While the market makers can play games with the level 2 in order to fool traders, in general you want to see high bid sizes and low ask sizes when you go long. On the flip side, you want to see low bid sizes and high ask sizes when you go short or sell out of a stock. Again, it's not foolproof but it adds to the odds of your trading winning.

Exiting a Trade

This is probably the most difficult part of the trade for most traders. Tape reading helps me get out of the trade by looking for imbalances. When I see a stock moving sharply in one direction, I will immediately look to the tape to offer clues as to when the brake pads will be applied. Again, this skill will take practice to develop. If your short a stock, keep an eye out for the bid side getting heavy and the bid/ask spread widening. This could be a tell tale sign that the juice has been used up.

Bid/Ask Spread at Key Levels

Make sure the stock does not have large bid/ask spreads as it approaches your entry points. You will not have much time to place your trade, and if you are trading a volatile stock, you most likely will have to execute the orders at market.

Large spreads tell me two things: first, your risk increases significantly when the spread increases. Why? Because most times you will have trouble getting out of a stock with a large spread using limit orders and this can turn a small loss into a big one quite quickly. Secondly, it tells me that there is not that much interest in the stock. If there was, the spreads would narrow and both sides would come as close as possible.

Extremely High Volume Stocks

There is trading high volume and then there is trading extremely high volume. I try and stay away from stocks that trade, for example, 30 or 40 million shares as the message of their tapes can be a bit confusing at times if you're a beginner. You may see 14 orders come through at bid with large sizes but that may not mean as much as if the stock was trading less volume. Remember to always keep everything in context. If your stock trades gigantic volume, you should expect a different kind of tape action.

Make Price Prove the Point

Up to this point, we have discussed order size, speed, and condition. While these are all key components of the tape, you must let price prove the point. For example, if you are looking to short a stock at $54 and there is strong order flow selling at bid at that level, my experience has shown me to wait for that level to break. If it does not, you may be involved in a trap that was made to get the weak traders out and then take the stock in the opposite direction.

Don't Let Your Ego Get in Your Way

One of the biggest mistakes that I see many traders making is that they get attached to their positions. In an effort to appease their egos, they tend to take a trade and stick with it until they are right. Remember, day trading is an extremely fast game and if you do not react with speed, you will be left in the dust. When you make a decision based on that tape action and the stock does not go in your favor relatively quickly, odds are that you are in a bad trade.

Focus

It is extremely important to have utmost focus when you are trading and trying to listen to the message that tape is giving you. Try and stay in a zone and filter out the extra noise. If you are going to put a trade on, be in that trade and nothing else. This will help you feel when it is right to stay in the stock and when it's time to get out.

Conclusion

Tape reading is a very important skill to have as a short term trader and can keep you out of many bad trades. Remember, don't be an action junkie, psyching yourself up for every trade. If you do this, you will find a reason to put on bad trades in the heat of the moment.

Discipline is key and it takes time to develop. For any new traders looking to try this out, please practice, practice, practice before you put your hard earned money at work. Mastering the art of tape reading will take time, but when you do, you will be rewarded.

[winston]

The 5 Factors of Insider Profit Analytics


1) Insider buying, not selling.

Insider selling is not nearly as powerful an indicator of a stock’s future performance. There are many reasons why insiders sell their stock. They could be exercising options. Or getting cash for a divorce settlement. Or buying a McMansion. On the other hand, there’s only one reason for buying their company’s stock. It’s to take advantage of what they expect to be an upward surge.


2) Significant buying.

Six- and seven-figure investments carry the most weight here. If the insiders commit enough money so that losing truly hurts, their buying is an even more powerful testament of confidence.


3) Insider buyers who have successful track records.

Study the historical “batting averages” of insider buyers. Have they been winners? Do stocks go up after their purchases? If so, their current transactions are an even greater indication that shares will pop.


4) Insider buying clusters.

When smaller fish add their hard-earned money to the investments of the higher-ups, it’s yet another powerful signal that something good is about to happen.


5) Insider buying at the high end of the price range.

When a company is flying high, moving upward on heavy volume – and the insiders are still buying – that’s a very positive predictor of success.

[kennynah]

thanks W for the above on insider buy in...

<<2) Significant buying.

Six- and seven-figure investments carry the most weight here. If the insiders commit enough money so that losing truly hurts, their buying is an even more powerful testament of confidence.>>

in this instance, a billionaire investor, Icahn bought into Yhoo recently... he is an astute corporate raider.. does it mean that Yhoo should be a good investment?

of cos, Icahn is not an insider before his purchase.

[helios]

>>> Or getting cash for a divorce settlement. Or buying a McMansion.

juz wonder'g if our listing rules & compliance requires companies to declare on their reasons for executing insider buying; exactly like why ceo/ mgmt resignation needs to be explained.

[winston]

Tice Proves Every Bear Has a 9.5% Return as He Invokes `D' Word
By Edward Robinson

May 21 (Bloomberg) -- Money manager David Tice pokes his head into a conference room at his Dallas offices and tells Doug Noland, his top market strategist, the morning investment meeting is starting.

``It's a historic day,'' Tice says as he disappears down the hall. ``This is crazy; just wild.''

It's March 13, one of the worst days yet in the spiraling credit crisis. Shares of Bear Stearns Cos. are falling en route to the bank's emergency rescue 72 hours later. Buyout giant Carlyle Group's mortgage bond fund has collapsed after defaulting on $16.6 billion of debt. The U.S. dollar is trading at a record low of $1.56 to the euro. New York University economics professor Nouriel Roubini is forecasting a severe recession that may last six quarters.

``Cookie anyone?'' says Tice, 53, offering peanut butter Girl Scout sandwich cremes to his four-member investment team.

Tice, founder of the Prudent Bear Fund, is in his element as short sellers savor a rare advantage in their tug of war with Wall Street's bulls. Tice, an economic history addict who lines his office bookshelves with volumes on the Great Depression, is the most bearish of bears. He's been preaching for almost a decade that runaway mortgage lending would blow up.

Tice blames former Federal Reserve Chairman Alan Greenspan, who led the central bank as it ratcheted down the benchmark U.S. interest rate to 1 percent in June 2003 from 5 percent in March 2001 and held it there for a year. Borrowers rushed in and mortgage debt soared to $1.4 trillion in 2006, double the $708 billion in 2001, according to Fed data.

15-Year Bear Market

Now, Tice says the Standard & Poor's 500 Index may tumble 40 percent during the next 12-24 months as the credit crisis undermines the economy, bankrupts households and companies and whacks profits. The drop would be worse than the 37 percent plunge in the index from 2000 through 2002.

Tice predicts U.S. equities will enter a bear market that may exceed the 15-year slump from 1965 to 1980. Moreover, he says if the Fed and Wall Street don't break their addiction to easy credit, the economy will eventually crash in a depression -- a condition marked by reduced purchasing power, unemployment and corporate failures.

The U.S. can't continue to inflate bubbles in stocks, real estate and other assets without crippling the financial system, Tice says.

`Drunken Sailors'

``We've become a country of drunken sailors'' he says, snapping his fingers as he makes his point. ``If you spend, spend, spend, there are going to be consequences to that -- you can't borrow your way to prosperity.''

Even so, the turmoil has been good for Prudent Bear. After five years of trailing the S&P 500 with an annualized 0.9 percent loss compared with the index's 11 percent annual gain, the tables have turned for Tice's mutual fund. Prudent Bear, which has $1.1 billion in assets, has returned 9.5 percent from June 30, 2007, to May 20. That's almost 14 percentage points better than the 4.3 percent decline in the S&P 500.

Tice, a short seller who profits when prices fall by borrowing and selling shares and then repaying at a lower price, bet correctly that Citigroup Inc. and Merrill Lynch & Co. would be hammered by mortgage losses.

He shorted companies that consumers were likely to avoid in a declining economy, such as Bed Bath & Beyond Inc. and Harley-Davidson Inc., according to Prudent Bear's annual report released on Sept. 30, 2007.

Prudent Bear went long on metals with Capstone Mining Corp. and other ore producers. Shares of the Vancouver-based silver, copper and zinc miner jumped 81 percent during the past year through May 20 thanks to the commodities boom and the falling dollar.

Predicting Credit Bubble

``Tice has been talking about the credit bubble for years,'' says David Kathman, a mutual fund analyst at Morningstar Inc., the Chicago- based investment research firm. ``He may have looked foolish there for a while, but now the chickens are coming home to roost.''

Tice and fellow bears had better savor their moment because the bulls are poised to take back the market, says Robert Olstein, a money manager in Purchase, New York, who runs the $1.2 billion Olstein All Cap Value Fund. The S&P 500 has rallied 11 percent since Fed Chairman Ben S. Bernanke's unprecedented moves to stabilize the U.S. financial system began in March.

In addition to backing JPMorgan Chase & Co.'s takeover of Bear Stearns, the Fed for the first time since the Great Depression allowed securities firms to borrow cash at the same rate as commercial banks.

By March 20, Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., among others, tapped $28.8 billion in cheap Fed loans, bolstering confidence that Wall Street would overcome the crisis.

`Butt Kicking'

``Don't bet against the Fed,'' says Olstein, 66, whose fund is down 6 percent this year. ``The worst is over, and the market is looking to turn; and when it takes off, the bears are going to be in for a good butt kicking.''

Richard Yamarone, chief economist at New York-based equity analysis firm Argus Research Co., says the $152 billion package of tax rebates and incentives that lawmakers passed this year will set off a shopping spree.

Another silver lining: Companies in the S&P 500 have almost doubled the average level of cash and equivalents in their coffers since 2001, to $2.05 billion from $1.08 billion, according to data compiled by Bloomberg. After gross domestic product inched ahead 0.6 percent in the first quarter, Yamarone is forecasting the economy will eke out a 1.7 percent increase by year's end.

`Doom and Gloom'

``Depression? C'mon, that's just the doomsayers trying to be funny,'' Yamarone says. ``We're going to be on the rocks during the first half of the year, but the pendulum is swinging too far toward doom and gloom.''

As he's been doing for two decades, Tice counters that bulls are ignoring the pain ahead. Losses from the U.S. mortgage crisis may reach $945 billion, the International Monetary Fund said in April. That would be a bill six times more costly than the savings and loan debacle of the late 1980s, according to the U.S. Government Accountability Office.

Banks alone have reported more than $323 billion in losses or writedowns worldwide since early 2007. U.S. consumer confidence fell to its lowest in 28 years in May as record gasoline prices and the loss of more than a quarter million U.S. jobs this year cut into spending.

``The economy is still a wreck,'' Tice says. ``We're not out of the woods.''

End of Golden Age

The credit meltdown runs so deep that the prosperous years on Wall Street that began in 1982 are probably drawing to a close, says Barton Biggs, 75, managing partner at Traxis Partners LLC, a New York- based hedge fund.

``We had a spectacular era of financial success that was extended by the subprime mortgage mania to 2007,'' says Biggs, who was chief global strategist at Morgan Stanley until 2003. ``But I think the golden age of Wall Street is over.''

Tice couldn't agree more. For him, the day of reckoning is long overdue. Yet profiting from the upheaval is fraught with peril. The No. 1 danger for bears: No matter how sound their analysis or prescient their predictions, they're often steamrolled by bullish momentum, Morningstar's Kathman says.

During the mid-1990s, Tice bet the tech boom was unsustainable. No matter. Prudent Bear was pounded for four straight years, dropping 58 percent from 1996 to the end of '99 as dot-coms exploded in value.

Following the 31 percent drop in the S&P 500 in 2001 and '02, Tice predicted equities had entered a long-term bear market. He was wrong again. The S&P 500 climbed to its all-time peak of 1,565.15 on Oct. 9, 2007.

`Bearish Convictions'

Tice says the market's record-breaking rise has only cemented his view that dangers lie ahead.

``He's unshakable in his bearish convictions on the credit bubble and how we're all going to pay for it,'' says James Chanos, founder and president of Kynikos Associates Ltd., a New York-based hedge fund that, like Prudent Bear, shorts stocks.

Chanos says he appreciates Tice's arguments; yet, as a pure stock picker, he doesn't apply macroeconomic analysis in his fund.

Tice, who zips around his Dallas neighborhood on a Vespa scooter and grooves to Led Zeppelin, says dire predictions aside, he's not some dour cynic. He's been enamored with the stock market since his teenage years in Independence, Missouri, in the 1970s. His mother introduced him to investments and analysis by tuning in to ``Wall Street Week with Louis Rukeyser,'' a TV program broadcast on public television stations.

Tice started on his path to becoming a ``perma-bear,'' a market skeptic in good times and bad, after Black Monday, Oct. 19, 1987. That day, the Dow Jones Industrial Average tumbled 508 points, or 23 percent: the worst single-day drop in its history.

Dead Houseplant

Tice, who was studying to pass the chartered financial analyst examinations, was already leery of Wall Street and put off by how investment banks skewed equity research to curry underwriting business.

``The banks were just touting the damn things and never had any skepticism,'' Tice says. ``So we would be the devil's advocate.''

He's still playing that role from a third-floor warren of offices in a 10-story building north of downtown Dallas that he shares with eight members of his investment team. A couple of these analysts are so contrarian, they delight in rooting against the Dallas Cowboys professional football team, heresy in a town that worships the five-time Super Bowl champs.

The offices look like the headquarters that time forgot, with prints of English fox hunts lining the walls and dusty stacks of financial reports in wooden bookcases. A dead houseplant sits on a filing cabinet. Paintings depict lighthouses withstanding the crashing sea, presenting an apt metaphor for how Tice and his colleagues see themselves in relation to the markets.

Biggest Challenge

On this March afternoon, Tice is keeping an eye cocked toward a computer screen that flashes prices of stocks, metals, oil and the dollar. He even plunks his laptop on the table of an upscale Italian restaurant in Dallas during lunch to monitor the action.

``There it is; gold just hit $1,000,'' he says as he tucks into a grilled salmon filet.

With many of his predictions about the credit crisis coming true, Tice's biggest challenge may be outfoxing the newly minted short sellers who are rushing to cash in on the economic gloom.

In April, short interest on the New York Stock Exchange reached 4.1 percent of total shares outstanding, the highest level since Bloomberg started tracking the data in 1995. The flood of shorts increases the chances for a market phenomenon that strikes dread in investors such as Tice: the short squeeze.

Short Squeeze

That's when a stock that's being sold short experiences a sudden upturn. Bears, fearful that shares are moving against them, buy the stock -- to ``cover'' in trading parlance. The buying spurs prices higher.

Tice says he and Noland defend against squeezes by maintaining short positions in 75 different stocks: none of them exceeding 1.25 percent of the portfolio. That way Prudent Bear can quickly unload any shares that start to climb. As of March 31, Tice was shorting organic grocer Whole Foods Market Inc. and credit card provider Capital One Financial Corp. He expects both to suffer if there's a recession as consumers cut back.

Noland and Prudent Bear analyst Ryan Bend feared a short squeeze on CarMax Inc., the national auto retailer based in Richmond, Virginia. In April 2007, Tice bet the worsening economy would wallop CarMax with falling sales and rising auto loan delinquencies. So Prudent Bear started shorting it at $24.78.

By Feb. 29, other bears had sniffed out the opportunity and laid siege to the stock: CarMax's short interest climbed to 17 percent of its daily trading volume from 9.8 percent on Dec. 31, according to Bloomberg data.

`Candy Bars'

Worried any scrap of good news might send shares higher and trigger a squeeze, Noland trimmed CarMax to 0.5 percent from 0.85 percent of the fund in the first quarter.

``We have to cut back on the candy bars to rein in risk,'' says Bend, 32, using lingo for a tasty short candidate.

On April 18, with short interest at 23 percent, Bend closed the position. Based on the stock's drop from $24.78 in April 2007 to $17.50 in January, Tice's target price, the trade delivered a 29 percent return.

Tice and Noland also have to be careful not to fall so in love with their own analysis that they overstay their short positions. Homebuilders have been so-called candy bars amid the real estate crash. As of September, Prudent Bear was shorting 75,000 shares of Los Angeles-based KB Home, which dropped 58 percent last year.

The fund was also short 90,000 shares of Toll Brothers Inc., based in Horsham, Pennsylvania, which fell 38 percent. The two hit bottom in January. KB Home returned 9 percent and Toll Brothers rose 15 percent this year through May 20. Prudent Bear closed its short positions in the companies in the first quarter even though Tice expects little immediate improvement in homebuilders' fortunes.

Pulling Weeds

``You have to pull the weeds,'' he says, referring to closing out losing positions.

Tice forged his bearish views in Texas's investing scene during the 1980s, the era of the TV drama Dallas. He earned a bachelor's degree in accounting from Texas Christian University in Fort Worth in 1976 and a Master of Business Administration from the same school the following year.

He spent the next eight years toiling as an internal auditor and acquisition planning executive in the Texas operations of oil giant Atlantic Richfield Co. and Enserch Corp., a Houston-based oil and natural gas firm.

Tice witnessed firsthand the perils of rampant speculation as the oil boom turned to bust. Then came the S&L debacle, when more than 740 lending institutions failed in a wave of corruption. By Black Monday 1987, Tice identified with the skeptics, not the market boosters. And he opted against looking for a job on Wall Street, which he considered a haven for Ivy Leaguers.

Investing Career

``I had a little chip on my shoulder,'' says Tice, leaning back behind a wooden desk in his office.

Eager to start an investing career, Tice read a book by Thornton O'glove called ``Quality of Earnings'' (Free Press, 1998). O'glove, who co-wrote a newsletter by the same name with money manager Olstein, showed that financial statements could reveal how companies used legerdemain to boost income and downplay expenses.

As a CPA, Tice loved the notion of becoming a financial detective. He also recognized that there was money to be made when stocks tumbled. Tice started his own newsletter called ``Behind the Numbers.''

It dissected financial statements and issued sell recommendations. He tapped $10,000 in savings and worked out of a spare bedroom in the Dallas home he shared with his wife and infant daughter. Soon enough, he started signing clients who saw his research as a way to cross-check Wall Street analysis.

`Cracks in the Financials'

``We didn't always agree with him,'' says Luther King, a fellow TCU grad and founder of Luther King Capital Management in Fort Worth, a money management firm with $7.7 billion in long-only funds. ``But he was an independent voice, and I knew by his nature he was looking for cracks in the financials.''

In the mid-90s, Tice was charging $10,000 a year for his reports. He counted hedge fund managers George Soros, Michael Steinhardt and Chanos as clients. CEOs often recoiled at his research.

In October 1999, Tice issued a sell on Tyco International Ltd. Chief Executive Officer Dennis Kozlowski expressed outrage after Tice raised concern that the Bermuda-based conglomerate was generating quarterly increases in income partly by disguising routine operating expenses as one-time charges for acquisitions. Analysts at Credit Suisse First Boston Inc., Bear Stearns and JPMorgan reiterated bullish recommendations on Tyco.

``Kozlowski was ripping us, and Wall Street was attacking, but we felt strongly that we were right,'' Tice says. In December 2002, an internal review found Tyco had used ``aggressive accounting'' to bolster results.

Bloodied and Unbowed

Separately, Kozlowski and Chief Financial Officer Mark Swartz were charged in New York state court with looting $137 million from Tyco. Convicted in June 2005, they're serving 8- to 25-year prison sentences. Tice sold ``Behind the Numbers'' for an undisclosed sum to his former analysts last year.

By the time Tice had made the Tyco call, he'd expanded into managing money himself by opening Prudent Bear in 1995. He chose the name to reflect his investing approach: He shuns using leverage to boost returns and doesn't hesitate to close out positions and rein in risk.

Still, Tice's wager that the technology-led boom was headed for the rocks was four years too early. Crushed by dot-com mania, the fund suffered a 34 percent drop in 1998. Tice refused to become a bull.

``I was bloodied, but I couldn't waver,'' he says. ``We were a hedge; that was our mandate, and I couldn't just tell clients, 'Well, I'm going to be bullish for three months.'''

Finding Footing

Prudent Bear found its footing in 2000. Betting that Wall Street would suffer from a decline in underwriting securities offerings and weak earnings amid the economic slump, Tice shorted shares of Goldman Sachs, Lehman Brothers and Morgan Stanley in 2002. They each fell more than 20 percent that year, contributing to Tice's best performance ever: a 63 percent return.

Tice became intrigued by forces such as credit. As early as 2001, he cautioned that the Fed, by lowering interest rates, was rescuing the economy from one bubble by inflating a new one.

``We do not believe it is advisable to stimulate a burst of unprecedented mortgage credit creation,'' he wrote in Prudent Bear's annual report in September 2001.

Tice also decried Wall Street's use of derivatives to transform toxic subprime mortgages into investment-grade securities. Derivatives are financial contracts whose value is based on, and determined by, another security or benchmark. He says banks pumped the credit bubble by manufacturing collateralized debt obligations and mortgage-backed securities.

Mining Fed Data

Ultimately, many of these instruments couldn't justify their value. Net issuance of asset-backed securities skyrocketed to a seasonally adjusted annualized rate of $906.8 billion in the fourth quarter of 2006, three and a half times the $255.6 billion in 2001, Fed data show. Last year, issuance plunged to $177.4 billion.

Noland, whom Tice had met in 1997, was a kindred spirit when it came to the credit bubble. The Indiana University MBA holder had turned bearish working for short seller GW Ringoen & Co. in San Francisco before joining Tice in 1999.

An intense man who utters complex sentences in a husky voice, Noland, 45, revels in mining arcane Fed data.

Setting down a document that's 2 inches (5 centimeters) thick called ``Flow of Funds Accounts of the United States,'' Noland says, ``The whole story is right here.''

Noland points to tables showing how total borrowing in the credit markets climbed to a seasonally adjusted annual rate of $4.96 trillion in the third quarter of last year, a 148 percent jump from 2001. The increase occurred even as U.S. home prices fell for the 14th straight month and foreclosures spiked.

Five-Alarm Fire

For Noland, this was a five-alarm fire: Wall Street was cranking out more high-risk debt securities in the face of deteriorating credit quality.

``Unlike the tech bubble, which was isolated, the mortgage finance burst is causing huge distortions in the entire economy,'' Noland says.

Tice and Noland anticipated the pummeling Wall Street would take and bet against securities firms. Prudent Bear was short 65,000 shares of Citigroup as of Sept. 30. The bank wrote down $18.1 billion on subprime losses in the fourth quarter.

Tice also sold short 21,000 shares of Merrill Lynch, which lost a record $9.8 billion in the same period. Both stocks dropped more than 40 percent last year.

Last May, Tice started shorting about 351,000 shares of Starbucks Corp. at $28.46 in a bet that stretched consumers would balk at $4 coffee drinks. Yesterday, the gourmet coffee maker closed at $16.83, meaning Prudent Bear would have reaped at least a 41 percent return if Tice covered that day.

Resilient Market

Now the challenge dogging Tice and Noland is that the markets may once again prove as resilient as they have in the past. Since March 10, bullish investors have driven the Dow up more than 350 points on three occasions, including a 420.4 point surge on March 18 -- five days after Tice was proffering cookies amid Bear Stearns's meltdown.

``The bears won for a while, but winter will turn to spring, trees will bloom and market psychology will shift,'' says Neil Hennessy, CEO of Novato, California-based investment firm Hennessy Advisors Inc.

For Tice, who has long been dismissed by bulls as a Cassandra warning of doom that would never come, the credit implosion has at least for now validated his pessimism.

``I do feel intellectually vindicated,'' he says.

Vindication may be cold comfort. In April, the S&P 500 rallied 4.8 percent, its biggest monthly rise in more than four years. If the bulls continue their stampede, Tice may find that even after being right about the credit crisis, he may be wrong about how long the bears will reign.

[kennynah]

i have been calling for a burst of oil...since crude was 125pbl....now it is 133pbl...

knn...i cant be more wrong...some more i have puts in apa...a oil related company...bleeding me somewhat...

lesson... dont be a smart alec... when the price is trending up...despite all logic that tells one it is overdone, it is NOT.......only your breakfast egg is overdone...

maybe it will soon bust.....soon? sooner i be broke betting on it...

when it happens, it happens...not any sooner...


and that's my lesson for all to learn....

[kennynah]

now that a couple of days have past....and really a stroke of luck...i am seeing some likeable candles forming on APA...they seem to be telling me 2 signs... a) a bullish rejection b) bearish engulfment formed on tues and wed...although thurs candle would be ideal if it was a solid black shaven cande..

while all of us can identify that hope brings no profits, luck do at times...

we see how it goes....