I see it more often than not, traders thinking they can make a quick buck with the VXX. This usually this turns out miserable for a vast majority of those in the trade, at least in the recent months. You can call it what you like, fighting the trend, trying to outsmart the market, whatever you call it, it looks like a mistake. Maybe my opinion is slighted from my unsuccessful trade in the VXX at the beginning of the year. Though, one cannot sit by on the sideline and not witness the massacre to those who believed in the VXX story. Volatility will come back in due time, it always does, but the VXX will likely take a grimmer route.

We as a memeber of the new trading community (one tainted by the market actions of 2008 and  drop off last year) believe that we can call the next disaster, that we can pick the next collapse. This has slighted many of our opinions, we saw the money made in volatility from those who timed the trade correct. I know I did, I saw those that made a killing off of the VXX, doubling their money in a month period and I wanted in. I thought at the beginning of the year, that would be me, I would make a killing on volatility. seven plus months have past since then and the VXX has done nothing but decrease in value. Oh yeah, and that collapse, it still hasn’t happened either. Everyone thinks they can outsmart the market for the next drop. The VXX seemed like the weapon of choice to take on the market that I saw as bearish. Maybe the market was very bullish and I was wrong, maybe the VXX is headed towards zero,  either way, the VXX was far from a beneficial tool to my portfolio.

The VXX ETF continually loses value on a monthly basis. Ask those who have used it as a hedge for an extended period and they will tell you it is a losing proposition. I at no point claim to understand the inner workings of the volatility ETF and that is why I should never have put money to work there. Hindsight always lends itself to be 20/20. Luckily, I walked away from the VXX a long time ago, saving some of my position. Since that time, I have seen the VXX sink lower and lower, and am glad I walked when I did. Take a look at that graph and you will see, time and time agian, it has melted lower since its inception.

My ramblings suggest two basic principles. First off, predicting the next collapse is merely a fools errand. If you pick quality companies that will do better in the near future and the future not so near, your portfolio will be rewarded. Making foolish bets has netted nothing but foolish results, ask around. Secondly, know what you are trading. If you do not understand the inner working of an ETF, such as the VXX (at this point I don’t even think Barclays understands it), don’t buy it.  I am still waiting on my check from Barclays with an apology note saying, “sorry we created an ETF that doesn’t work, here’s some gold coins for your trouble.” That day will never come, so I suggest learning from those who made the mistake before you, and find another way to bet bearish. If you happen to be a volatility addict like myself, day trading this monster seems like the best option.

Those in the housing trade since the earlier part of the year have been repeatedly rewarded, if they timed their entries and exits appropriately. I am not one to suggest an end of the housing disaster, rather I sit here advocating that things are not as bad as once suggested by the talking heads, making the housing play less risky. On weeks like these, when the global macro picture seems questionable yet again, betting on a U.S. recovery remains difficult. Though, as we look back at the worst of the recession, seeing the jobless claims sit in more comfortable territory, and see the home builders making investor money, it may be time to look at the housing derivative play- department stores.

At first you want to be skeptical, that was my initial reaction as well. Well aren’t department stores dying, isn’t everyone buying items online? One would think with the huge onset of technology that would be the case, but just look at your actions and see them tell a different story. Humans, in this case consumers, must feel and touch items.  We as a species are inherently nosy. Merely seeing an item on a screen does not suffice our appetite of need and lust. Yes, once Americans whip out their wallets they will spend it with an online giant like Amazon, but when they are setting up to fill a home with goods, they will be spend all their money in the department stores.

The play is simple. One buys a new home, the must in turn fill this home. If someone buys a used home, they will also fill it with goods. Again and again the play stares you in the face. If housing continues makes big moves, the department stores will follow. How much stuff do we really need? The desire for more never ends when it comes to Americans.  We buy new houses to fill these new homes with new items. Even if you cannot afford to furnish a new home you furnish it via credit. society has deemed it more acceptable to have an home furnished on credit than a home not furnished at all. Consumerism has fueled our economy for almost a century and our habits will not be changing anytime soon.

This derivative play may not be the move today or tomorrow, but as we see the housing sector continue to make leaps and bounds, department stores will be the play. Just look at the earlier part of the year as an indicator. When the United States was thought to make a full fledged recovery, the shippers doubled almost overnight. The economic situation may not be as picturesque as was first suggested many moons ago, but the movement exhibited by the housing sector suggests some profitable improvement. If this mediocre improvement is followed by continual improvement, department stores are the play.

Photo by thetorpedodog

With the continued horrible economic conditions that have become a norm to a vast majority of Americans, the populous has had to adjust their spending habits substantially. Americans now think differently when they walk into a store, compared to the thought process that once encompassed them, prior to the great recession. A majority of Americans no longer spend frivolously. As a investor you must evaluate what the masses are doing, where they are spending their money, who will set to profit from the new spending habits. The American consumer who was once willing to spend money anywhere, now has the responsibility instilled  in their spending habits to shop name brand items at a discount.

The plays in this current environment are Ross Stores and TJX Companies. This move will reward those in a jungle of an economic situation that collapses for the next few years or a climate where we run head first away from an American slow-down. You sit there stumped, wondering how will this play work in both economic conditions? The answer comes simple and straightforward, the American consumers have changed their spending habits and will not be changing them back anytime soon. These “cheap” habits are now instilled in Americas arsenal of shopping weapons. If Americans are no longer forced to shop at discount retailers they will choose to do so freely. If the masses are forced to shop “cheap” due to economic conditions, as they have for the last few years, these stores will continue to profit as well. Why spend 50 or more dollars on a polo when you can pay a measly $30 for the same item. The above example is how Americans are thinking as they go shopping on Saturday, the masses methodology that can be applied to many name brands and items, be it furniture, kitchen appliances, shoes and so on. Call it wealth effect, call it nervousness, call it whatever you like, Americans are scared of being poor again (think 2008, think unemployed, etc.) so they will continually pinch pennies.

Many Americans have seen the dark side, living pay check to pay check, many Americans have lost a substantial portion of their net worth in their houses, they feel poorer. You can attribute the change in behavior to whatever you like, the reality remains the same, Americans will continue to be cheap and the discount retailers will continue this profitable trend from this behavioral switch.

On a day like today, it isn’t rare for one to sit idly by observing the successes and failures of himself and the traders around them. The social media gods have chosen both a winner and a loser. The winner happens to be Yelp, for the time being, and the loser, much to my chagrin, is the gaming giant, Zynga. This game, stock picking, the game of choosing the winners and the losers, is far from the end. I will, as a proponent of Zynga, refrain from an admission of defeat and keep playing “the game.” However, we can sit, as more informed investors today, and see where exactly the divergence between Zynga and Yelp emerged.

This tale of two new tech babies can actually be broken down into a war of two tech giants. Yelp has the backing of Apple while Zynga has the backing of Facebook. Apple announced some time ago that Yelp would be an integral part of their next and best iPhone (and iPad, baby iPad, iTV?). Facebook, for the longest time, has derived many of its revenues from the social gamer Zynga. If you can’t see the ocean parting these two tech giants, let me inform you using the most basic terms. Yelp has sided with the one and only Apple, the tech giant of our generation. Apple has proven its merit to investors time and time again, even when it was thought to undermine your portfolio. Zynga has built their business around a company that has questionable profits and a questionable business model. In laymans terms: the investing public loves Apple and is yet to believe in Facebook.

Another disparity between these two up-and-coming tech companies happens to be extremely basic (while still playing a major role in the valuation of these names) is size. This may seem like a minute detail, but the size of these new tech darling say volumes about their trading. Simply put, Yelp trades with a takeout premium and Zynga does not. If you recall the small start up Instagram and their purchase price of around a billion, you now see the story emerge. Yelp trades at a range where a large corporation, say Apple, could come into tomorrow and buy them out for access to their valued reviews. If someone wished to buy Zynga, say Facebook, they would have a bit more of a challenge coughing up the $8 billion or so to pay for Zynga at premium cost.

The last and final point that the investing public seems to have fallen for Yelp once again is its use. Yelp serves a purpose, it’s the new word of mouth. Yelp allows users to say how they feel and give recommendations in the occasional form of insults. Zynga, in my opinion, serves a purpose as well, though the investing public believes that they can be replaced tomorrow. Yelp has proven it can stand on its own and the recent news out with Apple shows that they are the best-in-breed when it comes to reviews.

It is arguable that good companies trade well and bad companies trade poorly, blah blah. You might say “Zynga is down because it encompasses everything wrong in tech and Yelp trades up because it encompasses all the good in the world;” though you would be premising your argument on flawed logic. Both companies are of quality and will ultimately get their cake (preferably vanilla with chocolate icing) and eat it too. As anyone knows, companies do not always trade where they should, where they will, or where you want them to. I still am a long-time believer in Zynga (though I wish my money had been in Yelp) being that Yelp currently seems to be playing all the right cards.

I ain’t gonna lie, I bought Zynga way too early, but time heals all wounds.