CNBC Million Dollar Portfolio Challenge: End of Week 1

Update:  This is a post from the 2007 Portfolio Challenge.  If you're looking for posts on the 2008 contest, click here.

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Well, despite a strong performance through Thursday, the sound thumping visited upon South Korean e-commerce portal Gmarket (GMKT) on Friday evaporated more than $230,000 in portfolio value and sent me spiraling down more than 3,000 spots in the rankings to end the week at #3,428.  That was enough to remain in the top 2% with a total return of 9.5%, but several dozen percentage points behind the leaders.

It was pretty clear Gmarket would be a volatile one on Friday, which was precisely the point, but it happened to be the painful kind of volatility.  A few more pennies in 4th quarter earnings per share and the bloodletting might've been reversed.

Happily, the weekly ticket to the final round measures each week's performance in isolation, so the slate has just been wiped clean.  It also means if you haven't yet registered for the challenge, you can still get on board and have as good a shot as anyone.

A couple thoughts and observations about the first week of play.

1) CNBC grossly underestimated either the number of players that would register or the burden they would inflict on their servers.  The site began behaving erratically on Wednesday and has only worsened in the days since, particularly during market hours.  So far, I've managed to get my daily trades processed each day, but typically only after several attempts.  As voice by a number of understandably angry commenters on my earlier post, others have not been so lucky.  If the network is willing to pony up more than a million dollars in prize money, can't they spring for the incremental server capacity necessary to accommodate the flood of participants that kind of prize money was bound to attract?  Hopefully by Monday they will have.

2)  The contest rules (link available at the top of the FAQ) are extensive and in the constant promos being run on the network, the anchors frequently remind participants to review them thoroughly.  I did, and was looking specifically for any mention of whether players may sign up for multiple accounts.  Obviously, if you can manage multiple portfolios, your odds of winning a given week go way up, since the weekly contest is won by the player who notches up the top percentage gain.  Think of it like a roulette wheel with 230,000 numbers.  The more chips you can lay down, the better.  If you have several ideas about which stocks may post the largest gains in a given week, you can cover much more of the board with multiple portfolios.  The strategy I'm employing could be implemented with a high degree of confidence to at least tie the high score in a given week with as few as 600 or so accounts.  It'd take a fair amount of daily maintenance, but then again, the payoff is significant.  I thought about going this route, since the rules don't explicitly forbid multiple accounts.  Ultimately, I decided against it, as the rules do contain an ominous catch-all:

CNBC reserves the right to prevent access by any Participant who acts irresponsibly or inappropriately in playing the Contest.  Although all trading in the Contest is fictional, Participants are expected to engage in trading activity that fully complies with all federal and state securities laws (including without limitation insider trading), as if they were trading actual stocks.  CNBC reserves the right to terminate Contest participation by any Participants suspected of cheating, attempting to exploit the contest or other inappropriate behavior.  All such action will be determined by CNBC in its sole discretion.

I could certainly envision the contest administrators deciding that trading on multiple accounts is an inappropriate attempt to exploit the contest, so I decided not to risk ouster.  Another contestant, one Nancy Beaumont from California, came to a different decision.  She first appeared on the leaderboard on Thursday, occupying spots #11-21.  Yesterday, her name had disappeared, but Friday must've been a good day for the Nancy, as she's currently ranked #1, 2, 3, 6, 7, 11, 12, 15, and 17.  It looks like CNBC will be forced to make a decision about whether this activity is allowable or not, as that call will determine the first weekly winner.  I think I can guess which way #4 Colleen Ellsworth is leaning.

3)  This was an interesting week in the stock market.  Following 8 months of a nearly uni-directional bull market, stocks encountered their first real mini-correction the week before the contest, when an Asian sell-off prompted a one-day 3% decline in the major U.S. indices.  Generally speaking, this week was marked by a broad-based, if fitful, recovery.  But as mentioned before, savvy CNBC players are gluttons for volatility and nowhere was volatility higher this week than in the sub-prime lending market.  Not surprisingly, Fremont General (FMT) and New Century Financial (NEW) occupied spots on the most-traded list this week.  Anyone holding NEW took a long and ugly bath this week (unless they only held it Tuesday), as bankruptcy rumors swirled around the company, which is also facing a criminal investigation and just announced it will stop making new loans.  (In the interest of full disclosure, I bought some NEW at the close on Friday (in the contest, that is; I wouldn't touch it with real money)), with the stock now down 90% since early February.

FMT on the other hand was the undisputed belle of the ball in the first week of the contest.  The first opportunity to purchase FMT was at the close on Monday.  At $6/share, it'd just finished a weeklong 50% plummet.  By Wednesday, the shares had clawed back 45% and not surprisingly, the top 5 on the leaderboard had all posted returns of 45%.  CNBC didn't announce the leaders' percentage gains on Friday (reflecting Thursday closes), but FMT holders would've slipped a few percentage points.  At least a few among them must've jumped out though, meaning Friday's top scorers were likely north of 50% up for the week.  As of today's repricings, we can assume that among the 50%ers, a few must've made winning bets Friday.  I think the leading portfolio (whether it's one of the many iterations of Ms. Beaumont or the seemingly singular Colleen Ellsworth) most likely held FMT until Wednesday, found any number of neutral to positive positions on Thursday and moved into something like Blue Coat Systems (BCSI) on Friday.  As a late-Thursday earnings reporter, it would've been on volatility-seekers' radar screens and given its 12% upside move on Friday, anyone who had ridden FMT (and hopped off at the right time) and then moved into BCSI would be likely to put up the best weeklong gain, which I'm estimating came in around 71%.

For posterity, here's the daily breakdown for week 1 (my performance in green, my best guess of the leader's performance in yellow (for Tuesday and Wednesday, the leader figures are confirmed)).

I missed last night's "Inside the CNBC Portfolio Challenge" special, so if they gave any week 1 recap info that shed light on any of the above, please feel free to sound off in the comments.

Good luck to everyone in week 2!  If you're not signed up yet, it only takes a minute and the site is a lot less ornery on the weekend.

Previously:  CNBC Million Dollar Portfolio Challenge: Wednesday, Week 1