Ok, first let's cover the DFR -- yes I am feeling pretty stupid for buying more to try to recognize some losses (buy more wait 30 then sell). I am feeling stupid overall too -- what did I say in August? don't own the financials. Why I didn't equate that with DFR I don't know. They were too leveraged and owned the wrong securities with that leverage and they are practically insolvent -- at least that is what is implied by their current share price.
Owning a leveraged portfolio that was funded by the brokers has turned out to be the worst place to be -- the brokers are playing musical chairs with their capital -- there is only so much of it to go around and lately the hedge funds, mortgage REITs and others are having trouble finding chairs.
Their portfolio seemed simple and easy to understand in contrast to the brokers and other financials that owned complex hard to value securities. They have a great track record of credit analysis at a time where they should have known who their fellow investors were -- that was far more useful info than credit analysis. In the ultimate irony -- the mortgage part of the portfolio was merely designed to provide the REIT tax advantage with the risk and the higher returns coming from the alternatives yet its the mortgages that cost them a fortune.
The management company? what is that worth? I have bet a few bucks a share but obviously others disagree. I just find it hard to believe that the management team was that wrong as to sign up to be bought by a REIT that was headed for bankruptcy just a few months later. wouldn't you think they structured the deal to prevent one from destroying the other?
We are only a few months into this issue -- there is going to be more pain to come -- we haven't had any failures yet. So far companies seem to be able to get access to more capital which is why the financials aren't coming back for several years -- tech's have been in a trading range in some sense for about 5-6 years since they bottomed. Most tech's haven't gotten very far since the bottom or if they did they have rolled back over. Apple and RIMM are exceptions. Think about EMC, NTAP, SUNW, JDSU, CSCO, MSFT, etc. old leaders. no where for years. I expect that once the financials bottom they will not get very far for several years either.
Too much capital -- too many competitors meaning there is at once too much capital and not enough capital. There is too much capital but its spread amongst too many companies so there is too much for the industry but not enough capital for each company in the industry. That means pressure on liquidity and once they survive pressure on returns. People keep saying once the business bottoms the survivors will have great returns because the competition will be down so much. That's going to take a long time. When you back out all the leverage that was used you realize the actual amount of debt needed to finance the economy isn't nearly as much as what has been issued over the last few years. That impacts all the infrastructure put in place to produce that debt -- think brokers, hedge funds, mortgage REITs, banks, etc.
Remember my comments from August -- the mortgage market shrinks by 40% or so but the securitizations of the securitizations (CDOs buying MBS) means the actual mortgage related debt falls even more. That remains the biggest risk for MCO -- that the amount of debt issuance falls and keeps falling. Only hope is the rise of securities in Asia as well as the need to replace too many failed short term funding sources with longer term debt (i.e. auction securities).
Moody's has been flat but I think that is a function of a small float and lots of cash flow at the company to buy back stock. soaking up all the volume. it could easily fall to the 20's if people decided debt issuance was going to drop further -- say for them to earn $1.50 instead of $2 or more.
TSRA -- AMKOR arbitration will continue as planned -- panel rejected a stay motion. By law this is a contract dispute not a patent issue. Therefore TSRA should win easily after proving that AMKOR signed a license agreement and is using their technology without paying for it. However, the last few weeks proves nothing is easy or simple with TSRA. I would expect a decent rebound for the stock if they win the stay appeal and Amkor too. What sucks is that management can't buy the stock to show their confidence because of the insider rules -- they have to wait 6 months after their last sale before they can buy at the market price. So far this has held up well during the last couple of days declines. So much volume near these levels I think you have decent downside protection with a large potential upside.
FLIR and ILMN -- too many own the stocks and have been hiding here -- that means people are selling them because they haven't gone down yet and now the charts are broken (well at least FLIR's isn't looking as strong that's for sure). fortunately I sold some ILMN but obviously not enough so far. I will look to add to FLIR in a bit -- a little nervous given how far some of the stocks have fallen and the fact that we still have lots of unwinding to do in terms of fixed income leverage. do not believe there has been any material change in either of their businesses -- perhaps some loss of mo but that seems to be reflected in the price.
Nat Gas -- EOG is my pick at this point. I really like their strategy of using the drill bit to build reserves -- they buy cheap land and find reserves on it -- that's somewhat similar to MCF's strategy just on a bigger scale. I have been thinking a little diversification can't hurt. these nat gas stocks have just broken out from 3 year long bases -- that is usually a good thing for ongoing appreciation. CEO of EOG during their recent analyst meeting called horizontal drilling -- 10% of industry wells this year but 50% of EOG's wells -- a sea change that continues to be underestimated by the industry and by investors. They have identified enough growth paths in terms of areas to be drilled to last them for several years. Only problem is the stock has soared post analyst meeting -- I feel like CLB all over again. This time I am watching the stock pull back first but will probably switch some of my MCF over to EOG as a diversifier. I belive in nat gas overall and I think EOG will maintain strong growth in production, reserves and cash flow while keeping ROCE high. Still can't help but wonder why these won't be the next set of winners to roll over and go back down -- chart says a low volume pull back towards the breakout point is ok but nothing more.
We are at the previous lows -- are we to successfully retest them or are we going a lot lower? hard to say but It seems to me that if we luck out and don't go to new lows we aren't going up either. I expect flat prices at best for quite some time.
today's irony -- that all the concern is about the US economy -- is it in recession or not? yet the price of oil is hitting highs. commodity inflation is not driven by our economy but everyone else's. we have asset deflation combined with commodity inflation. fun stuff.
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