Tuesday, September 30, 2008

latest thoughts

Been an interesting period what with lehman, aig, wamu and now wachovia all either gone or dealt with -- the market up until the bailout bill failed had been in a narrow range for the past week or so-- from 1180 to 1220.  with a 9% mini crash today I think we are getting closer to a better near term low -- the one from a couple of thursday's ago was manipulated due to all the policy response including the short selling rules -- incredibly stupid by the way.  This next low has the chance of being real -- based on a selling exhaustion that rises almost for no explainable reason -- that's normally what happens.  

at the end, the market just bottoms and starts rising.  there is no good news to drive it, in fact the news is universally bad at the time.  I can't imagine worse news that what we have now -- an interventionist government destroying as much value as possible -- causing a domino effect of bank failures combined with unbelievably horrible leading indicators of massively slowing growth.  earnings estimates for almost every company are wrong but stock prices reflect that in many cases.  

On the one hand I believe the market could bottom somewhere in the 800 to 900 range -- down 650 to 750 from the peak -- that would make sense from the standpoint of the worst financial crisis since the great depression.  Right now the decline barely ranks -- does that make sense given all that has happened?  

but its hard to believe we are going to get there right now -- I would say sometime in the spring of next year at best.  in the mean time maybe we drop more but I find it hard to believe after today's drubbing that we aren't getting closer to a bounce -- maybe we fall another 5-10% tomorrow but that gets you to 1000 on the S&P -- are we going to drop more than that before a near term bottom?  I wouldn't think so.  then a rally back up towards 1200 -- maybe if we are lucky.  a trading range for a couple of months and then further declines.  

but all that is just for fun -- key is stocks -- what are my latest thoughts:

well -- didn't pull the trigger on the FDS despite having opportunities to sell all my shares above $60 -- ugh!  Did sell some ILMN -- just trimming around $85 ($42.50 post split).  Also sold some CME at $400.  Sold the POWI today at $24.8 -- always use limit orders -- I put the sale order at the market in at $25.1 but my actual trade done 30 cents lower.  still with the stock around $23 by the close its not a bad trade so far.  I still like the company but wanted to raise some cash.  Of course the time to do that was in May (1400 S&P) or back in Dec (1400 to 1500 S&P) but I didn't realize the permabears were finally going to be right after predicting doom and gloom for many years.  

still looking to buy more TECH, LH and UEPS.  Today was the day to buy UEPS but I was too busy dealing with work issues -- stock closed at $21.59 -- the bottom of its range since 2005.  You either have to believe that the stock will break out of its trading range to the downside or that this is another time to pick up more shares.  granted global calamity is an excuse for breaking down but you also have the SA government finally suggesting a decision is at hand.  

I have been wary of ERII because it is a play on desalinization -- which requires really expensive plants, which requires lots of capital -- one would think that would be a problem in this environment.  Of course fresh drinking water is a priority too.   stock has remained quite resilient -- similar to MXWL.  

I bought some options on TSRA today (monday) because the stock got hit worse than other stocks and decisions on their cases should be due soon.  I bought the Nov 17.50's -- not that I am an expert in terms of picking contracts.  I decided I wanted to go further out than october but didn't want to pay too much per contract so I picked the 17.50s rather than the $15's.  

I also dipped my toes in the water on some S&P calls (actually based on SPY) I have plenty of powder dry to buy more if the market keeps selling off.  I will probably double down if the market continues to decline.  what I mean by that is to put the same amount of money on the next trade but because the price will have dropped I can buy more contracts.  

At this point the only financials I would think about buying are SCHW, CME and maybe GS.  Although I wonder about BX at some point.  SCHW because they don't make money on their own money but rather on their clients money -- which is declining for now but this gives you a nice kicker on the market.  CME because of their monopoly.  GS because they are the best, period.  BX because they have cash to take advantage of the downturn.  if you believe we are in for an extended flat to down market than none of these is a good choice.  

Tuesday, September 9, 2008

bye bye Fannie and Freddie and other gibberish

Well -- its time for my once every few weeks post -- hope to get a little better about posting soon.

FNM and FRE dying today -- about time. What sucks is not making any money off of this -- what has been an obvious call -- an understanding of economics was all that was necessary to know they would eventually have to be destroyed by the system they created -- there is no one in the mortgage finance chain that cares about anything -- everyone makes assumptions but no one really checks or really underwrites -- maybe now given all that's happened but not last year when it mattered. Think about it -- the originator doesn't care whether you are going to pay back your loan or whether the home value can support the mortgage -- they are going to sell the mortgage to fnm or fre or some other securitizer. FNM or FRE doesn't care because even know they have a guarantee fee they are nationally diversified, only guarantee loans with 20% down payments and housing prices have never declined significantly across the board in this country.

Oops -- guess we can throw that one out. nationally diversified doesn't matter much when all houses are declining. 20% down payments don't matter when the home values are dropping by that much especially given the cost of carry -- i.e. a foreclosed home has lots of costs that must be covered and included in the loss estimates -- everything from taxes to fixing what's broke.

the person buying the mortgage securities doesn't care about credit risks either because they assume someone else did it -- like the originator or fnm or fre. they also assume they have the down payments and the national diversification, etc.. etc...

I still think deleveraging is occurring and that it will impact the economy and the markets. the only risk is that stocks already reflect that but I don't see that as being possible. international growth is slowing and that will pressure exports too.

Here are the stocks I want to buy more of --

FLIR -- they have solid demand and rapid innovation -- there is almost no limit to the number of applications for their infrared tech. Latest one I heard is building energy conservation as well as safety. They can use the temp readings from the infrared cameras to know where all the bodies are in the building -- lets them adjust the HVAC and the lighting to where the bodies are. Plus in an emergency, they can determine where the bodies are or were prior to the emergency. That might help the emergency responders focus their saving efforts.

UEPS -- bought a company that licensed their early tech to offer hardware and software within Russia and the FSU. This broadens their markets to include areas outside of Africa -- its a big deal yet the stock didn't react the day of the announcement because of EPS fears (they reported the next day). EPS report went well so the stock has jumped from the $24 to $27 level. Still love the story -- its going to be huge. Haven't bought more yet but on a pull back towards $25 I will.

LH -- at the right price -- closer to $70 I would love to buy more. At $75 its a little harder. While the last quarter came in a little light, the stock's valuation is low and the secular drivers are at their back -- its all about increased testing using genetic techniques that will improve outcomes. They are one of the biggest beneficiaries of ILMN's technology yet they sell at a fraction of ILMN's multiple.

TECH -- more genetic growth at a reasonable price. I think this one will pull back more -- maybe to $70.

What I would prefer to trim at the right price:

FDS -- anytime I can sell this with a 23x PE in this kind of environment I probably will. great company but they sell to financial services firms.

POWI -- $30 would be nice but its closer to $25. its a great story but is it as good as FLIR or UEPS? doubtful.

ILMN -- great story but its too big a position size given the risks that any slowdown will be met with sharp selling pressure. something between $85 and $90 would be great.

A few other buy ideas -- MXWL, ERII, SCHW

MXWL -- they are signing deals and winning more business but now the question is at what margin -- that was the big miss last eps report. I might average down if the stock gets a 10 handle to it.

ERII -- still researching and thinking about this one -- very interesting technology but its business model is kind of weak -- all a bet on fresh water and the need to find more of it -- or in this case to make more of it. the problem with the business model is that there is no annuity to the business -- just a razor not a razor/blade business.

SCHW -- its all about asset gathering because trading commissions only account for a small percentage of schwab's revenues -- maybe 20% vs. the rest which come from asset management and net interest income -- both of which are driven by the amount of assets within schwab. they will be hurt by a fall in the markets but not as much as a fund company like AB does.

good night.