one of the behavioral finance ideas about mistakes people make says that most investors mindsets are skewed by recent history -- they lose perspective and will often extrapolate recent experience into the future regardless of whether that makes sense or not. Consider the VIX and Rosenberg's comments about it. In fairness to him he is an economist not an options person.
but he recently made comments about the VIX spending a lot of time next year between 30 and 40. The problem is that makes no sense unless you expect sharp declines and a huge increase in the volatility of the market -- i.e. daily up and down moves north of 2%. A VIX of 21 is very close to its lifetime average so insurance is not cheap.
historical volatility is running significantly less than implied volatility so the VIX is currently most likely overpriced by several percent in terms of what the actual volatility will be in the next 30 days. in other words to justify the current level of the VIX we need to see a sharp increase in volatility. what is even more strange is the VIX futures were recently at a 4 point premium to the cash VIX -- so the difference between the VIX futures and recent actual volatility is at least 10 percentage points. wow.
I figure as long as that volatility premium is in place or folks are talking about a VIX of 21 as saying there are cheap puts available, its bullish for the markets.
that said, I'm not sure I expect the move to 1250 by mid january that was written up in Barron's this last weekend. I've also seen the end is here type of writing -- Kass went "all in" on his short position this week -- huh? is it really that bad right now that all in short is the right posture. he did this wednesday so Thursday's decline is great but he didn't say anything about covering shorts so I assume he ended today still all in. wow.
Also read a lot of comments about consolidations or tight ranges end with the prior trend in place -- i.e. everyone expects the market to break out its just a matter of time. then Thursday's decline hit -- perhaps that changed enough minds but chances are most still believe it. yes I do too but I'm not in any hurry either --
I am starting to think we will simply widen the range up and down rather than break out. so add 25-50 points on to each end and that is what I'm thinking about (say from 1025 to 1170). that way we can stay within a range for that much longer and frustrate as many market players as possible.
Thursday, December 17, 2009
Thursday, December 10, 2009
Boring like I said
I posted the market would likely be range bound or boring last time -- dec 2nd is the date stamp but I had been meaning to write that comment for at least a few days prior. looking back it turns out that the SPY has been in a $2 range from 109 to 111 since November 9th. The IWM has been between 58 and 61 since about that time. Dubai Friday is the only time the market has been outside those ranges. great time to have sold premium -- question is how long can it last? can it last through expiration? would be nice. Can it last through the end of the year? possibly. We were oversold recently but couldn't rally -- now we are overbought and can't really fall. Last note I said I thought it was more likely we have a pull back rather than a big rally -- now I'm not so sure.
The SMH getting to $27 or breaking out from the range it had been in since early August either means one or two things -- rotation continues as the energy/basic materials area has gotten whacked while tech/semi's outperformed or it means the range of the market will be resolved to the upside. We are still over bought so its likely we meander longer but I don't think we will see a decline below 1080 -- at least this year.
One reason the upside was capped is because we are hitting the half way point from the lows to the highs (roughly 666 and 1565). The QQQQ's hit that point around $40 -- late July is when the index first got to that level and it took until early-mid sep for the index to really break free of the $40 level. We first got to the 1100 area around mid oct and then had a sharp pull back to the 1025 level. We have been back around 1100 since early November. So in comparison to the QQQQs the SPX has spent about the same time -- break out could happen now if we got the momentum. I'm thinking it will be another week or so before the overbought condition is worked off but next week is expiration week -- lots of folks have sold premium and are sitting on fat profits. that means any movement outside of the range that has been in place will lead to options sellers panicking -- adding fuel to the rally. I think the highest probability is we don't break out of the range but if we do -- expect a pretty good gain.
one reason why I don't expect us to break the range? weakness in financials.
ERII -- the stock popped partly due to an upgrade from Baird and partly due to their buying one of their competitors -- someone with a similar device that works best in smaller plants. The device is lower cost and not as energy efficient but the lower cost is what matters for the smaller desalination plants. this expands ERII's market into an area that is less impacted by financing troubles. Also Pump Engineering already has a business outside of water -- they sell to nat gas processing plants. ERII has talked in the past about taking their ceramic tech and energy recovery ideas to other industries but nothing yet -- this gets them started. a big deal. water is a great place to be but if you can leverage existing tech to get into other markets that's a great growth and margin booster. I'm hoping to get long some more if it can pull back towards $6 -- so far the most it has pulled back is to $6.40 maybe. but the market hasn't had a down day either -- we'll see.
The SMH getting to $27 or breaking out from the range it had been in since early August either means one or two things -- rotation continues as the energy/basic materials area has gotten whacked while tech/semi's outperformed or it means the range of the market will be resolved to the upside. We are still over bought so its likely we meander longer but I don't think we will see a decline below 1080 -- at least this year.
One reason the upside was capped is because we are hitting the half way point from the lows to the highs (roughly 666 and 1565). The QQQQ's hit that point around $40 -- late July is when the index first got to that level and it took until early-mid sep for the index to really break free of the $40 level. We first got to the 1100 area around mid oct and then had a sharp pull back to the 1025 level. We have been back around 1100 since early November. So in comparison to the QQQQs the SPX has spent about the same time -- break out could happen now if we got the momentum. I'm thinking it will be another week or so before the overbought condition is worked off but next week is expiration week -- lots of folks have sold premium and are sitting on fat profits. that means any movement outside of the range that has been in place will lead to options sellers panicking -- adding fuel to the rally. I think the highest probability is we don't break out of the range but if we do -- expect a pretty good gain.
one reason why I don't expect us to break the range? weakness in financials.
ERII -- the stock popped partly due to an upgrade from Baird and partly due to their buying one of their competitors -- someone with a similar device that works best in smaller plants. The device is lower cost and not as energy efficient but the lower cost is what matters for the smaller desalination plants. this expands ERII's market into an area that is less impacted by financing troubles. Also Pump Engineering already has a business outside of water -- they sell to nat gas processing plants. ERII has talked in the past about taking their ceramic tech and energy recovery ideas to other industries but nothing yet -- this gets them started. a big deal. water is a great place to be but if you can leverage existing tech to get into other markets that's a great growth and margin booster. I'm hoping to get long some more if it can pull back towards $6 -- so far the most it has pulled back is to $6.40 maybe. but the market hasn't had a down day either -- we'll see.
Wednesday, December 2, 2009
market
Do you remember the beginning of Jaws the movie? The woman is swimming in the water out to the bouy at night and suddenly her head gets jerked under water but she pops back up quickly wondering what had happened. eventually she is eaten and one of the great movies begins. Was Dubai the first head jerk and the market is about to get eaten with a big decline as everyone realizes there is a massive world wide commercial real estate collapse coming?
The only thing that makes me concerned is a sharp jump in CDS spreads for various countries including the US and some emerging markets I believe -- I'm getting this second hand so I'm not sure how accurate the info is. Rising CDS spreads is not good -- may suggest a more significant pullback is coming.
my own thought on commercial real estate has been that there is too much money waiting in vulture mode -- prices won't get to where many are hoping and assets will get dealt with as new capital is put to work. many in real estate would say that is a ridiculously optimistic and naive view. Probably true but my thought is it won't be as bad as the bears think.
have you seen the semi's? they are rallying again but so far just to the top of the range. At some point they are going to break out because its not double ordering. CY has certainly done well.
in the near term I expect the market to be boring as can be -- although if I had to pick a direction it would likely be lower -- internals aren't too good and sentiment is more bullish than it has been in awhile -- not enough in my mind to signal the end of the rally but enough to see a pull back. on the other hand if you see what happened last week -- Dubai -- at most about a 3-4% drop in the SPX led to about a 30% jump in the VIX --- so people buying puts like crazy on a small decline. I figure the weak internals and bullish sentiment and the fact that we are still near the half way mark between the lows of march and the highs of 2007 means the upside is capped for now. The rush to puts on any decline means the downside is likely capped too -- at least for the moment.
a few other stocks I am monitoring -- BLUD -- after we sold this one they ran into FDA and DOJ troubles and the stock got crushed into the teens. business still doing ok. story hasn't changed -- the secular story is the switch from manual to automated testing. its not a great secular story in the sense that unit volumes for the industry aren't growing a lot but the valuation is attractive for the quality of the business and the consistency of the blood transfusions.
LMNX -- sells testing equipment used for proteins and nucleic acids -- they have a deal with Techne actually. their system handles multiplexing -- running multiple tests on multiple samples. ILMN has a competing platform called bead express but the key to LMNX is the installed base -- about 6000 units vs. only a few hundred for ILMN. That's a lot of systems to drive consummable sales. the growth story is about getting as many tests approved on the system as possible to drive usage and more system sales. their system has particular advantages in certain types of tests -- that's what you do leverage your strengths. they have missed earnings the last few quarters but its primarily a function of their model -- they have little visibility into what partners are doing with consummables so its not surprising that they struggle to give guidance they can beat -- their fate on a short term basis is in someone else's hands. TSRA fixes this problem by reporting revenues 1 quarter in arears -- something LMNX should think about. the other issue is they have not seen as much operating leverage as everyone wants. to me its in the stock given how poorly the stock has performed. remember there are 2 kinds of companies -- those with problems and those with problems everyone knows about.
CVA -- while the hoax of global warming is finally coming out (I can't think of a more complex system then our climate -- one which we have very little accurate data on relative to the total set of data (millions of years) it is the ultimate in human arrogance to assume we know anything about our impact on temperature), I still think there is potential for certain alternatives like Covanta, which is actually 2 businesses in one -- waste management services and power generation (incinerator for garbage). europe is a much bigger user of waste generated electricity so we have a lot of catching up to do. CVA has ops overseas too but I suspect they have more opportunity in the US given the low penetration. Its profitable, and the valuation on a cash flow basis seems reasonable. they do have a lot of debt which is worrisome -- initial answer is they also have a lot of cash flow so its manageable but I want to do some more digging. the chairman is Sam Zell and one of the largest owners is that marty guy from third avenue value -- noted deep value investor. is this a deep value? only based on growth projections but I think its still attractive. On earnings basis its nearly 20x so it doesn't look good relative to something like Waste Management that is much cheaper or even MCD -- which is low teens for such a franchise company with a 3.5% yield. need to do more valuation work. i like them better than Waste management -- don't trust the numbers there and the electricity side is very small. I am a big believer in the growth of electricity demand.
The only thing that makes me concerned is a sharp jump in CDS spreads for various countries including the US and some emerging markets I believe -- I'm getting this second hand so I'm not sure how accurate the info is. Rising CDS spreads is not good -- may suggest a more significant pullback is coming.
my own thought on commercial real estate has been that there is too much money waiting in vulture mode -- prices won't get to where many are hoping and assets will get dealt with as new capital is put to work. many in real estate would say that is a ridiculously optimistic and naive view. Probably true but my thought is it won't be as bad as the bears think.
have you seen the semi's? they are rallying again but so far just to the top of the range. At some point they are going to break out because its not double ordering. CY has certainly done well.
in the near term I expect the market to be boring as can be -- although if I had to pick a direction it would likely be lower -- internals aren't too good and sentiment is more bullish than it has been in awhile -- not enough in my mind to signal the end of the rally but enough to see a pull back. on the other hand if you see what happened last week -- Dubai -- at most about a 3-4% drop in the SPX led to about a 30% jump in the VIX --- so people buying puts like crazy on a small decline. I figure the weak internals and bullish sentiment and the fact that we are still near the half way mark between the lows of march and the highs of 2007 means the upside is capped for now. The rush to puts on any decline means the downside is likely capped too -- at least for the moment.
a few other stocks I am monitoring -- BLUD -- after we sold this one they ran into FDA and DOJ troubles and the stock got crushed into the teens. business still doing ok. story hasn't changed -- the secular story is the switch from manual to automated testing. its not a great secular story in the sense that unit volumes for the industry aren't growing a lot but the valuation is attractive for the quality of the business and the consistency of the blood transfusions.
LMNX -- sells testing equipment used for proteins and nucleic acids -- they have a deal with Techne actually. their system handles multiplexing -- running multiple tests on multiple samples. ILMN has a competing platform called bead express but the key to LMNX is the installed base -- about 6000 units vs. only a few hundred for ILMN. That's a lot of systems to drive consummable sales. the growth story is about getting as many tests approved on the system as possible to drive usage and more system sales. their system has particular advantages in certain types of tests -- that's what you do leverage your strengths. they have missed earnings the last few quarters but its primarily a function of their model -- they have little visibility into what partners are doing with consummables so its not surprising that they struggle to give guidance they can beat -- their fate on a short term basis is in someone else's hands. TSRA fixes this problem by reporting revenues 1 quarter in arears -- something LMNX should think about. the other issue is they have not seen as much operating leverage as everyone wants. to me its in the stock given how poorly the stock has performed. remember there are 2 kinds of companies -- those with problems and those with problems everyone knows about.
CVA -- while the hoax of global warming is finally coming out (I can't think of a more complex system then our climate -- one which we have very little accurate data on relative to the total set of data (millions of years) it is the ultimate in human arrogance to assume we know anything about our impact on temperature), I still think there is potential for certain alternatives like Covanta, which is actually 2 businesses in one -- waste management services and power generation (incinerator for garbage). europe is a much bigger user of waste generated electricity so we have a lot of catching up to do. CVA has ops overseas too but I suspect they have more opportunity in the US given the low penetration. Its profitable, and the valuation on a cash flow basis seems reasonable. they do have a lot of debt which is worrisome -- initial answer is they also have a lot of cash flow so its manageable but I want to do some more digging. the chairman is Sam Zell and one of the largest owners is that marty guy from third avenue value -- noted deep value investor. is this a deep value? only based on growth projections but I think its still attractive. On earnings basis its nearly 20x so it doesn't look good relative to something like Waste Management that is much cheaper or even MCD -- which is low teens for such a franchise company with a 3.5% yield. need to do more valuation work. i like them better than Waste management -- don't trust the numbers there and the electricity side is very small. I am a big believer in the growth of electricity demand.
Tuesday, November 17, 2009
more stock comments
UEPS -- got the chance to read some street research from Baird on the quarter. I was shocked to see the discrepancy between what UEPS is paid in South for welfare payments and what they are paid in Iraq for various government payments like war casualties, etc. UEPS gets about $3.7 in revenue per card per month in south africa. In Iraq they get about 22 cents -- are the services that much different? don't know. if they got the same in SA that they get in Iraq, revenues would be a lot less. I checked back to the reports I could find from the past and a year ago the same analyst was talking about IRAQ earning 70-80 cents in revenues per card per month. that's better but still not close to SA levels. I can remember reading previous notes from this analyst that assumed growth opportunities like Nigeria and wage payment in south africa would reach $2 in operating profit per card per month at maturity similar to South African welfare. I thought he said the same for Iraq -- turns out it was .50 in operating profit per card per month. still have a long way to go to reach those levels.
Do I think the $3.7 they get from SA is too high? of course. Is it likely to change soon? no because they have the contract, they are one of the few if not only people that can operate offline in the rural areas of SA, while still providing broad smart card services.
CEO just announced he is selling half of his shares over time. that's not a positive sign although its not necessarily negative either -- it means he doesn't think the stock is about to materially jump but it doesn't mean he thinks its going to fall any time soon.
There is no doubt that UEPS is an incredibly cheap stock for the metrics they can produce now -- issue is how sustainable are those metrics like high free cash flow and high return on assets? how quickly can they diversify their business away from SA welfare and or can they earn similar economics elsewhere that they earn in SA? I have said before that until UEPS gains traction in a 2nd area such as Nigeria, Iraq, Ghana, wage payment, etc. the stock's multiple will suffer. To me its limited downside and lots of upside potential thanks to the cheap multiple.
Wow - I guess someone was really hot to trot to sell Cypress Semi and once it hit the 200 day moving average the selling has dried up -- stock was back to almost 10 after being near $8 not that long ago. I am recouping losses on that one but I didn't get the chance to ramp it up near $8. Still like the secular story here plus the cyclical one that if ECRI is right and the recovery exceeds expectations then all this nonsense about double ordering on the semi' side will give way to outperforming growth.
I still hope to cover a few others such as MXWL, etc. but not tonight.
Do I think the $3.7 they get from SA is too high? of course. Is it likely to change soon? no because they have the contract, they are one of the few if not only people that can operate offline in the rural areas of SA, while still providing broad smart card services.
CEO just announced he is selling half of his shares over time. that's not a positive sign although its not necessarily negative either -- it means he doesn't think the stock is about to materially jump but it doesn't mean he thinks its going to fall any time soon.
There is no doubt that UEPS is an incredibly cheap stock for the metrics they can produce now -- issue is how sustainable are those metrics like high free cash flow and high return on assets? how quickly can they diversify their business away from SA welfare and or can they earn similar economics elsewhere that they earn in SA? I have said before that until UEPS gains traction in a 2nd area such as Nigeria, Iraq, Ghana, wage payment, etc. the stock's multiple will suffer. To me its limited downside and lots of upside potential thanks to the cheap multiple.
Wow - I guess someone was really hot to trot to sell Cypress Semi and once it hit the 200 day moving average the selling has dried up -- stock was back to almost 10 after being near $8 not that long ago. I am recouping losses on that one but I didn't get the chance to ramp it up near $8. Still like the secular story here plus the cyclical one that if ECRI is right and the recovery exceeds expectations then all this nonsense about double ordering on the semi' side will give way to outperforming growth.
I still hope to cover a few others such as MXWL, etc. but not tonight.
Wednesday, November 11, 2009
a few stock updates
I am slowly working through conference calls and other earnings related info to get a handle on my stocks. As far as the market goes -- we have rallied to the highs and the big question is will we sell off again to retest the last low or will we keep climbing the wall of worry. My first thought has been the trading range (1025-1100) would continue for awhile longer but I am wondering if too many other folks are not expecting new highs. Various sentiment measures reached similar extremes as in mid July.
Lots of big money boys have sold calls and bought puts trying to protect gains for the year -- if we do rally, then many of those folks will panic and buy back the calls, which will force the market higher. That would seem to be a likely scenario given that it would cause the most pain. I know I am short calls so a big rally would cause my stocks to gain but my options to lose -- so I'm a bit hedged as well. Only 7 trading days to expiration....
Some stock comments:
Iridium -- I went and saw Whitney Tilson of T2 partners make a presentation and this is their largest holding. I know they own warrants but they also probably own the stock too. The 30 second version: Iridium is the only reliable way to gain global communications coverage for those that need it. Terrestrial coverage is only 10% of the earth's surface area so shippers/logistics, military, those that sell products everywhere (Coca-Cola?), etc have no other choice. Their biggest growth is from machine to machine communications -- still working on some examples of that. Anyway, if you want to play the story, make sure you buy the warrants rather than the stock. to me the warrants are undervalued and offer much greater upside potential.
Warrants exercise at $7 (IRDMW) and expire in Feb of 2013 so with the stock around $9.50 to $9.70 you have about $2.6 or so of intrinsic value and only about $1.1 of time value despite more than 3 years of time to expiration and an IV for their longest options of like 50-60%. A back of the envelope (i.e. not 100% accurate but close enough for me) model for the warrants suggests that at $3.70ish they have IV of 25-30% or well below what I would expect given that its a small cap stock and the IV for their options is 2x that level. Now, keep in mind that the warrants will be FAR more volatile than the stock -- a drop in the stock would crush the warrants so base your position size on the stock's value not on the warrant's. To really take advantage of the low IV in the warrants, you should probably delta hedge -- i.e. short some of the stock to reduce risk in case of a drop. They report earnings thursday.
ILMN -- stock bottomed near $32 same as after the June quarter. There were a few issues with the quarter as to why they disappointed. From what I understand they have a quality issue that forced them to remove product and that hurt sales. There is also delays in stimulus and a lack of projects for the genome wide arrays. These seem like short term issues to me but the longer term risk is if the quality issue leads customers to diversify away from ILMN whose market share is quite high due to their lead and strong previous track record of quality product. To me they are still leaders in one of the key areas of health care technology -- DNA analysis. I will look to sell out of the money puts to take advantage of the pull back to add exposure.
TSRA -- I think the value has to be clipped some for the DRAM business being smaller than first thought due to the volume deals but the stock more than reflects it -- they have about $9 a share in cash and an optics business worth a similar amount so you are getting a microelectronics business that generates more than $1 per year in free cash flow for about $5-6. Either that or you put the value on microelectronics and get the optics for free. its a cheap stock. They have better financials then other royalty companies and yet have a lower valuation -- over time I believe this will be resolved positively. Within a couple of years I would expect them to produce free cash flow of $2 to $3 and that should drive a stock anywhere from $40 to $60 -- well above where we are now. That presupposes they will be able to renew their major license contracts that expire in 2012 at similar terms -- new technologies like micro pilar should make this a non-issue -- the customers will renew because TSRA offer's a better solution than they could develop on their own.
ARCC -- They spent the last several months doing due diligence on ALD's portfolio before deciding to buy them for .5x book value. There is huge opportunity here for ARCC in a scavenger role. ALD has already reduced the value of their assets by probably half so to pay half book value is a further margin of safety. So there is the upside that comes from potentially paying less than the assets are worth. There is the upside from lowering ALD's funding costs, which are well above ARCC's. There is the upside from shifting ALD's portfolio into more debt and less equity to boost risk adjusted returns and generate higher income. The deal is immediately accretive and should materially increase ARCC's value over the next couple of years. What is material? I wonder why they won't be able to increase dividends to north of $2 over the next couple of years. That's about 50% higher. I think this could be a high teens stock paying a double digit yield. -- vs. $11 bucks now? still lots of opportunity despite the rally from under $4 in march. That was a ridiculous price that had no bearing on value -- it was forced selling related.
UEPS -- haven't had the chance to review the call yet but numbers all looked good. In FY09 they produced over $100 mill in free cash flow on a revenue base of $250 mill and assets of about $500 mill -- that's not bad. They bought back almost 20% of the stock last year (took out a large private equity owner) so the assets are now closer to $400 mill but the cash flow is growing. Close to 25% free cash flow return on assets. The stock has a market cap of just over $1 bill -- about 10% free cash flow yield. so over 40% free cash flow margin with great returns on assets and huge growth potential in terms of getting more smart cards in new countries -- Iraq, Russia, rest of Africa, etc. and yet the stock is super cheap. essentially everyone believes they are going to lose the SA welfare business (at least the economics so keep the deal at lower pricing) and not pick up business anywhere else in the world as an offset. My bet is that they won't lose SA and they will gain SA wage payment, Nigeria, Ghana, Iraq, Russia, etc. so that in a few years they are producing $4-5 in free cash flow (instead of the $2 now. With a more appropriate multiple, I reiterate this could be a $100 stock in a few years. in the meantime they were able to buy back 16% of the stock last quarter and still have cash at the end the quarter at about 1/3 of assets with no debt. They are a cash machine it is only a matter of time before it becomes more known. I am thinking about writing up a full discussion and submitting it to seekingalpha.com. we'll see.
Lots of big money boys have sold calls and bought puts trying to protect gains for the year -- if we do rally, then many of those folks will panic and buy back the calls, which will force the market higher. That would seem to be a likely scenario given that it would cause the most pain. I know I am short calls so a big rally would cause my stocks to gain but my options to lose -- so I'm a bit hedged as well. Only 7 trading days to expiration....
Some stock comments:
Iridium -- I went and saw Whitney Tilson of T2 partners make a presentation and this is their largest holding. I know they own warrants but they also probably own the stock too. The 30 second version: Iridium is the only reliable way to gain global communications coverage for those that need it. Terrestrial coverage is only 10% of the earth's surface area so shippers/logistics, military, those that sell products everywhere (Coca-Cola?), etc have no other choice. Their biggest growth is from machine to machine communications -- still working on some examples of that. Anyway, if you want to play the story, make sure you buy the warrants rather than the stock. to me the warrants are undervalued and offer much greater upside potential.
Warrants exercise at $7 (IRDMW) and expire in Feb of 2013 so with the stock around $9.50 to $9.70 you have about $2.6 or so of intrinsic value and only about $1.1 of time value despite more than 3 years of time to expiration and an IV for their longest options of like 50-60%. A back of the envelope (i.e. not 100% accurate but close enough for me) model for the warrants suggests that at $3.70ish they have IV of 25-30% or well below what I would expect given that its a small cap stock and the IV for their options is 2x that level. Now, keep in mind that the warrants will be FAR more volatile than the stock -- a drop in the stock would crush the warrants so base your position size on the stock's value not on the warrant's. To really take advantage of the low IV in the warrants, you should probably delta hedge -- i.e. short some of the stock to reduce risk in case of a drop. They report earnings thursday.
ILMN -- stock bottomed near $32 same as after the June quarter. There were a few issues with the quarter as to why they disappointed. From what I understand they have a quality issue that forced them to remove product and that hurt sales. There is also delays in stimulus and a lack of projects for the genome wide arrays. These seem like short term issues to me but the longer term risk is if the quality issue leads customers to diversify away from ILMN whose market share is quite high due to their lead and strong previous track record of quality product. To me they are still leaders in one of the key areas of health care technology -- DNA analysis. I will look to sell out of the money puts to take advantage of the pull back to add exposure.
TSRA -- I think the value has to be clipped some for the DRAM business being smaller than first thought due to the volume deals but the stock more than reflects it -- they have about $9 a share in cash and an optics business worth a similar amount so you are getting a microelectronics business that generates more than $1 per year in free cash flow for about $5-6. Either that or you put the value on microelectronics and get the optics for free. its a cheap stock. They have better financials then other royalty companies and yet have a lower valuation -- over time I believe this will be resolved positively. Within a couple of years I would expect them to produce free cash flow of $2 to $3 and that should drive a stock anywhere from $40 to $60 -- well above where we are now. That presupposes they will be able to renew their major license contracts that expire in 2012 at similar terms -- new technologies like micro pilar should make this a non-issue -- the customers will renew because TSRA offer's a better solution than they could develop on their own.
ARCC -- They spent the last several months doing due diligence on ALD's portfolio before deciding to buy them for .5x book value. There is huge opportunity here for ARCC in a scavenger role. ALD has already reduced the value of their assets by probably half so to pay half book value is a further margin of safety. So there is the upside that comes from potentially paying less than the assets are worth. There is the upside from lowering ALD's funding costs, which are well above ARCC's. There is the upside from shifting ALD's portfolio into more debt and less equity to boost risk adjusted returns and generate higher income. The deal is immediately accretive and should materially increase ARCC's value over the next couple of years. What is material? I wonder why they won't be able to increase dividends to north of $2 over the next couple of years. That's about 50% higher. I think this could be a high teens stock paying a double digit yield. -- vs. $11 bucks now? still lots of opportunity despite the rally from under $4 in march. That was a ridiculous price that had no bearing on value -- it was forced selling related.
UEPS -- haven't had the chance to review the call yet but numbers all looked good. In FY09 they produced over $100 mill in free cash flow on a revenue base of $250 mill and assets of about $500 mill -- that's not bad. They bought back almost 20% of the stock last year (took out a large private equity owner) so the assets are now closer to $400 mill but the cash flow is growing. Close to 25% free cash flow return on assets. The stock has a market cap of just over $1 bill -- about 10% free cash flow yield. so over 40% free cash flow margin with great returns on assets and huge growth potential in terms of getting more smart cards in new countries -- Iraq, Russia, rest of Africa, etc. and yet the stock is super cheap. essentially everyone believes they are going to lose the SA welfare business (at least the economics so keep the deal at lower pricing) and not pick up business anywhere else in the world as an offset. My bet is that they won't lose SA and they will gain SA wage payment, Nigeria, Ghana, Iraq, Russia, etc. so that in a few years they are producing $4-5 in free cash flow (instead of the $2 now. With a more appropriate multiple, I reiterate this could be a $100 stock in a few years. in the meantime they were able to buy back 16% of the stock last quarter and still have cash at the end the quarter at about 1/3 of assets with no debt. They are a cash machine it is only a matter of time before it becomes more known. I am thinking about writing up a full discussion and submitting it to seekingalpha.com. we'll see.
Friday, October 30, 2009
that was quick plus what $300 could have bought
I didn't realize how right I was about a bounce and more downside -- too bad I was out yesterday and didn't get the chance to sell or buy puts or anything -- just let it all ride. ugh!
With the VIX having gone above 31 now the big question I have is about breadth -- is it worse today then wednesday given that we are at lower lows on the S&P 500? I don't have the numbers for wednesday so I don't know for sure but like I said the other day -- small caps hold the answer. if breadth has improved then that would be a positive, which along with the high VIX and the oversold nature of the market should get us a better bounce -- one that lasts longer than a day. if breadth made a lower low today like the market did, that just means we have risk of further downside even if we get a decent bounce. check out the QQQQ's -- now near their early october lows -- say those hold and the market rallies towards 43 but doesn't get further and then pulls back -- that will look like a H&S top forming. just like in July in the SPX. For the same pattern in SPX we may need to fall off to 1025ish -- the oct lows and then rally up to 1080ish.
on to stocks. TSRA -- well we didn't quite get the positive report we were hoping for -- great Q3 but Q4 guidance sucked to put it bluntly. Everyone following the company closely understands they have volume deals with a couple of DRAM players -- that doesn't mean we always remember that in thinking about guidance expectations nor that we understand just how big of a deal it can be..... so they are explaining a 10% sequential decline in their main business because of these DRAM deals (above certain volume thresholds their payments from 2 customers either end or drastically fall off). wow. My first thought is have to keep in mind that their revenues from DRAM can only be so big in Q4 and Q1 due to these deals regardless of how good the market is.
Second thought -- they need to diversify away from being so tied to DRAM -- that was the plan with the wireless court victory but so far it didn't quite work out as expected as the defendants are appealing rather than settling like prior losers had done. Still like the story but its longer term -- optics still building and the cooling tech looks awesome but its 2-3 years from now at best. I had the right idea of wanting to sell at $30 with the covered calls -- unfortunately unless you also buy puts to protect your downside, selling calls doesn't actually get the stock sold at that level unless you reach expiration above the strike. a lesson learned.
I had actually sold puts (25 strike) if you remember back a few weeks -- I bought them back luckily for 30 cents when the stock was near $30. That's the $300 -- what can it buy? 10 of the 25 strike puts on that day a week or so ago -- they are now worth close to $3500. a lesson learned.
so in that case hedging costs for the big drop were only 1% -- granted you had to experience the $30 to 25 decline first but even then the puts would be rising in value on a trading basis. point being I need to start hedging more -- its insurance. and just like most insurance you should expect it to cost money most of the time. you insure your house, life, auto, etc. but I have heard stories of wealthy folk (i.e. not me) who insure their 10 mill home and cars and life, etc. but refuse to buy puts on their 100 mill portfolio because they are too expensive. ok, dump the insurance on everything else and buy the puts on the portfolio.
AB also reported results -- much better than expected -- still seeing outflows but results are improving. need to do some more on this -- what can I say its a firehose of info in earnings season not to mention me trying to find employment -- but the key issue for me on the quarter was how sustainable that 67 cents was -- there was some investment gains and obviously the level of the market matters but if we are at least flat market wise can they earn 67 cents going forward? if so that's about 2.70 or about 10X earnings. i'm guessing that its somewhere between that number and the 1.6 that was the estimate prior to the report
With the VIX having gone above 31 now the big question I have is about breadth -- is it worse today then wednesday given that we are at lower lows on the S&P 500? I don't have the numbers for wednesday so I don't know for sure but like I said the other day -- small caps hold the answer. if breadth has improved then that would be a positive, which along with the high VIX and the oversold nature of the market should get us a better bounce -- one that lasts longer than a day. if breadth made a lower low today like the market did, that just means we have risk of further downside even if we get a decent bounce. check out the QQQQ's -- now near their early october lows -- say those hold and the market rallies towards 43 but doesn't get further and then pulls back -- that will look like a H&S top forming. just like in July in the SPX. For the same pattern in SPX we may need to fall off to 1025ish -- the oct lows and then rally up to 1080ish.
on to stocks. TSRA -- well we didn't quite get the positive report we were hoping for -- great Q3 but Q4 guidance sucked to put it bluntly. Everyone following the company closely understands they have volume deals with a couple of DRAM players -- that doesn't mean we always remember that in thinking about guidance expectations nor that we understand just how big of a deal it can be..... so they are explaining a 10% sequential decline in their main business because of these DRAM deals (above certain volume thresholds their payments from 2 customers either end or drastically fall off). wow. My first thought is have to keep in mind that their revenues from DRAM can only be so big in Q4 and Q1 due to these deals regardless of how good the market is.
Second thought -- they need to diversify away from being so tied to DRAM -- that was the plan with the wireless court victory but so far it didn't quite work out as expected as the defendants are appealing rather than settling like prior losers had done. Still like the story but its longer term -- optics still building and the cooling tech looks awesome but its 2-3 years from now at best. I had the right idea of wanting to sell at $30 with the covered calls -- unfortunately unless you also buy puts to protect your downside, selling calls doesn't actually get the stock sold at that level unless you reach expiration above the strike. a lesson learned.
I had actually sold puts (25 strike) if you remember back a few weeks -- I bought them back luckily for 30 cents when the stock was near $30. That's the $300 -- what can it buy? 10 of the 25 strike puts on that day a week or so ago -- they are now worth close to $3500. a lesson learned.
so in that case hedging costs for the big drop were only 1% -- granted you had to experience the $30 to 25 decline first but even then the puts would be rising in value on a trading basis. point being I need to start hedging more -- its insurance. and just like most insurance you should expect it to cost money most of the time. you insure your house, life, auto, etc. but I have heard stories of wealthy folk (i.e. not me) who insure their 10 mill home and cars and life, etc. but refuse to buy puts on their 100 mill portfolio because they are too expensive. ok, dump the insurance on everything else and buy the puts on the portfolio.
AB also reported results -- much better than expected -- still seeing outflows but results are improving. need to do some more on this -- what can I say its a firehose of info in earnings season not to mention me trying to find employment -- but the key issue for me on the quarter was how sustainable that 67 cents was -- there was some investment gains and obviously the level of the market matters but if we are at least flat market wise can they earn 67 cents going forward? if so that's about 2.70 or about 10X earnings. i'm guessing that its somewhere between that number and the 1.6 that was the estimate prior to the report
Thursday, October 29, 2009
bounce then more down
My assumption is we bounce and then see the downside momentum return -- if we manage to see improved breadth on the next decline that would be a positive sign that momentum was returning. when the large caps start meaningfully outperforming, that's generally the last leg of a rally -- it can last quite a while but we are hoping the small caps come back ...
Small caps (Russell 2000) look like a double top -- around 62.50 and then breaking below the valley in the middle (57.50) yesterday to close under 57 -- doesn't seem good. one reason I expect further tries at the downside. Another is too many I read seem to be willing to put money to work -- people finally assuming this is just another brief pull back -- that means its probably not since in the past I wasn't reading about people wanting to put money to work but rather of the bears gloating. there has been some gloating but not as much.
by the way, have you noticed how we have bottomed in the early days of the month lately -- it was about a week or so into the month in July but first couple of days in early sep and oct. not sure why this has happened -- typically you would expect strength around the end and early month due to what people call mark ups at the end of the month and 401k cash being put to work in the early part of the month. interesting. so if we bottom earlier this time, perhaps I'm not the only one that has spotted this.
how far do we bounce? watch the puts and the VIX -- the slower the VIX is in dropping or the more puts people keep buying during the bounce the higher and longer we go. if those two turn quickly, then the bounce is unlikely to last long. what is quickly is a judgment call.
TSRA reports tonight -- I feared they would disappoint the elevated expectations when the stock was in the low 30's but now that we are near $25 we should get some help from a positive report.
UEPS is another one that has surprised me in how far it has declined. of course it surprised me how high it rallied too. the stock is still too cheap but to really get this thing moving we need to see them get scale in another business besides south african welfare. whether its russia, ghana, nigeria, iraq, south african wage payment, etc, one of these sizable growth areas has to reach that point where the network effects kick in and creates a business with very strong dominance -- i.e. where so many use the cards and so many accept them that it is difficult to imagine life without UEPS -- that's the way welfare is in SA. once that happens it will diversify them away from SA welfare and drive the PE up dramatically. their returns and cash flow are so strong they should be selling at a big premium. the fact that they are not is due to their inability to get past welfare in SA (in my humble opinion). since welfare is a contract that can be changed at the governments whim, they need another area of scale to convince people its not temporary. I have consistently believed they would do it but it sure takes time and patience.
oh -- did I cover ARCC yet? can't remember for sure. not much to say yet because they haven't put up the presentation or reported Q3 but the merger with Allied Capital is a big deal. if well executed, this could materially improve the value -- like closer to $20. The key is how bad is ALD's book of loans -- I considered ALD to be amongst the worst BDC so I'm glad ARCC is only paying .5 times book value but that assumes ALD only valued their assets at 2x reality. It could easily be 3x or 4x which would create losses for ARCC. I have confidence in ARCC's ability to do due diligence -- presuming they got the chance to look these loans over good, then I would feel better -- hoping they cover that in more detail on the call next week. The other key is how quickly ARCC can lower ALD's funding costs -- which are well above ARCC's. The addition of ARCC -- i.e. the combination of the two should be able to lower costs and improve performance going forward -- i.e. with ARCC picking new loans they should perform better in the future. ARCC should be able to lower funding costs the question is how quickly. while it would be best to wait for further info on the call, the stock could drop further before then due to the uncertainty. you get the best price stepping into the uncertainty. now if it doesn't pull back more, it gets harder -- expectations higher.
Small caps (Russell 2000) look like a double top -- around 62.50 and then breaking below the valley in the middle (57.50) yesterday to close under 57 -- doesn't seem good. one reason I expect further tries at the downside. Another is too many I read seem to be willing to put money to work -- people finally assuming this is just another brief pull back -- that means its probably not since in the past I wasn't reading about people wanting to put money to work but rather of the bears gloating. there has been some gloating but not as much.
by the way, have you noticed how we have bottomed in the early days of the month lately -- it was about a week or so into the month in July but first couple of days in early sep and oct. not sure why this has happened -- typically you would expect strength around the end and early month due to what people call mark ups at the end of the month and 401k cash being put to work in the early part of the month. interesting. so if we bottom earlier this time, perhaps I'm not the only one that has spotted this.
how far do we bounce? watch the puts and the VIX -- the slower the VIX is in dropping or the more puts people keep buying during the bounce the higher and longer we go. if those two turn quickly, then the bounce is unlikely to last long. what is quickly is a judgment call.
TSRA reports tonight -- I feared they would disappoint the elevated expectations when the stock was in the low 30's but now that we are near $25 we should get some help from a positive report.
UEPS is another one that has surprised me in how far it has declined. of course it surprised me how high it rallied too. the stock is still too cheap but to really get this thing moving we need to see them get scale in another business besides south african welfare. whether its russia, ghana, nigeria, iraq, south african wage payment, etc, one of these sizable growth areas has to reach that point where the network effects kick in and creates a business with very strong dominance -- i.e. where so many use the cards and so many accept them that it is difficult to imagine life without UEPS -- that's the way welfare is in SA. once that happens it will diversify them away from SA welfare and drive the PE up dramatically. their returns and cash flow are so strong they should be selling at a big premium. the fact that they are not is due to their inability to get past welfare in SA (in my humble opinion). since welfare is a contract that can be changed at the governments whim, they need another area of scale to convince people its not temporary. I have consistently believed they would do it but it sure takes time and patience.
oh -- did I cover ARCC yet? can't remember for sure. not much to say yet because they haven't put up the presentation or reported Q3 but the merger with Allied Capital is a big deal. if well executed, this could materially improve the value -- like closer to $20. The key is how bad is ALD's book of loans -- I considered ALD to be amongst the worst BDC so I'm glad ARCC is only paying .5 times book value but that assumes ALD only valued their assets at 2x reality. It could easily be 3x or 4x which would create losses for ARCC. I have confidence in ARCC's ability to do due diligence -- presuming they got the chance to look these loans over good, then I would feel better -- hoping they cover that in more detail on the call next week. The other key is how quickly ARCC can lower ALD's funding costs -- which are well above ARCC's. The addition of ARCC -- i.e. the combination of the two should be able to lower costs and improve performance going forward -- i.e. with ARCC picking new loans they should perform better in the future. ARCC should be able to lower funding costs the question is how quickly. while it would be best to wait for further info on the call, the stock could drop further before then due to the uncertainty. you get the best price stepping into the uncertainty. now if it doesn't pull back more, it gets harder -- expectations higher.
Wednesday, October 28, 2009
sell off continues -- july 9% down or are we near end?
Big question is will we continue to sell off to match the july down 9% sell off or are we doing a more typical 5-6% sell off in the march rally that means we are getting close to being done.
Metrics that say we are near the end: VIX is jumping to over 26 which is up close to 30% from its recent lows, which I believe is similar to moves at recent lows. We are oversold on various internal measures. RSI (2) is pretty low for the indices. if we keep selling off and the vix keeps rising from here then this would strong suggest a change in character.
Thoughts on why this time is not like the last few pull backs: sell the news reaction -- positive news is getting sold in most cases. Small cap stocks never exceeded their previous highs in this last rally and they are near their lows of the previous pull back -- makes it look like a double top but for that to be confirmed need to break the previous lows -- i.e. fall through the valley in between the double top. so far we bounced right off those lows at 57.50 on the IWM. Small cap stocks have been leaders so far but that is changing. Internal indicators -- breadth related -- suggest loss of momentum and increase in downside momentum -- we are set for a rally but chances are it won't be a great one and that could lead to more downside later.
Some stocks especially the smaller cap ones are showing dramatic declines on no news -- TSRA, UEPS, CY are ones that come to mind. ILMN's decline is news related -- they missed revenues and guided lower. ugly.
In 2003, the S&P spent several months in a range from 1060 to 1160 -- the top end of which was about half way between the highs of 2000 and the lows of 2002. That same area for us this time (highs of 2007 and lows of 2009) is around 1115. We could be repeating that process of consolidation so perhaps 1000 to 1100. The idea is we may have reached that point where people need to see more improvement or more sustainability to the recovery before more highs are possible. I have been a believer in a strong recovery but that is based on indicators that only see at most the first half of next year. Is it possible that we roll over in the 2nd half of next year? of course given how similar we are to Japan but some of that depends on what the Fed does -- when do they raise rates and how much do they raise them. Ben is likely to know the Japanese situation and will therefore wait as long as possible before raising.
So I would not be surprised near term by a bounce that then leads to more downside.
more on ILMN after I have had the chance to review the quarter.
Metrics that say we are near the end: VIX is jumping to over 26 which is up close to 30% from its recent lows, which I believe is similar to moves at recent lows. We are oversold on various internal measures. RSI (2) is pretty low for the indices. if we keep selling off and the vix keeps rising from here then this would strong suggest a change in character.
Thoughts on why this time is not like the last few pull backs: sell the news reaction -- positive news is getting sold in most cases. Small cap stocks never exceeded their previous highs in this last rally and they are near their lows of the previous pull back -- makes it look like a double top but for that to be confirmed need to break the previous lows -- i.e. fall through the valley in between the double top. so far we bounced right off those lows at 57.50 on the IWM. Small cap stocks have been leaders so far but that is changing. Internal indicators -- breadth related -- suggest loss of momentum and increase in downside momentum -- we are set for a rally but chances are it won't be a great one and that could lead to more downside later.
Some stocks especially the smaller cap ones are showing dramatic declines on no news -- TSRA, UEPS, CY are ones that come to mind. ILMN's decline is news related -- they missed revenues and guided lower. ugly.
In 2003, the S&P spent several months in a range from 1060 to 1160 -- the top end of which was about half way between the highs of 2000 and the lows of 2002. That same area for us this time (highs of 2007 and lows of 2009) is around 1115. We could be repeating that process of consolidation so perhaps 1000 to 1100. The idea is we may have reached that point where people need to see more improvement or more sustainability to the recovery before more highs are possible. I have been a believer in a strong recovery but that is based on indicators that only see at most the first half of next year. Is it possible that we roll over in the 2nd half of next year? of course given how similar we are to Japan but some of that depends on what the Fed does -- when do they raise rates and how much do they raise them. Ben is likely to know the Japanese situation and will therefore wait as long as possible before raising.
So I would not be surprised near term by a bounce that then leads to more downside.
more on ILMN after I have had the chance to review the quarter.
Tuesday, October 27, 2009
Did you notice what didn't drop on monday?
Yep semiconductors outperformed on Monday -- with MRVL up, TSRA up, CY barely down, QCOM flat and the SMH actually up (obviously just a small sample). Either everyone was reacting to Marvel's results or perhaps the sell off hurt stocks that traders own -- energy was hit pretty good as opposed to stocks that have already been sold like the semi's.
If the recovery stays strong as ECRI says it will, then the semi's will be strong performers -- its just a matter of time. I linked in a story by Bob Faulkner about semi inventories last time -- he also has a nice write up on CY -- about the secular story of the PSoC and how this should drive strong revenue growth over the next few years. It sure looks like a good story to me. They have almost $2 a share in cash and I think they could earn closer to .60 next year vs. the consensus in the mid to high .40's due to higher revenues then currently forecast (which would also translate into higher gross margins than forecast).
So we are seeing a bigger pull back but will it be worse than our typical 3-5%? Sentiment is hard to get a read on -- Barrons' reported a few measures were near peak levels and a blogger that I read (see abnormal returns for the link) that produces a weekly sentiment report shows most measures are leaning too bullish but only put/call is truly too bullish. Kass on realmoney last week asked contributors to give highs and lows for the rest of the year and the results were interesting. not everyone participated, which means most were too chicken to guess. Those that did were not the bullish types -- their high end was near 1120 while their low end was in the 900's -- wow. I would be surprised by a pull back to 1000 let alone towards 900. anything is possible -- at some point the panic of watching gains go away will overwhelm investor's panic at not being in the market for this rally.
That said, I think its more likely you will see sector rotation -- getting that right could lead to great profits if you are nimble. going long that which is underperforming and selling that which is doing best has got to be a good strategy for this market. In 2003 we paused for several months around 1075 -- sound familiar? We first hit 107 on the SPY on September 17 and here we are over a month later and the SPY closed today at 106.91. that's some rally.
BAC last saw these levels in early August -- same for the XLF as well as semi's and actually the materials sector (MON anyone?). a few other sectors are well above their August highs -- industrials, consumer discretionary and energy stand out.
So if this rally is going to continue the laggards have to catch up while the leaders consolidate. Why? What economic scenario allows for the semi's to not see sustainable growth while the energy and industrial sectors do? just unlikely.
BTW, are you watching ERII? Here is a tip for you -- check out the sell side analyst reports that caution about the near term due to project delays but they remain confident in a strong 2010 -- people need clean water after all. If you can time that one, good luck. Much better off putting your chips in NOW while the stock is weak and adding on further weakness. Earnings coming up soon, which adds uncertainty -- last quarter they guided down but my bet is that was it. Just one cockroach in that kitchen? not unprecedented -- remember Flir who lowered last quarter and beat this quarter?
If the recovery stays strong as ECRI says it will, then the semi's will be strong performers -- its just a matter of time. I linked in a story by Bob Faulkner about semi inventories last time -- he also has a nice write up on CY -- about the secular story of the PSoC and how this should drive strong revenue growth over the next few years. It sure looks like a good story to me. They have almost $2 a share in cash and I think they could earn closer to .60 next year vs. the consensus in the mid to high .40's due to higher revenues then currently forecast (which would also translate into higher gross margins than forecast).
So we are seeing a bigger pull back but will it be worse than our typical 3-5%? Sentiment is hard to get a read on -- Barrons' reported a few measures were near peak levels and a blogger that I read (see abnormal returns for the link) that produces a weekly sentiment report shows most measures are leaning too bullish but only put/call is truly too bullish. Kass on realmoney last week asked contributors to give highs and lows for the rest of the year and the results were interesting. not everyone participated, which means most were too chicken to guess. Those that did were not the bullish types -- their high end was near 1120 while their low end was in the 900's -- wow. I would be surprised by a pull back to 1000 let alone towards 900. anything is possible -- at some point the panic of watching gains go away will overwhelm investor's panic at not being in the market for this rally.
That said, I think its more likely you will see sector rotation -- getting that right could lead to great profits if you are nimble. going long that which is underperforming and selling that which is doing best has got to be a good strategy for this market. In 2003 we paused for several months around 1075 -- sound familiar? We first hit 107 on the SPY on September 17 and here we are over a month later and the SPY closed today at 106.91. that's some rally.
BAC last saw these levels in early August -- same for the XLF as well as semi's and actually the materials sector (MON anyone?). a few other sectors are well above their August highs -- industrials, consumer discretionary and energy stand out.
So if this rally is going to continue the laggards have to catch up while the leaders consolidate. Why? What economic scenario allows for the semi's to not see sustainable growth while the energy and industrial sectors do? just unlikely.
BTW, are you watching ERII? Here is a tip for you -- check out the sell side analyst reports that caution about the near term due to project delays but they remain confident in a strong 2010 -- people need clean water after all. If you can time that one, good luck. Much better off putting your chips in NOW while the stock is weak and adding on further weakness. Earnings coming up soon, which adds uncertainty -- last quarter they guided down but my bet is that was it. Just one cockroach in that kitchen? not unprecedented -- remember Flir who lowered last quarter and beat this quarter?
Friday, October 23, 2009
earnings, market
I mentioned last note that we could see a pull back post options expiration and so far its been more up and down action but not really getting anywhere. The pattern of the last few months would suggest we are ready for a 3-5% whack after going nowhere for a week or two. then we rally hard to new highs. of course once everyone recognizes the pattern it won't work. how do you know? well in the past every time we sold off a few percent the hedge funds/traders that are negative go too far -- they load up on puts and start shorting and then when the downside momentum stalls and starts to reverse they have to cover and sell their puts, which adds fuel to the rally. So if we get a decline and you don't see a lot of puts being bought or get the feel that there is panic or if you don't see the bears come out and gloat that this is it -- finally the decline is here. That's when you should be more concerned.
Earnings have been strong for many companies but stocks have not reacted well which coincides with us being over bought. I am not worried about that -- it fits in more with a consolidation. As the quarter plays out and people keep getting more positive info on business trends I would expect stocks to move up again. If not, that just sets us up for a strong earnings season in Q1 -- i.e. you either get the move up before the reports like in Q3 or after the reports like in Q2 but as long as fundamentals are improving the stocks will move up.
I mentioned semi's last note too -- about all the concerns about double ordering. This note from Bob Faulkner writing on minyanville.com sums it up well:
http://www.minyanville.com/articles/ordering-double-semiconductor-sector-texas-instruments-fairchild-index-OEM/index/a/25063
No one double orders unless they are worried about getting their chips when they want them. That doesn't happen as long as lead times are short and not increasing.
Earnings -- FLIR -- solid numbers. Some analyst downgraded the stock on valuation concerns. ok. I could see it being fairly valued near $30 depending on what happens with estimates going forward. As the economy improves I would expect demand to drive upside to numbers -- meaning fair value might be $30 now but it could be $35 within a few months as numbers go up. secular story is powerful.
CY -- strong revenue growth sequentially and guidance for the next few quarters for growth vs. normal seasonality of declines. That was pretty positive in my mind but the stock has done nothing but drop since -- tied in I think to concerns its all just inventory or double ordering or whatever. fine. those concerns are wrong and this secular story will continue to improve -- question is how long will it take to be reflected in the stock. at least for now its probably best to play the volatility -- buy on the dips towards $9 and trim on the runs to $10 and higher.
CLB -- wow. very strong report especially on a cash flow basis -- to have as much free cash flow in 9 months this year vs. all of last year is huge. The stock has been a strong performer this year. -- one that I really should have loaded the boat on when I had the chance near $50. bought some but not enough of this great franchise. more after I review the details and think about valuation. On a near term basis its clearly vulnerable to a pull back in commodities/rally in the dollar.
LH -- strong free cash flow and great pricing. Volume was flat so the growth came from pricing. I say great because in the midst of a still recovering economy to be raising prices -- even if some or all of it is a mix shift benefit -- is a great sign. Stock has run into the $71 range. I sold calls on my position just in case we get a post report pull back but the valuation is not hard to handle given that the stock sells for less than 12x free cash flow for 2009. i could easily see this stock working its way higher towards the all time highs (low 80's) over the coming months. in terms of the government -- that is a risk but I think there is so much more opportunity in higher cost testing (imaging) and in other high cost areas that labs should not be a big focus.
enough for now -- hopefully more on earnings as I digest.
Earnings have been strong for many companies but stocks have not reacted well which coincides with us being over bought. I am not worried about that -- it fits in more with a consolidation. As the quarter plays out and people keep getting more positive info on business trends I would expect stocks to move up again. If not, that just sets us up for a strong earnings season in Q1 -- i.e. you either get the move up before the reports like in Q3 or after the reports like in Q2 but as long as fundamentals are improving the stocks will move up.
I mentioned semi's last note too -- about all the concerns about double ordering. This note from Bob Faulkner writing on minyanville.com sums it up well:
http://www.minyanville.com/articles/ordering-double-semiconductor-sector-texas-instruments-fairchild-index-OEM/index/a/25063
No one double orders unless they are worried about getting their chips when they want them. That doesn't happen as long as lead times are short and not increasing.
Earnings -- FLIR -- solid numbers. Some analyst downgraded the stock on valuation concerns. ok. I could see it being fairly valued near $30 depending on what happens with estimates going forward. As the economy improves I would expect demand to drive upside to numbers -- meaning fair value might be $30 now but it could be $35 within a few months as numbers go up. secular story is powerful.
CY -- strong revenue growth sequentially and guidance for the next few quarters for growth vs. normal seasonality of declines. That was pretty positive in my mind but the stock has done nothing but drop since -- tied in I think to concerns its all just inventory or double ordering or whatever. fine. those concerns are wrong and this secular story will continue to improve -- question is how long will it take to be reflected in the stock. at least for now its probably best to play the volatility -- buy on the dips towards $9 and trim on the runs to $10 and higher.
CLB -- wow. very strong report especially on a cash flow basis -- to have as much free cash flow in 9 months this year vs. all of last year is huge. The stock has been a strong performer this year. -- one that I really should have loaded the boat on when I had the chance near $50. bought some but not enough of this great franchise. more after I review the details and think about valuation. On a near term basis its clearly vulnerable to a pull back in commodities/rally in the dollar.
LH -- strong free cash flow and great pricing. Volume was flat so the growth came from pricing. I say great because in the midst of a still recovering economy to be raising prices -- even if some or all of it is a mix shift benefit -- is a great sign. Stock has run into the $71 range. I sold calls on my position just in case we get a post report pull back but the valuation is not hard to handle given that the stock sells for less than 12x free cash flow for 2009. i could easily see this stock working its way higher towards the all time highs (low 80's) over the coming months. in terms of the government -- that is a risk but I think there is so much more opportunity in higher cost testing (imaging) and in other high cost areas that labs should not be a big focus.
enough for now -- hopefully more on earnings as I digest.
Thursday, October 15, 2009
Intel
Interesting stuff -- Intel blows through estimates and its the S&P that goes crazy while the semi stocks underperform. Go figure. Intel's Q4 guidance shouldn't be too surprising to anyone with an understanding of the seasonality of their business -- even this guidance seems conservative to me. I expect them to hit the high end of those estimates.
I'm still long the semi's figuring they will break out and head higher its only a matter of time. I think they were held back today based on the cyclicals theory -- time to sell is when the news is best at the cyclicals because it has to get worse going forward. I disagree in this case given that the economic cycle is just getting started.
Big debate about ECRI and their big calls -- look there is no arguing that the firm is promotional and they brag incessantly -- to an annoying extent but its also true that their calls have been better than most. Were they late on this recession call? sure but they also told you it was going to be ugly while the market was in the 1300 range -- and they said bad recession before lehman and the panic started -- interesting stuff. I got to see a presentation slide of theirs that includes the indicators developed by their founder -- the early research -- not one mention of the money supply, interest rates, credit, etc. wow. so different than what most would expect. The 8 mentioned by them in the presentation:
1. sensitive commodity prices
2. avg work week manufacturing -- if you are going to produce more, you probably are going to work longer -- yet this seems like it should be more coincident. then again production cycle times mean work week increases before output does.
3. commercial and industrial building contracts -- not sure what this refers to.
4. new incorporations
5. new orders
6. housing starts -- makes sense given how much of the economy gets pulled in to making a house
7. stock prices
8. business failure liabilities -- not sure what this is either.
People are so focused on what the US government has done to boost our economy and their belief that it is unsustainable and therefore the recovery can't last yet I keep wondering the impact of the global stimulus -- every economy on the planet practically has done some kind of stimulus so given that we are the world's largest manufacturer and exporter (despite sentiment otherwise), you would expect us to benefit from the growth elsewhere.
I keep reading about how the fundamentals don't justify current stock prices. That depends on your definition of fundamentals -- most people making that argument are looking at current conditions -- or recent past. When Intel was in the low teens, do you think anyone thought they would do over $10 bill in Q4 revenues? I doubt it. I remember looking at semi stocks in 2003 and thinking about what their earnings power could be based on a reasonable margin estimate -- I used consensus revenue estimates figuring in my mind the problem would be margins would not be as good as expected while revenues were in line. Wow was that a bit off -- revenues soared past estimates because expectations were so low and the stocks took off.
Stock prices are designed to be forward looking but clearly that view is colored by sentiment -- in the spring too many investors began to extrapolate the awful economic data into the future (not to mention too many forced liquidations occurred where no one cared about the fundamentals). Those looking to justify the rally with fundamentals are always one step behind -- the news comes out and people will argue well if I knew Intel was going to earn X, I could easily have paid what the stock was selling for last month when I thought it was too expensive. Now of course those investors still aren't willing to pay up because intel has moved higher -- but Intel's numbers in the future will be higher too -- the investors doing well are those that anticipate where earnings expectations are headed -- find the stocks where the gap is greatest -- where actual future earnings are well above current expectations -- and those are the stocks to buy.
If UEPS is able to produce $4 in earnings in 2012 -- then that stock will be materially higher. If TSRA is able to produce $2.50 in 2011 earnings -- that stock will rise dramatically over the coming year. Those are longer term plays but near term I am betting CY and other semi's will see stronger revenue growth than people realize. I found it funny that Kass on realmoney today was picking on LLTC's comments about their business being driven by turns rather than orders -- many believe semi's are just about inventory refilling -- turns business occurs when supply is so much greater than demand that no purchasing manager worries about getting product when he wants it. orders come when they realize supply is filling up and if they want to keep getting product they better get their orders for the next few months in or they will lose out to others. So my point is anyone that is doing turns business is not increasing their own inventory -- they are ordering just in time for what they need for production. perhaps a little inventory build but not really -- why would they if they can get parts so easily?
this being options expiration week I expect to see the market stable to up until friday or possibly monday. Friday because index options stop trading Thursday night so any hangover hits on Friday. Stock and ETF options expire on Friday so their hangover is on monday. We will be max overbought on friday too so again -- more likely we pull back next week -- just like last option expiration.
Speaking of this incredible rally -- realize that last month's expiration was at 107 on the SPY? So we have gone up a whole 2% in the last month (all of it wednesday) -- yippy. August's expiration was at 103 -- so until Wednesday's rally we were flat with last month and only up a few percent since August. That to me is a slow crawl up the wall of worry.
enjoy
I'm still long the semi's figuring they will break out and head higher its only a matter of time. I think they were held back today based on the cyclicals theory -- time to sell is when the news is best at the cyclicals because it has to get worse going forward. I disagree in this case given that the economic cycle is just getting started.
Big debate about ECRI and their big calls -- look there is no arguing that the firm is promotional and they brag incessantly -- to an annoying extent but its also true that their calls have been better than most. Were they late on this recession call? sure but they also told you it was going to be ugly while the market was in the 1300 range -- and they said bad recession before lehman and the panic started -- interesting stuff. I got to see a presentation slide of theirs that includes the indicators developed by their founder -- the early research -- not one mention of the money supply, interest rates, credit, etc. wow. so different than what most would expect. The 8 mentioned by them in the presentation:
1. sensitive commodity prices
2. avg work week manufacturing -- if you are going to produce more, you probably are going to work longer -- yet this seems like it should be more coincident. then again production cycle times mean work week increases before output does.
3. commercial and industrial building contracts -- not sure what this refers to.
4. new incorporations
5. new orders
6. housing starts -- makes sense given how much of the economy gets pulled in to making a house
7. stock prices
8. business failure liabilities -- not sure what this is either.
People are so focused on what the US government has done to boost our economy and their belief that it is unsustainable and therefore the recovery can't last yet I keep wondering the impact of the global stimulus -- every economy on the planet practically has done some kind of stimulus so given that we are the world's largest manufacturer and exporter (despite sentiment otherwise), you would expect us to benefit from the growth elsewhere.
I keep reading about how the fundamentals don't justify current stock prices. That depends on your definition of fundamentals -- most people making that argument are looking at current conditions -- or recent past. When Intel was in the low teens, do you think anyone thought they would do over $10 bill in Q4 revenues? I doubt it. I remember looking at semi stocks in 2003 and thinking about what their earnings power could be based on a reasonable margin estimate -- I used consensus revenue estimates figuring in my mind the problem would be margins would not be as good as expected while revenues were in line. Wow was that a bit off -- revenues soared past estimates because expectations were so low and the stocks took off.
Stock prices are designed to be forward looking but clearly that view is colored by sentiment -- in the spring too many investors began to extrapolate the awful economic data into the future (not to mention too many forced liquidations occurred where no one cared about the fundamentals). Those looking to justify the rally with fundamentals are always one step behind -- the news comes out and people will argue well if I knew Intel was going to earn X, I could easily have paid what the stock was selling for last month when I thought it was too expensive. Now of course those investors still aren't willing to pay up because intel has moved higher -- but Intel's numbers in the future will be higher too -- the investors doing well are those that anticipate where earnings expectations are headed -- find the stocks where the gap is greatest -- where actual future earnings are well above current expectations -- and those are the stocks to buy.
If UEPS is able to produce $4 in earnings in 2012 -- then that stock will be materially higher. If TSRA is able to produce $2.50 in 2011 earnings -- that stock will rise dramatically over the coming year. Those are longer term plays but near term I am betting CY and other semi's will see stronger revenue growth than people realize. I found it funny that Kass on realmoney today was picking on LLTC's comments about their business being driven by turns rather than orders -- many believe semi's are just about inventory refilling -- turns business occurs when supply is so much greater than demand that no purchasing manager worries about getting product when he wants it. orders come when they realize supply is filling up and if they want to keep getting product they better get their orders for the next few months in or they will lose out to others. So my point is anyone that is doing turns business is not increasing their own inventory -- they are ordering just in time for what they need for production. perhaps a little inventory build but not really -- why would they if they can get parts so easily?
this being options expiration week I expect to see the market stable to up until friday or possibly monday. Friday because index options stop trading Thursday night so any hangover hits on Friday. Stock and ETF options expire on Friday so their hangover is on monday. We will be max overbought on friday too so again -- more likely we pull back next week -- just like last option expiration.
Speaking of this incredible rally -- realize that last month's expiration was at 107 on the SPY? So we have gone up a whole 2% in the last month (all of it wednesday) -- yippy. August's expiration was at 103 -- so until Wednesday's rally we were flat with last month and only up a few percent since August. That to me is a slow crawl up the wall of worry.
enjoy
Monday, October 12, 2009
TSRA et al
Well IBD joined cramer in bullish comments on TSRA last week and that got the stock over $31. Like I said, its my largest holding so I'm bullish too but more on the longer term side at this point. I am wary of Cramer since a previous time he was bullish on the story the stock missed high expectations and dropped from the mid 40's to the 30's. Could it happen again? sure. This is actually a singles kind of a stock except for big license wins, which can lead to bigger gains.
I can see a couple of positives helping them -- smartphones have higher content of their packaging technology so a higher per unit royalty and smartphone demand is pretty good. Second, they won the wireless case but no one settled. QCOM decided to use Amkor and so far it appears Amkor is not paying for QCOM's units given the litigation between TSRA and Amkor. Still it makes one wonder if other losers in the trial have decided to use licensed packaging firms as a solution while they appeal the decision. Those two positives plus the improving economy could drive upside to results.
The next issue is what is the true earnings power/cash flow of the company and what is an appropriate valuation for them. I have seen an estimate of $2.50 in 2011-2012 earnings power, which to me is reasonable and gets you to the low $50's or about 60% return from here -- still cheap in my mind. guess selling those calls at $30 could be silly. we'll see. like I said -- I can always roll them forward and the put selling helps to raise the break even value.
All that said, I wonder if UEPS isn't the more attractive now. that stock has also been moving up but it was at ridiculous valuation levels -- basically just a handful times free cash flow so now its up to about 10x free cash flow. A 10% free cash flow yield that is growing double digits? sign me up. I think they keep growing steadily but the true valuation change will occur when they reach critical mass in an application outside of south african welfare. if they can find a material earnings generator that is not south african welfare, the multiple will expand dramatically. for me that will either be Iraq, Ghana or Nigeria or south african wage payment. see why I like them -- huge free cash flow (as a percent of assets or revenues cash flow is very strong and cap ex requirements are very small), multiple ways of growing and the valuation remains low. I have not sold calls on UEPS because its too cheap but I might still do it just making sure the puts I sell are same strike as the calls -- straddle rather than strangle. that would help boost my upside break even.
still don't know if we can make it through all of next week without a dip -- if we don't go to new highs some will freak out that its over -- to me it means we need more consolidation time like june/july. semi's -- meant to post something to the effect that its all just rotation but didn't get the chance -- big investors seem to be rotating through different industry/sector groups so groups start to fall behind and then zoom forward as bargain hunters appear -- I have read bearish folks (Kass) who highlight the group that sucks as a reason to short the market or the group that is sucking. so last week he shorts the SMH because semi's are lagging and what happens? semi's take off. he has done the same thing with financials this year. I am hopeful semi's will keep rising -- including two of my super strugglers CY and QCOM. sold some NOV puts on QCOM last friday and have thought about buying some more calls in CY but probably missed my best chance when the stock was in the $9.5 range.
good luck
I can see a couple of positives helping them -- smartphones have higher content of their packaging technology so a higher per unit royalty and smartphone demand is pretty good. Second, they won the wireless case but no one settled. QCOM decided to use Amkor and so far it appears Amkor is not paying for QCOM's units given the litigation between TSRA and Amkor. Still it makes one wonder if other losers in the trial have decided to use licensed packaging firms as a solution while they appeal the decision. Those two positives plus the improving economy could drive upside to results.
The next issue is what is the true earnings power/cash flow of the company and what is an appropriate valuation for them. I have seen an estimate of $2.50 in 2011-2012 earnings power, which to me is reasonable and gets you to the low $50's or about 60% return from here -- still cheap in my mind. guess selling those calls at $30 could be silly. we'll see. like I said -- I can always roll them forward and the put selling helps to raise the break even value.
All that said, I wonder if UEPS isn't the more attractive now. that stock has also been moving up but it was at ridiculous valuation levels -- basically just a handful times free cash flow so now its up to about 10x free cash flow. A 10% free cash flow yield that is growing double digits? sign me up. I think they keep growing steadily but the true valuation change will occur when they reach critical mass in an application outside of south african welfare. if they can find a material earnings generator that is not south african welfare, the multiple will expand dramatically. for me that will either be Iraq, Ghana or Nigeria or south african wage payment. see why I like them -- huge free cash flow (as a percent of assets or revenues cash flow is very strong and cap ex requirements are very small), multiple ways of growing and the valuation remains low. I have not sold calls on UEPS because its too cheap but I might still do it just making sure the puts I sell are same strike as the calls -- straddle rather than strangle. that would help boost my upside break even.
still don't know if we can make it through all of next week without a dip -- if we don't go to new highs some will freak out that its over -- to me it means we need more consolidation time like june/july. semi's -- meant to post something to the effect that its all just rotation but didn't get the chance -- big investors seem to be rotating through different industry/sector groups so groups start to fall behind and then zoom forward as bargain hunters appear -- I have read bearish folks (Kass) who highlight the group that sucks as a reason to short the market or the group that is sucking. so last week he shorts the SMH because semi's are lagging and what happens? semi's take off. he has done the same thing with financials this year. I am hopeful semi's will keep rising -- including two of my super strugglers CY and QCOM. sold some NOV puts on QCOM last friday and have thought about buying some more calls in CY but probably missed my best chance when the stock was in the $9.5 range.
good luck
Wednesday, October 7, 2009
Timing is Everything
On Realmoney today there was a discussion about the probability of 0% economic growth in Q4 -- two contributors that are very smart and have a good track record actually believe there is a strong chance of that kind of outcome. wow.
Many people are looking at September data that they believe was weak and that this shows the economy is not going to recover -- they are delusional and NEED the market lower because they are either short or they are not long and therefore having performance challenges that will lead to clients leaving.
My way of playing this disconnect between growth forecasts is to be long semiconductors -- one of the most cyclical and global of industries. They rallied hard off the bottom true but they have been flattish since early August -- once investors recognize the strength in the recovery I suspect semi's should do quite well. The question is will I be proven right before my calls expire? hard to say but since I have Oct, Nov and Dec contracts on different stocks/ETFs, I figure at least some of it will work and potentially all of them.
In general that's my question -- will the market pull back again before people realize the strength of the recovery -- especially with option expiration next week. can we stay strong through next week? depends on how folks are positioned. sometimes they need the market to not go any higher -- which forces it up. Sometimes they need it higher which means the market will consolidate.
TSRA -- Cramer touted them last night due to their new product cycles -- one is the camera modules and the other is a new cooling technology that does not use fans -- so its more energy efficient and less noisy and allows for smaller devices. Cool stuff but its going to take a couple of years before material revenues. This is by far and away my largest holding but I am trying to manage the position a bit through options. I chose to try an interesting strategy -- sell a strangle, while buying protective puts -- so I'm short 30 calls, 25 puts and long 20 puts. Effectively its a covered call at $30 combined with a 25/20 bull put spread.
Just looking at the options trade my break even points are $32 and $23 -- put this on when the stock was about $27.75 so today's ramp to over $29 didn't help but if the stock keeps going the worst case is I sell half my holdings at $32. That would be a 15% return for the 45 days till expiration at the time of sale. I decided that wasn't bad. I can always choose to roll the position to December too. selling the put spreads helps to increase the upside but it also magnifies the downside. Overall its a slightly negative delta trade due to the proximity of the calls.
CY -- this is another of my semi play's -- so far the stock has dropped and is seriously testing the low end of the recent range. I think they have a winner in their PSOC business -- my bet is that analysts have under estimated the strength of the recovery so as the stock is at the low end of the range I would take a look at it.
FLIR -- longer term this is a big winner but near term I worry because their largest US gov contract is ending -- they need to replace about $140 mill in revenue next year -- will they do it? depends on the economy and if they win any other contracts. So the economy should help but with the stock up from 21 to 27 since they reported last quarter I wonder if there is a lot of upside in the mean time. so once again its a bit of a game of chicken -- near term squishy but long term huge so best time to buy a bunch was at $21 -- I was caught napping figuring there was no hurry -- everyone was waiting for them to lower guidance and once they did the stock was now "safe". in retrospect the lowering of guidance was an obvious buying time.
good luck
Many people are looking at September data that they believe was weak and that this shows the economy is not going to recover -- they are delusional and NEED the market lower because they are either short or they are not long and therefore having performance challenges that will lead to clients leaving.
My way of playing this disconnect between growth forecasts is to be long semiconductors -- one of the most cyclical and global of industries. They rallied hard off the bottom true but they have been flattish since early August -- once investors recognize the strength in the recovery I suspect semi's should do quite well. The question is will I be proven right before my calls expire? hard to say but since I have Oct, Nov and Dec contracts on different stocks/ETFs, I figure at least some of it will work and potentially all of them.
In general that's my question -- will the market pull back again before people realize the strength of the recovery -- especially with option expiration next week. can we stay strong through next week? depends on how folks are positioned. sometimes they need the market to not go any higher -- which forces it up. Sometimes they need it higher which means the market will consolidate.
TSRA -- Cramer touted them last night due to their new product cycles -- one is the camera modules and the other is a new cooling technology that does not use fans -- so its more energy efficient and less noisy and allows for smaller devices. Cool stuff but its going to take a couple of years before material revenues. This is by far and away my largest holding but I am trying to manage the position a bit through options. I chose to try an interesting strategy -- sell a strangle, while buying protective puts -- so I'm short 30 calls, 25 puts and long 20 puts. Effectively its a covered call at $30 combined with a 25/20 bull put spread.
Just looking at the options trade my break even points are $32 and $23 -- put this on when the stock was about $27.75 so today's ramp to over $29 didn't help but if the stock keeps going the worst case is I sell half my holdings at $32. That would be a 15% return for the 45 days till expiration at the time of sale. I decided that wasn't bad. I can always choose to roll the position to December too. selling the put spreads helps to increase the upside but it also magnifies the downside. Overall its a slightly negative delta trade due to the proximity of the calls.
CY -- this is another of my semi play's -- so far the stock has dropped and is seriously testing the low end of the recent range. I think they have a winner in their PSOC business -- my bet is that analysts have under estimated the strength of the recovery so as the stock is at the low end of the range I would take a look at it.
FLIR -- longer term this is a big winner but near term I worry because their largest US gov contract is ending -- they need to replace about $140 mill in revenue next year -- will they do it? depends on the economy and if they win any other contracts. So the economy should help but with the stock up from 21 to 27 since they reported last quarter I wonder if there is a lot of upside in the mean time. so once again its a bit of a game of chicken -- near term squishy but long term huge so best time to buy a bunch was at $21 -- I was caught napping figuring there was no hurry -- everyone was waiting for them to lower guidance and once they did the stock was now "safe". in retrospect the lowering of guidance was an obvious buying time.
good luck
Friday, October 2, 2009
employment report is noise
I am always amazed at the amount of attention this monthly report gets -- its based on a lot of statistics the accuracy of which is questionable; its adjusted huge from month to month; its a lagging indicator; its noise. I keep my focus on ECRI's leading indicators -- have yet to hear anything from them that says something different from strong recovery and no double dip.
many keep talking about no jobs no recovery -- they miss the fact that even though 15% of the workforce is out of work or under employed the other 85% of americans start to spend a little more freely because they realize their situation is not so precarious. many also screw this up because they believe anything Keynes said about the economy -- he talked about the consumer as paramount. I ask you what income any consumer would have without production? it is production and the capital goods side of the economy that drives income and then consumers choose what to do with that money -- then we learn who the winners and losers were amongst producers.
market has sold off hard here -- is it possible we see more downside -- yes because this time feels a little different -- in retrospect we had what I was hoping to watch out for but missed -- complacency about the early part of the decline -- oh we are only down 2-3% that's not a big deal -- that's different than early September when we fell 3% and everyone panicked. this time we are down more like 5.5% and there are more signs of panic but I don't know if its enough yet -- its possible we need to get to July type lows or back to a 990-1000 kind of area.
the interesting part will be earnings -- will we see the same kind of upside surprises this month and the same kind of market reaction -- at 1080 most likely not but at 1000-1030 we are better set up to see positive reactions to earnings.
Keep an eye on 2 stocks -- ERII and MXWL -- to me they are both well positioned for the future based on secular trends. ERII is a play on water and energy costs -- basically their system is much more energy efficient so in an era of more expensive energy their value proposition expands. Caveat -- they sell into multi-million dollar projects so in this era of reduced credit supply that is a potential problem -- they lowered guidance last quarter because of it. their cash on hand represents about 30-40% of the total market cap to give you an idea of the valuation.
MXWL sells ultracapacitors, which will prove essential to electrifying transportation. Right now most transportation uses some product refined from oil as its fuel -- cars, planes, trains, buses, etc. In the future, electricity will make a dent in gasoline usage as well as diesel. Even if it doesn't, the growing use of consumer electronic products in our cars has created strains on the auto's electrical system -- to make batteries more efficient, last longer and to make sure we don't have to have the biggest batteries they make for our car ultracapacitors will save the day. MXWL is a leading player. I would caution that this is a relatively young industry and setbacks are possible -- the company has been losing money so it is unclear what the longer term profitability of ultracapacitors will be -- I think it will be ok but the revenues will be huge.
my thought was we have a good chance of closing positive today but I'm not sure that is a good thing -- soak up as many sellers as possible so we can stabilize and move on.
many keep talking about no jobs no recovery -- they miss the fact that even though 15% of the workforce is out of work or under employed the other 85% of americans start to spend a little more freely because they realize their situation is not so precarious. many also screw this up because they believe anything Keynes said about the economy -- he talked about the consumer as paramount. I ask you what income any consumer would have without production? it is production and the capital goods side of the economy that drives income and then consumers choose what to do with that money -- then we learn who the winners and losers were amongst producers.
market has sold off hard here -- is it possible we see more downside -- yes because this time feels a little different -- in retrospect we had what I was hoping to watch out for but missed -- complacency about the early part of the decline -- oh we are only down 2-3% that's not a big deal -- that's different than early September when we fell 3% and everyone panicked. this time we are down more like 5.5% and there are more signs of panic but I don't know if its enough yet -- its possible we need to get to July type lows or back to a 990-1000 kind of area.
the interesting part will be earnings -- will we see the same kind of upside surprises this month and the same kind of market reaction -- at 1080 most likely not but at 1000-1030 we are better set up to see positive reactions to earnings.
Keep an eye on 2 stocks -- ERII and MXWL -- to me they are both well positioned for the future based on secular trends. ERII is a play on water and energy costs -- basically their system is much more energy efficient so in an era of more expensive energy their value proposition expands. Caveat -- they sell into multi-million dollar projects so in this era of reduced credit supply that is a potential problem -- they lowered guidance last quarter because of it. their cash on hand represents about 30-40% of the total market cap to give you an idea of the valuation.
MXWL sells ultracapacitors, which will prove essential to electrifying transportation. Right now most transportation uses some product refined from oil as its fuel -- cars, planes, trains, buses, etc. In the future, electricity will make a dent in gasoline usage as well as diesel. Even if it doesn't, the growing use of consumer electronic products in our cars has created strains on the auto's electrical system -- to make batteries more efficient, last longer and to make sure we don't have to have the biggest batteries they make for our car ultracapacitors will save the day. MXWL is a leading player. I would caution that this is a relatively young industry and setbacks are possible -- the company has been losing money so it is unclear what the longer term profitability of ultracapacitors will be -- I think it will be ok but the revenues will be huge.
my thought was we have a good chance of closing positive today but I'm not sure that is a good thing -- soak up as many sellers as possible so we can stabilize and move on.
Wednesday, September 30, 2009
EPS revisions
Saw comments today that mentioned huge positive earnings revisions for technology companies and how negative this was. Huh? how could positive earnings revisions be negative? Well because these analysts are just raising numbers to justify the current speculative rise in stock prices. The commenter assumed there was no way the new estimates were realistic because the economy won't be that good, yada yada yada. wow.
So last quarter it was all just cost cutting and therefore unsustainable and now its the numbers are going up not because anyone thinks they are real but because the analysts need big numbers to justify their target prices and buy ratings. I would argue they didn't juice the numbers like that during the bubble so why would they do it now? (not saying that their estimates at the peak involved sustainable levels of revenues and profits -- obviously not but the numbers were in line with company guidance and recent experience about what was possible -- they didn't need or want to really juice the estimates because they wanted the companies to beat numbers and they just raised the multiple to get their high target prices).
Two things to keep in mind when you hear its all just cost cutting:
1. GDP was flat at best in Q2 so why would anyone expect revenue growth? (granted that flat was Q/Q not Y/Y but that only makes my comment more right because the Y/Y change has to be negative -- so again why would you expect revenue growth in a declining economy?)
2. the dollar was actually a drag on revenue growth in Q2 for multinationals -- probably clipped revenue growth by 5+%.
So as we get to Q4 and you see the dollar is additive to revenue growth instead of a subtraction and GDP growth is now very positive both Q/Q and Y/Y then wouldn't you expect to see very strong earnings given that cost cutting has been so pervasive?
ECRI is unbelievably adamant -- STILL that the recovery is going to be very strong with no double dip. no one believes that. ALMOST EVERYONE believes our problems are so bad that the economy can't possibly enter a sustainable growth phase.
I chatted with some investment professionals today who went through their litany of issues surrounding the banks (will see lots and lots of failures), housing (still falling), government debt and stimulus (recovery is all due to huge stimulus so it can't last -- very inflationary they will have to raise rates), yada yada yada.
Went on and on about all the issues -- when I confront them with the recovery data from ECRI they point out sure the recovery will be strong in Q4 but it can't be sustained and its all just a sugar high from the stimulus. I can assure you that anyone with that kind of thinking has been too bearish all along this year -- someone that admits the recovery will be strong but it can't be sustained is someone that has refused to look forward -- has only looked backward at how bad things were and assumed there can't be any good news to get the market up because we have all these issues. He then switches gears to say that sure now its ok but I'm really worried about the long term -- Hello -- what have I been saying? there will be another bust and it will be ugly but that could be years in the future -- the market could make a triple top at 1550 before then.
One thing I would point out is that I am thinking about adjusting my thoughts on the next bust -- I have thought that since we didn't really deal with the overindebtedness of this last boom --we artificially have lowered rates and used various tactics to support asset values such as houses above true market levels -- that the next bust would be worse. we would have to deal with all the issues from the last boom plus the news issues from this boom. its still quite possible but given that anyone that levered up in the last boom does not have access to credit now, you have to assume that a whole new class of borrowers is going to lever up and cause problems. I'm thinking that maybe just like 2000-2002 was a different bust from 1990 that the next bust will be different from this one -- financials won't go bust twice in a row but some other industry will do it. Tech? probably not since we are too close to the last bubble burst.
Energy and commodities? sure could be. health care? possibly but do you see people going out and levering up to open up health care facilities? I don't.
Infrastructure? yep that's a possibility too -- all that building going on in China and other emerging markets. You'll know which area it will be because that will be the focus of all bullish commentary and it will be the area most often talked about in Time or Newsweek or businessweek or other non-financial publications. It will be the area that MBA's try to get into.
bottom line -- do you know anyone that thinks we are about to have a strong and sustainable recovery? I don't besides ECRI and Cramer.
one last thing -- if we don't see a strong up move on Wednesday that will be a change in the pattern -- last couple of months you see a 3 day sell off followed by a big up day followed by a neutral day -- generally up but basically flat -- followed by another big up day. some are already talking about a lower high -- so if the market pulls back to less than 1035 we will then have a lower low too. obviously at that point the rally is over and we are going to <700 again. Oh except we did all that lower high and lower low in July and then soared about 200 points. I can live with the pain of going below 1000 if I'm confident we will head to 1200+ soon after. unless the economy rolls over, fed raises or people get truly bullish, I don't see how a bigger pull back won't be a better buying opportunity.
good luck
So last quarter it was all just cost cutting and therefore unsustainable and now its the numbers are going up not because anyone thinks they are real but because the analysts need big numbers to justify their target prices and buy ratings. I would argue they didn't juice the numbers like that during the bubble so why would they do it now? (not saying that their estimates at the peak involved sustainable levels of revenues and profits -- obviously not but the numbers were in line with company guidance and recent experience about what was possible -- they didn't need or want to really juice the estimates because they wanted the companies to beat numbers and they just raised the multiple to get their high target prices).
Two things to keep in mind when you hear its all just cost cutting:
1. GDP was flat at best in Q2 so why would anyone expect revenue growth? (granted that flat was Q/Q not Y/Y but that only makes my comment more right because the Y/Y change has to be negative -- so again why would you expect revenue growth in a declining economy?)
2. the dollar was actually a drag on revenue growth in Q2 for multinationals -- probably clipped revenue growth by 5+%.
So as we get to Q4 and you see the dollar is additive to revenue growth instead of a subtraction and GDP growth is now very positive both Q/Q and Y/Y then wouldn't you expect to see very strong earnings given that cost cutting has been so pervasive?
ECRI is unbelievably adamant -- STILL that the recovery is going to be very strong with no double dip. no one believes that. ALMOST EVERYONE believes our problems are so bad that the economy can't possibly enter a sustainable growth phase.
I chatted with some investment professionals today who went through their litany of issues surrounding the banks (will see lots and lots of failures), housing (still falling), government debt and stimulus (recovery is all due to huge stimulus so it can't last -- very inflationary they will have to raise rates), yada yada yada.
Went on and on about all the issues -- when I confront them with the recovery data from ECRI they point out sure the recovery will be strong in Q4 but it can't be sustained and its all just a sugar high from the stimulus. I can assure you that anyone with that kind of thinking has been too bearish all along this year -- someone that admits the recovery will be strong but it can't be sustained is someone that has refused to look forward -- has only looked backward at how bad things were and assumed there can't be any good news to get the market up because we have all these issues. He then switches gears to say that sure now its ok but I'm really worried about the long term -- Hello -- what have I been saying? there will be another bust and it will be ugly but that could be years in the future -- the market could make a triple top at 1550 before then.
One thing I would point out is that I am thinking about adjusting my thoughts on the next bust -- I have thought that since we didn't really deal with the overindebtedness of this last boom --we artificially have lowered rates and used various tactics to support asset values such as houses above true market levels -- that the next bust would be worse. we would have to deal with all the issues from the last boom plus the news issues from this boom. its still quite possible but given that anyone that levered up in the last boom does not have access to credit now, you have to assume that a whole new class of borrowers is going to lever up and cause problems. I'm thinking that maybe just like 2000-2002 was a different bust from 1990 that the next bust will be different from this one -- financials won't go bust twice in a row but some other industry will do it. Tech? probably not since we are too close to the last bubble burst.
Energy and commodities? sure could be. health care? possibly but do you see people going out and levering up to open up health care facilities? I don't.
Infrastructure? yep that's a possibility too -- all that building going on in China and other emerging markets. You'll know which area it will be because that will be the focus of all bullish commentary and it will be the area most often talked about in Time or Newsweek or businessweek or other non-financial publications. It will be the area that MBA's try to get into.
bottom line -- do you know anyone that thinks we are about to have a strong and sustainable recovery? I don't besides ECRI and Cramer.
one last thing -- if we don't see a strong up move on Wednesday that will be a change in the pattern -- last couple of months you see a 3 day sell off followed by a big up day followed by a neutral day -- generally up but basically flat -- followed by another big up day. some are already talking about a lower high -- so if the market pulls back to less than 1035 we will then have a lower low too. obviously at that point the rally is over and we are going to <700 again. Oh except we did all that lower high and lower low in July and then soared about 200 points. I can live with the pain of going below 1000 if I'm confident we will head to 1200+ soon after. unless the economy rolls over, fed raises or people get truly bullish, I don't see how a bigger pull back won't be a better buying opportunity.
good luck
Monday, September 28, 2009
VIX
One more thing -- the VIX near 25 is way over priced!!!! Actual historical volatility has been running in the teens so one of two things have to change -- either volatility needs to jump or the VIX has to continue to drop. To give you an idea what a VIX at 25 means -- think 1.6% daily moves in the S&P 500 2/3 of the time -- so out of 21 trading days in a month we should be seeing 1.6% type moves 14 times. Last 10 trading days maybe 3 make the cut or about half of what is needed to justify a VIX near 25.
Well it looks like I just changed the font - hopefully it will change back next time.
Funny thing is that most think the VIX is too low and is headed higher -- they are reacting to the VIX of the last year that reached 90 and not to actual volatility. They are also fighting the rally and assuming the market is going down at any moment. nope. not gonna happen. not while everyone is expecting and practically wishing for it.
again, that doesn't mean we can't consolidate or pull back at times but no big swoon until either the fed changes dramatically, the economy dives (absolutely no sign yet) or people stop expecting the swoon.
Well it looks like I just changed the font - hopefully it will change back next time.
Funny thing is that most think the VIX is too low and is headed higher -- they are reacting to the VIX of the last year that reached 90 and not to actual volatility. They are also fighting the rally and assuming the market is going down at any moment. nope. not gonna happen. not while everyone is expecting and practically wishing for it.
again, that doesn't mean we can't consolidate or pull back at times but no big swoon until either the fed changes dramatically, the economy dives (absolutely no sign yet) or people stop expecting the swoon.
Its Not going to End Tomorrow!
We will see pull backs like we had last week from time to time but for the moment the end is not here. I had lunch recently with some former co-workers and no one felt comfortable being bullish on the rally -- they all expect a sharp downturn in the market to begin at any time. Asset flows for mutual funds? only if you want a bond fund. I just saw another comparison to 1929 and the big rally that occurred before the bottom fell out in 1930-1933. This is great news for the market -- as long as the wally of worry exists the market can keep rising. When everyone expects the rally to never end and that stocks are the place to be, that's when the end comes. We are so far away from that its not funny.
A few other reasons the rally can end:
the fed raises rates or stops the flow funds into the economy;
the chinese decide to raise the value of their currency vs. the dollar dramatically
the leading indicators on the economy roll over and point to a slow down.
I don't expect any of these to really happen until next year at the earliest -- plus just because the fed starts to raise doesn't mean the end is nigh -- it took a few years from when the fed first raised rates to when the rally ended. if they raise rates faster than obviously it will take less time to end the rally but I think the Fed's fear of pulling the plug too soon and leading to a fall back to the next depression will keep the money flowing.
MXWL -- they announced a deal with Continental to sell lots of ultracapacitors to the auto industry -- this market is just getting started. the stock is likely expensive having run up a few dollars in a matter of days but its one to keep an eye on. This market will be huge -- ultracapacitors will be a key to transitioning the market towards more electricity use within cars.
ERII -- if this stock pulls back towards 5.50 again, I plan on putting on a good position.
TCAP -- actually raised their dividend -- do the same as ARCC. Both have been great stocks -- ARCC is closing in on its NAV from Q2 but that NAV is likely 10-20% higher due to the improvement in the market. we'll see when they report.
BTW, not saying you can't take profits, raise cash or start a short position to hedge yourself given how far we've come. I just think we are going higher. 2003 we paused for several months around these levels. quite possible that happens again.
MCD -- interesting they raised their dividend to a 3.8% yield -- that seems like a high yield to me for this kind of quality company. lots of chinese and indians need to be fed.
A few other reasons the rally can end:
the fed raises rates or stops the flow funds into the economy;
the chinese decide to raise the value of their currency vs. the dollar dramatically
the leading indicators on the economy roll over and point to a slow down.
I don't expect any of these to really happen until next year at the earliest -- plus just because the fed starts to raise doesn't mean the end is nigh -- it took a few years from when the fed first raised rates to when the rally ended. if they raise rates faster than obviously it will take less time to end the rally but I think the Fed's fear of pulling the plug too soon and leading to a fall back to the next depression will keep the money flowing.
MXWL -- they announced a deal with Continental to sell lots of ultracapacitors to the auto industry -- this market is just getting started. the stock is likely expensive having run up a few dollars in a matter of days but its one to keep an eye on. This market will be huge -- ultracapacitors will be a key to transitioning the market towards more electricity use within cars.
ERII -- if this stock pulls back towards 5.50 again, I plan on putting on a good position.
TCAP -- actually raised their dividend -- do the same as ARCC. Both have been great stocks -- ARCC is closing in on its NAV from Q2 but that NAV is likely 10-20% higher due to the improvement in the market. we'll see when they report.
BTW, not saying you can't take profits, raise cash or start a short position to hedge yourself given how far we've come. I just think we are going higher. 2003 we paused for several months around these levels. quite possible that happens again.
MCD -- interesting they raised their dividend to a 3.8% yield -- that seems like a high yield to me for this kind of quality company. lots of chinese and indians need to be fed.
Monday, September 14, 2009
asset inflation
Option expiration week -- who knows what will happen this week. On the one hand there is big open interest around 1000 -- otherwise known as straddles. That could pull us lower -- not to mention the fact that the market has gone up for several days in a row without any break. 1035 was a fibonacci area and was expected to lead to consolidation -- so far its sort of working in that the futures can't get much past it. That said, besides Cramer what talking head is bullish? I probably don't watch enough CNBC to really say that but it just seems like everywhere you turn you find doubting thomas' about this rally.
I saw an analysis this morning that said the market was discounting 3-3.5% growth for 2010 in GDP and the analyst thought that rate was probably 2x what was likely. Based on ECRI, I would argue the growth for next year is likely to be faster than most expect -- is that faster than 3.5%? don't know because I'm not sure how many people expect that rate of growth.
But while there are fundamental reasons for the rally -- recovery -- there is also a huge driver known as liquidity -- the fed and every other central bank is pumping out money like crazy and it has to go somewhere -- almost every asset class is gaining in value. its called asset inflation and it happens when excess money needs to find a home and goods inflation isn't possible. I would say excess supply is a good reason why we won't see goods inflation at least for awhile.
The central banks pumping in money is leading to risk trades being put on all over the world -- especially financed by carry trades like taking advantage of the zero rates within the US. As long as the Fed keeps short rates near zero, you should assume the 10 year and 30 year won't get too far above where we are now -- too many arbitrageurs will prevent that -- people will borrow short to lend long and that might be stupid longer term but its very profitable as long as it lasts.
The biggest risk now is that the Chinese change the dollar peg because that is the source of greatest imbalance in the market -- the chinese currency is not being allowed to reach its true value and that causes imbalances to build in the market as everyone tries to find a way around the chinese currency's inability to rise. think of it like water trying to get into a basement -- it will search all around for a weak point and won't stop until the pressure is relieved. the pressure in the currency markets can build for years and then explode. I have a quarter of my assets in asian funds that invest in companies seeking local growth -- i.e. not exporters who will get crushed by the chinese currency soaring.
big question will be will my currency gains from being in non-dollar assets offset the losses that might come from asian stocks selling off figuring the export boom is over. who knows.
FLIR -- ugh! stock is up huge in the last week. I forgot that FLIR is a company that does one warning and is done -- they generally give conservative guidance and usually don't have to adjust lower but when they do its usually the end of the problems -- going forward they generally start beating again. looking around in late august this stock was too cheap compared to others -- their secular growth is huge but the gov business held me back because of all the talk of no growth. guessing someone decided it was too cheap compared to other industrials and that with the economy recovering their results would jump too. on the other hand it could be merger rumors too. not sure. I'm hoping for a pull back to increase my stake a bit.
more to come
I saw an analysis this morning that said the market was discounting 3-3.5% growth for 2010 in GDP and the analyst thought that rate was probably 2x what was likely. Based on ECRI, I would argue the growth for next year is likely to be faster than most expect -- is that faster than 3.5%? don't know because I'm not sure how many people expect that rate of growth.
But while there are fundamental reasons for the rally -- recovery -- there is also a huge driver known as liquidity -- the fed and every other central bank is pumping out money like crazy and it has to go somewhere -- almost every asset class is gaining in value. its called asset inflation and it happens when excess money needs to find a home and goods inflation isn't possible. I would say excess supply is a good reason why we won't see goods inflation at least for awhile.
The central banks pumping in money is leading to risk trades being put on all over the world -- especially financed by carry trades like taking advantage of the zero rates within the US. As long as the Fed keeps short rates near zero, you should assume the 10 year and 30 year won't get too far above where we are now -- too many arbitrageurs will prevent that -- people will borrow short to lend long and that might be stupid longer term but its very profitable as long as it lasts.
The biggest risk now is that the Chinese change the dollar peg because that is the source of greatest imbalance in the market -- the chinese currency is not being allowed to reach its true value and that causes imbalances to build in the market as everyone tries to find a way around the chinese currency's inability to rise. think of it like water trying to get into a basement -- it will search all around for a weak point and won't stop until the pressure is relieved. the pressure in the currency markets can build for years and then explode. I have a quarter of my assets in asian funds that invest in companies seeking local growth -- i.e. not exporters who will get crushed by the chinese currency soaring.
big question will be will my currency gains from being in non-dollar assets offset the losses that might come from asian stocks selling off figuring the export boom is over. who knows.
FLIR -- ugh! stock is up huge in the last week. I forgot that FLIR is a company that does one warning and is done -- they generally give conservative guidance and usually don't have to adjust lower but when they do its usually the end of the problems -- going forward they generally start beating again. looking around in late august this stock was too cheap compared to others -- their secular growth is huge but the gov business held me back because of all the talk of no growth. guessing someone decided it was too cheap compared to other industrials and that with the economy recovering their results would jump too. on the other hand it could be merger rumors too. not sure. I'm hoping for a pull back to increase my stake a bit.
more to come
Tuesday, September 8, 2009
did you buy last week's pull back?
The VIX spiked to 29 last week -- a huge move in percentage terms given a shallow pull back of only 3-4% for the market. That told you we weren't going much lower -- too many people were positioned for a big drop paying big premiums for puts -- when everyone realizes they might need insurance, that is when it will be most expensive. Are we just going to spurt to new highs? that is an interesting question. Its harder from here given the drop in the VIX (today's jump is holiday distortion) and options expiration approaching. Last month I was sure we wouldn't break to new highs and then what happened? new highs on expiration friday. Guess everyone else had the same thought.
So the question will be are we going past 1040 before next friday? I am somewhat skeptical again given that this area is around one of those fibonacci numbers -- we paused for 2 months at the last one near 950. So the market rallies another 8% and we pause for a shorter time period? that seems too aggressive. on the other hand the demand for stocks is huge -- unrelenting -- so why not assume further gains? tough call. For a trader the key is to have the most exposure when the odds are in your favor and to reduce exposure as it gets harder.
One thing that is undeniable? have you seen what the commodity tech players are doing? wow. semi's, disk drives, EMS, distributors like AVT, etc. economy has to be getting better unless you assume that all of these industries have removed so much supply that even weak demand can drive an upcycle -- is that even possible for these managements to do? history says no.
Stocks:
One fly in the ointment is CY -- they are supposed to be perfectly positioned given their programmable system on a chip business but the stock has been weak of late -- granted after a huge move off the bottom. watching this one. as far as I know there is nothing wrong but I don't have enough good info to know for sure. this could be a great opportunity to pick up a name on a pullback. I'll try to do some more work on it.
that's it for now
So the question will be are we going past 1040 before next friday? I am somewhat skeptical again given that this area is around one of those fibonacci numbers -- we paused for 2 months at the last one near 950. So the market rallies another 8% and we pause for a shorter time period? that seems too aggressive. on the other hand the demand for stocks is huge -- unrelenting -- so why not assume further gains? tough call. For a trader the key is to have the most exposure when the odds are in your favor and to reduce exposure as it gets harder.
One thing that is undeniable? have you seen what the commodity tech players are doing? wow. semi's, disk drives, EMS, distributors like AVT, etc. economy has to be getting better unless you assume that all of these industries have removed so much supply that even weak demand can drive an upcycle -- is that even possible for these managements to do? history says no.
Stocks:
One fly in the ointment is CY -- they are supposed to be perfectly positioned given their programmable system on a chip business but the stock has been weak of late -- granted after a huge move off the bottom. watching this one. as far as I know there is nothing wrong but I don't have enough good info to know for sure. this could be a great opportunity to pick up a name on a pullback. I'll try to do some more work on it.
that's it for now
Wednesday, August 26, 2009
update
so much for being back huh? one post and then another 5 month break. oh well. I have been busy learning how to trade options -- understanding volatility and its impact on options and basically trying to make money trading. that doesn't make sense for what was supposed to be an investment related blog like this one.
Anyway, I wish I would have made several posts in the past -- just to get my market thoughts on record. that's kind of why I started this in the first place -- to create a record of my thinking.
Its end of august and we have had a huge rally --especially since mid july where the market has barely corrected since then. I could easily see another 3-5% drop like we had monday last week but many many folks are adamant that we are topping -- that we will see a big correction -- call it 10-15% drop or something like that. Its possible -- the last year should have taught us that anything is possible -- but I am skeptical we will see that big of a pullback.
Why? simple -- ECRI says we are about to have one of the strongest recoveries since the early 1980's. How many people believe that? even the bullish are likely just playing the momentum game to some extent and hopeful of some kind of recovery. But ECRI has an amazing track record. I have yet to see them be wrong about a big call in 9 years of watching them -- they don't make false calls about recessions or recoveries. They are absolutely adamant we are going to see a strong recovery.
How could they be so sure? because they use leading indicators and these indicators are all pointing upward. Most people do not understand the difference between leading, coincident and lagging but that's what ECRI brings to the table. They say the recession is ending this summer, which means by definition the coincident and lagging indicators are at their worst levels.
That's why it doesn't feel like a recovery yet -- but over the next several months things will begin to feel a lot stronger. Oh, and their long leading index is still pointing upward too -- that means no double dip either. I just don't see how we are going to get a strong pull back when the leading indicators are acting so strong.
One more critical point -- everyone that I read that hates this rally says its all driven by stimulus from fed and gov spending and is therefore unsustainable -- no kidding the fed cannot be successful longer term but the last fed induced recovery lasted years. its way too early to focus on the coming disaster. The other point to make is that way too many people keep saying I would be bullish except for ...... I would join the bullish market if only .... wasn't true. I won't believe the housing market has bottomed until ....... well the problem is that you pay a high price for certainty -- by the time its obvious that the recovery is in place the S&P 500 will be higher than it is now. that's my guess. We will get to levels not realized before.
All that said -- we are certainly ready for a correction -- another few percent drop like we have had because bullishness has gotten a little ahead of it self. there are 2 ways to work off the overbought condition -- time and price. if we are flat for awhile that is enough. the highs on friday were the first new highs in almost 2 weeks -- amazing in hindsight.
now many arguing for a bigger decline say that it will be as obvious in hindsight that the trade was to sell now as it is obvious in hindsight that the trade was to buy in march. my retort is that a correction yes -- mild as the others -- yes but a big pull back no. not while the leading indicators are soaring.
Many are expecting volatility to pick up in september and october -- no way this happens to the extent people think -- that's last year's issue -- think back to the crash of '87 and what was on people's minds in 1988 as we approached the fall -- everyone was all worried about another crash. didn't happen. watched pots don't boil and market concerns that everyone has don't come to fruition.
US is now a carry trade currency. what does that mean? rest of world will outperform US markets -- way to play this is asian markets focused on domestic demand -- not the exporters. china's currency is being held artificially low -- that is unsustainable but it could take a long time to break. but this is in the category of soros and the pound -- its a matter of time. when the chinese currency jumps, the exporters will get hurt but the domestic demand will get a big help. either way being a US dollar investor it helps if you have assets in other currencies that appreciate.
Stocks -- well most of my favorites are doing OK --
TSRA won its legal battles and has rallied but its been stuck in the mid 20's since. another ruling due friday -- we shall see but I can't imagine they lose this ruling -- judge was over ruled on same issues so he has to know he would be overruled again -- only stubborness would make him rule against TSRA again. should get a pop in the stock towards 27 or higher depending on what is going on in the rest of the market. wireless ruling wasn't as big of a deal as I had hoped because most of those they were suing have fallen on hard times or have shifted to Amkor -- who has chosen not to pay for some of this new business. they are continuing to innovate and that will expand their market over time but with the court cases wrapping up the stock is getting tricky. Its one part catalyst from new licensees due to court victories and one part long term growth story due to their continued innovation. as you can imagine the first catalyst leads to a jump in the stock while the second leads to longer term appreciation if successful -- no guarantees they will be as successful now as in the past. If the stock pops, I hope to reduce my position size.
UEPS is doing great -- just bought back 16% of stock as a private equity firm had to liquidate to pay off clients.
ILMN -- ok -- talk of delays is not good but stock holding up fine. their innovation is still strong.
LH -- got worried about obamacare because they would be a target -- only way to cut costs is to force less care on the system and fewer tests is part of that (MRI's, x-ray's CT scans, etc more at risk). Valuation and cash flow remain attractive -- personalized medicine remains a growth angle over long term and LH is a play on that.
FLIR -- no secular issues but near term looks icky because of their hopes for flat government revenues -- basically they have been quite successful in recent years on gov biz and that is hard to replace after awhile. stock has been weak -- this one I was glad I sold in the high 20's to low 30's. still have small position.
POWI -- sold this one in the 24-25 range and for awhile it looked pretty smart -- stock bottomed in the teens but now its in the low 30's. just lost track of it with everything else I have going on.
CLB -- bought just a little bit near $50 and sold half near $78 so I'm upset I didn't have the guts to buy more. this is a great secular story -- they help oil and gas companies get more production out of their fields -- a technology/services play that benefits from the secular trend that oil is getting harder and harder to get out of the ground. they have great cash flow and a smart management team.
MXWL -- I sold this last year near $7.50 like an idiot. I had the chance to buy it back for a few months in the 4-7 range but didn't. I did sell puts on it twice and kept the premium so that was neat but in the meantime the stock has doubled off the bottom and they continue to grow revenues and improve margins. I continue to watch this and hope to get involved again. to me they are in the right place but the problem is their business is a little more commodity like to me than I would normally like.
ARCC -- a new position established near the bottom -- they are a business development company that lends money to private businesses as part of middle market private equity. they fill the gap between banks and investment banks -- these are relatively smaller companies so their choices are much more limited now. I bought in around $4 -- should have backed up the truck but who knew. What I bet on was they had the balance sheet to survive and there was no better time to be in middle market lending then during a huge credit panic. rather than buy junk bond funds I bought this. Its like a closed end fund and at the time was at $4 vs. NAV of more than $11. now we are in the $9 range so its still below NAV but not as much. still figure there is opportunity but not as much. I also bought into TCAP.
Besides MXWL, I am keeping an eye on ERII (water play -- they sell key part for desalination plants, good position but very little on going revenue stream so dependent on new plants) and CY (programmable system on chip play -- replacing microcontrollers because of better flexibility, faster time to market and lower overall cost). keeping my eyes open for other stories too.
hope to post more often now.
Anyway, I wish I would have made several posts in the past -- just to get my market thoughts on record. that's kind of why I started this in the first place -- to create a record of my thinking.
Its end of august and we have had a huge rally --especially since mid july where the market has barely corrected since then. I could easily see another 3-5% drop like we had monday last week but many many folks are adamant that we are topping -- that we will see a big correction -- call it 10-15% drop or something like that. Its possible -- the last year should have taught us that anything is possible -- but I am skeptical we will see that big of a pullback.
Why? simple -- ECRI says we are about to have one of the strongest recoveries since the early 1980's. How many people believe that? even the bullish are likely just playing the momentum game to some extent and hopeful of some kind of recovery. But ECRI has an amazing track record. I have yet to see them be wrong about a big call in 9 years of watching them -- they don't make false calls about recessions or recoveries. They are absolutely adamant we are going to see a strong recovery.
How could they be so sure? because they use leading indicators and these indicators are all pointing upward. Most people do not understand the difference between leading, coincident and lagging but that's what ECRI brings to the table. They say the recession is ending this summer, which means by definition the coincident and lagging indicators are at their worst levels.
That's why it doesn't feel like a recovery yet -- but over the next several months things will begin to feel a lot stronger. Oh, and their long leading index is still pointing upward too -- that means no double dip either. I just don't see how we are going to get a strong pull back when the leading indicators are acting so strong.
One more critical point -- everyone that I read that hates this rally says its all driven by stimulus from fed and gov spending and is therefore unsustainable -- no kidding the fed cannot be successful longer term but the last fed induced recovery lasted years. its way too early to focus on the coming disaster. The other point to make is that way too many people keep saying I would be bullish except for ...... I would join the bullish market if only .... wasn't true. I won't believe the housing market has bottomed until ....... well the problem is that you pay a high price for certainty -- by the time its obvious that the recovery is in place the S&P 500 will be higher than it is now. that's my guess. We will get to levels not realized before.
All that said -- we are certainly ready for a correction -- another few percent drop like we have had because bullishness has gotten a little ahead of it self. there are 2 ways to work off the overbought condition -- time and price. if we are flat for awhile that is enough. the highs on friday were the first new highs in almost 2 weeks -- amazing in hindsight.
now many arguing for a bigger decline say that it will be as obvious in hindsight that the trade was to sell now as it is obvious in hindsight that the trade was to buy in march. my retort is that a correction yes -- mild as the others -- yes but a big pull back no. not while the leading indicators are soaring.
Many are expecting volatility to pick up in september and october -- no way this happens to the extent people think -- that's last year's issue -- think back to the crash of '87 and what was on people's minds in 1988 as we approached the fall -- everyone was all worried about another crash. didn't happen. watched pots don't boil and market concerns that everyone has don't come to fruition.
US is now a carry trade currency. what does that mean? rest of world will outperform US markets -- way to play this is asian markets focused on domestic demand -- not the exporters. china's currency is being held artificially low -- that is unsustainable but it could take a long time to break. but this is in the category of soros and the pound -- its a matter of time. when the chinese currency jumps, the exporters will get hurt but the domestic demand will get a big help. either way being a US dollar investor it helps if you have assets in other currencies that appreciate.
Stocks -- well most of my favorites are doing OK --
TSRA won its legal battles and has rallied but its been stuck in the mid 20's since. another ruling due friday -- we shall see but I can't imagine they lose this ruling -- judge was over ruled on same issues so he has to know he would be overruled again -- only stubborness would make him rule against TSRA again. should get a pop in the stock towards 27 or higher depending on what is going on in the rest of the market. wireless ruling wasn't as big of a deal as I had hoped because most of those they were suing have fallen on hard times or have shifted to Amkor -- who has chosen not to pay for some of this new business. they are continuing to innovate and that will expand their market over time but with the court cases wrapping up the stock is getting tricky. Its one part catalyst from new licensees due to court victories and one part long term growth story due to their continued innovation. as you can imagine the first catalyst leads to a jump in the stock while the second leads to longer term appreciation if successful -- no guarantees they will be as successful now as in the past. If the stock pops, I hope to reduce my position size.
UEPS is doing great -- just bought back 16% of stock as a private equity firm had to liquidate to pay off clients.
ILMN -- ok -- talk of delays is not good but stock holding up fine. their innovation is still strong.
LH -- got worried about obamacare because they would be a target -- only way to cut costs is to force less care on the system and fewer tests is part of that (MRI's, x-ray's CT scans, etc more at risk). Valuation and cash flow remain attractive -- personalized medicine remains a growth angle over long term and LH is a play on that.
FLIR -- no secular issues but near term looks icky because of their hopes for flat government revenues -- basically they have been quite successful in recent years on gov biz and that is hard to replace after awhile. stock has been weak -- this one I was glad I sold in the high 20's to low 30's. still have small position.
POWI -- sold this one in the 24-25 range and for awhile it looked pretty smart -- stock bottomed in the teens but now its in the low 30's. just lost track of it with everything else I have going on.
CLB -- bought just a little bit near $50 and sold half near $78 so I'm upset I didn't have the guts to buy more. this is a great secular story -- they help oil and gas companies get more production out of their fields -- a technology/services play that benefits from the secular trend that oil is getting harder and harder to get out of the ground. they have great cash flow and a smart management team.
MXWL -- I sold this last year near $7.50 like an idiot. I had the chance to buy it back for a few months in the 4-7 range but didn't. I did sell puts on it twice and kept the premium so that was neat but in the meantime the stock has doubled off the bottom and they continue to grow revenues and improve margins. I continue to watch this and hope to get involved again. to me they are in the right place but the problem is their business is a little more commodity like to me than I would normally like.
ARCC -- a new position established near the bottom -- they are a business development company that lends money to private businesses as part of middle market private equity. they fill the gap between banks and investment banks -- these are relatively smaller companies so their choices are much more limited now. I bought in around $4 -- should have backed up the truck but who knew. What I bet on was they had the balance sheet to survive and there was no better time to be in middle market lending then during a huge credit panic. rather than buy junk bond funds I bought this. Its like a closed end fund and at the time was at $4 vs. NAV of more than $11. now we are in the $9 range so its still below NAV but not as much. still figure there is opportunity but not as much. I also bought into TCAP.
Besides MXWL, I am keeping an eye on ERII (water play -- they sell key part for desalination plants, good position but very little on going revenue stream so dependent on new plants) and CY (programmable system on chip play -- replacing microcontrollers because of better flexibility, faster time to market and lower overall cost). keeping my eyes open for other stories too.
hope to post more often now.
Tuesday, March 31, 2009
I'm back
wow where did that 6 months between posts go?
its been awhile so I realize if I had any readers they are long since gone. oh well. I got swamped trying to deal with the market, my job (laid off as of mid march) and other issues (2nd child born in early January). I made lots of changes to the portfolio in the last 6 months. some stocks I chose to let go while I held on to others but at reduced position sizes. The following stocks remain in the portfolio at their pre meltdown share count:
1. UEPS - missed this one at $8 -- what a fall during the Oct/Nov time frame as clearly some hedge fund was liquidating their position. I knew that $8 was a ridiculous price given their cash flow and cash on hand -- worked out to just a few times free cash flow. Yet I didn't add to my position because if $8 is ridiculous why wouldn't $5 be even more ridiculous and why wouldn't the price continue lower? too many forced sellers who don't care about price were driving UEPS' price down and what was going to change that dynamic? no idea. holding on worked out since the stock remained above its oct/nov low during the feb/mar sell off -- at $15 recently, its doubled off its lows.
2. MMP and AB -- MLP's so the tax consequences are huge for selling. MMP has the best balance sheet of all the MLPs. AB is my upside hedge -- if things work out that stock will take off and offset the defensive nature of the rest of the portfolio. I continue to think these 2 will do fine.
3. TECH -- while I should have sold some when it rallied to the mid $60's because the valuation was at ridiculous levels but the business is still a very good one even though the stock has dropped to the mid 50's.
Those stocks we sold out of completely:
CME -- got out at $360 to $400 because there was just too much risk that volumes would collapse in a bear market and that fixed income related futures needed the credit markets to return to pre aug 2007 type leverage and derivatives usage for the earnings to grow. would rethink about buying below $200.
FDS -- buyside revenues down 40% so labor costs have to drop to be competive.
its late -- have to finish up later. lots of thoughts on our new socialist government as well as direction of economy etc.
have fun
its been awhile so I realize if I had any readers they are long since gone. oh well. I got swamped trying to deal with the market, my job (laid off as of mid march) and other issues (2nd child born in early January). I made lots of changes to the portfolio in the last 6 months. some stocks I chose to let go while I held on to others but at reduced position sizes. The following stocks remain in the portfolio at their pre meltdown share count:
1. UEPS - missed this one at $8 -- what a fall during the Oct/Nov time frame as clearly some hedge fund was liquidating their position. I knew that $8 was a ridiculous price given their cash flow and cash on hand -- worked out to just a few times free cash flow. Yet I didn't add to my position because if $8 is ridiculous why wouldn't $5 be even more ridiculous and why wouldn't the price continue lower? too many forced sellers who don't care about price were driving UEPS' price down and what was going to change that dynamic? no idea. holding on worked out since the stock remained above its oct/nov low during the feb/mar sell off -- at $15 recently, its doubled off its lows.
2. MMP and AB -- MLP's so the tax consequences are huge for selling. MMP has the best balance sheet of all the MLPs. AB is my upside hedge -- if things work out that stock will take off and offset the defensive nature of the rest of the portfolio. I continue to think these 2 will do fine.
3. TECH -- while I should have sold some when it rallied to the mid $60's because the valuation was at ridiculous levels but the business is still a very good one even though the stock has dropped to the mid 50's.
Those stocks we sold out of completely:
CME -- got out at $360 to $400 because there was just too much risk that volumes would collapse in a bear market and that fixed income related futures needed the credit markets to return to pre aug 2007 type leverage and derivatives usage for the earnings to grow. would rethink about buying below $200.
FDS -- buyside revenues down 40% so labor costs have to drop to be competive.
its late -- have to finish up later. lots of thoughts on our new socialist government as well as direction of economy etc.
have fun
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