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.

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