Wednesday, December 2, 2009


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.

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