Wednesday, August 26, 2009


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.