Happy Easter

This week I have been trying to deal with how far the market has dropped my stock portfolio -- other than DFR, I haven't been exposed to a spread based financial (borrow, lend keep the spread between the two rates) and yet my taxable stock portfolio (as opposed to the IRA's, which remain mostly funds) has been down almost 25% from the highs. Right now it sits at -20%. This compares to the S&P 500, which at the worst was down 20% and is now down 15% from its highs.

Well it boils down to a few issues: 1. loosing big on a couple of positions -- DFR and TSRA that were sizable. Obviously DFR is a permanent capital loss which is a huge mistake -- no matter what your primary goal is to never permanently lose capital. A temporary decline due to sentiment is one thing but a permanent one means you were so completely wrong on the fundamentals that the money is never coming back -- I might be able to get DFR back to $3 but my 2 year old son will be out of college before DFR returns to the mid teens if it ever does.

I continue to believe that TSRA is a sentiment reaction more than a loss of capital -- while its quite possible that it will take a long time to get the money from these customers, I still believe its a matter of when not if. If TSRA loses the appeal, I would expect them to start adding new patents to the cases -- these will be patents that don't expire in 2010. They should at least try this tactic -- the other side has pulled out all the stops to engineer a delay. Why not whip out some more patents to keep the pressure on these firms. Perhaps they can get a separate action on the additional patents that will be heard sooner.

2. My tendency towards complacency in some of my favorite stories -- GOOG is in a great position but that doesn't mean in October at $700 that the good news wasn't priced in and then some -- after August's issues to go right back to new highs doesn't make any sense -- hindsight is 20/20 isn't it? The stock is off near 40% vs. the S&P down 15%. Yet fundamentally they will show better growth and profitability than most of the companies in the index. Valuation matters.

3. UEPS is down 25% yet there has been no real change -- in fact some of their business has actually turned out to be better than expected. The Rand dropping like a stone doesn't help. The delay in resolving the SA welfare contracts doesn't help. The amount of time it is taking them to build up Nigeria or SA wage payment isn't helping either. I still am a big believer in the opportunities but one needs patience.

4. AB -- like I mentioned on Thursday this one is a higher beta stock that goes up faster and down faster than the market. No issues here.

Thoughts on some other stocks:

1. TECH -- practically flat since the market peaked -- its a great business whose valuation has stayed expensive but not unusually so -- don't think there are any mo mo owners here. This is one that I was talking about on Thursday -- roll some profits from the others into stocks like this one.

2. LH -- the stock is being held back by the troubles of Quest Diagnostics -- that stock has dropped and the valuation is too attractive to avoid. I think LH is the better managed and the more focused and the more committed -- kind of like the difference between Philip Morris and RJ Reynolds.

3. FDS is in the mid 50's down from $70 at the peak. Their business is doing great despite all the troubles in the market. The troubles will keep the PE down on this one until either they do miss or the troubles run their course. Its a great firm but if the stock were to go up into the 60's I would really need to take profits unless I was convinced the troubles were over.

4. MCO -- Expect the odds are good the stock stays in the low 30's but its quite possible it reaches the 20's because the estimates are still too high -- structured product is unlikely to return this year or next in a meaningful way -- MBS is basically owned by FNM and FRE, which has to mean less ratings potential from MCO. This is a phenomenal business though in terms of capital requirements -- as long as they can buy back 5% of the stock each year, it seems to me to be worth owning it.

5. CME. They have a monopoly and earn fantastic returns yet there are 3 issues that give either me or other investors pause. First, volumes are up huge now but as deleveraging continues there will be less need for hedging trades -- fewer firms trading, smaller balance sheets, etc. -- this could mean less volume in the future once the unwinding of the leverage is done. This is quite possible yet I would point out that the OTC market is several times larger than the exchange traded market -- exchanges offer transparency and clearing protection vs. counterparties.

Second, Counterparty risk -- the clearing portion of the firm, which is key to the monopoly is also at risk if someone fails and can't pay up for their side of the trade. There are several levels of protection before CME is on the hook -- given that anyone in trouble would just have to unwind their trades and pay up the losses on the margin, the amounts involved are not the notional amounts but the actual amount needed to settle up -- far smaller. Positions are marked to market at least twice daily to make sure the margin levels are accurate with current market values. I see this as possible but not a high probability.

Third, -- Up until CBOT, most of the growth has been organic growth in volumes traded. Now they are doing deals -- why? because they don't think the growth will be there from volumes alone? could be. Because they are afraid that if they don't buy someone else will and that would endanger the franchise? maybe. either way it is dramatically increasing the amount of capital in the business via goodwill and its unlikely they will earn the incredibly high returns on that incremental capital -- ROIC going down is not the best thing for a stock.

6. FLIR -- chart suggests I will be able to buy it closer to $20 but who knows because they keep announcing defense orders (mostly shipments on stuff they have already won) that provide some reassurance. Key to the growth is the commercial end of things -- how quickly can they get the price points down.

7. ILMN -- next generation sequencing is a game changer -- they have started a product cycle with limitless potential. The amount of information to be gained from sequencing many many genomes is awesome -- this will take share of resources from other parts of health care research. ILMN has dropped the cost of sequencing from millions towards $100k and expects to lower it again towards $10k and $1k over the next several years. There is execution risk as others are competing in this market too -- stumble and they could be gone (just look at AFFX).

8. BLUD -- while the numbers dropped on this deal, they still have a strong product cycle with the echo. They have a long road to bring this bioarray tech to market but this could also be a game changer -- DNA based tools are dropping in price dramatically -- kind of like semiconductors (see ILMN comments),which to me means in several years blood typing will be done using DNA tools not serological tools like today. I'm no scientist so take that comment with a grain of salt but I do understand disruptive technology. If BLUD can commercialize this tech they could easily take market share and build an even better franchise. They will still remain one of the most profitable in health care even post deal.

9. Where to put incremental dollars -- BLUD? TECH? LMNX? ECL? SIAL? IVGN? CLB? CME? MCO? FDS? this is the hard question that I'm struggling with at present. I believe it is too early to add more money to anything financial related.

Trouble with health care -- even the life sciences part I am invested in is that most of it is US based -- growth will be stronger overseas. Then again who doesn't know that yet? investing is about predicting the fundamentals AND finding situations where the gap between perception and reality are widest -- growth is stronger overseas but its hard for that gap to be wide. will have to monitor the market to search for situations where the fundamentals will be much better than perceived in the future.

good luck