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
Friday, October 30, 2009
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.
Subscribe to:
Posts (Atom)