Monday, May 31, 2010

BAGAKOAA May 31, 2010 Trading vs. Investing the REAL difference


May 31, 2010 Trading vs. Investing the REAL difference

Hope you are all enjoying the long “Decoration Day” weekend. Memorial Day had its roots in the former Northern States of the US post the civil war in 1868 and it was known as Decoration Day as that was the day people would decorate the graves of those fallen in battle. Michigan was the first state to actually make it a holiday in 1870. Though the term Memorial Day was not used till sometime after World War I, by the end of World War II it was the common name. In 1968 the Congress passed the Uniform Holiday Bill which defined Memorial Day and set the date for the Holiday. We hope you took a minute to think of those who have given the ultimate duty to your country.

It is a fairly quiet news weekend as far as the market seems to go. The Turkish market was very wobbly today as Israeli troops clashed with pro-Palestinian demonstrators aboard ships carrying Turkish flags. The Turkish market ETF TUR was down today in international trading by 2%. Barron’s just did a brief article about TUR indicating that it was one of the best Euro bets going because of significant immigration, a low debt to GDP ratio, and over all economic soundness compared to the region. So does this one day skirmish warrant a 2 % drop creating a buying opportunity? It could be, but as we say, only use the Vegas cookie jar on that bet. It is trading just hare above its 200 day average and this current news should take it down to just that level. It was as high as 64 in April and will probably be down to 51-52 tomorrow. This is an ETF reflecting the Turkish Stock Market action. This is strictly a market play. Do your homework and good luck.

Saturday, after a beautiful round of golf, well the weather was beautiful, my game was stinking up the place, but I digress. After the game I had a few minutes to get caught up with some Cramer episodes and read this weeks Barron’s. I’ll get to Barron’s in a minute.

Friday’s Mad Money was a classic. If you have iTunes, please do yourself a favor and download the episode. His opening dealt with the FACT, that buy and hold is no longer a prudent investment strategy. He gave actually historical performance criteria to support his statements. He calls the idea of buy and hold, “Buy and Forget”. We know we are all guilty of that or at one time in our investment lives we were guilty of that. He goes on to say holding a stock in an IRA or a 401 K and ignoring it is not a sound money management scheme. I know several of you have funds that you say you can’t or don’t want to touch. That is a shame and you might want to reconsider that line of thinking as this volatile market we live in is no place to leave equity money lying around.

Now I cried and moaned after the Flash Crash of May 6th. I was mad as hell and wasn’t going to take it anymore. I got stopped out of almost every one of our positions and most had a handsome profit. All I had were gains and resulting taxes. Well, it turns out that was huge blessing in disguise and just further supports the argument that long forever can be gone for ever. That flash crash helped me avoid the worst May in the market for 60+ years. We now have cash, have gradually reestablished new positions on our favorite valued stocks and are doing our homework to find others.

Cramer’s comments last Friday were helpful in understanding that we as investors must be well educated, nimble, and responsive to what goes on in the news and market everyday. He echoed much of the content from the book Active Value Investing by Vitaliy Katsenelson, which we have quoted in this blog on many occasions commencing with one of the first posts back in October 2009. Katsenelson’s usage of the term Active Value Investor is just another word for a responsive trader. So what is the difference between an investor and a trader.

When we hear the word trader, we picture the person sitting behind 3 monitors and reacting to every click of the market. I have done that and quite honestly did it as late as last week at 6:30 in the morning guessing which way the VXX (iPath’s derivative of the CBOE’s VIX). I have done live trading on several other occasions. It is not my cup of tea and quite honestly I have this thing called a full time job that precludes me from staring at the live feed from on Schwab.

Now a trader, not a day trader, but someone who does the required homework and looks for opportunities to buy on the dips or non strategic weaknesses in a companies stock price and has a window of investment of between 12-18 months, is a trader or as Cramer and Katsenselson might say “an value active investor”. Then you might have a subset of those people who are astute enough to buy a value stock that has a good yield and long term promise and keep those stocks or a solid position in that stock for years. They are a long term investor. They could be and probably are an active value investor with a time frame in excess of a couple of years.

Do not confuse any of these trader/investors with the buy and forgets. I know of at least a couple of readers who bought into RIG when I was pimping it last year and earlier this year. Despite our mention of having well thought out and strategic stop orders in place, there are those people who still have RIG TODAY, despite a 40% drop in market value. The Salve Lucrum Portfolio got out of RIG , TransOcean with in hours of the explosion once I heard the oil leak estimates. RIG only does one thing that made it such a competitive proof company. Deep deep oil rig drilling services. If you are Exxon, Chevron, BP, etc there is only one company that had the expertise to drill below 3000 feet. But it was what set them apart. That business model is in critical condition as Norway, The US, most of Asia, and even the middle east have ceased any new deep water rig orders.

So if you are going to get in the market, that is buy stocks long, be prepared to do the homework and stay on top of your list of stocks you own, but be ready to buy when there are dips in there value because of non-strategic noise in the market place, and be prepared to take a profit when they become impressive, and be prepared to know when you decisions to buy a stock no longer exists. Trade or invest its up to you as long as you are making money.

This weeks Barron’s was good, bit not as great as the last several. There was much opining about the miserable May, Greece, Korea, Oil Spillage and a less than favorable feel to the magazine this week. If you are a fan of the take over executive Carl Icahn, Andy Bary had a good piece in there about how to invest with Carl. (The guy has a net worth of 10 Billion so he probably gets it right more times than wrong.) It appears to be a fairly quiet week ahead for economic news and we are nearing the end of reporting season. Let hope it is a stable week in the market and folk can get back in the game.

In Friday’s post I through out some Water Metering companies to take a look at. I hope you did. Here is what I found out.

ITRI  is not a pretty picture. According to everything I could find, their margins are weak, income is just starting to return, and thave significant long term debt, which I did not even bother to get the details on. I’d keep this on a watch list and read their press releases. As water and electric utilities go to remote metering ITRI could be an interesting play.

BMI on the other hand is a lot more promising now. They have no debt and they throw a little (1.2% yield) dividend. Their multiple is running a little lot at 23.6, but I am guessing that is because they could be best of breed. Earnings per share growth is 3 times the industry average and their ROE, (one of my favorite factors) is an impressive 24.6. Free cash flow has tripled in the last 3 quarters. Did I mention they have no debt. After reading the last 10 Q. I like what I see. CAUTION, There are some negative reports out there. Schwab shows them as an F, strongly under perform. I can only see two reasons for that and it would have to do with a changing of the guard at the Board level and the first quarter revenues being 5.7% even though their margin improved and their profit improved. Ned Davis Research also has them as a sell citing some market fears and the over value of the stock. I don’t see it as forward looking PE ratios are at 16 which is far from over valued. They have cash and no debt and what should be a strong second quarter. I am liking it below 40 a share. I will get in slow staying below the 40 thresh hold and acquire a 1% of my portfolio position and wait and see what the 2 nd quarter results brings. I am on my own with this pick but I like it. There will be an 8% down side stop put in once we catch and below 40.00 price. I am looking for a 42.00 stock by the end of summer.

So to all you traders and investors,

Salve Lucrum

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Friday, May 28, 2010

BAGAKOAA May 28 2010 The Rain In Spain


May 28 2010 The Rain In Spain

Well there were some opening jitters, traders headed to the Hamptons for the long weekend (so volume was weak), noise out of Korea, austerity measures in Greece causing more noise, then we had the downgrade of Spain’s Credit rating, and we had consumer spending weaken this morning (Got that one right). If you were lucky enough to be in a position to call your broker or log on, there were some good buying opportunities in the AM.

Tonight I have been doing some back to basics homework. In researching place to put money to work, I scanned Cramer’s portfolio. It is surprising to note that he only holds 100 share of AAPL which equates to about 1% of his portfolio. We pay a fair valued subscription for this info so I can’t say much more than that. I just found it interesting as he does pimp the stock a lot. BTW he is doing well with the 100 shares.

Anyway, he has a position about 3 times that in Accenture (ACN) which operates as a management consulting, technology services, and outsourcing company based in Dublin. They were also one of the first to DUMP the Mike Tyson of golf, Tiger Woods and that tells me they have a brain. In doing the homework on their 1st quarter earning report filed with the SEC, we (yes I do have a mouse in my pocket) were very impressed. Free cash flow is good, first quarter revnues were a bit week, no long term debt, they have a consistent stock buy back program and at 37.50 ish a share it is too good not to start a position. Most of the analysts out there have 2011 earnings pegged at 3 bucks a share giving us a P/E ratio of about 8.5 which is CHEAP CHEAP CHEAP. Do your homework and read the all the information you can. This is not risk free, but I am thinking that this is a 55-59 dollar stock in 12-18 months.

It is important to remember that the price of a stock has very little to do with the past. When you pull the trigger after doing all of your homework you are buying future expectations of financial prosperity. Today we bought MCD, FLS, IBM, INTC, BAC to name a few. Each of those decisions was based up what the COMPANY, not the stock is going to do the rest of 2010 and into 2011. You buy future earnings when you commit to a stock.

With that said, there was a great article in Thursday’s WSJ. Justin Lahart wrote an article called Machinery Shortages Put Businesses In A Bind. The article explains how the trough of the economic slowdown closed a lot of machine shops, migrated labor pools away from the machine tooling industry, and sold off or moth balled a lot of the state of the art machine tool equipment. That is causing a problem now as the economy gears up for the recovery, it is taking forever to get machine tool parts done and delivered. The most notable example of that is the multiple delays on Boeings Dreamliner. Almost all of the delays has had something to do with getting tooled parts.

So in reading the article I am thinking anything in short supply will usually have a premium associated and those firms who get their tooling needs met first should have some positive and aggressive revenue gains beyond their normal business into 2011. So I went hunting for some. After using the great and improved stock screening tool on I got through 182 machine tool companies publicly traded in the US. There were a few, actually 25, that came close to meeting my criteria. (If you follow the blog, you know those criteria, little or no debt, positive earning and top line growth, a reasonable PEG ratio, and good free cash flow). Here were some of the finalists that I did homework on: WTS, AIMC, and KAI. All are with a look. I ended up finding one that really caught my attention. ASTE, Astec Industries, Inc. engages in the design, engineering, manufacture, and marketing of equipment and components used in road building, utility, and related construction activities worldwide. I like because of the fundamental and their reach appears to be a bit broader than just machine tools.

And for a pure play Machine tool company, look at Fanuc (The US ADR is FANUY). This was a bit of trip down memory lane as I remembered working on robotic cables for Fanuc Machines in the Auto Industry in a former life. Their financials are sound and they are well positioned to grow with the economy. As a Japanese Company, their reporting is a bit sketchy but the sec filings seem to be in order. The best source of info was Morningstar.

If I had to choose one over the other, I would pick FANUY as their financials look nicer and with a PE ratio of 11, it looks cheaper. Do you homework on this one. I would suggest finding out how they are positioned to get tooling into China and India. That is where a lot of growth will go. I have a limit order at 52 a share for Tuesday Morning. This will fall into my speculative holdings category if I catch it.

Yesterday, Thursday, I was presented with a great paper about the water market. The document is intended for UBS clients and suggest you contact a representative of UBS to get a hold of it. I will be doing some in depth research with it this weekend. (Wow, what an exciting life I lead.) The paper outlines the initial findings of a study that indicates by 2030 half of the population of the world will live in “water stressed” environments. Then the piece done by Christoph Hugi, analyst, UBS AG, Gianreto Gamboni, analyst, UBS AG,

And Alexander Stiehler, analyst, UBS AG.

Off the top of the hat I have found a couple yopu might want to look at over the long weekend. Both are metering equipment manufacturing. Itron (ITRI) is a fast growing innovative manufacturer of meters for water AND electric utilities. You can also look at Badger Meter BMI. I’ll have more as I tear the report apart.

Thursday, May 27, 2010

BAGAKOAA May 27, 2010 The rest of the work. . .


May 27, 2010 The rest of the work. . .

We got Banking, Oil, Aerospace, Tech taken care of so that made for a pleasant day today in the market. Over the weekend we will look at Retail, non tech electronics, and more industrials.

That feeling good stuff was in the air in Europe and Asia as China said they are in the Euro Long term. That settled the markets and made for a nice opening here in the states. Economically, the news was not great but you would never tell it from the 284 point jump. The two areas of not so good news was GDP adjusted down. (Got that one wrong), and jobless numbers were softer than expected.

Anyway, it is late and I just enjoyed a great evening with my wife and my daughter, so the only thing that is necessary tonight is fundamentals. After watching Cramer on DVR, it became clear that getting back to fundamentals was what I needed to do this week and I have.

If you are fortunate to have access to Real Money Silver, you can see Cramer’s 25 rules for investing. We find these more important than the actual stock tips themselves. I went over Rule 20 tonight. Giving up on value is a sin. That is exactly what I did on Tuesday. I walked away from 15 stocks who all had great earning potential, and that is what you buy when you commit to a stock.

I can't give you verbatim the words Jim uses in this rule, but I assure it’s worth a read. Don't dump a stock that you believe and you have done the homework on now because it is not performing as you think it should. Be patient.

Last year I read all 700 pages of Snowball, the biography of Warren Buffet. I learned he had two characteristics that most investors lack. And I proved it this week. I had no focus and I had no patience. He has an incredible amount of both. And he has about 50 Billion Dollars to prove it.

Salve Lucrum

Wednesday, May 26, 2010

BAGAKOAA May 26, 2010 Starting Over Again


May 26, 2010 Starting Over Again

After my stupid moves on Tuesday, I could have cried in my beer and drank cheap scotch. Instead, I decided to get back in the game. I have told a few of you that I was going to sit on cash a while and sit on the sidelines, BUT I still believe there are great values out there, and I am slowly going to get back in the game, but very cautiously.

For my own historical purposes, I am going to document my game plan and that should help me stick to it.

First I want to define my goals. In the blog on May 22, I described what the 10 Year treasury yield should means to the average investor. It is a gauge of the return of ultra safe money. The current 10 year Treasury Note Yield is 3.18%. I am looking for an annual return of at least 2 times the ten year yield. That not only defines my return goal, it helps define my risk tolerance. In essence I am looking for an annual return on every dollar I invest of 6.36% which I’ll round to 6.5%.

Our current situation is 56% cash, 33% in mid term corporate bonds averaging a yield of 8.2%, The balance is in the gold ETF GLD and few poor performing long term 2011 calls.

We want to put 80% of the cash at hand to work, but want to enter the volatile market slowly. So at the end of this journey we will still want a 20% cash position.

By the end of this week we want to put 20% of the cash position back in equities. Keeping in mind we want to end up with a balanced portfolio, we want 20% of that 20% in the broad category of Banks (or finance), Oil (or energy related stocks), Aerospace (or large indstrials), Tech, and Speculative. Remember the acronym BOATS. Thank you Cramer. Now we can’t clearly identify every single stock I want to by into one of those categories, but the point is simple, don’t put more than 20% of your portfolio into any one given sector for any length of time. Please remember that more than 50% of the value of a stock is dictated by the market sector directions. I kinda cheat and use an acronym BOATERS which is Banks, Oil, Aerospace, Tech, Electonics, Retail, and Spec. Which means you put about 15% into each sector for a balanced portfolio.

So here we go, we want to get back in AAPL, so I want to do my research on the Tech sector first. First I go to Schwab which is my trading platform for all the equities. Schwab’s is a real time trading and a bunch of nice trading and charting tools. First I go to the main Schwab page for AAPL and read the Schwab equity ratings report. Schwab gives AAPL a C rating today. That means it is a market perform or, as the market goes so goes AAPL. I don’t understand the C rating, because almost all of the info reported is very favorable. One of the key elements I look at in this report and it is available on most free public finance pages is the Analysts forecast for the next 12-18 months. (Remember an analysts does not care if a stock is going up or down. They are compensated on their accuracy. The do not like surprises.) There is one analyst who has 2011 earnings pegged at 13.40 a share meaning a P/E ratio of 18.65. There is another analyst pegging 2011 share at 18.85 generating a forward looking P/E ratio of 13.26. the current P/E ratio for the entire S % P 500 is about 18.00. There only negative comments involve some changes in the balance sheet. Oh yeah, this is a big one AAPL DOES NOT PAY A DIVIDEND.

So we go to the last reported quarterly financials for AAPl and we find that at the SEC’s Edgar on line page Just type in AAPL in the company ticker search line and click on the 10-Q filed in April and you will then be presented with all of the relevant documents associated with the last quarterly filing for AAPL. One of the first documents is 10qdtm.html. Click on it and you have the complete 1st quarter filings with all the relevant data to confirm or criticize the analysts comments. There was nothing substantial to warrant the negative balance sheet comments. Their cash flow did drop, but they were gearing up for the distribution of 8.1 million iPads. So the rest of the Schwab report was glowing so let buy right? NOT. More homework.

Also in Schwab, they provide research from very prominent firms such as Credit Suisse, Ned Davis, Argus, S & P, and Rueter’s. It would be painful to walk you though all this detail but please look at reports like this. Many of you trade through Schwab, so the reports are free. There is no reason not to look at the data. Here are the highlights I discovered.

Credit Suisse terminated coverage on AAPL because their top analyst for AAPL Bill Shope, has apparently moved somewhere else. His last report dated April 21 (AAPL was at 272 at the time) is glowing. His target price was 315.

Ned Davis research is also glowing and has been a buy on their list since August of 2009. They do a good fundamental analysis as well as a technical analysis. Both have the stock rated as a buy and that was a May 21st report.

The next report is today’s Argus research report. It is absolute glowing so much so you would think Jobs wrote it himself. Their target price is 300. Keep in mind that this information is for Schwab clients or Argus clients so I cannot provide this info on all the picks, but wanted to show the process.

Today’s S & P report for AAPL is also amazing. They see revenues more than doubling 2010 and their obscene margins to remain the same or improve. All good stuff and their target price is 300 as well.

A quick review of The Market Edge report and Schwab’s earnings report confirm that we want to get back into AAPL. Now how do we determine the entry point. Ideally the best place to get into a stock is at the bottom end of its lower control limit on a six month chart. Now before you freak out, most financial websites have charting features that let you easily determine this lower control limit. Let’s take Yahoo Finance for example. Type in AAPL, click on the AAPL Chart. Set it for 6 months. Choose technical indicators and pick Bollinger bands 20,2. Don’t worry about the calculus here just look at the chart at the link above.  You can see the channel that the upper and lower control limits that the Bollinger Bands create. AAPL lower control limit is about 239. The upper is about 271. We will accumulate at 250 or below.

Keep in mind I will be adding to the position until I hit my balanced allotment of the stock. The portfolio will buy on dips. Our goal will be to make at least 6% annually on this investment, but expect to do much better. That means at 265, we need to do a lot of this homework again to be sure all the fundamentals remain the same and decide whether we take 6% profit to get us back to our original investment.

Staying with the tech sector, we go through our Schwab history and look at techs that were in the portfolio and look at our watch lists. Our watch list currently has about 7 stocks in it. They are from ideas from Cramer, Barron’s, our own ideas, and in all the information we glean from all this damn homework.

Here were our other two tech picks to fill the balance. IBM and INTC.

I liked IBM after reading a great Barron’s article in March 2009. Then after a lot of homework later we got in at the 103 level. We then took some profits at the 128 level. The Flash Crash caused me to stop out at an 8% loss. Though the stock recovered most of the 8 % a few minutes later. So the research tonight as described above has us back in it again at 123-124. The bottom of the Bollinger range is 120 so I am hoping to catch the 123 in the morning. Again we will slowly establish this position over the next few weeks and buy on the dips to 120ish.

We like all the homework on INTC as we did well with it over the last 14 months. Right now any entry below 21 looks interesting for a 12- 18 month investment.

So our tech position is IBM, AAPL, and INTC. As I mentioned, this kind of exercise turns over a lot of interesting possibilities. Here are some I have added to our watch list. CTSH, LIOX, SYNT, and ACN.

Ok now lets look at the banking finance sector.

We will go through the exercise with some old favorites. HBAN, BAC, C, and WFC. I have not owned Well Fargo despite Cramer pimping it almost once a week. I enjoyed reading the 10q for Citigroup .
 When all the homework was done we got into BAC, C, and WFC. Personally if you wanted to be a bit less aggressive, we might have wanted to wait a few weeks to get back into banks. I am betting that Barney Franks will balance the needs of the industry with the current witch hunt mentality when it comes to putting the final touches of the banking regulation bill. This is a bit of a gamble, but long term we have what I thing are three winners in the sector. Others to consider would be HBAN and ZION.

Then we need to look at the oil sector. I watched this and did so much homework before, during, and after the Deep Horizon Spill; it was easy for me just to get back into CVX. Now I caution as recent oil values due to the strong dollar have driven the commodity below 70 dollars a barrel. The BP spill will cause more oversight by the US government as well as others. New standards will be put in place and this will drive the cost of production up. There is confidence that the increased cost will be passed on to consumer which means most oil companies will see the same margins on a higher priced product, but this will all take time. The opportune price would be about 71.35 so we will wait with that limit order in place to see if we get it.

As far as Industry and big industrial, we have to go back to BA. We liked it at 70 and after the homework I love it at 62. We also want to look at the apparently cheap Flowserve at 94.

Now once all of these get executed, I will still go back and place 8% stops on all of these positions. Even though we have been burned over the last three weeks due to stops, their protections outweigh the cost. We only need look at RIG and BP to see that. Without my stops we would have lost all of the profit in those positions waiting figure out how bad a spill we had.

That does it for me tonight.  More work tomorrow night.

Salve Lucrum

Tuesday, May 25, 2010

BAGAKOAA May 25, 2010 Stupid is as stupid does


May 25, 2010 Stupid is as stupid does

OK, I broke every rule in the book this morning and gave back about 20% of the gains I had made since the February rally which did end about May 7th. So I took profits and gave about 25% to the government (or will next April) because of the Flash Crash, and now in one day sucked another 20% out of the gains because of some really stupid decisions today. So today we will show you how to loose money, I am actually getting quite good at it this week.

If you read the blog from last night, I fortuitously called a very weak opening because of the saber rattling between Clinton and Kim Jong-il on top of the Euro sliding more, Spain’s banking casualties, and a plethora of stuff that I had a feeling would cause the market to open way lower. Now I had well placed stops on all of my stocks. BUT, I knew the market was going to blow though those stops so why wait and take the lower sales. At 5:30 am I was premarket selling everything. That’s right, I was selling everything and I had not stocks with much if any gains. Got ride of AAPL, GIS (OK had a little gain there), IBM, KO, INTC, everything except GLD, SLV and VXX. Now I knew the VXX was going to pop from 35 to 40-50. Come one we had that crazy person causing all kinds of problems in Korea and Jong-il was not helping matters either, so I jumped in with both feet on the VXX. Got a great entry point at 35.25. So I am banking on a 13% jump today at least in the VXX. Gold was going up a bit too so I got some more of that.

Then something crazy happened. We reached our lows of the day by 6:41 am and the market with all this turmoil kind started to inch back. So from that low of 9793, it came back kicking my VXX every step of the way back to 10,243 just 20 points short of yesterday. In looking at my trades, NONE of my stops would have triggered today, I would not have lost 6% on a sizable VXX trade (I did exit my VXX with that 6% loss which was the ONLY thing I did right today as the VXX came down 11% today.

In essence, I did as I did and not as I say. I got caught up in the emotional frenzy of the moment and did the unthinkable, got out of the game.

Speaking of the game, I need to not look at the market tonight. We just got home from the Angel’s Game 8-3 Angels, so I am going to read and hit the sack.

Salve Lucrum

Monday, May 24, 2010

BAGAKOAA May 24, 2010 Today was worth wining about


May 24, 2010 Today was worth wining about

Even a real robust existing home sales report could not get the market happy today. Ever heard of CajaSur bank in Spain? You will. One of Spain’s oldest banks asked and received a bail out today. That took down every sector in the market today except wireless services and health care. Gold and Silver was up as well as the VIX.

So again what do you do in these turbulent times. Read and watch Cramer. He is entertaining and he is knowledgeable. Friday’s show, which I caught yesterday, was actually very good. He explained how good stocks can, and do, get hammered in the downward momentum of a crazy market like this. If you didn’t catch it its worth downloading on your iProduct. BUT, be careful as he actually suggested buy BP Petroleum. I got stopped out when the spill happened and it ain’t recovered yet. That is an unusually risky play he is suggesting, but if he is right there could be money to be made. ONLY use the Vegas money on that play.

I just got my renewal notice for the American Association of Individual Investors. I recommend you look into the association if you are serious about investing, if you have a portfolio of at least 20-25 thousand and don’t mind doing the hour a week of homework on each stock you buy. The association’s on line and paper products are informative, easy to understand and if you want and need the group hug thing they have chapters all over the place.

In the last (May) issue of AAII Journal there was a great article about Benjamin Graham (mentor of Warren Buffet and co-father of value investing- long with Dodd) and his last will and testament that was actually a project with a guy named James Rea to create a simple but powerful screen for high value stocks. The 4 page article is interesting and informative, but does require some stop and thinking. There are no holistic screeners out there to execute the screen so AAII has them on their website. Membership for the enhanced (On Line) membership is $59 a year and well worth it.

The Salve Lucrum Portfolio added to AAPL today, but that was about it. Excuse me, we bought some long term calls on a 20.00 INTC. We need a 22.35 Intel to be in the money. In a couple other portfolios, where there is more risk tolerance, we strengthened some GLD and SLV positions. We also added some IBM and INTC.

As I am putting this post to bed there are big concerns about N Korea and Korea coming to fistacuffs.  I can't believe China won't step in a bring some reasoning to the table, but it will be a very rocky start tomorrow morning.

Other than that, I can’t say anything good about the market right now. Only buy if you have to, and really do your homework. My mom always said, “If you can’t say anything good about the market, talk about wine.”

Last night Devin and I were at a fund raiser for children in need of Southern California. We were treated to a great glass of Chardonnay. The 2007 Chateau Montelena Chardonnay was exceptional. If blindfolded I would have taken this to be a Big French White Burg. Pale yellow in the glass with just enough viscosity to track. There were florals and mineral in the bouquet. Had a hard time placing the mineral aroma till someone suggested chalk. On the tongue, there were peaches, a little nectarine, minerality, and it had a nice finish. It was served with a well paired Ahi Tuna starter. You should be able to find this retail for about $40-45 dollars. Simply amazing.

Let’s hope for a better day tomorrow, but as two financial pundits said today. No one knows where this correction is going to end. In the meantime, read up on shorting stocks.

Salve Lucrum

Sunday, May 23, 2010

BAGAKOAA May 22, 2010 Gimme a V, Gimme a W, Gimme a ?

BAGAKOAA May 22, 2010 Gimme a V, Gimme a W, Gimme a ?

So what if any kind of recovery do you think this is going to be. From February 19th through May the 9th we saw a continuation of what appeared to be a bull market from the lows of March 2009. When you look at a 2 year chart, you could still even picture that despite the 10% correction of late. On Thursday we had whipping where down sides we 30 to 1 against uppers. But fundamentally what changed?

It is goosey and if I were 20 years older, I would be taking all of my money and getting entirely out of stocks and into safe bonds and or gold and silver. As this volatility continues and the Eurozone stays goofy, gold is headed for a conservative 1500 and possible higher. That is not yours truly speaking but almost every much more intelligent person in the WSJ, Barron’s, Bloomberg as well as people who are paid to pimp commodities. As it is, we are (NOTE I said we as Devin has shown a strong interest as of late) 25% cash, 30% bonds, 3% long options, 5% Gold, and the rest is in equities AAPL, IBM, GIS, MCD, CVX, KO, HAS, SBUX, and TGT. We took some of our Flash Crash Cash and lowered a LOC we had with Schwab.

So what do we do from here? Well I read this week’s Baron’s and while there were some great articles about the way things could and might go from here, there was no direction. Overall most of the articles were cautiously opportunistic. Don’t get me wrong, there was one sidebar tea leaf reader (technical chartist John Roque) that indicates that when a certain group of stocks (GS, MS, MON, MOS, and FCX) hits a certain level as they did Thursday, historically we have seen the S & P drop yet another 10-15 % so he is advocating a 900 level in the S & P. Could it happen? Sure. But there are till bargains out there.

This weeks Barron’s had their occasional PENTA section which is a special section they created a couple of years ago that show what hedge fund managers are doing with wealthy clients (Portfolios in excess of 5 million hence forth PENTA). The top 100 hedge funds survey for the report returned almost 21% over the last 3 years. Very impressive. I like these kinds of article because you and I can see what they are buying and what some of their reasoning is. These are big money managers. Most are managing portfolios in the billions. Remember by post about 13-F filings with the Security and Exchange Commission. Each one of these fund file a 13-F. You can go back 3 years or more and see how they adjusted their holdings through the good and the bad. You can see how they managed to achieve these incredible rates despite the world collapsing around us. You can see quarter by quarter how a guy like William Harnisch (managing about 500 million in stocks) started buying Best Buy at 2 dollars a share in 1997 and slowly bought his way into a significant position by 2006 and sold at a 200+% gain. Why did he sell? I could not tell you based upon the article or the historical 13-Fs but I know that Wal-Mart decided in 2006 to start to get serious about electronics. How did that work out? Ask Circuit city and look the price of BBY since then 58 down to 41. At 11 times earnings, I wonder if Harnisch is buying back into BBY? We’ll see next 13-F. Anyway, this is a great special section worth reading, but I say that every week.

I’ll get to other articles later in the week, but here are some teasers. Have we seen a top in the market for 2010? Caveat venditor! (Latin for let the seller beware). Watch Costco’s earnings report on Thursday, it could be a blow out against last years. Michael Santoli does a great article about some severely depressed stocks that look “Ripe”. (Michael, one of them is Wynn). Andrew Bary does a great article about the value of European Banks. One more worth mentioning is Johanna Bennet’s article about Medco (MHS) and what impact the health bill might have on the stock that is down 12% YTD. SPOILER ALERT, BUY BUY BUY.

Keep an eye ahead this week as we have existing home sales, which I was expecting this to soften a bit, but consensus estimates have it rising to 5.6 million for about 5.3 million. I was ready to arguer that number because the tax credits for home sales have expired so I thought for sure the number would be down, BUT this data point measures closing escrows so the tax credit influence will still be supporting the number. I’d temper the number down to 5.5. We’ll see. Why do you care? If you have home related stocks and the number comes in soft (Think below 5.4, HD, Lowes, Whirlpool, GE, Electrolux). They can all take a hit. (Whirlpool had a pretty day Friday) There might be some good news from Wednesday’s Durable good order. I mention that again Monday Night after I get a feel for military versus non military order which really determine the direction the report. The GDP reports on Thursday. If its not up I will be surprised. BUT, it will be my 39th surprise in the last 3 weeks so that don’t mean much. Friday, we have personal income and outlays. I agree with the consensus that income will be up and spending will be down.

To wrap things up, here is the link to who is reporting earnings this week. I will do some individual guesses either later tonight or tomorrow night. AZO files tomorrow and Advanced Auto had a great report last week. I’d guess AZO to meat or beat earnings of $3.57. TIF reports tomorrow and look for them to beat as well.

Salve Lucrum

BAGAKOAA May 22, 2010 The Ten Year Treasury note and what it means to you.


May 22, 2010 The Ten Year Treasury note and what it means to you.

I had a nice golf game yesterday morning and had a chance to talk with one of my financial mentors about the US treasury notes and what they really mean to a fluffy day trading casino monkey like me. In a very useful succinct statement he said, the 10 year Treasury note yield is like the Dow Jones Average for big money people in the money (bond) market.

Let me take a quick moment and break it down. The US Government issues, actually auctions bonds every week. This is debt that theoretically will be paid back. The interest on those bonds becomes the bellwether to gauge the return on all other investments in the market place. The yield or interest on the 10 year treasury notes issued each week also tells the market place how much risk acceptance is in the market place. Here is what I mean.

The last couple of weeks, the markets have been very volatile. We had the greek-Eurozone melt down right after we had the still yet to be determined cause of the flash crash, a senate banking legislation that no one has read, as well as some good but occasionally contradictory economic news. This creates a situation where many if not most investors seek safe haven investments. The US Treasury Notes fit that bill. If millions of investors are putting money into US Treasure Notes then our government does not need to make them quite so attractive so they LOWER the interest rates or yields on those notes. You can use any source you want, but look at the yields for May 21st (Last Friday’s Auction), May 14th (The Previous Friday), and one year ago. The numbers look like this 3.54% 3.56% and 3.14%. This is what you can extract from those figures. In the last week, we have seen enough chaos and concern in the market place to drive investors to the US Treasure notes. There was enough demand that the auction rates for those bonds went down 2 hundreds of a percent to 3.54% from 3.56%, but they are significantly higher than they were a year ago. Remember we had the March 2009 market lows and the world was ending and we were all going to be sterilesix foot methane breathing cockroaches. Treasure notes had a low yield of 3.14 as everyone wanted to be in safe investments. In November of 2008 it was as low as 2.08%.

This is important to us “Game Players” because this is really the gauge to determine the value and the yields of stocks and bonds we want to invest in. So IF the “safest” investment in the world is US Treasury Notes and they are currently yielding 3.54%, how much more would you be willing to risk to make more return on your stock investments. That is what you need to ask yourself every time you are looking to buy or sell a stock. If you are trying to be conservative and protect your assets, stay ahead of inflation (Currently there is NONE, actually we are in a deflationary cycle), you probably want to achieve that 3.5% interest rate. So what are the future earnings of the company you are looking at? What are their current dividend yields if any? What are their future growth prospects? Do the homework. If you can’t beat the 3.5% with something you feel comfortable with, consider some high quality bonds, be they corporate or government. You should have no problem meeting or beating the 3.5%. If you are lucky enough to have a few more earning years ahead of you and you can continue to invest and don’t mind taking a bit more risk, meaning reaching for returns in excess of 3.5%, then you still do your homework but you look for better returns on a little more risky investments.

So right now you have big players LEAVING stocks for the safety of GOLD, SILVER and Treasury notes or high quality bonds, depressing the prices on some great stocks. Their PE ratios are very attractive. Is your risk assessment telling you to look for a safe haven or go on a shopping spree. Only you can answer that question, but now you know how to assess the meaning of the 10 Year Treasure Auction rate or yield. Thanks Tim.

Salve Lucrum

Thursday, May 20, 2010

BAGAKOAA May 20, 2010 What goes down must go down

BAGAKOAA May 20, 2010 What goes down must go down

On November 19, 2009 there was this blog called The Salve Lucrum Blog that suggested a correction was due. A 10-15% correction was suggested again on the 4th of January 2010. And again on the 10th of January. And there were a couple of more suggestions it was coming. The flash crash of two weeks ago was not a correction. The last two weeks since the flash crash was the correction I was expecting.

At about 10 am PST, the market was down about 350 points and stocks got foolishly cheap. We went on a little shopping spree and picked up more KO, CVX, GIS, IBM, AAPL, and MCD. Please remember I had cash from all the positions I stopped out of during the flash crash and had been waiting for some ridiculous lows to get back in some great stocks.

The market did recover a bit until we were informed of the great news that the US Senate had broken its gridlock and passed a finance reform bill that no one has read and is not completely finished. That made the market feel so warm and fuzzy it finished the day down amost 4%.

Today the portfolio did get stopped out of KTCC, one of my spec picks from about a month ago, but loosing 8% was enough and now it is on my watch list again. I rode Flowserve FLS, another great cash rich company down 9% before getting off that train. Other than that, toady was a day of not watching the Bloomberg and figure out where to deploy cash. One of my options was to put a little dent on a line of credit.

Tonight I was looking for some “accidental yielders” to do homework on. If you watch Cramer you know that an accidental yielder is a stock that has a good dividend, but because the price of the stock is down for no apparent fundamental reason, its dividend as a percentage of its share price generates a great yield. For example if XYZ is paying a 25 cent per quarter dividend and its price has dropped from 50 dollars to 40 dollars for no other reason than market chaos or fear, its yield would be 2.5% (4X.25=1.00/40.00). Its dividend yield has risen from 2% to 2.5%. Here are some of the accidental yielders I will be looking at. CSX, MCD (which I own), YUM, VZ (which I owned in 09), INTC (which I own), KMB, and T. Do you own homework on this and see if you find anything cool. I’ll let ya know what I find out.

Now today did suck, but there were a few winners out there. For the last two weeks I told you we were getting into VXX, an ETF with almost follows the Chicago Board of Options Exchange volatility index (VIX). By last Friday it was my second largest holding. (About 5% of the portfolio). It is up 28% since I bought it so it covered some of my drops in other equities.

I heard the term, “indiscriminate selling” today. I think we saw a lot of that today. The S&P was trading below a level of 13 times 2011 estimated earnings. That is cheap, but money managers were still running away from some unidentified risk. The fear of Germany not allowing the sale of shorted naked CDSs and the unknown impact of the new senate slappy hand bill are totally over whelming the fact that Our Kind of Place A Hap Hap Happy Place is selling for 14 times earnings and about 5 times its book value. That is like getting a Big Mac for 99 cents. Ya gotta jump on it. Intel is selling at 12 times earning and a little over 2 times book value. Come on get me some chips with that Big Mac. KO the world’s most recognizable brand COKE, is selling for just under 14 times earning and under 5 times book value. Give me some Coke with that burger and chips. (Now I have done a lot of homework on these three and the only questionable news about any of them is the fact that beef prices are up which could ding MCDs margins. I’ll bet they up the price a nickel or two in a few months. But that would lead to inflation.)

Good segway Brian. (Don't ya love it when I talk to myself and refer to the blog in third person.)  It seems like just a few days ago there was worry of inflation. Oh yeah that was a few days ago. Did you catch the CPI report. Of course you didn’t. Here is the link if you want to read it all. Overall inflation stayed flat or even down in some categories resulting in the lowest inflation in 44 years. Now did you happen to compare the CPI number to Walmart first quarter revenues? Pretty darn close. If we are worried about deflation, which was the scary word of the day yesterday, after the CPI was published, just have Walmart bump up prices bay about 2%. That would put inflation at the bottom range of the Feds inflation mark and Bernanke can start increasing interest rates. Food for thought. Besides Walmart is now shopping for vendors in India, the Philippines, Viet Nam and Indonesia because those nice Chinese folk were brazen enough to ask for more money to make our products.

I am looking for an oil stock besides CVX to ad to my bag of tricks. I may have found one but have a lot of homework to do. OXY, Occidental petroleum came a cross my desk today and I kicked the tires on it tonight. There first quarter revenue was almost 200% over last year. Their production is up about 5 % last year and should improve as a press release last week indicated that Kern County field is turning out to be much more abundant that originally thought. They have very limited exposure to off shore and especially gulf issues. They do have some Latin America, Middle east, and North Africa exposure that lends itself to social unrest, but what oil company doesn’t. Analysts peg future growth at about 7% with some aggressive oil and gas price assumptions. It has a chemical division that should help revenues and the bottom line as the economy continues to improve. (The economy is improving even after today). It also has a good position in the nat gas filed with piplines and production that will benefit from what will be a growing industry once LNG learns how to lobby properly.

As of tonight it is trading at 10 times earnings and 2 times book. Some low end analysts estimates peg values at 85 and high end say 110. The stock closed today at 77 and change. On the scary side of things, if we do see a double dip recession and oil drops back down to 50 a barrel and gas goes to below 5 mcf, that the stock would be overvalued. According to Morningstar, the executive suite is talented and has equity in the company. Their compensation is equitable for shareholders and the industry. Do your homework, but I am going to watch the futures tonight see if tomorrow is a good time to get in. Right now, it looks like tomorrow could be replay of today.

Salve Lucrum

Wednesday, May 19, 2010

BAGAKOAA May 19,2010 Naked shorts and wealthy old men


May 19,2010 Naked shorts and wealthy old men

OK, got your attention now don’t I. Monday the 13-F of Warren Buffet, actually his company Berkshire Hathaways was released. You remember Monday, the Dow was at 10,600 and life was good. Anyway a 13-F is a form filed with the Securities Exchange Commission when an investment manager trades more than 100 million dollars in stocks, I believe in a quarter since it is a quarterly filing. So far I have not had to file one of those two, three, four, (waiting for the laughter to stop).

I like looking at the 13-F to see how many he got right last quarter. I know he reads my blog so its also nice to let him know we are thinking of him. But I digress.

Before we get into details, let talk about how big his portfolio is. As of March 31, 2010 his BRK holdings were about 51,203,000,000. That’s right, 51 Billion 203 million plus. I’d take the plus, but I am not jealous.

His top holding is KO, good old coke a cola. He owns 200,000,000 shares worth about 11 billion. He started buying Coke after the crash of 1987. By mid 1988 he had 1 billion worth had has had it ever since. Why did he buy it? He liked the product and it was undervalued.

His second largest holding is Wells Fargo Bank. Buffet started buying this during the money crisis of 1989-1990. He liked the management team and it was undervalued. Oh he has about 10 billion of WFC. He also has about 6.2 billion of American Express which he acquired at roughly the same time.

Buffet has about 5 billion of Proctor and Gamble, but note that he sold off about 9% of his holding the first quarter. That is called taking profits and apparently he moved some of the money into the bond market. Watch this boys and girls as if this is what the Oracle of Omaha is doing after a steady buying spree for two plus years it might be a tell of what all the big boys are doing. And to round out his top 5, he has about 3 billion in Kraft. This too was reduced over the last three months, but again it seems to be profit taking.

Knowing what he holds is one thing but watching the changes can be interesting as a guide to what he thinks is going on in the industry he plays. He is currently heavy in Financials and Consumer stocks with about 40 percent of each. He has much smaller holdings in consumer services, gas and oil, and industrials.

He added to his position on RSG, Republic Services, a provider of domestic non-hazardous waste. I did a blog about WM, Waste Management a few weeks ago and mentioned that the economic comeback will generate more trash. Buffet obviously thinks RSG is a better play than WM. Its fundamentals are nice and they throw a nice dividend. (2.6%+)

He also added IRM, Iron Mountain, a data and document management services company concern to his holdings. He has about a 200 million dollar position in Iron Mountain. The prices paid seemed a bit rich for Buffet’s usual bottom feeding tactics, but he has done a little better than I in the market. In addition there was a purchase of about 130 million dollars of Becton, Dickinson and Co, BDX a medical research supply and device manufacturer. It had a respectable 14% PE so it was apparently fairly valued.

He did take some profits and pared back some stocks like COP, COST, GCI, JNJ, KFT, KMX, MCO, MTB, and PG. And completely closed out of his positions in STI, TRV, UNH, and WLP.

Now before you get all excited and say, “WOW Brian knows so much.” Ok I know you would not say that but what they hey. Most of this info was in the WSJ and Barron’s this week. BUT, Behold the Underlying Truth, you can go to a website called edgar online that is the online search engine for SEC filings and you can get all the information you ever need on publicly held companies. I have it as a favorite in my browser bar, but I have no life.

I have been watching all the oil clean up stocks and still can’t pull the trigger on any of them. I mentioned CLH, NLC, NR, HOS, and SPN and nothing is jumping off the pages to get me to bite. If anyone found a sleeper in this mess, let me know what it is.

And inclosing because its getting late, let’s talk about naked shorts. Sounds like an oxymoron. Part of the volatility today was in response to yesterday’s decision by Germany to change the way the big monies guys play the game over there. They are temporarily banning naked short trades of CDS on Euro area government bonds. Now a CDS, credit default swap is a contract between a buyer and seller of a bond based upon a series of payments to one parties advantage. The underlying instrument is usually a bond or a loan. A naked short is when they write this contract in the nude. Ok who was paying attention? No a naked short on a CD is where these contracts are written, but neither party actually owns the underlying loan or bond. It is very very speculative and like gambling on a roulette wheel and never seeing a ball drop.

Anyway that drove the market down today along with a scary drop in mortgage applications. Could it be the impact of no more ORP money? (Obama Reid and Pelosi) The banks kinda did ok as the big scary news about banking legislation might not be as scary as once thought. And yes we have no inflation. The CPI was the lowest it has been for 44 years.  However if the market was not jumpy enough the terms stagflation and deflationary spiral was mentioned in a lot of the finance pundit factories.

In essence a lackluster day again.

Salve Lucrum

Tuesday, May 18, 2010

BAGAKOAA May 18, 2010 I’ve tried winning and I’ve tried loosing . . .

BAGAKOAA May 18, 2010 I’ve tried winning and I’ve tried loosing . . .

I’ve tried winning and I’ve tried loosing, and I can highly recommend winning, but the market of the last week or so is just plain crazy. I hope you got to see the opening segment of today’s Cramer Show. (Catch it on iTunes if not) Cramer does a great job of explaining how, in the turmoil of the market place right now, no one is paying any attention to the fundamentals of the stocks, sectors or industries. He does so with a great comparison of HD, Home Depot, and Lowes. In the short of it he chooses HD over Lowes. I would too, and after the 2% decline today I would be buying more, but I am not.

I picked up a little more SBUX and a few more shares of AAPL, but I am keeping my hand in the pocket and dare I say it, looking to take some profits. When the great stocks, CVX, IBM, AAPL, INTC, BA, FLS, and the likes can’t seem to get the big boys in, its best to take the money and run.

Due to the flash crash, I did end up taking a lot off the table on the 7th of May. I have been easing my way in over the last week or so, but I have also been hedging my bets with VXX, GLD, SLV, and a double short ETN called DRR. An ETN is an exchange traded note versus the more popular ETF, exchange trade fund. DRR plays a short term short position on the Euro. This ETN goes up in value as the Euro goes down. As you can imagine, it has done well over the last week or so in tandem with the volatility indexed ETF VXX.

Before I head off to slumber land, I am going to take a look at the news release from last night explaining what Mr. Buffet has bought and sold over the last 3 months. His SEC filing 13-F is a quarter filing of all of his position changes exceeding 5%. I will report back with that list either later tonight or tomorrow. I also owe you the Barron’s list of cash rich companies, and I am almost finished on the homework on the list of who might be in a position to make money on the oil clean up in the gulf.

Until then, to quote a famous 70s-80s TV show, “Let’s be careful out there.”

Salve Lucrum

Monday, May 17, 2010

BAGAKOAA May 17, 2010 A bad shift in money flow


May 17, 2010 A bad shift in money flow

This week’s Barron’s is yet again another great issue. The cover story is about all the US companies having gobs of cash. If you have been following the blog I have been harping on this subject. American companies have more cash on hand than since World War II. They like many Americans are wary as to where to deploy that cash. The article reviews many cash rich companies and explains which ones might go on the acquisition trail, which might be acquistionable, which might throw new or larger dividends, and which might buy back shares. And what do we call that boys and girls? It’s the trifecta of shareholder’s yield.

I will be kicking the tires on the list and let you if I pick up any new positions and what they are. I suggest you do get a copy of this week’s magazine. There is also a lot of coverage about the Euro and other currencies. What do I think? I just bought a new position on a short Euro ETN called DRR. It is a volatile bet on more downside of the Euro. I do not suggest anybody but crazy people put anything but Vegas money on this.

Here is why. In a recent survey done by Bloomberg asking how many money managers are long on the Euro, only 3 of 600 said yes. Now that should be an argument for my pick DRR. But I always get concerned when there are too many people in the pool. Everybody is in this pool.

Also, UBS had a piece out today (Thanks Tim) and there are some reality checks about the Euro imploding. Without plagiarizing too much and thanks to a similar article in Barron’s by Kopin Tan indicates that Spain, Portugal and Greece account for less than 20% of the Euro GDP. Healthy economies with significant outside customers like Germany and France will keep the Euro a viable currency, but the short term, 6-18 weeks, the Euro is in trouble. I am going to watch the DRR until the Euro hits about 1.10 US then I might switch to a long Euro ETN. Until then, Gold (GLD) and Silver (SLV) seem like a place to park a little money as well as playing the volatility with some VXX.

Gold will need to have an increase in demand to get to some of the outrageous values being talked about. It is interesting to note that there is a massive “dishoarding” of the metal in India and they know gold. If they are selling, we might be near a short term peak. If the European Central Bank starts copying the US and gets the printer cranking out more Euros, look for gold to go up. Remember the demand or perceived value of gold must rise higher than the adjustment for currency exchanges impacting the dollar. You can see the dollar go up against the Euro and see the price of gold decline, but that does not mean it is less valuable. (OK I read that twice and even I am confused, but you all are much smarter than I).

OK, I don’t know what to do with Flowserve FLS. I really like this stock, but it is hitting my sell threshold of down 8%. FLS is one of the world's leading providers of fluid motion and control products and services. Customers use fluid motion and control products to regulate the movement of liquids or gases through processing systems in their facilities. Its fundies are sexy and they seem to execute well. Their ROE is 27% (Read ROE ROE ROE your boat in the blog), but the oil spill, the drop in the Euro, and the drop in oil prices (mostly due to the bump in the dollar) is driving this nice stock to a point where its Multiple is below 10 which make its very very cheap. Do I head my own advice and bail at 8% or do I move my stop south and ride it out?

A few months back I was telling you that savings rates had loosened up a bit from its post WW II high of 7.2% to the mid 3s. Keep in mind that prior to the 07-09 recession (as it is now being called) personal savings rates were below 2%. Well in the last three weeks, we have seen a shift of monies out of equities and back on the sidelines. The journal reported a 16.2 billion dollar shift of moneys from stocks to money market accounts and saving account holding creeping up again.

Also when I prognosticated the 1335 in the S&P by years end 2010 (See the post from Jan 3, 2010), it was based upon the real estate market stabilizing and consumers getting back in the game. It appeared that we had both for a while (February 19-May 7), now both data points are in question. Consumers seemed to have entrenched again and there is no over whelming support for a true stabilization of real estate values.

I am concerned but not bearish at this point. There are some great economic fundamentals out there. We just need to wait for the rest of the world to figure out what we already know. It’s shopping time in the market.

Salve Lucrum

Saturday, May 15, 2010

BAGAKOAA May 13, 2010 ROE ROE ROE your boat.


Due to technical reason this could not post till this morning.  Sorry.

May 13, 2010 ROE ROE ROE your boat.

I had to stop listening to the noise today in the market and continue honing my investment skills or discovering my lack there of. You have heard me harp on Shareholder’s Yield based upon Free Cash Flow usage. So I won’t bore you with more info on that, though it is becoming more and more critical everyday as U.S. companies have more cash on their balance sheets since World War Two, adjusted for inflation.

So if you do your cash flow studies and like what you see there is one more quatitiave exercise you might want to execute. Look at the ROE, Return on Equity. Here is a brief primer, mostly in my own words, but based upon a series of articles by Ben McClure who is director of McClure & Co.

Simply put ROE is a way of determining how efficient a company’s management is at generating profit from the assets available to that management. It can indicate whether a company is fat and lazy or lean and mean. It is an important relationship between an organizations profit and it’s investors return.

Now the only value of an ROE is a relative metric used to compare one company to another or a company to an overall industry or sector. Typically you want to look at the company’s 5 year trend in ROE and then compare it with that of another company or the industry it is in.

The metric is easily determined by dividing net income by shareholder’s equity. These figures are readily available on almost all publically held company’s financials. And you do not have to calculate it since that metric is very common and found on most financial websites. Now a couple of things can artificially inflate ROE and you need to look out for them. Any one time or unusual write off reduces shareholder’s equity which by definition increases ROE. Also, a stock buy back (an important element in the use of free cash flow) will have a positive impact on ROE.

Here are a couple of examples:

ABC company has a shareholder equity of 100 million dollars. In 2009 the earned 10 million in net income. Their ROE, Return On Equity would be 10%. 10ml/100ml. Now if ABC makes 10 million in 2010 and has cash to buy back 10 million worth of share, the ROE becomes 11.1%. 10mil/90mil. Or if an unexpected or one time capital expense reduces shareholder’s equity, the same effect is true.

Now if Shareholder’s equity stays the same or similar, ONLY a change in net income can impact the ROE.

ABC company has a shareholder equity of 100 million dollars. In 2009 the earned 10 million in net income. Their ROE, Return On Equity would be 10%. 10ml/100ml. Now if ABC makes 15 million in 2010, the ROE becomes 15%.

So what is a good number? Many analysts look for 15% as a minimum. I like 25% or more but admittedly those are hard to find. You can’t take ROE in isolation as you really need to look at the overall fundamentals, but ROE is a strong metric to look at.

In the category of “Only In America”, I read one of my favorite columns in the WSJ today and could not help but laugh. I enjoy “Overheard” on the Heard on The Street” page in the journal. Todays “Overheard” was priceless. Apparently congressman Mike Pence (R) is drafting a bill for house consideration to limit Federal Funds to the IMF (International Monetary Fund) to only countries with a debt to gross domestic product of below 60%. Makes good fiscal sense. We should be lending money to countries whose debt is a large proportion of their total production. I would support that, wouldn’t you? Ironically The US’s current debt as a percentage is 60.3% and is expected to conservative expand to 66.7% over the next 5 years. Some analysts (Barclay’s) see our debt to GDP going to 95% by 2019. So we would not loan money to ourselves under Congressman Pence’s Bill. Only in America!

In listening to all the after close banter, there is no clear direction for the market.  It seems to be downward and some technicals support that direction.  So I am in no hurry to declare a new rally.  It interesting to listent to all the talking heads banter about the US Dollar, the Euro, Gold, Oil, and inflation.  It sounds as though the volatitly is coming from the belieg (I think it is a mistaken belief) that the Euro might collapse.  But since this thinking exisits and it has enough influence to overcome some good retail sales number as well as great industrial production numbers, you got to play it as you see it.  I added to AAPL, SBUX, GLD, SLV and took a huge position in VXX today.  I did not get in early enough to enjoy the 8% pop today but feel these concerns are going to linger a while.  I have a very narrow stop on the position at 3% and I am looking for it to hit 35-37 in the next couple of weeks then settle down again.  There is NO concern about inflation in any of these markets so the creeep in Gold and other commodities seems to be a strong dollar play and maybe a subtle underlying demand pressure.

Salve Lucrum

Thursday, May 13, 2010

BAGAKOAA May 13, 2010 Wanna Play the Whisper Game


May 13, 2010 Wanna Play the Whisper Game

A week or so ago I was explaining to someone the relationship between the Euro, the dollar, gold and other commodities. Today was a great example of that so I sent them a note. You might find it helpful.

“The market is a little sideways today but I am looking for bargains. I just wanted to explain that today is a good example of looking at the US dollar, Euro, Pound, Gold, Silver (commodity not coins) relationship. Because of the still slightly squishy Euro economy, the new government concerns in the UK, but overall fairly stable geopolitical issues (except the social unrest in Thailand and Greece), the dollar is rising so commodities are dropping as we see those commodities priced in US dollars. Our dollars are worth more so the commodities are cheaper. When the dollar drops as it did for most of 2009, we saw gold, silver, oil go up somewhat because of demand issues, but mostly because of the devalued dollar. In the last couple of week, prior to today, you saw the dollar going up and oil going up and precious metals going up. When you see that that means that global investor saw the US dollar and commodities as a safe haven. Keep in mind that the Euro is the only political currency in the world. It is not back by a single government or well defined assets. There are rumors that the Euro maybe abandoned in the next few years which will make the Dollar and commodities very attractive.

In a nutshell, today would be a good day to buy more GLD and SLV on the dip. And I will.”

Obviously by the end of the day the market did a little more than go sideways. There was an over reaction (my opinion) to the less than expected job numbers. If you remember on Sunday night I expected the number to be stronger than anticipated. Got that one wrong. The downer today has me bargain shopping tonight. In checking all the after hour pricing, there does not seem to be any bargains.

Besides GLD and SLV I did add to CVX, BA, SBUX, IDSA, CRUS, and FLS.

Now I get invited to play a game every couple weeks from the folks at Remember when a company reports their quarterly earnings, there are three number that matter. The first is the consensus number or analysts estimates, the next number is the key or senior analyst aka the AX, number called the Whisper Number, and of course there is the actual earnings number. Well I get invited to take a shot at the companies that are reporting the next couple of weeks every month or so. It is challenging and it is fun, but remember I have no life. Anyway if you want to play along, send me your guesses on the following companies that are reporting soon. It takes a while to do the homework so get back to me by Monday am.

INTU, Intuit, provides business and financial management solutions for small and medium sized businesses, consumers, accounting professionals, and financial institutions in the United States, Canada, and the United Kingdom. Analysts say $1.82 a share earnings and the current whisper Number is $1.95 a share.

HPQ, Hewlett-Packard Company offers various products, technologies, software, solutions, and services worldwide. Consensus is $1.05 a share, and the whisper number is $1.11.

CSC, Computer Sciences Corporation (CSC) provides information technology (IT) and business process outsourcing, and IT and professional services to the commercial and government markets. There is no whisper number on this but the consensus number is 1.43 a share.

HRL, Hormel Foods together with its subsidiaries, produces and markets various meat and food products in the United States and Internationally. There is no whisper number and the analysts estimate is 61 cents a share.

So why would anyone do this exercise? I do it because it makes me do homework where I discover new stocks and every once in a while I actually find enough accurate data to indicate that a stock is going to blow away analysts estimates and even rarer the earnings will blow away the whisper number. If you can do that, you get in the stock and or call option and the games begin.  For those of you that play, the person with the most accurate earnings guesses will get a copy of Active Value Investing. Good luck.

Salve Lucrum

Wednesday, May 12, 2010

BAGAKOAA May 12, 2010 The return of the rally?


May 12, 2010 The return of the rally?

I am getting very close to calling this a return of the rally. Upward momentum has me excited although I am re-entering the market with a little less vigor than in the past. In the past 48 hours, I have bought AAPL, IBM, CVX, INTC, CRUS (new position), FLS (new position), TGT, SBUX, IDSA (new position), HAS, MCD, ARMH (re-established part of a former position), BA, KTCC, and added to GLD and SLV.

On occasion when asked to evaluate a list of equities, I will say, that is fair valued, so let’s wait for a dip in the price. In seeing that in the notes I send or the posting I make it seems a bit counter intuitive. If its fairly valued then buy it, would be a logical response.

That would be true if we were talking about long term investing and if that is your thing, (more than 24 months), than fairly valued is good enough. Keep in mind that I NEVER, and I say that with confidence, NEVER buy a stock without putting a stop on that stock immediately after the purchase of the stock. I used to use a 10% stop and watched them like a hawk, then I used trailing stops where the stop tracks the rise in the price based upon the parameters you put in place, and I got burned on a few of those. Now I use an 8% stop and adjust them as I see fit. My reason for this is that I usually review a stock at least once a quarter at earnings time, or if the stock is up 25% or more, or if it is 8% down. If you follow the math, I can have 3 bad decisions for every correct one. I don’t use the trailing stop now as I spend an hour or two every night reviewing the stocks and adjusting as necessary. But I digress.

With my logic in place and knowing I am not a long term investor, not that I would love to be, the market just does not allow for it. Buy and hold does not work in the environment of the last 3 years and will not work for the next 5 years. Active Value Investing is what it will take to do almost as good as the overall market. So when I say its fairly valued let’s wait for a better price, all I am saying is I want a slight hedge to support my 8% down. If a stock is fairly valued at 10.00 a share, I want to buy it at at least 9.50 or 9.80. I want to add a 2-5% buffer to my 8% stop allowing me a volatility swing of 10-13% (8+2to5). The only time, (note that only was not in caps) I break this rule is if the company has a real strong shareholder’s yield formula working. Again, that would be strong free cash flow used to pay down or eliminate long term debt, issue dividends, and buy back shares. If I see all three in the last 3-4 quarters I will buy a fairly valued stock. If not, I want a bit of a bargain.

Let me put in golf speak. I am at the masters. I see the Amen Corner Golf Shirt in the Golf Shop at Augusta. The Price is $80.00. I know it is a $50.00 shirt, but it is the Masters, it has the official Masters Logo, and I have to have it. So I buy it. I get home and someone asks if I can get them that shirt. I go on eBay or Amen Corner’s website, I do not want to pay $80.00 for the shirt. I want to buy it somewhere between $50 and $79. Now that I read that, the analogy sucks, but it stays anyway.

Tonight I went back to last several corrections we experienced and compared to the current market action, taking out the 750 point Black Swan (by the way if some one says Black Swan, ask them what it means. I had one guy tell me it had something to do with a trade in Australia. In case you don’t know it is a term to describe a rare fluke which I know is redundant, but it is meant to be. Genetically it should be all but impossible to have a Black Swan. The parents are white the grand parents are white, but some how we have Black Swans.) and can see similarities to the July 9th, 2009 adjustment, the November 2, 2009 adjustment, and the February 8th, 2010 adjustment. Based upon those patterns, I would say we are about a week away from a return to a full fledged rally. Actually when you average out the 750 point Black Swan, you could almost say the rally from February 19th is continuing. I do not think that. I am buying as I feel that we will be in a market rally mode soon.

Now you are reading the blog of a criminal. I was notified by Schwab yesterday that one of my accounts was in breach of an SEC violation. Cool, little ol' me. Anyway what happened was when the portfolios got stopped out of so many positions; I wanted to get them re-established as soon as possible so I went on a buying spree in pre-market trading on Friday. While the market did skip quite a few of my limit buys, in one account I got in on most of my orders. Unfortunately it was a cash account. No Margin. The sales had not settled and I was buying with the house money. The SEC does not like that. The account is frozen to only cash on hand orders for 90 days. To quote that world famous investor from Orange County California, Steve Martin, "WELLLLL Excuuuuuussssee mmmeeeeeee!"

Salve Lucrum