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


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