Monday, June 07, 2010

BAGAKOAA June 7, 2010 Consumer credit and Alpha, I mean Beta


June 7, 2010 Consumer credit and Alpha, I mean Beta

As expected, we took a bit of hit with consumer credit dropping 5.4 billion dollars. That means five billion less in the economy, but that is not that big a deal. Like we said yesterday YAWN. You have to wade through the number and separate the non-auto figures, but it is there.

I read today in Bloomberg and in the Journal that some Traders were expecting bounce back today. They should read the Salve Lucrum blog. The last hour today showed the true sentiment of this market. We took advantage of the situation and added to our positions in FLS (more about that in a minute), AAPL, BMI, KO, WPRT, and INTC.

Our only happy thought is GLD which is hitting 52 week high numbers. Remember that we play gold with the ETF GLD. If you want to check out other gold plays, you could look at AEM, NEM, RGLD, GOLD, AUY, IAG, GG, GFI, and AU. We do not own any of these for reasons that have been discussed here on several occasions.

OK, I may owe some of you an explanation about FLS, Flowserve. This blog was pimping this stock last November as well as more recently in the last couple of months. This stock is taking a big hit, for one reason and one reason only. It has a perceived huge exposure to Euro income. About 22% of its top line figure is Euro centric. So even if you wash through the financials at the current Euro level you might see a 20 cent a share profit adjustment. The stock has completely over corrected and this is a buying opportunity. We, as I mentioned added to it with the a 3 dollar and change drop.

There are also concerns about the drilling moratorium impacting sales for FLS. If you read the last quarterly report, you would see that less than 3% exposure in that market. So now that scary stories are addressed let’s look at the positive side of FLS. Tyco, a prime competitor of FLS reported that flow order were increasing and in May were up a whopping 8%. That report is supported by other industry players. Also, but a bit longer term, as nuclear power options are being taken under consideration, Tyco and FLS are the best of breed. (I like the cash flow at FLS better than TYCO).

Anyway if you got in FLS, don’t get scarred. Think of it as a sale that the Market is putting on and grab some more of this thing. The portfolio is currently down 7.4% before the additional share bough today. I am moving my stops to a 12% loss base. That would blow away any technical barriers and indicate a free fall.

Occasionally I will get asked what the Beta of a stock is. It is not a metric I track, but many people do so I thought I would share what the Beta of a stock is.

Ok here is the equation for determining the Beta:

Any questions?

Like a PE ratio, most investors look for ways to compare the performance of a stock to other stocks or the overall market. One way of doing that is to see how a stock is correlated to the general direction of the market. In the 70s, this measurement was devised and it is called the beta of an equity. The number usually is in the range of -3 to +3. A stock with a positive beta basically indicates the it follows the market. If it is a negative beta the stock moves in an adverse relationship to the overall market. A stock or asset with a beta of 0 is not positively or negatively impacted by the market movements. Think T Bill or Bonds.

Stocks with betas of 3 or 4 are usually very volatile stocks. AAPL, my friend, has a Beta of 1.5 so it is somewhat volatile. Actually I was surprised that it was not higher since its influence factor on the NASDAQ is about 27%. GLD on the other hand has a Beta of .11 so it is not volatile at all, in theory.

Personally I do not put much credence in the metric. I am a firm believer that the historical price of a stock should not be an indicator of the future value of the stock which casts a huge shadow on the value of Beta.

Well I called for a 3% drop this week and we are half way there already. Look like we’ll be drinking the cheap scotch this week.

Salve Lucrum


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