Thursday, September 30, 2010

30 Sept 2010 “Mirror mirror on the Wall”

BAGAKOAA;

30 Sept 2010 “Mirror mirror on the Wall”

Mirror, mirror on the wall what will the market do this fall?

Sorry about the premature publication earlier today.  I was posting the screen print of the Salve Lucrum portfolio (below) and I must have hit publish instead of save.

Last night I/we provided you with the “Tools of The Trade”. Today, as I followed the market via Bloomberg in the background, there was no clear direction in the market what so ever. During the lunch hour I checked up on the portfolio, YAWN! I was considering taking a night off of posting tonight.

Then I remembered I owed you a reality check about my prognostication from Sunday night. We went out on a limb and suggested: “Personally after looking back a durable goods and the last Beige Book published by the Fed, look for a little bump in Real GDP to 1.7 and I agree with the Price Index staying at 1.9. Neither number will do much for the market. It is a true double edge sword. If GDP goes up too much, then the market will retrench because that would give the Fed motivation to tap the breaks. If GDP goes down, then everyone will be talking about the double dip, which has somehow purged its self from our vernacular over the last couple of weeks. This number is a lose lose. Let’s hope it stays flat, but I see a slight bump.”

Nailed that one baby. I got them both right. Damn I’m good some of the time.

So what will earnings season bring us starting next week. (Remember I have a contest as to what you think AA will hit in earnings next week. The first and closest guess will get either Cramer’s Mad Money or Getting Back to Even so get those guesses in.) I mentioned we belong to AAII (American Association of Individual Investors) and this afternoon they provided me their insight into earnings season upcoming.

Here are the highlights.

They quote S & P, saying the expectations for year over year earnings growth to be 31%. They also cite Reuter’s at a 24% growth rate. That is the good news. The bad news is that top line growth is much less in the single digits implying that earnings improvement are mostly coming from cuts to expenses versus organic growth.

Then they go on to analyze the profit warnings issued over the last three months. AAII watch a ratio, new to me, called the negative/positive preannouncement ratio. It takes the number of negative announcements (companies saying their earnings will be dropping) and compare them to positive announcements. (companies that are saying earnings will improve). The ratio is 2.3 right now. The actual numbers are 77/34. That is a huge jump from the first quarter of 1.2 but closer to the historical average of 2.1.

In breaking out the numbers they looked at revenue factors like market share gain, geographical sources of income, and new pricing strategies. They also scrutinize the income statements to see how they are cutting cost. After that they look are raw material costs and currency fluctuation issues. Then they look at cash flows and use of debt.

They approach this as the things the investor should do and they wrap up by recommending a visit to the sec.gov website to get the 10Q reports as they are published.

Attached to this piece was the AAII sentiment survey. There are a lot of folk who pay attention to this data point. It is often quoted in Barron’s so I though I would beat them to the punch. For 4 weeks now the AAII survy figure for the bulls, were above its all time historical averge of 39% at a 42.5% level. Now that number has come down in the last couple of week indicating that AAII member might be feeling a little stretched as to recent gains. The bears have been gaining and for the first time in a while have broken above their 30% average indicating that they think people will be taking profits or out and out selling.

This shift in sentiment is normal in a rising market.

So how is the Salve Lucrum Portfolio looking? Here it be as of today.



































From The White House Photo Gallery
"Ya know we did find one teeny tiny weapon of mass destruction."

Salve Lucrum

Wednesday, September 29, 2010

29 Sept 2010 Tools of The Trade

BAGAKOAA;

29 Sept 2010 Tools of The Trade

In the past a few days people have asked where do I get all of the information for the homework and the blog. Easy I steal it! That is why I say “we” in the blog it is my way of saying thanks to the hundreds of sources from which I steal. On a serious note, in the on line community at Motley Fool, you will see an occasional post about where to get good information to invest upon. Now I find that a little amusing as there are in the on line community on Motley Fool and they are asking where to find a good source of info.

Anyhow I thought it might be helpful to share the source list of reference material I use to do my homework. First, as a result of my real job, I have had to refresh my basic accounting skills over the last five years. Some of you know I started out in accounting and decided I would rather have a career of rubbing glass in my eyes the rest of my life than do the detail work of an accountant. God love you accounts out there as I know the reason why our company is so successful is because we have a great finance guy. (He is so smart he does not read my blog!) But I digress. I have had to brush off some old accounting books and I use them with regularity in determining values and ratios of companies. Some of my favorite are:

Statistics: An Intuitive Approach by Lincoln Lien Chao

This is helpful in understanding the methodology of how some the ratios are actually determined. If you get into charting and understanding Bollinger Bands, you will quickly recognize them (BBs) as upper and lower control limits as determined by the standard deviation of any moving average (ie 200 day or 50 day). The book also helps you see the nuts and bolts of the RSI, (relative strength calculation). Most of these concepts are available on line, but I still enjoy pretending I know what Chao is talking about.

Trading in the Global Currency Markets, 3rd Edition (I have the 2nd edition)Cornelius Luca

I do not trade currencies. I have tried it three times and always got my ass handed to me, so I leave that to people much smarter than I. The chapter on the historical back round of currencies is really informative, but my favorites are currency characteristics country by country and the chapter on economic fundamentals. Getting a better understanding on currency flows and values will make you a better trader. (Today is great example as Gold has breached the $1,300 barrier. Know how much upward pressure is due to international currency exchange versus true demand for the commodity helps you determine where the next resistance barriers is.) And the chapter on technical analysis is very helpful.

Financial Accounting Concepts James H. Rossell , William W. Frasure

Long out of print, this 1967 classic (he said in jest) helps with the basic understanding of financial statement and how to decipher some of the foot notes in those crazy SEC filing.

Barron's Finance and Investment Handbook by John Downes and Jordan Goodman

This 973 page beast (Now 1200+ pages in the latest edition) used to be my go to book. It had everything you need for thorough understanding of terms and markets and financials. Now I get most of this content on line. (I’ll give you on line content in a moment.)

The meaningful interpretation of financial statements; The cause-and-effect ratio approach by Donald E. Miller

This by far is my most referenced book. It has helped me decipher gobs (technical financial term for lots) of confusing annual reports. I also use it to maneuver my way through my own company’s quarterly financials. Again, this content is very available on line, but Miller takes the concepts and ratio explanations down to such a level to say something as simple as if this ratio is high it is a good thing. He also used relevant examples and explains how changes in the data points have what effect of the ratios. If you are an investor or an exec who has to wade through financials, I can not recommend this book enough.

Options as a Strategic Investment by Lawrence G. McMillan

This is the Bible, Qur’an, Rosetta Stone and the Dead Sea Scrolls of options, options strategies, and all the option lingo. This book cost me about $30.00 in 2005. Then there was about a $15,000 learning curve when I started to experiment with puts and calls. Without the book, it would have been much much more.

Financial Fine Print: Uncovering a Company's True Value by Michelle Leder

Written in 2003, Leder takes on the tough job of trying to explain financial footnoting and what they can truly mean. It is a tough read and probably better used as a reference book that a tutorial. It does a great job of explaining what to look for with executive compensation issues, compensation deferrals, option compensation issues and how they impact shareholder’s equity.

The Trader's Guide to Key Economic Indicators (Bloomberg Financial) by Richard Yamarone

Every investor trader should have a copy of this book. You know every Sunday night when we try and guess at the week ahead in economic reports, we are using this book or the knowledge derived from it. A must have if you have even the smallest of portfolios.

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) Benjamin Graham (Author), Jason Zweig (Author), Warren E. Buffett (Collaborator)

You’ll note that Warren Buffet is a collaborator on this edition. He actually wrote the foreword. The reason why is that Benjamin Graham and David Dodd co wrote the basis of this book when they penned Security Analysis in 1934. Intelligent Investor takes the painful but important content from Security Analysis and shows how to develop the basic understanding of Value Investing. We preach a lot about value and growth in the blog and this book along with SA (next) helps get the best understanding of the fundamental analysis, descriptive analysis, and technical analysis.

Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions) Benjamin Graham and  David Dodd

Just having this on the book shelf makes one feel wiser about the market. After learning the Graham and Dodd taught at Columbia in 1950, Buffet set his sight in going to school with his mentors. And, as they say, the rest was history. This is a very dry nuts and bolts forensic study on value investing. Not for the weak of heart. Buffet actually prefers the Intelligent Investor over this book, but one of his prized possessions (He has been offered several million for the signed copy) is his first edition gifted to him by Dodd I believe.

That is not all the books I have but those are my frequent reads. Of course you know I have Jim Cramer's Getting Back to Even and Jim Cramer's Real Money: Sane Investing in an Insane World.

 
As far as periodicals there are quite a few and several I receive in multi media (kindle versions, on line, zinio, ipad).

Barron’s

You all know my endearment with Barron’s. Beyond a doubt the best financial investment publication in the world. The paper and kindle edition come out once a week. The online content is updated through out the day. While I read it cover to cover over the weekend, I continuously check in on the economic calendar, earnings reports, and Stocks to Watch. Barron’s is part of the Dow Jones family of publications including The Wall Street Journal and Smart Money.

The Wall Street Journal

This is my daily bread. My method of attack depending upon the time I have is to glance at the What’s News Column first. It gives me all the pertinent news I need. If there is a interest rate change by the Bank of England, it will be in there before I have a chance to talk to our office in Bristol. Then below the What’s News is Vital Signs, usually a clever chart of some relevance. Today it was the S & P Case Shiller Home Price Index chart for the last 9 years.

When I was in marketing, I would go right to the Marketplace section and there was hardly a day that went by when I did not glean an idea or a concept to float amongst my team. It did drive them crazy and they did try and burn my WSJ, but it was a good read. Now I read that section last mostly for fun and an occasion investment idea.

Currently I spend most of my time in the Money & Investing Section. I start at the back page with Heard on The Street and Overheard. Always good stuff there. For example there was a small article about a Japanese Bank called Takefuji which just filed for bankruptcy. I found it relevant because yesterday I read Credit Saison’s (A large bank credit card company that holds the license to our office in Tokyo) annual report and the article helped me understand why the performance of their credit card business is in such angst. The Ahead of The Tape part of M & I usually has some relevant info. Today it talked about retail sales especially by discount stores.

Then I go to the front page section which is usually just a good general knowledge read and it helps provide and international views.

Lastly if time allows I go the personal journal section and read about new books coming out, sports news, and wine reviews when they have them.

AAII Journal

This is a publication by The American Association of Individual Investors. I use both the website and this monthly magazine. It is subscription based an I have the enhanced membership package at 49 dollars a year which gets me the magazine, their model stock portfolio, access to the AAII.com website, mutual fund guides, tax planning guides, local chapter access for real face to face meetings, a publication called computerized investing, stack screen (good ones at that) stack evaluation services and gobs of how to articles.

Technology Review

This is published by MIT and has the latest and the greatest from the work of technology in many fields. It is supported by a great website and many blogs. Here are a few titles so you can get a feel for content. The Big Losers in Energy, How to Build a Warp Drive Using Metamaterials, How Flexible Solar Panels Could Make Solar Power Competitive, The Browser Gets Fragmented and Time Likely To End Within Earth's Lifespan, Say Physicists .

I read this publication so I can stay on top of technology trends personally and in our business. I also glean issues for the next Exxon, Microsoft, or Facebook.

IEEE Spectrum

Equally as interesting as MIT’s publication but a little broader array of topics. Again this is read to stay on top of things and look for the new next big thing and changes to the recent status quo. Here are some sample titles. Get on the Optical Bus (an article about IBM and bandwidth), The Fastest Helicopter On Earth, and Cyber Armageddon.

American Scientific

Same as the previous two but dummied down so you can buy it off the shelf at a book store near you before they go bankrupt. Here are some recent titles. Frugal Innovation: Will Low-Cost Computers for the Developing World Succeed This Time? , Crude Alternatives: Energy Industry Heavyweights Debate Fuels of the Future , and Can America Lead the Global Electric Car Industry?

The Financial Times

The UKs equivalent to the WSJ. I receive this via the kindle, but it is the US edition. I also have the online subscription to FT.com. A very good publication especially if you do business overseas. I also help manage a portfolio traded on the LSE so it is crucial I have access to this information.

Investor’s Chronicle

This is a very expensive weekly magazine published by the FT folks. It is good but I cannot justify the expense for one portfolio so the person who has the portfolio picks me up a copy now and again and send it over to me. (BTW its time for another one my friend)

On Line Services

Morningstar.com, WSJ.com, The Street.com silver membership, VectorVest, charlesschwab.com, yahoofinance.com (mostly for earnings releases and estimates and earnings conference calls, finviz.com, Bloomberg.com (worth noting Bloomberg is on in my office all day), emergingstockreport.com, reuters.com, IBD.com (the online edition of Investors Business Daily-great website great publication-their stock check up almost always identifies sound value equities.), Ycharts.com, motelyfool.com (I enjoy hanging out there on line because the articles are great the chat board gives me ideas and I enjoy answering the questions there when folk need help), and of course SECedgar.com.

Tonight I will leave you with a great story.

Donald Trump walks into a bank in New York City one day and asked for the loan officer.

He told the loan officer that he was going to Philippines on business for two weeks and needed to borrow $1,000. The bank officer said “Mr. Trump you really need 1,000 bucks?” Trump answered to the affirmative. The loan office spoke with the bank manger and the bank manager came over and handed Mr. Trump 1,000 dollars. Trump said, “That is no way to run a bank. No loan papers, no collateral?” To which the manager said it would be their honor to take his word for the return of the $1,000. Trump insisted he be treated like anyone else and a simple note was executed. The manager then went to hand Trump the money and Trump said, “Again you ask for no collateral. What if my plane were to crash or I got kidnapped? You really should take some collateral for the note.” At which point trump suggested leaving his Rolls Royce with the manager until his return.

Two weeks later Mr. Trump returns to the bank to settle his loan. He pays the confused Manager $1,004.12 and takes his keys. At which point the manager says, “Mr. Trump. I do not understand. You are one of the wealthiest men in the world yet you come to my bank, borrow $1,000, hand me the keys to your $120,000 automobile. Then you return pay off the loan and walk away.”


Trump smiles as only Donald can and says, “How else could I park that beast anywhere in New York for $4.12 and expect to ever see it again.” And walked away.

Salve Lucrum





Tuesday, September 28, 2010

28 September 2010 Cause You Got, Volatiltiy

BAGAKOAA;

28 September 2010 Cause You Got, Volatiltiy

Cause You Got, Volatiltiy. Walk, Volatility. Talk, Volatility. Smile, Volatility. Charm, Volatility. Love, Volatility.

 
You all know who Art Rupe was. Well I bet one reader knows who he is, as he (Rupe aka Art Goldberg) went down to New Orleans in 1952 and heard Lloyd Price in a club sing a song called Lawdy Lawdy Lawdy Miss Clawdy. Rupe, who had just started a record company named “Specialty Records” wanted to record Price and his song. Price had no band, so he got a hold of a contact of his, Mr. Dave Bartholomew, who had band to play behind Lloyd. (FYI the piano player in the band was a guy you might know. Antoine Domino, aka Fats Domino). That launched Prices career and in 1959, he had a No 2 Billboard hit with “Personality”. But I digress.

You may know we did ok in 09 and early 2010 playing the Barclay’s ETN (VXX) for the Chicago Board of Exchange VIX Volatitlity Index. We chased it up and down as volatitly entered and left the market. When we thought things had calmed down in about May, we took a little sting and left the game. The VXX is currently selling at about 16, an almost all time low.

Now do you think we have seen the end of fear and confusion in the market? Do you think that the average price of stocks in the S & P 500 will change more than 16% in the next year? (That is the essence is what the VIX measures). I think it will and feel this maybe an interesting time to get back in the VXX. We are going to take baby steps and buy in below 20 over the next 30 days. We would like to have about 3% of the portfolio in VXX by the mid term elections. We are looking for VXX to climb back to 30 by the end of the year. THIS IS SPECULATIVE. Do not use grocery money on this one. Vegas funds only.

Portfolio Action Today

We added to our position in RINO RINO International Corporation, through its subsidiaries, operates as an environmental protection and remediation company in the People's Republic of China. The company engages in designing, manufacturing, installing, and servicing wastewater treatment and flue gas desulphurization equipment primarily for use in the iron and steel industry; and anti-oxidation products and equipment for use in the manufacture of hot rolled steel plate products. Its products include Lamella Inclined Tube Settler Waste Water Treatment System, which comprise industrial water treatment equipment, effluent-condensing equipment sets, solid and liquid abstraction dewatering equipment, and coal gas dust removal and cleaning equipment; and Circulating, Fluidized Bed, Flue Gas Desulphurization System that removes particulate sulphur from flue gas emissions generated by the sintering process in the production of iron and steel; and High Temperature Anti-Oxidation System for hot rolled steel, a set of products and a mechanized system, which reduces oxidation-related output losses in the production of continuous cast hot rolled steel. In addition, it offers contract machining services for third-party industrial enterprises. The company was incorporated in 1984 and is headquartered in Dalian, the People's Republic of China.

We are down about 6% on this stock and it took a 2% hit today which only makes it look more attractive.

We are also watching UNG very close. We are down about 12% on this Nat Gas Play, but feel long term it’s a solid play. When we have more cash we will add to this position.

On news that Knightsbridge Tankers is buying an existing cape-size tanker from Golden Ocean and GO will take a 28% of the 65 million dollar purchase price and buy Knightsbridge stock VLCCF, we added to our position. We established this position a month or so ago after doing some homework on DRYS (Mentioned in the lightning round last week by Mr. Cramer, not positively). We got in on DRYS and VLCCF but stopped out of DRYS quickly. Knightsbridge has been doing well (up about 16%) and we will add on the drop today.

KO has all kinds of news today but look for what is important. They are pumping a billion dollars in the Phillipines, they formed a coalition of sports teams to fight child obesity, but what is really important is the approval of their purchase of CCE North American Bottling operations. Both the US and Canadian officials are allowing this purchase. The official announcement will be Friday and we (IBD, The Journal, Cramer, etc) are expecting some positive forward looking statements. It is up about 8% over the last 3 months, but there are some impressive target prices out there above $60 a share and we might see those escalate after Friday. They have a 3% yield at this level and we might hear about a bump in dividends Friday, note the word MIGHT. Vectorvest has the company valued at $74 a share.

You asked for it you got it

We were asked today about banking stocks. Actually one specific stock, but its hard to talk about one stock when they are all in the same boat. (That would be a leaky sailboat with no sails.) One reader was contemplating MS Morgan Stanley , a financial holding company, provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide. It operates in three segments: Institutional Securities, Global Wealth Management Group, and Asset Management. The Institutional Securities segment provides financial advisory services on mergers and acquisitions, divestitures, joint ventures, corporate restructurings, recapitalizations, spin-offs, exchange offers, and leveraged buyouts and takeover defenses, as well as shareholder relations; capital raising; corporate lending; investments; and sales, trading, financing, and market-making activities, including equity trading, commodities, and interest rates, credit, and currencies, as well as financing services, including prime brokerage, consolidated clearance, settlement, custody, financing, and portfolio reporting services. The Global Wealth Management Group segment offers brokerage and investment advisory services covering various investment alternatives comprising equities, options, futures, foreign currencies, precious metals, fixed income securities, mutual funds, structured products, alternative investments, unit investment trusts, managed futures, separately managed accounts, and mutual fund asset allocation programs; financial and wealth planning services; annuity and insurance products; credit and other lending products; cash management services; retirement services; and trust and fiduciary services. The Asset Management segment offers products and services in equity, fixed income, and alternative investments, which include hedge funds, fund of funds, real estate, private equity, and infrastructure to institutional and retail clients through proprietary and third party distribution channels. This segment also involves in investment activities. The company was founded in 1935 and is headquartered in New York, New York.

First off, the thinking is quite sound if you are looking at the fact that banks have chosen (under threat of closure) to clean up their balance sheets, that there seems to be monies headed back into the market (for those banks that have brokerage operations attached to them), and that there will be consolidation with in the industry. So let’s look at the fundies.

The stock is selling at 24 and change creating a forward looking P/E of 7.48 making it look cheap. That compares to its 07 highs of $68 dollar a share if you are into irrelevant historical data. In July they were bragging about a decline of ONLY 21%. By comparison to other dogs in the dog show, I guess it was not bad, but it was still a dog show. In reality if you read Morningstar and check the SEC filings, some less than forth right accounting games let them improve the income factors to the tune of about 14%, so their real decline and an adjustment for an asset sale would have been a 36% decrease. Now our reader is guessing we are near a bottom, I assume. We don’t like looking for bottoms (Ok I’ll wait a minute here. . . . .) but let’s play along.

The stock is down 15% year to date. Price to book and price to sales is healthy or at least interesting. If my figures are right they have free cash flow of just under 8 billion dollars? I am having a hard time with that, but I checked it in three sources. Their return on equity is a very low 8% but we have to cut them some slack because of the Federal Reserve Oversight situation at the moment. Their margins at 77% are some of the best in the industry. Target prices from analysts range from 33 to 36 a share.

From a descriptive stand point MS is diversified enough to whether down turns in the various market segments like M & A, Investment Revenues, Proprietary Trading, and Forex exposure. It apparently has a big bucket of cash to make investments with. Here is the big thing I don’t like about the company at this moment in time. The Executive Suite. Mack the former CEO is now the Chair and Gorman the new CEO has to work around Mack and the Board to be his own man. There is an independent board member named Kidder who might help this balance of power, but it is not the best of scenarios for this precarious industry.

As a speculative play I could see easing your way into this dog in the hopes that it becomes a best of breed. It will probably be a long term 18-24 month play, at least until Morgan can hit stride as CEO. Tiny steps might be the answer here. If a person was thinking about a position representing 10% of their portfolio, I would buy into it on the dips over the next three month. As the bank regulations get on paper and Gorman knows the rules for those sectors, it might be a good play.

Another swing and a miss

I suggested the Consumer confidence number would be flat at 53.5 but it came way down to 48.5, but the market took it in stride.  We did get the WAG Wallgreens call correct it did beat and blew past even what we said.  They reported 49 cents a share, the estimate was 44 and we pegged it at 46 cents. 

Drinkin' Wine Spodee Odee

Last night, Monday, the wife was up for a night out so we went to our local pleasure palace, Hannas.  We had a tremendous meal and since I know she was not going to be able to join me in a touch of wine, I brought a long a 2005 Anderson's Conn Valley Vineyards Éloge.  Tod Anderson learned from his dad Gus how to lay down a great glass of Cab blend and this one was great.  It was poured through a Vinturi or as I call it a "Barbie Toilette".  This was the perfect inky purple and had some exotic spices and florals on the nose.  It really clung on tight to the glass (Dave has great stem wear and that can make all the difference).  I got berries and chewy earthy smoky tastes.  It was great.  It even put a nice smile on Dave's face when I gave him a pour.  Good stuff.

From the "Recreation at The White House" Gallery


Nixon and Johnson take a brief break from a stressful game of Finger Football Circa 1968
 
Salve Lucrum

Monday, September 27, 2010

27 September 2010 Looking for Love In All The Right Places.

BAGAKOAA;

27 September 2010 Looking for Love In All The Right Places.

OK market was dull and directionless most of the day today, closing a teeny tiny bit down. The Dow was off a half a point and the S & P stayed well above the all important 1130. Who cares about NASDAQ. Why? It was down.4 % and AAPL was down .4%. As goes AAPL so goes NASDAQ. On a weighted basis Apple account for about 22% of the overall inertia of the Index. We have stopped watching it for a while. It was yet another light day with the volume of shares being about 26% off their average.

Ok so if you are one of the many who have money on the side line and ready to jump in where would you put your money? Last week we told you about an article in Barron’s about the Barron’s 400 index. In Michael Santoli,s article he explains the stock selection criteria that defines the index creating a phenomenal tool for finding equities based upon value and growth. Admittedly that combination has not meant much over the craziness of thee market in recent months, but it appears as though when we get people back in the market they will be seeking those two attributes.

The Barron’s 400 was launched about 3 years ago. It has beaten the DOW and the S & P 500 since it was launched. As of a week ago, the index was only down 15% compared to the DOW down 24% and the S & P down 21%. It tracks closely to the S & P 400 but has a lot more diversification. It was designed to be a glorified watch list of stocks based up key criteria of value and growth. It was created to provide Barron’s writers with a pool of high quality stocks to make comparisons to in various sectors and industries. It is balanced and recomputed twice a year and was just updated two weeks ago.

Here is a brief explanation of how the 400 are determined. The exercise begins with the Dow Jones US TSM (Total Stock Market Index) which has 4,113 components and a market capitalization of 12.5 trillion dollars. Then a group called MarketGrader runs the following analysis on that data base. For growth they look at the companies earnings-surprise history (how many time they beat expectations), the revenue/growth rate, short term and long term sales to earnings growth rates and the stocks relative strength index RSI (this is a technical analysis of whether a stock is over bought or oversold based upon the number of days the stock closed up versus closed down). Marketgrader then applies a proprietary algorithm that measures the stocks reaction to earnings calls to determine how much expectations by analysts are built into the stocks performance. Then they do some good old fashion value number crunching like debt versus equity, price to book, price to cash flow, market cap, P/E ratios, and price to sales analysis. Then the list is ranked by those criteria and no sector can contribute more than 20% of the overall weight of the index. There must be an average day volume of 2 million dollars and the company must have a market cap of at least 250 million. I encourage you to check out the entire list at Barron’s 400.


Here are the top 10. As usual, do your homework as you would on any stock. In taking a quick look at some we don’t own, DECK is a 56 dollar stock selling for 49 bucks. No debt, no dividend, ROE is a nice 27%, about 2 million in free cash flow, phenomenal gross margin, this is one pretty investment. Finish the home work. IPXL look fabulous as well although they just received two down grades and I can not see why. More work to be done. As I look at the list, these are very impressive equities.


Deckers Outdoor DECK, Impax Labs IPXL, Microsoft MSFT,
Apple AAPL, Aiad Pharma ARIA, Syntel SYNT, Alexion Pharma ALXN, InterDigital IDCC, Ebix EBIX, and Intel INTC.

Now I only see one flaw with the list. If a sector is out of favor, like energy is at the moment, that sector will be misrepresented in the 400. Other than that, this is the watch lists of watch lists.

A Little Closer To Home

Ok we just gave you a list of 400 very impressive stocks to go homework yourself to death on. When you want to take a break from that kind of homework, here is a little fun exercise I do about once a quarter usually towards the end of earnings season when newsbytes are a bit slow. I got this idea from Warren Buffet. He and I were having lunch, OK not really, I read his biography Snowball last year and he described how he would tear a part the Pink Sheets (named for the color of the paper the over the counter penny stock information used to be printed on) to find small local companies that he could do more research on in his own backyard. We can do this today quite easily and let us show you how.

Let’s say you live in the pleasant state of Washington. You can read the Journal and find out about all kinds of companies from all over the word, but you want to find a home grown stock. In a regional paper you read “Cardiac Science to present at Needham Biotechnology and Medical Technology Conference”. You then go to FinViz and check out CSCX, Cardiac Science Corporation develops, manufactures, and markets diagnostic and therapeutic cardiology devices and systems in North America, Europe, and Asia. Its cardiac monitoring products primarily include resting ECG systems that allow physicians to record and analyze patient ECG waveforms; cardiac stress testing systems to monitor and analyze the performance of the heart under stress; Holter monitoring systems to record and assess the performance of a patient's heart; cardiac rehabilitation telemetry systems to monitor the patient's heart rate, heart rhythm, and ECG waveform data during rehabilitation exercises; vital signs monitors to monitor noninvasive blood pressure, pulse rate, temperature, and oxygen saturation; and cardiology data management systems that automate the processing, storage, retrieval, and editing of electrocardiograms and other patient data. The company also offers cardiac monitoring related products and supplies comprising lead wires and electrodes, and thermal chart paper, as well as an array of complementary products, such as temperature and blood pressure monitors, spirometers, and pulse oximeters. In addition, it provides defibrillation products consisting of public access automated external defibrillators (AEDs) that are deployed in various settings; professional AEDs for use by hospital personnel, medical professionals, and emergency medical technicians; traditional defibrillators that are positioned in hospitals at various locations; and defibrillation supplies and accessories, including replacement electrodes and batteries, training devices, wall cabinets, and carrying cases. Further, the company offers training, maintenance, and support services. Cardiac Science Corporation sells its products through its sales force, independent distributors, direct sales representatives, and third party distributors under the Burdick, Quinton, and Powerheart brand names. The company was founded in 1953 and is headquartered in Bothell, Washington.

In doing the initial homework, you find out the stock is selling for $1.75 and has no debt. However they got stung on late 08 and 09 for some responsibility in faulty AED designs and the stock has been in the toilette ever since. In reading all the press release it looks as though the past is the past and it could be time for the stock to return to its days of ol’ around $6.00 a share. There is still a lot of reading to do, but you get the point.

Try this as an example. Go back to your hometown, mine would be Albany New York and look at the on line edition of the local news paper. In my case it would be The Times Union. Right there on the home page is a link to the business section and they lay out all the companies that are publicly trade that do business in Albany and the tri county area. Not all newspapers will be that user friendly, but you get the idea. From there using the tools we have discussed here, you can do the necessary homework to find small regional companies to invest in. Imagine in 1976 if you have been reading the San Jose Mercury News and picked up on a little company called Apple Computers. Food for thought.

Ooops got that one wrong.

I guessed that Paychex would miss their expected 34 cents a share and come in at 32 cents. Well they missed by two cents, but they went the other way to 36 cents. The stock closed down as the CEO dropped guidance number into the next quarter.

From the Happy Presidents Photo Gallery


Eisenhower and Nixon consider the concept of recording visitors in the Oval Office.
 
Salve Lucrum



Sunday, September 26, 2010

26 September 2010 Will You Still Love Me This week

BAGAKOAA;

26 September 2010 Will You Still Love Me This Week

Friday was great. Between e-mails and phone calls we had about 5 people get in touch with me to tell me the market was going crazy. Crazy is a relative term. That is I have many relatives who are crazy. Well that is not exactly what I meant, but I could not resist. The market (S & P 500) was up over 500% on Friday. Well that is if you annualize the rate by taking the 2.12% and figuring out there are 253 working days this year. But I digress. (I was informed that my significant other does not really dislike that reference she just thinks it would make a bad title of a book I am writing.)

Saturday saw the arrival of yet another great edition of Barron’s. I can not encourage you enough to pick up one of these if you are serious about your portfolios. This publication really helps with the “Linkage” we often talk about here. Besides the usual great banter about what it means if the republicans take the house and or the senate, and the questionable sustainable growth that China has to offer, and how we might interpret the Feds fuzzy logic put forth last week, they bring some practical analysis to Best Buy recent reporting and why can’t Adobe, Photoshop itself into a better value stock.

The overall market is up 9% over the last few weeks. That makes the portfolios we work with look pretty(`sw`25`264 sorry about that I just had an ant crawl across the top line of my keyboard) nice but it has me concerned. I spent quite a while Friday setting sell placed stops in many of our key holdings. Remember a stop is an order that gets executed as a market order when the price of the stock falls below that stop price. You can also place stop limit order which is basically the same but you can set a minimum price at which the stock would sell at. This is the preferential way to set a stock whose volume is a bit goosey. (A financial term for sporadic). If you are setting a stop on a well traded stock like IBM, XOM, CVX, a stop will usually get executed in a couple of cents of your stop price.

Setting these stop will protect our gains. If you are wondering if I am concerned about the market, I am concerned that we have come so far so fast, that there should be an adjustment. I am excited that despite our little pull back on Thursday we finished the week above the special level of 1130 on the S & P 500. (Actually closing at 1148) As you read Barron’s this week, you will see a relatively positive tone, tempered with some of the factual data points that suggest we have run up quite fast. For example a few weeks ago less than 50% of the S & P 500 we at or near their 52 week high. Now more than 75% are. The fact that housing starts still suck, (My words not theirs) while this none voluminous rally continues is a concern. (Abelson calls it a BLT sandwich without the bacon.) Wall Street analysts have adjusted downwards the earnings expectations for more than 1/3 of the S & P 500. In the second quarter the S & P components bought back almost 80 Billion in shares helping (admittedly only a little) to edge prices up.

Anyway I do not know who has the time to gather every piece of information out there and build a blog with it, but I may have found him. His name is Barry Ritholtz. I got his name and blog address http://www.ritholtz.com/blog/2010/09/page/7/ Fusion IQ from an article in Barron’s. They had an interesting post from Barry entitled "10 things that make me nervous" and they appear to be a good guideline for things that go bump in the market. In summary, lack of volume (We have talked about that a lot here), consensus about the up and coming grid lock as a result of republican victories (he is suggesting it has already been priced into the market), VIX the volatility index keep slipping which could imply apathy or complacency, the headwind of a pukey (my word not his) real estate market, if you are a contrarian as most good trader investors have to be, might see recent investor sentiment surveys (he sites AAII) as really scary because they are all shifting bullish, the constant gut reaction to every single negative data point, from a technical stand point he points out some strong market resistance points (I have to quote here there is no other way to do it-1152 for the S & P 500 and 10,800 for the DOW), job creation or lack there of (we have spoke about that here a lot as well), no clear sector leadership in the market, and the assumption that all of the market pin action has come from moves by the FED (not sure I understand or agree with his point ten). Anyhow, you might want to check out his blog if your eyes are not bloody from reading mine.

But before you all sue me for asthenopia irritans (severe eyestrain). (One reader just called her husband to say Brian is taunting his reader to sue him. He is a good friend and an attorney we employ. She is a good friend as well but I just wish she would quit tattling on me everytime I say something about my wife.) Let’s take a look at the week ahead. (Only 10 more days till Alcoa AA kicks off the earnings season. Here is a challenge to all readers. Give me your guess as to AA earnings per share as reporting on September 7th. The first person with the closet answer can have a copy of either Mad Money or Getting Back to Even by Jim Cramer.)

This should be a lackluster week for economic news out of the US because won’t be held in suspense by employment figures. There is a lot of economic and central bank issues out of Asia and Europe coming out this week so be very flexible in your ability to react to international news.

Monday only has some treasure notes going up for sale as they do every week.

Tuesday we have 3 retail reports, the usual culprist and I am thinking we should see some small movements upwards. Only drastic moves up or down should move the market. Tuesday will also see consumer confidence. The consensus indicates a slight drop from 53.5 to 52. I am saying flat at 53.5. We will also see the State Street Investor Confidence report which should move to the upside as investors are slowly coming out of bonds and cash and getting into equities.

Wednesday is zzzzzzzzzz.

Thursday is the Gross Domestic Product report. The brain trust is expecting a flat line of Real GDP and the Quarter to Quarter GDP Price Index. Personally after looking back a durable goods and the last Beige Book published by the Fed, look for a little bump in Real GDP to 1.7 and I agree with the Price Index staying at 1.9. Neither number will do much for the market. It is a true double edge sword. If GDP goes up too much, then the market will retrench because that would give the Fed motivation to tap the breaks. If GDP goes down, then everyone will be talking about the double dip, which has somehow purged its self from our vernacular over the last couple of weeks. This number is a loose loose. Let’s hope it stays flat, but I see a slight bump.

Friday will tell us what consumers are doing with their cash. Personal outlays and incomes report. The people in the know are expecting personal income to go up one bps (basis point or in this case .1%) to .3%. They expect consumer spending and the core price index to remained unchanged. I am thinking spending will go up .1% to .5% and the price index to remain the same. And on Friday we get this months Industrial Supply Manufacturing (ISM) index. We had a good durable goods order number last week so at first I was thinking that this should go up from last months number of 56.3 which was a nice jump from the month before. However the new order section of the durable goods report was weak once you took out aircraft. The consensus is down to 54.5, but I see a little more hope there. Let’s look for 55.

As far as earning next week it is fairly quiet as we get to the end of the season.

Paychex report on Monday and it is a smaller version of ADP, the giant payroll company. Its key metric is hired people. We all know how that has been going. After reading some of the data, I think they will be challenged to hit the 34 cent a share estimate. Look for a slight miss at 32 cents.

Walgreens will have a good report on Tuesday. I am guessing the WAG took some market share from Rite Aid which had an icky (Financial term for disappointing) report last week. Look for a beat of the 44 cent a share to 46. I am putting this on my watch closely list as this 30 dollar stock has the makings of a 36 dollar stock. Its debt is manageable but the ROE looks a little weak at 14%.

Wednesday will see Family Dollars reporting and with people still holding on to their purse strings, look for a beat of the 51 cents a share estimate.

BBQ and French Wine

My wife did something Saturday morning that was a bit unusual. She made a dinner meal request at 9:30 am. Now usually that is my line, but Saturday she asked for BBQ Chicken. When dinner did approach and I realized she would not be joining me in a glass of wine due to her Vicodin Cocktails throught out the day, so I chose a 2005 Vieux Clos St. Émilion Bordeaux Blend. If you know anything about Bordeaux and the Graves district, it is hard to find a bad wine especially from the 05 picking. I was surprised to find out this was 60% Merlot, but it has a nice nose and taste. Very spicy and dark. It matched the chicken well enough for me to have 3 glasses. If you shop around, you can still find this for about 20-24 a bottle. It is a nice pour.


From the White House First Gallery

President Truman about to let the First Turkey into the White House
The Electoral College will do it for many years after.

Salve Lucrum

Friday, September 24, 2010

23 September 2010 Dr. VIC meets Martha

BAGAKOAA;

23 September 2010 Dr. VIC meets Martha

Thank all of you who sent in good wishes for Devin’s speedy recovery. We may want to slow down that recovery just a bit as I have found an interesting benefit to the situation. She was extremely uncomfortable early this morning and got some help from Dr. Vic (Vicodin). As we were driving on an errand on which she insisted in joining me, she apparently did not like a comment I made and used the word “Snotily”. Somewhat along the lines of, “You don’t have to say it so “snotily”. When your spouse starts inventing words it is a good time to become an opportunist. Realizing she was not thinking clearly, I quickly convinced her that they had closed the local Target store and that she was much better at landscaping, cleaning the pool, housekeeping, pet grooming and a few other activities that we occasion hire out, and that it was OK if I watch each episode of Jeaopardy before we play against each other. I call that making the best of a bad situation. Seriously, thank you all for the kind thoughts.

(I did some homework on calculating the G Force of a 30 mph crash. According to the Volvo website and my guess at the weight of the vehicles and Devin’s body weight, and assuming some of the roll of the vehicles, she took about a 5-9 G jerk. Which means she had the moving weight of between 665 pounds and 1170 pounds. Ouch!)

In the market today

As you know we closed below the mystical magical 1130 mark in the S & P. Most of that downward momentum was driven by the surprisingly negative initial jobless claims. I know I got that wrong too! The S & P closed at 1124. This is not good and we would suggest that you all keep a close eye on your stock stops. We have some nice gains so far this month and we want to keep them. AAPL has been up 17 of the last 19 sessions, GLD is tracking gold that is going to touch 1300 as soon as tomorrow. Our bonds holdings are still looking strong. (more on that later tonight If I have the time.) KO, currently our largest non bond holding came down just a hair but up 11.45% since we got in. We have a 20% upside to AAPL, 16% upside on Amazon, 18% up on McDermitt, 12% up on Knightsbridge, even several of my wayward calls are starting to get hot. Let’s be sure we keep these profits or at lease a part of them.

Questions from the readers.

Someone sent me a note today asking if it is time to sell their hot bonds that have been doing so well.

First off I am no expert in bonds and would highly recommend the best place to get relevant accurate info would be with a financial advisor with fixed income experience. There are dozens of bond strategies and terminology that would make some of our readers go looking for the next funny photo and caption. One great book that I have read and highly recommend and look forward to utilizing even more as my situation provokes me into being more conservative with my investments, is a book called "Bonds: The Unbeaten Path to Secure Investment Growth" by Bloomberg press. (Hildy Richelson and Stan Richelson, are the authors.)

They actually lay out some interesting pragmatic strategies for moving to an all bond portfolio with impressive returns. For a true nuts and bolts read about this class of investments, buy a copy of this book.

Now to the question, is it time to sell, sell, sell? (Someone is watching way too much Cramer. Love Love Love it.) Yes and no. Answering this question about bonds is difficult as each bond is different and each person’s situation is different. Now I will give my fluffy monkey in the casino answer for two categories of people. First, let’s look at a younger single person with gobs (a financial term for more than 20), of earning years ahead of them. Then let’s look at a couple at or near their retirement and for all intense purpose ending their earning years.


Let’s make some assumptions about the younger person. They are employed well vested in their 401 K, they have a solid medical/disability insurance program and are not overly encumbered by debt. Let’s assume they have 50,000 in their 401 K and earn 20% in matching funds from their employer and they are doing their best to max out their 401 K every year. As of march 31st 2010, they have had 75% of their 401 K money in bond focused mutual funds. The other 25 % is split in equity mutual funds and cash funds. In their non 401 K investments totaling 30,000, let’s say they are 50% bonds or bonds funds and 50 % stocks. And let’s assume they have enough interest and skill to do the necessary homework to select value based equities with attributes towards accretive shareholders equity. (Good free cash flow used to pay down or eliminate long term debt, issue dividends in line with or exceeding the 10 year treasury yield, and executing stock buy backs.)


Should they sell sell sell their bond and bond funds? Yes I would suggest shifting more away from Bonds until about 20% is based in bonds. Bonds have performed exceedingly well over the last 2 years. There are many tells there is shift from bonds and cash onto equities. It is a low volume subtle shift, but a shift none the less. So evaluate taking some profits and start looking for quality value or solid growth stocks. Consider bumping up the equity holdings to 40% of the portfolio and 401 K. The other 20% might be in Gold/Silver and cash leaning more heavy towards the metals. Assuming the equities are balanced in a diversified portfolio with no more than 20% in any one of the 5 following sectors Energy, Finance, Industrial-Aerospace, Tech-Tel, and Speculative (yes if you are paying attention that is Cramer BOATS acronym for a balanced portfolio) it should keep you happy and making money for the next 1-2 years.


Here are the assumptions for the retired couple. Net worth is about 500,000 with 50% in real estate and 50 % in a selection of IRAs containing mutual funds broken out like this 30% Bonds, 30% cash funds, and 40% equity funds. They have adequate medical coverage either through cobra arrangements, carry over medical programs from former employers or Medicare with a decent secondary. They are for all intent purposes debt free.


My suggestion would be to get about 60-70% into bond based mutual funds or actual bonds shooting for a yield of at least two times the 10 year treasury. Under this scenario, unless they are willing to invest a lot of time and attention to managing an equity heavy portfolio they would be better off seeking a good yield on a blend of corporate or tax exempt bonds. So in this scenario we would buy buy buy. One bond fund I was recently asked to kick the tires on was Vanguard Long-Term Investment-Grade ticker VWESX. This is a long term high quality corporate Bond MF. March to March ending 2010 showed almost a 20% gain. As we all know billions pour out of equities and into bonds. VWESX was a primary beneficiary. It could loose a lot of this steam over the next 12 months if the shift being recognized is real. Its expenses are in tact, and some its prime holdings are Goldman Sachs, GE, JPMorgan, Astrozeneca, all long term and having yields of 5.5 to 7%. It is managed well. We would not look for another 20% this year but 10 is very doable with a little regression next year. Remember we are expecting mass exodus out of bonds and back into blue chip equities 4th quarter 2010 and Q 1 2011.


This is only my humble opinion on the subject of market timing for bond investing. I hope it helps. PLEASE pick up a copy of the Richeleson Book if you are serious about bonds. It is a good primer and more.


Martha and the chain gang.


Someone today, who is long in MSO, Martha Stewart Living Omnimedia is wondering why this stock never took off especially after she was released from prison. OK the person asking this question is someone I respect and admire and if I didn’t I might say, “Listen to the question as it is read a loud to you. “Why didn’t the stock take off after the former CEO was released from Prison?” Ok, let's look beyond the fact the former CEO is a felon and is prohibited from ever serving on any publically held BOD. Mr. Koppleman Chairman has burned through a couple of CEOs since Martha’s Sabbatical and during that time they lost the K Mart business which was significant income for the company.

Rule Number One only buy what you know. Here is what MSO is. (SEE MY COMMENTS IN CAPS) Martha Stewart Living Omnimedia, Inc. operates as an integrated media and merchandise company. It creates media and merchandise in the areas of cooking THIS SEGMENT HAS EXPLODED AND GOT VERY CROWDED OVER THE LAST 5 YEARS and entertaining, holidays, crafts, home, whole living, weddings THIS SEGMET HAS TAKEN A HUGE HIT DURING THE RECESSION, organizing, and gardening. The company operates through four segments: Publishing OUCH OUCH OUCH, Broadcasting I’LL GIVE THAT TWO OUCHS, Internet, and Merchandising. The Publishing segment publishes magazines, primarily including Martha Stewart Living for college-educated women, who own principal residences; Martha Stewart Weddings for brides; Everyday Food for the supermarket shopper and the everyday cook; and Body+Soul magazine and Dr. Andrew Weil's Self Healing newsletter featuring natural living content. This segment also publishes Martha Stewart and Emeril Lagasse THE KING OF BAM, BUT TERRIBLY OVER EXPOSED branded books. The Broadcasting segment engages in the production of television programming; and distribution of its library of programming in existing and repurposed formats. This segment also involves in the provision of talent services; and satellite radio channel operations. The Internet segment engages in online advertising sales business primarily through its Web site, marthastewart.com, which offers recipes, articles and video, integrated across the Martha Stewart brands in food, entertaining, holidays, home and garden, crafts, weddings, pets, and whole living categories. It also operates wholeliving.com, a Web site designed to help women achieve their goals for living better lives; and marthastewartweddings.com to guide brides for their weddings. The Merchandising segment designs merchandise and related packaging, and promotional and advertising materials, as well as licenses various proprietary trademarks, in connection with retail programs conducted through retailers and manufacturers. Martha Stewart Living Omnimedia was founded in 1996 and is based in New York, New York.


Ok let's look at Ms. Stewart Fundies. I was surprised to see how small a cap this company is with only about 250 million dollars in capitalization. Its forward looking p/e ratio is a whopping 60+. OUCH that is truly expensive. There is little or no free cash flow but also little long term debt. I just read the Q 2 earnings transcript and can understand why they are struggling. It seems like they are trying to be all things to all media but not doing any very well. I encourage you to read the transcript at Seeking Alpha. This is a 4.75 cent stock with all the makings of a 6.00 stock if they do many things right. If they don’t, with a little work and some luck they might remain a 4.00 stock. This is a fad stock. So much depends on Martha Herself and that commodity does not seem to be drawing like it used to.


We do not and would not own it. It does not get a good rating anywhere we looked, Schwab, IBD, Morningstar, etc all love to hate Martha.

From the "Special Moments in the Oval Office" Gallery 
On this day POTUS had to break up a fight between Lawrence Summers on the Left and Rahm Emanuel on the Right because Rahm had stolen Larry's Apple (In Rahm's hand).  The result, they are both leaving the White House by November.

Salve Lucrum

Wednesday, September 22, 2010

21 September 2010 I was driving down the street . . .

BAGAKOAA;

21 September 2010 I was driving down the street . . .

Well I wasn’t, but my wife Devin was and at 8:30 am she had someone run into the back of her Escolade at 30 mph while she was almost at a complete stop. The front end of the big pick up truck that hit her was toast. The back door on the Escolade will never open again, but absorbed so much of the crash, we are all thankful. After an eTicket ride in an ambulance to the great people at Mission Hospital, Devin is resting almost comfortable with a concussion.

As such, I did not have much watch on the market today, but it does not look like I missed much. Volume stayed very light. From the little reading I did, there is still too much uncertainty and no one is making bold moves.

Last night I put a limit sale on a Janus Bond Fund and took a whopping 1.2% gain after 40 days. I did that to free up some cash as a result of our Illinois Tool Work call option execution.

We had suggested (One of our readers asked if I had a helper? Actually I have hundreds as I only regurgitate what I have read heard or researched over the course of a day. That coupled with all the voices in my head allow me the use of the Royal We as our reader surmised) that Adobe would beat, saying they would beat the .49 cent estimate by a Penney. They beat by a nickel, but got bitch slapped by the market for lowering their next quarter expectations. This, boys and girls, is evidence that the market rewards future growth and not performance.

With all of the personal excitement today, I am sending an abbreviated post tonight. Thanks you to a couple of my readers who have sent Devin and us kind thoughts for a quick heal to all the soft tissue that got ripped apart today. She will be sore in the morning.

Let me leave you with this. We are going to be kicking the tires on some of the growth and value stock in the Barron’s 400. We are headed into the next earnings season as Alcoa reports on October 7th. Help me out with the blog by sending me stocks you have or are looking at but need to have the tires kicked. Just send them to me at brian.cronin@padi.com or use the comment button on the end of each post.


A couple of weeks ago we had a photo of President Obama talking to one of his advisors.  Does the guy on the right look familiar?
Salve Lucrum

Tuesday, September 21, 2010

21 September 2010 A Kinder And Gentler Obama

BAGAKOAA;

21 September 2010 A Kinder And Gentler Obama


We had a busy day today with our real job as most of you do. We had Bloomberg on in the AM while prepping for meetings and fending of requests to support a plethora of political pundits need for funds. I honestly think we could go to a cocktail party and or dinner every weeknight for the next two months if I wanted to.


The market was looking for a reason to do something today. We suggested housing starts would be stronger than expected and they were. The .598 million homes starts was higher than the .550 expectation and our guess of .560. That should have sparked the market upwards, but didn’t. Like a giant grizzly bear getting ready for its long winter nap, the lethargy of this market is amazing.


Perhaps the gains from yesterday are being taken at the same time as the good news about housing. We’ll have to wait and see. The good news is the S & P remained above the 1130 mark, which should mean the big money boys aka the pit bosses of the Wall Street Casino and Spa, should be starting to put some money on the pass line. (Can you tell I spent 13 years in Las Vegas one night.)

So on a day like today with the little time we have tonight we could share a little wisdom (very little) or talk about wine. Yes its late and we had a couple of long meetings today and fund raiser so it a short post tonight. (Applause 2 3 4)


A grape by any other name


About a week ago I had the pleasure to try a great bottle of Brunello di Montalcino by Vitanza at, you guessed it, Hanna’s. This of course is a sangiovese grape and the vintage was a 2001. Hanna’s is a bit dark, but we could get the garnet to inky dark purple color. It clung to the glass just fabulously and was pleasantly chewy in the glass. I got some woody raspberry tastes, but not much of a nose. Someone mentioned raisin, but I did not get it. These are hard to find, but if you are serious about your Brunello’s this was a great example. Give it a try.
 
From the Pets at The White House Photo Gallery:


"First it was Rahm Emanuel, then it was Lawrence Summers, and today even Bo the President's Portuguese Water Dog is trying to flee the White House in a stolen Capitol Police vehicle."
 
Salve Lucrum

Monday, September 20, 2010

20 September 2010 Stress what Stress

BAGAKOAA;

20 September 2010 Stress what Stress

Well it was that time of year again when I got to pretend I could maintain a conversation with my cardiologist while running on a treadmill for my stress echo cardio. I was explaining to him about the great weekend we had fishing and the sentences kept getting shorter and shorter until the very last minute when my side of the conversation sounded a lot like. . yah . . trout. . . . catch. . . .and re. . . .lease. . . Pro . . . vo . . . river. . .

But alas I survived and was told I’ll pay taxes for many more years to come.

We are getting questions from readers and we really like that as it allows us to focus on what you are thinking about. We have a couple tonight to play with.

The first one is from someone who knows we are long in gold (about 6.8% of our portfolio, up 17.4% unrealized gain and 9.2% realized gain- thanks to a triggered stop because of the adjustment to the run up after the May flash crash.) and was asking about a strategy to short gold. They were directed to DZZ. Their thinking was that when gold adjusts it will be big and fast.

Here was our response to the reader:

"Interesting thought. There is a lot of fundamental support to at least $1,300. Not sure what you mean by “goes down fast”. Since 1986 there were two huge drops 05-06 and 07-08, but if you look at the month to month chart provided in the first link, the months with the worst drops only average a 3.2% drop. The annual 07-08 drop was about 22%. Your pick DZZ as you probably know, tries to get twice the inverse of the Deutsche Bank Liquid Commodity Index - Optimum Yield Diversified Excess ReturnTM (DBLCIX) is composed of futures contracts on fourteen of the most heavily traded and important physical commodities in the world. The Index commodity components were chosen based on the depth and liquidity of their markets and to provide diversified commodity performance.  The base fund dblcix is only vested 8% in gold.

 
If you want a short play in gold, AND I DO NOT RECOMMEND IT UNTIL WE SEE WHAT KIND OF RESISTANCE THERE IS AT $1,300 AND WE KNOW DEFLATION AND INFLATION ARE NOT MARKET CONCERNS. Take a look at GLL. The investment will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective."



To Open The Floodgates or Not Open The Floodgates


We had a reader ask a great question today as to why these banks that have all of this inventory of delinquent real estate loans just don’t not unload them and to quote the reader “Open The Flood Gates”. I know we have at least two bank associated readers and one for sure ultra full time realtor type person. He was my response and I welcome any additional points of view.


“Great question. There are several reasons. First off, until recently, the banks have to keep solvent or the FDIC can come in and close them down. In order to remain solvent, they must have more assets than debts. When the banks started to fail circa 2008, the Federal Government alah, Bush, Obama, Guitner, Greenspan and Bernanke all agreed we have to bail out the banks to the tune of 800 billion dollars. Banks received the money with the assumption they would start to shore up their balance sheets by determining their good loan to bad loan balances, refinance or selling the bad notes (Those would be the homes you –the reader- are referring to). At the same time in their infinite wisdom said to the banks you must pass a stress test in order to quality for future stimulus money and to stay in business. (So far since 2008 more than 300 banks have been closed because they could not meet the stress tests) Then they spent 15 months trying to get new banking regulations passed and they did in August, but no one in the banking industry knows how that legislation is going to look like as banking regulation.


So pretend you are the CEO of RBC, Reader Banking Corporation. You have 1 billion worth of home loans due to you on your books. You would estimate the true value of those homes is 750 million dollars. You had your hand out during the crisis and you qualified for 500 million in funding from the TARP programme. Your delinquency rate is about 20% (The national average). Your interest income on the 1 billion was about 5 million a month, but it is now 4 million because of non payment to you. You know you can pass the stress tests because you have NOT devalued your assets by the 250 million in market devaluation, you do not know if the government is going to stop giving money to your bank, you do not know if the government is going to stop helping people who are behind in their payments and you do not know what the new banking legislation is going to translate into rules and regulations for running your business.


Why would you start foreclosing and selling these homes at a loss? It would be poor management. There is no upside at this moment in time to “open the flood gates”. What you will see in the next few months will be a turn of the spigot. We are seeing it in Coto. The under 3 million homes are stabilizing in price and the banks are being a bit more flexible in cash deals. It will be a while before that confidence trickles down to the under 750,000 price mark."

OK I told you I would make up for no clever captioned pictures.  Tonight we have two.  One here and one towards the end.

From the "Ways To Lower the Deficit" White House Photo Gallery:
At a Home Depot Near You

"Attention Home Depot shoppers, in the lumber department today we have one slightly used Presidential Limousine."

 

I got my first subscription to Kiplinger newsletter in 1986 when I became a branch manager of the company for which I worked. I asked my old man where I could find meaningful information for what was going on in the economy of the world and US. He gave me a gift subscription to the main Kiplinger Letter of which I have been a subscriber on and off since then. They manage to cram an incredible amount of timely important information into four pages every week.

This weeks news letter has some info that might be of interest to you. It is regarding Venture Capitalists and apparent trends as to where they are putting their money. We have to be a bit careful as to not plagiarize for two good reasons. Number one, I totally respect the publication and the team of professional who put together this document and number two they defend their content like a pit bull. That said, I highly recommend you consider a subscription to the newsletter. It is now published on line as well as print.

The article describes the fact that we are seeing VC monies back in play again. The information in the article and confirmed at the street.com indicates that more than 60 companies have gone public raising more than 12 billion so far this year. This is a huge jump (500%) over 2009. this may not be big news to you if you sit all day long and have Bloomberg on your TV, but for the average Joe or Jane that might be impressive. What might be more impressive and helpful is know where the monies might be played. This surprised me and I do have Bloomberg on all day long.

Retail was a sector I had not thought about even though we have been pontificating about a slight improvement in the sector. The disemployment of many people have put some mom and pop retailers out on the street with new ideas and new ways of getting business. These small regional chains that have survived are likely candidates for IPOs.

Another strong probable area is the medical device sector that alo includes biotech. Green engineering and pollution management is looking to be very hot and has the attention of VC dollars. Of course there is always VC interest in the Internet Wireless Tsunami sector.

Now if you have a huge portfolio and are in tight with your broker, you can get in on deals before they happen, that is the best way to make things happen. Another way is to keep your eyes open for small cap regional companies that fit the bill in these categories. For almost any state or large city you can Google search for publically traded companies in “Fill in the blank” Look at the lists and the sectors described above. Then do your homework like you would for any other stock. There are some golden little nuggets out there I assure you. If you find any and want us to kick the tires on them let us know.

A little too Optimistic

Last night we suggested the Housing Market Index report would beat the consensus of 13 and hit a whopping 15. Well I apparently did not have enough to drink last night with the morning echo cardio on the horizon and I get that call wrong. It stayed flat at 13 just like the smarter people had thought. Have you noticed how the more I get these guesses wrong, the better the market does.

We were surprised the market kinda ignored the debt issues in the news over in Europe. Financials and staples we up strongly today. And of course it was made official today, The National Bureau of Economic Research announced that recession is over! They said it ended in June 2009. Now I was watching Mad Money on or about the 18th or 19th of June 2009 when Cramer told us the recession was over. I have not looked at today’s DVR’d Mad Money, but I am sure Jim will have something to say about this amazing announcement.

Oh yeah I was wrong on the DFS Discover Financial call suggesting a 2 cent miss. They had huge beat today which is what drove the financials up. Some good news from their report is credit card usage was up 5%. Could it be the consumer is entering the market place once again.

In the portfolio today.

What was that loud sucking noise coming out of our main Schwab account today? We exercised some option calls on Illinois tool work as we had gotten in at the right price. It was a 45.00 option call and we got in about 2.00 a contract so we are just barely in the money and well take it as ITW Illinois Tool Works Inc. manufactures a range of industrial products and equipment worldwide. The company's Transportation segment offers metal and plastic components, fasteners, and assemblies; fluids and polymers; fillers and putties; polyester coatings, and patch and repair products; and truck remanufacturing and related parts and service. Its Industrial Packaging segment offers steel and plastic strapping and related tools and equipment; plastic stretch film and related equipment; paper and plastic products that protect goods in transit; and metal jacketing products. The company's Food Equipment segment provides warewashing, cooking, refrigeration, and food processing equipment; and kitchen exhaust, ventilation, and pollution control systems. Its Power Systems & Electronics segment provides arc welding equipment; metal arc welding consumables; metal solder materials for PC board fabrication; equipment and services for microelectronics assembly; electronic components and component packaging; and airport ground support equipment. The company's Construction Products segment offers anchors, fasteners, and related fastening tools for wood, metal, and concrete applications; metal plate truss components, and related equipment and software; and packaged hardware and other products for retail. Its Polymers & Fluids segment provides adhesives, chemical fluids, epoxy and resin-based coating products, hand wipes and cleaners, and pressure-sensitive adhesives and components. The company's Decorative Surfaces segment offers laminate for furniture, office and retail space, and countertops; and laminate flooring and worktops. In addition, the company offers plastic reclosable packages and bags, and consumables; plastic and metal fasteners, and components; foil and film products; product coding and marking, paint spray, and static and contamination control equipment; and swabs and mats. The company was founded in 1912 and is based in Glenview, Illinois throws a nice dividend, has a reasonable payout ratio at 45% and an average target price of 57 dollars. This will be a 12-24 month investment from us as any infrastructure money will bode well for the company and they are well positioned in China, India and Brazil.

We also got some checks in the mail from Ronald McDonald, Zion Banks, and Badger Meter. We love dividends.

From the Leaving the "White House Soon" Gallery

I Beg Your Pardon . . . . . .


"I know, I really like this part of the pardon where I get off Scott free.  I came up with that all by myself."

Salve Lucrum




VC is back in Vogue