Monday, September 20, 2010

20 September 2010 Stress what Stress


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 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


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