28 October 2010 Everyday It’s a Getting Faster
We are going to start out with some linkage today. If you agree with the idea that investors are getting more intelligent and are coming back to the idea (maybe not the execution, but the idea) of taking a bit more risk and that technology is playing a bigger role in the execution of trades in various baskets of assets classes, then a company best postioned for that occurrence might do well. Couple that with the volume increases in future options in everything from hog bellies to corn of the cob trading firms are going to be looking to exploit milliseconds in trade execution to make sure they have the best price or spread between their cost and their sale. That idea lead me to CME Group Inc. which operates the CME, CBOT, NYMEX, and COMEX self-regulatory exchanges. It provides a range of products available across various asset classes, including futures and options on futures based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metal, and alternative investment products, such as weather and real estate. The company offers various products that provide a means for hedging, speculation, and asset allocation relating to the risks associated with interest rate sensitive instruments, equity ownership, changes in the value of foreign currency, and changes in the prices of commodities. The company also owns a clearing house, CME Clearing. In addition, CME Group offers market data and information products, as well as involves in real estate business. Its primary trade execution facilities consist of its CME Globex electronic trading platform and open outcry trading floors, as well as privately negotiated transactions that are cleared and settled through its clearing house. Its customer base includes professional traders, financial institutions, institutional and individual investors, corporations, manufacturers, producers, and governments worldwide. The company has strategic relationships with BM&FBOVESPA S.A., Bursa Malaysia Derivatives, Dubai Mercantile Exchange, Green Exchange Venture, Korea Exchange Inc., and Singapore Exchange Limited, as well as a joint venture agreement with Dow Jones & Company Inc. CME Group was founded in 1898 and is headquartered in Chicago, Illinois.
Let’s take a look at the fundamentals. In honesty, I have to say that is what first caught my attention tonight in a post market flash from Credit Suisse. Their margin of safety is a nice 27% even after the nice run up they had today. They are good size company with a 19 billion dollar market cap. They have a price to book ratio of just under one which is great. That basically means, if they did nothing and liquidated the company you would be guaranteed to get every dime of your principal back. Its forward looking P/E ratio is 16.8, which may be a teeny tiny rich compared to the over all S % P ratio. (Currently at 14.1) It hit a nice bottom in August and has come back nicely. They have debt but it is manageable. They have had 5 years of revenue growth above 20% and they just had a 17% quarter. The CEO sits on the Chicago Mercantile Exchange Board so he is in the cat bird seat. Now here is what some of you might call the bad news. The stock sells for 289 a share. Yes that is $289.00 a share. There are some of you saying wow that is really expensive. We will spare the lecture about the price of the stock has nothing to do with whether the stock is cheap or expensive. This stock is valued by many in the 312-320 range. Target prices are just north of there.
Here is my game plan. I would get in at below $290. Then I would put my stop in at $267. Look for 330ish by the end of Q1 2010. Now rather than pay up for the stock we will use a call option. We are looking at the January 21, 2010 $220 call option. We have to pay $71 a contract for it which means we would not be in the money until $291 a share. This would be one of the most expensive calls we ever bought but we like the play. DO YOUR HOMEWORK.
Mea Culpa Mea Culpa
In looking at the SL portfolio we are pretty happy and we will protect these gains as best we can. I did notice that all of our nat gas picks are doin stinky (a financial term meaning not as good as we would like). I along with others including one Mr. Cramer have been pimping natural gas and LNG for quite a while-UNTIL Tuesday night. That turn coat blinked. He is going to coal. Well we are going to suffer through this drought in nat gas. I will take a lesson from Mr. Buffet and have patience and focus. This is too logical an energy source to ignore. Prices are depressed and might be for quite a while. We have added PAA, UNG, and, WPRT (As well as an etn in the UK for another portfolio) in the drops. We are down almost 10% on most of these and as you know I like to bail at 8%. I am making a cognizant long term play on these. If you have done your homework and also took on some nat gas exposure, misery loves company.
Buffets New 40 Year Strategy
Todd Combs. Ever heard of him? You will. He is a 39 year old investment fund manager from Sarasota FL. (I think I have skin tag almost that old.) Anyway Buffet announced yesterday the Mr. Combs is the anointed one to take the helm of Berkshire Hathaways come Mr. Buffet’s demise.
All this has me thinking about the timelines I use for investing. I am 54 and most of my investment thinking is short term, 1-3 years. This 39 year old is now charged with taking the helm of a company from a guy who had no measurable time line for investments. When we were looking at the CME play tonight we were thinking longer than a year and how this is the best of breed and how they would really have to work hard at loosing their margin of safety, but even if all of that happened that company is one that will be around a long time. In 40 years it will be a heck of an investment.
Keep an eye on this Combs guy as you will be hearing a lot about him.
The Pope Had A House Warming Party
A few years ago, circa 1308, Pope Clement V must have been tired of all the pick pockets and traffic in Rome and moved the seat of the papacy to a little town called Avignon France. He did miss the wines so he started a winery in the area using many grapes but he a following Popes settled on the Grenache grape. Since the 1400s, Avignon is know for a great wine called Châteauneuf-du-Pape, loosely translated as the Pope new digs or home. Last week I opened one of my CdPs as they are known, at Hanna’s my local little piece of epicurean heaven. It was a wonderful 2003 Domaine du Pégaü Châteauneuf-du-Pape Cuvée Réservée. The color was a wonderful deep purple but not inky. On the nose, the first thing that came to mind was a trip we made a million years ago to Oregon and we jarred some blackberrys and smell of the house while we were making them was special. It was a sticky viscous pour clinging to the stemware with legs all the way up to the lip of the glass. In the mouth, we had smokey meaty peppery stuff happening. There was also some subtle mineral components goin on, but it was a lot of fun picking this beast apart. I enjoyed it with filet skewers over their incredible mushroom risotto.
Some Insight Into The Boeing Dreamliner Delays
As some of us BA shareholders know, the many delays of the new Dreamliner have us concerned. Today a picture have leaked out of Seattle that at last assures us the the plane can take flight.