Sunday, January 16, 2011

15 January 2011 The Reverse Lotto


15 January 2011 The Reverse Lotto

We were giving one of our readers an update of the situation here at reconstruction central and I explained it was kind of like the reverse lottery. The odds were about 18 million to one that this would ever happen and we do not even get the choice of paying the moneys in a lump sum or over twenty years. You will probably be reading about us taking some profits in the weeks to come. Some of this will be market timing brilliance and some will be in reaction to in ability of our contractors to work for free.

Now we share this with you because we want you to feel sorry for us and start insisting we go to a subscription based readership. Not really, but we wanted to let you know because of the historical significance of us liquidating portions of our portfolio.

I noticed in today’s Barron’s, that they really go out of their way to look for historical references to explain what might be happening in the near term.
One example though there were many was Kopi Tan’s article “Listening to the Hallelujah Chorus”, and I quote “The last time the Dow went this long without a 0.32% loss, Omar Shariff was nuzzling Julie Christie in Doctor Zhivago, and the hills were alive with the sound of music.” That implies we have a correction coming.

OK my turn, in early1986, we first got in “the game”. The Dow was in the high 1700s and we got in the market and in some gold investments. We did very well and we were loving it until we needed some cash for down payment on a home. We cashed out on Thursday October 15, 1987.
While very depressed that I was leaving the game, we looked brilliant come Monday Night and it had nothing to do with football. Monday was Black Monday when the market collapsed around the world.

We were in and out of the market several times in the 1990s, but it was not until we were established in Southern California that we had the resources to invest with any real money. Circa 1995-1996. The market was at 6,500ish. We got in then and rode the wave till a college tuition made it a little tight and we took some money off the table in 1999 and 2000 with the DOW in the 10,500 range. We were relative cash poor for the period between 2000-2003 and then we were able to get back in the game. Due to the crash of 01-02, we got back in the market in the 9000 range. And had a great run until we decided to spruce up the house which got a little out of hand and we needed to sell off some equities. That was not a necessity, but mostly because we chose not to borrow more money and felt the market was running rich at the 11,000 + mark. We took a lot off the table. We did miss the peak at 14,200 but were quickly rewarded when everything went to hell in a hand basket.

Now if that is any indication of what will be happening, if we choose to take some profits and sell some equities like I think we will, at least this one is on the record, before any crisis.

This could be right on the Target

If you have followed this blog, we have been in and out of TGT Target for several years. This week, there were a couple of announcements that are making the retailer look attractive again. They have entered into an agreement to buy 220 Leases of Zeller Stores in Canada from Hudson Bay Company. This is Targets first serious attempt at expanding outside the US. While we are not able to tell if the price is right (we’ll leave that to the experts and see what they say), we do know that Canada has one of the hottest economies around. They relationship with Asian exporters, their abundant natural resources and charming personalities (sorry I needed a triplet and that was the best I could come up with) bodes well for future economic expansion. They have also committed to opening 150-200 more locations between now and 2014.

In a separate announcement they have decided to once again try and sell their credit card division, whose value is estimated to be near 7 Billion. If you remember, there were headed that way when the credit crisis hit the fan. They are having a great success with their REDcard program which allows for educational contribution to schools you choose, pharmaceutical rebates, and 5% back on all purchase. (I think we could fund a significant portion of our rebuild on that one.)

And if you do the homework and read the SEC filings, they are investing in same store sales efficiencies. The only thing they seem to be ignoring, which is a concern is their on-line sales presence. They face strong competition in the brick and mortar arena from Costco and WalMart. On line they have a way to go to worry Amazon.

Fundamentally, since the first of the year, they have dropped about 10% in price. The forward looking P/E ration is 12.49 which puts them equally valued with Walmart and cheaper than Costco. Their margins are comparable to WMT and COST. They all suffer from debt load, but that has more to do with real estate options than operations.

The fairly value of the stock $58.00 gives you only a little margin of safety as the stock is trading at $55 and change. There are some target (no pun intended) prices of $68-70). We don’t see that value especially with commodity prices escalating up.

Do your homework on this but it could be an interesting time to aim at the target. If cash were not an issue, I would look at the recent price dip as a chance to establish a nice entry point. We do not want to tie up that capital at this moment in time, but would like the right to buy in below 60 a share. Are you thinking what I am thinking? Yeah, there are some cheap 60 dollar April calls. If we can pick these up at 66 cents or less, it might provide that interesting entry point and by April we might be in a better cash position to make a longer term commitment. (once the IRS has had its way with us.) The Delta (Fancy Greek term meaning volatility) shows a volatility measure of between 18-20 to one, making this very volatile. That means if the stock returns to its 60 dollar range, this could be a lucrative call option. It also mean if the stock corrects down even a dollar we may never see break even. But for every 66 cent call contract (100X.66=66.00) we are controlling $5,500 (100X$55.00) of TGT stock.

A break in that action.

I am currently enjoying a few minutes of football and realized we have a break in the action tomorrow as it is a trading Holiday. We will be sending you the week ahead and the Barron’s recap later tonight or tomorrow night. Go Chicago.

Salve Lucrum


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