Saturday, January 08, 2011

8 January 2011 Mixed Emotions and What to Do.


8 January 2011 Mixed Emotions and What to Do.

Sanity could be found tonight at Hanna’s Restaurant. Devin and I enjoyed a great evening there before returning to the construction zone. It was nice to end the day almost as normal as it began. Having no kitchen I was headed out the door this morning to hunt up a few bagels and coffee. There at the end of my driveway, at the end of this huge rainbow (ok there was no rainbow), were three poly wrapped packages. The first was the local rag about all the exciting news worthy stuff with in a 15 mile radius of our now washed out abode (YAWN ZZZZZZ), the Weekend Edition of the WSJ, and, be still my heart, this weeks Barron’s. Yes, for the first time in two weeks, the most important document in the world, (OK I was excited) the latest edition of Barron’s.

Unfortunately I had to get the bagels and endure an hour or so of contractor speak as to why our demo was running several days behind schedule. Then when I finally had the chance to enjoy Barron’s it was time to take my son to Basket ball practice. I was the only parent there and after a few minutes, my buddy Jack came up to me and said, “Dad, what are you doing?” I said I was watching him play B Ball. He looked around the gym and I realized I was the ONLY parent there. I asked “Son, would you like me to leave?” He said Dad, yah if you don’t mind.” I said “OK”. He said, “Are you sure?” I said, “Yes Son.” I ran a couple of errands and though of my Barron’s there in the back seat of my replacement new car. I could hear it yelling “READ ME, READ ME!” (It’s the voices Doc). I got a late cup of coffee and opened the pages.

First of for those of you interested in some good info regarding emerging markets, the supplement is a great read. It is worth the cover price alone. For those of you who got the iPad from Santa, there is a great Barron’s iPad App for 2.99 a week. It is about as close to the real thing as possible.

Alan Abelson wrote a great piece about the change of power in Washington and Mr Daley taking over Emanuel’s post of Chief of Staff. ( Little more about that later.) I don’t usually quote barron’s because I respect the intellectual property way too much, but I have to give one of the best lines from the article, “Not every representative volunteered to participate in the vocal exercise (a recitation of a politically correct constitution). Many of those who opted out explained that reading made their lips grow tired, which is, as we all know, the worst thing that can happen to a politician.” Told you it was good.

Reading between the lines, Abelson and most of Wall Street find Mr. Daley a great move toward the middle for President Obama. Daley has an extensive (although slightly exaggerated) experience in meeting a budget and payroll. Has experience sitting on a panel on Bloomberg or CNBC (EVER remember Emmanuel doing that? You can’t because he did not.) With Lawrence Summers gone, Mr. Daley is now the most pro-business and non-ideological individual on the presidents staff. A huge step in the right direction. His experience on Clinton’s Commerce Committee staff and his tenure at JP Morgan is a sign that maybe President Obama is serious about undemonizing big business.

Abelson, in a disconnected kinda way explains why the disappointing employment number were disappointing. He explains why expectations were high and why the drop in unemployment from 9.8 to 9.4 was not a real drop. (Hint, 240,000 left the rolls as unemployed, but not hired.) BTW, trhe average work week remained a 34.3 hours, but production was up. Thursday’s comments by Guietner that return to normal unemployment might be 4-5 years, was the reason why the market could not take the decent employment news as good news.

Michael Santoli expressed a less than enthusiastic sentiment in has article entitled It’s No Time To Dive Into the Market. He correctly points out that the market is do for a correction. (We have been saying that for about 5 weeks now.) Despite all the Euphoria in the last several week the market is only up 1.2%. (Now personally when you annualize that, it works out to almost 14%, which is not too shabby compared to a 10 year yield of 3.3%.) This article and another confirmation of the weakness of the dollar as a world currency. (That article would be the brief side bar by Nick Lord about the recent success of Renmimbi Bond auction by the likes of Microsoft, Caterpillar, and McDonald’s, lends credence to the possible collapse of the dollar as the safe haven currency. When you meld that with recent dollar devaluation, and commodity escalations, we have to start thinking about a correction and how big it might be.

OK I am bumming you out, so let me try giving you ideas to make money with. First off, from this point forward, go into your accounts and apply a trailing stop order on every position that you can. We will be doing that tomorrow on more than 70 positions in 9 portfolios. If we are wrong about the 5-40% correction that might happen, the trailing stops will only protect your current gains and any further appreciation. If I am right, you can thank us later. We will be using a 10% trailing stop order. (A trailing stop at 10% follows the value of the stock upwards. As the value increase the trailing stop sell order goes up. Once a top has been established and corrects downward, the trailing stop order sits 10% below the price until that price is met and then executes a sell order at that price or better. Here is an example. Let’s say you borught AAPL at 255.a share and you like us are enjoying a 24 % gain on the stock. You would set a 10% trailing stop order. That guarantees you a 14% gain no matter what -24%-10=14. If the stock continues up to say 380 a share, you stop order move up with to 340 a share guaranteeing you a 33% gain.)

Part of me wants to believe this market has another 10-20% left in this rally, but the underlying dollar value question along with state economic conditions had me getting a little goosey.

The rest of this Barron’s issue is great. The last two articles I highly recommend is about UNP Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, provides rail transportation services in North America. It has approximately 32,094 route miles linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways, and provides several corridors to Mexican gateways.

When you read this article in isolation it seems like the usual great reporting you would expect from the Barron’s Staff. When you read this in conjunction with the Andrew Bary article about how well Barron’s Bullish article have performed over the last several year, you have to take notice. We will be doing homework tomorrow reading the SEC notes and PR releases. Fundamentally, the debt is high but not so for rail companies. It has a small but manageable dividend, rumored to be increasing. At 95 a share, it is selling at 14 and change as far as P/E ratio. It’s price to book is 2.6, very acceptable for a great brand.

Here is the strategy we are going to play once we check out the SEC filings. We are going to buy Jan 2012 95 Call Options at the 10.00 price and forget about them. Per contract, that will cost $1,000 (100 X 10). There are some first quarter price targets in the 125-140 range. We would be in the money at the 105 range. (95 + 10=105) If we can get to 110 a share, it would be a 40-50% gain.

In another great article by Andrew Bary, he points out the great value of major Blue Chip stocks. Companies the like of MSFT, CSCO, WMT, JNJ, KO, and INTC to name a few are considered by many as great value stocks.

The New Chief of Staff

Here, William M. Daley is explaining to the President how much money is left in the budget after all the pending expenditures his administration has proposed in terms that even The President and his staff could understand.

Those of you that know me may have noticed I made it all the way through this blog without mentioning today was Elvis Presley's Birthday.  In honor, here is one of my favorites Bridge Over Trouble Water.
If I get a chance tommorow, I will get you the week ahead in earnings and economic data points.  Remember, Alcoa kicks of the earnings season on Monday.  As a teaser, they are looking for 19 cents a share, up from once cent last year.  We are thinking that they will disappoint.  Look for 15 cents a share.
Salve Lucrum


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