Thursday, June 08, 2006

What I am doing

Looks like I mistakenly got caught in a dead cat bounce. Hey, after 2 weeks of collapsing stocks, I thought the worst was over. Wrong.

Uncertainty is driving money managers to lock in profits now, before the end of Q2. So money is leaving the market in droves. As institutions lock in gains, the highest flying stocks are getting hit the hardest: that's where the biggest gains have been. Instead of 50% profit, they will settle for 30%.

What's an investor to do? First, protect your investments. I am sitting tight - I don't think that oil is going to $50 anytime soon, so drilling will continue. Second, plan your moves carefully. I think that there are some stocks which are weathering this psat few weeks volatilty - I am looking for them (DIS is one). It's not exactly a flight to quality but a sign of strength. However, I am not putting any new money into the market until I see the institutions do the same.

I see bargains everywhere. Many of my favorite stocks are nearing incredibly low P/Es. I am not going to bargain hunt. I misread the past few weeks as another market gyration which would be followed by a return to sanity. I didn't count on Bernanke wanting to talk the market down.

That's right: it dawned on me today as the markets collapsed again for the 4th week, that Bernanke has been remarkably silent. That is in itself a strong message: rather than raise rates, he is letting the fear of rate hikes do the trick. Savvy and effective. "Maybe I will, maybe I won't." He is achieving lower inflation by talking down commodities without actually pulling the trigger. And it's working

Gold is down almost 20% in 3 weeks. Didn't investors, touts, and others say that gold was a haven during uncertainty, hedge against weak dollar, blah blah blah? It was naked speculation and it was adding to inflationary fears. It isn't titanium, a metal that is actually used.

Bernanke - I now respect you and wished I'd been able to pick up your game sooner. You bought yourself and the Fed moving room without doing a damn thing. In the space of 3 weeks, you have wiped out 5 months of worldwide stock market values. Now that's power.

Bernanke is also playing with fire. With housing values coming down (watch - they are) and with the stock market coming down, US consumers will feel poorer and stop buying things. This can and will cause a faster and deeper recession. He will sacrifice the worldwide economy to keep inflation in check. That's a powerful message.

A long term investor would move now and not worry about a near-term further erosion in position. That has been my style and I have lost a great deal the last week doing this instead of waiting to see institutional money move back in. See, I think he wants to talk the Dow down to 10,500. That scares me because I saw the Dow rising high this year based on underlying strength. I thought there was no more room, no companies overvalued and worth shorting. And now it's gotten even bloodier.

We have to wait a long 2 weeks.

Situation room

High growth stocks continue to get pummeled - signs that the market thinks the party is ending in 6 months.

We were stoppde out of the following
ET
JLG
isil
NTRI
TIE
RFMD
TRID
GRP
DO
ESV

Tuesday, June 06, 2006

It wasn't Bernanke, It was Me

I think I made the world markets crash again.
I am very sorry and I will try not to do it again.

Seriously though, this is the 4th week of down days. We are under 11,000 for the Dow and 2150 for the NASDAQ. And world markets are similarly spooked.

It isn't about any one particular thing like oil, inflation or interest rates. When things are negative, people look for bad news: Iran, oil prices, elections, employment figures, whatever. It's simple: the economic cycle is peaking and possibly moderating and the markets want to feel that the US Fed is steering towards a smooth landing. They don't know Bernanke and they also see problems.

There is an unwinding of the housing market - that causes fears about consumer spending.
There are fears about a cheaper dollar - good for the trade balance but bad for consumer spending. It also raises the cost of raw goods - leading to inflation.
There are fears about more interest rate hikes - not because they are inherently evil, but because it is uncertainty. After all, a strong economy is always a good thing, as long as it isn't inflationary.

At the heart of this is the interest rate. Raise it to cool down the economy, and Bernanke risks that the housing markets may crash. Don't raise it and watch inflation take off.
And at the heart of it is a guy who is untested: Bernanke.

The stockmarket is incredibly cheap. In 1994, the average S&P P/E was ~19. It soared to a peak in 2001 of ~45. It is back down to 19.

My point is that Bernanke is not talking down the dollar. He is navigating inflationary waters.
To shore up his anti-inflationary credentials, it is highly likely that today's rate of 5% will end up at 5.5% by year end.

We have until June 24th for the next Fed meeting. The markets will be volatile until then. I haven't looked but we probably got stopped out of a few more stocks (JLG is one).

-------------------------------------
Revised to add:
I think there is no safety net under the market. Most institutional buyers are balancing the risk of entering a market in a freefall (down 315 points in 2 days) and obvious opportunities. I imagine that we will be losing quite a lot of money this week and I am in no rush to jump back in until I see institutions buying back in. At the same time, I do not see a lot of short opportunities that haven't already played out.

Monday, June 05, 2006

LiveRocket Turbo

LiveRocket Turbo will be different.
Higher risk stocks, option trading, and more frequent trading.

Strap yourself in

AMX 250 shares @ 34.51
BMHC Puts (Dec $25) 40 contracts @ 2.2
DO 100 shares @86.43
GRP 175 shares @ 47.87
NUAN 900 shares @9.13
RFMD 1010 shares @7.48
STX 350 shares @ 23.33
TIE Calls (Dec 50) 21 contracts at 4
TTI 275 shares @30.6
ZOLT 275 shares @ 32.03
ZRAN 305 shares @25.56
TRID Calls (Jan 22.50) 20 contracts at 4.1

New Stop Prices

I am going to keep it simple and stick with trailing 10% stops. I may refine based on some action this week,.

ET 22.9
DIS 26.9
JLG 18.7
JOYG 47
NTRI 63
TIE 24
ISIL 25.5
RFMD 7
TRID 21
GRP 44
DO 79
ESV 46
ZRAN 23.4

Sunday, June 04, 2006

Housing bubble bursting fast

Anecdotes are no longer isolated events. They are now examples of economic trends.
1. April Housing prices dropped 7.3%, cancelling out most of the year-to-year growth (which was 10% as of end of March)
2. Phoenix Condos have dropped 50% in price http://www.azcentral.com/arizonarepublic/business/articles/0604catherine0604.html
3. Home builders are slashing earnings expectations
http://news.moneycentral.msn.com/provider/providerarticle.asp?feed=FT&Date=20060602&ID=5766904

I have been proposing that there is a houisng bubble that is in the process of bursting even though the facts seem to contradict me. Homebuilders reported record Q1 profits. Suppliers did the same.

I felt that Q1 was really reflecting 2005 buying (end of the year purchasing that closed in 2006). I also felt that suppliers were seeing a burst of business as builders rushed to finish building so that they could unload the houses before the rug gets pulled out from under them.

Supporting my hypothesis was that housing inventory was rising dramatically, home sales volume was dropping dramatically, and prices were dropping march-April.

I did some research on how home prices are reported. Apparently, we are the victims of sloppy statistics. A database of 149 metro areas is maintained and house price changes are tracked for each area. Then the midpoint (the median) of those datapoints is selected. From the standpoint of turning data into usable intelligence, we would want to adjust the data to weight the higher population areas over the lower population areas. We should care more about San Francisco, Boston, LA and NY than we do about what is going on in Decatur, Ill (population 78,000). Not only because these are the population centers, but mainly because more homes are being sold in those areas.

As it turns out, the recent report that Q1 2006 housing prices rose 10.3% in fact hides much more negative data. For Q1 2006 a sampling shows:
Boston (-1.5%)
Houston 3%
Chicago 11%
Las Vegas 9%
LA 19%
NY 11%
San Francisco 4%
Miami 11%

I can't see the April or May detail yet, but if April was a 7.3% drop in price from March to April, then 3 out of 8 of those areas are negative, 4 out of 8 are ~3% growth. The detail is needed, but the trend is obviously worrying.

"Pulte Homes, the largest US housebuilder by sales, on Friday cut its full-year earnings' forecast by a quarter in a move which will heighten tension over the cooling of the country's housing market. The Michigan-based group said new sales in April and May slumped 29 per cent, the latest and most severe of a series of declines reported by the largest US housebuilders."

New sales slumped 29%. Sales in the West are expected to slump 20%.

I am trying to understand their pre-earnings announcement that the full year earnings will be lower by 25%. In late April, they confirmed expectations and 1 month later they are offering lower guidance. That tells me that the last 8 months of the year (May-Dec) are problematic. For 75% of the calendar year to drive a 25% total year reduction, that means that they expect future earnings to drop 33%.
They make ~$1.4B in earnings or $1.1B for the period under question. But now they expect to earn $350M less. It sells ~18,000 units. They are looking at a loss of ~$20K per house. A little lower in some states, a little higher in others. My gut says that they are assuming some higher costs of supplies and some longer sales cycles (higher carrying costs), but primarily they are assuming incentives to sell a house. Like 1%+ interest subsidies and no closing costs.

Sure, Pulte could be sandbagging - guiding expectations even lower in order to exceed. I don't think so. In fact, I think sales are collapsing around them. In Phoenix, a hot growth market, high-end condos are falling 40%+ in price. Imagine the downward pressure on other condos and on houses. Condos and townhouses are inferior susbtitutes for houses. But if you want to buy in San Francisco and condos fell 50% in price to ~$400K, would consumers still be looking to pay $1M for run-down houses needing $200K+ upgrades for the comparable granite counters and double pane windows? Obviously, it puts downward pressure on existing, lower priced condos/townhouses and on houses.

And this is happening as we stand at the beginning of the season. Pulte's costs didn't suddenly jump in one month: they lock in supply prices and most of their houses are already more built than not. This is tied to sales problems. And another rate hike will not help.

How to play this?
1. Housing companies like TOL, PHM and so forth will continue to slide. Short.
2. Cancellations will hit suppliers hard. I am liking my BMHC puts more and more every day. I especially worry about window and door manufacturers. It strikes me that high rise condos use a lot of glass, windows and doors. Anyone suggest a specialized company that is looking especially vulnerable?

Week 30 LiveRocket Portfolio - Up 2.64%

Week 30 (versus previous week)
Dow -0.27%
S&P 0.63%
NASDAQ 0.41%
LiveRocket 2.64%

YTD
Dow 4.95%
S&P 3.21%
NASDAQ 0.63%
LiveRocket 31.35%

Since Inception (Nov 4, 2005)
Dow 6.9%
S&P 5.7%
NASDAQ 2.3%
LiveRocket 43.85%

Note: I screwed up. I bought GRP 200 shares @ $42.4 on May 22nd but forgot to enter it into my records. I compounded this by buying another 200 shares @ $45.4 on May 31st.
To net it all out, the impact of all this is
* Cash position is (3,445.88). If we didn't have a margin account, then the 2nd GRP trade would not have happened. No confusion. However, like most traders, I do have a margin account and will move forward as if LR does too. Up til now there has been no margin trading and there will be none going forward.
* Last week's results were higher than I reported: unrealized gain on GRP of $600. That amount is $1250 as of this week (GRP is up 15% since May 22nd). So last week should have been 1.4% not the reported 0.79. That makes the jump this week look high (from 40.15% to 43.85%) when it would have looked more like ~41% to 43.85%

OVERVIEW
I continue to follow this premise: corporate earnings have been strong despite the surge in oil and raw materials costs. The economy is strong and we do have a Goldilocks scenario. The only storm cloud on the horizon is housing, something which will affect the economy less than the stock market. Goldman Sachs says GDP will drop as much as 0.6% if housing softens dramatically. That would ease the pressure to raise rates without being a massive drag on the overall economy. Certainly, certain stocks will get hit and we're prepared.

RECENT TRADES
Bought JLG 400 shares @ $21.96 (5/22/06) stopped out $22 on May 31.
Bought JLG 409 shares @ $21.50 (5/31/06)
Bought DO 150 shares @ $82.7 (5/31/06)
Bought ESV 150 shares @ $48.2 (5/31/06)
Bought ZRAN 400 shares @ $24.48 (5/31/06)
Bought GRP 200 @ $45.4 (5/31/06)

FINANCIALS
ET - Flat. Patience is key here.

COMMODITIES/ENERGY/INFRASTRUCTURE
JLG - Down 10%. We are down (3.2%) We got stopped out at $24 for a 10% loss. We waited and got back in ~$22 and were stopped out at $22. Third times is the charm: we bought in @ $21.50.

GRP - Up 7%+. We are up 11% overall the past 2 weeks.

JOYG - Up 4%. We watched JOYG crash, getting stopped out at $51. Waiting for the bottom, we bought back in @ $48.7. The lowest was last week at $45. It's now $55. We are up ~13%.

TIE - Up 4%. We are up 25%. Boeing received new plane orders worth $5.8B at list. That's 20 planes using 59 metric tons of titanium each. That's ~2.4M pounds of new demand. Also, TIE stock crossed $40 again.

DO - Up 4%, we are up 5.5%. There is just too much upside here. Offshore drilling is surging. BTW, offshore drilling requires GRP drill bits and titanium pipes.

ESV - Up 4%, we are up 7.3%.

HIGH TECH
The Semiconductor April report showed 8% increase in sales, dominated by cell phones. A great Y/Y result but it was down 0.4% from March. That's seasonality. The point is growth in chip stocks contonues apace

TRID - Down 6%. We are down a total (18%+). it's down on up days. I will wait for next quarter's results before making a move.
ISIL - Up 0.5%. They re-affirmed guidance that their Book-to-Bill was >1.
RFMD - Up 1%. Incredibly low volume gthis week.
ZRAN - Up 6%.

MISCELLANEOUS
DIS - Flat. cars comes out this week. Should be good - no other movie for kids. Disney has had only 8 down days in the last 24. That makes me feel good about the market sentiment.

NTRI - Up 2%. No volume, no news.

Happy Investing