Liverocket Week 30 Performance - Down 6.7%

Bloody week. What happened and why?
Start with the fact that this was indiscriminate: every stock was hit. Small cap and large cap, biotech and consumer spending - this was a wholesale exit from the market.

Also, the stocks that crashed hardest seemed to be the ones that moved up the most recently.

Consider that most companies beat earnings and then factor in the strong GDP results. Clearly fundamentals today and going forward look generally good.

The lack of a bounce on Friday after the selloff Thursday also suggests that this wasn't exacerbated by program selling. If it isn't fear about stock performance and it isn't sector specific, I must conclude that money was removed because money was needed somewhere.

That gets back to my comments starting last month that a liquidity strain would rattle the markets. Investment Banks are closing positions to lock in profits and use the cash to cover massive losses in housing related adventures. It takes a while for this drop in liquidity to resolve itself.

The carry trade is another factor to consider. The carry trade is a fancy way to describe a certain type of arbitrage. If the US offers rates of 5.25% and New Zealand offers 8%, a person can borrow in the US and buy NZ notes for 8.25%. Assuming exchange rates don't change, that's a tidy 3%. If you use leverage, that return grows a lot more. Even better, if the exchange rates move so that the US dollar drops in value, someone can make even more money.

But what if it is the opposite: borrowing Yen at 3% and buying US Treasury notes at 5.25%. Then the US dollar drops in value by 10%. In this case, money will flow away from the US markets.

Whether the drop is tied to the carry trade or to covering subprime loan problems, the consequence is liquidity tightening.

Also, this helps the Fed. Without raising rates, liquidity is drying up. Inflation is tied to liquidity, so we should see some ebbing in inflationary pressure. While this gives the Fed room to drop rates, I don't think that they will.

In this volatile atmosphere, investing will be challenging. If you must buy, consider buying calls about 6 months out.

REALITY CHECK & DEBT CHECK
We want to watch for stocks where the P/E is too close to earnings growth. And, with debt servicing getting more expensive as credit tightens, we need to see who has debt.
1 year PEG Debt
AMX .6 $3B
ATW .2 $36M
CLB .9 $300M
CTSH 1.2 0
ESV .4 $500M
HOLX 1.3 $9M
IMA .5 $160M
MDR 2 $270M
NUAN 1.2 $353M
OCN .3 $1B
PCP 1.1 $875M
PWR 1.2 $447M
TIE .6 0
TRID unknown
UCTT .3 $32M

Focusing on the PEG >1, we see CTSH, HOLX, MDR, NUAN, PCP and PWR as being expensive relative to expected growth. I think the future growth of HOLX, NUAN, & PCP is under stated. I think MDR is very understated, so I am not concerned. I am concerned about PWR and CTSH. I need to see accelerating growth or I would expect price drops.

Most companies with debt can service it easily using existing cash and forward cash flow. OCN can not.

HIGH TECH
AMX – Down 8%. Paid a dividend of $0.37 per share. They reported very nice earnings (30% growth). They grew the subscriber base by 4M. With a P/E of 24 they seem a little undervalued.
CTSH – Down 5%. They are tracking INFY. It’s all about the earnings.
NUAN – Down 7.5%. No news, but they hit a near term high of ~$18 before crashing.
TRID – Down 8%. Competitors PXLW and GNSS were down 18% for the week. They are losing business and TRID is just waiting to deal with the options issue and release earnings. Interestingly, short positions dropped 7%.
PWR – Down 11%. No news.
UCTT – Up 3%.

ENERGY EQUIPMENT/SERVICES

Drillers were rewarded early in the week with the merger of RIG and GSF. Rumors of a merger among drillers pushed them to new highs, until the market pullback took back the excitement. I’m thinking that this sector has legs for maybe 6 more months before growth and P/Es come a little more into alignment.

ATW – Flat. Although they popped up to $74 and ended at $68. Earnings in 2 weeks.
CLB – Down 2%. Great earnings release. Earnings rose 69% and revenue rose 20%. They just beat expectations by a penny. They also raised guidance a little for the rest of the year.
ESV – Down 2.5%. Earnings release showed 31% growth and beat expectations by 4%. Credit Suisse actually called ESV underperform. I’m not sure what they expect – this company is throwing out ~$7 EPS and has a P/E 10.
MDR – Down 13%. Ok, I’m just puzzled. It’s possible that the July 15th article in Barron’s shoved MDR up too fast, but MDR had been ~$90 for a week before that article.

BIOTECH
HOLX – Down 5%. They just can’t seem to hold on. Meanwhile shorting has increased dramatically.
IMA – Down 5%. No news.

OTHER
TIE – Down 9%. Although rivals are reporting great results, TIE remains a trading stock, hovering in the $32~$35 range. On the downside, Insider buying has begun again. That is a sign that no deal is in the works. Meanwhile, the short position in this company rose to 34%.
KSU – Sold at 38.5. I didn’t like their earnings, but I’ll back at the new low. I am investing for the Mexico port opportunity.
OCN – Down a whopping 15%. I must be wrong about this stock and they do have exposure to loans and housing prices. Otherwise this makes no sense. They are supposed to benefit from a rise in foreclosures but they are dropping like a rock. I guess we’ll find out Tuesday.
PCP – Down 1%. They had a great earnings release this week.