TRID Update

TRID is up 4% today.
Here's some updted press to consider
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070108005243&newsLang=en

Sprint a buy?

I've talked about Sprint in the recent past.
Sprint can not compete against Cingular and Verizon wireless. So it continues to hemorrhage money and customers (another reason to buy T - they now own 100% of Cingular, which must be gaining some of the 300K+ customers Sprint lost).

However, Cable companies lack a mobile phone play. Just as ATT partners with Dish Networks to provide video/cable, Comcast and Time Warner recently partnered with SPrint to provide mobile phone services. The key difference is that AT&T is building out its own video infrastructure. Comcast and TWC don't seem to be building cellular phone infrastructure. Partly because licensing for wireless spectrum inhibits investments whereas laying fiber cable doesn't require licensing.

Sprint really seems like a takeover target, with TWC and Comcast circling. The business case is really strong. The question is when. Right now, Comcast and TWC get access to Sprint's network at heavily discounted prices. Why buy the cow when the milk comes so cheap.

And Sprint is expensive. $41B in sales. They are priced at book value ($18.2 per share), until you realize that their books are cooked:
* cash and equivalents have dropped every quarter for the last 5 quarters, from $9B to $1B
* Property and equipment has dropped 20% from $31B to $24B
* Goodwill is up 50% from $1B to $30B.
In other words, hard assets have fallen from $40B to $25B while fuzzy assets have grown.
There is a downward trend in costs, and I like that, but it isn't making up the difference in hard asset drops.

Bottom line: They paid a lot for Nextel and the Nextel customers are leaving.

TRID & Other thoughts

TRID sank hard today. I shake my head in dumbfounded wonder (and at the loss I am facing on my call options).
Down on no news suggests that there are fears about pricing pressure.

Other stocks under pressure include TIE, ESV, & ILMN
TIE - As of Jan 5th, the #1 Russian Titanium maker (VSNMPO) is banned from doing business with US companies due to its Iran/Syrian business ties. Boeing gets 50% of titanium from them, and Airbus 80%. This is incredible for TIE. If Bush allows it - it is a good stick over Putin at a time when Russia is dragging feet over Iran
The fact that TIE has had nothing but incredible good news lately (major cost reductions from titanium sponge production, reduction in competitive threats from Russia) and the fact that the stock continues to fall tells me to accumulate.

ESV - Downgraded within 1 week by JP Morgan and Wachovia (JPM was today). A conspiracy nut would suggest that the rumors of an ESV buyout are true, that JP Morgan and Wachovia are underwriting part of it, and these downgrades are part of getting a lower price. More likely, there is general concern about natural gas and ESV's exposure to NG drilling in the Gulf of Mexico. the facts show that ESV has very minimal exposure to NG drilling and that its GOM exposure is small and shrinking.
In fact, a smart investor would recognize that most companies are moving the drilling fleets out of the GOM, which will lead to substantially lower NG drilling (25% of NG comes from GOM). That means higher NG prices in 2007 Winter.
Which brings me back to my conspiracy theory. Many other drilling firms are much, much more exposed to GOM and NG weakness. So why did JPM single out ESV? Bash the company to get a better price and do the Seadrill acquisition.
As a value guy, I see a company selling for 7x contracted 2007 earnings. Buying out this company today would drive a 15% annual return on investment. That's hard to ignore.

ILMN - revisiting lows before earnings releases. This stock, as a small-cap, will surge on earnings.

OCN and NUAN are showing strength. Good sign. As did CTSH and CSH.
PCP - Big bounce back after their acquisition announcement of another Boeing related company.
CLB - Nice bounce back today on no news.
MDR - Nice bounce back. This one is so undervalued that I see a large jump i nthe next 3 months.

How does all of this affect the portfolio?
Well, we are very weighted in small caps, so I accept volatility.
Winners so far - UCTT, PCPand NUAN
Losers so far - TRID, CLB, MDR, ESV (a bit) and TIE (a bit)
The rest are stuck in the middle - a little up, a little down, although more down than up.

What to do about the losers? I don't see any reasons to hop out and hop back in (missed that on TRID).
TRID - Technically, this is a broken stock with no support. In barely 2 months it has fallen from $25 to $17 - a 30% drop. Fundamentally, though, this company is fantastic. Sales are through the roof and better than expected. CES is all about LCD TVs. And TRID dominates the market. They have ~16 P/E (which is according to estimates for the last 2 unreported quarters). The only weakness is falling consumer spending as it affects TV purchases. Well, I think falling prices translates into higher sales. I am staying put. I will be contrary on this one.

ESV - Staying put.
MDR - Like I am going to leave a company growing 100%+ and accelerating their earnings and margins. And has a 20 P/E. Bear in mind that the rest of the world is on a spending spree for energy infrastructure. US economic developments will not stop Indian electricity investments, for example.
CLB - I am going to wait for the earnings release. We are down a lot - 13% - but lets hold on. It is the one stock that looks riskiest.
TIE - I think investors will rediscover TIE in 2007. There is absolutely no weak spots in this company's armor. The stock is no longer trading at the discount it was last year because contracts are not re-setting at the phenomenally higher prices. (Contracts expiring in 2005/6 re-set prices from an average $8 to $30+, creating a massive profit surge). However, they will get upside from more production and moderating energy prices. Demand is not going away, unlike copper.

UCTT up 10% today

No news, but UCTT up 10% on 2X normal volume

LiveRocket Week 1 2007 Performance

THE MOOD OF THE MARKET
The theme is that the party is winding down, but hopefully without surprises. What is upsetting the guests?
1. Inflation keeping interest rates high or erodes corporate profits. A higher minimum wage is inflationary. But materials costs are falling. Corporate profits will remain strong, but not acclerating.
2. Housing market collapse will not be contained. This is two things, really. The first, that the hiring and spending related to construction building will stress out the economy. (It won't help, that's for sure.) The second part, that falling housing prices will stop the US consumer. The combination will definitely slow consumer spending.
The market wants a rate drop and the Fed isn't going to give it anytime soon. So the market will be jittery.
My concern is the liquidity in the market. The last cycle was 100% driven by cheap liquidity. The Housing market was able to take the liquidity to a new extreme by pushing mortgage rates really low by removing risk premiums (by unloading the mortgages onto Pension funds and other countries).
Can the Fed re-inflate the economy via lower rates? Definitely. But last time it required a year of 1% rates before the economy responded. And the response was a massive housing bubble and other asset bubbles (like gold).
I think that the Housing market won't return, no matter what. First, because it wiwll be too late to stop the building wave of defaults and foreclosures. Also because the same suckers won't return. And lsatly, because I think that rates can fall but mortgage rates won't fall as much. Defaults and bankrupting lending institutions will mean that mortgage companies will require some risk premium.

OIL
Goodbye oil sector? Did we stay in when we should have jumped out?
Based on the 15% crash in oil prices, you would think that oil is in oversupply. In fact, the opposite is true. This week's EIA report says that oil inventory is lower than same time last year:
*Crude Oil (Ex. SPR) is DOWN 1.2% from last year.
*Total Motor Gasoline is UP 0.7% from last year (though demand is growing).
* Kerosene-Type Jet Fuel is DOWN 6.5% from last year.
*Distillate Fuel Oil (cumulative) is DOWN 0.1% from last year.

And that is without a major cold front (the mid-west excepted). A cold front would have reduced inventories even further. I take this as a sign of growing overall demand. Put another way, the US economy is cooling but its total oil consumption has risen. Wait for the snowwstorm that is expected in New York next week, and watch oil reverse.
The combination of mild weather and a US economic slowdown make hedge fund traders assume supply will exceed demand. They are wrong, partly because they discount the surging Indian and Chinese oil demand, but that doesn't matter. Hedge funds drove the price >$73 and they can drive it down.
Whether oil goes up a few more dollars or down a few more, it isn't going higher than ~$60. And if oil doesn’t go up, what does that mean to oil equipment and services companies? It is hard to expect price acceleration, for one thing. At this time, however, our companies will continue to see growth versus last year because of the contracts they have signed that have locked in much higher prices.
Comparing theory and reality, I will point out that ESV posts actual up-to-date contract details. http://www.enscous.com/UploadFiles/File/12-15-06%208K%20Rig%20Status.pdf
In Jan/Feb, ESV's contract rates increase $790K per day. An average 40%+ increase in prices. And these are pure profit increases. ESV will be adding nearly $750M per quarter to its bottom line starting this quarter. Doesn't sound like a drop in oil prices is affecting its business yet.

OVERVIEW
The drop in our oil services/equipment stocks have hit our portfolio really hard. We are down 3.5% in just 3 weeks.

AMX – No real news. After hitting a new high of $46+, it crashed today -3%. Earnings release in early February, so we must wait.

ATW – Regained some ground. It has a forward PE of 5 and a current P/E of 16. This is not overpriced for a company growing earnings by 230%. The RSI is almost 30 – a sign of overselling.

CLB – A 20% drop from its recent high of $92. The degree of selling is obvious with CLB – the RSI is below 20. They have a 33 PE which will drop to 24 next month (if they hit their target).

CSH – Down a hefty 3% today. Earnings are the 25th. Wait and see.

CTSH – Getting hit by concerns about IT spending.

DIGE – Up a solid 4% today. The CDC is recommending HPV testing and DIGE has the only test. Kaiser HMO is doing the same, as are European Insurance companies. It’s just a matter of time.

ESV – Up 1.7% today. ESV was added to the S&P 500, which is nice. The COO sold 10,000 shares recently, for what it’s worth. Wachovia downgraded ESV because of natural gas concerns. This doesn’t matter to ESV because they have moved out of the Gulf of Mexico and Natural gas drilling is less than 33% of their business and shrinking.

HOLX – Down on no news.

ILMN – No real news. Interestingly, ILMN’s chief competitor, AFFX, dropped almost 7% this week.

INFY – Flat.

MDR – Down 12% this week. What’s fascinating here is that MDR is not tied to oil. Moreover, their operating costs will fall due to accelerating some asbestos related costs.

NUAN – After hitting 12.5 this week, it pulled back sharply.

OCN – After hitting $16 this week, OCN pulled back.

PCP – Lots of upgrades (BofA, Merril Lynch) and a new 52 week high. Credit Suisse raised the target price to $87. PCP is very tied to Boeing which continues to do well.

TIE – Flat. TIE can’t seem to get the market’s attention. They announced that their costs will be dropping dramatically due to their ability to increase titanium sponge production (it’s like a steel maker finding a cheaper source of iron ore). Harold Simmons continues to buy shares in his own company (another 50,000 this last week). TIE sold a stake in a company and earned $39M on a sale price of $75M. They signed a contract to sell 2,500 tons of titanium per year, that’s about $200M per year in sales. That alone is a $0.25 per share boost, but no change in stock price. The only negative is that oil drillers use titanium, so that may be pushing the price down.

TRID – What a volatile stock. After falling to $18 this week, it bounced back to $19.5. As flat panel prices drop, pressure on margins picks up. But as prices drop, volumes will pick up, offsetting margin pressure and ASP pressure with sales volume increases.

UCTT – No news, but stock looks solid.