LiveRocket Week 3 overview - Down 1.7%

Some interesting developments worth a few comments.

OIL I was very focused on why Saudi Arabia was letting oil slide to $50. I gave a few possibilities:

* Undermines Iranian government

* A means of achieving discipline from other OPEC members that cheat on production cuts

* helping out the US economy

It turns out that is was to drive discipline. Cheating has been rampant, as expected. Several countries recently re-committed to the cuts starting with Venezuela.

As if to emphasize the message that oil prices don't affect investment in oil equipment/service companies, SLB reported fantastic earnings: up 71% and 305 higher than analysts expected.

Oh yeah, there is a lot of money being made here.

Oil equipment stocks are growing faster than high tech stocks, driving higher cash flow, and with dramatically lower P/Es.

BERNANKE AND INTEREST RATES
Ben expressed concern about the Federal Budget, specifically Medicare and Social Security. He focused on Medicare because Social Security is more of a political headache (it funds the deficit and reduces the true size of the Federal deficit, SS is also a key focus for the elderly and for the lower income earners). Driving down Medicare costs affects only companies - a lesser political headache.
This is not real news - everyone knows this. Hilary & Bill Clinton tried to tackle it starting in 1992. So why is Ben talking about it now?
1. He's neutral: as a non-politician he loses nothing to highlight the problem
2. He can play CYA: Ben will be around for a while, so he needs to be able to cover his ass and say: I told you so.
3. Deficits reduce flexibility to lower interest rates

The key here is interest rates. Ben needs to prepare for an economic slowdown and the weapon of choice is interest rates. Inflation is an important factor in determining when interest rates can be moved and by how much (FWIW inflation is mild). But the Fed is now competing in a global economy that can invest in other financial instruments like the Euro and the Yen.
The Bank of England raised rates and so did the Bank of Japan. That pressures US rates up, not down, to stay competitive.
Meanwhile, a bigger deficit is funded by more IOUs (aka Treasury Bills). If the Fed has to flood the market with T-bills, it has to offer competitive interest rates. Again - that pressures rates up.
I take away a few thoughts from this:
1. The Fed wants to lower rates but is not able to do it yet
2. Generic drug companies are sitting in a good place, big pharma is not

STOPPED OUT
We were stopped out of TRID, UCTT and CSH.


I like UCTT and will explore re-investing. It fell almost 15% this week, taking $1000+ of profit with them.


I had reservations when I got into CSH because of my fears that a housing construction slowdown would affect their payday loan business. We lost 8% on this and, frankly, I am debating re-entering.


TRID is killing me. We lost 20% or $1400. I personally bought back in today (1000 shares) because I am loving a $17 price for this company. I am waiting for LR to get in below $17 so that I can average up a little bit. Sadly, TRID pre-announced that - while they are releasing financials next week - they still can't disclose the earnings due to the options.


I find this unbelievable - this is not a large employee company like Apple. Three quarters in a row with no earnings clarity.





These 3 companies together accounted for our losses this week.





WEEK IN REVIEW


The Dow and S&P were flat but the NASDAQ fell 2.1%. Compared with last week when the NASDAQ was up higher than the DOW by the same amount. The main reason is Apple (AAPL). AAPL is down 8% for the week after rising 15% last week. Many others failed poorly: INTC -5%, CSCO down 8%, GOOG down 3%.



In our portfolio, the major movers were:
ENERGY

ATW - Up 3%
CLB- Up 2%
ESV - Up 5%
MDR - Up 5%

HEALTHCARE
DIGE - Up ~5%
HOLX - Up 6%
IMA - Down 4%

OTHER
NUAN - Down 5%

I feel pretty good. Most stocks headed up strong (especially when the market was pretty weak this week).

Thursday Bloody Thursday

After a fabulous run, a market pull back was inevitable. Most of our stocks got hit, some quite a bit.
The indiscriminate sell-off in the oil sector continues. I don't care how valuable or oversold - we have a line in the sand with our STOPs. If they get hit, we will be buying back in, hopefully adding to our shares thereby. However, tomorrow is options day and I see selling ressure. So I will be watching carefully.

WINNERS
DIGE up a tad
HOLX up 1% on great news. The WSJ had an article saying that big (dense) breasted women benefit from digital imaging not film. That means HOLX. We are considering buying more.
ILMN - they ended flat but were in positive territory all day.


LOSERS
AMX - down 2%. Just a market move.
ATW - down 1.5%. Down 2.4%
CSH - Down 6%. CSH is down nearly 9% in just a few days. If it's any consolation, their biggest competitor EZPW is down 15%. The concern is a NY Times article expressing concern that operations like CSH charge outrageous fees.
ESV down a tad. Looks like a floor is set at $47. I am considering buying LEAPS (the Jan 08 $55 calls for $4.)
IMA - down 1.5%. Just a market move.
INFY - down 2.3%.
MDR - Down a tad
NUAN - Down a whopping 5%. No news.
OCn - Down a tad
PCP - Down 1.5%
TIE - Down a tad. Looks like $29 continues to be a base.
TRID - Down 2.7% and we were stopped out at $17. We're buying back in.
UCTT - Down a whopping 8%. We were stopped out at $14. We're buying back in.

Stock updates

CSH - Down 4%. No news. I don't know what to make of this.
ESV/MDR - Up 2% on Saudi Arabia's commentary regarding ongoing production investments
HOLX - Up 2%. No news.
NUAN - Up then down. NUAN started th wek up 4% yesterday and then gave it back today. No news except for Cramer talking nonsense.
TRID - Slide continues. This time bcause of Intl profit issues. I am going to load up again in my personal account. Pretty soon, someone is going to buy this undervalued stock.
UCTT - Down a whopping 4%. Profit taking after a big run.

Apple scores big - but everything depends on the iPhone

APPLE SLOWING DOWN
Apple shipped 1.6 million Macs and more than 21 million iPods during the quarter, representing a growth of 28% and 50% respectively from the year-ago holiday season. Earnings rocketed up 78% on sales growth of 24%. Zune went nowhere.
Hunh? Only 24% sales growth? That's mediocre. There must be some mistake, especially with the much higher unit sales growth.

Indeed, Mac sales were strong and almost 3x industry average growth – the biggest factor for me that indicates Mac is truly gaining in acceptance and market share. Prior to this quarter, Mac sales were really just pacing Dell et al. And iTunes is also growing and kicking out a solid batch of money. So why is sales growth a sickly 24%?
Answer: Apple is selling lots of $100 nanos and very few of the $400 iPods. Yikes.

In fact, even the Mac growth is illusory. Sales of the Mac are actually flat, sequentially. They aren't getting much acceleration. Last year sales were low in expectation of the new dual core iMac, so growth year over year is not meaningful. Flat flat flatter. Apple has reached a nice point where they are enjoying some better margins. Especially with the iTunes business.

But flattening sales is flattening sales. Apple can spin it anyway they want – they are slowing down. The stakes are even higher now, and the laws of big numbers are kicking in.

Into the breach comes the iPhone. And it is an amazing product.
As always - the form and interface are superior. The touch-screen is brilliant because of the enormous flexibility. Instead of Cyrillic, Japanese or Roman letters with different keypads, the same hardware can be used. Upgrades via software are possible. And more programs can be added. And a bigger screen from ditching the keypad allows for some nifty versatility in programs. This is a truly innovative product.

What about pricing? This is $500~$600. Sure, for Blackberry users, the price is the same but the phone is much more powerful. Goodbye RIM. Their days are numbered. And that’s a lot of business to steal. Apple is projecting 10 million unit sales in 2008. That is an amazing $5B~$6B in new revenue – about 40% additional annual growth. Enough to silence critics. Ok, a lot will come from cannibalizing iPod sales, but even a fraction of the $5B in net additive sales will be great.

There are problems.
TIMING The product isn’t shipping for a while, 2 quarters I think. In the meantime, I think the flattening sales growth will become more obvious. That’s a short term issue, but it is a window to competition.
COMPETITION The iPod debuted without strong entrenched players. The iPhone is coming into a very competitive market. It won’t be hard for Nokia or Motorola to mimic several of the key features: bigger screen, software based keypad, more flash memory for music/videos. The hardware is easily mimicked: LG and Nokia could roll it out in 1 month. More importantly, none of the established players will wait to let Apple succeed – they saw what happened with the iPod.
A smart competitor would release a me-too version for $200 and undermine Apple.
STEVE JOBS Clearly Jobs did a criminal act: he maneuvered for options and had them backdated. The counter argument is that h didn’t benefit – he returned them. Yes, but that’s only half the story, isn’t it. He didn’t return them, he actually swapped them for stock. Bottom line – he backdated and did benefit. At the least a criminal case is a distraction, and a bad one. I predict that he’ll get off, but will look like what he is: a greedy jackass, and one of the most successful.

The iPhone is a real disruption in the marketplace and consumers will win. Apple continues to be the Lexus in high-tech: setting the stage for a quality experience. Except that cell phone makers are not Detroit - they move fast.

Clearly, Apple has a lot of momentum. But they are picking fights with wealthier and nastier companies. So far, they are winning.

Oil slide continues - does it matter?

OIL SLIDES – WHAT & WHY
Oil is now in a critical zone: nearing $50. This figure changes weekly and a recent cold front could push prices up. In response to the deep slide in oil prices (15%+ in 3 weeks) Saudi Arabia is doing….nothing.

The key questions to ask are: what is causing this, will it change, and how does it affect our stocks?

CAUSES
There are two causes: the perceived glut of oil in the US and a move away from commodity stocks. In the minds of investors, both are tied to a US economic slowdown. Only proof of shortages will change things: either because of OPEC supply changes or demand outpacing supply.

WILL IT CHANGE?
The only thing that will bring hedge funds back is strong signals that demand is outpacing supply. Current and forecasted demand/supply suggests that demand will outstrip supply…eventually. That could change overnight if Iraq or Iran get into wars. So the biggest signal for hedge funds is if Saudi Arabia or OPEC cut production.

The SA non-action is very telling. Given cheating by other OPEC members, it fell to SA to make the cuts (they are the biggest producer) to bring about a slight supply shortage. Now comes the second guessing. Why is SA okay with $50 a barrel?

It could be that they know cheaper gas eventually drives more consumption. It could be that thy want the US economy to strengthen and cheap energy helps – and a strong US economy is a good customer. And it undermines the attractiveness of alternative energy. It is noteworthy that SA & Kuwait build their budgets based on $50 oil, so they are doing fine still. Also, a lower oil price helps SA get the other countries to behave better – SA can afford the lower price a lot longer than other OPC members can. It gives them a big stick, something that they may need to show from time to time.

Indeed, another interesting geopolitical spin is that this hurts Iran greatly. The Iranian government is very dependent on oil. They are in a perpetual recession and $60 oil is a lot better than $50 oil. Iran is also creating trouble for Saudi Arabia – both are arch enemies and Iran seems to be scoring the most points: Lebanon is about to crumble, Iran is chasing after a nuke, and Iran is meddling in Iraq. In every case, SA is the immediate and direct adversary. Iran tends to think of itself as the superior culture compared with the recent Abdullah-com-latelies in SA, until recent desert tent dwellers. It is not a surprise that the Iranian Foreign Minister just visited SA to meet with the King. Perhaps the low oil price is a way to tell Iran that they are in fact junior and subject to SA.

WHO BENEFITS: OUR STOCKS
I have been saying for a while that service and equipment companies continue to thrive. Saudi Oil Minister Ali Naimi said Wednesday that despite the recent drop in prices, OPECSEARCH
Meanwhile, Europe has seen what it means to be dependent on Russia and they don’t like it. Expect more pipeline building, more nuclear reactors, and more liquid gas storage. That means MDR, for starters.

And lower oil is good for the US economy and inflation pressure.

Week 2 esults: Up 3%

Talk about a balanced potfolio: 5 stocks up big in one month and 6 stocks down big. The big gainers since we bought last month:
INFY +9% NUAN +20% OCN +10% PCP + 8% UCTT +23%
At the same time, the oil/commodity stocks are lagging, to say the least:
ATW -9% CLB -13% ESV -6% MDR -9% TIE -7%
And TRID is down 16%.

A VOLATILE PROFILE
Volatility enters the LiveRocket portfolio in two very calculated places.
1. Business cycle contrarian stocks
2. Small cap stocks
At this point in the cycle, when we expect a downturn, a lot of sectors are out of favor. Those sectors include IT, consumer products, oil/energy related, commodities, manufacturing and so forth. Clearly, we have stocks that play in these areas:
Energy Related: ATW, CLB, ESV, MDR
Commodities:TIE
Consumer Electronics: TRID
IT: INFY, CTSH
Manufacturing: PCP

In fact, most of our stocks should be bad plays at this stage. So why did I get in? The reality is, oil excepted, I am not contrarian at all.
Oil services/equipment still has legs. This is the only place where I am contrarian. My premise certainly looks shaky given that the price of oil has fallen from $73 to $52 in just a few months. I continue to believe that these companies are incredibly undervalued. In fact, Friday’s big bounce up on high volume means only one of two things: dead cat bounce or pre-earnings buy-in. Also, I had expected some consolidation of players at this point (and maybe so did others, which is why the stocks zipped up beginning December.) In any event, we are down an average 9% for this sector.
I am continuing my support for oil rigs and drillers for some basic reasons. First, most new oil discoveries are occurring offshore. Second, most countries are non-OPEC countries – they want oil in order to avoid paying OPEC prices (or to benefit in case they can sell).
Additionally, the negative movements in these stocks is 100% sector related: compare them versus OIH (Oil services Index) and you will see exactly what I mean. That means that they are giving up some momentum but not because of fundamentals.

Commodities should go down, but TIE is not a commodity per se. They are tied to Boeing’s airplane production (as well as new military products). There is an ongoing severe shortage of titanium that even a 30% cancellation in planes will not change.

Consumer Electronics should go down, but LCD/Plasma TV sales are continuing to surge. TRID is only going to continue to benefit.

IT continues to enjoy investment and growth.

Manufacturing is going down, but PCP is dedicated to Boeing and demand is super strong.

The other area of volatility comes from buying small cap stocks. Small caps are where we play because small caps are where the biggest earnings growth can be achieved.


AMX – Up 2%+ this week. AMX pulled back from its 52 week high 2 weeks. It has consolidated a base of $44 and looks poised to run again. I will point out that Motley Fool chose AMX as a stock to own.

ATW – Up 2%. After releasing blazing earnings in early December, ATW has slumped 20% from the oil malaise.

CLB – Flat for the week. Almost a mirror image of ATW – down 20% from oil malaise.

CSH – Up 3%+. After setting a peak 3 weeks ago, CSH pulled back. I see a consolidation here and then forward movement.

CTSH – Up 4%. This is due to the great INFY earnings results. CTSH has earnings release in 3 weeks.

DIGE – Up 1%. DIGE has filed a lawsuit against a company named Third Wave. This is a defensive lawsuit that is trying to delay the inevitable entry of competition. Currently DIGE offers the only HPV test approved by US regulators. The fact that competition is coming is just testimony to the market potential. Now, interestingly enough, the CEO also announced that DIGE plans to expand beyond the HPV test. The two are clearly related: DIGE wants to grow past being a one-trick pony. Creating options for growth is always a nice thing to see, even if it is really just a way of getting a better price from a potential buyout.

ESV – Flat. YAOS (Yet another oil-related stock). ESV starred in downgrades by Citigroup and JPMorgan. (Remember, JPMorgan is the same company that said they thought the real estate market had bottomed.)

HOLX – Up 4%+.HOLX has been trading between $45~50 for the better part of a year. I am hoping that the next earnings release will push them up to $54 and stay there.

ILMN – Up 4.5%. ILMN has been consolidating around $39 ever since it announced its acquisition. ILMN has had a lot of positive news recently. They are working with the Mayo clinic. They will probably benefit from DNA (Genentech’s) great results. I spoke with someone who works for Genentech and has friends at ILMN. He said that his friend talks about amazing business. For what it’s worth…..

IMA – Up 5%. An acquisition of a distributor in Canada was well-received.

INFY – Up 5%. Blistering earnings results and it hit a new 52 week high. Earnings up 51%. I am not convinced that these results defy the IT slowdown in the near future. These earnings could reflect past contracts reaching maturity. I’d like to see it hit $58 and then I’ll consider leaving.

MDR – Up 2.7%. I think their nuclear energy products should soften the perceived oil sector issues.

NUAN – Up 5.5%. They are at a 9 month high, and only positive news so far. I wonder if the iPhone will use this technology…..We are up 20% here and I could see more when earnings come out, potentially $14. This feels like more than pre-earnings excitement because it has been on a solid move up since July (after a major collapse in May).

OCN – Up 6%. OCN finally seems to be making its move: it hit a new 52 week high and is above $16. (Yeah, I know, price points are only psychological, but it’s a nice thing to see.) I do think that this is pre-earnings excitement.

PCP – Flat. PCP seems to be ignoring the broader market: moving up on down days and down on up days. It hit a new 52 week high this week before pulling back. Actually, they started the week with an announced acquisition of a rivet maker (all part of providing aerospace manufacturing support to Boeing). Also, one of PCP’s previous acquisitions (SMC) is yielding better margins than expected.

TIE – Although ending the week flat, TIE dipped as low as $28. I said that it would be a bumpy ride to $35, and I wouldn’t be surprised to see a rally shortly. I continue to think this company is undervalued, but it keeps staying within the $28~$33 zone. Watch it test $33 the closer we get to earnings.

TRID – Down 5%. And it hit $17. The flat panel TV sales were expected to exceed the wildest expectations. This is probably being discounted because Xmas sales were mostly booked last quarter when manufacturing took place. So the fear is about margin pressure and ongoing demand in the face of potential consumer spending slowdowns. There is also a rumor that Toshiba is taking its business away from GNSS and giving it to TRID. Prices and margins can get squeezed 5% as long as sales grow much faster. Earnings were released Oct 25th, my options expire Jan 19th – probably before the next earnings release. In other words, the market has proven that it can stay irrational longer than I can stay liquid.

UCTT – Up 18% this week on no n3ws. Not only did it hit $15 for the first time, it went way beyond, stopping just pennies away from $16. Volume has been very strong: a sign of pre-earnings excitement.