LiveRocket Week 8 Performance - Up 1.24%

Overall, nice support considering the market had 3 down days in a row.
From a timing point of view, we are starting the next earnings reporting cycle. With about 5 weeks left in the quarter, this is when companies will start giving some guidance. And when hedge funds and mutual funds make their moves. TRID and UCTT are examples of the impact on small cap stocks when a large company makes a sizeable investment.

Short squeezes look likely for the following companies
HOLX – 15% short
NUAN – 16% short

DIGE has 11% short but the recent pullback is not likely to lead to a short squeeze. Stock will race up if it goes back to $51, because then shorts are squeezed.
DO at 8% short is in the same bucket.
-----------------------------------------------------------------------------

AMX – Down 2%, but staying close to its recent high.

ATW – Interesting 4% jump while the market went down.

CLB – Flat. Not liking the weakness after the great earnings. It’s not as if they had a run-up pre-earnings. One thing that interests me: it started the week down and stayed up for the rest of the week

CSH – Down 1%. Nice $0.035 per share dividend

CTSH – Flat. Watch for an announcement of a split and then we’ll get ready for a sale.

DIGE – Trading sideways. I think that means consolidation. Interesting developments among the competition. First, Roche has fallen by the wayside with their rival test. Next, Merck has encountered problems with proposing pre-emptive vaccination for HPV. They actually were roundly booed in Texas. The Merck approach matters because it would have bypassed the entire testing represented by DIGE.

DO – Up 1%. After starting the week down, DO rose an impressive 4% during a down week. I think the problem here is that DO is outside the M&A universe. It isn’t going to acquire or be acquired, so it won’t enjoy the premium. At best, we’ll see a P/E comparable to lower end of peers.

ESV – Up 3%. Released earnings and what a phenomenal release.
Earnings up 67% (and beat expectations by 6%).
Sales up 51%
Utilization has hit 96% (2 rigs are out of production for retro-fitting) and dayrates are up 36%
Analysts keep focusing on the Gulf of Mexico slowdown. Two things: ESV has reduced its GOM rigs, moving them to higher paying sites. Second, natural gas is set to surge, driving GOM demand. Notice these tiny moves lately - looks like consolidation before rising again.

HOLX – Up 3.5%. Major breakout.

IMA – Flat. They re-scheduled earnings to this coming Monday. I wonder why.

INFY – Down 3%. Pulling back from recent high as well as a sudden drop in the SENSEX.

MDR – Flat. Won a $125M contract to build part of a terminal in Indonesia. Strange pullbacks recently, unless someone is trying to lock in gains after a 15% rise in the last 6 weeks. The stock keeps knocking on the $52 ceiling and getting pushed back. Maybe this quarter will allow them to break out. After the fabulous returns by competitors like Schlumberger, I am surprised at the disregard.

NUAN – Up 3.5% to $15. That was fast. NUAN is buying BeVocal, a small company that handles Cingular 411 traffic, among other things. NUAN is vertically integrating, and that is a big step as they go against Microsoft and IBM. The purchase is non-dilutive.

PCP – Up 4%. I smell stock split.

TIE – Up 9%. At last, we see some recognition of TIE’s returns.

Other noteworthy stocks
GRP – I’ve written about them. They regularly oscillate between $35 and $45, depending on where natural gas is. They are at $45 now, following great earnings.

KSU – We were in KSU and then out because of my concern regarding a slowdown in auto parts shipments. Indeed, that par of the business is down 10%. But it was more than offset by raw material shipments like coal. I think 2007 will be the year the Mexican connection plays a role. I could see some pullback in the short term, and they are getting closer to being fairly valued, but that does not take into account the disruptive aspect of a Mexican challenge to LA/Long Beach and KSU’s dominant role.

UCTT – Wow. Up 16% Friday due to a JP Morgan upgrade and 5X normal volume. Someone big just made a position. Wait for it to retreat again and get back in.

TRID – Up 6% Friday. What’s interesting is that from a technical standpoint, they are up but not signaling overbought (RSI<50).>

ILMN – I thought the recent moves have been closer to a dead cat bounce, and I may have been right. I’ll watch and see if they move below $35.

JBLU – These guys can’t catch a break. The recent cancellations clobbered them.

JOYG – Up 20%+ in 2 weeks ($10). Something is going on – buyout maybe. Worth buying some calls.

NTRI – They clobbered expectations and then sank just as fast as they rose. They are simply out of favor right now.

STX – They just hit $28. I bought a hard disc video recorder recently and I love it. Although PC sales may be slowing, HDD camcorders will make up the difference. My only concern is price pressure from flash memory, which is crashing hard.

ZOLT – What a volatile stock – up 50% in 1 month. Demand for carbon fiber is huge (windmills, airplanes) and ZOLT is king of the mountain. It’s a product that is stronger than steel, lighter than steel, and it doesn’t rust. That being said, I think the real reason for the rise is a short squeeze – 25% of the shares are shorted.

MRVL – made a decisive move above $20. Sorry, but I don’t see much upside for a quarter or two.

CRDN – they were on my semifinal list, and I hesitated because I expected lower military spending. I was wrong. Up a healthy 10% since December.

TEVA – It’s just a matter of time for this company. They recently moved up ~10%, and I expect some pullback. This is a longterm winner.

WFMI – They bought Wild Oats and the market liked it. Frankly, I think it was a waste of money. How does WFMI benefit?

* Expanded store footprint – I don’t think WFMI has an expansion issue. More to the point, most Wild Oat stores are too small to be instant WFMI stores. Some, yes. Most no. On the other hand, there is minimal geographical overlap.

* Remove the competition. That assumes that the shoppers are interchangeable (Albertsons vs Safeway, for example). They aren’t. Wild Oats is low end, WFMI is middle and high end. There is some upside in forcing the organic shopper to buy from WFMI. Oats does $1B annually = 15% of WFMI. But there are headaches as well.

Buy today or wait?

Wait.

It's been a long time since we saw a pullback. Tuesday started as a pullback but the market rallied. Today it may stay a pullback. I'd like to see a stronger pullback before jumping in. I'm just that greedy.

It's nice that our stocks have pulled back but only slightly. HOLX is way up and I don't see any news.

TRID - Jumping back in

TRID back near $20 is inviting. I have posted two reasons for loving TRID:
1. Incredibly undervalued
2. Possible takeover target

I won't go over #1 again.

But for #2, consider the following:
2 companies now own 16% of TRID outstanding shares: Wellington and Fred Alger.
Fred Alger went from 0 shares to 6.2% ownership last quarter. Wellington added 1.2M shares to a 9.6% position. Both are aggressive equity investment firms.

What strikes me as interesting is the Wellington position: almost 10% and that's where an investor must declare intent.

Dollar Wins & Housing Loses

Last week Ben Bernanke declared that the inflation battle was far from over and he suggested that interest rates could be rising.
Given that January wholesale prices collapsed 0.6% and inflation was at a moderate 0.2%, why the hawkishness? Yes, inflation exists but it is well within the normal range established by the Fed (<3% annualized).

Arguably the Fed has engineered us away from a looming train wreck. The combination of a falling economy and the crash of the housing market would have pushed the US into a hard recession. Instead, we have a fairly strong economy that is withstanding the housing blahs. At least for now.
Will this situation continue? Probably not. The economy will weaken over time and the housing burst will take a bigger bite.
But for now at least, the Fed has bought some time and wiggle room.

That wiggle room is important because the Fed was taking a major gamble: that a housing crash would not bring down the broader US economy.

Why would they be focused on sacrificing the housing market? Because they have to choose between the dollar and housing, and the dollar drives much more of the economy.

The common variable between housing and the dollar is interest rates. As you've noticed in the past few months, interest rates are rising in Europe and Japan. That matters because the US is now ~$800B in debt which it finances via treasury bills. (Yes, Tbills are sold to cover the budget deficit but the market for them is primarily to cover the trade deficits.) Those T bill sales must compete with Euro sales, and bankers focus on the rates. Interestingly, Tbill rates increased almost 0.45% as the market realized that the US might not lower interest rates (based on the stronger-than-expected economy) and that better tax revenue meant the Treasury wouldn't have to sell as much to cover the budget deficit shortfall.

What happens if the dollar does not stay competitive? The US gets an export advantage but since most of the deficit is oil, and oil will just get re-priced to handle the dollar weakness, much of the deficit won't change. A more important piece is that countries will no longer want to trade goods for the US dollar, not when equally liquid but stronger currencies are available. The news is already littered with countries starting to turn away from the dollar.

My point is that major external pressure is being exerted on the US by the international financial markets. The Fed is trying to keep the dollar attractive and interest rates are the only tool it possesses to achieve this.

My conclusion is that the Fed intends to keep the dollar strong via interest rates, but it is forced to do so wth deception. Why else would Bernanke refer to inflation worries and allude to possible hikes when every data point shows a mellowing of inflation? Especially when the rising interest rates kill the housing market. That was something Barney Frank wondered too.

Well, bad news: housing is going to get sacrificed. The Fed will not inject liquidity to save it. If anyhing, it wants to tighten. Already new rules have gone into affect. The market is obliging as well: several lenders have declared bankruptcy. Without easy money but in the face of rising mortgage payments, foreclosures will accelerate. No buyers means no sellers. It also means that, according to supply-demand rules, a lower demand with higher supply equals lower prices. Which hurts mainly investors and people who lose their houses, but it is deflationary in practice.

The tea leaves are showing no mercy for the housing markets. Watch out.