Inflation moderating?

It occurs to me that in some respects, inflation is moderate.
I know - that's a tough one to imagine. But consider the case of oil. Gas prices last year were $3 on average - exactly where they are today.
http://www.gasbuddy.com/gb_retail_price_chart.aspx

My point is that while gas prices are high compared to 3 years ago, measured on a year-over-year basis, they are fairly constant. So inflationary measures should appear to be moderating.

Add to that the drop in other commodity prices (steel, lumber, aluminum soon), and we would actually say that inflation is moderating.

Where it isn't moderating is food - largely because of unintended consequences tied to the corn ethanol fiasco that is brewing.

TRID - laughing and crying

Ok, it's dropped 30% in ~2 months, and on high volumes.
That's institutional shedding and usually a sign that something is not right and that the word has spilled out to the funds.

I checked and found that there are a lot of rumors about missing business at the majors, but the institutional analysts at CIBC claimed to have done checking that completely disputed the rumors. More critically, TRID picked up Westinghouse and plenty of other Chinese manufacturers. They continue to grow market share in a fast growing product. Enough said.

There is also a rumor that TRID will miss the earnings re-statement this quarter. Interestingly enough, both Lehman and CIBC claimed that they would resolve it BEFORE the July 19th earnings report. frankly, I don't care if they hit or miss the date because the deadline is 100% absolute: October or they get de-listed with no appeals.

Short interest has climbed to ~20%, and I am certain that that is also creating downward pressure.

At $18, I'm satisfied that we've hit close to the bottom. I'm getting in tomorrow and buying calls.

Feels like whiplash

Big down days followed by big up days - it's getting hard to know what is going on.
I hold firmly to my belief that this is being driven mainly by
1. Technical noise tied to interest rate jitters
2. End of the quarter re-positioning
3. Hedge fund margin management

I am mostly concerned about the latter. Did you know that Bear Sterns had only $600M in one hedge fund but used it to borrow $6B? They are suffering from the institutional equivalent of margin calls and had to cash out of stocks to cover their positions.

Now imagine that there are 300 similar funds (there are actually quite a few more). Oh yes, it is that ugly. Goldman Sachs has seen their CDO bond sales drop from $20B to $3B. Nobody wants this garbage and someone has to cover. What happens next is the banks have to re-state the bonda that they hold on their books - massive write downs.

Now imagine that all of this covering by institutions is leading in 2 directions
1. Cashing out
2. Borrowing more
The Fed's reluctance to drop interest rates (and the increase in rates internationally) makes borrowing more expensive.

And bond fund gurus like Bill Gross have turned Bearish - nobody wants these bonds.

Again, should be good news for the stock market except for the need to cash out of stocks to cover bad bond positions.

Technical retreats, fundamentals are ok

CLB announced that it was raising earnings guidance by 10% - above analyst expectations. Stronger than expected demand was the reason. The stock fell.
In fact, energy stocks and commodity stocks all retreated.

I think that this is mainly window dressing for the end of the quarter - it's a technical retreat and is not driven by underlying strength or weakness.

TRID has collapsed. When it went below $20 I started watching for a buy-in price. I kept seeing weakness and held back. Now we are near $18. I'm still going to wait but not long. The company is raking in the cash and only the options overhang is preventing it from moving up. I am thinking about buying some $20 January calls.

I think the retreat will last through the week, possibly even after July 4th. But earnings are coming in and they are strong, so I think this is a buying opportunity.

LiveRocket Week 25 Performance - Down 1.7%

Fundamentally, the economy remains rock solid thanks to global demand and strength. Short term worries about interest rates are just that: short term.

There is a liquidity retreat tied to the housing market, and that retreat has yet to play out. I see the following over the next few months:
1. Bonds pressured by subprime collapse. The subprime issue is not contained. Other bonds will get hit, and prices will drop. That is, the intrinsic value of many bonds is ~50% of stated value AND many institutions will begin dumping the eroding bonds. It creates a free-for-all that leads to a collapse in bond prices.
That could be good for stocks (leave bonds, buy equities) except that….
2. Hedge funds will scramble to make margin calls on their bonds. Funds will dump stocks to get cash. Notice the past 2 weeks that there has been a very indiscriminate sell-off of stocks.
3. Earnings season will be good but the response may be delayed as the hedge funds manage a bad situation.

As we head into earnings season, my overall concern is stock price value. That is, are the current prices already reflecting a fair price.

I am thinking that we reduce our non-energy related holdings and beef up our energy related holdings.

HIGH TECH
AMX – Down 1.3%. Hit a new 52 week high this week. They are trading at a 28 P/E, which feels reasonable (especially if it drops to 23 after the earnings release in a few weeks). 23 P/E for 40% growth.
CTSH – Down 3.9%. I thought we were going to move again as we approached $80, but the retreat in the face of resistance was disheartening. They are expected to grow ~40% and they have a 43 P/E. Feels fairly valued. The chance of upside is there, but not especially likely. I am going to wait for a surge and dump. This was a mistake.
NUAN – Down 1.25%. After hitting a new 52 week high, NUAN dropped after announcing a planned purchase of an AOL subsidiary that specializes in predictive text software for cell phones. The acquisition makes sense considering the direction of cell phone as universal device. In any case, the deal feels pricey: all cash $265M for a company generating $60M+ annually. And the earnings will drop substantially.
So why do it? China. Tegic brings an immediate channel access to China cell phones.
However, NUAN has shown a strong ability to integrate companies. Plus, it has a clear strategy of acquiring companies with strong revenue streams.
A major analyst protested that this distracts from NUAN’s “core business” of call center support (using computers to handle 411 calls). This analyst apparently does not see the cell phone business opportunity. Voice recognition has multiple channels.
Traded on 4x average volume.
PWR – Down 5.9%. I think that they are fairly valued.
TRID– Up 2.9% and on strong volume. I am going to use our cash to buy more.
UCTT – Down 4% on ~5% average volume.

OIL SERVICES/EQUIPMENT
ATW – Up 2.9% and hit a new 52 week high. Say no more.
CLB – Flat after hitting a new 52 week high
ESV – Flat.
MDR – Down2.6%. They won a major Trinidad gas construction project.

BIOTECH
DIGE – Flat, but it doesn’t matter. It’s on its way to $61 buyout price.
HOLX – Flat.
IMA – Flat.

OTHER
KSU – Down 5%. They are at a 2 month low but a lot of this is tied to the excitement after Buffet bought into railroads.
OCN – Down 5%. With foreclosure activity bursting at the seams, they will benefit.
PCP – Down 1%.
TIE – Down 5%. It is now a 19 P/E with 30%+ growth.