Liverocket Performance Week 28 - Up 0.66%

Apologies if this is hard to read. Very soon I expect to reduce this grouping to fewer stocks.

The past month has been an excellent time to be in the market. We aren't up as much as we should be and here's why:

UCTT - I don't understand the drop. I thought we would see a pre-earnings run up, but not at all. It keeps bouncing around $13. And frankly - it is UCTT specific. AMAT/LAM are both up big. DRAM makers slowed purchases the 1st half of 07 but are ramping up. I would expect that to have been felt in UCTT's stock price and causing a move up.

UCTT continues to meet my investment criteria of undervalued growth, strong management and the potential of acquisition. It does not fit a core requirement of accelerating growth, but I felt that was a near term problem only. I hope that I am not wrong.

OCN - Every day I read about foreclosures surging. This is OCN's bread and butter: foreclosure. Could be tied to a general bailing on the financial sector, but we are playing contrarian here, so we should be gaining. This was risky but still....

ESV - 5% pullback as the recent price run up is being written about.

TIE - This is 12% of the portfolio and it's just sitting. It's doing better than RTI and worse, much worse than ATI. Why? Compared to its competitors, TIE has much higher margins, and comparable P/E.

It is sitting at its 200 day moving average, a sign of a bottom and a sign of limited investor interest. Why? With the dollar down it should be getting the benefit of higher worldwide prices. Analysts and others note the incredible demand for titanium. Takeover targets like Alcan are being compared favorably to TIE. With a limited float, one would expect these elements to drive up prices for 'scarce' shares.

I'm staying in for now because I see this at $40 easy, which would be a nice return.

TRID - 8% of our portfolio and we added to it this week. Again, the pain is very TRID specific - the sector is actually up nicely. It's the whole de-listing thing. A normal company would deal with the issue and get it behind them, and that's my investment thesis. That would also mean a massive run-up in price.

There is a very real possibility that management doesn't care. Yes, in my most frightened state of mind, I can and do see a nasty management play to take it private. Letting the stock collapse makes it a cheap buy with potentially higher upside than a few million in options and shares.

That would fit the real reason why management has been making the rounds of investment banks: to prove the value and line up the funds.

If management were to try doing this maneuver now, while publicly traded, a lot of companies would pounce and the price would return to a more reasonable level ($30)

But let it get delisted, and it's a different game. It's off the radar. And the former CEO can come back in and take charge.

The only reason I don't worry about this is that I would see the company sued into oblivion by US shareholders. Of course, if headquarters gets moved to China....

lets hope I'm right....

The Beginning of a New Beginning

We are finally seeing the beginning of a change that will lead to the end of a US-centric global economy. Change brings opportunity.

Global growth of consumerism = expansion of US brands
More middle class = US lifestyle (travel, home appliances, healthcare)
Raw material consumption at new high levels
Banking changes = liquidity surge but US must compete more for that liquidity

I think the US-centric economy was an anomaly. I also think that we are returning to the Silk Road global economy of 2000 years ago. And I think that the internet is at the heart of it all.
This may be better considered elsewhere and in more documented fashion, but let me take a stab at this.

The Death of the US-Centric Economy
Over the past 50 years, population centers have not been economic centers. 1 billion Chinese and 1 billion Indians had a pretty small share of the global economy. The same with Asia, Africa, South America, and the Middle East. I would even go so far as to say that Europe might have fallen into something akin to insignificance without the US Marshall Plan. In fact, I would argue that the only economies that grew succeeded by trading with the US: Japan, Korea, Europe, the Middle East’s oil countries, and so forth.

This economic dominance meant massive inflows of capital, the dollar as financial instrument, manufacturing and high tech leadership, and lack of competition for resources. In each of these areas, US dominance is under threat. At the same time, the emergence of new and incredibly large markets (Middle East, Russia, India, China) suggests that US dominance will grow in many new ways.

The Global Economy Shift
The world economy is still very much US centric and will be for some time. Middle Eastern ad Russian economies are one dimensional economies: oil and gas. They may vertically integrate into manufacturing plastics and chemicals, but overall they will fail. The seeds of their marginalization are already written:
* Russia’s collapsing demographics coupled with hyper-aggressiveness show a country punching far above its weight. This will lead to desperation and embarrassing mistakes. Additionally, the horrible corruption and political interference drives business away. Overall, the world economy would prefer to avoid Russia although it wants Russian resources
* Middle Eastern countries don't have a tradition that supports much of a presence on the world's economic stage beyond oil. They can't be an Israel or Singapore because they actively prevent free flow of thoughts and productivity. Oil countries depend almost exclusively on migrant labor to produce everything. (While the US leverages cheap Mexican labor, Middle Eastern countries depend on it.) Saudi Arabia wanted to replace migrant labor with its own citizens and found that none had the skills or, worse, inclination to work. The violence in the Middle East drives away investment, interestingly, the violence tends to emerge when times are good because the money is available to stoke the flames.
* But India and China are much more multi-dimensional.

I can’t help but be reminded of the Silk Road 2000 years ago. Trade between Rome and China. Raw materials from Africa were plundered and made into goods in Greece and Rome. India and China made their own goods and traded with Rome. The Middle Eastern countries played the role of traders. The New World was isolated and can’t be considered at this time.
Flash forward to today. Asia and the West make things and trade with each other. Other lands supply raw materials. The Middle East continues to be dependent on global producers.

In effect, we are returning to a familiar order where China, India and the West are the poles of economic power and wealth.

Consequences of returning to the good old days
The first thing has been deflation of manufacturing costs. The internet enabled a reduction in inventory build up aka just in time manufacturing. Additionally, it enables a broader web of suppliers. Add a dash of competition and we find incredible efficiencies and low costs. Low costs means low consumer prices.

The unleashing of the Indian and Chinese economies has been followed by the harnessing to a more integrated global economy (at first a US centric economy). Wealth has increased in many places and middle classes have arisen. Hundreds of millions more consumers have access and exposure to products that they never had before (products that are coincidentally much cheaper now, as well).

Hundreds of millions more consumers will lead to exactly two things: competition for resources and desire for the US quality of life. Competition for resources will mean higher prices as well as demand for US products. Start with the basics of infrastructure (folks want to fly and drive easier). Water and electric grids need building out. Phone and internet systems too. And then there’s healthcare, Western quality healthcare. Medicines can be copied, but faking diagnostic machines will be less welcome and less tolerated. And entertainment and leisure will boom. Indian ski slopes, anyone? How about an Indian wine industry? Or a Chinese one?
Go back to Japan in the 80s to see how a newly rich middle class behaves – luxury goods get hot.

And that is huge for the US, because it's our lifestyle and we can easily ship it over. Look at Starbucks' success in China, for a ready example. I would expect popular Western brands to invade other countries that have no existing brands of their own. Why can’t Victoria Secrets succeed in India? Western standards of food production certainly look positive in China today. Indian and Chinese companies will try and copy US style branding and shopping retail store layouts, while US companies will invade. Some brands will even invade the US, but not many. Look back at the Japanese and Korean brands in the US and you’ll see that they are isolated to manufacturing where price/performance were critical.

So US consumers will be treated to new selections and flavors. US producers will be treated to hungry new markets.

Banking is an area where I see problems and opportunities. US expertise doesn’t look very attractive in the face of the subprime fiasco. But the move to global accounting standards and access to funds will make the US expertise desired. Watch Citibank and others work to invade other countries. Same with credit card companies like Mastercard. Alternatively, the US may adopt eCash based on cell phones.

But fundamentally, the US is facing a big problem because it has to compete for liquidity and investment. As a center for intellectual capital and product development, the US outshines every country and will continue to do so for the foreseeable future. So investment in companies will continue.
I am much more concerned with investment in the US dollar. What are the consequences of competition for funds? Higher rates. Long term, I don’t think we’ll see a drop in liquidity because there’s just too much money out there. But I think that the US will suffer from a focused pullback in the housing market.

Lastly, I wonder if geopolitics will get more not less stable. In the bipolar Soviet/US war, competition existed to create marketplaces aligned with one or the other giant. While the US focused on maintaining stable trade routes, the Soviets were all about Russian plunder and empire building.

The end of the conflict meant that old animosities could arise and that false animosities would dissipate.

I think China and India will join the US in putting out conflicts that interfere with trade. China will prevent Iran from attacking oil tankers in the gulf, for example. And Israel's technology may become more important to China than access to oil. For example, as alternative fuels and technologies take hold. But this is much further out - 10 years.

I also think that India will be put on the Security Council and Britain and/or France gets booted out.

So where do we invest to take advantage of a sudden burst of hundreds of millions of new consumers dialing into the global economy?
Planes, trains and automobiles.
Electric and water grids.
Internet and cell phone service companies
Medical device makers.
Consumer products.

That’s where I think we are, with 1 or 2 exceptions.

Great day - some quickies

After dropping 1% midweek, the markets rebounded strongly. The week’s totals are:
Dow up ~1.8%
NASDAQ up 1.5%
S&P up 1%

The reality for us is very minimal change this week.

Watch for major short covering, pushing prices sky high

HIGH TECH
AMX – Flat
CTSH – Up 10%. Up every day – says nice things
NUAN – Up 4%
PWR – Up 3%. Hit a new 52 week high
TRID– Down 3.5%. It’s all about next week and the potential delisting
UCTT – Down 3%

OIL SERVICES/EQUIPMENT
A slew of sector downgrades due to the recent price accelerationATW – Flat after hitting a new 52 week high this week
CLB – Flat
ESV – Down 3% after getting a downgrade to underperform. This was based on pricing getting ahead of itself. Yeah, right.
MDR – Down 1%

BIOTECH
DIGE – Down 1%
HOLX – Up 2%. Their usual pre-earnings run-up, I hope
IMA – Down 2%.

OTHER
KSU – Flat
OCN – Up 2%.
PCP – Up 2% and a new 52 week high
TIE – Up 2%

Housing throws in the towel

http://news.yahoo.com/s/ap/20070711/ap_on_bi_ge/home_prices;_ylt=AttBDReqQnTq4Nz0_nxhqQNu24cA

Just a few months ago, the Real Estate spin-meisters were beating the drum of a housing bottom. The NAR even claimed a 1%+ price increase. A lot of people were hoping for a Spring re-bound.

But the homebuilders were not cooperating with this fantasy. Every quarter the homebuilders have presented evidence of an accelerating erosion. DR Horton just announced that cancellations increased from 32% to 38%. Ouch. And this is prime buying season.

So now they are throwing in the towel on this year and looking to next year. The drums are beginning to beat. Next year will be the bottom, they say. And the Fed has to drop rates to support the housing industry.

This, of course, is wishful thinking.
Higher costs of borrowing - Lenders are going to get more demanding with the collapse of the subprime market and a writeoff conservatively estimated at $52B (and more likely approaching $100B in 1 year). And, of course, there will be fewer lenders
Fewer Buyers - Naturally, stricter lending standards will reduce the pool of buyers. And with foreclosures accelerating, many buyers will be unable to buy due to that pesky bankruptcy note on their credit reports. And investors and speculators are gone - and they were about 30% of the buyers. That's my figure based on fundamental reality that home sales are down that much and more - and I believe that the bulk of the gap is because speculators/investors stopped enteringthe market and flipping. Whatever the case, fewer people want to buy the inventory out there
More sellers - Bankruptcy will create more sellers, investors will dump houses, and so on.
Prices are dropping, not rising - There may be a false bounce, but the ARM re-setting will kill it. As reality sets in, people will not buy.

Steady, Steady

Ie said not too long ago that things would be volatile. I mentioned especially the fundamental fact that investment companies would have to dump shares to cover their bond positions. Couple that with the usual earnings cycle voltility, and we end up with stocks running up and falling back.

At the same time, we have some specific items.
TRID - As one wag pointed out, on Wall Street you are guilty unless proven innocent. In this case TRID is guilty of a suspiciously drawn out options grant overhang. Executives cheated on stock option grants or worse.
But what are the ramifications of a worst case scenario? After all, any re-statement of finances is historical. The only impact today will be fines and lawsuits. Fine amount will be anybody's guess, but lawsuits will take years to have an impact.
So the current impact is slight

UCTT - Crashing pre-earnings, not rising. Like any small cap stock, their price can be volatile. I don't have any visibility into reasons. The last shareholder meeting warned of short term order slowdown, but that should have been baked in.

CTSH - Up strong. I want out at 90

Buying TRID 200 shares

Just bought TRID 200 shares $18.59
yes, I'm doubliing down

Great Day to Buy

This is a great day to buy.

First of all, some pullback is okay. Stocks have been creeping up in a pre-earnings excitement.

Second, earnings are bad for housing related stocks. this should be no surprise. I was banging on the drum all last year that appliances and home building related stocks would be suffering very fast. They tried a lot of accounting tricks to keep earnings high (like stock buybacks) but ultimately the time was going to come when they couldn't hide the reality. Well, it has happened.

Be very clear: new couches, new washing machines, and home improvements are driven mostly by moving. People move and they upgrade. Or they want to flip homes and have to repair/improve them. Well, with housing sales down ~30% in volume terms, this was inevitable.

Does this bleed to other consumer spending? Not yet. How many iPhones were sold in 1 week? Official figures aren't out, but estimates are for ~200,000. That's 200,000 very expensive phones. Consumer spending is still going strong.

However, housing did bankroll other big ticket items like cars. I would be shorting HOG (harley Davidson) right now. Also, boat sales should be down. And RVs (which also suffer from high gas prices)
Bg ticket items are sensitive not just to the slowdown in the house-as-ATM: financing can be a lot tougher.

Overall, global consumer demand should meet any US slowdown, as long as those products are not tied to housing and as long as those products have a global market. HOG is not global. Anything that requires financing is under threat (furniture, appliances, motor vehicles).

Yet again, the market will be focused not on the past but on the future.

It's earnings season, and volatility is here.