Most of our stocks continue to trade on less than average volume. I don’t know what this means, but I take it to mean not to take for granted the recent upwards movements.
After getting out of MDR, I posted that I would be removing the Sell prices and revisiting them. Or I thought I posted. I’ve been having more than a few problems with the blogging host Blogspot. Or maybe there’s a conflict between it and my PC, but sometimes things don’t post and if I’m not careful, I move to another website thinking its posted and it hasn’t.
So there are two things I’m saying: (a) I removed the sell prices for revision and (b) I am going to take this opportunity to announce that I am moving to a website. In about 8 weeks, I should have something up. I’ve reserved the domain LIVEROCKET.COM.
My goal is to make navigating a lot easier. Instead of scrolling through the posts, you can click on a link to a theme (portfolio, investment strategy, stock review, whatever). If you have any strong thoughts about themes, now is a good time to let me know.
I imagine the bull rally will continue into earnings season, so sitting on the sidelines is not a smart way to go.
However, be very careful – a lot of companies will be window dressing to show better than actual results. Examples emerged this week at Lehman Brothers and Goldman. No way their losses were so low from the real estate industry. These guys are at the center of the subprime meltdown and they have just found a clever accounting gimmick that allows them to hide their losses. Essentially, they are stating the value of the assets because a market for them does not really exist.
It works like this – say I have $1B of gold and $1B of an exotic metal called Unobtainium. If gold drops 10%, then I must declare losses of $100M. But if Unobtainium is not being traded, then there is no reference point. I can claim any value I want. In reality, if I try to sell my Unobtainium, I’ll get maybe 50% of what I paid. But as long as I don’t sell, you won’t see my loss. Yes, it is Enron all over again.
As an interesting side, a reverse of this was occurring in Japan back in the 80s and 90s. Many Japanese companies were also large landholders. As the price of land skyrocketed, the underlying value of these companies surged as well. However, they continued to report the land value at some fraction of the current value.
The term that is often used is marked to market, and it refers to the action of taking something and selling it at current market prices. In the Japanese example and in the Lehman example, both were not marking to market. Is that wrong? Not necessarily. If someone buys a house, is it worth what they actually sell it for or what the appraiser values it for? Same with these companies: the paper gains/losses don’t necessarily matter until the asset is sold.
At the same time, however, the purpose of a quarterly earnings report is to give investors some sense of what could drive value. What is wrong here is that Lehman isn’t just saying “I haven’t sold so any gain/loss is just paper.” Rather, Lehman is trying to hide the asset so that investors can’t see and judge the potential value. They are committing the sin of omission, and doing it on assets that everyone knows are worth less than they are.
Bottom line – investment banks are lying about their value and it will be 2 or 3 quarters before the truth comes out.
That will matter as we wind up holiday sales and the figures are less than fantastic.
Housing will continue to fall in value. The interest rate drop will not trickle down to consumers. And besides, the housing market is blowing up because of affordability. Nobody can or should buy a home that requires a mortgage >5X their salary. And a 5% drop only brings the mortgage down from 11x to 10x. It isn’t enough.
(Strangely, tho, it happened just in time for those Christmas bonuses. Hedge funds and others base bonuses off the performance to Sept 28th – and the market could top 14,000 again by then. How convenient.)
TRID yet again makes the top of the list for most irritating stock ever. We got bumped out at $14 only to see it run ~10%. That’s ok, we bought MICC and FWLT which moved up almost as much. I do want to get back into TRID but I want to see if it pulls back again.
AMX – Up 5.1%
ATW Up 3.5%
CLB – Up 7%.
FWLT – Up 2.6%. They announced a new contract to build a coal plant in Spain.
HOLX – Flat. They closed Biolucent, a maker of a mammography accessory (a breast pad). It was small and dilutive: HOLX used $65M of stock to purchase the company and they must pay out ~$30M in cash over 2 years. Their last quarter yielded $25M in net income, so $15M per year is not small.
I raise the point for several reasons.
1. Nice Synergy – Given the strong sales HOLX channel, dumping a complementary product into that channel will boost the Biolucent sales quite high. And it stresses the HOLX position as more than a machine maker
2. No impact on stock price – The purchase was relatively small and I don’t think it held back HOLX’s stock price. They are down for the past 6 months
We are not going to remain in stocks that are weak after 3 quarters. That means that we will certainly leave behind a few eventual winners, but locking in gains is critical as the market begins to turn.
Put differently, what keeps HOLX from breaking through $60?
I’m not sure, but I see one possible momentum driver in the year-over-year EPS. Because of a loss last year, HOLX has $1.12 EPS for the last 12 months. Assuming they hit their numbers, the EPS will jump to $1.62. The P/E will drop from 50 to 31. That should make it show up on radars as undervalued growth.
If it doesn’t move, we leave. It’s just that simple.
IMA – Up 5%. Strong volume here. Someone just bought a big block of shares.
MICC – Up 8%. I think the recent huge drop was caused by a leak over the NASDAQ issue. As of Sept 3rd, MICC was non-compliant with NASDAQ rules regarding auditors – an audit Director resigned from the Board. That very day is when MICC began its slide from $85. I am not concerned and I’m glad that we added to the position
NOV – Up 8.2% and on heavy volume. They also hit a 52 week high. They split next week. NOV received some positive spin on its credit ratings from S&P.
NUAN – Up ~3% and on strong volume. NUAN continues to battle back to $20, but a solid quarter should keep them there.
PCP – Up 11.2% and they hit a new 52 week high. A falling dollar just gives more edge to Boeing (over Airbus) and PCP reaps the benefits.
TIE – Up 8.3%. Not TIE specific – this was a commodity metals move thanks to the Fed.
