Tactics Going Forward

If you followed my advice on December 23rd, you would have either:
1. Put a trailing 5% STOP on your positions
2. Put 5% of your portfolio into puts3.
3. Bought AAPL puts when it hit $200
(http://liverocket.blogspot.com/2007_12_23_archive.html)

Alternatively, you would have bought any of the puts I reccomended on Jan 6th


The ideal approach was to use a combined startegy of puts and trailing STOPs on the long positions. For LiveRocket, however that was just not possible because, as I stated previously:
1. I do not have the bandwidth to jump out and jump back in (not until February)
2. LiveRocket follows a long approach - no puts

I am hoping that most of the positions will recover over the next few months. MVL, for example, is already back. We did miss a prime opportunity to buy back in at a lower price (my favorite method of maximizing gains). However, I think all will be fine.

Now that earnings are being released and most are positive, the market is breathing easier. Note that companies with US exposure are suffering (HOG, for example) but global oriented companies are doing fine (IBM, CAT, JNPR). That is exactly what we expected.

In the next few weeks, I predict another see-saw:
1. Jan - Mid February - Slight rise in markets. A wave of good earnings coupled with the current oversold conditions will stabilize the markets and even move them up
2. Mid-February - Renewed doubts and concerns. More indications of US recession.

Do not get lulled into being bullish. You should close out short positions and re-open them in about 2 weeks.

Earnings Release: NE

Although we own ATW and not NE, it is worth looking at to understand the sector.

* Earnings grew to $347.4 million, or $1.29 per share, from $199.7 million, or $0.74, last year. That's up 74% YoY and 9% sequentially. Earnings included a one-time $0.06 EPS cost due to a fire.
* Sales up 50% to $761M
* 80% of available rig time is booked for 2008.

Given the continued demand, I see nothing but positives for IO, NOV, ATW and others.

Earnings Release: MEMC

An amazing quarter! The highlights:
* Net income grew YoY to $376.4 million, or $1.72 per share, from $129 million, or $0.56 cents per share. Excluding a one-time gain of $0.75, the earnings were $0.97 EPS. Analysts expected $0.96.
* Revenue grew 27% to $535.9M from $420.6M last year. Analysts expected $544M. The $8M sales gap was due to a shut down at one of the production plants.
* Gross margins increased to 54.8% from 48.3% last year
* PE of 22 (excluding the $0.75 one time event) with a forecasted growth of ~30%.
* Raised revenue and earnings guidance by $5M and $0.40~$0.50 (a 10%+ increase). that excludes any future gain on the Suntech warrants

WHY YOU SHOULD BUY MORE
* Demand for wafers exceeds supply - While I think solar power demand will slacken in a recession, there is no denying that solar will remain in hot demand. Chip demand continues to grow as well.
* Margins accelerating
* Production expanding to meet more demand
* Limited competition for high volume, higher margin 200mm wafers
* Suntech warrants - WFR has ~8M warrants priced at ~$28. They can exercise 20% per year and they have been cashing out each quarter. STP was recently trading in the 80s and is now in the 50s. This is an earnings kicker of at least $50M per year.

Earnings Releases: PCP

PCP is down 30% since mid-December. But consider their fundamental business strength:
* Net income for the quarter $1.73 per share versus analyst estimates of $1.72 per share. That is up from $1.14 last year (55% gain)
* Quarterly sales of $1.7 B versus analyst estimates of $1.74B. That is up from $1.38B, a 22% rise.
* A low P/E of 19
* Net Margins increased YoY to 21.4% from 16.9%

So why the drop? Partly the concern over the $40M gap between expected and actual sales. And partly concern that they beat by only a penny (growing 'only' 55%). I don't know what caused the sales gap - obviously at 21.4% net margins, $40M would yield an additional $0.06 EPS.

WHY YOU SHOULD BUY MORE
This company has it all: rising sales and accelerating margins.
From a business environment perspective, they also have everything going their way.
Costs are dropping - Nickel and other raw materials are dropping in price
Production is increasing - They have more production lines starting up this year, which means more sales
Demand is booming in aerospace - This growth is coming BEFORE Boeing begins Dreamliner shipments. As we know from GE's release, demand for engines is through the roof - and that confirms the demand for PCP products as well
Incredibly low valuation - A P/E of 19 with 30% projected earnings growth next quarter and a conservative 18% forecasted growth next year.

The upside is that when Boeing begins shipping Dreamliners, PCP will have the production line capacity to meet the strong demand. The current forecasts of sales and earnings are too low imho.

Far from a bottom - but some segmenting is happening

Well, I just got back from Japan. It seems every time I hed overseas, a big crash happens in the market.

The final wave of a crash is typified by retail customers pulling out. I suspect that will happen strongly this week. So why am I still long?

To begin with, the model here doesn't allow me much leeway - I agreed to keep this a simple model with no option plays. However, I am thinkingthat we should buy a contrarian ETF fund like Proshares.

Also, I think we will be rewarded for holding through this earnings season. Consider the GE earnings report last week. The CEO said:
"Every place we went, there's a need for power, there's a need for planes, and there's just no signs that this global infrastructure boom is slowing at all."
And that's where we are firmly invested. That's what I call segmenting: we will start to see separation, with consumer related stocks continuing to crash and infrastructure related stocks continuing to grow their business.

As if to underscore this point, the question was raised: "... how long does it last and how does the U.S. recession impact the rest of the world?"

The US consumer needs to be written off and even in these sectors there is a slowing growth.

The US faces a simple choice between a painful and deep recession or a lingering, multiyear recession. The odds are on the latter, not the former. Again, we are not talking about a technical recession where we roll back the housing bubble and the math works out to falling GDP. I mean slow consumer spending across the board.

I think you should focus on buying puts. A strategy is to buy and then sell by the end of the week. Don't wait too long imho. Although I think we have yet to see a bottom, individual stocks could see a sudden move up. There is some bottom feeding that could push a stock up in the short term.