My Three Cents

We've Moved

2008-09-19T20:56:00.000-07:00

Come on over to -

LIVEROCKET.COM

Exciting doesn't do it justice

2008-09-18T20:29:00.001-07:00

Notice how every time we approach the end of the quarter, all hell breaks loose.

It's the manifestation of hedge funds and their investment behaviors at the end of the quarter:
1. Their profits are determined at quarter end
2. They place their bets before the end of the quarter (within a few weeks of quarter end, a company's business conditions can be relatively well sized up, especially if you spend time collecting insider info)

Another factor is lack of liquidity. Hedge funds thrive on leverage: they borrow form banks and investment banks. Lately, these financial entities are cash strapped, which means that funds are cash strapped.

Lastly, we have a commodity bubble blowing up starting in July. Copper, gold, oil - they went south. Quite a few funds were caught out and have had to sell to raise cash.

In essence, quarter end is setting off alarms and the funds are panicking as they struggle to meet deadlines. As if to prove the point, notice how the Fed's efforts to add liquidity to the market are sparking rallies. It's removing pressure on banks to preserve cash.

As frayed nerves are soothed by the Fed's ready cash, we will see a bounce. But it will be a short lived rally. Quarterly earnings are coming in. The markets will welcome anything short of negative growth, but mediocre growth will be the message.

My prediction:
A rally that will be boosted by options expiration tomorrow.
Then the markets will see-saw back and forth between elation that the government is in control and the reality that the economy is getting worse.
Capitulation by December as layoffs spread and companies can no longer hide the global recession (and seek to take the tax write-offs in 2008).

Meanwhile, it's also clear that the Fed and the Treasury are going to set up a japan-like entity to swallow the bad debt. That means that the time is definitely coming to buy financials.

I would like to add more QID in the rally coming up. Also, if I'm right and we are about to enter another trading channel, it's wise to not hold positions very long. We will probably bounce between 10,600 and 11,100 starting October. Similar to the 11,200~11,600 channel we just left.

Oracle beats - Thanks to the dollar exchange rate

2008-09-18T20:29:00.000-07:00

http://biz.yahoo.com/ibd/080918/tech.html?.v=1

* Earnings beat expectations by 7% rising to $0.21 GAAP vs $0.16 last year
* Earnings rose 28% over last year to $1.08 B
* Sales rose 18% to $5.3B

Without a tax gain and the dollar exchange rate, the growth would have been negative.

1. Taxes are 1.2% lower this year versus last year. That generated $15M or $0.03 per share.

2. Exchange rates contributed another $0.05 EPS
- EU sales rose 20% to $1.9B. Of which $190M is from the US dollar being 10% weaker this quarter than last year.
- Asia Sales rose to ~$900M. Of which $90M (10%) is from dollar exchange rates

In fact, remove that dollar exchange rate gain and the Sales growth was a lackluster 11%.

The currency impact is so significant, that Oracle expects it to reduce sales growth by 3% next quarter. Why? Because the dollar is almost flat year over year.

They are forecasting ~10% growth next quarter after the currency issue is taken into account. And that includes the tax gain. So, in fact, Oracle is forecasting almost no growth next quarter.

It's hard to mistake the reality underlying the accounting one-offs. Business is flat at best. Which means it goes negative soon - probably Spring of next year.

More Pain on The Way

2008-09-15T20:47:00.000-07:00

A 500 point drop and solidly below the psychologically critical threshold 11,000.

What's next?
The basic trend is down - corporate profits are slowing. The pace of fall will be driven a lot by the dollar & interest rates. The Fed would like to keep the economy ticking away with more interest rate cuts. And easing commodity prices give them much needed latitude to do just that.

A problem is that lower interest rates tend to weaken the dollar. That's a problem only insofar as the Fed needs other countries to buy Treasury notes. It's hard to entice buyers to stock up on even more eroding assets.

In fact, I suspect that Lehman Brothers was allowed to fail because China and others signalled that they wouldn't put up the money.

On the other hand, the volatility and expected market crash is driving a flight to quality - back to Treasuries.

In addition to the dollar question, the major issue now is a scramble for cash. Hedge funds in particular are net sellers of equities. This will push the markets down even further.

We are positioned awkwardly.
The positives - The Ultrashorts, QID and DUG
The mixed: ETFC dropped below $3, but I am not worried. This is a long term play.
The bad: MUR and the calls.

The calls could breakeven if one or two rally. BIG, for example.
But the Puts are the big problem. With 4 months until expiration, I am more than a little concerned. I am counting on this quarter to put some fear into retail stocks.
The puts aren't performing at all. I am amazed that HOG won't crash despite the obvious

Writing ETFC Covered calls

2008-09-12T08:50:00.000-07:00

Writing the ETFC $4 Oct calls
10 contracts $0.15 per share

Here's the math:
Sold Oct $3 $0.50
Bought back Oct $3 $0.35
Selling Oct $4 for $0.15
----------------------------
$300 cash for the calls
Moved strike price from $3 to $4

Buying back ETFC Oct $3 calls

2008-09-10T11:31:00.001-07:00

10 contracts
$0.35 each

Week Preview: Big Moves Up

2008-09-07T20:30:00.000-07:00

The markets will love the FRE/FNM takeover. This will be taken a s a sign of the bottom, and in a way it is for the investment banks. I expect ETFC to move up sharply. The systemic financial market risk has been removed.

As a Citigroup analyst put it:
"This stops well short of the 'nightmare scenario' where foreign investors start to sell the stock of their U.S. holdings, triggering a U.S. dollar collapse, but represents another factor arguing against more dollar-favorable capital flows."

In other words, a short term panic is averted. But the bad news has not been addressed. I expect the positive momentum to carry forward as banks report earnings. Then I expect retail to bring the markets back down. To reality.

Which means bad news for the puts and ultrashorts and possibly good news for the calls. After all, the real reason for the rapid run-down in commodities is hedge fund panic. Also, Hurricane Ike is sweeping up the Gulf and this time it might be a serious impact on Gulf oil and gas production.

US owns Fannie Mae and Freddie Mac: Inflationary or not?

2008-09-07T10:13:00.000-07:00

The government unveiled their plan to takeover FNM/FRE.

A quick re-cap of why this matters.
The mortgage industry today is structured very differently today. Mortgages are bought and sold to government entities, pension funds and other investment groups that want a steady cash flow. The banks processing the individual loans rely on a clearinghouse to aggregate the loans and sell them on. This role has been played by Fannie Mae.

Fannie Mae's role is more than just an expediter. It provides a certain amount of liquidity and risk management, both of which keep mortgage prices low. Without a Fannie Mae, mortgage rates would soar. FNM's business model is simple - they make money on the difference between the rates on the money they borrow and the rates on the loans they buy. That might only be 1/4%, but it's across trillions of dollars.

Lately FNM/FRE have faced a serious problem. Entities don't want to buy their debt because they rightly doubt the companies' longterm viability. Inability to borrow cash is a double hit: FNM/FRE can't buy mortgage loans and FNM/FRE capitalization (aka solvency) is a problem.

To calm the markets, some tricks have been rolled out. last month they sold $2B in new debt. http://news.moneycentral.msn.com/ticker/article.aspx?Feed=OBR&Date=20080825&ID=9058077&Symbol=FNM
In reality, they just rolled over new debt for old debt. Buyers of new debt were guaranteed that FNM/FRE would use the cash to buy back the same amount of old debt. In other words, buyers did not want to increase exposure to FNM/FRE but they were willing to go along with the game to bolster FNM/FRE shows of strength. Not only that, but FNM/FRE capitalization didn't change. Why the charade? To prevent a massive dumping of FNM/FRE debt. That would make their capitalization that much worse and make the value much less for the bond holders.

China had $340B in FNM/FRE debt, and they are selling it and not buying any more.
http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html?bl&ex=1220760000&en=911c9604f792c501&ei=5087%0A

The implications of a FNM/FRE failure go beyond the US housing market and hit directly at the entire US economic model. We depend on low-cost debt. The term "too big to fail" is bandied around a lot, but the reality is, if we don't keep FNM/FRE in business, then global investors will lose faith in our system. If we had to compete for money in the global marketplace, we would have to raise interest rates a lot higher.

Even saving FNM/FRE opens the door to inflation. A lot of money has to get printed to cover the debt. The US Government just added $5T in debt.

Now, not all of that debt is bad. But would you, as an investor, feel comfortable trusting anyone to tell you which is which? Especially given the current climate of accelerating foreclosures and falling prices.

In fact, price stability is critical. Can it be delivered? It will be very hard in a recessionary climate with unemployment rising. Incredibly, making housing out of reach for the majority of Americans is th eonly way to keep the US economy afloat.

It's hard to know how the markets will react. They will favor the 'business as usual' approach that will maintain the current system of writing mortgages and selling them on.
ETFC and other investment companies should look good because they can now unload their FNM/FRE debt onto taxpayers.

The dollar could even rise as US economic stability is delivered, regardless of the cost. After all, wth global recession on the way and inflation largely tamed, other countries have scope to drop interest rates. By default, that makes the dollar stronger. That would mean a further drop in commodity prices. Oil at $80???

Or will the markets realize that this can not be funded without printing more dollars, undermining its value? It's a fight between reality (the dollar is more worthless) and systemic collusion (governments fighting to keep the dollar strong)

Q2 GDP: Domestic recession and Export Strength

2008-09-07T10:06:00.000-07:00

I look at unemployment data for two very important reasons. First, because it gives a general sense of where the economy is heading. Unemployment is both a lagging indicator (business is good/bad and so they are hiring/firing) and it’s a leading indicator (the US economy is driven by consumer spending, which in turn is driven by income). Unemployment at 6.1% is at recessionary levels.

But a far more specific reason to watch unemployment is that it can reveal which sectors are doing well. If boom times mean heavy hiring, then heavy hiring confirms boom times.

http://www.bls.gov/news.release/empsit.t14.htm
From March to July, preliminary figures say that payroll has dropped 215K jobs (seasonally adjusted), and at a constant rate of ~50K jobs per month. Because the actual numbers are massaged and rarely believable, I will concentrate on the trends.

Most of the drop is from construction and manufacturing, just as most of the rise is in extracting and shipping coal, gas, oil and other mined products.

Over 50% of all sectors are firing people. Ignore Healthcare and the government, and there is almost no hiring. But the strongest growth in employment in relative terms is oil & mining. Nearly 5% growth in payrolls in just 5 months. Business must be good for those sectors.

For the rest of the economy, however, things are clearly trending down. Compared to the last recession, unemployment rates are almost as high. Also interesting is how similar the unemployment picture looks compared with the 2001/2002 recession
Sharp spikes in unemployment on a month-to-month basis
All monthly changes are increases in unemployment

The GDP numbers are also revealing. The first challenge is that the reported figures are based on seasonally adjusted and inflation adjusted figures. The problem is that this methodology says that spending on electricity and gas has been flat for 5 months.
Instead, lets use the raw data – not adjusted for inflation or seasonality.

The 2008 Q2 GDP was $1.43T, a $600B increase over 2007 Q2 GDP of $1.38T.
* Personal Consumption $500B: $100B more for food (7% annual increase) & $120B for gas/electricity (23% increase). Also $100B for medical care.
* Private Investment -$150B: Continued commercial construction grew $75B but was more than offset by a $150B drop in home buying and a $75B drop in business inventories.
* Exports/Imports: Exports rose $300B and imports surged $313B.
* Government spent an extra $200B.

Think about this for a moment. GDP spending increased because people had to pay more for food, gas and healthcare. They stopped buying homes and businesses stopped adding inventory. The only big spending entity was the government. That is not productive growth and it is not a good picture of the future economy.

If anything, this is proof that we are in a major domestic recession and only exporters are doing well:
- Companies are hurting
- Corporate Profits are down 7% since last year
- Investment is down (15% of GDP) and businesses are unloading goods and not restocking
- Consumer spending (71% of GDP) is going to essentials (food, gas, medical) and squeezing out everything else
- Durable goods (7% of total GDP) is down 2%
- Non-durable spending is up (22% of total GDP) but that’s mainly on food & gas
- Service spending (42% of GDP) is up and that’s medical care
- Exports rose – but that’s mostly commodities, which is not broad based
- Imports also rose, but that does not reflect a strong consumer appetite but the higher prices paid for gas. Peel out the gas component, and spending on non-oil related products is sharply down.

Business is belt tightening in response to lower consumer spending – administrative and support staff are being laid off, inventory is being dumped and not replenished, what’s next?

Reviewing the situation

2008-09-05T08:42:00.000-07:00

It's been 2 months since I posted the portfolio (sorry) so I'll do that this weekend. It does not look good but I am actually feeling very positive.

Bearish positions are improving:
* Ultrashorts are rebounding. This is 25% of the portfolio, so continued weakness in the markets will move these up nicely
* Puts are rebounding a bit. This is now ~20% of the portfolio but has more potential impact given the leverage. I think AN, HOG, & NKE may pull through for us. ZLC and VMC are showing just too much resistance.
* DUG is up big. I wrote covered calls at $40 (instead of selling at $39.50). This may get exercised.

ETFC excepted, long positions are close to worthless. The calls alone created a massive $12K+ loss.

My mistakes the last 2 months are strategic and tactical.
Strategic: getting into commodities. I interpreted the July drop as a pullback when it was the start of the crash. My analysis of the fundamentals is correct (these companies are incredibly profitable and will remain so). But the point is that the market does not think so.

Tactical: Removing my STOP loss. It is there for a reason and I have not applied it twice: once to ensure the Puts yielded maximum return in July and again when the calls started to drop. STOPs are there for me to lock in gains and limit the downside, and by temporarily abandoning this critical tool, I am facing a loss this year. I can only hope tha tthe Puts yield some golden fruit. Next month is critical.

Buying more ETFC

2008-09-03T09:18:00.000-07:00

Buying 4000 ETFC @ $3.30
Selling 40 Covered calls Oct $4 $0.10

Updating my Strategy

2008-09-03T08:49:00.000-07:00

Half of the portfolio is ok: ETFC, DUG, Ultrashorts, QID
Half is not: MUR, Calls, Puts

I am going to continue my strategy of selling covered calls – that should generate ~1%+ yield per month on average.

The Ultrashorts really depend on a crash, which I think is imminent. So I am ok riding them out.

The Puts are not performing at all. And the performance really rides on them. The companies I chose are struggling, but the stock prices don’t reflect that. Take ZLC for example. They are pulling out Oscar Award quality accounting special effects. For example, they would have had a $0.60 EPS loss instead of $0.15, but they reversed vacation day accruals.
I am waiting on the Puts because I sincerely believe that these companies are running on fumes.

The Calls are where we face the toughest decision.
The fundamentals are sound – energy demand is strong. Even with oil at $100, these companies are much more profitable than they were last year. And even at $80. But the concern right now is not this quarter or next quarter, but next year. And the market is spooked.
Plus there are clear signs of commodity hedge funds selling. With just 3+ weeks left in the quarter, funds are not making profits and they have to re-position. A $3B commodity fund just went belly up (http://www.iht.com/articles/2008/09/03/business/03fund.php). And they probably were very leveraged, so that’s more like a $20B+ position being unwound. They were concentrated in ACI among others, which explains the sell-off there. They are liquidating positions and that is triggering automatic sell programs.

So the current atmosphere is working against my investment approach which is to buy undervalued growth stocks and sell overvalued dogs.
If anything, it looks like the market is running for safe haven: stocks that have been consistent in ability to deliver over a 5~10 year period.

So, to re-cap:
Short the market with Ultrashorts and QID
Stay the course with the puts because the accounting games are running out for AN, HOG & ZLC
Focus on ETFC as a winning long
Wait out the liquidation one more month. If no rebound post earnings, close out the calls and trim losses by year end

Selling Covered Calls

2008-09-03T08:46:00.000-07:00

Writing covered calls as follows:
1 contract each unless specified otherwise
QID Sept $50 @ $0.35 2 contracts
SRS Sept $100 @ $0.90

Check out LGF

2008-08-25T21:09:00.002-07:00

I own LGF and I'm glad. I see them executing on a simple strategy: create content and look for opportunities to generate revenue from TV and cable. Basically, create and manage a library of product. They also show discipline in a few way sthat I think are an advantage
1. Focus on action and youth markets: many of their movies are silly comedies or horror movies or straight up action (The Transporter).
2. Focus on cost management: budgets tend to be low: <$20M per movie. They get talent by sharing in the upside. As a movie production house, they generated ~$500M in box office revenue from various movies including: 1. The Saw IV 2. The Bank Job 3. Rambo 4. 3:10 to Yuma 5. Juno They also invested big with Tyler Perry (this concerns me because he seems to be prolific but quality is supposedly dropping) They have a lot of movies coming out that should continue to generate profits (Saw V, The Spirit) They have a Nicolas Cage movie coming out that got positives from the New York Times http://www.nytimes.com/2008/08/24/movies/24raff.html?_r=1&oref=slogin

In other words, they have box office money. I doubt they will hit the same $500M mark, but who knows.

And they are a powerhouse on cable TV. They own DEAD ZONE, WEEDS & MAD MEN and are debuting a new show with Dennis Hopper. The key here is that WEEDS just hit its 4th season - which means that they can get the syndication money. DEAD ZONE is already in syndication

They have also put their library to use: they are Paramount, MGM, & Viacom to launch a new cable channel. And the Blu Ray DVD releases should juice things up.

Add it up and they earned $1.4B for their fiscal year ending May 30th. Up 39%. They also surprised everyone with a major upside: instead of a ($0.05) loss they had a $0.06 EPS profit. Their balance sheet is fine - debt is low and almost equalled by cash. The stock is also steady.

Can they keep this up? As a sector, entertainment is one place that Americans tend to indulge, in good times and bad.

And they are positioned well with a low-cost, steady revenue business model.

I would consider buying them and writing covered calls. or just buying them and looking for a 10%+ annual rise.

How to improve my investing results

2008-08-25T21:09:00.001-07:00

Yet again I did my research to find companies firing on all cylinders. I favor undervalued growth companies with improving fundamentals and excellent balance sheets.
And again, I see the same bag of companies pop up that I have invested in – mostly energy companies.

Yet these companies have been – and continue to be –spanked hard. So it begs the question: is my investing strategy wrong for current market conditions? Broadly speaking, I detect a flight to consistency – companies that have a history of delivering steady sales and growth.

Energy companies are delivering the only exciting growth around but their stocks are in the doldrums because they face an uphill battle convincing funds that this commodity run will continue. After all, it is axiomatic that you disinvest in commodities at the end of the business cycle. Staying in energy is doubly risky: time based risk (MUR aside, we bought calls) and country dependent (very dependent on Chinese oil/coal demand).

If I am correct – that the market will pay a premium for consistency – then I have the wrong strategy. I have worsened this situation by trying to be opportunistic and not executing well. For example, I bought the calls on the premise of a dead-cat bounce and I didn’t sell when I could. Same with the puts – we had an amazing opportunity in July before the rally started.

So this is what I am going to do
Assume the rally is ending and the market will crash before January –
Ultrashorts – hold them. They are mostly ~10% below our purchase price and breakeven just means a 5% drop in the markets (i.e. Dow <11,000).
Puts – Hold them. We have 2 more quarterly earnings seasons before they expire. We are mostly in consumer retail (AN, HOG, NKE, ZLC) and construction (VMC). Some of the most hurting sectors out there. And we have stocks that are clearly overpriced with problem balance sheets (NKE excepted). The risk here is time – it’s not if but when will these stocks head down.

Assume an oil rally by November (election time). This is risky. But I’m noticing a floor in oil and Natural gas, and that’s where we are concentrating. A cold winter can only help. Also, Chinese oil and coal imports should pick up now that the Olympics are over.
A lot is being written about oil prices going forward. The price is tied to the dollar, obviously. Also, fears of demand erosion are strong. Normally, oil prices would shoot up on a war fought near major oil terminals. And there are technicals – last week saw an expiration of future contracts. Interestingly enough, oil has stabilized since then, suggesting a stabilizing direction.

Calls – hold them for now.
DUG – This has done well but I think we need to leave. I put in a price of $39.50.

Inject trading but in a managed way
I don’t like trading and being opportunistic. Unless I can watch the market every day, all day, it’s easy to miss the opportunities. So here’s what I want to do.
I want to buy a lot of ETFC and sell the covered calls each month. Here’s my thinking
* ETFC has bottomed imho. It could still slip a bit, but the story has shifted dramatically. It is no longer a question of if they will recover but when.
* ETFC Covered calls yield ~2% per month for a strike price 33% away (the Oct $4 are ~3.4%). If not exercised, that is a solid yield of 20% over the year
* Manages downside risk. Over time, this creates a cushion of flexibility. If ETFC does not recover or even drops, I can hopefully have built a 20%+ cushion such that I am profitable even at $2.35.
* Adds to upside return.

More specifically, let’s say I buy ETFC today at $2.94. I sell the Sept $3 covered calls for $0.15.
* If ETFC >$3, I get $0.06 for the stock plus $0.15 for the calls. That’s 7%+ return for 1 month investment. I’ll do that as frequently as possible.
* If ETFC <$3, my cost basis is $2.79. Hopefully, I can write another batch of calls and get ~$0.15 again.

I do think that we are heading for a major financial meltdown which will reflect back on ETFC. So I am waiting to pull the trigger – I’d love to do this closer to $2.60.

The trick is to pick a stock that has minimal downside.

Essentially, we continue to be trading sideways with down movements. The best way that I know of to trade in a sideways market is to sell covered calls and lock in a few percent each month. And if it turns down, the accumulated call revenue cushions the downside and – even better – potentially the stock is chosen such that it has little or no downside. I see ETFC as having much more positives than negatives.

LGF is another candidate- it also delivers a 3% monthly yield on the call.

Inflation is not a signal to watch

2008-08-25T09:52:00.000-07:00

Bernanke said that inflation will come down soon, maybe as soon as 6 months.
In at least one respect, this pronouncement matters: the direction of interest rates. Currently the Fed is in a lose/lose position: raise rates to combat inflation or lower rates to pump up the economy. A lower inflation rate gets them out of this position.

But overall, the idea of inflation going down is misleading.
For starters, inflation will naturally ease as long as commodity prices don't go up. It's just math: inflation is the measurement of the price this year compared to the price last year. Yes, food and oil prices surged in the last 6 months, but as they ease, the prices come closer to where they were a year ago. Better yet, if oil <$120 next Spring, the Fed can even claim that inflation is dropping! Break out the champagne - the Fed Governors are genuises!

Inflation matters but disposable income matters more. Let's say Jane's take home income is $100: $40 goes to gas and food and $60 to other things. With inflation, she now spends $50 on gas and food and $50 on other things. No problem: Jane will ask for a raise, the traditional way fo dealing with inflation. Except that, in a recession with rising unemployment (tickling 7.5% in california and 6% in the US), wage earners have no leverage. So an ease in inflation matters in that Jane's spending won't further erode and she'll be left with $40 on other things and $60 on gas/food. But the picture is still bleak: Jane still only spends $50 on other and not yesteryear's $60.

Joe is in worse shape. He has no job. His discretionary spending is $0.

Our economy has to adjust to both Jane's lower spending and Joe's non-spending.

The focus on inflation is like worrying about some splinters when you've been knocked on your ass by a 2 x 4. Splinters are the least of your concerns right now.

Interesting Aspects to our Puts

2008-08-25T08:14:00.000-07:00

It is a fact that motorcycle and car sales are down, but you woldn't know that to look at the stock prices of HOG and AN. Also, with consumer jewelry spending down, you would expect ZLC's stock price to be shattered and not approaching a 52 week high.

I dug deep into these stocks and I think I understand what is going on. The premise of my puts is sound, but I also chose target stocks with some challenging ownership

AN
Shares short latest reported month – Increased 1M
Shares short % of float ~40%
88% held by 15 firms
* 46% Eddie Lampert
* 6% Gates Foundation
* 30% 9 Institutions
* 6% 4 Mutual Funds

Eddie Lampert purchased 3.5M shares July 29.

There is a dual problem here: short squeeze and concentrated share ownership. The concentrated share ownership means that a drop in price really requires one of these players to walk away and dump shares. Meanwhile, with very few shares floating around, it is hard for shorts to cover positions without paying a premium

HOG
Shares short latest reported month – decreased 1M
Shares short as % float ~12%
68% held by 20 firms
* 46% 10 Institutions
* 22% 10 Mutual Funds

While not as concentrated as AN, this again explains a lot of the resistance to a falling stock price. I am counting on a bad Q3 to scare away these companies

NKE
Shares short latest reported month– increased 1.8M
Shares short as % float ~5%
35% held by 20 firms
28% 10 Institutions
7% 10 Mutual Funds

Almost no concentration that would hurt our short. I am counting on weak overall sales and a stronger dollar to erode their EPS.

VMC
Shares short latest reported month – increased 2M
Shares short as % float ~22%
63% held by 14 firms
53% 10 Institutions
10% 4 Mutual Funds

Very similar to AN and that explains the stock's strength in light of a very poor quarterly release and lowered guidance. The fundamental story is very bad - rising costs and falling revenue (not a lot of interest in building infrastructure). They have a forward P/E of ~25, which is pretty high for a firm providing construction supplies, and especially for a firm growing <10%.

ZLC
Shares short latest reported month– no change
Shares short as % float ~45%
153% held by 20 firms
109% 10 Institutions
44% 10 Mutual Funds

Short squeeze is driving this stock. Almost half of the stock is shorted.

What about our ETFC?
ETFC
Shares short latest reported month – decreased 2M
Shares short as % float ~25%
30% held by 14 firms
24% 10 Institutions
6% 4 Mutual Funds

While ETFC also faces a lot of short pressure, that pressure is lightening: down 2M shares in one month alone. A short squeeze could move the stock a little, but overall this stock is driven by fear and uncertainty in the Financial market.

After reviewing the short positions, I reach the following conclusions:
- AN, HOG, VMC & ZLC stock prices do not reflect the weak business conditions because of concentrated ownership and short squeezing
- When the stocks drop, they will plunge hard
- Still plenty of time
- NKE is the only risky investment from the standpoint of fundamentals. All other puts are dead on with respect to business conditions

Selling TRID, ETFC/MUR/DUG Covered calls

2008-08-22T11:01:00.000-07:00

Selling TRID 1000 shares @ 2.95

COVERED CALLS -
Selling Oct $4 ETFC 60 contracts @ $0.10

Selling Oct $90 MUR 1 contract @ $1.10

Selling Sept $40 DUG 5 contracts @$0.65

Are Basic Financial Models About to Blow Up?

2008-08-21T20:01:00.000-07:00

Financial investment theory has a few very basic sacred beliefs. One of them is that more risk brings more reward. Study after study prove that stocks outperform bonds, and that small cap stocks outperform them all.

Studies prove this. Study after study proves this.

But what if those studies are wrong? After all, they always include the last 15 years and I believe that the last 15 years were an anomaly. In many ways, the last few years favored small cap stocks. The rise of the internet created the ideal conditions for small cap stocks. Traditional barriers to entry were destroyed overnight. Small companies could form connections a lot faster. Access to customers became easier.

This is when small cap stocks became the monster stocks of today: Cisco, Dell, Google, Yahoo, Ebay, Amazon, and so on.

In essence, the last few years were the golden age for small companies.

What if those days are over? After all, as far as I can tell, we've wrung out almost all the gains in the supply chain.

Is it possible that if we take out the internet age, small cap stock returns are actually less rewarding for their risk? That would shatter quite a lot of investing approaches.

The reason that I raise this is that I had the chance to review someone's investment portfolio. Their adviser had 50% of their portfolio in micro-cap stocks, far too many of which were housing related. naturally, they were down ~50%+ for the past year.

In speaking with the financial planner, I was told that I shouldn't worry. I should take the long-term view because, after all, the small cap stocks always generate the best returns.

Needless to say, I left shaking my head. I don't blame the investment advisor for buying into the theories that call for a better reward for small cap stocks. It's certainly worked. What bothers me is that this seems to remove responsibility for picking dumb sectors. Why buy into the housing sector last year when it was so obvious that it was crashing?

And, frankly, I question the entire premise. Maybe small caps have had their heyday, and the risk isn't offset by the reward.

I tend to avoid small cap stocks because of the liquidity problems and the potential for radical manipulation. Also, they are the first ones to suffer in a slowdown.

AN in the news

2008-08-20T20:17:00.000-07:00

AN - http://www.zacks.com/stock/news/14316/Autonation+Heavily+Exposed+to+Lag
"We expect Autonation, Inc. (AN), the largest automotive retailer in the U.S., to be hurt by a continuing weak new car market. The company is disproportionately exposed to Florida and California, states that will be hit the most by a slowing car market. As a result, we rate the shares a Sell with a target of $9."
Ouch!

Hewlett packard - Currency Exchnage Rate to The Rescue

2008-08-19T20:31:00.000-07:00

I know that I keep hammering away at this point. But it is hugely critical, especially when this core benefit disappears.
Far too many companies are meeting their sales and earnings growth targets mainly because the dollar is weaker and that exaggerates the strength of overseas earnings.
We can predict when this comes to an end - January 2009. Specifically, we can say that EPS growth will be negative for most international companies. Live by the sword, die by the sword.

Here's what I mean.
If we consider the year-over-year gain of the Euro versus the dollar, we can see a general trend towards a stronger Euro. Starting in September of last year, the Fed began emergency rate cuts. That made the Euro stronger by comparison and the rate of strengthening accelerated from a benign 7% to ~18% in 6 months.

That is, the Euro surged in value 18%. Since that time it has weakened and is only 9% more valuable than it was same time last year.

That is not a small thing: it accounted for 50% of HWP's Sales growth.
http://biz.yahoo.com/ap/080819/earns_hewlett_packard_summary_box.html?.v=2
"sales rose 10 percent -- 5 percent if adjusting for currency fluctuations"
Eliminate the currency exchange rate issue, and HP's growth is barely positive.

Return to the slide and we see that, indeed, that currency rate advantage is going away.
Scenario #1: Euro stays flat. Already the Euro/USD rate is approaching that of last year. A flat rate would eradicate most of HWP's growth.

Scenario #2: Euro weakens. Less likely but always a possibility. In this case, HWP sales growth goes negative.

Scenario #3: Euro strengthens. Possible. After all, I suspect that it is weakening only because of Central bankers bluff and no actual moves.

Regardless of which scenario we consider, the days are almost over for the currency impact on EPS. This will be a major surprise for too many investors. And that is a negative for the Bulls.

Trick or Treat?

2008-08-19T19:23:00.000-07:00

It's an early Halloween, complete with scary undead monsters. Is that Alan Greenspan again? He's like Jason - you think he's gone, and then he pops back up again to scare us.

My gut is telling me a few things:
1. Dollar may start to weaken again. Consider that the dollar rose only after the threat of action (or inaction) by The Fed and the ECB. the Fed talked tough about inflation, but did nothing. The ECB talked tough about inflation but did nothing. A lot of nothing in the face of inflationary fiscal and monetary policy tends to play out one way: weak dollar and continuing inflation
INVESTMENT IMPACT: Good for multinational US companies, exporters, and commodities.

2. Return of commodities. The past few days, oil has steadily weakened but I noticed that the oil/gas/coal/energy stocks have stopped crashing. Better yet, some positive comments are coming out - mostly saying "wow, these companies sure look cheap!"
INVESTMENT IMPACT: Demand is uncertain and supply increases each month. I was opportunistic when I bought these calls on the pullback, but I bought too soon. We'll see what the next month brings us - maybe we can narrow the losses a bit. I also want to close DUG and I am going to put an order in for $39.50.

3. End of the mini-rally sparked by short covering. The lurch up last week and the sudden lurch down this week both indicate that options expiration on Friday was playing a role. In essence: short covering. Consider AN. Since the news was released last month that the Gates Foundation took a stake, the stock shot up from $8 to $12.50 last week. In fact, in 6 trading days, it rose from $11 to $12.50 by Friday. Then today it dropped back to $11.
If I am right about this, Dow will be <11,000
INVESTMENT IMPACT: Great for our Ultrashorts and our puts. Bad for our calls, unless energy rallies from being oversold.

4. Financials back in trouble. Suddenly everyone is realizing that the credit crisis has a long way to go and that Financial institutions are not being honest. FNM, FRE, Merrill, and others are about to shock the world with the bad news.

We have a long way to go yet for our options to show the returns we want. I will be posting the portfolio update this weekend.

Commodities Due for A Rise

2008-08-18T08:43:00.002-07:00

Commodities have crashed as the fast money moved out. But I suspect a resurgence. Nowhere else is there growth >20%.

I am a strong believer in a 12 week cycle wherein investment companies tend to make their investment decisions around week 7 or 8 (basically a month before end of the quarter).

It's consistent with the buy-on-the-rumor, sell-on-the-fact behavior, except this follows the practical behavior of funds. Practically speaking, 2 months into the quarter, most companies have a feel for where they will be at quarter end. And hedge funds trade less in analysis and more in insider information. By Week 8, their spies are giving them early indication of performance expectations.

We are halfway through Q3 and approaching that point. Already I am noticing the early trail of a commodity promotion.

If I'm right, you'll start to see analysts upgrading agriculture, coal, oil and gas. Here's an example

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&date=20080818&id=9038612

Notice that a key reason for the upgrade: oversold sector.

I am especially watching NG because this is the first year that the UK is a major importer. I expect a lot of competition for They and other countries are much more reliant on NG for heating and cooking. One solid hurricane in the Gulf and a cold snap in the Northern hemisphere, and gas prices will surge

Bear in mind that expectations are for a heavier than usual hurricane season. I don't like counting on a hurricane to move gas stocks up, but that is the reality.

Also, with the Olympics over, I expect a surge in Chinese commodity demand. That should startle folks and drive interest back into these sectors.

Catching Up

2008-08-18T08:43:00.001-07:00

I was out the past week and need to catch up.
That means:
* Writing calls on MUR and ETFC
* Selling some DUG and TRID
* Watching this week (post-options week) to determine whether or not to unwind some oil/gas positions or wait til November
* Watching the post-Olympics impact

Will Oil keep sliding?

2008-08-13T07:02:00.000-07:00

Probably. But is this the end?

US demand has eased. At the same time, Russian, Indian and Chinese demand is surging.

Chinese car demand continues, although it seems to have slowed in July to 488K units. http://www.reuters.com/article/marketsNews/idUSSHA37382520080808

Russian and Brazilian sales are strong, averaging 240K cars per month each. http://www.economicnews.ca/cepnews/wire/article/104486
India adds 100K cars per month. http://www.reuters.com/article/rbssAutoTruckManufacturers/idUSDEL18269120080710

What does this mean for fuel consumption?
The car market in these 3 countries is growing 1.1M cars per month. The US has ~100M cars and total mileage driven has sagged ~2.2%. In car terms, that’s about 2.2M cars not driving or 2 months of these countries new car demand. There have been 3 months of US oil consumption sluggishness, so the US shortfall will be offset in 3 months.

It is hard to argue that oil demand will surge if the global economy slows. And oil supplies are increasing. Should we count on an Iranian attack or a Hurricane to reduce supply? No, but maybe OPEC will step in to keep oil ~$100+. That will make our marginal producers still profitable.

Will it be enough? I don't know. I am suspecting that I made the wrong move with respect to the gas and oil calls.

Is energy my South Ossetia?

2008-08-12T20:05:00.000-07:00

It’s hard not to feel alarmed. The market rally is crushing my Ultrashorts and the Commodity oil drop is crushing the calls. Where did I go wrong?

It’s hard for me to find any single event that drove the turnaround. At some point, around July 15th, commodities started to drop, the dollar started to firm and in response the stock markets surged.
Frankly, I suspect that what happened was simply options expiration day July 15th. That is, prior to the 15th, a lot of funds had to cover short positions that were due to expire on the 15th. They were buying up oil and gold and so forth. Once they covered, commodity prices eased and so did the pressure on the stock markets.

And as they eased, suddenly, there were no buyers. And worse – there were lots more sellers.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYsD4ZNMER4c&refer=home
“For the past three weeks, the number of short positions, or traders selling futures, is greater than the long positions, U.S. government data has showed.
Speculative short positions, or bets that prices will fall, outnumbered long positions by 5,550 contracts on the New York Mercantile Exchange in the week ended Aug. 5, the Commodity Futures Trading Commission said in its Commitments of Traders report on Aug. 8. Net-short positions rose by 4,890 contracts, or 741 percent, from a week earlier.”

In other words, speculation drove up the prices. When it went away, prices started to come down. And then funds started pushing them down. Pump and dump action.

Maybe there is also a bit of coordinated dollar buying as well. Because if you look at the economic data over the last few weeks, it only says inflation and dollar weakness
July 14th - the Fed & Treasury lay out plans to backstop Fannie Mae and Freddie Mac
July 14th - Bernanke says things are tough but economy should turn around in the 2nd half
July 16th – Core CPI more than expected
July 23rd – Housing bill moves through Congress and Bush signals he will sign
July 28th – Record Budget deficit
Aug 1st – Unemployment at 4.5 year high
August 5th – Fed leaves rates alone

But sentiment has changed to the positive as well, adding reinforcement to the trend. The thinking now is that, yes the US economy is weak, but now so is the EU and Japan’s (Japan just announced that their economy shrank -2.4%). German industrial orders slowed in June, unexpectedly. ECB held interest rates. http://www.ft.com/cms/s/0/e19cad80-6172-11dd-af94-000077b07658.html

If everybody is heading to a recession, then, relatively speaking, the dollar looks stronger because the yen and the Euro will be weakening too. And then there’s the flight to the dollar in times of financial uncertainty. “European Central Bank left its key lending rates unchanged and bank President Jean-Claude Trichet said "annual inflation rates are likely to remain well above levels consistent with price stability."
The International Herald Tribune reported.

"Until now, the severity of Europe's problems have been outweighed by what happened in the United States," Stephen Jen, global head of currency research at Morgan Stanley in London told the newspaper. The euro reached a record at $1.60 in mid July after the ECB raised interest rates to 4.25 percent -- a move made while most other central banks were lowering rates.
Some analysts believe the ECB will likely lower rates next year, when inflation in the Eurozone is expected to slow from its current rate above 4 percent to closer to the target rate of 2 percent, the Herald reported.”

Expectations are for a slowdown in Q2 for Europe
http://www.nytimes.com/2008/08/09/business/worldbusiness/09euro.html?partner=rssnyt&emc=rss

In other words, the dollar may be standing still, but it looks good compared to a stumbling EU. A cut in the interest rates in Europe reduce the attractiveness of investing there and increases the dollar attractiveness.

This eliminates the race to hedge inflation. A firmer dollar drives down commodities both as inflation hedge and from pricing power

So we take away the commodity price speculation that has been driving up inflation, and we add dollar strength, and we see that future inflation will be easing. The markets like that.

Now add in earnings results. Did you notice that Cisco had terrible earnings results? No? Well they did, but it was spun as a positive. (Cisco latest EPS grew only 4%, forward guidance is only 8%, they lowered guidance and have no visibility to growth after 2 quarters).

There is a sentiment that things could be worse. “At least Cisco grew and continues to predict growth.” That sentiment is not exactly misplaced, but it is very short sighted.

I reviewed the earnings released from July 21-August 11th, and what I found was that results were pretty good: 54% of companies reported growth year-over-year. How does that stack up against last year’s results? I don’t know. But the majority of companies are showing growth of some kind.

Now, what’s interesting is that 45% of the companies missed expectations by more than a penny and only 35% beat by more than a penny. Given that companies are guiding analyst expectations, who can lower estimates during the quarter, for almost half of the companies to still miss – that’s a sign of distress.

While we still have growth, far too many companies are not growing as much as expected. That will change, but for now the tone is definitely a positive spin: we didn’t go over the cliff. The market is saying: things aren’t horrible today, so let’s get excited. But the reality is that the distant early warning signs are all flashing red.

Start with corporate earnings. If the EU and Japan are going down, that is bad news for earnings. To begin with, who will buy our exports if their economies are also hurting? And the stronger dollar will reduce corporate EPS.

As I’ve pointed out, most multinational companies have achieved their EPS on the back of currency translation: re-stating their yen and Euro business into a dollar that was 15% weaker than it was the previous year and achieving an automatic pop. Well, a 5% rise in the dollar eliminates that profit magnifier. By October, the dollar will be at parity with last year. No more EPS juicing.

The nitro is no longer available to juice up the engine, and that’s the only way most of these players have been able to cross the finishing line.

I also notice that the stock market volume is down, which is also indicative of a falling market. Volumes are down 20% (Something we need to watch for ETFC)

Meanwhile, non-Federal government spending is definitely coming down, both state and consumer.

State budget deficits http://www.cbpp.org/1-15-08sfp.htm
29 States face deficits for a total $49B shortfall. I suspect that number will just increase. Any actions taken by the states – cut expenditures or raise taxes – will decrease the economy. Interestingly enough, California is almost half of the collective shortfall. At $22B and rising, this presents a particularly sharp problem. California is the largest economic engine in the US, and it is already dealing with being the largest foreclosure state. Further economic distress will hurt the State and the rest of the country’s economy

Alt A loan defaults rising - http://www.nytimes.com/2008/08/04/business/04lend.html?ref=realestate
“The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.”

That means another $300B in prime loans will default this year. This means two things. Not only are higher end properties shedding value, but wealthier people are in financial distress. And it’s accelerating. Why?
“some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe.”

And unemployment is soaring. unemployment rose to level of last recession (March 2002). Worse than expected http://www.usatoday.com/money/economy/2008-08-07-jobless_N.htm

To net it out – we can expect to see only a reduction in economic activity among the world’s largest economies. How can that possibly be good for the stock markets?

So this is why I am okay riding out the rally and staying with the puts and the Ultrashorts.

As for the energy calls, that is trickier. I like to go long on companies that are growing and have the potential for upside surprises. When these companies pulled back, I saw an opportunity. Indeed, I have been mostly right: most of these companies have enjoyed massive growth and upside surprises. But their stock prices are down. The market no longer believes that forward earnings will be as strong, either because commodity prices will be drastically lower (they are) or because future demand will dry up.

I have decided to push out my decision until after options expiration week this Friday. If this is pump and dump, it is possible that we will see pump again. Also, with 6 weeks left in the quarter, funds will begin placing their bets in the next 2 weeks. I suspect that they will look around and acknowledge that energy is the last growing sector.

Indeed, when I go back to my earnings result analysis, 75% of the top performing companies were tied to commodities (steel, agriculture, energy). When I survey the last 3 weeks of earnings results, the top 25 growth companies were

Bunge Limited
CF Industries
United States Steel Corp.
iPCS, Inc.
DOLAN MEDIA CO
Innophos
Apache Corporation
ArcelorMittal
Potash Corporation of Saskatchewan Inc.
Fording Canadian Coal Trust
Olympic Steel
Cimarex Energy Co.
Cleveland-Cliffs
Occidental Petroleum Corporation
Transocean Inc.
OSG
Murphy Oil Corporation
Plains Exploration
Whiting Petroleum Corp.
The Mosaic Company

I wouldn’t be surprised if analysts start upgrading many energy companies because they will look good for valuation reasons.

AN Watch

2008-08-06T07:50:00.000-07:00

http://online.wsj.com/article/SB121802828775716735.html?mod=googlenews_wsj

Carmax is the largest US used car retailer (just as AN is the largest new car retailer).
Sales are down 17% and no expectations that they will recover.

The working theory is that SUV and large cars are out of style. And that's why AN is suffering. It's all because of oil. So just fix the product mix to emphasize smaller cars, and all will be ok.

Except that car sales slowdown is not because of oil. When a used car dealer that has plenty of small cars is still suffering, the answer is obvious.

Therefore, the reason AN stock bounced off $8 and stays >$10 is unrelated to fundamentals. It's probably a continued playing out of a short cover story complicated by recent announcements of a Gates Foundation stock accumulation.

The Market rally - There Will be Blood

2008-08-06T07:26:00.000-07:00

The Market Rally – There will be Blood
I notice three dominant trends driving the market the last few weeks
1. Flight from commodities
2. The glass is half full
3. The economy will turn around in 6 months

I can show why each is wrong, but I’d rather follow the market psychology and profit from it. For now, the market will find good news when it tries. Think back to Goldman Sachs in January when earnings were released against the background of an awakening realization that a banking crisis was dawning. At that time, GS’ earnings expectations had been reduced some 70%, and GS beat those severely lowered expectations. The market cheered and rallied. Weeks later, it crashed hard.

Six months later and we are again seeing the market say “Things aren’t as bad as we expected.”
Yesterday, Cisco reported earnings that beat expectations. But they also lowered guidance for the next 2 quarters. And they refused to talk about anything 6 months out. The message being, of course, that past performance may not guide future.
But the very fact that Cisco grew at all became a reason for excitement.

So here’s my thought – as we leave earning season, there will be less news to make the market excited.

The drop in commodities is also very uplifting because the market thinks it is keeping inflation down. In fact, it is more complicated
Commodities are currently the biggest contributor to exports. A lower price disrupts the benefits of higher exports
Commodities are going down because of a stronger dollar. The dollar has firmed – which is bad for global companies that are achieving EPS based on currency exchanges.
Temporary at best. A recent statement was made by a Kuwaiti minister that oil will remain above $100 a barrel. In oil-speak, that means – “oil better stay above $100 or we cut production.”
As commodity prices have dropped rapidly, and the floors have disappeared, investors are staying away. Oil has dropped 20% in 4 weeks (from $147 to $119). Maybe it will drop more. Who knows. Better to wait until it stabilizes for a while. Or, maybe bet that it could drop further. And that’s what funds are doing – oil got pumped up, and now they are dumping.

Since May, the mad rise in commodity pricing has been driven by speculation. Lets just accept that and move on. An example is SemGroup, a hedge fund, that bet against oil and, in order to cover its positions, had to buy up a lot of oil. They lost $2.5B. And they aren’t the only ones. That caused much of the dash from $120 to $147 a barrel.

Before May, however, commodity prices boomed because of the shrinking dollar and tight supplies. A firming dollar will keep commodity prices low. But the ongoing credit crisis requires the Fed to keep monetary policy loose – meaning an eroding dollar. We could easily see oil $150 in 3 months (post US election).

I raise that SemGroup example for a reason. The market can surge or collapse because of companies having to cover positions. A market can collapse because a fund has to sell a lot to raise cash (perhaps because clients are exiting or the fund has to cover margin calls). The rumor is that is now happening in Natural Gas, apparently.

But what if the many players bet on a major collapse and the market rebounded in stead? In that case, a mini-rally would become a major rally as short positions raced to buy stocks to cover their positions. That’s what I think is happening right now. After all, options expiration is next Friday.

The market continues to bounce between 11,100 and 11,600. I thought that it wouldn’t retrace but go down. I was very wrong and our ultrashorts are getting clobbered. But I am investing and not trading, so I am focused on the forest and not the trees. I see no good news:
Inflation jumping at 20+ year levels
Wages stagnating & unemployment rising
Service spending down
GDP flat or negative (as long as you ignore the GDP bought with the stimulus checks)
Housing crisis accelerating (DR Horton yesterday announced deeper losses, Fannie announced today losses 2X expected levels and barely have enough cash to stay afloat)
Credit crisis is accelerating. Consumer credit card defaults are rising
Global slowdown is starting

I find it amusing to read an analyst report on AutoNation that car sales will be a lot better by the end of the year. http://money.cnn.com/news/newsfeeds/articles/apwire/f7a091abf240578cc1a73511ad4d40bd.htm
No facts supporting this. He does not consider the challenges to buying a new car such as tighter lending, no HELOCs, end of leasing, job losses. He doesn’t speak to the fact that car sales were tied to the housing bubble boom. And how is it that the car makers themselves are expecting further drops.

But the sentiment is there. “We are close to a turnaround.” Unless I’m mistaken, the correction just started. How can the turnaround be so close?

So we have disconnect between the euphoria (things are going to be okay) and the reality (things are bad and getting worse).
What do we do while it lasts?
We could jump on the bandwagon and bet on market strength.
Or we could be patient a few weeks and watch things collapse again. That addresses the ultrashorts. I also think commodity flight is ending – they are so oversold it’s silly.

Reconsidering my energy strategy

2008-08-04T09:21:00.000-07:00

It is obvious that my jump into energy stocks ~3 weeks ago is not playing out yet.

My premise was that oil prices would pull back - so I bought DUG (and have since added to that position).
My second premise was that the target energy-related companies would still do well despite an ease in prices. I was correct - earnings show across the board upside surprises. But their stock prices have continued to collapse.

I could exit and take my losses. For example, if oil continues to ease towards $100, then these stocks will clearly droop as well.
I could hold firm, knowing that these companies are now severely undervalued and should rally. Eventually.

It is clearly sentiment. Oil is still ~20% higher than it was 6 months ago, yet these stocks are below their prices of 6 months ago. This is clearly foolish and a sign of fear/panic.

So I vote to wait a few more weeks.

Thoughts on AN and ZLC

2008-08-03T21:29:00.000-07:00

AN and ZLC share at least one common element: the stock prices remain strong.
They also have in common the fact that they are consumer product companies at a time when the consumer is belt tightening.
For example, Auto sales are down to 16 year lows, but somehow AN remains hardly affected.

The answer lies in something beyond fundamentals.

AN enjoys the benefit of one thing: a report that the Gates foundation has accumulated a position in them. That probably has shorts running for cover.

ZLC is a different beast altogether.

I am just completely blown away here. What could be the possible reason for anyone to buy this stock?

Overvalued – PE of 60 & a forward PE of 20.
No Future Growth Opportunity – This isn’t Tiffanys: Zales sells to the working class. And they are not running to spend money in a downturn.
Falling sales – The hundreds of stores being closed will boost EPS but hurt sales
Falling profitability – Margins are <1%.

My conclusion: shorts are covering. 45% of available shares are shorted. The question is why are they covering.

Earnings Releases: MUR, WLL, MMR, MEE, GTLS, OSG

2008-08-03T21:22:00.000-07:00

As expected, every stock I chose beat earnings. A few had issues related to some derivative positions they took, but the overall trend is promising: there is a lot of money and upside surprise in the world of energy and the services tied to it

MUR –

EPS up 175%, or 160% after some one-off gains and charges
Beat expectations by 40%, after the one-time events
Raised outlook 10%+ for the next quarter
Revenue almost doubled

Stock didn’t move.

------------------------

WLL

Revenue up 84%
EPS up 164%. And that includes a huge loss on derivates to hedge prices. Excluding that, it’s a 220% growth
Missed expectations by 3% or $0.05 due to the derivatives. Otherwise they would have beaten by 14%.
They raised production forecasts by 5%.

-----------------------------

MMR

Revenues up 8x
EPS up huge, even after a massive derivatives loss for oil price hedges
Natural gas production up 5X same period a year previous (due to acquisitions)
Reduced debt from $1.2B (from acquisitions) to $300M. Imagine the massive cash flow and confidence to do that in 3 quarters.
EPS estimates have been raised 20%

Very interesting is a renewed interest to mine sulphur. They have a massive sulphur mine and sulphur is now $450/ton. They have 60M tons ($30B).

-------------------------------------

MEE

Revenue up 38%
EPS up 170% and beat expectations by 70% (after excluding a one-time charge)
Raised guidance 15%
Exports up 83% - confirming our premise

---------------------------------------

CLF

Revenue up 84%
EPS up 214%
The big problem here is a potential bidding war for ANR.

----------------------------------

GTLS

EPS up 150%, beating expectations by 30%
Revenue up 18%, beat expectations by 2%
Increased EPS guidance 10%

--------------------------------

OSG

Revenue up 41% and beat expectations by 7%
EPS up 20% and missed expectations by $0.01. They had major losses in derivative positions

Q2 GDP and Trade data reviewed

2008-08-02T13:16:00.000-07:00

The Q2 GDP numbers came out and some interesting trends pop up.

Before I dive into them, I want to point out 3 things:
1. Focus on trends not the exact numbers.
* The numbers always get revised. For example, the Q4 2007 GDP was just revised from a positive 0.6% to -0.2%. Is that a big difference? Yes and no. Yes, because it’s a contraction. Also, a 1% swing is $110B in real dollars. And no because once we are <1% style="color:#ff0000;">* Don't lose the forest for the trees: the direction is important. For 2007, we were seeing 4.8% growth, and now we’re struggling to stay positive. That is a big contraction.
2. The numbers are skewed by the stimulus package. $130B of stimulus checks happens to equal the exact growth in consumer spending for Q2.
3. Housing exaggerated the growth just as it is exaggerating the pullback.
This is very important to understand and I’ve pointed it out before. When I say ‘Housing’, I mean fixed investment in residential structures. The buying and selling of houses, not the spending on furniture and so forth.

For 4 years, housing prices rose ~20% each year. So the annual market went from $300B in Year 1 to $360B in Year 2. That added ~0.5% to the GDP. After 4 years, housing went from contributing 3% to GDP to suddenly meaning 6% of GDP. In 2005, quarterly residential was $600B+ vs $360B the recent quarter.
Naturally, as housing prices fall, that contribution drops. And it takes GDP with it.
Housing as a % of GDP
2006 5.0% (~$550B)
2007 4.1% (~$450B)
2008 Q2 3.1% ($370B)

So a slower GDP does not in itself mean anything about the broader economy. It just means that at least one sector is no longer contributing as much.

In the case of housing, the drop in value is quite large. The last 4 quarters saw $1.6T in residential investment vs. $2T the previous 4 quarters. Poof – there goes $400B of GDP contribution. Which really wasn’t anything productive – just trading.

I want to focus, instead, on which sectors seem to be rising and which seem to be falling.
Comparing Q2 2008 to Q2 2006, we see
Nominal Inflation adjusted
Food 0.4% no change
Gas 0.5% no change
Motor vehicles -0.5% -0.4%
Furniture -0.1% 0.6%
Medical 0.5% 0.3%
Non-residential
structures 0.7% 0.6%
Residential
structures -2.4% -1.9%
Transportation -0.5% -0.5%
High tech 0.2% 0.8%
Business
Inventories -1.2% -1.1%
Exports 2.2% 1.6%
Imports 1.5% -0.5%
Government 1.1% no change

By the way, 0.5% GDP growth is ~$60B in 2000 dollars. It’s meaningful.

Notice the anomalies.
As a rule, spending in nominal dollars is always higher than inflation adjusted. But somehow furniture and high tech spending in today’s dollars is a lot lower than it is in inflation adjusted dollars.
ALERT – that shows something is wrong with the adjusting done by government algorithms. In other words, the nominal numbers dovetail closer to reality:
1. Furniture spending is down not up. If people are not buying houses and foreclosures are in the millions, and furniture companies are going bankrupt, there is no way to believe that the spending on Furniture is up $100B in 2 years.
2. High tech spending is flat, not up. Again, with businesses in trouble, high tech is affected.
3. Imports are up a lot more. It's massaging the oil/gas prices at work. Oil and related products are only 25% of total imports in 2008 year-to-date but they are 55% of the total import growth. Neutralize growth in oil and you see the slower import growth.

Now look at the other anomalies.
It is simply wrong to say that, after inflation, spending on food and gas hasn’t grown. We know for a fact that gas prices have tripled but inflation is supposedly up only 7% in 2 years.

Stick with the nominal data.

Fine. So GDP confirms a slowdown in general, and specifically in a few places. Lets really call out which sectors are growing (and worth buying) and which are slowing (and worth selling).

Compare the 2008 year-to-date (Jan-May) exports with 2007 year-to-date, the top 20 growing areas are:
Item Change ($M) Change %
Fuel oil 7,572 157%
Nonmonetary gold 4,544 86%
Soybeans 3,697 96%
Petroleum products, other 3,471 46%
Civilian aircraft 2,922 16%
Wheat 2,784 115%
Corn 2,293 55%
Plastic materials 1,899 16%
Gem diamonds 1,768 38%
Telecom equipment 1,765 15%
Precious metals, other 1,699 53%
Chemicals-organic 1,593 13%
Steelmaking materials 1,477 37%
Meat, poultry, etc. 1,472 39%
Chemicals-fertilizers 1,433 63%
Materials handling
equipment 1,270 28%
Medicinal equipment 1,267 13%
Industrial engines 1,240 17%
Chemicals-other 1,186 14%
Toys, games, and
sporting goods 1,070 27%
Metallurgical grade coal 989 90%

Oil, food and coal rank as the fastest growth areas.

And the same comparison for imports:
Item Change $M Change %
Crude oil 56,797 39.4%
Fuel oil 5,462 31.7%
Petroleum products, other 3,005 14.0%
Liquefied petroleum gases 2,965 37.5%
Other household goods 2,681 10.4%
Industrial machines, other 1,775 11.5%
TV's, VCR's, etc 1,727 9.8%
Chemicals-organic 1,591 16.9%
Chemicals-fertilizers 1,560 29.5%
Telecom equipment 1,245 6.6%
Gem diamonds 1,241 13.9%
Steelmaking materials 1,239 30.3%
Industrial engines 1,210 16.4%
Nonmonetary gold 1,189 39.7%
Computers 1,051 6.0%
Food oils, oilseeds 1,008 47.0%
Medicinal equipment 980 8.9%
Engines-civilian aircraft 977 16.4%
Electric apparatus 863 5.6%
Feedstuff and foodgrains 839 42.7%

Except for oil and other energy items, import growth is pretty tepid.

Look at the sharpest drops in exports and imports. Exports show very minimal drop, in fact.
Item Change ($M) Change %
Computer accessories -1,115 -8%
Tobacco, manufactured -162 -30%
Logs and lumber -148 -7%
Apparel, household goods - textile -52 -3%
Finished textile supplies -51 -5%
Tapes, audio and visual -50 -19%
Hides and skins -32 -4%
Stereo equipment, etc. -23 -2%
Textile, sewing machines -21 -4%
Cotton fiber cloth -12 -1%
Vessels, excluding scrap -9 -22%
Leather and furs -1 0%
Jewelry, etc 4 0%
Spacecraft, excluding military 7 233%
Hair, waste materials 8 3%
Glassware, chinaware 8 4%
Fish and shellfish 9 1%
Sports apparel and gear 15 6%
Nursery stock, etc. 16 9%
Nontextile floor tiles 19 10%

Except for computer accessories, there is growth almost everywhere.

Now imports
Item Change ($M) Change %
Lumber -876 -42.2%
Stereo equipment, etc -815 -28.2%
Computer accessories -704 -2.6%
Business machines and equipment -685 -31.2%
Shingles, wallboard -657 -18.4%
Apparel, textiles, nonwool or cotton -600 -4.8%
Apparel, household goods - cotton -589 -2.8%
Jewelry -562 -11.2%
Household appliances -546 -7.1%
Bauxite and aluminum -414 -8.0%
Zinc -366 -41.0%
Furniture, household goods, etc. -358 -3.6%
Stone, sand, cement, etc. -352 -15.4%
Blank tapes, audio & visual -292 -38.4%
Nickel -278 -15.5%
Meat products -244 -7.9%
Motorcycles and parts -237 -14.6%
Camping apparel and gear -117 -3.7%
Alcoholic beverages, excluding wine -105 -5.0%
Plywood and veneers -97 -9.3%
Nontextile floor tiles -97 -9.1%
Newsprint -82 -8.3%

Quite a lot of consumer items are dropping: stereo, computer, clothing, furniture, jewelry, household appliances, motorcycles, alcohol, and so forth. And so are residential and non-residential related items

What's also interesting is that this represents $9.6B of fewer imports for 5 months. if this pace accelerates and even invades other areas, it's easily a $30B reduction in imports. That is noticeable to many of our trading partners.

Add it up and we see a lot of export growth, especially for commodity goods like oil, coal and some food.
We see a slowdown in imports, especially for consumer durables.

In my next post, I’ll show how I track this data back to the specific stocks in which we hold positions.

GDP Disappoints

2008-07-31T06:00:00.000-07:00

Professional analysts don't seem to be very good.
Take yesterday's EIA report on US oil stockpiles. (It's a big report that swings oil prices because it surveys and reports supplies of various oil products, which in turn provides visibility to demand.) On every metric analysts were completely wrong. Instead of supplies being up 400,000 barrels, they were down 1.4M barrels. And so on.

The analysts are at it again with the GDP. Instead of the report being 2.3% growth, it came in at 1.9%.
http://biz.yahoo.com/cnnm/080731/073108_gdp.html

To be honest, it doesn't really matter. The government bought the GDP growth with $130B in stimulus checks. Literally.

* Q2 GDP of $12.3T, of which $8.6T was personal consumption

* $130B in stimulus checks = 1.9% of $8.6T.

It's really that straightforward.

And what it means is that GDP was actually 0% without the food stamps... I mean stimulus checks.

Reading the report is pretty sobering.
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
1. Inflation was 4.2%
2. Imports are down 6% - and that's after the rapid rise in oil prices. That means consumer spending is way down
3. The auto industry's deperession drove out 1% of GDP
4. Inventories shrunk a whopping $62B (they shrank $10B the previous quarter)

But there are some bright spots as well
1. Exports are up 9%
2. Housing construction related spending is still shrinking but at a slower rate. I won't say bottom, but it's there in 2 or 3 quarters.

Of the 1.9% growth
* 1% was consumer spending
- 0.54% food and clothing
- 0.41% medical

* Government spending. Up 6.7% vs 5.8% in the first quarter. This is largely from raises that went into place at the beginning of the year, as well as heavy defense spending increases

At the same time, GDP was revised downwards as follows:
Q4 2007 GDP -0.6%
Q1 2008 GDP 0.9%

I'll do a separate, more comprehensive GDP review, but the message is very clear: consumers and businesses are cutting way back.

Quick updates

2008-07-31T05:48:00.000-07:00

A slew of companies reported earnings and I have not reviewed the details. But basically, without looking at the score, the home team of Oil is yelling "We're #1."

From a trading perspective, I pulled the trigger too soon on those calls. Fortunately, we have many months fo rth eprices to catch up.
Fundamentally, it looks like the approach was more or less sound: the target companies are showing signs of strong growth.

There have been some misses. OSG missed expectations because they tried a bad hedging strategy. But their business is booming, so I have hopes that they turn around before January.

I won't go stock by stock at this time, but I will say that there is a clear anti-energy sentiment that is suddenly pushing the energy stocks down. I take that to mean that hedge funds are either on the sidelines or actually shorting these stocks. Eventually, they will return: energy is the only place that is still booming and still showing the ability to beat expectations and raise guidance.

ETFC continues to plunk away around $3. I am watching for another <$3 move to accumulat emore. The strategy here is long term: at some point in 12 months, I believe that this stock will move to $5.

TRID I waited to sell on the assumption that it might creep up a few pennies over the next few days. But I am selling, make no mistake.

The Ultrashorts are so volatile it isn't funny. Again, time will tell.

I was also wrong that the Bear would return. Instead, we are retracing the move up. It suggests that we will move down again. Until now, the rally was because oil was dropping - but it rose yesterday even though oil rose. Perhaps it was the new Housing Bill. It sure wasn't all the bad news. In any case, the market is looking for reasons to stay or go - it has no current direction.

In this kind of sideways market, it i sonly a matter of time before it finds direction. An dI think that it will be downward. We have an upcoming Fed meeting, and that may be the trigger.

In the meantime, if all this market lurching is driving you crazy, don't look. Go short everything except Agriculture and energy. Then look away.

Recent DUG/QID purchases

2008-07-29T09:42:00.000-07:00

I bought in yesterday for trading purposes.
I see us in a trading range and want to buy on the lows and sel lon the highs.

However, with a stronge rdollar, I expect oil prices to sag a bit. So i won't jump out of DUG just yet

TRID "Fredo. You broke my heart. You broke my heart!"

2008-07-28T21:47:00.000-07:00

That's it, we're done.

TRID simply can't get its act together. I was willing to give new management 3 quarters to do something, and there is nothing here.

We will take our loss and walk away. And I won't look back.

ETFC - Doing fine

2008-07-28T21:44:00.000-07:00

Most analysts missed the point about ETFC: if you are going to bottom-fish, you buy when most of the bad news is out but before the good news is all in. Of course there’s mixed news, but the picture brightens each quarter.

The way to understand ETFC is to look at it as two separate businesses: a brokerage and a lending business. The brokerage is doing amazingly well while the lending business is limping along

The brokerage:
* Trade volume was up 7% over last year. The value of that trade was similarly strong versus last year
* Margin business was up 11% over the previous quarter (not sure what it was last year)
* Customer cash and deposits were $33.7B and up $1.8B since last year’s low
* Total accounts are up 196,000 since last year (30,000 in the last quarter)
* Generated $170M in profits for 1 quarter.

So how did $170M in profits turn into $95M in losses? First, they are increasing their capital reserves in the event of more debt failure. Second, they are losing money on the debt.

Now, this is important. The amount they choose to put aside is somewhat discretionary. That is, they are deliberately taking money away from the profits and putting it aside for a rainy-day. So instead of inflating profits, they are artificially deflating them. Nice. I like this correct and conservative approach. It’s quite refreshing and I will invest in management like this.

They have already put aside $620M and the Etrade Canada deal will bring them close to $1.2B

But the balance sheet is awful because of the debt.
1. Reduced undrawn lines of credit to $3.7B – that is, money folks can borrow and ETrade is obligated to offer. ETFC would have to put aside cash reserves to cover this credit, and they don’t want to expose themselves. This is a 49% reduction from $7.2B. It basically allows them to preserve capital to where they need it.
2. Swapped debt for equity – They reduced $121M in debt by cash and $27M shares
3. Have $1.8B in cash. This is in addition to reserves for losses and next quarter’s $500M Etrade Canada cash (aka the $1.3B on capital reserves).
4. Planning for $1.5B in mortgage related losses. Frankly, I wonder if this is low. It represents ~12% of their mortgage package. They pointed to 2 things
* They use Case-Shiller for the metro areas to project failure rates (with 15% being the minimum). This is very solid and smart.
* 2007 loans are only 11% of their total loan portfolio (2007 was a year of really shoddy lending standards and high foreclosure likelihood)
5. Loan delinquencies grew to $111M but it seems to peaking after 4 quarters. Not sure if this is a trend or not, but it helped them this last quarter.
6. In process of writing off FNM/FRE investments of $330M. They will probably take a $120M loss next quarter.

So what are they going to be worth in 4 quarters?
- They sold Etrade Canada for ~$3.5K per account. ETFC currently has 4.5M+ accounts, which puts a value of $16B on the brokerage. But TDAmeritrade has 6.3M accounts and is valued at $10.6B or ~$1.7K per account. Using the lower figure puts ETFC’s brokerage value at $8B
- Add in $2B for current cash and new profits.
- Take out the bad debt. The absolute worst case is a 50% loss on $23B or $11.5B. The likely worst case is a 30% loss or $6B. They have $1.2B as of next quarter. So the worst cases are that they have a net loss of $4.8B~$10B.

So that gives them a liquidation value of $0~$5.2B. That’s a stock value of $0~$10. The gap between the $3 price today and the $0/$10 valuation is the debt. Every month the debt could be improving or worsening – it’s hard to say. A $3 stock price implies a $10B loss on the $23B portfolio or a 43% loss.

So what are the real risks here
1. Brokerage business droops in a downturn – this is a definite probability. I think the $2B cash/profit figure I use above already bakes that in.
2. Current spreads droop: they are generating an average 2.72% above borrowing costs on the cash. I don’t give this a high probability, even in the face of a rate hike.
3. Mortgage and HELOC business gets worse – this is a definite probability. It would take years to cover the debt write-down. However, the other $13B in debt is implicitly performing and throwing off some profit.

In effect, it really depends on the exposure to the debt and their ability to meet capitalization requirements. The latter point is what drives insolvency and emergencies. They have a total 5% capital-to-debt coverage and access to 50% from the Fed. I don’t see an emergency here.

A final key point is the short ratio - ~30% of the shares are short.

This is a 4 quarter story. If we can have an average $3.50 cost and the stock moves >$4 in 4 quarters, that’s still a 14% return. But I am shooting for a $6+ valuation this time next year.

Buying QID & DUG

2008-07-28T08:10:00.000-07:00

Buying
100 shares QID $44.54
100 shares DUG $35.43

Is this why oil went up so fast recently?

2008-07-27T17:01:00.000-07:00

http://www.investmentrarities.com/07-21-08.html

You have to scrol ldown to the bottom to get the message.
The issue is that the group that monitors oil futures trading just found that 1 trader was controlling 10% of the entire futures market. This analysis confirms a rumor that i had read where a hedge fund had taken a massive short position in oil and, caught by th eprie rise, had to take an equal long position. Unfortunately, they had to keep adding and adding because the short position kept collapsing.

How that affected the market: someone had to buy a lot of oil future contracts, an din a hurry. WIthoutthis demand, oil futures will come down.

"There was an extraordinary development in the Commitment of Traders Report (COT) for this week. The CFTC issued a special announcement concerning the energy markets. Do to recent pressure, principally by lawmakers, on the CFTC to do something about oil prices, the Commission took a closer look at large traders in the energy market. You can read the special announcement for yourself -
http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm
What you won’t read in the announcement is the real story. That you can only get from studying the different tables provided. Please allow me to summarize what those tables reveal. As a result of the closer scrutiny, the CFTC suddenly "discovered" that a very large trader in crude oil needed to be reclassified from the commercial category to the non-commercial category because the position that this trader held did not represent a bona fide hedge and was, therefore, a speculative position.
What was shocking about this position is its size. This one trader held a spread position of 147.000 contracts in NYMEX crude oil futures and a spread position of 326,000 contracts in futures and options combined, a position of more than 10% of both the entire futures market and futures and options combined. While this percentage of concentration does not come close to the concentrations in silver or gold, it was still largely unknown that one trader held such a large position in crude oil, even if it was a spread position (being long and short different contract months simultaneously.
Of course, the CFTC did not identify this trader by name, as that is contrary to current law (why, I am not sure), but the Commission clearly revealed the trader by size. To give you some perspective of the size of this trader’s futures only position, in the non-commercial spread category to which the position was reclassified, this single trader holds a position more than 90 times as large as the average trader in this category (147,000 contracts vs. an average spread position of 1,630 contracts). How could such a dominant position not control spread price changes?

Planning for the week ahead.

2008-07-27T11:37:00.000-07:00

Over the past 3 months, the Dow, NASDAQ and S&P are exhibiting the exact same characteristics.
1. A narrow trading range for 6 weeks
2. A sudden down move
3. A narrow (4%) trading range the last few weeks.
(FYI - Blue candles are down days and white candles are up days)

Look even closer and you will spot that the big moves down are prefaced by a major, one-day down move. We just saw one on Thursday imho.

Drill down and look at the last week, and you will see a very important and revealing move. On July 15th, all markets hit the bottom of the range and on July 15th they shot up. What we see is a challenge to the bottom followed by a brief rally. You can see it earlier around May 6th and May 20th.

What is important to notice is that the brief rally fizzles: it doesn’t break through the top of the range. In fact, we see very big down days immediately after. Like we just saw Thursday last week.

Ok, so that’s the descriptive part. Here’s the prescriptive part.
We are going to re-explore the bottom of the range and if we go below the range, we will see a bear move down.

In other words:
1. The next few weeks will be a move down.
Dow = 11,000
NASDAQ = 2,200
S&P = 1,225
2. Either the markets will continue down further or we will bounce in this trading range for 3~6 weeks

How to play this
Regardless of whether we are stuck in a trading range or heading for a deeper, bear leg down, the best bet is to be negative the markets. I’m thinking QID, for starters.

Also, there is a remaining issue of whether we should be trading (holding only for a short time) or buying and holding. If we are heading down, then a buy and hold strategy makes more sense. What I’ll do is watch as we head to the bottom of the ranges. If we break through, then we hold. If we bounce, then it’s a trading situation: we look to sell some shorts and go a bit long.

Almost anything can trigger the down move, but my technical review suggests that the market is primed to go down.

This obviously concerns me regarding the Calls and ETFC.
I am thinking about writing some $4 ETFC covered calls. If it dips <$2.80, I’ll buy more.
The calls are mainly an energy play and I am hoping that they will behave differently. They look very oversold at a time when the market moved up. If they behave as a market hedge, then that is good. Especially if the market goes breaks down further.

Qucik overview of Portfolio

2008-07-26T12:59:00.000-07:00

I am a bit behind in my posts, so let me start with a brief synopsis of the individual stocks.

In general, the energy calls are suffering, and our shorts are messed around by this mini-rally.
I am counting on this being a short term event.

Volatile market the last 2 weeks. Several factors played a role:
1. Options season – It now looks like some hedge funds panicked and drove the price of oil high. They are unwinding their positions and oil is moving accordingly. The unwinding of positions also probably explains the sudden rush out of all energy related stocks
2. Lower oil prices – Falling oil prices will eventually free up some consumer income, which makes the markets relieved. Plus it demonstrated that the government is more in charge than previously imagined
3. More banking stability – The majors are wounded, but not yet failing. Again, a sigh of relief
4. Earnings season – Buy on the rumor, sell on the fact. In other words, it’s a pre-earnings rally.

In essence, the market is being driven more by psychology than fundamentals.

Update on Energy Fundamentals:
The fact is that oil ran up to $147 because of hedge funds speculating and having to cover their positions. In response to soaring oil prices, the Fed and other entities staged a major with hunt to scare folks out of oil.

But this won’t last. Where will money rotate to? Financials? Not likely – still too much blood being spilled. Healthcare? Not very exciting (although my ILMN has been strong and I wish I owned ISRG). Only energy is booming. ACI (a major coal producer) showed profits up 300%+.
My conclusion: money will roll back in. Oil may be soft, but Natural gas and coal will remain strong. And oil >$100 still makes these oil service and equipment companies strong.

In general, energy stocks are oversold. They are now at 200 day moving averages and some even lower. That makes no sense – even if oil predictions are correct and it drifts to $100, that’s still higher than it was 6 months ago. And forward PEs are ~7.
Prices could break down some, but overall, these stocks are oversold and that represents a bounce in the near future. My play has been that oil/NG prices are disconnected from these companies’ profits. That is probably more true than not, but the market moved the stock prices up based on the oil/NG prices. Which means that I pulled the trigger too soon. But we have a lot of time to see them move back up.

AN – Surged after it was announced the Gates Foundation had achieved a 5.5% position. So that explains why the stock stayed strong in May and June. The news also drove others into the stock. But it’s fading again in the face of fundamentals: profits dropped 33% and sales dropped 13%. (http://www.forbes.com/feeds/ap/2008/07/24/ap5251877.html).
I expect accelerating drops in sales because AN sells primarily US cars and US car makers are reporting massive sales drops.
Meanwhile, Chrysler announced that they won’t be leasing cars. That won’t be good for AN.
Once the Gates hype blows away, I expect AN to drop back down <$8.

TRID – No news.

ETFC – Big miss on earnings and a big grand slam homerun on revenue. I’ll review in a separate posting, but I like what I see (even if the stock is temporarily hit). I may buy more at this level and continue to average the cost down.
Two things of note:
To use a sports metaphor, they are off the disabled list. They aren’t going bankrupt, so it’s now just a matter of time for profits to appear
The short interest rose to 27%, and is now at a point where a short squeeze is likely. I expect covering to push it back above $4, at which point I’ll write some calls

MUR – Down 25% from its high a few weeks ago. More interestingly, it is now at February levels. Yet oil is well above that level, despite the recent pullback. That indicates to me that the market has over-reacted.

DUG – Up 33% since we bought a few weeks ago. I do think oil will continue to drop and so will natural gas, at least until the Fall. BTW, someone said that DUG is not the anti-oil ET. They are wrong: DUG trades against the DJUSEN, which is to say, the Dow Jones US Gas and Oil exchange.
SZK – I’m not getting the bounce here that I want. With consumer goods companies imploding, this ETF isn’t performing. I can’t get visibility to its holdings, so I don’t have any thoughts here. The low volume may be a factor as well. I think we may exit sooner than later

SIJ – Same as SZK, just not getting the bounce.

SCC – Same as SZK, just not getting the bounce

SRS – I am not getting the bounce yet, but I see commercial real estate crashing very hard very soon.

VMC – A huge rally after falling to $50: a bounce to ~$65 and then down to ~$61. They’ll be revisiting the 50s soon.
It isn’t just that oil prices hurt their margins – it’s clear that their commercial business is dying as developments slow and even stop. In addition, I expect major municipal project cancellations.

HOG – Enjoyed a bounce off $33 on the basis that their news wasn’t as bad as expected. I see nothing but accounting chicanery (like stuffing the channels) and this will last another quarter.
An example: HOG closed two major production lines because sales were down 2.9%. That makes no sense, unless sales are down a lot more and they artificially boosted the number.

NKE – They are depending on the Olympics for a bull run, and I just don’t see it happening. The Olympics is clearly looking to be the anti-party of the year. A stronger dollar hurts them because it reduces the value of overseas sales, and that’s what’s been propelling their earnings.

ZLC – This is the one that just confuses me. We know discretionary spending is way down, just look at the implosion in Vegas. They have a forward P/E of ~25. But this stock stays ~$20. The only thing I can imagine is the shorts are covering a bit: 46%+ of the float is currently shorted. We may have to wait until January on this one – because holiday sales are their major income. In other words: wait for proof that the company is dying.

UNT – Down 10% from our purchase price and 25% from their recent high. Drilling has not slackened, so this is just a sector rotation issue.

SM – Down 20% from our buy-in and 30%+ from the recent high.

WLL – Stable but below our purchase price.

SD – Down 15% from our buy-in and 30% from the recent high

PXD – Flat

MMR – Up a bit.

GTLS – Flat

SE – Flat

OSG – Up a bit

MEE – Down 10% and was down even more. BTU and ACI’s earnings seemed to show that coal is doing quite well.

CPX – Earnings came in and they met but did not beat. Which means that they are relatively fairly valued and I don’t expect this option to pay out unless the sector comes back in favor.

CLF – Flat. They announced plans to buy ANR, a large coal company, and that shook the stock a bit.
BIG – This play was about catching folks who are trying to stretch their dollars. Like a cheaper Walmart. Shorts are very involved here: 47% of float I shorted

FRO – Flat.

Holding in a volatile market

2008-07-23T07:08:00.000-07:00

The market is up. Now it's down. Now it's up.

This is the time for traders, not investors. I prefer to buy and hold. But some short term trades may be necessary.

Market rally - when will it end?

2008-07-23T07:02:00.000-07:00

What started as a reaction to an oversold market is now gaining momentum on lower oil prices (down $20 and about to test the $120 mark).

Do economic fundamentals drastically change with oil at $120 vs. oil at $147?
Not really. Higher oil prices accelerated the pain, much like a flurry of punches in the 8th round of a boxing match weakens the already faltering boxer.

1. Good for cheap oil is bad for exports - Exports of US goods need a cheap dollar and strong demand for commodities. Some of the export boomlet will reverse. And exports are helping us right now, however minimal
2. Oil prices won't change for consumers until the Fall
3. Oil prices drops won't be felt that much - Whether it's a few pennies on household items or as much as $0.25 per gallon at the pumps, lower oil prices won't suddenly free up significant discretionary spending. It's a Starbucks Grande Latte a week.
4. Too little, too late - the economy is already heading down. And other economies are slowing as well
5. OPEC will not accept oil <$100. 6. Oil consumption in US will remain stable - in the last recessions, oil consumption reversed a tad but not much.

I expect the US consumer will do the same this time - conserve a bit and then adjust to higher prices and go back to old habits. Already some pullback is evident and planes are being grounded - all of which reduces oil consumption.

I could see another market rally if a housing bill goes through. But overall, I am assuming that this is a rally on the way down.

Feels like March all over again

2008-07-23T06:03:00.000-07:00

Back in March I took a bearish position that contradicted the market's direction. It rallied while I went short.

Same thing again. A market rally is crushing the shorts. Worse, my energy positions are diving with oil. Both are related.

My strategy is to wait.
1. Rally will fizzle – so many companies are missing estimates and showing weakness. It is currently riding high on an oil pullback, but a few dollars lower will not change the realities of the economy. I beleieve that we are heading to a global recession.
2. Oil will stay around $120 and not go below. If it goes below, OPEC will reduce production. Meanwhile, I am betting that the energy companies we bought will show strong results for the next few quarters and the price will rebound. I clearly made two mistakes here: bought too early on the pullback and underestimated the degree to which oil prices would impact the stock prices. I could unwind the positions or wait for 2 quarters of strong results to pull up the prices. That's my strategy for now.

Buying ETFC

2008-07-22T07:24:00.000-07:00

5000 shares @ $3.59

Oil Strength - BHI, HAL, JEC

2008-07-22T06:02:00.000-07:00

HAL's numbers last year included a $933M one-time payout. So if we exclude that figure, we get
* Revenue up $750M or 20%
* Income up 5% after one-time events

"the company said operating income at its drilling and evaluation arm rose 38 percent to $480 million in the most-recent quarter, the beneficiary of increased drilling worldwide."
Well, we own companies in the drilling side of the business, so lets hope they benefit.

----------------------------------
Baker Hughes (BHI) did even better
http://www.bloomberg.com/apps/news?pid=20601103&sid=a3U_Wr2fD.XU&refer=us
* Revenue up 18%
* EPS up 30+% excluding one-time events
Note the significant margins that take an 18% jump in sales and turn it into a 30%+ jump in eanrings.

-----------------------
Jacobs Engineering did best of all
http://money.cnn.com/news/newsfeeds/articles/apwire/6d008b4652d6920c279c0615052e90d8.htm
* Revenue up 40%
* Profit up 45%

Earnings of Interest - July 22

2008-07-21T22:38:00.000-07:00

Tomorrow brings ETFC earnings. I'm actually considering buying more on the off chance that the market sours because of AAPL and AMEX.

It's also a big day for oil company service & equipment companies: Baker Hughes, Halliburton, Nabors (a land drilling company), Jacobs, TESSCO

Is the Commodity Party Over

2008-07-20T13:54:00.000-07:00

Steel, agriculture, oil, coal, natural gas - what do all of these have in common?
They recently surged and recently bombed, almost at the same time. That has all th ehallmarks of a sector rotation - big money moving in and then out.

There is no doubt that a lot of related companies surged purely on momentum. That’s why we waited for a significant pullback before jumping in. Because the fundamentals are still strong. With oil still up 40% since last year, why the pullback to 5 month lows?

Look at coal. China is experiencing blackouts because of major coal shortages
http://www.bloomberg.com/apps/news?pid=20601080&sid=aiyKnEEj9qZ0&refer=asia
“Coal inventories at State Grid, the country's biggest power distributor, were enough for about 11 days of consumption as of July 6, compared with 12 days in April and 15 days in March”
Want coal? Better buy it and ship it in (hence my OSG and why I also went with DSX before getting stopped out)

I keep checking my assumptions and asking the question: was I snookered on oil/coal/natural gas? Put differently, was this pump-and-dump or are funds just doing a bit of sector rotation in and out, and then back in. All signs point to a positive future for these energy related stocks, so I am sticking with them.

I think this was ashort term need for cash and the fattest stocks got taken down. I thought a 15% hit was the pullback but it looks like a 30% pull back was on th ecards. We have 6 months for our options, and that's plenty of time for the money to roll back in

OIL
My premise is basic.
1. Upside potential. In the last quarter, oil prices were up 40% and the same this quarter so far. Natural gas is up 30%. That’s a lot of upside potential
2. Better profitability. Independent companies are interesting because they have lower operating costs and can be profitable where the big boys can’t be.
3. Consolidation potential. Always a potential with the massive cash floating around.
4. Dividend increase potential. Again, lots of cash may lead to more dividends.
5. Earnings are close and this is pre-earnings jitters

MUR – A very integrated company: extract, refine, and retail oil. The key areas of interest to me are:
* Increasing extraction at higher oil prices
* Increasing retail sales thanks to Walmart co-locations
I expect triple digit returns this quarter and going forward: higher oil prices and higher retail sales. Analysts expect a 50% increase in EPS, but I could see it even higher.

I also see this as undervalued: from Oct 2007-March 2008, the stock traded $70~$80. Meanwhile, oil has doubled in price. In fact, at today’s price, they are up only 30% in 1 year. And the forward P/E is 7.

DUG – Our anti-oil price move. Staying with it for a while because I see major efforts to drive oil down to $120.

WLL – Oil and gas extraction. They will benefit from higher fuel prices.

SM – An independent oil producer. Very bad. They collapsed under the 50DMA and look to still be sinking. That’s a 30% pullback in 1 month. At this point, the stock is up 20% in a year – less than the price of oil.

MMR/PXD/SD – Independent gas/oil producers.

MEE – Coal producer. Down 30% despite a major coal shortage?

CLF – Steel and coal go hand in hand. They are a major owner in an Australian mine and that is valuable because of proximity to China. The recent move to buy ANR is about coal.

OIL/GAS INFRASTRUCTURE
GTLS – Fuel storage. Also, I think they may be enjoying an export benefit from the weak dollar

UNT – A contract driller. When oil goes >$100, everyone wants to sink a well. I look at UNT as the equivalent of shovel makers during the gold boom in California. They don’t have to find oil to do well.

CPX – Drilling equipment and service provider

SE – The largest natural gas transmission company in North America.

FRO/OSG – OSG is up ~$5 since we bought. China must import more food and coal, that means busy times for tankers.
http://investerms.com/top_news/558.html
Follow this logic. Tankers (they carry oil) cost ~$100K per day. So folks were making them run fast, moving oil back and forth. That increased operating costs (faster speeds use up more fuel).

So now they will slow them down. That will likely do a few things.
* Marginally reduce oil supplies
* Increase tanker revenues: this reduces availability of tankers while not affecting days rented out. That could mean higher prices.

There will be blood

2008-07-18T05:22:00.000-07:00

First of all, I was very, very lucky to get out of AGN.

Now the key question is: what is going on with oil/coal/natural gas?
Put differently, is this a fundamental or a technical change? Because it makes a difference.
A technical sell-off could be triggered by a few factors, like:
1. It was irrationally driven up
2. Falling prices triggered trading programs to sell, and thereby lock in profits
3. Banks and funds need cash, and there has been a good run in these sectors
4. The end of a short squeeze. What if the prior 1 month of oil price run-up was driven largely by companies having to cover short positions in oil? They finished and so demand for oil contracts is down.
5. Volatility of earnings season and options expiration week
6. Earnings season has begun – a lot of volatility
7. Fed reporting has begun – Bernanke’s Congressional presentation (the economy looks like it’s worse) plus GDP figures, monthly economic indicators for June and so forth
8. Oil as a dollar hedge – Inflation and a weak dollar drove folks to oil. The dollar has firmed somewhat and inflation came in moderate (if we’re only talking core CPI).

A fundamental based sell-off could be triggered by:
1. Supply exceeding demand. This week we saw that US supplies were sharply higher than expected. Also, OPEC predicted a slight reduction in global demand next year. The shift was so slight, but just enough to spook the traders. That is very important to note.
2. Overbought stocks. I had been saying that these stocks looked too expensive, and I based that on the relationship to the 50 dma. So when they dipped to the 50dma last week, we moved in. Subsequently they moved up a bit and then went below their 50dma yesterday. Some even went below the 200 dma.

Now look at the volatility for the last 100 days. As the Dow has dropped, volume has surged. (Which is a big, big deal for ETFC – more trading is more revenue, and trades are up 75%). That’s a lot of money moving around.

Lastly, was this limited to oil? In the past 2 months, gold surged 15%, from $850 to $980. In the last week it has drooped 3%. Gold is another hedge against inflation and a weak dollar, and it has not crashed like oil. That suggests a more oil sector specific trend.

TRYING TO MAKE SENSE OF IT ALL
We bought DUG on the premise that oil was over bought and a pullback was in the cards. At the same time, I felt that companies providing oil/coal and providing services/equipment to the energy sector would continue to do well even in a pullback. For example, with so many more drills being operated, they need more equipment and they will continue to have big demand regardless of oil at $145, $130 or 4120.

Instead of jumping in, which is why I waited for a sharp pullback to where the price seemed reasonable. The continued pullback seems overdone relative to their move up and relative to the oil drop that triggered their pullback this week.

Consider Murphy Oil, down 21% in 17 days, and at a 3 month low. All of the energy stocks in our Call positions are at 60 day or 90 day lows. That is, they have fallen back to levels before the oil run.
That tells me that either this was pump-and-dump (my worst fear) or just a panicky run for the exits. Since I have done my due diligence and I am confident that these stocks are seeing accelerating growth, I don’t think a 10% drop in oil prices will change their profitability prospects.

I fall into the category of feeling that this is partly trading (sector rotation to lock in profits) and partly a sign of a panicked market. The market thought things were ok, but then Fannie Mae almost went belly-up and IndyMac did. And then Bernanke came clean and admitted that the economy is hosed.

I do think that these stocks will come out with great earnings and upward guidance and they will move again.
However, after reviewing the chart on volatility and experiencing it the last week, I am of the opinion that I need to do a lot more in-and-out trades. More short term moves and less long term moves.

I may sell DUG sooner rather than later.

Also, it looks like March all over again. We may have to wait a while for the soundness of my stock picking to be reflected in the options.

Mixed News: Closed AGN Puts and watching calls droop

2008-07-17T10:14:00.000-07:00

THE GOOD NEWS
* Got $4.1o for the AGN puts.
* ETFC looks really good. The recent ETFC move I made could net 41% by October. The Older ETFC shares that I wrote the $4 calls could show 11%.
* DUG is up big again. Up 30% since we bought last month. It's ~10% of the portfolio, so that's nice to see
* TRID is holding up nicely, but we'll see if it can hold onto the gains and advance more

THE BAD
Meanwhile, the rally is hurting us in two ways.
Short positions - Ultrashorts and puts are getting smacked around. Earnings season will do that. I'm not worried about the puts - with 6 months to go, time is on our side.

Call positions - The oil dip is crushing the energy markets. Oil has gone slightly bearish and exposed a lot of traders. The future price of oil is contingent on actual supply/demand constraints. Those constraints are now showing the potential for oversupply based on a potential dip in global demand.

A lot of ifs - if the US demand slows, if Asia demand slows. I note that Russian car sales are up 44% and China car sales are up 15%. US demand is slowing. Meanwhile, no storms have hit the Gulf of Mexico yet. Add it up and there are a lot of unknowns - which makes for a lot of volatility focused around the weekly supply figures from the EIA.

Further adding volatility is the role of hedge funds and banks. It's one thing for investment companies to profit off the run-up: prices will come down as they lock in profits and sell, but prices will move back up as investors rotate back in in the face of superior profits. To that point, notice the recent CLF acquisition of ANR - a sign of lots of cash.

But what if the oil run is over? What if investors didn't benefit from the run as much as drive it? If so, then this is over.

I think we're about to see major profits from these companies, and for the next few quarters as well. I think we'll see consolidations as well. Meanwhile, I've done the due diligence on global demand and I'm satisfied that energy demand will only rise. Most of our options give us 6 months time - that's almost 3 quarters of earnings.

We may be experiencing what we saw in March - I bought puts right before a rally. We had to wait a few months, but the payoff has been good so far.

Ouch, Ouch, Ouch

2008-07-17T06:48:00.000-07:00

Did not get the $4.10 on the AGNs. Will watch again today for a good sell price

Meanwhile, the market is smacking us hard exactly where it hurts the most - our shorts and the oil/energy positions.

I continue to believe that the energy positions will do well for a while yet because these stocks will outperform expectations - regardless of whether oil is at $145, $135 or $120.

The shorts are getting hammered in this mini-rally.

I am glad that our options have a lot more time on them, so we can withstand this silliness

Putting in an order to sell AGN Puts $4

2008-07-16T10:43:00.000-07:00

Closingthe position today and asking $4
I should be able to get that......

Trading Update: AGN, AN and other puts

2008-07-16T05:24:00.000-07:00

A few thoughts today.
I am concerned that the Fed's short selling moves will scare others into covering positions - pushing up stock prices. Good for our calls, bad for our puts. Also, this is expiration week for options so strange things can happen. With the exception of AGN (expires Friday) we are protected from major swings.

AGN - It looks like it won't drop much so I think I'll be closing out today. Hopefully I can get $4

AN - It has slid more than I expected and I think I will ride it down more, if possible
http://finance.yahoo.com/q/op?s=AN&m=2008-10
According to the above link, 31K put contracts were bought yesterday for the Oct $5. That's a big bet against

HOG - Down ~8% in a few days. Yesterday's rebound troubled me because it came on high volumes. They report tomorrow and it could be a buy-on-the-rumor-sell-on-the-fact. Anyway, Harley is in trouble in two ways, and it might take another quarter for the accounting to reflect the reality.
First of all, harley sales are bad but they stuff the channel. That will make sales look bigger than they really are. But eventually this game playing stops. I think that next quarter, not this quarter, is when the house of cards collapses.
Second, HOG is a financial company. They made loans to sell the bikes. Apparently they have a lot of non-performing loans: Level 3 assets are ~$400M. Level 3 assets are assets with no known value - this is where banks are putting subprime loans. Apparently, so is Harley. HOG is playing games to hide massive debt exposure. Oh, and they have $700M in bike financing as well.
The combination of weak sales and weak financials may need another quarter to play out. These puts go out further than that, so it's not a problem. I'd like to wait and see if HOG can drop to $20

NKE - An upgrade pushed them higher. I think US business is weakening faster than expected. Nevertheless, a fall to $50 would be nice so that we can exit.

VMC - After drifting close to $50, the stock shot up on the back of a dividend and a drop in oil prices. I am hearing about a lot of cancelled projects, so I don't think VMC is sitting on a strong backlog of work.

ZLC - It shot up 10% yesterday, but I am telling myself that it is on weak volume and without conviction.

Short oil but long energy

2008-07-16T05:11:00.000-07:00

It must seem strange that we own DUG (an oil short position) while having even more money in MUR as well as energy stock calls (a long position).

I bought DUG because I felt that oil would move back closer to $120. Partly because I saw movements to reduce speculation and partly because the dollar seemed to be firming up.

At the same time, I believe that the energy companies I selected are awash with money. It doesn't matter if coal, oil, or natural gas are at today's price or 20% lower. These companies will beat expectations (I hope). Also, there should be more consolidation, especially among coal producers.

Well, looks like I am right
1. Oil has dropped from $147 to $136. DUG is up 20% from our purchase point
2. Consolidation has begun. CLF announced that they are purchasing ANR. I own ANR stock and CLF calls, so the ANR buy was a nice thing. Given the choice, I wouldn't mind having ANR calls right now......
http://money.cnn.com/news/newsfeeds/articles/apwire/673cf3525363d7f98e831dd47240861c.htm
This is dilutive - CLF has to issue more shares. I think that this will hurt the stock

INTC & JNJ: Meet EPS thanks to dollar exchange rates

2008-07-15T19:38:00.000-07:00

Yet again, we see top US companies meet their EPS solely because of currency conversions

INTEL
* 60% of sales are from Asia
* 19% of sales are from EU
* dollar this year vs last year added 14% in currency conversions
* 9% increase in sales is actually a fall when the dollar currency transaction gains are included

The weak dollar has some impact on boosting PC sales, but only minimally
- As a virtual monopoly, INTC isn't gaining market share because they are cheaper compared with a competitor
- the decision to buy a PC or not is barely affected by the INTC cost

The point: the dollar currency transaction gains stop in 5 months. That is when the dollar exchange rates will be the same as last year.
Suddenly, $1B in revenue gains each quarte will disappear, and so will the earnings

JOHNSON & JOHNSON
"Favorable currency exchange rates due to the weak dollar accounted for almost two-thirds of the increased sales"
Sales were $16.45 billion, up 9% or $1.36B. Of that $1.3B, ~$1B came from dollar conversions.

http://www.mercurynews.com/business/ci_9886176

ETFC Update - Raised $511M in cash

2008-07-14T15:16:00.000-07:00

http://www.marketwatch.com/news/story/e-trade-selling-e-trade-canada-442/story.aspx?guid=%7B84774F70-F27A-4CD7-B3C9-592488010632%7D&dist=hplatest

They sold Canadian branch for $511M. They continue to show strength in their core business (stock trading) and have firmed up their cash position.

That has pushed up the shares in after hours and I think the stock will move back up as folks make the connection and realize that ETFC is not a problem child.

We have 1000 shares with a cash basis of $3.72 (paid $4.07 and wrote covered calls for $0.35). We sold the August $4 for $0.10. Our cost basis is now $3.62.
If >$4 in August, we net 11% in 4 1/2 months.
If <$4 in August, we'll write more covered calls.

We bought 1000 shares today at $2.47 and sold the Oct $3 calls for $0.50. With a cost basis of $1.97.
If >$3 in October, we net 51% in 3 months
If <$2 in October, we are at a loss
Given the news today, I think $4 by October is likely

ETFC - Buying more

2008-07-14T11:11:00.000-07:00

ETFC is getting hammered today - well below $3.
This is a sector thing - all banks, lenders and investment houses are being hammered.

The fear is creating opportunity for us to buy some more.
Buying 1000 ETFC @ $2.47
Writing 10 contracts ETFC Aug 08 $4 for $0.10 each (these are for the ones we have that are now underwater)
Writing 10 contracts ETFC Oct 08 $3 for $0.50 each (these are for the ones we are buying now)

Here's the math
Existing 1000 shares of ETFC have a cost basis ~$3.70. If the option gets exercised, I will net $0.40 or ~11% for 3 months. if not, I have reduced my cost basis further. Again, I feel that the long term viability of this company is strong and I am not eager to leave.

The new shares take advantage of the high premium on ETFC calls.
I write the calls and have lowered my cost basis to ~$2. Meanwhile, if the calls get exercised, I get $1 or 50%.

Liverocket Portfolio - Updates

2008-07-12T10:47:00.000-07:00

Uggh. Sorry about the eyechart. Please click on it to see the details.

My intent is to review the portfolio and performance monthly. We had a lot of trades this week, so this is intended to capture and update the portfolio.

Sold DSX and MGM Puts. Took a small loss on the DSX (got bottom-ticked) but the MGM wsa a sweet return. The proceeds are not yet added to the cash position.

Bought a slew of Calls. From a trading perspective, I am wondering whether to exit next week if there is a short squeeze spike or whether to wait a few months. I may leave BIG if I don't see them grabbing market share a la Walmart.

Planning on exiting AGN Puts ASAP and possibly adding to ETFC. The AGNs expire next Friday and I just don't see them crashing. I will set an order to sell at $5 and watch every day. If it doesn't bite by Tuesday, I will make a different decision.

ETFC is crashing with the banking sector and I see myself averaging costs down. If I look out 1 year from now, I see the sector bouncing back a bit. Even a return to $5 would be meaningful. This is a speculative move all the way, but it assumes that ETFC is fine from a liquidity standpoint.

In general, I am pleased. To be in positive territory in a major Bear market is a good thing. I do not feel comfortable with STOP orders as we head into earnings season, but they will return in mid-August.

The long equity positions are mediocre right now. The calls, however, are doing well. (The TRID calls are old and a major speculative play that is not paying out...yet.) This week's purchases were a short term play in response to short term volatility. I felt that this was a pullback driven hard by technical issues (hedge funds selling to get cash and triggering automatic sale orders). With volatility of this nature, options are the best way to maximize gains. If I am correct and these stocks return to their highs and go even higher, we should see some nice returns. Otherwise I would much prefer to own the stock.

In looking at the call value, note that I use the Bid price (what we would get if we sold) and not the Ask price (what we paid).

Also the Call positions are less than the Puts ($27K invested in Puts vs $22K invested in Calls). Several reasons:

1. Options exposure is high: 33% of total portfolio value. That's about 3X what I normally want, but understandable given the opportunities

2. Calls feel riskier. Chinese response to Western slowdowns is the wild card for commodity demand. However, dollar weakness may counter Chindia weakness. Friday's IndyMac, Fannie Mae & Freddie Mac implosions simply raise US Government obligations and stress the value of the dollar.

The short positions are also doing much, much better. The Ultrashorts are essentially breakeven (yeah, we got in too soon). The Puts are doing very well, even excluding the MGM returns. As I mentioned about 2 weeks ago - the leverage here is so significant for the portfolio that a swing up or down makes a big difference. At the moment, the stocks are swinging in the way we want, and another few dollars down for each stock will generate handsome returns.

Some of the results still puzzle me: HOG and ZLC should be down so much more. At the same time, I feel lucky with NKE. The loss could be much, much higher.

Closed MGM Put position for $25

2008-07-10T12:43:00.000-07:00

MGM is still dropping, but we are out at $25.

That's a profit of $21+ per share on 500 shares (5 contracts).

Options Update

2008-07-09T20:39:00.000-07:00

I am mostly concerned about AGN - with just 7 trading days to go, the sudden turn is eroding most of our gains here.

Looks like we did not get orders for
ME
TS
GIFI

My strategy was straightforward. I decided that this wasn't a Bull trap and just a pullback. So I bought calls that were 15%~20% above where we were today but close to or at prices that had been hit recently. I also bought months in advance.

What we bought today:
Up a bit: MEE, FRO
Barely moved: UNT, SM, GTLS, OSG, CPX, BIG
Eased More: WLL, SD, PXD, SE
Eased a lot: MMR

I had expected a strong rally but it did not happen. Does that mean I was wrong about a Bull Trap? We'll see what earnings bring. I have been tracking all of these stocks and I see some big wins this quarter and next because they get the benefit of current pricing.

Will coal/oil/Natural gas prices drop? I hope not.....

Buying Update

2008-07-09T07:44:00.000-07:00

I am waiting for some of the orders to go through. If they haven't, I'll revise the prices.
So far, open orders are:
gifi
se
ts
osg
me
pxd
sm

Last time I did this I got cheap on the calls and missed out on WTI & MVL.

Meanwhile, I have been waiting for a pullback to the 50dma on many stocks. I saw that yesterday.

Buying these calls

2008-07-09T07:42:00.000-07:00

I put in orders to buy 2 contracts each of the following calls.

unt 4 dec 90s
sm 5 nov 60s
wll 10.5 jan 110
sd 7.5 Jan-65
pxd 5 jan 80s
mmr 2.7 Jan-35
gtls 5 dec 55s
gifi 1.6 jan 50s
se 1.25 jan 30s
ts 3.2 dec 80s
osg 5 jan 90s
me 2 Feb-40
mee 11.5 jan 90s
cpx 1.7 Jan-45
clf 16 jan 120
big 2.4 jan 40s
fro 3 feb 75s

False rally - but short squeeze could pressure our puts

2008-07-09T06:49:00.000-07:00

I bought DUG and remained on the sidelines because I saw too much hyperbolic behavior in commodities.
The last few days pullback was exactly the thing I wanted to see. It was exaggerated by program selling - technical moves and not fundamentals.

So I will be buying some calls this morning.

In the meantime, my take on the rally yesterday is this:
1. The Fed announced that it will keep the money pumps flowing
This cuts in several ways. In March they announced that the loans to banks and investment companies would be short term - ending in September. Now they see the loans continuing through 2009. That reinforces the banks significantly and, in the short term, removes some pressure to repay loans.
But the important point to me is that the Fed clearly sees that the situation is much, much worse than they imagined. And that they see it persisting another 18 months.

2. Banks and Lenders are too big to fail
The Fed is waiving laws that require Fannie Mae and Freddie Mac to be solvent. In other words, these lenders are insolvent - they lent more money than they have. The law requires that these companies must immediately raise capital - and they need ~$100B combined. Obviously they can't, which would force them into bankruptcy.
So the Fed has given them a hall pass.
That removes immediate pressure, but it doesn't solve the downstream mortgage mess. FNM and Freddie are the largest lenders in the US. This state of affairs will affect their ability to lend as well as the expectations in the markets that buy US mortgages.
Given the obvious risk associated with mortgages, I expect rates to rise even more to reflect a bigger risk premium. I predict that, by the end of the year, if the Fed raises rates, the Jumbo loan rates will be 8%+.

Get ready to buy today

Oil, Coal and Natural gas

2008-07-07T21:51:00.000-07:00

While an oil crisis is good for spurring innovation, it takes years to affect the existing energy market. Meanwhile, world energy consumption is growing, especially in Asia.

Oil consumption is affected by manufacturing and cars. US and EU demand has leveled off the last few years for the exact reasons that it has grown in China: vehicle growth and manufacturing have flattened. China has become the world’s manufacturing plant while car sales are surging.

The Chinese car market is growing ~2M units per year. India is expected to add 1.5M units. Add in Russia and other countries and it is safe to say that 5M more cars will be on the road in 2008 than in 2007. And many of these countries subsidize oil, so there is no incentive to consume less in the face of rising oil prices.

Will reduced US and EU consumption balance out this new soaring demand? Already the US is reducing consumption, but it isn’t enough. There is less than a 1M bpd surplus in the world today. US oil consumption has fallen ~4% or ~0.8M bpd. A lot fewer planes and cars are running these days.
(http://www.eia.doe.gov/oiaf/forecasting.html)

But that 0.8M bpd is quickly eroded by new demand. A barrel of oil yields 20 gallons of gas. 5M cars on the road will consume 1 gallon a day (terrible traffic consumes a lot of oil) or roughly 0.25M bpd. Add in growth in emerging markets from manufacturing, airplane travel, and so forth, and global increases in demand reduce US surplus gains to almost zero. One refinery goes down, and any surplus disappears. One major storm in the Gulf or the North Sea, and that’s it.

Meanwhile, China imports ~150M tons of oil per year. There are only 2619 ships to go around and China is already using half of them. http://www.osg.com/oi_tankermarket.htm
Factor in the scarcity of refineries and you see a transportation process that moves crude oil to a refinery and then to local markets. The remainder service Japan and the US. Which leaves very few ships around to contract – hence my love of shipping and interest in DSX and FRO.

Getting back to oil – supply is very tight today and for the next 12 months. While dollar weakness and speculation has played a part, the reality is that underinvestment and sudden demand are the real culprits.

The real issue is electricity. Factories run on electricity. Air conditioning, hospitals, the internet, infrastructure – it all needs electricity. And coal and natural gas generate the bulk of electricity in the world.

Half of the US electricity is generated by coal. China consumes more coal than the US, Europe and Japan combined. India is better off because it produces 80% of its coal needs, but it still imports almost as much coal as the US exports. China became a coal importer as of January 2007.

Meanwhile Vietnam is slowing exports, hurting Japan. The net result is that Asian countries need coal and are having to go further afield to obtain it. Hence my love of US coal.

This is not going to stop for some time. And there are bottlenecks which create mini-shortages - like limited transportation routes and ships, like weather around East Coast or West Coast ports, and so on. DSX is a contract drybulk shipper - they pass fuel costs on to customers, so oil i snot an issue. And they are the ones who benefit from this demand.

Natural gas is in a similar shortage.
NG is used for heating, electricity generation and for fertilizer. The US consumes the most (the Gulf of Mexico provides a lot), and China comes second. China demand grew 20% last year.
http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7045418

So all roads seem to lead to China. Will a recession change things? Probably not. Even a low growth forecast will not see major surpluses in the next 12 months.

I think earnings will blow away all expectations and I like the recent pullback for an opportunity to buy oil extractors and services, NG extractors and services, coal, and shipping.

Liverocket doing great!

2008-07-06T16:38:00.000-07:00

Although I have shifted to a monthly performance review, I couldn't help but peek at the weekly results. We are down 4% against the background of a broader market that is down 15%.

A lot of this could be due to July 4th weekend and a short week. It would be nice to see the markets erode further and boost our short positions.

THE LONGS
With the major coal pullback, I ready to jump in. Got my picks ready.

DSX - I decided to take the loss. My analysis said that $30 was the resistance point and when it blew past it and down more, I preferred to take the hit and maybe get back in. Sure enough, it fell another $1 Friday. I like this company, so will look for a cheaper buy-in point.

DUG - Even with gas going up, DUG rises on strong volume. The broader market is starting to doubt oil's continued rise.

ETFC - Climbing back as I expected. It was up on large volume too.

MUR - Oil and coal had a crazy week. MUR raced up to $101 and fell back to $94.

TRID - Nice article in Barron's (http://ceoblogger.wordpress.com/2008/07/03/barrons-analyst-says-the-timing-is-right-for-trident-microsystems-trid/)
Nothing new said there: the article points out that the stock was trading for cash.
However, the timing was interesting - a bullish article before earnings. Someone must need their stock to move.

THE SHORTS
Honestly speaking, things are crashing faster than I expected. That means faster gains
AGN - Time is running out: 2 weeks to go. It keeps bouncing around $52, so I am going to not be greedy and close out the position this week. Closing in on 75% return.

AN - Fell below $9 on heavy volume. Even the Fool noted the bad performance. http://www.fool.com/investing/value/2008/06/30/buffett-and-lampert-miss-the-boat.aspx
We paid $0.90 per option and are $1.02 in the money with 6 months to go. Closing in on 100% return.

HOG - This stock has a lot of resilience. I expected that they would crash like Ford and GM, but not at all. They have been bouncing between $35 and $40 for some time. But the trend line is currently pointing down for now. A bad quarter will drop them hard and put us in the money.

MGM - Wow. I am surprised by the drop. A huge drop on Friday on major volume (3X the normal). In any case, we are below the $30 threshold that I expected to see. MGM is struggling in a classic case of doubling down at the wrong time. But they can always sell off a casino if needed. I am putting a sell order to close the puts if they hit $25
This has been a solid grand slam homerun: 600%+ profit

NKE - A lot of puzzled people are wondering why NKE is drifting below $60. Personally, I think the Olympics will be a bust for them. In the meantime, I see gross margin weakness from inventory buildup. In any case, I'd like to breakeven here.

VMC - From the 80s to the 50s in 1 month. This is testimony to keeping the faith and sticking to our investment thesis. We are breakeven and I could see a better return with 1 or 2 bad quarters.

ZLC - Nice week: from $21 to $18. The story here is that Zales is telling fund managers that they can maintain sales and profits by pushing silver and other cheaper jewelry. After all, $200 doesn't buy much gold.
The problem with this thesis is that it assumes that consumer disposable spending won't drop. It will. This is a put we will likely have to hold until January.

Selling DSX

2008-07-02T08:57:00.000-07:00

Selling all shares at $27.88

I don't know what is going on but the pain point is reached
Damn.

DSX, DUG and Oil Prices

2008-07-02T07:11:00.001-07:00

Oil has not levelled off as I hoped, so DUG is down a bit.

What is surprising to me is DSX - down almost 10% in just 2 weeks.
* Not about oil. DSX is unaffected by oil prices - they pass the cost on to whoever rents their boats. This is one reason why I boat into them.
* Sector is troubled - GNK, DRYS, and DSX are all pulling back

I would pull the plug at a 15% loss, but the dividend should contribute back ~3%, so I will be a boit flexible for now

DSX, DUG and Oil Prices

2008-07-02T07:11:00.000-07:00

Banks Window Dressing: A Possible Confirmation

2008-07-02T04:41:00.000-07:00

http://www.ft.com/cms/s/0/ee80c738-46ca-11dd-876a-0000779fd2ac.html?nclick_check=1

The sharp drop in the markets the last 2 weeks was extreme and broad based.
That suggested that money was being taken off the table indiscriminately. I cited a few possible reasons:
1. Lock in profits - Not very likely. The agriculture and oil related sectors had the biggest runs the last few months and yet they did not really sell-off.
2. End of quarter window-dressing - Hedge fund performance gets are measured at quarter end. Also, re-balancing the portfolio makes sense if there are off-setting gains in some of the hot sector investments

But what was most remarkable was the suddenness and the race for the exits before July 1st and the start of the new quarter. After all, the market stopped dropping July 1st and is set to open positive July 2nd.

That indicates that deadlines are the rogue in the house. And my take is that a lot of financial institutions are scrambling to raise cash to cover shortfalls from mortgage write-downs. It's like a margin call on lenders.

Additionally, they can't lend out the cash at this time - they have to preserve their books. So that forces their clients - like Hedge funds - to pull money out of the market. Covering $30B in writedowns has the follow-on effect of $400B in withdrawals form the market (just my estimate based on the margin requirements and the secondary effect on other investors that get caught in the storm).

The implication would be that - once the books are closed - lenders will go back to lending and the markets could rally as money re-enters. Something to think about for our short positions.

So if you read the article I linked, you'll see a rant about lending rates between banks. It goes like this:
In stable times, banks loan money to each other at around 0.20%.
In a period of crisis, when banks don't know who to trust, rates go up. When Bear Sterns was melting down, the rate surged from 0.20% to 1%.
The rates subsided a bit but have risen slightly recently (from 0.69% to 0.72% - I know, it doesn't seem like much, but when you are used to paying 0.20%, that 0.03% uptick stands out.

I am wondering if this article is interpreting the situation incorrectly. What if this isn't a return of a crisis of confidence but plain old supply-and-demand at work. Bank A needs cash fast to cover a writedown. So Bank B charges a bit more.

It would confirm my suspicions that we just went through a fire-sale of money leaving the market to cover lender's books. In which case a rally is imminent.

Key impact: AGN puts which expire soon. An earnings miss is likely but the quarterly report is AFTER the options expire. I want out. We'll take the money and run.

All other puts are fine because a rally will fizzle in a month

Did we just miss an opportunity to close some puts?

2008-07-01T11:53:00.000-07:00

The market was crashing and I was getting pretty excited. AN had fallen to $9.50, for example.
Now it looks like a rebound in the making.

Did we miss out? I hope not. Definitely the stocks underlying the puts were much lower than they closed, but overall they still ended down. Better yet, we see weakness and that's a good thing.

Near term puts are mixed. MGM (expires September or 2.5 months) sank to $30 before closing down to $32. AGN (expires in 2.5 weeks) actually rose but the weakness and potential for a drop translated into a slightly better put value.

The longer term puts look tasty as well
AN - dropped under $10 and moved the put up $0.25 (56% potential gain)
HOG - Rose a fraction but the puts are flat and we are still negative
NKE - A little up for us, but still negative
VMC - Stock dropped to $58 and the put is now 15% in the money
ZLC - Almost breakeven

Most of the stocks we are shorting fell pretty hard before recovering, so I think that, given time and weak earnings, they will see those levels and lower.
Right now we are looking good on AN, VMC and ZLC
HOG and NKE need a 10% stock drop for us to get breakeven or more

Volatility is our friend because of the implied potential of th eputs to be in th emoney.

Watch out ahead - falling tax revenues

2008-06-30T21:07:00.000-07:00

Some basic facts about our Federal Budget
1. Cash paid out: In FY2007, the US Federal Budget was $2.7T. (It's $3T for the current fiscal year)
2. Cash brought in: tax receipts were $2.5T
3. That $200B deficit was added to the $9.34T debt that is currently in place and which costs $280B in annual interest to fund.

About $2T of the tax receipts (80%) comes from individuals: income taxes, Social security, FICA. Another $400B comes from corporate taxes.

Currently, the budget expectations are for a moderate $45B drop in corporate tax receipts in 2008.
That sound slight. The tax payments by C, LEH, MER, JPM, & GS were $25B, and that will be closer to $0 in 2008. Add up all the banks and the shortfall has to be much higher. Then add in corporate earnings slowdowns and it's hard to see anything less than a $200B reduction.

Now add in shortfalls in personal income tax and social security. Millions more unemployed is billions in less tax receipts. The government is forecasting a $50B increase for 2008.
Again, not likely. At least $100B less, especially when capital gains taxes are factored in (not much capital gains in a Bear market).

Add in the $300B that Congress wants to throw at the housing mess, and I conclude that we will see a massive shortfall next fiscal year.

In essence, a$600B~$1T shortfall. That can not be hidden from the markets and is disruptive. It also limits the amount of leeway the government has to promote a stimulus package.

I think we'll see more taxes - on corporations (too bad shareholders) and on individuals (sorry wealthy folks, higher capital gains taxes).

I also think we'll see states like california trying to tax internet purchases.

I don't think we'll see reductions in entitlements. Not only because Congress is weak and unable. But there isn't enough discretionary budget to cut: the total discretionary budget is $1T+.

It makes gold and short positions look that much more attractive.

ETFC - Really Good News

2008-06-30T06:46:00.000-07:00

http://biz.yahoo.com/bw/080630/20080630005521.html?.v=1

Announcing their conference call to review earnings, ETrade also slipped some good news under the door
1. Debt was reduced $95M
2. Retail business was strongerthan expected
3. Earnings are ahead of expectations: "generate earnings....to absorb credit losses in excess of management’s current three-year forecast"
4. They are well capitalized - they expect to have $1B in capital above the requirements

The message boils down to 2 things
1. Core business is strong & stronger than expected
2. There should be no concern over solvency.

Now, the real meat is this
1. Earnings should beat - At the moment, analyst expectations are for a negative quarter (~-$0.13 EPS). It seems like they have good news. Can you imagine what the stock will do if it is positive?
2. They have $1B in cash AFTER covering any wierd debt. That puts a floor value under them of ~$2.3 per share in cash alone.

Meanwhile, the market hasn't opened yet and already 1M shares are trading. In pre-market, the stock is up to $3.21.

Lets hope for a steady march back above $4.

Stock analysis

2008-06-29T16:55:00.000-07:00

BLOW BY BLOW REVIEW
AN - GM and Carmax announcements undeniably point to a deeply troubled car market.
Another used car retailer released earnings last week. "Car-Mart admitted it is benefitting from higher-income customers feeling the economic squeeze and forgoing new car purchases in favor of a used automobile."
AN sells new cars and their market is disappearing. There is still the chance that Eddie Lampert could take them private (easier at $10 per share than it was at $14). That's one reason I want to exit. Another is that I doubt the puts will approach $2. That would mean the stock itself is approaching $8 ($10 strike minus the $2 option value). Shorts are piling in: short position rose from 10% to 12% in one month.

AGN - Puts expire in 3 weeks. I could see more pullback, so this is on day-to-day watch.

DUG - Yes, I went negative oil. And oil shot up ~5% and DUG still rose. Volume has been rising because many people (myself included) think that oil is going to pullback. I base this on a few variables:
1. Clear, concerted efforts to pull the price down. The Fed & SEC are trying to limit speculation, which will help.
2. Demand is down. US oil consumption has dropped 4% in the last 2 months. Apparently oil is elastic. Airplane flights and less car travel is changing the consumption landscape.
3. Supply is rising - At $130, lots of new supply is coming online
4. OPEC knows that we are heading back to oversupply. Libya and Saudi Arabia are not the only voices talking about reducing supply to keep prices high. The only question is can they manage to stop production when prices slow. It sounds almost contradictory, but Iran, Venezuela, Russia and others must pump as much oil as they can to sustain their economies. As prices dip closer to $120, they are encouraged to pump even more. The history of OPEC is the history of cheating by member states - producing above quota.
5. Summer ends soon - oil consumption will moderate. But capacity will stay high.

Rumors of an attack on Iran could make for problems, but those pass quickly. I think an actual attack would happen in November, after the elections and before the new US Commander-in-Chief takes charge.

DSX - Shipping. I will do a write-up on shipping another time. For now, my rational is
1. 10% dividend
2. Undervalued - they have a very small P/E given their massive growth expectations

ETFC - I think the drop is really in sympathy with all financials. Guilt by association.
Recall, however, that ETFC owned up to their mortgage and HELOC exposure back in September - 9 months ago. They had much more time to deal with the problem. And they seem to have been the only ones that have owned up to the problem (as opposed to C, MER, MS and others that continue to try and wait out the problem).
Meanwhile, they have poached a lot of business from Schwab and TD Ameritrade. They'll need them - people trade less in Bear markets.
It all comes down to showing an improvement in their loan portfolio.
In the near term, I do expect more down moves as other lenders show weakness and drag down the sector (IndyMac may go bankrupt, for example, & Morgan Stanley will get downgraded).

Interestingly enough, the Short position has fallen from 111M shares to 105M in 1 month. Of course, that may be why the price was above $4 last month.

Longer term, I am not very worried here:
1. Stock is already down 85%
2. Company is not on any rumor mill for bankruptcy, downgrades, or similar critical issues.

HOG - These guys are not a transportation company, they are a consumer product. Most people own Harley's as vanity items not for core transportation. It's an expensive luxury item too - requiring maintenance and insurance, at a time when most hog riders are cash strapped.

Some folks will argue that they are an oil play because motorcycles are more fuel efficient than cars. Several problems with that theory:
1. Not that much more fuel efficient
2. Other bikes are more efficient
3. They cost almost as much as a used car. Folks who are challenged to buy a car are not going to look at something almost as expensive

HOG is facing low demand, so they are shutting down several production lines.
Another core problem is financing, which has a double impact. First, delinquency rates are rising, meaning folks are returning their bikes to HOG. Second, they can't write new loans on new cycles.
Lastly, they have almost no International presence to bail them out.

MGM - Times must be difficult for Vegas: I have free offers being thrown at me every week.
MGM took a hard blow after getting downgraded by an analyst. They are a HOLD, which means SELL.
Not one aspect of their business is doing well, and it looks like Wall Street is noticing. Vegas is hurting and so is Macau (take note those of you who are banking on a strong China - even the Chinese are startingto show signs of exposure).

The chart looks ugly with more pain ahead. There are rumors now of bankruptcy because of the $13B City Center that looks like it won't even come close to being breakeven. A major writedown will occur in a few quarters. We have a September expiration (almost 3 months). So lets keep those puts for now.

MUR - A refinery. An oil retailer. A driller and oil producer. Every single one of these is a good business right now. What makes me favor MUR is that they sell gas at Walmarts. Recent news shows that consumers are buying much more cheap gas at Walmart - and that means MUR. I like the way they stayed above $90 for the past 2.5 months.
And they only have a 14 Forward P/E

NKE - I think storm clouds are ahead but they are not terribly overpriced, so I want to close out the position as soon as possible.

VMC - VMC is locked into long-term development contracts, and they are somewhat immune form current building demand.
They are not immune from the high cost of oil - asphalt is a big part of their business. Their margins are getting squeezed right now.
A second area of concern is new business. A large number of potential contracts are probably being deferred by both government and commercial developers.
A third and final problem for them is cement. Prices are dropping, further pressuring margins.

Resistance is strong at $60, which means that once it gets broken, the low 50s are next.

ZLC - this one puzzles me.
The competitors are hurting.
* Blue Nile announced US sales are slow
* Whitehall is declaring bankruptcy

I want to say that they may be rising because of the value of their gold inventory. Except that gold hasn't moved much in 6 months. With the exception of a 3 week spike in February/March, gold has traded around $880 an ounce +/- $40. And ZLC flushed its inventories the last 2 quarters by 15% - reducing their gold position.

Sales may be up thanks to the stimulus checks. But one-offs aren't going to save them. And they rely on too much private financing to make the sale: they actually use Citigroup and that must be starting to tighten.

To scare the shorts, management has announced a share buyback of $350M. They have the debt and have spent it already to reduce shares outstanding by ~9%.
But they are really short cash and I just don't see how long they can keep bleeding money.

In fact, I notice that short pressure is huge: 44% of shares are shorted and that's an increase of 4% since last month.

LiveRocket Portfolio Update

2008-06-29T15:12:00.000-07:00

It's been 2 months since I posted a performance summary. During that time, we've seen the following:

Dividend Payouts received: $112
QID $9
SZK $10
SCC $14
SIJ $9
SRS $44
DUG $16
CF $10

Three Covered Calls (CF, ETFC, & ETFC again)
CF Covered Call Play Total Net: $600
CF 100 shares @ $130 Strike price (cost basis $130.2)
CF Covered Calls 100 @ $6.2 each

ETFC Covered Call Play Total Net: $1,300
ETFC 2000 shares @ $4 Strike Price (cost basis $3.75)
ETFC 2000 Covered calls @$0.40 each

ETFC Covered Call Play Total Net: ($580 loss at current values)
ETFC 1000 shares @ $4 Strike price (cost basis $4.07) – Not exercised
ETFC Covered Calls 1000 @ $0.35

The covered call move has been a net positive. We also have 1000 shares of ETFC at a cost basis of $3.72. I missed an opportunity to write another $4 covered call and bring down that cost basis further. The sudden downshift in ETFC caught me by surprise. I think patience will pay off and that, within 6 months, we'll see at least a 33% return on this position (via a combination of ETFC covered calls and an actual stock movement up closer to $5)

I moved into short territory in early March, probably the worst possible timing because the market chose to rally strongly immediately after the purchase. But patience has paid off:
* Ultrashorts & QID are down a combined $2,091 or -5%. This is 41% of our invested position
* Puts are down a combined $810 or -3%. This is 29% of our invested position

What will it take for the shorts to generate positive returns?
Obviously patience matters most. We have plenty of room to wait - the Ultrashorts don't expire and most Puts go out to January 2009 (MGM expires September 2008 and AGN expires this month).
Having the right positions matters next. We have 3 quarters of earnings releases: July, October, & January. In a hostile market like today, one misstep will drop a stock hard. I believe that we have positions in companies that are at risk of lowered earnings guidance.
Finally, continued negative sentiment. We are in Bear territory. There will be rallies, but as long as the Bear continues to bite, we could see a further 10% dip in the markets over the next 4 months months. That's probably all we need to see a 15% return in these positions.

Ultrashorts & QID: most of these positions are ahead or barely 5% away from being positive. QID is the real problem here - down 23%.
Puts: The key here is that we have 2000 each of AN/HOG/NKE/VMC/ZLC and we have 6 months before they expire. A major move down in any of these stocks makes a big impression: every $1 gain in the put will drive $2000. If all puts go up $1, that drives $10K.

The longs are a calculated risk at the moment. Longs are 30% of our position.
I recently chose to dive into 3 stocks: DSX, DUG & MUR. I'll explain more below.

My short term focus:
Exit AN, AGN, NKE puts as soon as reasonable.
Hold MGM for a further dip
Write covered calls on ETFC AFTER earnings release

A rally? Did I suggest an imminent rally?

2008-06-26T20:01:00.000-07:00

if you ever needed proof - you have it. I would make a lousy day trader.
Instead of a rally, we had a 300 point drop.

I thought a short rally would follow last week's crash a la a dead cat bounce. And that the hedge funds were done with their pruning.

What a day.
I am ok with the ETFC for now. They dropped in sympathy with the other financials, but ETFC has no more mortgage exposure, unlike the others. And recent evidence points to ETFC's ability to outperform stock brokerages like Schwab and Ameritrade. the question is whethe rtrading revenue will continue to grow. Well, if C and LEH go up in flames, ETrade may pick up the leavings.

TRID just blows me away. Still haven't decided what to do. take the loss and walk or wait for market sanity. I will wait this quarter earnings release for signs of design wins. If none, I have to walk.

TRID - Below Cash value

2008-06-26T07:19:00.001-07:00

I honestly don't know what to do here. It is selling for below cash value - and that's a strong message from the market

MGM Downgraded

2008-06-26T06:42:00.002-07:00

http://money.cnn.com/news/newsfeeds/articles/apwire/3c14c459b19ddc93b46f6c1adb9fe57f.htm

MGM Downgraded

2008-06-26T06:42:00.001-07:00

http://money.cnn.com/news/newsfeeds/articles/apwire/3c14c459b19ddc93b46f6c1adb9fe57f.htm

Expect a brief rally

2008-06-25T20:38:00.000-07:00

After the massive drops the last 2 weeks, this week will probably see the start of a brief rally as traders go bargain hunting and essentially take a breath.

A mixed bag of earnings releases will add to market gloom. Earnings will show decent returns for global companies but the guidance will be negative.

NKE Beats with Dollar Currency Upside

2008-06-25T17:42:00.000-07:00

http://money.cnn.com/2008/06/25/news/companies/nike_earnings.ap/?postversion=2008062518

Nike sales grew 16% to $5.1B from $4.4B. Earnings grew ~14% (and EPS beat by $0.02 (2%)). From $438M to $490M

* US sales grew 4%

* Asia sales surged 39% to ~$828M from $595M.

* EU grew 19%

But the sales and earnings story is actually quite bad and bodes poorly for the future.

* Sales growth was only 8% after subtracting currency transaction gains.

* "Changes in currency exchange rates increased revenue by 7 percentage points for the quarter." Of the $700M growth, fully $350M was from currency gains

Earnings on a year-over-year basis fell nearly 40%:

* One-time earnings gain of $32M from a sale of Nike Bauer Hockey

* Lower tax rate added ~$15M

* $150M came from currency gains.

Let's revisit the issue of currency gains.

When the dollar weakens, overseas sales results look bigger in dollar terms. Last quarter, it was 15% cheaper than last year against the Euro. If Nike sells 25M shoes in China and Europe, they would have gotten $1B last year and $1.15B this year. In essence, Nike unit sales are virtually flat.

Nike will continue to enjoy this weakness until the end of the year.

For the next quarter, the dollar looks set to be ~13% cheaper than last year. (BTW, the $/Euro rate drop is similar to the $/Yuan rate drop, so the Euro rates are applicable.)

But look at the end of the year: the $ weakness falls to ~8%. In fact, we could even see some dollar strength, which would drive that 8% down. (Note: the dollar has been moving up the last 2 months and a weaker Europe will drive $ strength.)

A breakdown of this quarter's sales growth shows the following:

* 50% dollar weakness

* 25% US growth

* 25% Global growth

By Q4, two of the 3 growth factors disappear: no more dollar weakness and no more US growth (per Nike, they expect flat US growth). In fact, a pullback in US sales would negate any global growth.

I am forecasting a flat Q4. Analysts expect 10% Sales growth for the next 12 months. Meanwhile, I expect costs to increase. China has been increasing clothing prices. As reported by NKE this quarter,

* COGs rose from 29% to 33.1%

Flat sales and higher costs will mean falling EPS. (Note: NKE is forecast to have a lower EPS next quarter because they enjoyed a special tax gain last year)

CONCLUSION

Overpriced by ~15%

* PE is too high: NKE has a 15 forward P/E for 10% growth (and that is net $2B cash).

* EPS will probably drop from forecast $3.95 to $3.75

Current 15 P/E on $3.75 drives a $59 price. A lower P/E will drop it to $50.

Market see-saws

2008-06-25T09:31:00.000-07:00

A big switch in investment tone is shaping up.
* Profit taking in Agriculture and Energy - They've had a big run
* Delayed dead-cat bounce

Oil prices dropped ~$4 a barrel today. Gas consumption looks to be lower than expected. However, I suspect that a key unstated factor is that the government slowed their re-filling of strategic reserves.

In any case, it's good for DUG and DSX, and bad for MUR.
BTW we have a $0.04 per share dividend on DSX.
MUR I'm not too worried about. They got alittle ahead of themselves and now they are consolidating. A dip below $90 and then I could see them move up to $100.

The puts are no longer as attractive and the Ultrashorts are getting whalloped.
-------------------
Wall Street is encouraged that things may be getting better: we have the combination of easing oil prices and a housing solution from Congress. Add in the threat of higher interest rates in the Fall, and Wall Street will think inflation is going to go away and the economy bought itself some breathing room.

In reality, things will just continue to get worse because it isn't about paying a little less for gas or being able to avoid foreclosure. People are getting fired and consumers have too much debt to buy more stuff. Consumer spending drives our economy, and it isn't coming back anytime soon to the levels that the leaders want.

Take oil, for example. Does a slightly lower oil price suddenly make the economy stronger? Not really.
For consumers, $4 oil or $3.50 oil doesn't really make for dramatic changes. A few dollars a month in gas is not why consumers are slowing their spending on durable goods like washing machines.
For producers, it will be at least 4 months before their energy related costs come down. And even then, the economy isn't going to roar back to life.

And the housing debacle. The dollar will shrivel in the face of an additional $300M spend on housing.

But the perception of improvement is reality for Wall Street and it could spark a rally, which would be bad for our short positions.

Market nervousness in action

2008-06-24T07:42:00.000-07:00

The Fed meets today and I think the markets are nervous.
I see profit taking in agriculture and oil - the bubblier parts of the market.

We are going to maintain our short positions. AGN, VMC & HOG are very strong in the face of the sell-off - and I don't like to see that. We have large volume positions such that every $1 or $2 move down can throw off good returns. That's why I watch them like a hawk

Overall, our put positions are neutral right now: 2 are ahead, 2 are near cost basis, and 3 are behind. Only MGM and AGN are generating solid returns at thi stime, and AGN is on day watch (because they expire soon)
MGM - At $13.60, our Sept $50 puts are much higher than our cost (purchase = $3.4). This gain is wiped out by the NKE loss, which is too bad.
AGN - talk about resistant. The July $55s are selling for $3 (purchase = $2.10). The resistance is concerning and I'd hate to see them snap back, so I am going to put in an order to sell at $4. We'll see: I am watching daily
AN - back to purchase basis. They now look broken and every day more bad news about cars. The sooner they get to $10, the sooner we can unload our puts for ~$2 (purchase = $0.90)
VMC - Also resistant and the $50 puts are far out of the money. Nevertheless, we are close to purchase price (current = $3.1, purchase = $3.58). A 10% drop closer to $55 in the next 2 months would give us a chance to sell for close to $6.
ZLC - Who could be buying jewelry today? Our $15 puts are far away from today's ~$20 price, and the put sells for $1 (purchase = $1.85). ZLC depends on holiday season sales, so we may have to ride this one for a while.
HOG - Can't believe these guys won't drop, as if Motorcycle sales aren't suffering like cars and trucks. Our $30 puts are $1.65 (purchase = $3.20).
NKE

ETFC and TRID are very concerning. ETFC because (1) I did not write covered calls to further reduce the cost basis and (2) the absolute price drop is now ~ our cost basis. I think ETC is trading in sympathy with the other financial stocks, which are all trading down. But I am ok sticking with ETFC for another year because they are financially sound imho.

TRID is the mystery to me. They are trading at cash basis despite very tasty market growth and position.

Buying

2008-06-23T08:21:00.000-07:00

MUR 100 shares @ 92.61
DSX 100 shares @31.42

US Gas consumption drops 2nd month in a row

2008-06-22T21:41:00.001-07:00

http://www.reuters.com/article/marketsNews/idUSN1736453520080617

According to Mastercard
"U.S. retail gasoline demand year-to-date fell 1.96 percent from the same time last year as prices for the fuel rose above $4 per gallon, MasterCard Advisors said Tuesday.
'The regional year-over-year view shows all regions are consuming less gasoline when compared to a similar week in 2007," said Michael McNamara, vice president of MasterCard Advisors.'"

This is a 210K bpd drop. Couple this with increases in supply and likely drops in demand elsewhere, and we will see a 1M bpd gap again by Summer's end. Hence, we bought DUG.

"The four-week moving average for retail gasoline demand was also down 4.3 percent, the eighteenth consecutive week that it has shown a decrease"

US Gas consumption drops 2nd month in a row

2008-06-22T21:41:00.000-07:00

Patience is Paying Off

2008-06-21T21:58:00.000-07:00

Last week the Dow fell 400 points and the NASDAQ fell 2%.
That’s 3 down weeks in a row. Out of the last 7 weeks, 5 weeks ended down.

I always go back to the trends because it’s too easy to lose sight of the forest for the trees. Individual weeks can be false signals. For example, I would argue that May 16th was an options expiration day and a short squeeze pushed up stocks that week. That’s just conjecture, of course, but it makes sense when you see that stocks had been moving up for 2 months prior. Also, note that that was the last time the Dow moved up.

Just as the last options expiration day may have pushed up stocks, it also may have been acting last week to push them down. This time, with stocks trending down, there was no short squeeze to drive traders to buy stocks to cover their positions.

Which is my way of saying things might be oversold in the short term. Don’t be surprised if the market rises up again next week in a mini dead cat bounce. But overall, the market will continue to move down.

Staying with the big picture story, go back to my previous chart showing global money racing away from the stock markets and into money markets. Now go back to the chart showing the Dow and the NASDAQ for the last 3 months. Hedge fund rules limit investors from cashing out in the last 45 days of the quarter. In this case, May 16th. Notice the sag in both markets that week.

The story I'm reading in the markets is that smart money hsa been leaving the markets for some time and in earnest in May when the Q2 exit deadline loomed. The market's downward drift was arrested by an options expiration week that squeezed shorts (traders had to buy up stocks to cover short positions). Also, I suspect that regular investors misinterpreted the pullback as an investment opportunity, further goosing up the market in the short term.

At this point, the NASDAQ and DOW diverged. I think this was caused by the financial heavy Dow.

If I had to guess, next week will be even worse as funds sell-off in order to lock in rapidly evaporating Q2 profits. Especially tech stocks.

I am focusing on the big picture. Foreclosures are accelerating, consumers are belt tightening, and companies are firing people. California unemployment shot up in May from 6.2% to 6.8%. Experts point to seasonal summertime workers like students, as if that explains the increase. First of all, schools don’t get out until late May. Secondly, there wasn’t the same problem last year in May. The jobs simply don’t exist.

I think the stock market will continue to get worse as mid-July comes. We get a look at corporate earnings and the GDP, and as we get forward guidance. And the Fed meets.

Against this background it only makes sense to hold short positions.
AGN is the only one crying out for an immediate decision – it expires in 4 weeks. It would be great to see a $50 price before then. But I noticed last week that AGN is finally tracking the Dow’s decline.
AN is also exciting. The fell below 412 – what I consider to be a resistance point, and on heavy volume. From Wednesday-Friday last week, 21M+ shares were traded compared with an average daily volume of 2.3M.

The Ultrafunds are also showing a lot of life

My preference is to unload the puts in the summer. I’ll stay in the ultrashorts a bit longer.

I want to buy Natural Gas and Coal stocks, and there was some pullback last week. I usually don’t want to buy this close to earnings, but I suspect some amazing earnings and guidance will be forthcoming. The only concern here is that some investors mistake a connection between oil and coal & NG.

Don't sell those puts

2008-06-20T10:32:00.000-07:00

Great day to be short - and a lot of this is simply because it's options expiration Friday. There is no short squeeze in a market that has seen the Dow drop 1000 points in 1 month. Nothing to prop up prices.

Which means prices could rebound a bit in the next 2 weeks - and AGN puts expire in 4 weeks.

I think we sit tight and hope for another 5% drop in the stock prices underlying our puts.

MGM - I think the deep decline suggests further weakness. Sell the put when it hits $35? (a ~$3 investment and a $15 return)
AN - looks like another breakdown. It is also showing definite weakness

VMC - not getting low enough, fast enough

ZLC/HOG/NKE - what is up with these consumer stocks? Why won't they crash harder? Sadly, we need a 15% pullback on these in 3 months just to return to breakeven.

Stocks in the News

2008-06-19T05:06:00.000-07:00

I saw some interesting news that seemed worth pointing out

ETFC - They have drooped in light of the recent Financial sector concerns. I missed the chance to make a few pennies on June $4 covered calls, but I think next week, after Friday's options expiration, the stock should lift and give us a good opportunity.
Meanwhile, they announced good news about trading volume
http://uk.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUKN1844941220080618
"Average daily trading volume, a key indicator in the on-line brokerage industry, increased 10 percent from a year earlier while its retail customer assets were up 3.9 percent month over month."
They have more money in the bank and customers are doing a lot more trading and adding to ETFC's revenues.
It's a sign of a solid turnaround plan in motion.
I think that ETFC could shoort to $5 if they can show a return to the core business - meaning zero exposure to the mortgage debacle.

AN - More good news for our puts. Yesterday saw shares tumble in the car industry. Carmax, the nation's largest used car seller, reported a 54% drop in profits and missed earnings by 40%. http://uk.reuters.com/article/ousiv/idUKN1847736220080619
AN is the nation's largest new car dealership and they can't be doing any better. In fact, I think they are doing much worse - their biggest product line is SUVs and they aren't selling.
I previously mentioned that I thought US car sales would fall from 16M to 14M - looks like that's even optimistic. "A survey of dealers...suggested the seasonally adjusted, annualized rate of sales was running near 13 million vehicles in the first half of the month, down from 15.2 million in the first quarter and near 14.4 million in April and May"
Also, put volume has dramatically accelerated on AN.
The combination of more interest in puts and the stock price nearing $12 helps our puts. At the moment, $12 is the resistance point. I think we drop below that soon.

MGM - Down a bit more. I think $40 is their resistance point, but I also think the worst has yet to come for Vegas. But how far down can MGM drop?
I'm thinking $35 is the low. Throughout 2005 & 2006 they bounced around between $34 and $45. Business levels are already returning to 2006 levels.
Business wise, cash is tight. Operating income was running at $450M per quarter until last quarter when it fell to $340M. Then they have to pay ~$160M servicing their $13B debt. They are cash flow positive but it has fallen from $280M a quarter to $180M per quarter.

Outside of weakness as a hotel, a business conference destination and a gambler's mecca, MGM is exposed in the real estate market. Called the City Center and located next to Monte Carlo and Bellagio, it will open in August 2009 with 4,800 hotel rooms and 2650 condos. Talk about bad timing - Vegas is already starting to see surplus hotel rooms and massive oversupply of condos. Meanwhile, construction prices have pushed up development costs from $4B to $9B and counting. The stock price has yet to bake in the impact of lower condo prices (at least $100K lower per condo, or $2B shortfall).
Long term, this is probably a brilliant move. Short term, it will probably force MGM to go deeper into debt and sell off pieces of its empire. I believe that, once folks look beyond the gamblers revenue shortfalls and start asking questions about the City Center, the stock will take another beating.

ZLC - Unbelievably strong, but I have faith in their doom. Blue collar workers are struggling to put gas in their trucks - they aren't buying jewelry. In fact, look at the news on Blue Nile, a major competitor. http://www.forbes.com/markets/economy/2008/06/18/blue-nile-closer-markets-equity-cx_lal_0618markets41.html
"Traffic on Blue Nile's U.S. Web site decreased by 29% in May from the year prior period"
Even Tiffany saw only 6% growth in the US.
It's just a matter of time and we have 6 months.

VMC - From the 80s down to the 60s. VMC is raising $650M to payoff some debt (a bridge loan).

http://www.forbes.com/afxnewslimited/feeds/afx/2008/06/18/afx5127269.html

It's a great idea to borrow money in a low interest environment, and this will improve their financials somewhat.
But that doesn't chang ethe fact that business sucks today and is getting worse every month. Revenue and profits are down after they acquired Florida Rock. Ooops. And their materials costs are rising rapidly as oil costs rise.
I suspect they drop to $60 next month if they show a negative quarter.

HOG - They slipped 4% yesterday in sympathy with the auto stocks. We've done the due diligence: auto/vehicle imports and exports are down, GM/Carmax reports extremely soft car sales, and financing is tighter. And the working man is cash strapped. Analysts expect only a 6% drop in sales, which seems optimistic: new car sales look to be down 20%.
I see them drooping to the low 30s by next month's earnings release.

NKE - Uggh, this isn't working out. I expected a drop in clothing sales and I was right: US consumer spending on clothes drooped $3B in Q1 this year. Apparently, NKE is immune. Tiger Woods is out for the rest o fthe season, and that may dent sales, but I doubt it really matters. NKE is riding on the Olympics and the gains from international sales being translated into the dollar. The dollar advantage ends in a few months, so that works in our favor. But we really need to see a consume spending pullback, and soon.

AGN - Word is getting out - cosmetic surgery is drooping. (Sorry - couldn't resist)
Not only was this issue featured on the Daily Show, it is starting to make the rounds in the investors corners.
http://biz.yahoo.com/ibd/080613/health.html?.v=1
The article nicely sums up my investment thesis. AGN is all about cosmetic surgery. Almost 40% of their business is botox and breast implants. And they are slowing (despite recent company assurances that all would be fine). AGN is going to weather any downturn because they do have a strong business in eye care (pink eye and glaucoma products), but I think th ebotox projections are optimistic. In any case, a forward P/E of 24 seems a bit lofty, especially given current expected growth of 18% for 2008 and 2009.
I hope to see $50 and we're out.

TRID - It actually traded below $4, almost their cash value. Which means that it could do it again. I am puzzled here. All facts point to a strong market. There are no facts (yet) showing competition, but neither are there any pointers indicating that TRID has effectively gained some new product wins.

Buying DUG

2008-06-18T10:00:00.000-07:00

400 shares @ 27.27

MGM Puts still looking good

2008-06-17T07:45:00.000-07:00

Four issues are driving down MGM's profits. Three are known, 1 I uncovered.

http://www.marketwatch.com/news/story/airfare-hikes-capacity-cuts-start/story.aspx?guid=%7BF6045F48%2DC0C8%2D44ED%2D9CEB%2DFAF1E60E4D24%7D&siteid=yhoof

1. Fewer people are travelling to Vegas.
"there are predictions that total capacity could be down by double-digits percentages or more by autumn, following declines of 3% and 6% in the first and second quarters, respectively"

2. They are gambling less when they do go
"April gambling revenues were down 5% statewide to $1 billion, with a 1.3% drop on the Strip"
If that continues, Strip casinos will lose 15% gambling revenues for the year.

3. Hotels room rates are dropping
"average daily room rates (ADRs) on the Strip in the second quarter were 13% (down) over the same period in 2007, with weekdays off 10% and weekends down 17%. "
An MGM spokesman "noted that when the company reported its first quarter earnings, it said that occupancy was flat with rates down slightly. 'This will likely continue through the end of the year...'"

And now the 4th issue
4. Surging electricity costs
According to the EPA, the average large Vegas Casino uses 100m kwh per year or ~$9M annually per hotel. MGM in Vegas has the Mirage, MGM, Bellagio, Circus Circus, Excalibur, Luxor, Mandalay Bay, New York New York, Monte Carlo, and Treasure Island. That's 10 casinos with an annual electrical bill of ~$90M. Add other casinos in Reno, Detroit and elsewhere and we can round up to $100M.

Electricity costs are up 15% in Vegas since last year (they went up June 1st 2007). MGM is looking at an extra $15M in annual costs or ~$4M this quarter. That's ~2% drop in EPS.

Revenues falling 6%, costs going up. Last year, MGM reported $360M in profits fo rthe quarter. I'll be surprised if they beat $200M.

I'm hoping that they see a big miss and the stock drops <$40. That's when I'll unload the puts.

Investing in the Oil Bubble

2008-06-16T05:44:00.000-07:00

While oil is making all the headlines, the real action is coal and natural gas.

I will post a separate review of coal and NG later, although my previous posts include my target stocks for these sectors.

It's worth taking a big picture look at energy consumption. I will explore the myth of Peak Oil and show why today's oil prices are just an ordinary bubble, and then where to invest.

Energy consumption is growing overall but rocketing up in Asia.

Growth in global trade has led to massive increases in manufacturing, itself a major driver of energy consumption. In addition, getting richer means millions more people are joining the ranks of the middle class. Inevitably they aspire to the same living standards as enjoyed in the developed world : refrigerators, TVs, air conditioners, computers and so on. And of course, cars.

In the chart of global energy consumption, you'll see that the 5 year growth in energy demand is mild in the developed world (less than 5%). A lot of this growth comes from computers and the internet: according to the EPA, US data centers now consume 1.5% of total US energy consumption. Asia – the world's largest energy consumer - has seen energy consumption grow 38%. Big growth off a big base. The point being that developed world energy consumption has largely stabilized but that of Asia has a long way to go.

When it comes to electricity, multiple sources exist: coal, nuclear, wind, hydro, solar, natural gas and so on. When it comes to transportation, however, the only solution today is oil (forget ethanol for the moment).

Oil is a challenge for two reasons. First, there is no substitute (at least today). Second, global economies depend on hauling raw materials and finished goods.
INVESTMENT OPPORTUNITIES:
SHORT: Shippers (UPS, FEDEX), Truckers (pick any), planes (United or USairways), CCL
LONG: Railroads (CSX, KSU is my favorite), Boeing/PCP in 6 months (once Boeing begins shipping their fuel efficient planes), TIE, ZOLT (now that prices have fallen, expect more usage of lightweight, strong materials)

WHY OIL PRICES ARE SO HIGH: THE MYTH OF PEAK OIL
OPEC was formed 34 years ago with a mission: to manipulate prices by managing supply. They didn't do a very good job: oil stayed around $20~$30 for years. But the emergence of strong, new demand in Asia meant that the end of years of oversupply. One side effect of forcing production below capacity is that OPEC never invested in boosting capaccity - so now that they want to sell more oil at $135 a barrel, they can't!

Ever noticed that, every 20 years or so, when oil prices surge, we hear that oil won’t last more than 40 years. Then 20 years pass and, again, prices spike, and again we are told: oil won’t last more than 40 years. Sounds like the same crap peddled by real estate agents during the housing bubble: "prices ar ehigh and will stay high because they aren’t building land anymore."
It's hype to distract from massive specualtion.

Like diamonds, prices are high because a cartel has restricted supply. Unlike diamonds, it takes time to get new supply to the market.

KNOW YOUR HISTORY
Lets review the history of supply, demand, and price controls.
1974 OPEC is formed.
1979-81 prices surge due to Iranian revolution and impact on oil supplies
1982-1985 Prices begin falling. Saudi Arabia cuts production to stabilize oil prices, but it doesn't work – too much member cheating. By 1994, oil prices had fallen to the lowest level since OPEC was formed in 1973.
1995 A new cycle emerges. Demand surges from India and China. Supply also surges from former Soviet states.
1998 Prices soften further amid oversupply and slackening Asian demand (the Asian economic crisis). OPEC again tries to enforce production cuts in order to raise prices. On Jan 1st 1998, OPEC oil production stood at 27.5 million barrels per day, OPEC removes 4.2 Million bpd from production. It works: prices began to rise.

Note that at ~$25/barrel, there was minimal infrastructure investment to increase production AND there was plenty of spare capacity.

2000 OPEC reversed production cuts and added 3.7M bpd
2001 Chaos in the oil markets. A weakening US economy, 9/11, and more Russian supply all combine to undermine OPEC attempts to drive up prices. OPEC and Russia cut production a staggering 5.5M bpd. That is nearly 15% of combined supply taken off the market.
2002 Supply exceeded demand by 6M bpd.

2003 Oversupply stopped being a problem: falling to only 2M bpd.
* Surging demand from a strong global economy that now includes rapid India and China growth
* Shrinking supply Iraq (2M bpd), Venezuela (1M bpd), Mexico and Iran.

2007 OPEC has lost control. Price controls are no longer a matter of turning the faucet on or off. Lack of investment means that OPEC is operating almost at full capacity.

Venezuela and Iran followed similar paths in managing the oil revenue. Oil drives 65% of Iran’s government budget but they allocate only $4B per year to infrastructure improvements. Same with Venezuela. The result - they want to pump more but can not.

In 2007, oversupply was less than 1M bpd. That’s tight enough to where a slight disruption in supply matters. Israel fights Lebanon - oil prices spike. Nigerian oil pipeline disruptions - oil prices spike. But the real endemic problem is Russia: in May 2008 they reported that oil production slipped 0.7%.

Russia's problems are partly the Iran disease (underfunding oil infrastructure) and partly government intervention i nthe oil markets. In its rush to secure oil reserves and kick out the Western oil companies, Russia's oil development is slow.

The point is simple. Oil is alimited resource and we will run out of it. But today's oil price surge is not about a long term shortage. It is purely about supply mismanagement. And, arguably, demand mismanagement in the form of sloppy fuel standards for cars and planes.

OPEC wants high oil prices but not this high. They like $80 but not $135. The threat of permanently high oil prices is driving a lot of investment away from oil and into alternative energies. That’s a permanent and long-term threat to OPEC. Secondly, expensive oil is pushing weakening economies into a deeper slowdown, which always reduces demand. US fuel consumption has already started to decline. But, as usual, OPEC has overshot the mark in its efforts to manage prices and risks killing the golden goose.

Turning up more supply is an obvious step, and it will be taken. But another course of action is breaking the back of oil speculators who are taking advantage of short term supply disruptions.

The first step is a strong dollar. The Fed is all talk. But notice that, following the recent trip to the Middle East by Treasury Secretary Paulson, we see a firming of the dollar. Whereas Gulf countries were talking about moving away from the dollar, I bet they are now buying it. And we hear more discussion about making speculation technically harder and more expensive by raising the margin limits. Apparently, it is pretty cheap for Wall Street to trade oil commodities.

At the same time, expect China to raise the yuan. This will have a knock-on effect of raising global inflation somewhat (latest trade figures show that Chinese exports to the US are already seeing price inflation of 2.3%) A strong yuan reduces the value of Chinese dollar holdings, but it more critically reduces Chinese inflation from food and commodity imports. They subsidize oil, and a stronger Yuan will help.

INVESTMENT OPPORTUNITY:
DUG (oil short), get out of overseas stocks, buy dollars or sell the Yen. Buy Yuan.

On top of a slight OPEC oil supply increase, we will see slowing demand. One can play what-if games. What if US demand slows 1% (drops 210K bpd)? What if Global demand doesn’t grow 2M bpd but only 1M bpd.

It doesn't matter. Once there are signs that scarcity is not an immediate issue, expect speculators to leave and for prices to return to $100.

Prices could go even lower. Oil at $130 is a massive windfall – it is the only thing keeping Russian, Venezuela and Iranian governments in power. And they want to sell as much as they can. The pressure to pump more oil is going to drive demand for equipment and services to find and extract oil.

It will take years to hit serious oversupply. As long as oil is >$50, expect to see massive ongoing investment in oil extraction and production. Additionally, since 80% of world reserves are in the hands of State governments, public companies like Exxon will be looking offshore. Not in the Gulf of Mexico that is 200ft deep but 5 miles deep. So oil rigs and deep submersibles are a hot play for a while.

The bottlenecks in the supply chain are in drilling (wells, oil rigs), drilling equipment, and shipping. Secondly, there aren’t enough refineries. With extraction, distinguish between land based (aka known reserves) and offshore (aka unknown). Land based is about drilling new wells. Offshore is about oil rigs and exploration. And shipping in tankers

INVESTMENT OPPORTUNITY: MDR, FLR, ATW, DO, TTI, IO, NOV, FWLT, FLS, GNK, DSX

There are a few more I could throw out, but that's a good start.

Retail Sales 'strong' & Jobs are weak

2008-06-12T07:03:00.000-07:00

Retail sales for May grew 1%, or 0.8% minus gas.
http://biz.yahoo.com/rb/080612/usa_economy_retail.html

It's still positive, but when you consider that
1. We just threw $50B into consumer pockets
2. Food inflation surged in May
3. Promotions to boost sales will hurt margins

I'd say that this growth is actually a negative.
But it was above expectations of 0.5%, so everyone is happy.

Meanwhile, jobless claims rose more than expected.
http://biz.yahoo.com/ap/080612/jobless_claims.html

TRID Bad News

2008-06-11T20:15:00.000-07:00

There was a basic strategy with TRID: they are oversold (trading almost at cash) and are turning the corner with more design wins.

There is no TRID specific news. There was an announcement today by SIA that chip sales are weakening, especially memory chips.

What about the LCD TV Market?
* Corning is doing very well. they are the leading supplier of LCD glass. http://seekingalpha.com/article/80065-corning-lcd-tv-sales-up-confirms-guidance-for-q2

"The company confirmed that it is not seeing evidence of an economic downturn affecting LCD TV sales in the U.S. To the contrary, GLW said that LCD TV unit sales were up at least 30% year-over-year for each of the first four months of 2008. The company expects sales of LCD TVs to continue to be strong."

* Samsung is doing very well. They are the world's leading LCD TV seller and a top TRID customer. "Samsung's profits were up 37% in the first quarter of 2008 with profits of $2.2 billion on sales of $17.2 billion. Much of Samsung's growth was generated from LCD TV sales, especially those 46-inches and above. The company's LCD business generated 53% year-over-year growth itself."

* LG, the 2nd largest LCD TV seller, reported 82% growth. http://www.24-7pressrelease.com/pdf/2008/05/26/press_release_51151.pdf

* According to displaysearch Q1 2008 LCD TV units shipped grew 69% year-over-year. http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/6575.asp

One of the following may be at work:
1. Demand concern - the US market is rapidly eroding and there may be fears that CHina and other countries are not able to pick up the slack. Is this valid? Fear about the future is always valid, but they seem to be discounting expectations pretty significantly

2. More direct competition - bigger companies may enter the market.
3. ZRAN specific competition. ZRAN had an analyst meeting yesterday. Perhaps they leaked some gains in th emarket. It doesn't seem to have done much: both TRID and ZRAN downshifted.
In fact, all graphics makers were down today: Pixelworks, Silicon Image, Neomagic, etc.

3. Greater price erosion

4. Missed design wins - This is the big one. TRID is riding past design wins to drive cash growth. They need to expand the wins.

My take is general fear of a major consumer electronics slowdown.

A basic comparison of fundamentals demonstrates how negative the market has become about TRID:
Price to Cash:
TRID is 1 (at cash value)
ZRAN is 2.6
SIMG is 2.6

Price to Sales:
TRID is .9
ZRAN is 1.5
SIMG is 1.7

Operating Margins
TRID had 11%
ZRAN had -0.2%
SIMG had 7%

The fundamentals above are why I thought $10 for TRID was a slam dunk. Clearly, the market assumes TRID is worthless. Ouch. With such a strong negative sentiment, it is hard to add. I would sell, but at this point, why bother.

Stocks to buy

2008-06-11T20:10:00.000-07:00

I have waited weeks and still no pullback onthese stocks.
These are my favorites (in descending order)
CF
MOS
ARD
PXP
DSX
CRK
LNN
NXY
BDE
WTI
WLL
XEC
MUR
RIG
ME
ACI
DNR

2001 All Over Again

2008-06-10T06:43:00.000-07:00

One thing about the stock market that resembles 2001: a lot of volatility, with deep drops followed by rallies that almost but didn't quite close the gap.

Look at yesterday - following a major fall on Friday, the markets did not rally Monday
1. NASDAQ continued its drop (another -0.6%)
2. Dow rose just under 0.6%, not a rally
3. S&P did not move (it rose 1 point)
4. Declines outnumbered advances
5. Down volume was 2:1 vs. up volume
6. New Lows vs. Highs were 4:1
7. Markets traded at higher than average volumes, indicating a broad based move

Meanwhile Bernanke is continuing the tough talk about inflation, but that's all it is imho.
1. Economy is still too shaky to talk rate hikes
2. Unemployment problems are getting deeper and going global. The largest temp agency, Manpower, said that hiring plans are falling to 2003 levels. For all countries in the G7 (most of the world's economy), only 30% of companies surveyed will be hiring. http://www.reuters.com/article/ousiv/idUSN0930367520080610

What is interesting is that the hiring is slowing not crashing. This is the same consistent tune across all economic indicators. I'm reminded of the story about a frog in a hot pan. Put a frog in a hot pan, and he'll jump out. But put a frog in a cold pan and gradually heat it, and the frog stays put.
----------------------
Where are the bright spots? Mining and coal.
According to the recent trade figures for April and the hiring data, only mining is strong. Thank you China and petro-dollar countries.

TRID at $4.28

2008-06-09T11:20:00.000-07:00

TRID trading almost for cash!
Wow. I am speechless.

Some stock comments

2008-06-09T09:46:00.000-07:00

I see some major hyperbolic actions in the gas arena - everyone is pouring into energy stocks.

My strategy of holding back and waiting for a broad market pullback has not worked.
GSG - a fine place to start investing
ETFC - I keep holding off writing calls for a better price

PUTS UPDATE
I'll do a more comprehensive review, but for now the puts are not doing well, with MGM the only exception (up ~100%). We have plenty of time - 7 months - and a bad Q2 quarter could propel us closer, but too many stocks are exhibiting strength in the face of poor fundamentals. AN for example: car sales are slumping to a major low, but the stock stays up.

MGM Sept $50 puts - very tasty: we're $5 in the money. Going to wait on this one.
AGN July $55 puts - AGN keeps rising. I think we can get out ahead on this one, but just barely
AN jan $10 puts - If they approach $12 we'll be fine. Right now they are at $14
NKE Jan $50 puts - this one is looking dicey. Everything is riding on a major drop in the US market, which looks very likely given the major pullback in clothing spending. But overseas still looks good. I am counting on a weak Q4.
VMC Jan $50 puts - These guys are finally falling back hard, but not hard enough. They must be getting creamed by oil prices and by construction pullbacks. But the stock hsa resistance at $70. If they screw up this quarter, then we should see $63 and that will put us in the money
ZLC Jan $15 puts - This looks like a lost cause. No way is business doing well, but the stock has legs. Everything depends on a strong Q4 and I don't know if we should wait until then. They need a 25% pullback.
HOG Jan $30 puts - Another one with surprise strength. They should be squealing like a pig as they get stuck with slower sales, minimal international opportunity/exposure, and lots of returned stock

Help me create a calendar

2008-06-08T16:45:00.000-07:00

Each week I'd like to spotlight a specific stock.
Specical requests gladly accepted and encouraged

Back on Track: Market Heading Down

2008-06-08T16:28:00.000-07:00

Earlier in the week I presented this chart and wondered whether we were on the shallow or the steep down slope. The difference being how rapidly the market will unravel IF it is going to unravel. By Friday, it became clear that we are on the steep downward slope.

To revisit my Last Gasp Theory (first mentioned April 5th http://liverocket.blogspot.com/2008_03_30_archive.html)
1. The market bounces around in 10% cycles prior to one final surge – The Last Gasp
2. The Last Gasp is a large run-up of ~15%+
3. The surge continues as the recession officially starts, peaking within a few weeks of the recession’s beginning
4. The subsequent crash happens quickly and is much deeper than the run-up

The last few weeks look really, really like the the Last Gasp is playing out. In theory, we are out of whack with #3 because the Q1 GDP was revised up to 0.9%. My take: whether or not the Recession has begun may be less important than what people think. An dmost people think that we are in a recession.

(BTW hug apologies. I work for Cisco Systems and there is an investment community there. On Thursday, as the market was racing up, I shared my thoughts that it was a head-fake: a false rally. I was rightly criticized for not sharing those thoughts here. Going forward, I will post my thoughts here first, and then copy and paste there. You deserve to get the latest ideas first.)

Other than a neat chart, why do I think worse has yet to come? Start with the Dow’s P/E of 82. (http://online.wsj.com/mdc/public/page/2_3021-peyield.html?mod=topnav_2_3002)
That’s a clear sign that the market has over valued equities.

To understand what is about to happen, you have to consider the origins of the disconnect between economic fundamentals and the stock market’s prices.
For a few months, the Fed has been peddling the following story that
- outside of housing and banking, the economy isn’t that bad and it will be better by the 2nd half of 2008
- Exports will boost our economy

Clearly, both are wrong. As I showed before, latest export figures show a fall in exports. It’s hard to predict the trend. Pushing up exports will be the harvest season that just began. But pushing it right back down is the newly invigorated dollar (5% higher than in March) and the slowing European economies.
Bottom line – with the $2B pullback, the economy needs at least a $5B+ surge to bolster the broader economy. That's a lot of corn and wheat.

Meanwhile, the economy is doing worse not better. Unemployment and inflation are both up. Last week’s preliminary retail report for May showed consumer weakness. Spending went to food and gas, and not to discretionary items like clothes and durables. At this point, the question is not about Bull market or Bear market. We are in a Little Bear market. The question is: will the Little Bear become a Big Bear?

I think the market is about to react furiously, like the betrayed spouse who is waking up to the facts that they have been lied to and ignored the truth displayed before their eyes.

Beyond financial market behaviors and psychology, we have the very real problems of the investment banks and hedge funds. These are the players at the table who make the markets move. As pointed out previously, lately they have been rushing into cash (http://liverocket.blogspot.com/search?q=morgan). JP Morgan showed that the rush is happening at exactly the same rate as happened in previous recessions. Money sitting on the sidelines is money not pushing up stock prices.

March: Hedge Funds suddenly re-gain access to easy money. The Fed didn’t just lower lending rates to 2%, they also began lending to investment banks.

April: Hedge funds drive up bubbles in food, gas and commodity metals. The target is determined by two things: the only recession-proof investments are food and energy and, secondly, many commodities have less stringent margin requirements than equities.

May: Lenders face insolvency. The dominos from housing are falling: a terrible Spring season for housing sales means lenders are starved for liquidity: builders and homeowners aren’t paying back loans. Banks have capital/cash requirements and they aren’t meeting them. Meanwhile, their customers are facing the same problem: the collateral they put up has dropped in value. Banks are making margin calls.

June: Lenders and others begin panicking. They now have 4 weeks to get cash or begin fire sales. But banks are getting smacked around. Home builders are dropping prices even faster to raise cash to pay back the banks, but the new prices pressure home prices overall, hurting the individual homeowners that are behind payments or looking to re-finance.
Meanwhile, the consumer is not spending. The stimulus package fizzles.

I’ve mentioned the 90 day cycle wherein funds make investment decisions around 6 weeks before the end of the quarter. In this case, late May. Yep, the market started sagging exactly when you would expect the funds to start heading for the exits. Smart money began leaving 3 weeks ago. Next up: retail investors like you and me. Unless, like me, you have been in cash and short positions.

To make matters worse, the funds are getting pressured by their lenders, the banks, who need that cash back. Now. That pressures funds to sell even more.

So it's a convergence of liquidity an dfinancial pressures pulling money out of the stock market and a weaker than expected corporate earnings (thanks to the now-hibernating consumer). Unfortunate timing for longs.

Can the Fed do something to stop the slide? Not really. They can’t risk another rate cut. In fact, they want to stop the rampant speculation that is driving up inflation.

And then there is market psychology. The economic data will no longer be fuzzy – one week positive and the next week negative. Too much economic data is going to be released shows a sharp downturn. It’s not that the economy is slowing – it’s also that the Fed has been singing songs of good cheer, making investors feel foolish.
What are the steps? Denial, anger, and then acceptance? Something like that. We are exiting the denial stage, next up is anger. Angry investors are dis-investors. Which will add to the market plunge.

I've published my watch list. Next step: shorten the list and buy. I’m thinking about buying in Friday on the back of a bad week of economic data. I have been looking for my target stocks to pullback with the broader market. No such luck. I like Friday because I see bad news ahead.
- April export/import data (Tuesday)
- May Retail Sales (Thursday)
- May CPI (Friday)
- June Consumer Sentiment (Friday)

It's possible that retail data will continue to be both positive and negative. Sales could be up, but largely because of inflation. Strip out food and energy, and you’ll see falling spending on consumer durables. That will no doubt be echoed in the import/export figures in things like lower imports of clothes, cars, electronics, and so forth

BTW I am seriously thinking about jumping into silver. I think gold jewelry is too expensive for most folks, so retailers will be shifting to silver.

Market continues down, my stock list goes up

2008-06-03T19:03:00.000-07:00

Starting in mid-March, the market rallied and didn't look back. During those 10 weeks, the market dipped 7 times. So strong was the rally that with one exception, every dip was a little bit higher than the previous one. That's a classic sign of strength.

But the opposite is also the case. The market has been bearish for 5 weeks. Each low is lower than the previous one. In fact, if that premise is correct and the market is moving down almost as linearly as it moved up, then the next low will be ~12,300 before it pulls up a bit. Some would say that 12,300 is a resistance point.

I think any pullback now can be expected to worsen as hedge funds look to lock in profits.

Some might even argue that I am being too positive.

I start my analysis back in early May, when the market first topped out. Others would start in mid-May when the market last peaked. The difference is one of severity. As I've mentioned in the past, with my Last Gasp Theory, compared with the rally, the market crash happens more severely and much faster.

- If we start with early May, the pullback is happening at the same rate and degree as the rally: 700 points in 5 weeks.

- If we start with mid-May, the pullback is much more pronounced: 700 points in 2 weeks.

I'm not going to get too hung up on this, but the difference means where we will be if this is a bear crash. We could see 12,000 a lot faster.

I note that oil has pulled back. Not sure if anyone followed my suggestion re: DUG. I didn't do anything.

The market pullback has not resulted in any pullback in my target stocks. So it looks like I'm going to have to buy.