Monday, June 30, 2008

Calling a Bottom... Again

My call of a bottom in March seemed accurate until just the past few sessions as the indexes have tested or broken through their lows from about three months ago.

The Dow, helped by losers C and BAC did indeed break through its low. The S&P tested it, and it appears to be bouncing off nicely.

So why is now the (real, or second) bottom? I think that the planets are aligning - er, mutual fund window-dressing is ending, which will eliminate the recent downward pressure.

Such financial losers like LEH and CIT were down 10-15% today on little or no news. The dumping (and possibly subsequent shorting) seems to have little fundamental basis.

So as the S&P and Dow try to squeak out a positive day, maybe this will be the bottom. Many buyouts are failing (fingers still crossed for PENN!), Citi's now a sell, and nearly everyone has a negative point of view.

Other than the end of quarter, another stimulus, maybe an unexpected positive data point, Fed tightening, or a nice shower of oil that gives the US a nice 10mmb reserve, could cement a turn. Otherwise, the superficial causes of this extra pain may end, as investors rich with commodity gains might reinvest the proceeds into financial (if they follow the sheiks' leads).

Lunchtime Thought: "Wonderful Companies"

"It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Warren Buffett bestows that nugget of knowledge upon us peasant investors. I believe that it's very important to reflect on such a quote during current market conditions.

I must admit that I dream of investing home runs; finding a company and having it double quickly, or appreciate many times over during a longer period of time. I have had a few such successes; a lucky timely buy of Vonage last year was one such trade.

However, chasing out-of-this-world performance usually does more harm than good. Whether due to a value trap or just a dumb investment, I'm down more than the market since my portfolio's inception due to some bad calls while hoping for huge gains.

Why not settle for solid appreciation from a great company? And Buffett's quote is now, more than ever, like a lighthouse's beacon, leading investors through this troubled sea. There are so many great blue-chips on sale - I'll focus on two - that long-term investors can buy now and (likely) look back in five years and realize how they pillaged Mr. Market.

GE is the American blue chip. It has made everything forever. More importantly, the company is trying to tackle future problems - its current portfolio of products include water purification and desalinization units, clean, efficient locomotives and aircraft engines, wind turbines, and more. It's possibly looking to drop its mature brands - like appliances - to free up cash, streamline the business and focus on its future prospects.

There are issues that GE faces in the short-term, namely its financial arm, but it won't cripple the business. But the toxicity of anything financial, coupled with an overall market downturn, has ripened GE's stock for a long-term thinker. The dividend yield, now nearly 5%, is enough of a reason to invest - earn a better yield than you would in a CD while exposing yourself to the possible capital appreciation.

The second company I'll mention is Toyota. Toyota looks like it will become the world's biggest automaker this year, as GM's horribly gas-guzzling lineup is passed over in favor of smaller vehicles. Once again, Toyota faces issues - a maturing (or mature) US auto market, competition from Honda, Nissan, Kia, Hyundai, and the American auto makers (if they can become competitive once again). Honda is releasing a Prius-like vehicle soon, but as of now, Toyota sells the number-one hybrid in the world, and backs it up with a popular lineup of reasonably-sized cars like the Camry. Though its trucks may currently be a burden on business, there will always be a market for trucks, and weakness in American companies' operations (like Ford delaying the new F-150) will benefit that part of TM's business, too.

So, in conclusion, diversified blue-chips do face challenges in this tough economic environment. However, specific issues (GE Finance) and overall market skittishness have probably pushed these gems down farther than they should be. Do what Buffett would do - buy great brands when they are at reasonable prices - instead of chasing bottom-feeders and dead cats.

Tuesday, June 24, 2008

Quick Thoughts: PENN, FSLR, BWLD

My apologies for no regular updates recently (if there's even anyone listening...) - I now work full time AND take an evening class (every day). What a fun summer!

Here are some noteworthy happenings:

PENN (Penn National Gaming), which has a pending takeover deal with FIG (Fortress Investment Group) and others at $67/share, has seen its share price crumble over the past week as other deals have fallen through (and maybe because of general market weakness).

Shares have fallen from about $45 this time last week to the current $33. Yep, that's right... if the deal somehow goes through, any arbitrager could make over 100%. That isn't an accidental inclusion of an extra "0."

To me, it seems like the deal failure is now priced in. (Then again, I said that yesterday, when shares were about $2 higher, to my father in an email). PENN trades at a 19x trailing P/E and a 15 forward P/E, which is a much cheaper valuation than when the deal was proposed!

As a regional casino operator, PENN should do well during tough economic times. People may not be able to drop a grand to go to Vegas for a week... but they can afford a little gas to drive to the nearest casino to gamble a couple dollars away.

I believe that the deal, in some form, will go through, whether it's a $67, $57, or $47. If it doesn't, PENN gets $200 million, which is about $2/share. I can't imagine the stock dropping that much farther if/when a non-deal is announced... but I've been thinking that for a while. Either way, I see either a huge short-term or steady long-term gain in PENN shares from this point.

FSLR continues to baffle me. After trending lower from a high of about $320, it has climbed back near the top. Most recently, FSLR jumped $17 yesterday because one analyst upped his price target, and claimed that one particular variable could lead to $30 million more revenue than previously anticipated.

So let me get this straight... the potential for $30 million more revenue leads to... a $1.4 billion increase in market cap?! Makes sense to me!

(I understand that market cap isn't really a metric that should be used on a day-to-day basis... but that statistic helps exemplify my opinion that FSLR's valuation is out of control).

I'm still short.... and hoping that the bottom falls out soon.

Lastly, BWLD is down 15+% over the past few sessions after an analyst downgraded on valuation and chicken-price concerns. However, BWLD has managed to keep growing earnings at its 25%/year target even as chicken prices increased in the past, so I see no material change to their business. I'd say that this is a good entry point for a great company.

I'll try to keep feeding any readers with more regular updates going forward.

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Thursday, June 12, 2008

eBay: Personal Dissatisfaction, Investor Doubt, and I'm Gone.

Just a few months ago, I defended eBay’s business as it was being attacked on all fronts; fee hikes had disenfranchised big sellers, who were being lured by Amazon’s fulfillment program.

I proclaimed confidence in eBay’s marketplace, even as they began to squeeze too many pennies out of small sellers like myself (peddling my ski wax, Whacks Wax), right as was allowing sellers to list their items for free.

I also noted that PayPal was much of the reason to invest in eBay’s stock. PayPal still is a great brand, but Google is pushing hard to popularize its payment processing service, Google Checkout, by offering new buyers a free $10 discount on their first purchase.

My problem with eBay, the corporation, has grown from a personal problem, but I feel as though it also sheds light on many of the issues currently facing eBay, and it shows that they may be failing to properly address those issues.

I have been selling various goods on eBay for over five years through three different accounts. I began selling trinkets, mirroring eBay’s promoted image as a worldwide 24/7 garage sale. However, a few years ago, I invented and began selling my own ski wax, and eBay was a great market place to promote a brand in its infancy.

Over the years, I have sold approximately $10,000 of goods through eBay. My average selling price was no more than $10, so I logged about 1,000 transactions through the different accounts. Considering that eBay charges a listing fee, a final value fee, promotional fees (I often did choose featured listings to attract attention), and most of my payments were processed through PayPal (which charges a base fee AND a percentage of the transaction), I would estimate that I generated $1000-2000 of revenues for eBay and its entities over the years.

Now, in an effort to promote “marketplace security,” the account that I sold ski wax through (which generated the majority of personal revenue and eBay fees) has been permanently suspended. The account’s feedback rating (the metric that eBay uses to establish confidence in transactions) is excellent, with a 97+% positive rating, including about 400 total positive transactions. The other two household accounts also may be suspended – each of them was sporting a 99% positive rating.

However, the very last transaction I conducted resulted in a negative feedback, and because of some silly computer search eBay must conduct, my account was blacklisted and suspended. (An aside: The circumstance was unusual, and I refunded the customer’s money right after negative feedback was left, so the transaction was resolved. My integrity as a seller remains intact.) eBay suspended the account because of a “result of your violation of site policy on Seller Non-Performance” because I “generated unacceptable levels of buyer dissatisfaction in your transactions.” This is solely based on the one most recent feedback.

A reasonable person could see that I have established and re-established credibility as a merchant. A reasonable company would allow real customer service people to review and overturn suspensions such as mine when their computers clearly take transactions out of context. However, eBay seemingly will not let customer service employees breach official policy, even if the situation merits it.

eBay clearly has issues policing its increasingly-dangerous marketplace, and this is an example of an overreaction that may have broader implications. As many larger sellers are already flocking to Amazon or other auction websites, fleeing the stranglehold of the new fees eBay has imposed, eBay should not be barring willing merchants from using the website. Yes, this may be an isolated, individual incident, but it is an example of policy and bureaucracy of an inefficiently-large corporation destroying the very nuances that led to its success.

Whacks Wax will survive. I already began using’s fulfillment system last year, which streamlines my operations and makes selling my product immensely easier. An eBay presence was certainly beneficial to the company, but this past winter it accounted for the smallest percentage of sales yet. The nostalgia of eBay, where I had built my company from the ground up, may have been one factor that continued to attract me to the increasingly expensive marketplace.

Bigger niche sellers have no need for eBay anymore. Amazon is a worldwide marketplace that attracts deal-seekers just like eBay, except they charge no upfront fees. Merchants leaving eBay can spend the money that would have paid on fees (in my case, between 10-40% of final selling price) to invest in their business or advertise, and probably more than make up for lost sales.

eBay will always exist as a marketplace to promote knickknacks, but its heyday as a serious marketplace seems to have already passed . Now, through websites like and (eBay owns the latter), consumers can quickly and easily find the cheapest price for a good, instead of having to devote hours to manual browsing as they would have to have done in the past (which led to bidding on eBay, a relatively-cheap marketplace). Powersellers with significant draw can simply promote their own websites, which requires a greater sunk cost but little (if any) incremental costs compared to eBay selling. As continues to expand into groceries, people may become accustomed to look there as a first place for anything they desire, not eBay, as may have been the case in the past.

Luckily for shareholders, eBay’s non-core businesses are continuing to grow the company as the auction marketplace has stagnated. PayPal is still the only widely accepted online payment processer, and no matter how many $10 credits Google throws at consumers to encourage them to use their checkout, PayPal’s dominance should continue. PayPal is also now being used unconventionally, as family may send remittances cross-border through PayPal, and traditional merchants (airlines, etc.) are now accepting it.

Skype also seems to finally be gaining some traction, and eBay has already written off most of the (ultra-inflated) value of the purchase it made a few years ago. Integration into the auction website has made Skype more relevant as corporations and consumers have simultaneously started to use it. Skype is now a positive contributor to the eBay brand, and if eBay chooses to get rid of it, they could probably sell it for more than the value they now have booked.

Still, the street continues to look at the auction website as the most important component of eBay’s businesses (which it is). That business is no longer growing. The exodus of Powersellers and banning of lowly, innocent, above-average sellers will not help stop the bleeding. eBay needs to focus on re-attracting the big sellers, possibly creating a different way for them to list items (think eBay stores, but better) that can rival the appeal of If the core business continues to decline, it will be hard to make up that gap with the growth of other the brands.

I am angry and disappointed enough by my ordeal to sell my stake in eBay. Investments shouldn’t be an emotional decision, but I cannot have confidence in a brand that has treated me, a shareholder and merchant, so horribly. With few exceptions, brands with poor customer service are eventually passed over in favor of competitors that treat them better - I had personal phone calls with an Amazon Fulfillment representative a handful of times before I even set up an account, but I can’t even get a non-automated response when I’ve made eBay thousands of dollars. My decision was made for me, but it was time to move on anyway. eBay, I don’t need you, and many other sellers don’t either. Even if you don’t kick them out, they'll eventually leave.

Monday, June 9, 2008

Oil Prices: Who will be the Biggest Fool?

From Wikipedia:

The bigger fool theory or greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to some one else for an even higher price.[1]

In my honest opinion, I think that the oil markets, describable as a bubble, can now also be filed into the category of "bigger fool" investment vehicles.

Just this weekend, Barron's interviewed Arjun N. Murti, a top energy analyst at Goldman Sachs. In the interview, Murti said that we are now in the "later stages" of a "super spike," a dramatic short-term price increase where, he thinks, we will see a barrel of oil hit $150-200.

Murti argues that the price really is driven by supply, unlike the speculation-driven theories of other analysts. However, I took away too other noteworthy nuggets of information:

On the front page of Barron's website (I'm not sure about actual magazine layout), the subtitle of the article throws out a $5.75/gallon gasoline quote. However, in the article, Murti more conservatively states:

"Oil at $150 to $200 a barrel would imply between $4 and $5.75 a gallon."

Though not incorrect, Barron's focus on the maximum estimate is exemplary of the current fanaticism in the oil market. Ignore the reasonable or low-end expectations, but rather, shout the highest ones from the mountaintops.

Even more surprising and important was Murti's long term estimate, which does not get mentioned on the front page. In the article, Murti says:

"Our long-term oil forecast looking out 20 years is [for crude] to fall back to $75 a barrel, or some lower number."

This sentence perfectly states why I think that current oil prices are now reflecting a bubble, or now even a bigger-fool type of market. Murti, who did correctly call $100+ (and now even more expensive) oil, is forecasting that the era of $150 or $200 oil will not last long. Though not too many people could short oil today on the thesis that it will eventually, within five, ten, or 20 years, halve in price, the forecast of an eventually-lower figure shows that speculation does influence, if not control, the current market.

It seems as though investors aren't concerned if oil will be $120 in December or $100 in two years; what's important to them appears to be the prospect of selling their USO ETF (which allows any investor with a brokerage account to essentially buy oil futures) for a couple bucks more in a week or a month.

What started the two-day, $15+ rally in oil was an update price forecast from Morgan Stanley. Stating that Asia will consumer a greater share of Middle Eastern exports, they predicted that oil would hit $150/barrel by July 4th. I am admittedly not an expert, but that prediction, made midweek when oil was as low as $122/barrel, seems to me like MS was a little presumptuous - how could that small change merit a $30, or 25%, price increase?

Oil rallied through the end of the week, gaining $10 on Friday, on that report and a "weaker dollar." Yes, the dollar did drop as much as a few percent against the Euro, but why does a 1-2% drop in exchange rates trigger a 7% increase in the price of a related commodity? (Also, that same day, disappointing employment numbers were released. Normally, I'd expect a economically-bearish news nugget like that to move oil prices downward.)

On this hype, I attempted to short USO on Friday, but was denied as a significant percentage of my portfolio is currently short FSLR and CRM. Oil is down about $3 so far today, but as the previous contraction from about $135 to $122 showed us, all it will take for a nice surge in prices is another bullish report from experts.

My thesis remains that the price of oil resembles that of a bubble, or a "bigger-fool" type of market. In hindsight, I'm glad that I'm not short, because I don't want to be holding the bag if oil does appreciate another 10, 20, or 30%, as many individuals and experts are forecasting (or speculating). However, I agree with Murti's long-term thesis; expensive oil is making alternatives very viable, if not much cheaper compared to hydrocarbon solutions. Maybe $120 or $150 oil will eventually reflect the supply-demand equilibrium, but I don't think that that time is now. I think that the best option is to just sit on the sidelines; maybe you'll miss out on some fast money, but someone is bound to end up holding the bag when rationality defeats speculation.

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