Student Stocks

The Future of Netflix?

2011-01-06T23:09:00.001-08:00

Who is Buying Sport Chalet Shares?

2011-01-03T09:52:00.000-08:00

I began tracking Sport Chalet, a regional sporting goods retailer, this summer and bought a bit of class A shares on November 5th. The share price after my purchase but has been appreciating in price on highly abnormal volume over the past few weeks. However, the reason behind this buying isn't clear - the tiny company has produced no news during this time period, yet someone is purchasing lots of stock, focusing efforts on the Class B shares.

First, a bit of background:

The company has two classes of shares (symbols SPCHA and SPCHB). As of this June 17, 2010, there were 17.4 million class A shares outstanding and 1.7 million class B shares outstanding. However, each B share has 20x the voting power of an A share. Additionally, three key insiders - the founder, the CEO and the CFO - collectively own shares that comprise 65% of all voting power, effectively being able to make any company decision as long as they vote together.

There are also unusual provisions that further protect the ownership stake and decision-making power of these people. There a provision that allows the above owners to sell class A shares to buy more class B shares to increase voting power; another provision allows the Board of Directors to issue more class B shares directly to "persons deemed... to be preferable to a potential acquirer" which likely translates to "giving more shares to the founder and management." Also, an acquirer of more than 10% of the class B shares may be required to buy a matching amount of class A shares, with the goal of making the accumulation of a large voting stake more expensive. (All of this information was found in the most recent annual report.)

What's happening now:

The recent action in the stock has been most notable in the class B shares. Since December 17th, over 150,000 shares have traded, including 98,000 on December 17th. Though a single buyer certainly hasn't purchased every share traded, it is still notable that almost 10% of the class B shares have changed hands in the past two weeks, especially considering that average daily volume is just 1,400 shares. During this time period, shares increased from $2.70 on December 15th to roughly $4 today.

Class A shares have acted similarly over the past few weeks. Share price increased from $1.91 on December 15th to $2.80 today, and volume has been about 2-4x above average during the past two weeks. However, this only represents about 1% of the outstanding A shares.

Who dun it?

Despite the accelerated purchasing of B shares, it seems unlikely that a potential acquirer is behind this action because it any efforts towards acquisition can be easily negated by the Board of Directors. Therefore, it seems likelier that current management/insiders, a large retail investor or small institutional investor may be responsible for recent purchases. However, until some sort of disclosure statement or press release clarifies what is behind the recent action, owners of A and B shares can only speculate on the cause while shares may continue to act abnormally.

The future of Digital Media: 4 Tiers, Consumers Lose

2010-12-28T00:06:00.000-08:00

Much has been written recently about the future of digital content delivery, primarily via opposing camps discussing the unquestionable strength or impending crash of Netflix’s shares; both longs and shorts point to digital delivery of content as the catalyst behind future performance. A tipping point in content delivery is occurring, and the development of the next few years will impact the market as significantly as Netflix’s delivery model did over the past decade.

It will soon become easier for content creators to reach large pools of customers without going through separate distributors. In the past, middlemen such as Blockbuster or retailers were essential in bringing customers together, and Netflix’s success in becoming the major (and basically the only) player in this market over the past decade shows that, as of this moment, it is still very important. However, content creators should soon be able to bypass entities like Netflix if they choose to do so.

If future consumers want to watch media on mobile devices, a content creator needs only to write applications for iOS and Android (and maybe a few others) in order to be able to reach the majority of the market. If customers prefer watching on a computer, making content available through individual websites or aggregation hubs (like Hulu) is even easier. Delivering content for viewing on an actual television is where distributors (cable companies and Netflix) are currently most needed, but internet-enabled TVs are hitting the market and seem likely to become the industry standard in the near future. Then, content providers can reach a customer through a website or application.

Because of the ease of delivery, I see content providers working to gain greater control of content to increase revenue and deliver their best properties straight to consumers. I can see a scenario where four tiers of differing content, availability, pricing and legality exist.

Tier 1: Latest & Best Content, Owners as Distributors, Highest Prices

The Tier 1 offerings will be the studios’ best content delivered to consumers as directly as possible. (For example, a consumer uses an NBC-for-Andriod application to gain access to every episode of The Office). Consumers will have to go straight to the owners (via a website, mobile-device application, etc.) to get the latest films, TV episodes, or classics of either medium. They’ll also likely pay relatively high prices, as the studios have no reason to give away their best content, whether directly to consumers or to other distributors.

Tier 2: Limited but Broadly-Appealing Content, Distribution Partnerships, Medium Prices

Future Tier 2 distribution may look a lot like Hulu or Hulu Plus does today. Content owners may partner together to create some entities that aggregate content to allow less-discerning customers to easily access their content. These portals may simply tease customers with a few available episodes for free or allow a greater library for some cost, but ultimately, the purpose would likely be to point customers to the owner’s own purchasing/viewing platform.

Tier 3: Lots of Acceptable Content, Mass Distribution, Pricing Consumers Love

Tier 3 content providers will attempt to bridge the gap between their customers’ desires for cheap content and the content owners’ resistance to providing attractive properties. Netflix will likely own this sandbox for the foreseeable future, and their main battle may be negotiating with content owners to obtain enough content to keep subscribers from cancelling without having to pay an amount that will decrease margins. Netflix does seem to be comfortable in serving this niche, as Netflix’s own CEO, in open letter published on Seeking Alpha, wrote “…that at $7.99 per month, [Netflix] consumers don’t expect to have everything under the sun.” While a subscriber’s $8 will probably not buy much content from Tier 1 or Tier 2 distributors, subscribing will only remain attractive if content owners are charitable in providing some watchable content to the Tier 3 distributors.

Tier 4: Illegal, but Everything You Could Ever Want and More

While older people may not even be aware of it, almost any digital media ever created is easily available online. Consumers who are willing to ignore the law can easily stream or download pretty much anything. The availability beats anything that any company provides: movies are available while still in theatres, and episodes are uploaded the night they air. While this dark corner of the market may be relatively unimportant now, expensive prices from Tier 1 and Tier 2 providers and lackluster availability from Tier 3 may push more consumers, especially young ones, towards obtaining media through this medium.

Win, Lose, Draw

Content owners seem likely to win, as they will have the power to charge what they choose, whether selling directly to consumers or to third-party distributors.

Consumers seem likely to lose. Prices for media fell as Blockbuster put mom-and-pop rental stores out of business, and Netflix trumped Blockbuster by providing more content in a more efficient way for cheaper prices. Now, all-you-can-watch content seems likely to decline in quality and prices will increase for the most in-demand media.

The future for Netflix and other third-party distributors is less certain. If the best content is too expensive to be attractive, consumers will flock to cheaper content at Netflix. But Netflix will be at the mercy of content owners when negotiating the price and quality of content that they can redistribute. I personally think that the risk of owning shares at this point is not worth the potential reward, though as a consumer, I am rooting for their continued success.

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Why is Vonage up 500% in 5 days?!

2009-08-25T16:03:00.000-07:00

As I begin this, Vonage is trading at over $2.40 in the aftermarket.

Vonage was trading below $.40 just five days ago.

The (investment) world is looking for an explanation. Barron's tech writers have been blogging frequently over the past few days, marveling at the huge move. The Yahoo! message boards are abuzz.

To me, this looks like a euphorically-driven chain reaction.

A short squeeze might have triggered this rally, but it isn't responsible for the majority of today's move. According to Yahoo! Finance, around the end of July, there were 4 million shares sold short. 41 million VG shares traded today, so short covering can't be credited with this move.

There also hasn't been any significant news within the past few days. VG reported optimistic results in the recent past, and they also announced a new international phone service last week. Vonage's comment on the situation seems to imply that the entire world just realized these couple tidbits and all tried to enter at once. I'm not buying that. I think that's the equivalent of saying "we have no idea why our stock is up 500% in a week, but we're just as estatic about it as you are!"

So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren't selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock.

VG has been prone to such explosive moves; I was lucky enough to own it in the past prior to a positive announcement; shares jumped 100%.

Buying (or shorting) VG today or tomorrow is simply gambling. Without a clear driver of this extreme movement, there's no concrete reason why shares are worth so much more today than they were last week. At the same time, shorting against such powerful upward movement is insane. Three times during the day today, VG moved up over $.20 (representing 20+% moves) in mere minutes. That's not the kind of momentum I'd want to be shorting into.

This is certainly an interesting story, and it'll be interesting to see how and where things settle down. Stay tuned.

Buy a Kindle 2

FSLR Downgrade; Falls; Is Still Overvalued

2009-05-27T22:06:00.000-07:00

Originally published at The No Buy List:

Barrons wrote about First Solar's weaknesses and competitive threats this weekend (Reuters coverage of Barron's commentary here), and an analyst, FBR Capital Markets, followed up Barron's with a downgrade on Tuesday morning.

The FBR analyst, who slapped an "underperform" rating on FSLR, mused that "recent checks indicate at least one of First Solar's top customers has already switched from First Solar to a silicon-based module vendor for a project that is currently under construction."

The Yahoo! article covering the analyst downgrade elaborated. "Hosseini noted that FBR's meeting with the KfW Bank Group, a Frankfurt-based development bank that lends especially to economic, social and ecological projects internationally, revealed that its year-to-date photovoltaic project backlog has shifted dramatically toward silicon-based modules compared with its 2008 thin-film-focused mix."

I have previously drawn similar conclusions on this blog and on Student Stocks. First Solar is a company that is ALREADY overvalued even before considering the significant, growing competition that they face from both silicon-panel makers and thin-film outfits. Though the share price unfortunately increased after my last article, I made (real) money in the past shorting FSLR from $280 to $140. Though shares have fallen $20 (10%) since the Barrons and FBR pieces, shares still should have plenty of downside room. I tried to short FSLR a few weeks ago (shares were at levels similar to today's price) but none were available.

I continue to dislike FSLR shares at this price, in this environment. I'd never go long, and I will be considering initiating a short position.

Support This Blog (and Author) by buying anything at Amazon.com

Final Kindle Thoughts: Good Device, Way Overpriced

2009-05-25T19:06:00.000-07:00

I have enjoyed writing about the Kindle and Amazon.com on multiple occasions over the past few weeks, so I decided that I'd try to bring everything together in one last post on this topic.

Both the Kindle 2 and the Kindle DX are attractive devices that perform niche functions spectacularly. If you're into reading books, both devices can make that hobby better. The Kindles have the ability to carry an entire library of books everywhere, and the ability to add to that library instantaneously from anywhere courtesy of a Spring-powered network. The e-ink in the reader is easy on the eyes, allowing for extended reading without the eyestrain that often comes from extended reading of an LCD screen.

One of the best aspects of the Kindle (which often goes unreported) are the thousands of free titles available for it. Virtually every book that is off-copyright can be read for free on the Kindle (as on any other e-book reader). A Kindle user can read all of Shakespeare, Mark Twain, and more without spending a cent on the literature itself. The content is often available for free in the Kindle store (which means easy wireless downloads anywhere) or can be found in PDF format, which the Kindle can also utilize.

That function, coupled with a price decrease could be the feature that expands the Kindle's market appeal. The current price of $359 is still prohibitively expensive, as the $5 bills saved on Huck Finn or The Merchant of Venice take way too long to add up. But if Amazon was able to offer Kindles to schools for a price closer to $100, the savings would add up and schools may be motivated to integrate the Kindle into textbook curriculum.

So my reoccurring analysis is that the Kindle is a solid device that prices itself out of practicality. The bookiest of bookworms may be able to see some savings and yuppies may buy the device for the "cool" factor, but it is not yet practical to substitute the Kindle for paper books. But more and more e-readers are entering the market, which should force Amazon to price its reader more competitively in the future. I don't doubt that there will be a day when many 7th-graders read Uncle Tom's Cabin on an electronic reading device. But today is not that day.

And the same overpriced thesis can be applied to Amazon shares. Amazon is a great company that has allowed me to make money (via selling on the website, not by owning the stock). As eBay continues to slide towards irrelevancy, Amazon will become even more dominant in e-retail. But shares are ahead of themselves, and the potential for medium-term price appreciation from this point seems minimal.

Lastly, I feel compelled to acknowledge that my affiliate promotion of Amazon.com has surprisingly generated some decent results. I have sold two Kindles and a few other miscellaneous items via my promotion links (like the one at the bottom of this post), which have generated almost enough money for me to pay for one half of one accounting textbook. So thank you for reading this blog, and I humbly ask that if you ever make any purchases from Amazon.com, please start those purchases by clicking the link below.

Support Student Stocks by purchasing anything from Amazon.com.

On a final note, I have started my summer internship and writing will take a backseat to my real work. But I plan on continuing to post regularly, so check back for the content that you can't live without. Also, visit The No Buy List, which is a more frequently-updated compilation of short ideas.

Why I Voted Against Barack Obama

2009-05-16T12:07:00.001-07:00

I was reading some WSJ today and came across an article that linked to this graph, which I hadn't seen before.

Graph of US budget deficit:

Please vote against big-government supporters in the next election, no matter what political party they may be affiliated with.

Buy a Kindle 2 or anything else at Amazon.com

Follow up to Amazon Short-Call

2009-05-13T21:53:00.001-07:00

Originally published at The No Buy List:

Though I myself didn't short shares of Amazon.com (AMZN) despite all of my recent negatively-slanted pieces, I am glad to report that shares are sitting lower than they were on every date that I published anything about them.

AMZN's recent decline can be attributed to the general market pullback, but looking forward, shares may continue to underperform. Below is a six month chart of AMZN:

Shares are still trading at $75 though the company is only expected to earn roughly $2/share next year. Even a 50% upward surprise (meaning yearly earnings of $3/share) still wouldn't make shares look cheap.

Looking at the chart, shares seemed to touch resistance (both 50 day moving average and some previous lows) today, so further movement downward could be looked at as a weak technical sign. Shares have also clearly broken the upward trend that began in march. Looking downward, there had previously been consolidation between $60 and $65, which could be a reasonable mid-term price if the wider market continues to correct. There's still a glaring gap between $50 and $57, but I wouldn't expect that to be filled anytime soon.

The bottom line, once again, is that Amazon is a great company but AMZN shares are still overvalued. I'm personally not initiating any short position at this point, but I'd rather short than buy long AMZN shares tomorrow.

And as always, if you're in the market for one of Amazon's new Kindle readers, please do through so my link below.

Buy a Kindle 2, Kindle DX, or anything else at Amazon.

Time to Short Treasurys?

2009-05-13T15:55:00.001-07:00

Originally Published at The No Buy List:

Is it time to short treasuries?
Seeking Alpha contributor Larry McDonald thinks so.

Many market analysts and observers have been screaming to short Treasurys for months as rates have hovered near all-time lows. Even Warren Buffet has now acknowledged that the current treasury situation appears to be bubble-like.

I agree that the current Treasury bond environment is unsustainable, but "when" is the key unknown. I was early when I called for an oil-bubble implosion, and I have also been early on shorting stocks like FSLR and CMG. But yields for Treasurys can't really get much lower, so it seems like downside risk for the shorting instruments (TBT) might be more limited.

The article is worth a read, and you can check it out here:
Read "Rising Treasury Yields Could Mean Its Time to Short Them" at Seeking Alpha.

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E*Trade Monthly Statistics Give Investors Hope

2009-05-13T13:58:00.000-07:00

Today, E*Trade (ETFC) released its monthly customer statistics, and the statistics were pleasantly surprising.

The full run-down of statistics can be found here on Yahoo! Finance, but I'll summarize some important stuff below:

Total gross new accounts:

75,624

Net new accounts:

29,393

End of period total accounts: 4,518,638

Total customer assets:

121,779,000,000

Also:

"Total Daily Average Revenue Trades (“DARTs”) increased 7.2 percent sequentially and 34.5 percent from the prior year to 230,345." Plus, "Asset flows continued to be positive, as the Company realized $300 million in net new customer assets during April, marking the seventh consecutive month of positive inflows." (quoted from linked article).

ETFC's brokerage business is obviously healthy, which is an encouraging sign considering the overall company's murkier picture. ETFC recently announced that it would sell $150 million in common stock, boosting capital reserves to meet regulatory requests. The shares would be sold "from time to time at market prices" by JP Morgan.

As I wrote in March, ETFC shareholders will have to wait and see if the thriving brokerage business can endure and outlast losses from the asset-holding component of the business. The capital raise and continued healthy customer statistics are promising, though the battle is likely far from over.

I have accumulated some more shares of ETFC over the past few weeks after shares fell nearly $1 from the recent highs near $2.50. I plan on continuing to occasionally buy shares on weakness as long as ETFC's business doesn't change materially.

On a final note, I'd like to criticize another analyst (partially because my material is often scrutinized by commenters here and on Seeking Alpha). Rick Aristotle Munarriz at The Motley Fool wrote this article, where he did a great job demonstrating that he knows nothing about E*Trade.

He writes "Either way this is a brokerage growth story." Sorry, Aristotle, but that is incorrect; it is a story of inadequate capital cushions to cover losses on portfolios of mortgages and other troubled assets. Any naive investor who thinks about buying ETFC shares based on that article will have been horribly misled.

It is very dangerous and unprofessional for Motley Fool editors to let that article hit the internet. As someone who has been criticized for not thoroughly researching, I don't know how a professional writer can publish an article where so much material information is omitted. Shame on you, Motley Fool.

On a related note, I'm available for hire for freelance writing. Motley Fool, if you're interested, feel free to contact me at studentstocks@gmail dot com.

Buy a Kindle 2

Time to Short Chipotle Mexican Grill?

2009-05-08T08:04:00.000-07:00

How's this for a nice throwback - Short Chipotle Mexican Grill (CMG).

On this blog, I have written plenty about CMG's ridiculous valuation in late 2007 and early 2008. I was never actually able to short CMG shares, as I could never find any available, but that was ok - my initial call on October 31, 2007 was a bit early, and I would have probably covered as shares rose from $130 to $150. However, my thesis was eventually vindicated as shares fell from $150 to about $40 over the course of 2008.

Now shares have recovered back to about $80, and armchair analysts are once again labeling CMG shares as too expensive. Though company results have been impressive over the past few quarters, there appear to be some cracks under the surface that will cause a slip-up going forward.

Two article below are worth reading: The first, at Zachstocks, is a general overview on the bearish CMG case. The second is another piece at Seeking Alpha about recent insider sales of CMG shares.

Read the article "Chipotle - A Tasty Short Opportunity" at Zachstocks.
Read "Why are Insiders Losing their Taste for Chipotle" at Seeking Alpha.

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More Kindle DX Details: Still Not Impressed

2009-05-06T10:00:00.001-07:00

Originally published on the No Buy List:

Well, most leaked pre-release facts seem to be right: the new Kindle is big, pretty, and textbook- and newspaper-friendly. As I mentioned in my last post, a few colleges will be participating in trials to see if the Kindle textbook experience can catch on.

A troubling new piece of information is the price of the Kindle DX: $489. For $500, a consumer can buy a newest-generation iPod or iPhone, competing ebook reader, or one of many high-quality netbooks. I think that Amazon has priced the device far too high, as the allure of a device with relatively-limited functionality diminishes considerably as price increases.

And once again, Amazon is paying 10% to anyone that can sell one, which is a very significant amount of foregone revenue. On a similar note, if anyone was looking to buy a Kindle DX, feel free to put $48.90 in my pocket for (old-fashioned) textbooks, you can click this link to pre-order a Kindle DX.

My original thesis before the release of the Kindle 2 was that the new Amazon e-media readers would not be game-changers, and I stand by this sentiment. The function-to-dollar ratio for the Kindle 2 and Kindle DX cannot compete with an iPod or a netbook. The Kindle family is a wonderful niche product for a certain group of people - bookworms that travel - but I still cannot conceptualize mass appeal at this current level of high price and low functionality. Amazon's core business is still growing healthily, and shares may continue to enjoy a rich valuation, but I wouldn't expect the Kindle to add materially to Amazon's bottom line anytime soon.

Buy a Kindle 2
Buy a Kindle DX

Amazon's Kindle 2.5? Nothing to Get Excited About.

2009-05-05T20:08:00.001-07:00

Would you like to buy a Kindle 2 or a Kindle DX?
Check them out at Amazon by clicking this link?

This post was originally published at The No Buy List:

Amazon is holding a press conference at a New York university tomorrow to probably announce what many optimistic investors had been waiting for: a Kindle with a bigger screen.

Much of the reason for the press conference seems lost as the important info has been leaking out over the past few days. Engadget, a popular electronics blog, published this post about the new Kindle, including leaked pictures.

Supposedly, the new Kindle will feature a 9.7 inch screen, enhanced browsing capabilities, and a built-in PDF reader, adding some more functionality to the device. However, the Kindle is still far from being a full-fledged computer-alternative (I'd argue that the most recent iPods are much more functional) so I don't know if the Kindle buzz is merited.

Newspaper and textbook publishers are looking to this bigger Kindle to try to increase popularity of their products: apparently, Case Western, Pace, Princeton, Reed, Arizona State, and Darden School at the University of Virginia will be participating in a trial where Kindles will be used in the classroom.

However, as a college student, I don't see this application of the device gaining much traction. Traditional textbooks are convenient because they can be taken everywhere (though not necessarily all at one time). The new Kindle will replicate this ability, with the added convenience of carrying a single device weighing ounces instead of lugging a half-dozen textbooks weighing 20 pounds. However, the appeal ends there. Paper textbooks can easily be marked up to enhance the learning experience; even with some sort of highlighting or annotation feature, the effect is largely lost on-screen. The best part about paper textbooks are their reusability; books used year after year are very cheap to buy secondhand, and even new books can be returned or resold for a significant portion of their face value. Though the user will likely be able to keep their Introduction to Macroeconomics book forever, it retains little value after the course is over.

I also think that there is an emotional objection to electronic textbooks. In my Penn State-mandated public speaking course, the required text was electronic. It amounted to a PDF with links to a limited-access website with additional material and assignments. For this, the publisher charged about $70 - a hefty price for intellectual property. Students were outwardly angry and hostile, and many, like myself, didn't bother to even purchase the textbook. People would rather spend $100 for a paper version that they can sell to a friend or the bookstore for $50 than pay for material that feels like it should be free.

Maybe schools like Princeton will have free course materials or heavily subsidized textbooks, but I don't see the Kindle catching on at Penn State.

The other highly-touted new application is the reading of newspapers, and struggling companies like the Times are hoping that they can sell a lot of $10 monthly subscriptions to help stop the widespread bleeding. But as other bloggers and writers have pointed out, why would someone pay $10/month for the Times limited-feature Kindle edition when their regular website features much deeper and richer content for free?

Unless there are some mind-blowing details that haven't been leaked yet, I don't see this new Kindle creating much of an addition to Amazon's bottom line anytime soon. I think that Amazon's shares are already more than fully valued, so if AMZN shares do pop tomorrow, that pop simply provides a juicier entry point for a short position.

Buy a Kindle 2

Buying BGZ as a Hedge and Speculation

2009-05-04T08:31:00.000-07:00

Originally posted at The No Buy Lis t:

My portfolio is made up of plenty of high-beta stocks with questionable futures.... I am proud to hold 1000+ shares of ETFC. Other winners (note to reader: that's typed sarcastically) include AIG. Rounding out some other holdings are Penn Gaming and US Steel.

To hedge this exposure and to attempt to profit off of a market correction that I believe is overdue, I just purchased some shares of BGZ, one of Direxion's 3x ETFs. BGZ is 3x bear Large-Caps, so I expect it to more closely track the indexes (S&P 500/Nasdaq) than any of their other highly-leveraged instruments.

The Direxion products are widely criticized for destroying share value simply because of the details of how it leverages up performance, so holding it for forever isn't recommended. But with market strength today, I figured I'd buy it with a one- to two-week timeframe due to stock-market strength and the potential for forthcoming weakness (such as stress-test results released later this week).

As with any volatile instrument, I entered a stop-limit sell order to protect against huge losses. My stop-limit is currently at $38.50, which may be adjusted up if the shares move up as I think they will. My intended exit is roughly $50/share, which should happen if the market is down 2%/day for 3 days in a row.

So this is how I'm attempting to trade what I feel is current exuberance in the market... We'll see how well this method really works.

Buy a Kindle 2

Do Not Buy FSLR

2009-04-29T12:50:00.000-07:00

First Solar is set to release earnings after the market closes (in about 7 minutes), and I believe that it will be hard for FSLR to impress the street. Their disappointing results last quarter led to a huge drop in share price.

Read my full analysis at The No Buy List.

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Revisiting VMWare: Still Not a Buy

2009-04-28T17:36:00.000-07:00

I have previously written about VMWare on this blog. VMW provides many different IT services to corporations and consumers, primarily focusing on virtualization and cloud computing.

I last wrote about them exactly one year ago on the day of an earnings release; back then, shares traded at $56. Today shares only fetch $26.

I published a brief article about the challenges that VMWare continues to face. Check it out at The No Buy List.

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Continue to Avoid Swine Flu-Related Stocks

2009-04-27T22:17:00.000-07:00

Originally posted at The No Buy List:

This morning, I wrote about huge daily declines in share prices of companies that have exposure to any business that may be adversely affected by the swine flu (or simply a reluctance to travel/go out because of fear of it). Shares of such companies continued to fall throughout the day:

Carnival Corp. (CCL), -13.5%
Royal Caribbean (RCL), -16.3%
Southwest Airlines (LUV), - 9.4%
US Airways (LCC), -17.4%
Smithfield Foods (SFD), -12.4%

All five companies mentioned saw a slight rebound in aftermarket trading (generally 1-2%), suggesting that investors were ready to expose themselves to some risk.

The pace of new developments in this swine flu saga seems to be slowing, pointing to a possible end of such knee-jerk declines. However, some entities continue to escalate their reactions: Russia has temporarily banned meat imports from Mexico and a few US states, and more recently announced that it will begin checking planes arriving from the Americas. The World Health Organization has also raised its alertness level, and new cases are continuing to pop up in different corners of the globe.

So how does swine flu relate to stocks right now? I would not yet dabble in companies and industries (travel, meat, etc.) that are effected (actually or psychologically) from this swine flu concern. If and when the panic blows over, investors that jumped in at the right time will realize healthy gains from stocks like CCL. However, it is too soon to discern the extent of this swine flu problem, so prudent investors should avoid buying any affected companies in the immediate future.

Buy a Kindle 2

Do Not Buy Swine Flu-Related Stocks

2009-04-27T07:11:00.000-07:00

Published at The No Buy List:

As the world is freaking out about a possible swine flu pandemic, travel related stocks are being sold off. The damage that swine flu will inflict on airlines and cruise companies is likely (much) more psychological than tangible, but I would still avoid buying any travel-related stocks until this swine flu hype (hopefully) blows over.

For example, Carnival Cruise Lines (CCL) shares are down 10% as of 10 AM Monday, and its main competitor, Royal Carribean (RCL) is down 15%. Airlines are taking a beating too - Southwest (LUV) is down about 9%, while US Air (LCC), which was also downgraded by UBS this morning, is trading down 15%. Here is a little article on MarketWatch showing the price declines of airline stocks.

Actual bookings for things like cruises and flights may decline if this fear doesn't pass over quickly. But the market will continue to sell these stocks as long as the swine flu scare is making news. Eventually, there will be a buying opportunity after the fear subsides, but I would not be buying any of these stocks today.

Buy a Kindle 2

Do Not Buy Amazon.com

2009-04-21T21:50:00.001-07:00

Written and originally published by myself at The No Buy List - a blog focused on negative analysis of companies.

Amazon.com began as an internet book retailer and has expanded into sales of goods of all kinds. A consumer can now buy everything from groceries to the latest G-Unit CD on Amazon. Amazon's product offerings only continue to grow as they add more products to their site directly and invite outside sellers to sell through the Amazon portal. Amazon has even begun developing and selling its own products: the recently-introduced Kindle 2 created much buzz and will fluff Amazon's bottom line as they are the sole retailer of the high-margin product: "A teardown analysis of the Kindle 2 by market research firm iSuppli estimates the cost to build the device at $185.49, or about 52% of its retail price of $359" (Businessweek).

With other offerings like apparel, foodstuffs, and mp3 downloads, Amazon is attempting to diversify into a seller that can supply almost anything a consumer could want. The strategy does seem to be working, as revenue and profit keep increasing despite a sour economy. However, Amazon's weakness has always been tight margins, and margin expansion is unlikely. The internet is an ultra-competitive animal, as many websites (like SlickDeals.net) exist solely to alert consumers to good deals. Amazon's decision to allow outside sellers to sell products on the website (via the Fulfillment-by-Amazon program and the simpler Selling on Amazon option) allows sellers to attempt to match or undercut Amazon's prices, making it more difficult for Amazon to retain healthy markups (except on niche products like the Kindle).

When Amazon can't increase margins, they increase volume, which has worked thus far. I believe it will continue to work, as consumers will increasingly turn to Amazon to meet all of their discretionary needs, so I do believe that Amazon will continue to be a growing, healthy, and increasingly profitable company.

However, Amazon makes the Do Not Buy List due to an overly-rich current valuation. Amazon is expected to make $1.50 per share this year, slapping a price to earnings ratio of over 50 on shares. Even next year's earnings, currently estimated at $1.94, will maintain a P/E of over 40. Since I believe that Amazon will continue to perform well, I'll say that Amazon will make $2.75/share next year - even with such results, the shares would still trade at a 29 P/E. These ratios are much, much higher than competitors, and seem unsustainable despite recent enthusiasm.

eBay, Amazon's most comparable online competitor, trades at a P/E of just 10 (though that is partially attributable to problems with eBay's business). Wal-Mart, the diversified brick-and-mortar retailer, trades at a P/E of 15, while Target, Wal-Mart's smaller competitor, trades at a similar valuation. Best Buy, the electronics retailer, trades at roughly a 17 P/E.

Amazon's business model does differ from these retailers - Amazon is less of a pure-retail play with the addition of revenue streams like music sales, the Fulfillment by Amazon program, publishing, and more - but at its core, AMZN is a retailer. Amazon does have a world-class supply chain and does not have to pay for retail square footage like the aforementioned competitors do. But because a consumer can buy the same books, movies, and groceries from Target or Best Buy, Amazon's margins on such commoditized items will always remain slim.

The bottom line is that Amazon.com is a great company that trades at a somewhat-ridiculous valuation. AMZN will report earnings later this week, and I have a cannot believe that any news could propel shares much higher at this point. Therefore, Amazon will be placed on the Do Not Buy List for the short- to medium-term until margins show signs of improving, or earnings increase to a point where AMZN's P/E falls closer in line with competitors.

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Amazon.com Offends Gay Community

2009-04-12T14:45:00.000-07:00

Amazon.com will likely take some heat tomorrow as it has become known that they apparently have been systematically "hiding" books deemed to be about non-heterosexual topics by changing classifications and making them ineligible for their ranking systems.

A reasonably-thorough article is available here, but expect more news on this tomorrow as the mainstream media picks up this story.

I know of this now because of the already-huge backlash on Twitter. I recently signed up for a Twitter account (to promote my ski wax company, Whacks Wax, which is coincidentally sold on Amazon.com) and the website's millions of microbloggers are tweeting furiously about this topic. (On a related note, I think Twitter is pretty pointless and unmonitizable, though that doesn't mean some bigger company won't buy it [after all, Google bought YouTube and eBay overpaid for Skype].)

Though some people are already tweeting for a total boycott of Amazon.com, that's obviously ridiculous. There will likely be some protests and LGBT spokespeople complaining through various news mediums, but this drama should blow over shortly. The only people that I feel are very wronged are the authors and publishers of the blacklisted books, so I do hope that the problems will be fixed and that their personal wrongs will be righted.

I think that Amazon's results may be materially affected by this in one of two ways.

On one hand, the calls for boycott may keep some people from making purchases. It is possible to still buy books from physical bookstores or other websites, so Amazon may give up a couple of percentage points of market share in the very immediate future (the next few days or weeks). But I expect that Amazon will quickly apologize and hope that this is all forgotten, and I don't expect any huge long-term effects. The simple truth is that Amazon is too big, popular, and powerful to get hurt by such a minor slip-up.

On the other, Amazon might actually benefit from this negative publicity. An unintended positive consequence may actually be additional traffic and sales on Amazon.com within the next few days. Amazon is obviously already a household name, but the attention Amazon may receive will likely drive MORE people to the site, as people read the site's name in their newspapers and hear it on the evening news. Amazon sells anything and everything - from books to banadages - so visitors may just curiously type in a desired item and end up buying it.

The bottom line is that huge companies like Amazon shouldn't bother to try to sneak things like this past the watchdog that is the internet community. It would have been better for them simply to have stated upfront that "due to new company policy, books with strong homosexual material will be ineligable for popularity rankings" rather than try to cover it up. In the age of Googling, Twitter, and blogging, someone is bound to stumple upon these types of things, and the discovery of secrecy causes a stronger backlash than what would have been initially suffered.

Amazon.com may be a little embarrassed that they got caught enacting this shameful policy, but they will continue to perform strongly as a company nonetheless.

Buy a Kindle 2

Unconventional Way to go long Financials

2009-03-30T21:18:00.000-07:00

Once-proud financial-service companies have been humbled, and currently trade at lowly prices usually reserved for unknown, unremarkable companies.

Citi (C) ended at $2.31 at Monday's close. American International Group (AIG) closed below a dollar. Both stocks are up roughly 250% off of all-time lows, but the future of the shares (and companies) are hazy at best. Risk-adverse investors don't necessarily want to gamble on such risky companies, especially while daily price fluctuations are so extreme. At the same time, however, bullish investors may want to be exposed to potential upside in shares of such trampled companies.

Rather than owning the shares of stock, investors could gain exposure to upside movement by selling naked put options.

Selling "naked" puts refers to selling puts without actually being short shares of the stock, which would sometimes create a riskier situation for the seller. However, with C shares so close to $0, even the worst-case scenario is very clear.

When puts are sold, the seller's account gets credited with the amount of the sale and an outstanding obligation shows up. If shares do move lower, the size of that obligation increases as the puts increase in value, and the seller essentially loses money. If shares increase in price, the size of the obligation gets smaller, and the seller enjoys some paper gains.

Below is a table of C January 2010 puts (courtesy of Marketwatch.com)

Though there is little to no volume in the far in-the-money puts, the bid and ask spreads remain reasonable and transaction costs do not inhibit using this strategy. Options close to the current share price retain time value, providing a bonus for the seller.

At the $2.50 level, options traded hands yesterday at roughly $1.25 (we'll take the bid), implying that investors expect C shares to be worth no more than $1.25 in January of 2010. If shares close below that level, the put seller will lose money. If shares became completely worthless ($0) before then, the put seller would essentially owe $250 per contract while he was only credited $125 at the time of sale. However, if shares only appreciate 10% (to over the $2.50 strike price) within the next 10 months, the seller will get to keep the entire credit at the time of sale.

Utilizing this strategy with in-the-money options changes the risk and reward involved. If a seller sold $10 puts for $8.05, he has a possibility of making $800 per contract (if shares close above $10 in Jan '10) while only potentially losing $200 (if shares go to $0).

Selling even farther OTM puts exaggerates the risk/return profile further. Selling $40 puts in the bid/ask spread at $38 seems possible, even though its highly unlikely that C shares will see that share price within the foreseeable future. However, the trade can still be made. Again, downside risk is limited to coughing up $200 if shares hit $0 (which means repaying $4000 compared to an initial credit of $3800), while profit potential remains intact (a $10 share price close would net the seller $800 of profit, essentially). And with C, AIG, BAC, and many other companies trading relatively close to $0, this strategy can be employed for an entire portfolio of companies.

Requirements for selling naked puts differs based on broker, and the strategy isn't for everyone. Like owning shares, downside risk is limited (paying the entire difference between strike price and $0) if the shares become worthless, but gains are capped too (at the initial selling price of the contract). But this strategy may offer an interesting way to expose one's portfolio to the possibility of bullish performance without sacrificing too much capital.

Buy a Kindle 2

More Positive ETFC News

2009-03-18T05:44:00.000-07:00

Since I wrote about ETFC last week, shares have crept up from $.66 to $1 (in pre-market action this morning; last night's close was $.91).

The Wall Street Journal put out a little article this morning discussing a few monthly updates that ETFC released today. The article may (or may not, depending on if it's subscription-based) be seen here.

Not only did trading volume stay steady, but more importantly, loan delinquencies among its portfolio are on the DECLINE. "The company said Wednesday delinquencies of 30 to 89 days have fallen 16% in the first two months of the current quarter, while delinquencies of 30 to 179 days are down 1%."

That is obviously wonderful news for ETFC. They have already provided loss provisions far beyond realized losses, so if things are bottoming (or improving) now, they might not have to increase provisions anymore, allowing them to return to profitability. This may sound a little crazy, but maybe write-ups are hiding in the not-too-distant future.

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From Laggards to Leaders

2009-03-16T13:20:00.000-07:00

Monday's market action was volatile and interesting, with a couple surprising underlying themes.

The S&P 500 opened higher, peaked midday while up about 2%, and ended up closing marginally lower. Many of the previously worst-performing stocks (financial) had daily charts that resembled the S&P's movement, albeit with supercharged movements.

As AIG made news by listing important counter-parties and declaring that it planned to pay bonuses, the shares exploded higher.

Shares logged a few trades at $1, which was an 100% daily move. Even as trades ticked lower with general market weakness at the end of the day, shares still logged a 66% daily gain. Though the percentage gain is obviously impressive, it pales in comparison to the enormous wealth that was lost as AIG fell from real-company valuation to penny-stock territory. But theoretically, an investor that plowed some money into shares at $.33 recently would have been very pleased with this recent performance.

Some other examples of beaten-up stocks that outperformed today:

E*Trade (ETFC): +9% today (read my recent article about ETFC shares here)
Citi (C): +31% today
Bank of America (BAC): +7%
Freddie Mac (FRE) +21%

Obviously all stocks mentioned are ultra-risky, and some may ultimately be worthless. But such extreme movements are heartening for investors who own shares of said companies, and if any major development in the market or indivual stocks (like ETFC getting TARP money, or the alteration of M2M rules) happens, shares could explode higher. But "investing" in any of the five companies I named (I own shares of ETFC and AIG) is still more like gambling than rational, careful capital allocation.

People courageous (or stupid) enough to invest will continue to see gains or losses that are characatures of the general market.

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This Week Crucial to Investor Emotion

2009-03-15T11:48:00.000-07:00

Though I'm currently being taught that many scholars and businesspeople believe that stock market prices represent the entirety of all available information, I disagree. I see the stock market as a much less rational creature; along with true facts and information, fear, emotion, rumors, and expectations share responsibility for driving prices and creating price swings.

The major markets (S&P 500, Dow, NASDAQ, and most international markets too) have endured wild fluctuations over the past year and a half as they shed 50% of their value. Below is a chart of the S&P 500 over just the past six months, after the index had already lost a significant portion of its value.

After establishing a new multi-year low late last week, the S&P 500 had a spectacular rebound, rising roughly 80 points - adding more than 10% to the index's value.

I was on spring break this past week, which allowed me to waste plenty of time lounging around watching CNBC. While I don't take too much from that channel to heart, watching the various personalities, traders, and interviewees provides a good sense of sentiment on the street. At the end of the week, the depressing fog certainly seemed to be clearing and some people seemed downright cheerful. A few actually resented the steep rise as they had hoped to initiate some long positions at better prices.

The week was kind to the general markets, but certain beaten-up stocks did even more exceptionally well. GE bottomed at $5.87 last week, but recovered to nearly $10 by Friday's close. General Motors (GM) more than doubled from an intraday low of $1.27 last week to close at $2.72 on Friday. PNC, a bank of national (and moreso local, due to my Pittsburgh roots) significance, began the week under $18 and closed at $28.

Last week's rally may have been caused by any different number of factors. Some scary unknowns became known; both GE and Berkshire lost their AAA ratings, but credit outlooks were reset to stable, allowing investors to feel a little relieved and reassured. Mark-to-market rules are under review, and any suspension or alteration of them would likely lead to writeups and increased capital cushions at virtually every financial institution. Other commentators think that some sidelined money may have flowed into the market, and after the gains began early in the week, additional investors threw even more tinder on the financial fire.

Some people are less optimistic. Considering the depressed, pathetic pre-rally prices of stocks like GE, GM, and many others, some people argue that much of the reason for the rally this week was short covering.

No matter the reason for what is now history, the market action this week may stifle and reverse, or enhance, the movements of this past week. The S&P 500 now sits at approximately its November low; it may not be able to cross that resistance level, but if it does, it should have a new level of support. (Note: I'm not a technician and I don't believe too deeply in technical trading, but because enough investors do, it sort of becomes a self-fulfilling prophecy).

Disregarding any technical indicators, simple emotional sentiment is hinging on the first few trading days of this week. After a 10% gain, many people want to believe that the market has turned a corner; they may be willing to commit more capital or cover any outstanding shorts if they see a little more proof that the markets will continue skyward. On the contrary, the good feelings of this week will be forgotten if markets stutter early in the week, as investors are inches away from writing off any gains as a bear-market rally in a formerly-undersold market.

Various nuggets of news will likely drive sentiment this week. FedEx (FDX) reports earnings, and they are often considered to represent the general economic environment; a positive report will reassure jittery investors, while a bleak one may estinguish existing goodwill. Nike (NKE) and Oracle (ORCL) also report earnings, while GE will provide some information about their financing arm. A spattering of other economic news and company reports will augment the aforementioned ones.

I don't have any fresh capital to invest at this point, but I'm eager to see how the markets will move. On one hand, I too share the opinion that I don't want things to go up too far, too fast - I'd like to buy some good companies at the current firesale prices! However, I think many stocks are currently oversold, and an extention of last week's rally doesn't seem irrational to me. Only time will tell...

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E*Trade: Worth Ten Dollars or Ten Cents?

2009-03-12T23:40:00.000-07:00

E*Trade (ETFC) shares have suffered one of the greatest declines of all (non-bankrupt) financial service companies - a whopping 97% from pre-meltdown levels. (From the start of 2006 through the first half of 2007, ETFC was a $20+ stock.)

The verdict remains out on ETFC. Obviously the possibility (or probability?) of bankruptcy is priced in, as shares changed hands at $.66 on Thursday. However, the core brokerage business remains strong... if only management had had the foresight to have avoided banking and investments over the past five years.

Shares slumped Thursday amid the strong rally after a Citi analyst slapped a "sell" on the stock this morning. The Citi analyst provided a price target of $.25/share. However, along with that bleak statement, he pointed out:

"E*Trade is a tale of two companies. On one hand, the retail brokerage operation is steady. The segment has averaged over $500M of annual operating earnings and 41% margins over the past five years. The institutional business, however, remains an albatross as a result of its $25.5B loan portfolio. While we believe current management is doing all they can to address the company's legacy balance sheet issues, the long-term viability of the company remains in doubt, in our view."

(Source: StreetInsider.com)

There are about 500 million ETFC shares outstanding, so theoretically, the brokerage-only component would be making $1/share per year and trade at $10-$20.

However, the institutional component, which focused on investing in mortage securities, threatens the viability of the company. ETFC hasn't reported a profit since 2007 as mark-to-market writedowns of assets have forced ETFC to take losses. However, management has proactively dealt with the losses and associated need for increased capital; they sold E*Trade Canada for over $500 million (after taxes) and sold a portion of their asset portfolio to private buyers.

They now seem well capitalized, and a recent stress test confirmed that conclusion. (Read the article here.) The analyst concludes that while ETFC would need more capital in a (harsher than realistic) immediate full-writedown scenario, it would be able to maintain a Tier-1 capital ratio if the writeoffs happen over a few quarters.

The wild card that could still significantly change things is ETFC's still-outstanding request for TARP funds. ETFC requested $800 million, which would cover all losses even in the aforementioned analyst's doomsday scenario.

The bottom line is that ETFC will do one of two things - go bankrupt, or go way, way up.

When it comes to the financial services sector, the most important thing now is survival. For the past year (or more), companies have written down assets repeatedly thanks to mark-to-market accounting. Assets have to be written down to prices they'd fetch on the open market, while in reality, many instruments have intrinsic value (based on interest payouts, etc.) above their current marked values. Eventually, these assets will be written up. Some firms will fail or be bought out before they have the opportunity to do this; others, whether due to good management or the government's good graces, will survive until the day they report a gain on their held assets.

Even ignoring any writing-up of ETFC's assets, if they can survive to the day that their non-brokerage business no longer impairs their results, the shares will skyrocket - eventually back to double-digit (dollars, not cents) territory. (Note: Seemingly ridiculous claim is based on $1/share brokerage-component earnings). However, current market pricing indicates that most investors don't think that will happen.

I find buying ETFC a bet worth making - The slim possibility of a 10- or 20-bagger makes the probability of bankruptcy worth betting against. I currently hold some shares, but I'm planning to add to my position if shares stay at current levels. ETFC shares are not for everyone, and I'd almost classify going long as closer to gambling than true Buffet-like investing... but I'm young and I like taking risks. I'm hoping that management can continue to bail water out of this sinking dingy until the storm clouds have cleared.

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First Solar Tumbles After Earnings

2009-02-25T17:44:00.000-08:00

As I posted yesterday, I was watching First Solar's earnings closely when they reported after the bell.

Earnings for the quarter ended were strong, but FSLR's future outlook was even bleaker than I had imagined. Unfortunately I was not short the stock, but anyone that was short or held puts fared very well - shares fell $30, nearly 22%.

FSLR's executives had many troubling things to say - the economy is tough, the solar business is tough, and they expect it to get tougher in the near-term. According to the company, up to 15% of 2009 shipments could be at risk of "customer default." To make up for waning corporate credit, FSLR is even financing or taking stakes in projects (rather than simply selling panels) which complicates their business model and casts even greater doubt on their future prospects.

So being right really didn't positively effect me, but I enjoy seeing rationality return to one of the only market segments where euphoric expectations still reigned king.

First Solar Reporting After the Bell

2009-02-24T10:43:00.000-08:00

I have published previous articles about shorting First Solar starting in April 2008 as the stock hovered near $300/share. At that time, general economic, stock market, and solar business prospects were much better than they were now.

Thanks to weaknesses unique to FSLR (and now, general market weakness) my short worked out very well - I shorted in the high $200's and rode it down past $150 before covering. I haven't had any position in the stock for a while.

FSLR reports earnings after the bell today, and i have not initiated any position prior to the announcement (nor do I plan to initiate any position after). However, I love me some schadenfreude... I mean, First Solar is still way overvalued compared to its fundamentals. The P/E is sky high, margins are slipping and growth is slowing. Competition is tough. Though there are some green energy incentives in the stimulus bill, it may only make up for what would have been an astronimical drop by real businesses and consumers facing tougher spending decisions.

Who knows? They might beat and raise, if some footnote in the bill specifies that FSLR's panels will be placed on every police station in the US. But based on the overall economic malaise, I expect a "we expect a tough year due to the economy" type of commentary during the conference call.

Analysts, on average, expect earnings next year of $7/share. That's a PE of about 20 at today's market price, which is rich considering the decline of most tech high-flyers. Unless FSLR's executives forecast above that consensus, my gut tells me that shares will more likely fall than rise.

Whether shares pop or drop tomorrow, I'd stay away. There is a glut of solar capacity in a world that has shifted focus back towards cheap energy instead of green-at-all-costs energy.

Ski Wax
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TCLP Follow Up

2009-02-23T22:13:00.000-08:00

So clearly my calls expired worthless, as TCLP failed to rally on Friday as I had hoped.

However, the stock is still a conservative yet wonderful (nearly guaranteed 10% yield is looking tastier by the day) choice for an investor in today's increasingly-disappointing market.

Ski Wax
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First Options Trade in a Months: TCLP Calls

2009-02-19T11:35:00.000-08:00

I have followed TCLP (Transcontinental Pipelines), a pipeline trust, for a very long time now.

Under normal market conditions it was a very stable stock (as it is in a widows-and-orphans industry), but during the last six months the stock has been effected by increased volitility as the general stock market became more unpredictable.

Below is an approximately six-month chart. As the candles show, there have been numerous days when the stock has risen (or fallen) by greater than $1.

TCLP reports earnings tomorrow morning, and I'm speculating that the stable numbers will reassure antsy investors. Obviously this trade is more lottery-ticket than science, but I was willing to throw down a little money and take a chance.

I was able to pick up at-the-money $25 calls for $.30 per contract this afternoon. If earnings please investors, a $1 or $2 pop will pay off nicely.

(As an aside, I have followed TCLP for a long time because of its very high dividend - the shares currently yield about 11%. The 5 year average dividend payment is only 6.6% [according to Yahoo Finance], which might point to share appreciation in the future. I think that TCLP is a great conservative long-term investment regardless of the outcome of my options trade tomorrow.)

Ski Wax
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Final Thoughts on Stimulus Bill

2009-02-13T07:30:00.000-08:00

I hope that the bloated, pork-heavy stimulus bill doesn't pass today and has to be re-written. The final version contains over 1,000 pages.

An example of an element that I have an issue with is the inclusion of a tax credit for firms who employ "disconnected youth." I pulled the definition of that term from the bill.

DISCONNECTED YOUTH.—
The term ‘disconnected youth’ means any individual who is certified by the designated
local agency—

‘‘(I) as having attained age 16 but not age 25 on the hiring date,
‘‘(II) as not regularly attending any secondary, technical, or post-secondary school during the 6-month period preceding the hiring date,
‘‘(III) as not regularly employed during such 6-month period, and
‘‘(IV) as not readily employable by reason of lacking a sufficient number of basic skills.’’.

As to why employers would want to employ workers lacking the skills that have thus far kept them from holding a job? I don't know.

Ski Wax
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Thoughts on Amazon and Kindle 2

2009-02-11T19:26:00.000-08:00

Amazon shocked the street recently as its holiday quarter numbers held up as the wider retail industry suffered through a horrible holiday season. Analysts and investors digested Amazon's reasonably strong performance favorably and tried to assess why they are succeeding while others are struggling.

As that euphoria was fading, Amazon kept its buzz strong by announcing the Kindle 2, Amazon's new and improved ebook viewer. The Kindle 2's release was anticipated after Amazon allowed the first Kindle to go out of stock during the holiday shopping season; the new Kindle will start shipping on February 24th. Many retail investors seem excited about the Kindle's prospects and some equate it with the early iPod. I think that such hopes are misguided.

The Kindle 2 is a very good product, and Amazon taking the time to upgrade it was a smart move. The new kindle is lighter, slimmer, sleeker, holds more books, can "speak" any text on the screen, has a sharper e-ink display, and still utilizes the free-forever cellular networks to quickly deliver content. The device retails for a hefty $359, but the yuppies that the Kindle is marketed to should be willing to pony up that price for the newest, coolest device.

Amazon is estimated to have sold about 500,000 of the first-edition Kindles. The Kindle 2 should surely break those numbers (rather quickly), and sales of the Kindle should help fluff Amazon's bottom line for years to come. But expectations of a game-changing device (as iPod-comparers imply) will lead to disappointment.

The iPod revolutionized how consumers accessed media. The iPod allowed consumers to carry their entire music library in their pockets for the first time ever, and there were no alternative devices at that time that performed any sort of similar function. It took a while for iPod sales to really start accelerating, and sales eventually boomed as internet speeds and music downloads (both legal and illegal) increased exponentially.

The Kindle 2 is the sleekest ebook devise on the market, but the market is much more limited than that which the iPod filled, and Kindle's market will only shrink. Virtually everyone has a few hundred songs that they'd like to be able to listen to at any time; a much, much smaller pool of people have a few hundred books they'd want to be able to read at any time. (I'm aware that the Kindle 2 can show newspapers, blogs, and more, but my point is the Kindle's less-universal appeal). Plus, netbook sales are increasing dramatically and prices are very affordable (even sometimes less than the Kindle), and some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities.

Amazon also seems motivated to sell as many Kindle 2's as possible. I have had an affiliate account with Amazon.com for years, though I have never attempted to sell products. Recently I noticed an email from Amazon announcing that Kindle commissions would be roughly double that of normal everyday sales. To me, this seems to indicate that Amazon's margins on the Kindle are fairly wide, which would obviously be good for investors. Amazon is willing to give up 10% of the cost of the Kindle to anyone who can sell one. (On a similar note, you have likely noted the hyperlinked "Kindles" littered earlier in the article; if you plan on buying a Kindle, please click one of the links above or this one here.)

I anticipate that Amazon will report good top- and bottom-line numbers over the next year as the Kindle should sell strongly; a couple million units are definitely within the realm of possibility. However, I wouldn't buy Amazon's stock on the expectation that they'll eventually sell 100,000,000 Kindles. The product is good, but the market is limited.

I also get another peek into Amazon's operations via my status as a seller on Amazon.com who is engaged in the Fulfillment-by-Amazon program. (I have discussed this program before; basically, a seller pays a fee to use Amazon's warehousing and supply chain - Amazon stores products and ships it when a customer makes a purchase).

I recently received a few emails from them about expanding my product lines within my category (sporting goods). In the most recent email, they were specific enough to suggest about 100 brands that they "want to get into FBA." Listed brands include major sporting icons like Nike, Burton and K2.

Obviously Amazon is urging sellers to expand to further their own interests, and this is a brilliant strategy. Rather than risking their own capital by buying, storing, and selling themselves, Amazon can have independent sellers do that for them and sit back, while collecting a significant chunk of revenue. Amazon charges FBA merchants a percentage of the purchase price (about 10% on average) as well as a base monthly fee, monthly storage fees (based on cubic feet of actual warehouse space used), and three fees per shipment - one base fee, a fee per item, and a fee based on total weight. Increasing FBA sales is the quickest and easiest way for Amazon to increase profits without increasing their own risks whatsoever.

I don't want my tone to suggest that I am unhappy with Amazon's attitude - the FBA program allows me to run my small business (Whacks Wax) from any internet-accessible computer. Without FBA, I would have quit selling ski wax from my bedroom became less attractive when I moved to college. If I had access to any of the brands Amazon is asking for, I'd gladly sell them through Amazon. Every experience I have had with Amazon and FBA thus far has been positive, and they are very smart for attempting to grow that segment of their business.

As a company, Amazon's prospects clearly seem positive as buyers look for deals and sellers try to make money. As a stock, these good prospects seem to be fairly factored in already, so I would neither buy nor sell shares at this point. The purpose of this article was simply to inform the public on my limited yet increased insight of some of the behind-the-scenes workings of the thriving internet retailer, and my observations indicate likely continued success for Amazon.com.

Ski Wax
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A Deflationary Mindset

2009-02-09T22:13:00.000-08:00

Phil Gramm famously stated in July that "this is a mental recession." He followed up with further quotable remarks and some explanation of his statements (you can read a Washington Times writeup here). Dispite anything else he said, his comment implying an imagined-recession as Americans were paying $4 for gas and fearing pink slips was what grabbed media attention. Though Mr. Gramm was quickly proven wrong by economic data that confirmed the existence of a very real recession, I understood his point: The current dire warnings perpetrated by our president and media that are predicting economic catastrophe are NOT promoting a quick recovery. A consumer is not encouraged to stimulate the economy via purchases, investment, or job creation if he is being force-fed predictions of the end of the world.

Alongside the general discussion about shrinking GDP and worsening employment numbers, many observers have been debating whether the current stimulative policies will result in massive inflation or crippling deflation. Proponents of the first idea claim that the rampant creation of money (TARP, Bailouts, Stimulus Bill, etc.) will result in Zimbabwe-like hyperinflation. Though the government is creating a couple trillion dollars, I personally believe that the huge stock, commodity, housing and derivative market losses will offset this fresh money. I nevertheless strongly disagree with the recent stimulus bill (at least in its most current forms), but for other reasons. I disagree because it is full of pet projects and pork, it will surely increase America's borrowing costs over time, and it will be my taxes that eventually pay off these debts. I'd like to keep much of the money that I plan to make.

Therefore, I think that deflation is the more likely monetary problem, though the condition that I'm calling "a deflationary mindset" is the primary concern.

Capital and capital markets remain relatively frozen. Credit card and loan companies have raised lending standards, lowered lines of credit, and have generally slowed their rates of lending. Leveraged buyouts are non-existent. Many companies still holding mortgage-related assets have decided to let portfolios run-off (whereas their business model pre-meltdown was the continued accumulation of such assets).

Even more bleak and reflective of my "deflationary mindset" principle is the change in consumer purchasing habits. The savings rate has approached 3% of income over the past few (recessionary) quarters, while it averaged below 1% from 2005 through the first quarter of 2008 [graph below]. Most retailers and restaurants (excluding a few value-oriented entities) are suffering huge month-over-month and year-over-year declines in overall and same-store sales.

Frugality is in vogue.

The attitude of both boomers and younger adults has changed from overconsumption to penny-pinching - thus, my "deflationary mindset." Advertisements are now being written to appeal to cost-conscious consumers - the words "in this economy" are uttered annoyingly frequently. Recent CES and various auto shows have been scaled back in comparison to the excess of better years. Corporations are canceling purchases of jets and corporate retreats as the media started to crucify any corporation that is still actually stimulating the economy. Though this frugality is good on an individual level, and was obviously absent from American culture over the past few years, this attitude will prolong the recession as consumers are reluctant to buy their next iPod (AAPL), car (TM, GM, F, NSANY) or computer.

For the vast majority of Americans that will retain employment during this recession, low prices on consumer discretionary purchases will make consuming fun. I don't expect a long Japan-like deflationary period (mainly due to the huge government money injections), so purchase your LCD TV reasonably if you want to snag the best price.

I may one day eat my words, but I am currently not afraid of the Big Bad Recession. Obama can attempt to scare the public into supporting a bloated stimulus bill, but the economic truths are likely not as bleak as he'd have you think. Right now, spending normally (though within your means) is the most patriotic thing you can do for your country.

Ski Wax
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The Stimulus Bill

2009-02-05T09:40:00.000-08:00

I am disgusted with the Obama/Democratic administration's handling of the stimulus bill. Here are a few articles that can articulate why you should be upset too.

Article 1

Article 2

Thankfully, Republicans are standing firm and attempting to trim pork and make this bill a little more acceptable. If you're unhappy, let your Congressman know.

Ski Wax
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And He's Out...

2009-02-03T11:16:00.000-08:00

Clearly, my disgusted post was what caused Tom Daschle to withdraw his nomination to become the Health and Human Services secretary.

I bet he wishes that Obama wouldn't have nominated him in the first place, so he wouldn't have spent $126,000 paying taxes that should have been paid years ago.

Government Employees Don't Need to Pay Taxes

2009-02-02T18:47:00.001-08:00

An ugly fact has surfaced in the past weeks, and no entity of importance seems to care. Congress (thanks to the huge Democratic majority) looked past Timothy Geithner's $26,000 tax error that he conveniently recognized and paid back as he was being examined for Treasury Secretary.

Even worse is Tom Daschle, Obama's pick for Secretary of Health and Human Services. Daschle recently reported income and perks that generated more than $120,000 in tax liabilities, which he quickly and quietly paid. Robery Gibbs, press secretary, downplayed this blunder with a simple "Nobody's perfect."

But most people aren't criminals, and clearly Geithner and Daschle are. Obviously neither politician had any intention of paying taxes on their unreported income/perks unless they ever needed to, like when facing something like this (or an audit). I can guarantee that there are many politicians like them who inaccurately, whether purposely or accidentally, report their incomes and owe the IRS lots of money. There are also many normal Americans that also cheat on their taxes, but policymakers SHOULD be held to higher standards. As the Democrats aim to expand government with this stimulus package, why not hire a couple more people at the IRS to audit audit every Congress(wo)man's return every year?

I wish that Obama-mania would end so that Americans would be as disgusted at this as they should be. Geithner and Daschle certainly appreciate Obama's continued support, but Obama should make an example of them and withdraw his recommendations in light of these issues. If he is honestly aiming to promote change (via government clarity and accountability), allowing these crooks to hold significant offices under him is laughable. Americans need to sober up from their Obamahigh and realize that it's business as usual (if not worse than usual) in Obama's Washington.

Here's to change.

Russia and China Boasting

2009-01-28T17:45:00.000-08:00

Before I had a chance to write anything more significant, I thought I'd throw up a link to this interesting article at FT.com.

China and Russia have heavily criticized Western economic policies at this year's Davos conference; not that we're perfect, but last time I checked, Russia is an authoritarian state that's also in a recession, and China's economy is grinding to a halt as our demand for cheap stuff dries up....

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If I had Dry Powder...

2009-01-20T07:51:00.000-08:00

I'd be buying PNC today.

The shares are currently down 30% on general financial-sector weakness. However, (to my knowledge) there is no relevant bad news actually about PNC that has leaked today.

Other banks have reported lower earnings and bigger unrealized losses. State Street's shares have declined about 50% today after acknowledging about $9 billion of such losses.

I can't promise sunny skies for PNC, and buying National City certainly put them at a greater risk of reporting disappointing news, but for now, PNC looks like a gift today. Of course, my recommendations are never really "recommendations," and always thoroughly research your investments, but my instincts tell me that PNC's intraday decline is an overreaction.

Soda Stocks: Falling Flat or Plenty of Fizz?

2009-01-13T21:22:00.000-08:00

As economic and stock market conditions continue to show little improvement, investors naturally look for safe havens to make investments. The good-times goal of appreciation of almost seems like wishful thinking; preservation of capital is the more important goal for many investors.

One usual area of perceived relative safety are consumer necessities. Companies like J&J, McDonalds, and Wal-Mart have attracted investors as stocks of more discretionary purchases (premium clothing, travel, premium restaurants) have tanked.

As an appreciator of many things fizzy, I decided to take a look at various beverage companies who may enjoy some benefits in a rough market as an area of perceived safety.

First is Coca-Cola (KO), a company that has been a longtime favorite of Warren Buffet. KO has actually fallen by an amount similar to the general market - shares are now down about 30% off of their 52-week high. Coke is one of the most recognizable brands worldwide, and shares have historically enjoyed generous valuations because of that valuable brand power. Though the stock's current PE of 17 doesn't seem cheap, it is compared to KO's 5-year average of 20. KO's PE is even higher if the time frame is expanded beyond five years; during the rougher few prior years, KO's PE was close to 30 for much of the time. (Full table here from Morningstar.com) Price-to-sales and Price-to-CF ratios are trading at similar discounts to historical levels, implying that KO could realize 30+% of upside if it were to trade back at historical valuations. In the mean time, the stock is currently yielding roughtly 4%, which isn't bad considering the pathetic yield in Treasuries at the moment.

Many parallels can be drawn between KO and Pepsico (PEP). KO's beverages do outsell Pepsi's worldwide, but Pepsico owns the valuable Lay's snackfood brands and has done well increasing sales of non-soda beverages. (Pepsi's purchase of Quaker Oats years ago brought the Gatorade brand under the Pepsi umbrella, and other drinks such as Tropicana juices are also great sellers). Pepsi is trading at cheaper valuations relative to KO and to its historical averages: PEP's PE is now 14.7, compared to a 5-year average of 20.6. PEP's P-to-S ratio is 2, compared to a historical average of 3. With strong brands providing stable sales, an investor should be able to park money in either Pepsi or Coke, enjoy respectable yields (Pepsi's is about 3%), and eventually sell the shares for a nice capital appreciation.

Looking beyond the two biggest players, there are some other noteworthy opportunities.

Cadburry spun off Dr. Pepper Snapple Group (DPS) about a year ago as capital markets were freezing and a highly-leveraged private equity buyout was no longer an option. DPS was initially sold around $25/share; after touching $27 soon after the spin off, shares sunk during general market weakness and now trade for around $16. DPS has a narrower focus than KO and PEP, with a much more limited brand spectrum and operations in only North America, Latin America, and the Caribbean. (DPS also engages in some bottling and distribution activities, while KO and PEP sell primarily syrups and let bottlers do the less profitable work). However, DPS looks very cheap compared to its two bigger peers, which may even make it a takeover target. DPS is expected to earn about $1.75/share this year, giving shares a very attractive 9 P/E. Price to sales are just 0.7, compared to PEP's 2 and KO's 3.2. Price-to-Cash Flow for DPS is just ten, providing a buyer with a steady stream of cash from its investment. With a market cap of just $4 billion, compared to KO's $100b and PEP's $80b, DPS may seem too attractive to pass up soon. (KO actually currently has $8b of cash sitting on its balance sheet, so a buyout wouldn't need any additional financing). Investing solely on the basis of expecting a buyout is risky, but DPS's fundamentals justify buy shares nonetheless.

Hansen Natural (HANS) is a maker of energy drinks, notably the Monster brand. HANS is a faster growing company than the soda makers, but skeptics often worry that energy drinks may be a fad. As a consumer, I can understand both bullish and bearish arguments about the business model - I do buy and love energy drinks, but I have cut back consumption as cheaper alternatives (coffee) exist. Also, energy drinks are becoming commoditized; I saw 99 cent energy drinks popping up in convenience stores in Pittsburgh, which should erode market share from the $2.29 Monster. HANS has done a good job of widening distribution and introducing new beverages (coffee-like drinks, etc.), but I have to believe that the growth will fizzle out eventually. Since the topic of this post is safety stocks, I'll exclude HANS - but there is a good chance that it may outperform KO, PEP, and DPS if management continues to execute well.

Lastly, I'll throw Jones Soda's name into the blogosphere. JSDA is a maker of relatively expensive, high-quality sodas. JSDA has had some successes getting their sodas into more stores, but the company isn't profitable and trades at $.38 for a reason. However, JSDA might work out as a very speculative bet. Jones Soda drinkers are often very fond of the brand, and thanks to wide distribution in Starbucks in the past, it has become somewhat of a household name. A recovery is clearly priced in as being unlikely, but if management can turn the company around, take it private, or sell out, there could be huge upside.

In conclusion, KO and PEP provide great places to park money in a wild market. DPS trades at a cheaper valuation than KO and PEP, and should recover strongly or be bought out. HANS has been one of the hottest stocks of the past half-decade, but such companies often fizzle out. And, if you're too cheap to fly to Vegas, buying JSDA might mirror betting on a single number in roulette; you'll likely lose, but any winnings should be big.

I'm back... Looking at 2008, and Looking to 2009

2009-01-07T18:14:00.001-08:00

Reflections on 2008:

The presidential candidate promising “change” has now promised to deliver more of the same (but worse)… bigger deficits, bigger government, more spending, and more bloat

I changed my major from finance to accounting due to my observations and expectations about the job market in two years. Accounting seems like a much safer choice

The stock market performed poorly during the year, and even more poorly during certain months (October). I lost a lot of money.

Looking forward to 2009:

I’ll begin regularly posting again!

It’s now the time of year when Whacks Wax is in full swing. I’m hoping it’s a good winter, as I’d like to be able to reinvest some business profits back into the market.

Things may get better…

But right now, predictions are looking gloomy. Major blue-chip companies like Alcoa and Intel are announcing job cuts, revenue decreases, and decreased expectations.

I expect general economic weakness for a while, but there are opportunities for good investments in individual companies/investment vehicles in the short term. (Of course, I’ll be writing about those!)

All things considered, I had a great 2008 from the viewpoint of a 19-year-old college student. The market sucked… but spring semester, my internship, and fall semester were all great. I obviously hope for a better market (or at least better individual performance!) during 2009, but it’s wonderful to be able to step back from the doom and gloom because of current position in life. Obtaining and internship this summer might be a little difficult, but at least I’m not getting laid off from an actual full-time job…

So check back in regularly, as I will begin posting the same stock, commodity, and market analyses that I had prior to my publishing slowdown this fall.

I'm Back, after a Very Bleak October

2008-11-02T20:55:00.000-08:00

It's been over a month since my last post, and i have been very busy. School has been hectic and I have had many (thus far fruitless) internship/co-op interviews, so blogging had to take a back seat to more important matters.

I've missed out on commenting on a very noteworthy month of market activity. Taken from Marketwatch.com:

The Dow rallied a whopping 11.3% for the week, even as it plunged 14.1% for the month, its worst October since the stock market crash of 1987. See The Month that Was.

The S&P posted a monthly decline of 16.9% -- its worst month since 1987, but a weekly gain of 10.5%. The Nasdaq slumped 17.7% in October, its worst month since 2001, but it rose 10.9% from last Friday's close.

If not for the rally this week, the final statistics would have been much bleaker. Still, October had many spooky moments (note: obligatory Halloween joke is now complete). The VIX (an options volatility index) still sits in previously-uncharted territory; after hitting highs above 80, the index closed at 60 on Friday. Prior to this month, peaks had been made around 40 with a normal range between 10 and 25. The VIX measures options premiums (which can represent sentiment or "fear") - readings this high show that traders expect big moves, and are either trying to capitalize on swings directly or are hedging longer-term bets with options.

Because of a busy schedule (or at least I'll use that as an excuse) I have largely ignored the market over the past month. I have generally held all of my long-term positions (though I did need to meet a margin call due to declining prices) as I was comfortable with long-term valuations and prospects. This past week, I did well with buying and selling some MRO and VLO calls (I sold Friday fearing a Monday selloff and a decline in options premiums), but energy companies are grossly undervalued right now.

Valero, a refiner, made $1.86 per share during this past quarter (after backing out one-time items and other extras). The stock was trading at $16 earlier in the week ahead of earnings and ended around $20.50 on Friday. It had traded below $15 earlier this month. As a refiner, Valero actually does better in an energy environment like the one we have now - crude oil prices are falling faster than gasoline (and other distillate) prices are. With oil at $60-70, Valero makes a very desirable margin on the difference between input costs and output prices.

Marathon Oil (MRO) has equally bright prospects. MRO has both upstream (finding/drilling oil) and downstream (refining, gasoline retailing) operations, which helps buffer the impact of a fluctuating price of oil. Marathon reported adjusted net income of $2.76 per share for this quarter - once again, before the announcement, shares were trading at less than 10x QUARTERLY earnings. Marathon is expected to make about $6/share this year - a reasonable 8-10x earnings valuation would put MRO shares around $48-60, where they were trading before this market mayhem. Additionally, Marathon is moving to possibly break up the companies upstream and downstream components into two different publicly traded companies. Jim Cramer estimates that the market values of the two companies would value current shares between about $70-$100, though trusting that pundit is always risky.

I will happily reenter calls for either company if there is market weakness early this week. Long-term valuations are wonderful - Price to Cash Flow for the trailing twelve months is just 2.8 compared to a 10-year average of 4.6. MRO is currently trading at book value, while the 10-year average for that metric is a price-to-book of 1.7. There isn't much money available to flow into the market and buy great stocks like these, but shares should clearly appreciate over time.

That's all for now, but a lightening schedule should lead to frequent posting once again. There's certainly a lot to write about, so I hope to continue to commentate during this wild market.

Automakers Receiving Government Money?!

2008-09-24T23:56:00.000-07:00

Rather than write my own article, I'll direct you to an already-written one on SeekingAlpha.com.

Click to read Article

The most noteworthy thing about this is how the government and media have allowed this to happen silently. Though, as the author states, $25 billion isn't much compared to other recent events, I think that the terms are what's most interesting. These loans are low-interest and don't even require repayment for the next five years, while AIG is paying 11% on all of their $85 billion line of credit (even monies not used) while forfeiting 80% ownership of the company.

I guess the auto lobby is better than the insurance lobby.

CIT Added to "Do Not Short"

2008-09-22T06:33:00.000-07:00

Along with GE, GM, American Express, and more, CIT was added to the unshortable list this morning. The SEC also gave the NYSE and Nasdaq further authority to continue to add companies as necessary.

http://www.bloomberg.com/apps/news?pid=20601082&sid=azaqwT1A0gk4&refer=canada

It's a Wonderful Day

2008-09-19T12:28:00.000-07:00

...When you're almost irresponsibly long AIG, ETFC, and energy.

I've never listed my full portfolio here and I don't plan to, but here are some things that I have been doing lately:

I sold more of my once-huge BWLD position today as the stock notched a new 52-week high. I still hold some BWLD, but the stock is definitely fairly valued here, so there are better opportunities for this money elsewhere.
I sold COP $75 calls this morning that I had purchased during the oil panic of last week. I bought the contracts for $.40 and sold for $1.70 - having a nice win after losing on my TTWO position definitely helped.
Speaking of TTWO, I bought equity earlier this week at $15.50, but my big options position will expire worthless this afternoon. Long-term prospects are great and share valuation is ridiculously low, but I don't expect a near-term catalyst (or at least I'm not willing to bet on one via options after getting burned).
I progressively backed up the truck with AIG this week, buying different lots at different times. My first purchase was at $7.50 - ouch. But thanks to averaging down, my average cost is now $3.25/share. In addition to the temporary end of short selling and general euphoria, shares are rallying today as some investors are attempting to block the government's dilution of the company. I see it as a win-win; even if the company is diluted and liquidates, the sum of parts is much greater than the current valuation (I have seen $10 cited as a reasonable estimate). If the government agrees to less or no dilution (considering that the 11% interest on the $80 billion loan should provide them with some nice income anyway), shares will obviously be worth even more.
I added to my CIT position today (increased it by 75%, it's still a small portion of my portfolio) when the stock was down earlier in the day. Wells Fargo provided CIT with a $500 million line of credit yesterday; I see that as a sign of confidence and relatively-clean books. Also, CIT has asket to be added to the list of companies that can't be shorted (I don't understand why it was left off in the first place). If their request is granted, the near-term floor should be right here at 10.
I added to my ETFC position earlier this week; my average cost is now just above $3. Like CIT, ETFC has done a better-than-average job of selling assets to create a capital cushion, and their retail business is thriving. Continued writedowns on mortgage-based assets they still hold may be a short-term issue, but I see no bankruptcy risk anymore, which the market still seems to imply.
Other energy: At the end of last week, I held COP, MRO, and CEO shares. I sold the COP earlier this week to avoid a margin call, but still hold MRO and CEO, with costs of about $40 and $118. $100 oil seems to be the sweet spot for integrated companies (MRO), and CEO (CNOOC, a Chinese oil company) doesn't have to deal with as many government controls as PetroChina does. It also pays a nice 5% dividend.

I have a few other positions, but that covers my major actions of the past two weeks. With all of the aforementioned purchases, I have fairly long-term timeframe; with a predator-free trading environment for the next few weeks and ample government-provided liquidity, financials may finally get their act together.

Lehman Sells a Limb; AIG Sells Out

2008-09-16T22:26:00.000-07:00

Lehman sold part of itself this evening to Barclay's for $1.75 billion.

"Barclays' purchase includes Lehman's North American sales, trading, and research and investment banking businesses, as well as its midtown Manhattan headquarters and two New Jersey data centers." Source

Lehman still has other assets, including international units and its famed asset-management firm.

"Barclays said it intends to immediately begin discussions with international authorities to acquire similar operations of Lehman outside of North America. Barclays also has agreed to provide $500 million of debtor-in-possession financing to Lehman.

Meanwhile, Lehman said it's in advanced talks to sell its investment management division, which includes money manager Neuberger Berman, to a third party.

The division was once valued by as much as $10 billion, but now could fetch much less considering Lehman's bankruptcy, the Associated Press reported. Source

Lehman has about 700 million outstanding shares, so the assets sold today represent about $2.5 per share. (I'm not stating that the shares will trade at that level tomorrow - that's just the asset prices divided by shares.)

Considering Lehman still has other valuable assets to sell off, it seems like shares should continue upward from the $.30 closing price today. Barclay's bought Lehman's North American business for just $250 million - roughly the closing price - implying that a lot of the troubled assets were packaged in that deal. The relatively clean parts - buildings, investment management firms - should fetch nice premiums.

I also added to my original AIG position, but that may not turn out so well. AIG agreed to accept $85 billion in government financing in exchange for warrants representing 79.9% of shares. The $85b isn't payment for the shares - rather, it's a loan, which accrues interest at Libor + 850 basis points (currently totaling over 11%).

So the good news is, AIG will definitely survive, and they have plenty of assets to sell to repay the loans. The bad news is that current shareholders - myself included - will be substantially diluted.

However, the credit rating agencies should upgrade AIG's ratings tomorrow morning after this capital infusion, and AIG will have time to sell assets in a orderly fashion. I don't expect a FRE/FNM-like 90% haircut to $.30 tomorrow morning, but the reaction will probably be negative. However, the government did imply that their goal was to maximize shareholder value, in contrast to the explicitly statement that common holders came last with the FRE/FNM situation.

Considering AIG's after-hours closing price under $3 represents a 95% decline from the top, the dilution may be pared with the survival of the company.

All I can do at this point is dream for good opening prices tomorrow. Both of these purchases represent timing and speculation more than Buffett-like investing. I couldn't keep my hand out of the cookie jar. Tomorrow, and continuing onward, we'll see if I enjoy sweet rewards or endure stomachaches.

Tripling Down on AIG

2008-09-16T08:03:00.000-07:00

Quick update between classes:

I tripled my original (small, speculative) AIG stake this morning at $1.82/share.

I wish I could have purchased more, at a lower price, but Ameritrade's software was acting funny.

I'll have a longer writeup some other time on why I'm plowing capital into AIG at this level, but my general, one-sentence thesis is that it's a company whose core business is not affected by the "mortgage meltdown."

I believe (correct me if i'm wrong) that AIG doesn't even have to mark their positions to market, since they intend to hold to maturity, but when another company, like LEH, updates the values of their positions, S&P, Moodys, and other ratings agencies apply those valuations to AIG's books and draw their own conclusions.

So my average cost for AIG is $3.7 now, and I may continue to add below that. I'm hoping shares recover quickly enough that I don't get to see prices below that level again, but, I'm at the mercy of the markets.

A REALLY, REALLY Terrible Morning

2008-09-15T06:06:00.000-07:00

The red ink is stunning, almost breathtaking.

As of 9:05 A.M.(Thanks Marketwatch):

MONDAY MARKETS BY THE NUMBER

Pre-market indications:
• Dow industrials: -353
• S&P: -46.2
• Nasdaq: -52

• Crude oil: -$5.15
• Gold: +$14.50
• Dollar vs. yen, -2.4%
• Euro vs. dollar: -0.4%

The destruction of paper wealth this morning is incredible. The indexes are off 3%. Oil is down 5%, the first business day after a major hurricane continues to shut down 20% of the nation's production and even more of our refining output. The Yen has spiked due to "safe-haven" buying.

At this point, it seems like we're all in this together. Wall Street leaders put in a 40-hour weekend trying to open their doors this morning. Lehman Brothers has filed for a form of bankruptcy. Merrill Lynch has agreed to be consumed by Bank of America for $29/share; the street doesn't believe it, based on the MER quote of $22 that I'm getting right now.

Ten banks set up a $70 billion fund that they can draw from during times of stress. Some of those banks will be using it this morning.

"Big" companies have fallen. Bigger companies have lost almost everything; AIG's market cap is $20 billion this morning, compared to nearly $200 billion less than one year ago. LEH's $200 million morning market cap is laughable. (I have to believe that there's more value in the company than that, but I chose to buy AIG this morning instead of LEH.)

I'll drown in the sea of red ink this morning along with most investors. My FSLR short and DUG shares will hedge losses, but not offset them. As I mentioned, I bought a little AIG pre-market at $7.50 and TTWO at $15.50 (as they are reeling from ERTS' walkaway, not this general weakness).

Hopefully the VIX will spike, and at the very least, this trauma will create a bottom. With quotes for nearly every company I can think of down 5% before the bell, maybe this is capitulation. Then again, this is probably the third or fourth time that I've hoped for a bottom.

TTWO's Response

2008-09-14T14:14:00.001-07:00

Below is the response that TTWO released after ERTS announced that they are done with merger talks.

Strauss Zelnick, Chairman of the Board of Take-Two, commented, "We remain focused on creating value for our stockholders and our consumers. This has been our goal since EA launched its conditional and unsolicited bid six months ago, a bid which was repeatedly rejected by our stockholders. As part of that commitment, we remain actively engaged in discussions with other parties in the context of our formal process to consider strategic alternatives. We're especially proud of the success we've enjoyed over the past eighteen months and we remain confident in our ability to generate value for stockholders."

"Take-Two's business has continued to strengthen since the time EA first made its offer. We have delivered terrific products to our consumers and we've been rewarded with very strong financial performance. We have an exciting future ahead of us, powered by our profitability, a significant cash position, the absence of debt, an undrawn credit facility and a terrific lineup of games. We are confident in the unique value of our business given our strong position in what is a growing and dynamic industry," said Ben Feder, Chief Executive Officer of Take-Two.

Electronic Arts Walks from TTWO Talks

2008-09-14T13:40:00.000-07:00

"Electronic Arts Inc today announced that while EA continues to have a high regard for Take-Two's creative teams and products, after careful consideration, including a management presentation and review of other due diligence materials provided by Take-Two Interactive Software Inc., EA has decided not to make a proposal to acquire Take-Two and has terminated discussions with Take-Two.

John Riccitiello, Chief Executive Officer of EA, said: "EA is tracking toward a record breaking year. We're launching 15 new games including award-winners like SPORE, Dead Space and Mirror's Edge, great new titles from the Sims, new family titles with Hasbro, and the highest quality slate of EA SPORTS titles on this generation of consoles. We're also expanding beyond our core business with a series of direct-to-consumer launches including Warhammer Online."

(Taken from Marketwatch.com)

First, I think that the tone that ERTS used is noteworthy. Though the reaction tomorrow may still be negative for TTWO shares, ERTS said nothing to that effect in their statement. In fact, from my point of view, it was mildly positive - ERTS seemed to say, "We're more focused on turning around our money-losing business right now than spending the appropriately-large amount of money on TTWO's successful one."

It will be interesting to see TTWO's reaction tomorrow. Though I have a long bias, I must admit that an initial drop will likely occur. I'll be buying if it does. TTWO is on track to make $2/share this year; no other company in the video game industry (and really very few companies besides integrated oil industry) trade at a 10 p/e. TTWO has a steady stream of releases for the rest of the year, the holiday season, and beyond.

Though I initially and continually touted a possible merger, I recognized that value may be better maximized when ERTS stopps capping TTWO shares with the $25 merger ceiling. Therefore, I think that going forward - whether at 3:30 tomorrow, this friday, or next April - TTWO share should be trading at a higher price than they were at Friday's close.

It looks like my calls may expire worthless, but it was a gamble that I don't regret taking. The earnings TTWO reported about ten days ago were unbelievable, and the street could have, under other circumstances, applauded loudly. Observing the ERTS' Take-2 tango was certainly a good experience for this young, often-speculative investor to experience.

I'll be sure to disclose any new position I take if conditions are ripe enough tomorrow morning.

Interesting Week for Oil...This Time, I'm Playing for Real

2008-09-08T17:58:00.000-07:00

Oil prices snuck higher today, but the real action should be forthcoming.

OPEC begins meeting tomorrow, and the usual troublemakers (Venezuela, Iran) are looking to milk some more money from their barrels. The cool, calm, and in-control Saudis will be expected to propose holding production steady. As oil rose exponentially earlier this summer, Saudi economists and oil ministers affirmed that they believed that $80-100 was a good price for oil, but as barrels begin to approach that range, they too may step up the rhetoric a little bit. Countries like Venezuela and Iran have called oil too cheap, but the Saudis control enough of OPEC production to really be the deciding party.

Though any big change in production is unlikely to occur, the degree of rhetoric may have some influence on market movements going forward starting tomorrow.

And as news outlets have informed you, there's another hurricane brewing in the Atlantic - Ike. Ike just crossed Cuba and weakened, and it will cross again, but at some point it will enter the gulf and (supposedly) begin to strengthen. Right now, the track takes Ike into the middle of Texas, a little south of Houston. If this forecast proves accurate, then oil and gas production will be disrupted.

Wednesday is the weekly inventory report, and the numbers will be a little funny due to our ol' pal Gustav. However, Gustav didn't affect production or refining to the extent that was originally expected (hence the big drop in energy prices after my post about it), so the numbers may be bearish.

With my funds, I took a long position via my favorite vehicle - Conoco Calls. Unfortunately for me, Conoco announced a big, expensive parternership dealing with Liquified Natural Gas in Australia last night, so COP shares fell while those of other oil companies rose today.

Last time I was dead wrong; Gustav was a dud (relatively speaking - unfortunately, peoples in ocean countries beared the brunt of the once-powerful storm). This time, multiple events will be in play. I'm taking the contrarian stance - it's in my nature, for better or worse - after energy prices and related shares have fallen dramatically over the past two months. A quick pop tomorrow, Wednesday, or anytime soon, and I'm out - I'm still not convinced that oil's true value is $108/barrel.

To follow up:

As oil shares crashed on Tuesday, I bought shares of COP around $70 and Marathon Oil (MRO) Around $41 as long-term purchases. It looks like crude and oil equities will open lower today, but oil companies are looking dirty cheap.

Results? Check. Reaction? Nope.

2008-09-04T16:28:00.000-07:00

TTWO blew out the quarter, reporting earnings of 67 cents per share compared to an analyst consensus of about 54 cents.

TTWO raised guidance for the year, and released their pipeline, which should provide strong sales during the next quarter and through the Christmas season.

Investors were unimpressed, however, and shares are flat.

The withdrawn-bid of $26 continues to cap the stock price. Hopefully analyst upgrades or commentary (which I expect to be forthcoming) will inspire investor interest; otherwise, ERTS needs to bid reasonably ($35+, now that TTWO is set to make $2/share this year), or admit that TTWO is too expensive for them so that the stock price can rise organically.

Almost D-Day, and TTWO is Jumpy

2008-09-03T22:43:00.000-07:00

Today's session featured some strange exchanging of TTWO shares, just one day before the company is set to release earnings.

There was no news released (though Barron's later said that the price decline was due to rumors about ERTS walking way from merger talks), though ERTS had an executive speak at a conference right around noon.

Below is a graph of TTWO's trades between about 11:15 and 12:05, when shares declined sharply, rebounded sharply, and then settled roughly 5% lower than where they opened.

Note: Right-click and open this picture in a new tab or window. Damned blogger margins!

As the stock crossed $24 about 8 minutes into the graph, the first pickup in volume can be seen, possibly by stop-limit orders being triggered. The price continued to slide on light volume until shares broke through $23, when volume accelerated to over 50,000 shares per minute.

As the shares dropped below $22, volume topped 150,000 shares per minute, which is impressive, considering only 500,000 shares traded during all of Friday and only 1.3 million exchanged hands yesterday.

Frantic selling and buying took place over the following ten minutes, as about 1.3 million shares were traded. It seems as though stop-limit orders first were triggered, panic selling insued, and finally, as the stock sat at $22, buyers came in to snap up shares.

Normally I wouldn't analyse the intraday trading of a stock so deeply, but the trading pattern certainly seemed odd. TTWO consolidated at $25 during the previous week, with Thursday's trading featuring a $.15 range.

If there was a news leak, or some sort of manipulation, I'd expect to see it in the options, as premiums are still low enough that a trader with information could make a killing. However, volume and pricing on the options seemed normal. The options with the greatest volume were the $25 and $27.5 September calls; premiums did decline, but the $25 call, which went from being nearly at-the-money to almost 10% out of it, only lost about 25% of its value, and ended the day with a trade at $1.10. Volume was a little high (relative to open interest) in some deep OTM Sept, Oct, and Dec puts (with trades at the $15 strike), but I can't see the shares falling that low.

So I backed up the truck a little further and bought a few more $27.5 calls at a cheaper price, adding to my unwisely-large position going into tomorrow. (Thankfully recent good trades with FSLR puts, AIG, AEO, and DDM calls have helped to offset any potential losses from TTWO.)

Once again, in my humble, bullish opinion, all signs (besides today's trading) point to good events tomorrow. I don't know why TTWO would have bothered setting up these secret meetings with ERTS if they weren't showing them something good, and I don't know why ERTS wouldn't have walked away already if they were wholly unimpressed. TTWO has historically beaten earnings, and they are still riding the success of GTA IV, with a decent slate of titles that will be released for the holidays this year.

Who knows, maybe TTWO will report a loss, and these talks were about some firesale price at $14/share, and some speculator (or inside-information-haver) will be chuckling as they rake in the bucks. However, TTWO's management has insisted on the strength of TTWO's business, and empiracle evidence doesn't contracdict their statements.

Considering that ERTS lost over $400 million last year while TTWO is expected to book about $140 million in profit this year, barring a disaster, I don't get how TTWO shares would move lower. An independant TTWO (without this takeover hangover) would be trading much higher than it is today, and TTWO should demand a price somewhere in the $30's if they are to be bought.

Prior to the after-the-bell announcement tomorrow, I'd expect that TTWO trades around $22.5 or $25, as those option strikes have been heavily traded. When they report at the close, a beat-and-raise (without any mention of a takeover) should send shares skyward; ultimately, there could be some announcement concerning the deal during the call tomorrow. Though there is the non-disclosure agreement, I can't believe that TTWO will be completely silent about a deal during the call tomorrow.

If I had a reputation, I'd be putting it on the line. Thankfully, if I'm wrong, no one really reads this anyway, and I'm young enough to lose some money. If I'm right, the profits, and vindication, shall be lovely.

Text of Palin's Speech at the RNC

2008-09-03T21:07:00.001-07:00

It's time to get political with the election only two months away...

Mr. Chairman, delegates, and fellow citizens: I am honored to be considered for the nomination for Vice President of the United States...

I accept the call to help our nominee for president to serve and defend America.

I accept the challenge of a tough fight in this election... against confident opponents ... at a crucial hour for our country.

And I accept the privilege of serving with a man who has come through much harder missions ... and met far graver challenges ... and knows how tough fights are won - the next president of the United States, John S. McCain.

It was just a year ago when all the experts in Washington counted out our nominee because he refused to hedge his commitment to the security of the country he loves.

With their usual certitude, they told us that all was lost - there was no hope for this candidate who said that he would rather lose an election than see his country lose a war.

But the pollsters and pundits overlooked just one thing when they wrote him off.

They overlooked the caliber of the man himself - the determination, resolve, and sheer guts of Senator John McCain. The voters knew better.

And maybe that's because they realize there is a time for politics and a time for leadership ... a time to campaign and a time to put our country first.

Our nominee for president is a true profile in courage, and people like that are hard to come by.

He's a man who wore the uniform of this country for 22 years, and refused to break faith with those troops in Iraq who have now brought victory within sight.

And as the mother of one of those troops, that is exactly the kind of man I want as commander in chief. I'm just one of many moms who'll say an extra prayer each night for our sons and daughters going into harm's way.

Our son Track is 19.

And one week from tomorrow - September 11th - he'll deploy to Iraq with the Army infantry in the service of his country.

My nephew Kasey also enlisted, and serves on a carrier in the Persian Gulf.

My family is proud of both of them and of all the fine men and women serving the country in uniform. Track is the eldest of our five children.

In our family, it's two boys and three girls in between - my strong and kind-hearted daughters Bristol, Willow, and Piper.

And in April, my husband Todd and I welcomed our littlest one into the world, a perfectly beautiful baby boy named Trig. From the inside, no family ever seems typical.

That's how it is with us.

Our family has the same ups and downs as any other ... the same challenges and the same joys.

Sometimes even the greatest joys bring challenge.

And children with special needs inspire a special love.

To the families of special-needs children all across this country, I have a message: For years, you sought to make America a more welcoming place for your sons and daughters.

I pledge to you that if we are elected, you will have a friend and advocate in the White House. Todd is a story all by himself.

He's a lifelong commercial fisherman ... a production operator in the oil fields of Alaska's North Slope ... a proud member of the United Steel Workers' Union ... and world champion snow machine racer.

Throw in his Yup'ik Eskimo ancestry, and it all makes for quite a package.

We met in high school, and two decades and five children later he's still my guy. My Mom and Dad both worked at the elementary school in our small town.

And among the many things I owe them is one simple lesson: that this is America, and every woman can walk through every door of opportunity.

My parents are here tonight, and I am so proud to be the daughter of Chuck and Sally Heath. Long ago, a young farmer and habber-dasher from Missouri followed an unlikely path to the vice presidency.

A writer observed: "We grow good people in our small towns, with honesty, sincerity, and dignity." I know just the kind of people that writer had in mind when he praised Harry Truman.

I grew up with those people.

They are the ones who do some of the hardest work in America ... who grow our food, run our factories, and fight our wars.

They love their country, in good times and bad, and they're always proud of America. I had the privilege of living most of my life in a small town.

I was just your average hockey mom, and signed up for the PTA because I wanted to make my kids' public education better.

When I ran for city council, I didn't need focus groups and voter profiles because I knew those voters, and knew their families, too.

Before I became governor of the great state of Alaska, I was mayor of my hometown.

And since our opponents in this presidential election seem to look down on that experience, let me explain to them what the job involves.

I guess a small-town mayor is sort of like a "community organizer," except that you have actual responsibilities. I might add that in small towns, we don't quite know what to make of a candidate who lavishes praise on working people when they are listening, and then talks about how bitterly they cling to their religion and guns when those people aren't listening.

We tend to prefer candidates who don't talk about us one way in Scranton and another way in San Francisco.

As for my running mate, you can be certain that wherever he goes, and whoever is listening, John McCain is the same man. I'm not a member of the permanent political establishment.
And I've learned quickly, these past few days, that if you're not a member in good standing of the Washington elite, then some in the media consider a candidate unqualified for that reason alone.

But here's a little news flash for all those reporters and commentators: I'm not going to Washington to seek their good opinion - I'm going to Washington to serve the people of this country. Americans expect us to go to Washington for the right reasons, and not just to mingle with the right people.

Politics isn't just a game of clashing parties and competing interests.

The right reason is to challenge the status quo, to serve the common good, and to leave this nation better than we found it.

No one expects us to agree on everything.

But we are expected to govern with integrity, good will, clear convictions, and ... a servant's heart.

I pledge to all Americans that I will carry myself in this spirit as vice president of the United States. This was the spirit that brought me to the governor's office, when I took on the old politics as usual in Juneau ... when I stood up to the special interests, the lobbyists, big oil companies, and the good-ol' boys network.

Sudden and relentless reform never sits well with entrenched interests and power brokers. That's why true reform is so hard to achieve.

But with the support of the citizens of Alaska, we shook things up.

And in short order we put the government of our state back on the side of the people.

I came to office promising major ethics reform, to end the culture of self-dealing. And today, that ethics reform is the law.

While I was at it, I got rid of a few things in the governor's office that I didn't believe our citizens should have to pay for.

That luxury jet was over the top. I put it on eBay.

I also drive myself to work.

And I thought we could muddle through without the governor's personal chef - although I've got to admit that sometimes my kids sure miss her. I came to office promising to control spending - by request if possible and by veto if necessary.

Senator McCain also promises to use the power of veto in defense of the public interest - and as a chief executive, I can assure you it works.

Our state budget is under control.

We have a surplus.

And I have protected the taxpayers by vetoing wasteful spending: nearly half a billion dollars in vetoes.

I suspended the state fuel tax, and championed reform to end the abuses of earmark spending by Congress.

I told the Congress "thanks, but no thanks," for that Bridge to Nowhere.

If our state wanted a bridge, we'd build it ourselves. When oil and gas prices went up dramatically, and filled up the state treasury, I sent a large share of that revenue back where it belonged - directly to the people of Alaska.

And despite fierce opposition from oil company lobbyists, who kind of liked things the way they were, we broke their monopoly on power and resources.

As governor, I insisted on competition and basic fairness to end their control of our state and return it to the people.

I fought to bring about the largest private-sector infrastructure project in North American history.

And when that deal was struck, we began a nearly forty billion dollar natural gas pipeline to help lead America to energy independence.

That pipeline, when the last section is laid and its valves are opened, will lead America one step farther away from dependence on dangerous foreign powers that do not have our interests at heart.

The stakes for our nation could not be higher.

When a hurricane strikes in the Gulf of Mexico, this country should not be so dependent on imported oil that we are forced to draw from our Strategic Petroleum Reserve.

And families cannot throw away more and more of their paychecks on gas and heating oil.

With Russia wanting to control a vital pipeline in the Caucasus, and to divide and intimidate our European allies by using energy as a weapon, we cannot leave ourselves at the mercy of foreign suppliers.

To confront the threat that Iran might seek to cut off nearly a fifth of world energy supplies ... or that terrorists might strike again at the Abqaiq facility in Saudi Arabia ... or that Venezuela might shut off its oil deliveries ... we Americans need to produce more of our own oil and gas.

And take it from a gal who knows the North Slope of Alaska: we've got lots of both.

Our opponents say, again and again, that drilling will not solve all of America's energy problems - as if we all didn't know that already.

But the fact that drilling won't solve every problem is no excuse to do nothing at all.

Starting in January, in a McCain-Palin administration, we're going to lay more pipelines ... build more new-clear plants ... create jobs with clean coal ... and move forward on solar, wind, geothermal, and other alternative sources.

We need American energy resources, brought to you by American ingenuity, and produced by American workers. I've noticed a pattern with our opponent.

Maybe you have, too.

We've all heard his dramatic speeches before devoted followers.

And there is much to like and admire about our opponent.

But listening to him speak, it's easy to forget that this is a man who has authored two memoirs but not a single major law or reform - not even in the state senate.

This is a man who can give an entire speech about the wars America is fighting, and never use the word "victory" except when he's talking about his own campaign. But when the cloud of rhetoric has passed ... when the roar of the crowd fades away ... when the stadium lights go out, and those Styrofoam Greek columns are hauled back to some studio lot - what exactly is our opponent's plan? What does he actually seek to accomplish, after he's done turning back the waters and healing the planet? The answer is to make government bigger ... take more of your money ... give you more orders from Washington ... and to reduce the strength of America in a dangerous world. America needs more energy ... our opponent is against producing it.

Victory in Iraq is finally in sight ... he wants to forfeit.

Terrorist states are seeking new-clear weapons without delay ... he wants to meet them without preconditions.

Al Qaeda terrorists still plot to inflict catastrophic harm on America ... he's worried that someone won't read them their rights? Government is too big ... he wants to grow it.

Congress spends too much ... he promises more.

Taxes are too high ... he wants to raise them. His tax increases are the fine print in his economic plan, and let me be specific.

The Democratic nominee for president supports plans to raise income taxes ... raise payroll taxes ... raise investment income taxes ... raise the death tax ... raise business taxes ... and increase the tax burden on the American people by hundreds of billions of dollars. My sister Heather and her husband have just built a service station that's now opened for business - like millions of others who run small businesses.

How are they going to be any better off if taxes go up? Or maybe you're trying to keep your job at a plant in Michigan or Ohio ... or create jobs with clean coal from Pennsylvania or West Virginia ... or keep a small farm in the family right here in Minnesota.

How are you going to be better off if our opponent adds a massive tax burden to the American economy? Here's how I look at the choice Americans face in this election.

In politics, there are some candidates who use change to promote their careers.

And then there are those, like John McCain, who use their careers to promote change.

They're the ones whose names appear on laws and landmark reforms, not just on buttons and banners, or on self-designed presidential seals.

Among politicians, there is the idealism of high-flown speechmaking, in which crowds are stirringly summoned to support great things.

And then there is the idealism of those leaders, like John McCain, who actually do great things. They're the ones who are good for more than talk ... the ones we have always been able to count on to serve and defend America. Senator McCain's record of actual achievement and reform helps explain why so many special interests, lobbyists, and comfortable committee chairmen in Congress have fought the prospect of a McCain presidency - from the primary election of 2000 to this very day.

Our nominee doesn't run with the Washington herd.

He's a man who's there to serve his country, and not just his party.

A leader who's not looking for a fight, but is not afraid of one either. Harry Reid, the Majority Leader of the current do-nothing Senate, not long ago summed up his feelings about our nominee.

He said, quote, "I can't stand John McCain." Ladies and gentlemen, perhaps no accolade we hear this week is better proof that we've chosen the right man. Clearly what the Majority Leader was driving at is that he can't stand up to John McCain. That is only one more reason to take the maverick of the Senate and put him in the White House. My fellow citizens, the American presidency is not supposed to be a journey of "personal discovery." This world of threats and dangers is not just a community, and it doesn't just need an organizer.

And though both Senator Obama and Senator Biden have been going on lately about how they are always, quote, "fighting for you," let us face the matter squarely.

There is only one man in this election who has ever really fought for you ... in places where winning means survival and defeat means death ... and that man is John McCain. In our day, politicians have readily shared much lesser tales of adversity than the nightmare world in which this man, and others equally brave, served and suffered for their country.

It's a long way from the fear and pain and squalor of a six-by-four cell in Hanoi to the Oval Office.

But if Senator McCain is elected president, that is the journey he will have made.

It's the journey of an upright and honorable man - the kind of fellow whose name you will find on war memorials in small towns across this country, only he was among those who came home.

To the most powerful office on earth, he would bring the compassion that comes from having once been powerless ... the wisdom that comes even to the captives, by the grace of God ... the special confidence of those who have seen evil, and seen how evil is overcome. A fellow prisoner of war, a man named Tom Moe of Lancaster, Ohio, recalls looking through a pin-hole in his cell door as Lieutenant Commander John McCain was led down the hallway, by the guards, day after day.

As the story is told, "When McCain shuffled back from torturous interrogations, he would turn toward Moe's door and flash a grin and thumbs up" - as if to say, "We're going to pull through this." My fellow Americans, that is the kind of man America needs to see us through these next four years.

For a season, a gifted speaker can inspire with his words.

For a lifetime, John McCain has inspired with his deeds.

If character is the measure in this election ... and hope the theme ... and change the goal we share, then I ask you to join our cause. Join our cause and help America elect a great man as the next president of the United States.

Thank you all, and may God bless America.

Shoulda, Woulda, Coulda, Gone Long Energy

2008-08-31T10:51:00.000-07:00

In light of Gustav's increasing strength and imminent re-destruction of Louisiana coastline, I wish I would have gone long energy before the close on Friday.

I'd be absolutely shocked if oil and natural gas prices don't rocket upward by at least 5% during Asian trading tonight. Gustav has shut down the majority of energy production in the Gulf and a significant portion of refining capability on land.

Refining capability had been underutilized during the previous weeks leading up to the storm, so refineries not affected by the storm should be able to maximize production (if they want to) to compensate for shut-downs. The US Department of Energy plans to release oil from reserves if it is deemed necessary; so there should be no lines at the pumps next week.

My instincts say that futures will jump and oil company equity will drop Monday, so long both USO and DUG would have been a good trade. Higher prices don't help companies who are shutting down production and are enduring damage to their rigs, while the Saudis will reap higher prices for the oil they are pumping.

Thankfully I don't do much driving while here at school, but gas prices should surely be higher in the coming weeks and months, even if only due to the fear factor. The extent of Gustav's disruption and damage waits to be seen. I sympathize for lives and property in the path of the storm, and hope that the early evacuations minimize damage.

A Crucial Side Note: Multiple democratic pundits, from position-holders to the fat, shameless Michael Moore, have called Hurricane Gustav a "blessing from God." Below are two links. Please note that these are thoughts produced by the intellectual kin of Barack Obama when you don't vote for him this November. How heartless must a person be to claim that the destruction of homes and property and loss of life can be a positive event?

http://www.redstate.com/diaries/absentee/2008/aug/30/fowler-fouls-hurricane-is-gods-favor-to-dem/
http://www.businessandmedia.org/articles/2008/20080830000004.aspx

Backing up the Take-Two Truck

2008-08-28T16:01:00.001-07:00

I closed my last post, which was about Take-Two and Electronic Arts entering into a confidentiality agreement, with a cautious sentiment. I said that I was planning on maintaining my disclosed position, TTWO Sept $27.5 and $30 calls, or selling contracts as premiums rose.

There was little spike in the stock price or options premium, so I decided to load up on more calls. TTWO has now set September 4th as the date of their earnings report and conference call for the quarter ended July 31st.

TTWO made $1.52 per share in during the quarter ended in April; much of that money was made during the few days that Grand Theft Auto IV was sold during the end of that quarter. However, sales continued to be strong during this quarter and TTWO's results should reflect this. The consensus estimate for this quarter is only $.55/share, which could easily be beaten; in fact, TTWO has beaten estimates handily each of the past four quarters. Full-year predicictions (currently $1.85) also may be revised upward; so far this year, TTWO has tallied -$.41 and $1.52, for a total of +$1.11. The estimes for the next two quarters, $.55 and $.19 could be easily crushed. TTWO is releasing GTA IV in Japan in early October and on the PC in November (which falls under the next fiscal year), so sales should continue to trickle down to TTWO's bottom line.

As long as TTWO comes in at least in-line this quarter, ERTS will have to re-bid at a much higher price or admit that TTWO is too expensive for them. If ERTS does make the $1.52/share that they're expecting to tally this year, the stock trades at about a 32 P/E. ERTS's asking price of $26/share for TTWO assigns a 14 P/E. Activision-Blizzard trades at a P/E in the high 20's. ERTS cannot expect TTWO to sell out at such a discount to itself and the industry.

So I am indeed speculating as this tango proceeds. If TTWO's management has presented its material to ERTS's board already, they could forseeably make an offer before earnings to minimize the influence of the investor community's reaction on a takeover price. If TTWO reports in-line or surprises positively, shares should jump for many reasons - TTWO's shares are deeply undervalued compared to its competitors, and investors like me may think that ERTS will pony up more for the company.

Shares currently seem to be hugging the $25 level, but I'd be surprised if they stayed there for long. It's time for ERTS to sack up and make a reasonable bid, or leave TTWO alone. The lead-lined takeover cloud capped TTWO's share price as it released the best-selling media release of all time and subsequently reported unbelievable earnings. It's time for the sun to shine on TTWO.

Disclosure: Long TTWO Sept. $27.5 and $30 calls.

Electronic Arts Wining and Dining Take-Two

2008-08-25T20:17:00.000-07:00

According to a Reuters press release after-hours, Electronic Arts (ERTS) and Take-Two (TTWO) have now entered into confidential discussions regarding a potential merger.

This is the latest development in a soap-opera-like courtship that has disappointed TTWO investors as the share price has been stagnant since ERTS's first offer of $26 this spring. ERTS extended the offer multiple times throughout the summer. ERTS withdrew the offer earlier this month, but agreed to view a presentation of non-public material by TTWO's executives.

This disclosure of privacy should stoke investor speculation that a new offer may be in the works. Whether an offer is publicly made, however, remains to be seen. Electronic Arts seemed set on acquiring TTWO at $26, but many investors thought that the bid was a shrewed tactic to cap TTWO's share price as it released Grand Theft Auto IV, the biggest game release ever. But Electronic Arts shareholders may be disappointed by a higher bid, as each dollar increases the takeover price by about $75 million. A price in the $30s, which would represent a reasonable premium in light of GTA's success and TTWO's earnings potential, would represent a bid increase of hundreds of millions of dollars.

I may sell some of the options, likely the 30s, if TTWO share prices (or options premiums) pop tomorrow at the open. After speculating twice on this merger, I'm willing to take profits when I can (hopefully) get them. TTWO didn't move much after hours, so maybe longs aren't enthused by this hype anymore. However, TTWO and ERTS will probably clear the air with a new bid or a conclusive "not-interested" statement fairly soon.

I held TTWO calls that expired (worthless) at the end of August, and did buy September calls at both the 27.5 and 30 strike.

A New Search Engine: Cooler than Cuil

2008-07-30T08:41:00.000-07:00

For some reason that I could not comprehend, a new search engine called Cuil (pronounced cool) debuted within the past week to much fanfare. TV and internet news outlets, including MarketWatch.com, picked up on this non-event.

In my experience, the search engine returned limited, irrelevant results.

However, I stumbled upon another search engine called Scour that I actually like. Scour, like other search websites, compiles results from the Big Three - Google, Yahoo, and MSN - and attempts to combine the results with internal metrics and package them relevantly. Scour combines the engine rankings along with user votes and comments to arrange results in a certain order.

Best of all, Scour pays users (albeit peanuts) to search, comment, and vote. One search results in one point, while commenting or voting can increase the total per search to four points; after 6,500 points, they'll send a $25 Visa. They do provide toolbar plugins for Firefox and IE, so it's easy to earn points without altering your usual routine. To me, the allure of Scour isn't making money, it's getting good search results (and being able to creep my websites' rankings all in one place) while diverting some revenue away from Google into a smaller company's pockets.

At least the people at Scour were able to pick a decent name. Really, Cuil?

Grand Theft... Vista?

2008-07-25T11:04:00.000-07:00

My previous post addressed the possibility of another company bidding for Take Two (TTWO), a video game maker that currently has been offered to be bought out by Electronic Arts (ERTS).

Take Two's chairman said (in a press release) that multiple other parties were performing due diligence and TTWO was in early discussions with these potential suitors.

In my previous article, I threw out Viacom, as many pundits often cite them as wishing to become a player in the growing video game industry. However, I think that there's a more likely bidder.

I think that Microsoft is a likely bidder for TTWO. Microsoft already makes a video game platform (Xbox and Xbox 360) and also independently publishes video games. Years ago, they made a video game acquisition when they bought tiny Bungie studios, the company that developed the Halo series. Microsoft had already published the Halo games, but they decided to bring the production in-house to reap the benefits of vertical integration. I can't tell you how many dollars Microsoft has made, but Halo has now produced three best-selling games, and its exclusivity on the Xbox (it's also available on the PC, but no other console) has driven console sales too.

Besides Halo, Grand Theft Auto, TTWO's signature game, is the other dynasty of the video game universe. GTA IV, the most recent addition, released earlier this year, broke sales records that were set by Halo 3 last year.

Halo 3 generated sales of $170 million dollars during its first week last fall. (As previously discussed, virtually every component of creation, production, and distribution is internal, so much of this amount must fall straight to MSFT's bottom line). Compare that to a major blockbuster movie's debut weekend (the numbers are very similar), and the growing value of video games becomes clear.

However, that total, while impressive, is dwarfed by GTA IV's first week, as the game reported $500 million in sales.

For the mere cost of $2.5 billion (25% over ERTS's bid, or about $32/share), MSFT could absorb that massive revenue- and profit-generating game along with the rest of TTWO's portfolio. TTWO does make other games; BioShock was a surprise success this year, and its sports franchises, covering basketball, baseball, hockey, and tennis, are ranked highly and sell well.

Microsoft could become a serious player in the video game industry if they made a console and sold the two best selling games on the planet. Making GTA exclusive to the Xbox (like Halo is) would be a terrible decision, but providing some incentive, like an earlier release date, could drive additional Xbox sales too.

Such a takeover would be so insignificant to MSFT as a whole; unlike an overpriced Yahoo takeover, buying TTWO at $2.5b would only use up about 10% of their cash, in a transaction that's only as big as 1% of their market cap. However, their growing video game department would certainly flourish, growing to a point where it could be spun off if MSFT deemed that most profitable.

Microsoft has the cash, the takeover desire, and the rationale for making such a purchase. The Grand Theft Auto franchise alone is worth more than this current takeover price (which is why many people think that ERTS submitted the bid before the game came out, so that they could cap the share price), and TTWO has many other promising games and franchises that MSFT could continue to build and polish.

I'm long ERTS and now own TTWO calls, so admittedly, I have an interest in a higher bid (especially from someone other than ERTS). But it is in no way ridiculous to conclude that TTWO could, and should, be bought for a price much higher than it's current share price (high $24) and offer price (~$25.75).

Take Two's Takeover

2008-07-21T22:46:00.000-07:00

Electronic Arts (ERTS) has been courting Take Two (TTWO for some time now; just yesterday they extended their current offer to buy out TTWO at about $26 per share just as it was set to expire.

Electronic Arts bid for TTWO when the shares were trading in the mid-teens, as TTWO struggled to do much of anything between releases of the different editions of Grand Theft Auto. However, the recent installment has been successful beyond expectations, and TTWO plans to ride that gravy train until its final stop.

In light of the success of GTA IV, TTWO is claiming that ERTS's offer significantly undervalues the business, which may be true. Here's what the chairman of TTWO said today:

"We are fully engaged in a formal process to evaluate strategic alternatives that have the potential to deliver greater value than EA's inadequate offer," said Strauss Zelnick, Take-Two's chairman. "As part of this process, we continue to engage in meaningful discussions with multiple parties, a number of whom have been conducting due diligence."

The chairman hinted, if falling short of explicitly stating, that there are other companies shopping for TTWO. In the golden age of the video game, traditional media companies like Viacom have been previously suggested/speculated upon being interested in such a purchase. Otherwise, ATVI would be the only likely suitor, though they just completed their own merger with another company.

However, since the chairman stated with more-than-hypothetical language that there is the possibility of another offer, I think it's worth it to gamble here. I bought TTWO August 27.5 calls for $.15 today; the shares closed at $24.66, a discount to ERTS's offer. September calls at 27.5 strike went for about $.70.

Certainly, a higher bid is far from certain, and ERTS could get tired of pursuing the stubborn TTWO and let its current offer expire. However, if another company does come in with a bid of, say, $30, owning either options contract will result in windfall profits.

Owning something like the Aug calls might actually be the safest way to play this; the enormous upside potential is preserved, while the downside from a the end of ERTS's extensions won't be too painful. I can't say that I expect a new bid to emerge - and for one to be announced within the next month is even less likely - but I'd rather lose a little money speculating than miss a hugely profitable trade.

(Disclosure and note: I am long TTWO Aug 27.5 Calls. If a new bid is made, I have a crystal ball for sale... but actually, any success predicting such an event is because of common sense and/or dumb luck.)

Google: Bad for Me, Good for Them

2008-07-15T07:54:00.000-07:00

I'm an entrepreneur at heart, and I like when my little business ventures and investing happen to coincide. Running a business using products by eBay, Amazon, and Google allow me to have some additional insight into the actual usage and application of their tools.

I defended and then berated eBay, who has, through their own actions, distanced, scattered, or simply banned a growing number of important sellers.

I have written good things about Amazon.com multiple times - their Fulfillment by Amazon service allows small, medium, and large merchants to enjoy Amazon's world-class supply chain at a (somewhat) reasonable cost.

Now it's Google's term to get an in-depth, er, superficial analysis based on my experiences with Google's tools.

I've been using Gmail since before it was cool, run Adsense on multiple sites, use Firefox with a Google toolbar, post on Blogspot (which is owned by Google), have used G's free "analytics" service before, have watched way too many YouTube videos, have listed items on Google Base (a sort of online marketplace that they have been trying to promote), have accepted and paid through Google Checkout, and lastly, have advertised using Google Adwords. I'll be dwelling on the last service.

Google Adwords is the half of their advertising enterprises that serves merchants. By now, most heavy internet users probably are somewhat familar with Adwords. (If you didn't know, it's those advertisement boxes containing links strewn all over this, and other, websites). Adwords is used by everyone from lowly cottage-industry merchants like myself to Fortune 500 companies - everyone seems drawn by the promise of ten-cent clicks leading to unfathomable sales.

In my experiences thus far, I haven't been able to discern that Adwords is very effective, at least for my business (Whacks Wax). I earned allotments of Adwords credits as I've signed up and renewed hosting contracts over the past five years, and I'd use them as they trickled in. Clicks on keywords that aren't too sought after, like "hot ski wax," are pretty inexpensive, so I set up some programs and let them run.

Maybe it was a result of my lackluster website or undesirable product, but very few clicks ever resulted in sales. It wasn't until I spiffied up my metatags and did some other SEO tricks, earning my website a spot on the first page of Yahoo and Google searches for many keywords, that sales came flowing in. The organic traffic was much, much more effective than the purchased hits.

I just set up CanadasCoffee.com as a means of distributing Tim Horton's, the world's most delicious (but hard to find) coffee. Once again, I have $50 of Adwords credits to play around with; I hoped some free advertising could jump-start sales.

However, the impact of my advertising buck has been wittled away as Google's algorithms keep making my clicks more expensive. The first day, all search terms (from "Tim Horton's" to the more obscure "buy tim hortons coffee" featured minimum bids of ten cents. Some terms had some other advertising competition, but not very many people were competing for most of the terms.

However, the cost of many terms has inexplicably increased in the two days since then. "Tim Hortons" is now requiring a bid of 40 cents per click, even though there are currently no advertisements shown when the term is searched.

My assumption (which may be incorrect) is that Google identifies when advertisers start advertising, and it will then increase the cost as the term becomes demanded (even if only a single advertiser is using it). That way, it can encourage less-searched terms to be paid for cheaply while slowly milking all it can out of more desirable, though uncompetitive, terms.

This strategy is good for Google - in the last quarter, they beat estimates and expectations because they managed to earn more per click. But it's bad for merchants, who are looking to use Adwords to generate sales as margins and demand are squeezed in a tough macroeconomic environment.

But unlike my nasty experiences with eBay, I'll admit that what's bad for me isn't bad for Google at all. Many people and companies believe in the effectiveness of Adwords, and there really aren't many alternatives for little businesses with advertising budgets in the hundreds of dollars. Adwords has now expanded into print advertising (and radio and TV advertising), and it helps advertisers find space in major newspapers for huge discounts (I put an ad for Whacks in the major Salt Lake City paper last winter for like $10, thanks to Google).

As Google's search dominance continues to grow, and as Gmail continues to become the world's premier free email service, the revenues from advertising should continue to grow. Monetizing international markets, especially China, will be essential for Google's onward success. Google ponied up billions for YouTube, but they still haven't been able to figure out how to make money from it; luckily, the cash from their other operations makes the lack of monetization less of a problem for GOOG than it would be for another company. If Google can manage to start making money from these non-core businesses, their furious growth should continue.

Google's earnings are released Friday, and clarity into how revenues hold up during tough economic times will be seen then. On one hand, Adwords is a cheap way to advertise, compared to purchasing hundred- or thousand-dollar advertisements in newspapers or on TV. But there's a chance that the coupling of thriftiness from big companies - like mortgage lenders - or abandonment by many small advertisers (like myself) may pressure growth. I have no prediction to offer.

But as I listed all of the Google services I use, it became clear that Google has built an unrivaled internet kingdom. Its most popular services - Gmail, YouTube, Adsense and Adwords, and of course, the search engine - are the best that the Web has to offer, and they draw users in with little coercing. It's less-popular offerings, like Base and Checkout, are being bankrolled by Google's vaults in an effort to buy market share.

So in the end, my thriftiness may be indicative of one fact about Google - they make a ton of money. Don't hate the player, hate the game.

Shameless Promotion

2008-07-14T11:22:00.000-07:00

Just as I have mentioned Whacks Wax (a separate venture of mine) or business of friends or family, I figured I'd post a link to CanadasCoffee.com. Canada's Coffee sells Tim Horton's (THI) coffee, which is nearly impossible to find outside of Canada or US towns surrounding the country.

Out with the Old, in with the New

2008-07-10T10:41:00.000-07:00

I closed FRE around $12.50 and closed CIT around $7.80, both for ~$1/share gain over my entry points. If I would have held until the end of the day, I would have made about twice as much... but if I was still holding now, I'd be in bad shape.

I bought NTRI $12.5 July call and $7.50 July ODP call (shares had been crushed after advising that sales were very, very sluggish).

I’m playing the dead cat bounce with ODP while NTRI seems to be drunkenly staggering out of oversold territory. USO puts still open, and those have bled a little today.

Also bought CSCO Aug $22 call for $.90 when stock was at $21.60 yesterday, dropping 6% on the day. I figured it was oversold.

Why not try to take advantage of some market volatility?

Closing Positions

2008-07-09T05:55:00.000-07:00

I sold my little CIT and FRE stakes yesterday into the strength at the end of the day. I don't not believe in their future prospects, but I'll take quick gains in the face of future uncertainty.

As a whole, the rally looked like short-covering to me... The parabolic gains heading into the close are one indicator, as people aren't usually as eager to initiate new long positions at ever-higher prices as they are willing to cover their shorts. Also, the performance seen yesterday from dogs like CROX indicates that many shorts may have thrown in the towel.

I'm still holding USO $104 Jul puts, and I'll see the value of that decline today as oil seems to be recovering modestly. If the inventory report at 10:30 is super bearish, oil should continue its slide; otherwise, it too may be pumped back up.

A Fan of Freddie

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

I picked up some shares of FRE, the quasi-government federal mortgage company as it was sitting near lows at $11.24. I had been waiting to jump into Freddie or Fannie (FNM) at such a time like this.

My thesis is that they are too intertwined with the government for anything really, really bad to happen, unless doomsday predictions come true. After a 25% intraday pop, I liked this entry point, whether I sell it off after a (potential) rebound or hold it for the long haul.

PENN: No Deal

2008-07-03T06:36:00.000-07:00

Today, Penn National Gaming (PENN) confirmed that its pending deal with Fortress Investment Group (FIG) and others was indeed terminated.

They will receive $200 million in cash (about $2/share) and over $1billion in preferred equity in 2013.

As I had speculated (when the stock was a few dollars higher), failure was priced in - the stock is flat today (at least in the opening minutes). I still like PENN, I like this cash infusion, and I like their prospects in a tough economy - why fly to Vegas when you can lose money close to home?

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

When Bubbles Pop (or Lose just a little Hot Air)

2008-07-03T06:24:00.000-07:00

Coal stocks, which I have identified as overheated for a while (but thankfully didn't short), all crashed yesterday as spot prices in Europe were less desirable than expected.

Here's a chart of CNX, Consol Energy, a huge coal producer in Appalachia:

Here's JRCC, truly a joke - it's a coal company that's losing money right now. Still, that hasn't stopped it from going from $3 to $60 over the past year:

Lastly, this is KOL, the coal ETF - so when an ETF declines 10%, you know that the industry is getting crushed.
Earlier this week when I had some fresh funds (which I eventually put into CIT for a profitable trade), I was checking out JRCC $50 july puts when the stock was around $57.50... and I talked myself out of them because I didn't expect a move that big. Though nine times out of ten (if not more) that $2 options contract would have been a wasted lottery ticket, it would have panned out nicely this time.

I haven't stayed on top of the coal market enough to speak more specifically than I have just done, but the stocks above demonstrate the power of bubble-deflation. Especially in the case of JRCC, a company with no earnings, it's astronomical price increase has been because of complete fabrication and speculation, and it should all come crashing down. CNX is a solid company, but it too has enjoyed a massive price increase because of tightening worldwide coal supplies.

The thing that makes coal from different from oil is that there's no talk of "peak coal" - we know that we have hundreds of years of supply left. Getting it out of the ground in a timely fashion can be challenging, as big trucks and tires are in short supply, but I'd have to believe that the CEOs, especially of companies like JRCC, know that this heyday will end sometime, probably in the not-too-distant future.

Two Trades

2008-07-01T06:15:00.000-07:00

In my personal account, I did two things yesterday:

I put in an order at 6AM to buy these nice little illiquid tools called Fixed Return Options, a new derivative (how could that ever be a bad thing?!) invented by the administration of TradeKing, my online broker.

Anyway, how these things work, is that they are all-or-nothing contracts. If your contract finishes above the strike price (when you own a high-finish contract), you get $100 credited into your account. When it finishes below, it's worthless. The put-like options work the opposite way.

I bought Citi (C) high-finish options at the August 17.50 strike price. So, if the price (well, actually, a different metric that measures the average price of every trade that day, but basically price) finishes at $17.51 on expiration, I get $100. If not, it's worthless. The contracts were only $40 each, so the risk/reward was worth it to me. (I don't have a ton of confidence in Citi as a company, but I do think it's oversold, but regular options had premiums too high or were too far out of the money.)

The FROs can be sold before expiration, but since the market is pretty illiquid right now, it's best to hold as long as the trade looks like there's a good chance of success.

I also bought CIT after the bell at $6.88. It was down 15 percent on no real news yesterday; I figured it was just a financial company getting dumped as funds and firms window-dressed. This morning they announced that they are selling the home loan business, their most troublesome one, for some nice cash AND the forgiveness of lots of debt. It's over $8 right now.

As I wrote yesterday, I hope that this new month and quarter mark a turnaround for the market... but that doesn't look to be the case, at least during the opening of this first day. Hold on for the ride.

Calling a Bottom... Again

2008-06-30T12:36:00.000-07:00

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"

2008-06-30T09:40:00.000-07:00

"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.

Quick Thoughts: PENN, FSLR, BWLD

2008-06-24T06:47:00.000-07:00

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.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

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

2008-06-12T11:00:00.001-07:00

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 Amazon.com 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 Amazon.com’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 pricegrabber.com and shopping.com (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 Amazon.com 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 Amazon.com. 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.

Oil Prices: Who will be the Biggest Fool?

2008-06-09T07:00:00.000-07:00

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.

Oil Established a (Temporary? All-Time?) High

2008-05-27T17:51:00.000-07:00

Last week, oil futures topped out at around $135 on news that everyone thinks
that a barrel of oil is going to $150, $200, $500, or $1million.
However, some important, telling data lateweek led to a pullback that
may lead to something more significant.

Late in the week, the Department of Transportation reported that the
number of miles driven in March fell by nearly 5% year-over-year.
That five percent decline is an enormous number of miles – about 11
billion. The 11 billion miles not traveled saves an enormous amount
of gasoline; assuming 20 mpg (which may be too optimistic), 500
million gallons of gasoline weren't burned during March.

That huge decline may signal a serious shift in the willingness of
Americans to pay for gasoline. As gas crept up from $1.xx per gallon
a decade ago to about $3 nine months ago, consumers complained.
Simply complaining doesn't keep any money out of sheiks pockets,
however, and Americans kept purchasing the necessary gas to get to
work, take a trip to the mall, or run endless amounts of single
errands.

However, as economic conditions worsened in late 2007 and early 2008
while gas prices continued to rise, consumers finally complained with
their proverbial pocketbooks, and actually altered the way that they
live their lives. It appears as though $3.50+ gasoline IS finally
enough to alter driving and living habits for many penny-pinching
drivers.

Econ 101 (it's actually Econ 102 at Penn State) preaches that gasoline
has a relatively inelastic demand curve – that is, since it's so
necessary to basic life in the US, consumers don't change their
purchasing habits very quickly. (Think about it – even if gas was
$10/gallon, could you stop commuting to work/school tomorrow?)
Usually, it takes a long time for inelastically-demanded goods to
exhibit weakening demand, as over a long period of time, people can
find alternative solutions (ride the bus, move closer to work, buy a
more fuel-efficient vehicle, etc.). The quick 5% drop seems to boldly
state "enough is enough."

Sentiment has clearly been changing for years – car companies now
advertise MPG, not just horsepower or number of cup holders. Dozens of
models of hybrids are now sold (and Toyota's Prius, the best selling
and most efficient hybrid, just passed the 1 million mark), and the
aforementioned complaining has been becoming louder and louder. Oil
executives were crucified on Capitol Hill last week (though I think
that the parading and harassing is an insult to the intellects of
Americans, if legislators believe that finger-pointing [at the wrong
people] will make Americans feel better).

There is also talk of raising margin requirements on energy trading,
which basically would lessen the value of the bets being placed on the
price of crude (and other commodities). A bigger issue, in my
opinion, is the funny money in ETFs like OIL (which tracks the price
of oil) and DBA (an agriculture index), which purchases the hard
commodities with money from individual investors. The massive amounts
of money being pushed into such ETFs have artificially raised demand
for the underlying futures, increasing prices further.

As permabulls cite ever increasing demand for petroleum as why it just can't go down, the DOT statistic pokes a big hole in their arguments. Yes, the third world will use more oil as people can buy cars and agriculture is mechanized. However, a movement towards efficiency in the United States will have a meaningful impact on worldwide consumption and could offset any increases in developing nations. If oil does stay at $130/barrel in an environment of commodity (and overall) inflation, all of the millions of Chinese and Indian people who were inches away from buying their first car may now have to allocate more of their would-be disposable income on food and other necessities.

OPEC seems to stand firm on not increasing production to ease prices. (Many people argue if they could up output if they even wanted to, but I won't comment on that). However, if OPEC wants a market to sell their oil to ten, twenty, or fifty years from now, they should be more concerned with keeping oil cheap. Finally, fully-electric cars are on the roads (Telsa makes a sportscar, GM is releasing the mass-marketed Volt within a few years), and it looks like they'll be powered by newly contracted wind farms and solar plants. (Okay, that's a bit of a stretch, but alternative energy facilities are quickly being built.) Another energy policy change that may soon occur is the opening up of the US Eastern Continental shelf, which has been off-limits to oil exploration and drilling. The US may couple growth in alternatives with domestically-produced crude filling the important niches. Real measures are finally being taken to counteract the rising cost of energy.

So, in my opinion, it's time for something to give. A minor policy
change, the closing of the so-called "Enron Loophole" (which allowed
the buying of commodities on multiple exchanges once the limit on one
was met), may have signaled a willingness for lawmakers to win votes
by changing laws. The United States is currently warehousing over 700
million barrels of crude in the Strategic Petroleum Reserve. If one
million barrel (or less) was released per day, any real supply/demand
issue would be completely negated and crude futures would plummet.
Increasing margin requirements would take some speculative money out
of the market, but the ETFs are purchasing their contracts with cash.
Though bulls argue that crude has much farther to run, the increase
past $100 really hasn't been backed by much tangible, actionable facts
– and as tidbits of information like the driving statistic surface, this oil bubble may deflate.

Bank of America: Break the Silence

2008-05-05T06:21:00.000-07:00

This morning, Friedman, Billings, Ramsey analyst Paul Million said that he believes that Bank of America should walk away from its Countrywide purchase because of deteriorating assets. At the very least, he suggested that BAC should/will renegotiate to a price between "0 and $2" per share (compared to an approximate deal price of $7 based on BAC's closing price on Friday).

Bank of America needs to comment on this suggestion immediately. Countrywide is down over 10% in the pre-market because of this news. In a post-Bear Stearns era, the power of rumors and speculation has been demonstrated. If BAC intends on following through with the deal, they should make it known. If they are indeed thinking about renegotiating or withdrawing, CFC shareholders will take the hit eventually anyway - better now than later.

Rumors such as these can become self-fulfilling prophecies. BAC needs to clarify this issue before more damage is done.

Easy Money: Yahoo Arb; a Note on FSLR

2008-04-30T16:42:00.000-07:00

Tonight, the WSJ reports that Microsoft leaked news that they're willing to pay $32 or $33 per share for Yahoo. Also, the article states that major Yahoo shareholders are seeking $35-37 and the Yahoo board wants "upper 30's."

It's trading up about fifty cents right below $29/share after hours, which is about a dime below the current offer. To me, going long seems like a no-brainer. A higher-priced deal is looking very possible, and even at $32, that's about a 13% gain from current prices. Since it's still only trading at the first deal offer price, there doesn't seem to be much downside (at this point; obviously, if MSFT walked away completely that would probably be a bad thing for YHOO shares).

I bought a small position at $27.9. Whether a deal gets done at $32, 33, 35, or 39, it's higher than what I paid. Hopefully it will be a quick, easy trade.

On another note, FSLR reported earnings today. The shares traded wildly; in premarket trading, shares were down about $20 (in the 265 range) and traded as high as $307 during the session, establishing a nice range for day traders.

I listened to the conference call this morning and was not impressed with anything I heard. Revenues and margins were both worse than the numbers last quarter, and they cautioned that margins would continue to fall over the coming quarters. They basically reaffirmed revenue estimates for next quarter (the "modest growth" they predicted should place the number within current analyst estimates), and raised them negligibly for the year (the old estimate was $950mil, and FSLR's new midpoint is $990mil).

As growth seems to have cooled from the previously-feverish pace, the current valuation looks more and more ridiculous. The current average 2008 EPS estimate is $2.53. Based on the slightly increased revenue estimate, favorable foreign exchange rates, but shrinking revenues, I don't think FSLR will earn more than $2.80 this year - and they could earn no more than $2.60. Based on current share price of $290, the P/E based on my 2008 estimate of $2.7/share is 107. In 2009, current estimates predict $5.11 in earnings; I'll be generous and give FSLR $6. Based on that number, the P/E multiple on 2009 is about 50.

Right now, eight analysts have "strong buy" ratings and 11 analysts have "buy" ratings on FSLR. I wouldn't be surprised if a few of them, especially ones with the strong buy rating, downgrade FSLR on valuation concerns. I certainly expect no upgrades; after the in-line performance and forecast, there is no reason to upgrade FSLR at this point.

I didn't cover my short position today. Hopefully, the stock put in a top at $307 today. FSLR does seem like a solid company, and I don't doubt the long-term prospects for the solar industry. However, as it has become clear that FSLR can't grow like the Incredible Hulk anymore, i believe that its time for shares to pull back.

First Solar: Bright Future or Dim Prospects?

2008-04-28T05:19:00.001-07:00

Solar Stocks, along with shares of other alternative energy mediums, are currently being sold as "the next big thing" in the stock market. Whenever a stock or industry is touted as such an investment, be cautious.

Solar energy may, one day, make up a meaningful proportion of energy generation in this company. However, even with the advances that companies are making, it still makes no economic sense to choose solar over another power medium.

Even in a very sunny area like Odessa, Texas, solar panels generate a very unattractive return on investment. According to BP's website, a 6kW fixture would generate enough power to cover the average home's yearly use (about 9,000 kWh) would cost $49,000.

There are cheaper panels available (from other companies, like FSLR, SPWR, and the others talked about daily by pundits like Jim Cramer), but it's clear that buying panels offers a terrible ROI. The 9,000 kWhs per year equates to an energy bill of about $1000-1500, or 2-3% of the original cost. (Sure, panels can be purchased under mortgages and then qualify for tax-deductions, but instead of looking at every loophole, I'm looking at the big picture.)

Now Texas is one of the many states (like my home state of Pennsylvania) that offers little subsidies or refunds for panel purchases. The same panels purchased in Los Gatos, CA would qualify for $9,747 of additional rebates, $12,825 in Beverly Hills, or $23,000 in Albany, NY. In a state like NY, which refunds (what appears to be) about half of the purchase price, the investment is more attractive; however, solar output is also lower, so the ROI may only improve to 4-5%, still rivaled by simple, safe investments like CDs or I-Bonds.

I'm not here to discuss exact costs, but my point is, people (or companies) cannot honestly be motivated by economics, at this point, to purchase solar power fixtures. Secondary motives, like saving polar bears and penguins or electricity security during system-wide blackouts or a requirement (as is the case for CA's energy producers) may influence the decision to buy panels.

I view those general factors as an issue that the entire industry has to face, but First Solar is looking particularly vulnerable.

FSLR is expected to report earnings tomorrow, profiting $.47 per share. Analysts predict about $2.53 this year and $5.11 next year - certainly, growth is foreseen.

FSLR's future estimates manifest how inflated expectations already are. 2010's earnings estimate is $8.75/share, which would be a multiple of 32 - much higher than many current companies' TTM- or this-year P/Es. That conclusion is also reached by assuming the best-case scenario in many variables, like the price and availability of cadmium tellurium remaining ideal, and new production facilities coming online-as expected.

In a heavily subsidized industry, the end of such subsidies would also be disastrous. That doesn't seem too likely in the USA, where all three (but especially two) of the prospective presidents are pushing green energy, but in more developed countries, like Germany, who have been subsidizing for years, it looks like there may be an end to help to the industry.

First Solar's panels are made differently than any other company; instead of using the now-more-expensive silicon, they use tellurium. That helps them now, as it lets them offer attractive pricing, but may hurt in the long run; solar-grade silicon is being produced in bigger quantities by more companies as the solar movement is spreading, which should eventually lead to cheaper prices for that raw material. First Solar's tellurium appears to have supply and pricing issues, as is discussed here (warning: pieces from Seeking Alpha are not scholarly in nature).

Lastly, insiders have been dumping stock lately. About $100million of FSLR stock was sold during the past few weeks, mainly by FSLR's CEO. Yes, the sales were under pre-made plans that allowed such sales, but the CEO was not obligated to sell anything. If he though the company was a steal at $285, like the general market seems to think, why would he be letting go of his shares two weeks before earnings? (Insider data available here.)

My bottom-line conclusion is basically to short FSLR based on common sense. The current share price seems blinded (by the sun?) towards any sense of valuation, and towards potential difficulties. The end of subsidies, a tellurium disruption or price increase, or delay in facilities coming on-line. They may indeed beat estimates and raise guidance, as the solar business is hot right now - but I think rationality can't be ignored much longer. Years of good fortune are baked in to share prices already.

My risk tolerance is high, but I'm still worried by the $50 pop after the last earnings report. However, I'm short FSLR. It fell from $285 to $160 before, and I'm hoping that the same increase in rationality causes a similar crash after earnings tomorrow.

Disclosure: Short FSLR... and a little scared that hype will take over after earnings.

Wednesday

2008-04-23T12:55:00.000-07:00

Apple's announcement of a 3G iPhone during the conference call may offset an otherwise disappointing report. Mac sales will be great, but the slowdown of consumer spending will hurt iPod and iPhone sales. iPhone sales in Europe are slow.

Amazon.com will also cite the challenging retain environment, and unless they improve margins, I don't see investors being impressed with their report.

Then again, VMW just met and confirmed guidance, still sporting a 40 forward P/E, and investors applauded. I'm not that good at guessing market sentiment, I guess.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Tuesday Earnings Highlights

2008-04-22T01:16:00.000-07:00

My Monday thoughts were hit and miss; I was a little too bearish on BAC, but my thoughts on NFLX were pretty accurate. Just like flipping a coin...

Anyway, on Tuesday, more major corporations will report earnings.

McDonalds reports in the morning, and I think that they will likely report a solid quarter due to growth overseas and favorable exchange rates. Also, domestic restaurant statistics were good during months during the first quarter, so I am expecting a very good release from MCD. However, the stock has priced in a lot of good news, so I don't expect more than a 3 or 4 percent price increase, even if the earnings are great. However, I definitely think that MCD is a great company to own; with expansion into the developing world, mainly China, and attractive menu items like new coffees and dollar-menu items, MCD looks set to perform well for a while.

In the afternoon, two big tech names report: VMWare and Yahoo!

VMW disappointed the street last quarter, and the shares were sent to the chopping block - the stock fell more than $20 overnight. VMW's technologies may be attractive in this macroeconomic climate as they provide savings over buying more hardware, but the stock is still very expensive. VMW is only expected to earn $1.08 this year and $1.52 next year - with shares trading at $56, current P/E is over $50 and forward P/E is still about 37. Unless VMW dramatically upwardly revises future estimates, there could be more pain for VMW longs this quarter.

I think that YHOO earnings may be moot, considering that the merger process has stabilized share price since MSFT put its offer on the table. Maybe blockbuster earnings could fuel hope for a higher bid, but I think that a quarter that's fairly in-line with estimates won't do much to move the price. A bad miss, however, may spook investors, fearing that MSFT may be able to lower its bid price.

I'll hopefully publish some thoughts on Wed's morning's earnings before the end of the session Tuesday.

Monday's Biggest Earnings Reports

2008-04-20T22:35:00.000-07:00

The deluge of earnings releases will continue this money, as multiple noteworthy companies report earnings.

If Monday's morning reports are good, the market should continue the rally that began last week. Asia is currently up a couple percent overnight, led by exporters like Honda.

The biggest story Monday morning will be Bank of America. According to Yahoo! Finance and EarningsWhispers.com, the average analyst estimate is either $.41 or $.45 per share, though estimates vary wildly from losses to almost $1 of profit.

Based on releases from Citi and other major banks, BAC will probably disappoint, but anything short of absolutely unthinkable will be applauded (ala Citi's earnings on Friday). As many professionals are starting to believe that we are in the bottoming process, they expect bad news, just not new, terrible news.

BAC started last week around $35.5 and ended up 10% at $38.5 - I think it'll trade at $40 after earnings tomorrow. However, if BAC does turn a $.50 profit, maybe the shares will be up 10% at $42.

Netflix is another company reporting today that I'll focus on.

First, according to Yahoo! Finance, insiders sold 700,000 shares, or almost 20% of total holdings, over the past 6 months. It's acceptable to cash out of a successful investment and diversify, but maybe they think the valuation has become too rich.

The average estimate for NFLX's quarter is $.21/share, while EarningsWhisper is calling for $.25. Whether or not they beat the street, I think that the NFLX is already fully valued.

Expecting $1.25 this year makes NFLX's current P/E about 30, while next year's estimated $1.53/share creates a 25 forward P/E. Those valuations aren't insane, but Netflix may not be able to continue growing as quickly as they have in the past.

BlockBuster seems to be getting their act together, as they recently reported a profitable quarter. For some that is interested in mail-in DVDs, BB offers the same mail-in program with the added bonus of in-store exchanges.

However, even the quick 1-2 day turnaround of NFLX may be obsolete in just a few years. Now, movies are available on-demand through digital cable for about $3 a pop - and most cable providers and premium channels include a large library of free movies. Also, companies (including NFLX) are rolling out downloading services, which will become even more accepted as internet connections keep becoming faster.

A 4-month chart of NFLX shows its impressive run-up from about $21 to $40, which occurred even as the wider market was moving sideways (or down). NFLX actually fell about 5% on Friday while the broad market rallied, due to an analyst's comment about valuation.

It looks like this quarter's report will determine the direction of NFLX stock. The long-term uptrend looks like it could be broken as the stock just bounced off an "overbought" RSI level, but there appears to be support at $35, minimizing pain. However, as the valuation is a little rich, I think that a good report may already be priced in. Maybe if NFLX surprises positively, it'll bounce back to $40, which is where it was two sessions ago. There really hasn't been much options volume on NFLX, which can show where investors expect the stock to move to.

NFLX will close near $35 if the earnings don't meet estimates or guidance isn't good, while the stock may pop to $40 if they beat and raise.

In the long term, unless they say they'll make $1.50 this year and $2 next year, I don't see much more upward movement for NFLX over the coming months. As I stated, growth is slowing, competition is increasing, and valuation is already rich (though not ridiculous). 20% is nothing to sneeze at, but I see $45 as the ceiling for NFLX in 2008. If things take a turn for the worse, NFLX has much of a recent 90% price increase to give back.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Earnings Season: Like Goin' to Vegas

2008-04-19T17:54:00.000-07:00

As earnings season was in full force over the past week, investors were taken for a ride on a bucking bull.

I had a lot of fun and made a little money at the craps table, er, I mean, playing options of companies releasing earnings.

Early in the week, I took a bullish stance on Intel; they pleased the street and I came out ahead. Later, I also placed a bullish bet on eBay, but their earnings were not lauded by analysts (though I liked the release; more on that in another post). Thankfully, a 15% OTM put on SunPower (SPWR) just touched the moneyline, making my options worth something. (Side note: I'm very short-term bearish on solar stocks; I'll post about that later too.) On Thursday, I made two bets, on E*Trade and Citi, which both ended up being slightly profitable; however, I passed on the biggest surprise of the week, the company that owns the internet, Google.

I was looking at Google options but ultimately decided it would probably be like throwing money away. After all, the level I was looking at $490 or $500 calls) were $50 out of the money - I thought that they would surely expire worthless, even if the report was good.

I was wrong, and it hurt. The $60 contract of $500 April calls sold for between $2,500 and $4,700 on Friday. Lots of wealth changed hands in the way-out-of-the-money contracts; what was selling for dollars or pennies on Thursday was worth 50-100x as much Friday. However, as a (self-proclaimed) long-term investor, I have to look past such fanciful missed opportunities and focus on the future.

Lots of companies still have to report their quarters over the coming weeks. I will post individual thoughts, analysis, and predictions concerning the coming days, or even specific companies.

What did I promise again? A bearish writeup about solar stocks, individual earnings predictions... I'll also tease and say I'm going to write about the attractive value of PetroChina - keep checking back all week for the frequent updates.

Companies reporting that I'm eyeing up this week:

Monday: BAC, NFLX
Tuesday: MHP, OXPS, YHOO, VMW
Wednesday: UPS, AMZN, AAPL, CMG, NTRI
Thursday: POT, PEP, OXY, COP, MSFT, WDC, DECK
Friday: HMC

I'm expecting good news from some, and bad from others. Let's crank up the guessing machine.
"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Buying Opportunity in GE

2008-04-11T11:15:00.000-07:00

GE, the great American conglomerate corporation, was down about 13% today at its low (just made around 2:15PM at $32).

GE's finance department was mainly responsible for the disappointing numbers released today, as they blamed Bear Stearn's meltdown for impairing their ability to sell securities, instead having to mark them to market, resulting in greater devaluation of those assets.

They also mentioned weakness in the overall US economy, specifically, their healthcare biz.

However, look at the big picture - this should be just a short-sighted hiccup in GE's huge, successful business. As their ECOmagination commercials publicize, GE is developing solar, wind, water, aircraft- and train- engine and nuclear technologies that will power the world of the future. Hospitals are buying up more of their healthcare devises as the population ages and demands more tests. The NBC properties (including CNBC) are probably a fairly steady business.

They said that the revised estimates are VERY conservative and based on no growth this year; I'm thinking that they'll pleasantly surprise the street as they've now priced in the worst-case scenario. GE can even benefit from a weaker dollar, as much of their sales are made overseas.

As GE pays a 4% dividend and, based on an approximate current price of $32, GE is only trading at 13.6x 2008's earnings (using the midpoint of the new estimate - $2.35). Analysts expected $2.70 in 2009 - which may be lowered a little - but the forward P/E is even cheaper.

I think that this short-term drop is a great long-term entry point for a solid, growing, dividend-paying American business.

I'm playing this very short term with April $31 calls. If I wasn't fully invested, I would have bought stock.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Straddling an Airplane

2008-04-07T14:04:00.001-07:00

I have written posts in the past about utilizing my favorite options strategy, the straddle , when big news is due to be released.

In the past, I have set up a straddle (or strangle, which is a sort of higher-volatility straddle) before big oil news like OPEC supply decisions. I've used them on Chevron and ConocoPhillips in the past, reaping decent returns.

For those who may not know, a straddle is done by purchasing (or selling, but I always purchase) both a call and a put option at the same strike price for one security. The bet you are placing is that the stock will trade wildly - it doesn't matter in which direction, it just has to move.

In the last hour of trading today, I set up a straddle on Boeing (BA). Today they said that the would be updating Wall Street on the progress of their Dreamliner jet on Wednesday.

The Dreamliner promises to be the best plane on the market, but first-flight and delivery dates have already been pushed back. Many analysts expect the delivery date (or at least the bulk of total deliveries) to be pushed back. (Much of this has to do with the high-tech nature of the plane, as it is apparently hard to source the many specialized components.)

Anyway, right as BA was trading around the $75 mark, I bought an equal amount of April $75 calls and puts. The total cost for each 1call/1put straddle was $310 (including commission).

So, for this trade to be successful, Boeing has to move more than $3 up or down between now and April 18th. (If it jumps after the announcement Wednesday, there will still be some time value left, but much of that $1.50 price is the manifestation of the volatility due to the announcement).

So I don't know if the news will be good or bad on Wednesday, but that doesn't matter. I just think that it'll send the stock up or down more than 5% over the next two weeks. As long as something important or controversial is said, then this trade should yield a nice return.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

SpeculatioNCC

2008-04-03T22:51:00.000-07:00

I bought 100 shares of National City (NCC) after-hours today as rumors about a possible buyout surfaced today.

Apparently, both Fifth Third (FITB) and KeyCorp (KEY) may be eyeing National City. Fifth Third covers basically the same geographical area (Midwest/MidAtlantic) that National City does, [theoretically] making a merger much easier. KeyCorp is another regional bank, but its presence is heaviest in the Mountain states. One could argue that NCC could give KEY an opportunity to expand into a new market; others may argue that it would just complicate KEY's current business.

Anyway, I don't expect any bidding war, but with two potential suitors, I think that National City will fetch a good price (if a deal is reached). I bought in at $9.77; I'd expect a deal to close in the $12-15 range.

I don't see too much downside; sure, banking is dangerous (especially when your assets are the mortgages of blue-collar workers), but NCC isn't a Bear Stearns. The analysts/speculators commented that a deal may be completed before NCC reports later this month; there seems to be potential for a very quick turnaround.

As any regular reader knows by now, my risk tolerance is high. I'm buying this on a feeling, more so than on tangible, actionable information. However, I bought CIT below $10 on gut feeling about a week ago, and that has turned out pretty well - if NCC doesn't work out, maybe it's just my karma.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Our Next President...

2008-04-01T07:56:00.001-07:00

After seeing the brilliant orator Barack Obama speak in front of 20,000 of my fellow intelligent, rational students, I can proudly say I will vote for him in November.

His hour-long speech touched criticized the current government for 20 minutes, talked about raising my taxes for 5, and then spent 15 minutes defining hope, 10 minutes asking the crowd to believe in it, and finished up discussing change.

April Fools (yes, the above joke was terrible). But for a couple good April Fools pranks, go to gmail's homepage today (gmail.com) or read an article about Sun Microsystem's past pranks (published recently in a business publication, or just google it).

I am still in the thick of exams, but some brief thoughts:

BWLD is rallying 10% today along with the broad market on no news. Now way off of its 52-week low of $18, the stock appears to have some strength. Trading at 16x next year's earnings with a .8 estimated 5-year PEG ratio, it's still a value-growth play at these levels. I have been recommending it forever, and I'm finally just about back to break-even.
I think (and hope) that this market will run for a while, so I'm not trying to short CMG... but hopefully once things settle down, there will be shares available to short.
For the fiftieth time, the CFC/BAC arbitrage is still available for any takers. Intra-day prices value CFC shares at $7.32, still about a 20% premium over their intra-day price of $6 (after a $.50 gain today).

And a broader, less specific thought...

The market is now up 5% since March 10th, when I speculated that we had reached a bottom. If this stock market uptrend continues, bolstered by a better economic environment and less fear (the VIX is now down to 23 after topping 35 two weeks ago), expect a sell-off in commodities. As I've written about before, the broad-based commodities rally extended beyond the domains of gold bugs and Texas oilmen; wheat, corn, soybeans, and pretty much every other tradable commodity reached an all-time or recent high. As the hot money raced into the DBA (ag ETF) and other vehicles to trade that boom, it may be withdrawn just as quickly. The speculation and retail-investor interest that propped up those commodities may indeed be their undoing, too. If you've got faith in the dollar, buy UUP - a strong-dollar ETF weighted against a basket of multiple currencies.

As both the stimulus package and rate cuts effectively hit the economy starting this summer, there's a possibility for a quick and strong (albeit, articulated and arguably-artificial) recovery. I'm not trying to hype-monger, but the policies that have been enacted over the past six months will come to fruition soon, and if they work as intended, then Goldilocks will be back.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Going Long ANF - Range-Sound Stock

2008-03-28T09:05:00.000-07:00

I may be a session or two premature, but I went long Abercrombie (ANF) today as it's now around the low end of it's trading range.

Below is an 11-Month chart that shows the cycles:

The three deepest, major bottoms formed around $68, $70, and $71, but as you can see, minor bottoms have been higher. I may eat a couple dollars of downside if the markets aren't great, but if there's an afternoon rebound today or if we open up Monday, I bet this is where ANF puts in its current low.

With this trade, (if I'm correct about the movement direction), it's usually safe to hold out for $79 or so. It usually tops out a little above $80, but there's a risk of missing the top and having to hold for longer.

The reason I like this trade is that it's pretty predictable, and if something unforeseeable does happen, I'm ok with holding ANF stock for a while.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Two Public Figures, Lots of Homework, a Little Stock Talk

2008-03-27T23:22:00.000-07:00

I apologize for the absence of new posts this week; I've had two exams (well, Macro Econ is tomorrow morning at 10:10) and lots of other work.

Plus, on Wednesday, Jim Cramer came to do his show here. Tonight (Thursday), Bill Clinton came to speak on behalf of his wife.

I semi-reluctantly went to see Cramer put on his show, and I'm glad that I did. I hate the caricature-Cramer of the show, with yelling, screaming, hyperbole, and sound effects - but in real life, I was able to see a different side of him.

And, interestingly, his on-show appearance is turned on and off like a light switch. As the cameras rolled, he was in his TV persona, but as soon as they cut to commercial (when filming here, the "commercial" breaks were about ten minutes long), he began to speak candidly. He fielded long questions and lightning-round quickpicks from investment club and secular audience members; instead of screaming about them, he responded logically and thoroughly. He talked a little about himself and his life, in a very personal and honest way.

So I definitely have a new respect for Jim Cramer. I'm still not a fan of the show, but I like the real Cramer (or at least as much of the real Cramer as I got to know in that hour). He seems like a great guy to have dinner, a beer (if you're of age), or a round of golf with him. One last, possibly jaded comment; if he doesn't like his TV semi-insane alter ego, I feel bad that he has to turn it on for hours every day. However, if it's fun for him... then good for him. He's making money doing it.

Concerning Mr. President William Clinton's appearance tonight...

It was worthwhile to see him, but instead of talking about himself (which I would have cared more about), it was all about his wife and her policies.

I actually registered as a democrat (though I consider myself to be more republican) so I could have a meaningful vote this April in the Pennsylvania primary. Though I'm not a fan of Barack's 20-30% capital gains tax (and main campaign platform of "hope"), I think I'll probably vote for him over Hillary next month. I firmly disagree with many of her policies (as outlined by Bill), except for one - she supports a troop withdrawal, beginning within 60 days of taking office. Iraq is a waste of time, lives, and most importantly, money - money that is spent now, will continue to cost more money later (as veterans require medical care, future aid because of mental illness, etc), and money in the future (in the form of repayment of national debt). It really doesn't matter to me if we're "winning" or if the surge is "working" - great! our generals learned how to fight this war. Just because we're doing better doesn't mean that we should continue to be there. I have friends from high school that went to the Naval Academy, and I hope they'll be deployed in a time of peace.

A couple quick stock thoughts:

I put in a super-lowball bid on a lottery-ticket option for Penn National Gaming (PENN). They are (supposed to be) bought by Fortress (FIG) by the summer, at $67/share. I put in a low bid and got April $55 contracts for $.15 - I'll actually probably sell now that it's a quick double in value. However, if the deal somehow closed between now and then, it would be jackpot for me.

I also tried to short my long-loathed CMG over the past few days, as it's bounced up about $20 for no reason at all... but Ameritrade doesn't have any share available for me to short. Options aren't worth it (premiums are too high), but I'm staying on the lookout for an opportunity to get short.

Financials are coming back down, which I dislike (because I own CFC and ETFC) but also like (because I'd like to buy some LEAP calls of other ones). I think FIG and BX are good buys at these levels; both are about as low as they have ever been, and I think they're likely to snatch up a few good bargains as things have cheapened, which they'll be able to sell for much more when conditions improve. If they fall a little farther, I'm still not against buying FRE or FNM, because I think the quasi-government connection provides safety. Brokers are still dangerous, I think - I'd rather go with a BAC or C, but in a few months after they write down some more of their balance sheet.

Lastly... I'm still in TMA. They'll probably be stagnated between $1-$2 for a while, but it seems like the danger of bankruptcy has passed. If one can endure the 10% daily moves, I think there's an outside chance that its a $5-10 stock in a few years.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Was that the bottom?

2008-03-24T10:56:00.000-07:00

I wrote on March 11th that I had thought we had hit bottom. On March 10th, the S&P established a double-bottom, and the market rallied off of that bottom on the 11th.

One week ago, the market did break through that bottom, as news of Bear Stearn's fire-sale bailout rocked the markets. However, markets recovered from that shock, and actually ended last week positively.

Today, the major indexes are up multiple percent on news of the higher-priced BSC buyout, CIT financing, better-than-expected home sales, and just good feelings. One can almost feel the fear slowly trickling out of the market - and if they don't want to go by feelings, the VIX, often called the "fear indicator" (but actually a measure of options volitility) has fallen from an intra-day high of 35 last Monday to 25 today.

Thankfully, the pathetic-performing financial in my portfolio have begun to pick up some lost ground - Countrywide has moved from $4/share last Monday to over $6 today. (As I love pointing out, Countrywide is in the process of being purchased by Bank of America - at this time, that deal would close at $7.80 based on BAC's share price). I added 30% more CFC at $4.44, and I sold off that block at $6.20 today. I'm holding the rest until the merger close or, at least, the arbitrage gap starts to narrow.

I also bought CIT at $9.90 in the pre-market today as I thought they'd announce good news about financial backing; they didn't even have to announce anything to be up about $3 today. I have an itch to sell now and take my nice daily gain, but I think I'll use my seemingly well-timed entry as a basis for a long-term investment. After all, CIT has fallen from about $60/share, and until recently, its business was not tainted by the subprime fiasco.

I missed out on Freddie and Fannie - I thought were good vehicles to play a housing/economic recovery because of slightly less danger due to their quasi-government status. Both were trading near (or below) $20 last Monday; both are above $30 today.

One of the most interesting aspects about this rally is the depth of companies participating in it. It may be short covering (which I never regard as a bad thing), but many general market laggards are performing, or even outperforming, the overall indexes as they rally. For example, Buffalo Wild Wings, a company that I regard as undervalued, continued to slide and suffer as the markets fell in January, February, and March. However, starting last Tuesday, BWLD reversed the trend, and share price has increased from $20 to $26 in the past four sessions. (Note: The increase is partly due to an analyst upgrade). Crocs and eBay, two more laggards, are both up 15% percent in the last week.

I'm not 100% certain that the market won't face pressure in the coming days, weeks, or months, but the combination of technicals (double bottom, higher lows), data (housing numbers, Fed opening discount window, BSC bailout) and mentality may just mean that the bottom is in.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Adding to TMA

2008-03-19T10:22:00.000-07:00

I wrote last week about my trading of TMA; I bought a position at $1.35 and sold a third of that position near $3. I decided to let the rest ride this crisis out.

However, today, I couldn't resist putting my hand back in the cookie jar. I bought back the shares I sold at $1.62.

Once again, just like the first time I bought it, TMA has had a huge intra-day fall. Today, it was on news that I thought wasn't bad - it made a deal with its lenders that allows TMA to stop having to sell off its assets.

The deal today did directly dilute shareholder value - it gave the lenders options to buy about a quarter of the company's shares for $.01. But at the same time, it may have allowed TMA to avoid losing even more value, through the sales of its low-risk, quality mortgages at bargain-basement prices. The deal made lenders freeze requests for margin calls for the next year, which should allow TMA to sit on the sidelines and let this crisis play out.

So even if the deal today did reduce shareholder value by 25%, the stock is off more than 40%. I must admit, my appetite for risk is enormous... But I couldn't resist some more TMA.

I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Stocks up; Fed Cuts

2008-03-18T11:39:00.000-07:00

With more than an hour left in the day, it's hard to tell where the market will go. But major indexes have lost about a percent since the Fed cut the Funds rate by .75% at 2:15.

Thanks to my overweighting (poor diversification?) in broken financial companies, my portfolio is doing well today, so before 2:15 I hedged some of my gains by buying S&P 500 ETF and Countrywide puts. I'd like it if both popped back up and the options expired worthless, but I decide to negate some gains by protecting against losses if today's finish is dismal.

Another thought: I'm not a currency expert, but the dollar is the cheapest it has been in decades, and the Fed looks like it's just about done cutting... I'm starting to look at UUP, a Powershares Bullish Dollar ETF.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Wall Street Values BSC at $90/share

2008-03-17T18:01:00.000-07:00

Wait... hold on a second... Didn't Bear Stearns close at less than $5/share today, because of the pending buyout at $2/share?!?

Well, it's true that Bear's market cap at the end of today was $650 million, a horrifyingly low number based on its value of more than $20 billion less than one year ago.

But here's another way to measure the value of Bear Stearns; JPMorgan's price increase today.

JPM shares were up $3.77 today, as the company announced that it was planning to acquire BSC at $2/share. Clearly, investors think that JPM is getting a great deal, as it was one of the only financials to rally on a day when the XLF, the S&P Financial Sector ETF, fell 2%.

So, about that $90/share valuation...

JPMorgan was up $3.77 today, and there are 3.4 billion outstanding shares. Therefore, JPM's market cap increased $12.8 billion today. If you divide that $12.8 billion by Bear's 136 million outstanding shares, the value of JPM's increase translated into Bear shares would price BSC at $94/share.

Now I don't think that BSC is worth $90 per share; there are clearly issues that BSC needs to resolve. However, it does show that investors, whether they are right or wrong, value Bear at much, much more than $2 share.

So what does this mean?

I certainly don't think that the deal will close at $2 share. Today, Bear shares were changing hands at more than twice that much, implying that another party would make a higher offer or that JPM needed to raise its price. The offer does have to be approved by Bear's shareholders, and I think that the 1/3 of shares owned by company employees will lead the vote against the current buyout offer. The Fed did guarantee Bear funding for 28 days, and JPM's new backing of obligations will last a year, as the deal is pending, so Bear's shareholders have some time to think about what to do.

Now, as confidence is restored, the discount window is open, and JPM is insuring obligations, Bear might not need to sell itself at all. As I disclosed before, I own a tiny stake in Bear, and I won't be adding to it at these prices; the uncertainty just isn't worth risking more money. I paid $30 for my shares - thankfully not $50 or $100 or $150 - and I may never see that $30 price again.

Just as many negative factors came together over Long Island, forming the perfect financial storm that capsized Bear's stock, clearing skies, and promise of cheap, available, and guaranteed money may just prove to be a lifeboat for Bear shareholders. Whether it means a buyout at $10, $20, $30, or $50, or the continuation of Bear operating independently, this display of valuation by JPM's investors shows that Bear is worth a lot more than $2/share.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

JPMorgan Plunders Bear Stearns

2008-03-16T18:03:00.000-07:00

I was absolutely shocked to see the headline; Bear Stearns bought out at $2 per share.

Prior to the news release, the low estimate of merger-price speculation was at $15/share, a discount of 50% from Friday's closing price. Many analysts expected Bear to fetch more than the $30 closing price from a potential suitor.

I do not understand how Bear's board members sold themselves out for $2/share, or $236 million. The value of their headquarters was estimated to be $12/share by Barron's - why would the board sell out to an offer so far below the value of Bear's tangible assets?

I guess there may be some ghosts on the balance sheet, but I am honestly dumbfounded by the $2 price. I wish I could say I did not own BSC (or was short), but unfortunately, I bought a few share on Friday as I thought that the buyout would be for more than peanuts.

Hopefully another bidder comes along, as it appears as though Bear is a steal at this level. Also, the deal is subject to shareholder approval; considering that employees own an estimated 1/3 of the company, I don't see all of those people losing much of their nest eggs without a fight.

In other news, the Fed also cut the discount window.

As the shockwaves from both events hit investors, futures plummeted. All major indexes are now looking to fall at least 1% tomorrow.

Who wins? It's hard to say. It looks as though shareholders of any US stock will lose tomorrow, and certainly, the evaporation of billions of dollars of BSC will not help millions of investors' portfolios.

As my title suggests, it looks like JPMorgan has stolen itself a building, a clearing house, and many other businesses for far less than the market was valuing them at. Though I'll only get one share of JPMorgan from my BSC, I may look to add more as this may provide very lucrative once cooler heads prevail.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

My Birthday Wish: A Bull Market

2008-03-13T08:01:00.000-07:00

Well, I'm 19 years old today... and it's probably the least monumental birthday ever. Other than a few small monetary gifts, it's life as usual. [If anyone is feeling especially generous - stevof@gmail.com is my PayPal account. :)]

So what else is new - oh yeah, the market is tanking.

Thankfully, I sold a third of my Thornberg shares yesterday near $3/share to lock in neutrality for the trade... now, even if the rest of my TMA falls to zero, I'll break even.

I bought some Bear Stearns (BSC) today as a trade, but my lower stop loss was just touched and I was forced out. It has now moved up a couple dollars, so I don't know if I'll get back in (its in my Ameritrade account, where commissions are $10 each way... I should be using my Tradeking account, with $5 commissions). BSC is attractive because it is down like 70% in the past year, but it is clearly having problems operating, so there may be more attractive beaten-up financials.

I also bought some Etrade a few days ago as a speculative play; it's also priced for bankruptcy, while I expect the company to survive and recover.

I also have an order in for American Eagle (AEO) LEAP calls right now - as a teenager (I can only call myself that for another year), I'm familiar with their business. The stock has fallen 50% over the past year, and valuations are at a historic low.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Fed Saves the Day; Market Establishes Bottom; Financials Pop

2008-03-11T20:42:00.000-07:00

If you're a regular reader, you'll know that I'm more into fundimental analysis than trading on technicals. However, at this point, I'll take any excuse to say that the market is turning around.

After the Fed announced today to accept Mortgage-Backed Securities as collateral on Treasuries (essentially allowing banks to NOT have to sell/write down the MBS while being able to get needed capital), markets exploded upwards. Above is a three-month chart of the S&P 500 ETF.

Looking at the chart, three very important things happened today.

The RSI touched the "oversold" line (30) yesterday and bounced today, as buyers entered an oversold market.
Yesterday's close tested the January lows/resistance levels, and the market popped off of those, suggesting strong support at that level. When the market rallied late January, many analysts said that the market had to move sideways and test lows before it could move up for good; after a month and a half of volatile movement, we've retested lows, and apparently, bounced off of them.
Lastly, on the MACD lower indicator, the gap is closing, and a cross will suggest a bigger change-of-trend.

Combined with the great fiscal-policy news (now maybe JPMorgan and others can stop bothering my Thornberg, demanding their margin calls), my basic chart/technical analysis suggests that this may be a major turning point for the market.

However, keep in mind that, after a day of 3-4% gains, some sideways or downward action is reasonable, if not necessary. I'd love to see the market up another few percent tomorrow, but such an outstanding day (the best in five years) may prove itself a hard day to follow.

Just a reminder - this weekend I sent out my first edition of the StudentStocksLetter; email me (studentstocks@gmail.com) if you'd like to be added to the email list. Starting this week, I'll also be detailing trades from the previous week.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Roses or Thorns?

2008-03-06T08:09:00.000-08:00

I just took a chance and bought a tiny position in Thornberg Mortagage (TMA). I don't have the time to write a full analysis now, but I think that the company is too good fundimentally to be trading this cheap. One kind of debt is killing them, and it's causing margin calls to completely disable them from operating. But the vast majority of their portfolio is made up of prime and super-prime debt, and I think that, if nothing else, a bigger company will be willing to snatch that up at this price.

Bought in @ $1.35.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Investors: Read Before You Vote for Obama

2008-03-05T19:08:00.000-08:00

Unless you want to impoverish yourself, consider voting for someone besides Barack Obama.

I'm not going to get too political on this blog (yet), but I felt that there was one bit of information that deserved to be made known at this point:

Obama plans to hike capital gains taxes.

Due to his tax-break initiatives, which aim at lowering taxes for lower-income, middle-income, and elderly taxpayers (which I do not necessarily impose), he plans to raise the capital gains tax to pay for the decreases elsewhere.

How much? It's not clear yet. I can't find an official stated policy on his website, but here are some excerpts I've picked up from other press sources.

The USA Today reports:

"When Obama announced his health care plan in May, his campaign said he could pay for it by rolling back several Bush tax cuts that benefit the wealthy. That included restoring the top rate on investments to pre-Bush levels: 20% for capital gains and 39.6% for dividends.

...However, they could not say how much that would raise or exactly how high Obama would raise them except that the top rate for both would be between 20% and 28% — the rate President Reagan set in 1986.

(source)

The New York Times reports:

"While Mr. Obama said he had not settled on how high to raise the capital gains rates, he added that he would “adjust the top dividends and capital gains rate to something closer to — but no greater than — the rates Ronald Reagan set in 1986.” Later, aides said the top rates would be 20 percent to 28 percent. Most people now pay 15 percent on capital gains, with lower-income people eligible for a 5 percent rate."

(source)

So it's not clear exactly how high Obama plans to raise capital gains taxes, but it does seem likely that they will be increased. From what I can tell, based on articles and his website, he does not specify if taxes will be raised for every taxpayer, or if only "wealthy" investors will have an increased burden.

This tax increase will be a terrible blow to the stock market and the fiscal health of America. First, if Barack is elected, the stock market will likely tank, if investors think that a tax increase is probable or imminent. A hike just to 20% represents a 33% increase - a HUGE number - while a raise to the highest stated possibility, 28%, is a 90% increase.

The markets sell off on news lesof their value os scary than that. How eager to would you be to hold onto gains that would lose up to a quarter overnight?

Plus, at a time when most Americans have little net worth, why does it make sense to make it less desirable to save money? The government should be doing everything it can to promote investing and savings; instead of sending rebate checks this summer, they could be sending everyone some stock certificates with C, MBI, ABK, CFC, or BAC printed on them. (That wasn't a wholly serious statement, but it would be much better for the stock market and the American economy for families to spend their $1,000 checks on stocks instead of iPhones.)

Of course, many people aren't in a position to have the capital gains tax really effect their lifestyle; to them, the tax cuts Obama proposes would probably put more money into their checking account. However, everyone from the 50-year-old couple saving for retirement to multi-million-dollar investors should be wary of this possible disaster.

Obama enjoys romanticizing people with words like hope, change, and believe... I think that his focus on lofty ideas has removed him from reality.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Introducing the StudentStocksLetter

2008-03-04T19:58:00.000-08:00

I'm going to start writing a weekly letter, uncleverly called the StudentStocksLetter (SSL), that I will gladly email for free to any willing reader.

Simply click to email me, and I'll add you to the mailing list. I won't spam or sell or anything like that; I'll just deliver (great) investing ideas once a week, into your inbox.

As of now, I plan to email the letters every weekend, recapping the previous week and presenting analysis or trading ideas for the coming week.

If the link above doesn't work, just send me an email at studentstocks@gmail.com and I'll put you on the list. Look for the first email this weekend.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Commodities Bubble Needs to Burst

2008-03-03T11:08:00.000-08:00

....and the government can help this process.

The only good long investment in this current market is an investment in a commodity. Take your pick out of the bunch; whether mined, grown, or pumped, the price is skyrocketing.

I'm not sure that I have earned the credibility to call out professional analysts, but I can't believe that anyone who is still pumping commodities is a prudent investor. Below is the chart of wheat; I think it exemplifies how the current prices can't be justified as a normal movement.

Not too many tangible goods can increase in price fourfold in three years (or double in one). However, any agricultural product (or byproduct) has done this recently; corn, soybeans, soy oil, and other products have doubled or tripled in this same time frame.

Precious metals aren't too different; gold is setting new (non-inflation-adjusted) highs, while silver and platinum have enjoyed similar run-ups. Oil is also at historic highs, which is in turn increasing prices of natural gas, heating oil, and gasoline. Coal, the one non-renewable resource with hundreds of years of proven reserves, has also ballooned in price recently.

I can discern a few reasons for these increases:

Devaluation of the dollar
Mass-exodus from US equities
The ethanol hoax
Speculation

The dollar's sinking value simply makes globally-available goods more expensive. The cheapening of money by the Federal Reserve isn't happening; hopefully economic fears will pass over soon so that monetary policy can change.

The stock market performance is also leading to a search for alternative investments; many people think commodities are the answer. The only stocks currently performing are commodity stocks, as the underlying prices rise themselves.

The promotion of ethanol as a next-generation, better-than-oil fuel is a massive policy blunder. OK, it's a great PR opportunity to take a picture next to a pitchfork-holding farmer in the heartland; however, the same farmer will be cursing that politician in a decade when we're importing grain from Brazil. Someone made a great quote to this affect - "something is surely wrong with society when we burn our food as fuel." As the cost of dinner is increasing, how can anyone support the massive subsidies that allow a negligible amount of ethanol to enter the US energy system? I think if ethanol subsidies ended tomorrow, sure, some plants may shut down, and a few companies may go bust, but corn would return to a normal price, simultaneously decreasing inflation.

Lastly, speculation is clearly responsible for a big part of price appreciation. These people will get killed when the inevitable bust happens.

I'm not betting on an immediate burst; the analysts talking about support for oil at $100/barrel and $1500 gold have succeeded in establishing an acceptance of high prices. But eventually, rationality will return, and people shorting commodities (or stocks/ETFs) will be the winners.

I'm long DUG (Ultrashort Oil & Gas) right now; the energy price swings are a little more short-term than the grains and metals. It's a small position, because it's not worth it to bet against the fear, speculation, and madness driving prices. If key policy (Fed, ethanol, etc) is changed, prices could change soon - otherwise, prices may stay high in the immediate... but wheat won't be above $10 forever.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Introducing Two New Paper Pprtfolios

2008-02-29T12:03:00.000-08:00

First, my apologies for the delay between new posts. This week featured 3 midterm exams, so I had to tend to the responsibilities of being a student.

I've created two new paper portfolios on UpDown.com - the StudentStocks Fund and the StudentStocks Commodities Account.

The Fund will feature short-, mid- and long-term plays on valuations and fundamentals. I'm assembling the portfolio as I write this, so when an initial makeup is structured, I'll post the components.

The commodities account is a trading account, as I try to exploit (gamble/guess) the movement of commodities. Right now, I own DUG (ultrashort oil and gas), and have shorted ConocoPhillips, KOL (Coal ETF), CNX (a coal producer), GDX (Gold Producers) and GLD (a gold ETF).

So i'm currently betting on a pop/deflation of the current energy bubble. As prices swing from high to low, I'll change sides of positions.

I plan to update performance from both accounts approximately weekly; hopefully, I'll produce some good, tradeable ideas for readers.

UpDown.com is a free paper-trading site where you can earn real money. If you're interested in opening an account, email me!

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Doubling up on CROX; NTRI stock losing weight

2008-02-19T19:59:00.000-08:00

Crocs released earnings after the bell, and even though estimates came in largely in-line, the stock tanked after hours. Margins were down (partially due to having to air-mail goods to retailers after the Mammoth sold out during the holiday season), but profits came in right around the street's consensus.

CROX reaffirmed the full-year forecast, which is for $2.70 EPS. After-hours, the stock was trading around $27.

CROX grew revenues 99% in Q407... and will continue to grow (at a slower pace) throughout 2008, especially as they release their clothing line.

It's unfathomable to buy such growth potential at a 10 P/E. When the earnings originally came out, I thought that these might have been the earnings that firmed investor confidence, as BWLD's were last week. That wasn't the case.

Once again, just like BWLD, I got in a little to early (in the mid-30s for CROX). I doubled my position today at $28. But investors are discounting another cheap growth stock too heavily, and CROX should take off soon.

Also, after the bell, Nutrisystem reported earnings and guidance that didn't please the street. The stock has lost about 70% of its value since the summer, when it traded around $70/share. It ended the after hours session at $18, after trading below $17 for a period of time.

The bad NTRI news? 2008's earnings look likely to decrease from 2007's numbers, and negative earnings growth certainly isn't a good thing. Nutrisystem blames this on difficult macroeconomic conditions, which is a convenient albeit reasonable excuse.

It should not be ignored that NTRI's lowered projections of $130 in earnings this year; based on the 35 million outstanding shares, that breaks down to nearly $4 per share. Considering NTRI is now an $18/stock, the P/E is like five.

The downward trend is certainly concerning, but short-term problems and fears about future expansion have punished NTRI too much. I'm going to look into some LEAPS for NTRI - maybe just January 09's, because with such a low multiple, I don't think NTRI can stay depressed for too long.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

A Slew of Stocks - Tech, Banks, Coal, and More.

2008-02-18T22:19:00.001-08:00

Well, let's hope I don't, but last time I wrote about the prospects of a strong opening/daily performance, the market didn't perform positively.

However, once again, futures are up after a positive sessions in Europe (on Monday) and in Asia (on Tuesday).

I'm hoping for a couple pops on stocks I personally own; over the weekend, both Microsoft and Crocs received positive writeups in Barron's. (I own MSFT calls and CROX shares). Also, I'm long VIX puts and the VIX price has been falling as the market makes small (1%) positive moves. Also, in another post, someone reported that bank shares were up overseas; I'm hoping that bodes well for my CFC stock.

To substantiate this post with something other than personal investments most of you don't care about, I'll write about a bearish idea I have (and have executed in a paper account).

Coal stocks were sitting at 52-week highs before a downgrade by Goldman on Friday. On Wednesday, I discussed a potential trade in shorting coal with my father (who is a registered investment adviser). He discouraged the idea, so I didn't do anything immediately in any real-money account, but in my paper account at UpDown.com (more on that site later) I shorted both CNX (Consol Energy) and KOL (the new coal ETF).

My reasoning is thus: extraordinary circumstances have caused a temporary bubble in coal demand. Snowstorms in China and floods in Australia caused production to cease from many mines, and a combination of legitimate supply concerns and speculative fears drove the price of coal skyward.

There's one problem with coal getting this expensive this fast - there's so much of it in the ground. Unlike oil, which might have 50-100 years left, or natural gas, with a slightly longer timeframe, it's common knowledge that there are hundreds, if not thousands, of years of coal consumption left in the ground.

According to simple economic theory, what happens when the price of a good increases? Producer surplus increases, and producers become even more motivated to bring goods to market. As they record huge profits (as they may in the coming quarters), coal producers will surely ramp up production.

Then, when the snow melts, the waters retreat, and the coal dust settles, there will be more production capacity than there will be demand.

Big coal companies like CNX are trading at valuations of about 50-70x TTM earnings and 15x forward earnings (which take into account higher prices). But if prices fall (or even stabilize), these valuations will be unjustifiable. Look at big oil/gas companies - Exxon, Chevron, Conoco, Marathon, BP, and most others trade at multiples of less than 10.

So when the coal companies tanked Friday, I made nice 5% one-day returns on my newly-shorted shares. If only I would have done it with real money.

***Note: UpDown.com is a site I recently discovered. I have been using it for less than a month (so have not been eligible for payment), but here's how it works: you beat the S&P or write highly-recommended reviews, and you get paid. If anyone is interested in joining, just message me.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Four in a Row?!

2008-02-14T05:22:00.000-08:00

I'm knocking on wood, crossing my fingers, and picking four-leaf clovers as I write that title... I don't want to do anything to jinx an unbelievable four-day rally that it looks like we'll continue today.

The US markets look set to move after good earnings from here and abroad. Toyko markets moved up 3+%, the most since 2002, after Japan's economy grew much more than expected. The rest of Asia followed upward.

Europe is up more moderately, but that's fine with me... UBS reported a huge, terrible loss because of subprime writedowns. For them to report that and for the market to still be up.... I like that.

US futures are trending higher for all three major indexes. Comcast just released excellent earnings, and the NASDAQ should have some positive reaction after (so-called) good earnings from Baidu.com (BIDU) after the bell yesterday. (On a side note, I think that BIDU is a high-PE "pig" that needs to be slaughtered... but if it's gonna pull up my tech stocks today, i'll be ok with that.)

A nice move today will be very beneficial to my trading account here and my longer-term Ameritrade account... between the two accounts, I have February ATVI and SNDK calls that, as of yesterdays close, were about $.30 away from the strike price.... if the positive market momentum can push them above the strike prices in early trading, then I'll be able to break even (or maybe even sell profitably!) in trades I had written off as losses.

Looking forward, the MSFT options that I wrote a trade note about buying look like they'll work out well (still knocking on wood). MSFT closed a tad under $29 yesterday (the option's strike price) with an entire month left. As I stated before, as clarity increases concerning the Yahoo deal (and just as the market goes up), MSFT has a lot of ground to make up towards its high of $37. I also bought some $30 SNDK calls yesterday as the stock appears to be picking up some momentum.

So, if the market opens up big, I plan on profit taking on a few trades, just because I'm not sure about the sustainability of a weeklong rally. But the market is still dirt cheap, and if economic conditions continue to stabilize/improve, this could prove to be the beginning of the end of the best buying opportunity for years to come.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."