I'm Back, after a Very Bleak October

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?!

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"

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

...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

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

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

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.