Dykstra on McDermott (MDR)

Lenny Dykstra, ex baseball player, and apparently investor extraordinaire apparently shares my views on MDR, as opined in his TheStreet.com post

Since it is in the free area of the website I will post some of the blurbs:

My pick today is getting cheap enough to become a possible takeover target: McDermott International

McDermott is one of those companies that define fundamental strength; its balance sheet is about as good as it gets. Its second-quarter earnings tripled from the same period a year ago, with net income increasing to $149.4 million, from $47 million. The result easily surpassed estimates on Wall Street, as revenue rose to $1.42 billion from $1.05 billion last year, beating analysts' forecast of $1.39 billion.

McDermott's customers are utility companies, oil companies and the U.S. government. The U.S. Energy Department recently renewed its contract with them to maintain the nation's strategic crude oil reserve. The $600 million contract will provide needed protection against disruptions in the oil market.

In April I raved about the company's strong return on equity. That ROE provides a great measure of how well a company generates profits. McDermott's ROE continues to be outstanding, currently at an amazing 117%. This means that for each $1 of equity, McDermott generates $1.17 of profit. Additionally, it has booked $5.21 billion in revenue and $1.12 billion in cash, and it has zero debt.

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Dykstra had a limit order to buy 10 November 60 calls, thereby controlling 1000 shares of MDR. This is a leveraged way to play the stock and could work out very well - his target was $12 for the calls so I am unsure if he got them or not.

MDR continues to be the #1 holding in the fund at >5% and a large holding in my personal portfolio.

Long MDR

A telling day looking good for the longs

As stated earlier this should be a telling day

With an hour to go the market is picking up some steam which should (short of a number of hedge funds announcing their blow ups this weekend) set us up for a decent rally at the front end of next week. It has just been way too easy to short blindly of late and make money.

While I still expect a retest of the 12,500 area we hit yesterday (it was just yesterday, imagine that, 500 points higher) - I am hoping for some strength to 13,300-13,400 first to lighten positions into.
One can only hope it is that easy. :)

Navteq (NVT) and Garmin (GRMN) - Navigation Technology

Rather than recreate the wheel, I am going to link to a recent post from a blog I enjoy reading as his picks are very similar to mine. The blog entry is in regards to 2 stocks I have on my watch list, Navteq and Garmin - both deal with navigation technology in different ways. Navteq is more content (mapping), and Garmin is more hardware.

Stocks & Blogs blog entry: Navigation Technology Goes Mainstream. Buy Navteq and Garmin

In full disclosure, I bought GRMN in a personal account back in the spring on one of its pullbacks in the $50s - the stock did nothing; I got impatient and left the scene. Now look at it, over $100 last week. That doesn't feel too good. :)

Of the two, they both have potential 'issues', with GRMN there is always potential margin pressure as price pressure increases from competitors and potential raw product costs go up. So far they have handled it pretty well.

For NVT, which I am less familiar with, citing a Motley Fool article from early August, it appears that one of their customers bought a competitor: "Management remained mostly tight-lipped, opting not to speculate on how TomTom's planned acquisition of Navteq competitor Tele Atlas would affect the market in the future. While Navteq acknowledged that lost revenue from TomTom's business will have a meaningful impact in the second half of the year, CEO Judson Green stated that the deal will not fundamentally change how the company operates."

On the plus side, these 2 companies form a relative duopoly in the niche.

Due to the huge run up, I had not started a position in Garmin but did so recently in a very small way, while I am still evaluating NVT so no position there. Unfortunately, Garmin is also a Cramer favorite, which means its full of Cramer lemmings, always making the stock more of a madhouse.

No positions

Collateral damage: WNS Holdings (WNS)

One of the stocks in my wide ranging watch lists is WNS Industries (WNS)

Per Yahoo Profile:
WNS (Holdings) Limited provides offshore business process outsourcing services. The company's services include data, voice, and analytical services. It provides reservation, customer service, Web support, revenue accounting, audit and recovery, fare construction, and fare filling services to travel industry. The company also provides mortgage/loan processing; life, property, health, and casualty insurance processing; and financial advisory services to banking, financial services, and insurance industries. In addition, it provides enterprise services that focus on finance and accounting, human resource, and supply chain management; and knowledge services, which focus on market, business and financial research, and analytical services for manufacturing, logistics, retail, utilities, and professional services industries.

So it seems like a pretty diverse company - an outsource shop - which you would not think would get hit by subprime loans.

Then yesterday after the close, WNS comes out with this statement:
MUMBAI, India & NEW YORK--(BUSINESS WIRE)--WNS (Holdings) Limited, a leading provider of offshore business process outsourcing (BPO) services announced today that following its earnings call earlier today it was verbally advised by First Magnus Financial Corporation, one of its customers in the mortgage business, that they expect to stop substantially all work WNS does for them. First Magnus was expected to account for approximately 5% of WNS's revenue less repair payments for the period between 1 July 2007 and 31 March 2008. WNS expects that this event will have a material adverse impact on its financial performance and the guidance it had issued earlier today.

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Further today:

WNS expects the suspension to reduce its pretax profit by $26 million. The company said on Thursday it expected net income before certain charges to range between $41 million and $43 million for its fiscal year ending March 31, 2008.

WNS expects revenue excluding repair payments between $286 million to $291 million. The range is about $16 million less than what WNS guided for Thursday, before First Magnus Financial Corp. said it would stop originating loans and suspend operations.

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Now on first glance I am unsure how such a relatively small revenue reduction can destroy profit margins so much, but the stock is down >20% at this moment.

Per Reuters story: " In a statement, the company said net income before tax is expected to be about $26 million lower than previously estimated, of which about $16 million is the potential write off in respect of intangibles and goodwill."

As of writing the stock is just above $19, and as a trader it seems like a good trade could be had. In other market, maybe - in this one - eh, gonna pass.

But in terms of "wow I own a stock totally oblivious to US mortgage issues" - well as you can see, it can strike from very unsuspecting candidates. Here is a case of collateral damage. I am trying to think of that with each stock I hold or consider buying. You should too.

No position

Update on current top 10 positions

As of this morning my current top 10 positions (and % of total holdings) are:

McDermott (MDR) 5.1%
Western Refining (WNR) 4.1%
Foster Wheeler (FWLT) 3.9%
Suntech Power Holdings (STP) 3.6%
NII Holdings (NIHD) 3.3%
Trina Solar (TSL) 3.2%
Allegheny Technologies (ATI) 3.1%
InterContinental Exchange (ICE) 3.0%
Riverbed Technology (RVBD) 2.9%
Yingli Green Energy (YGE) 2.9%

Roughly 35% of holdings are in these 10 names, with another 7% or so in cash

MDR/FWLT are both global infrastructure plays that have just been trashed in this pullback. Both have the wind behind them as I have blogged about continuously in the short life of this blog. Once I have a better feel for the market stabilizing I'd be happy to add, along with the other infrastructure play I have PCR (which is weak today for some reason) - PCR is a 2.5% position in the fund; and I also have been buying KBR of late - this is the basket approach to the group.

WNR is a refining stock and the refiners have had a bad 6 weeks or so. Their fortunes rise and fall with the 'crack spread' - essentially the variance in price between crude oil and gasoline; with gasoline prices weak (relatively speaking) the past month, their fortunes have suffered. WNR is the most volatile of the refining names, with the highest beta, but it is relatively interchangeable (to me) with some of the bigger fish in the area - Valero (VLO), Tesoro (TSO), Frontier Oil (FTO) - Frontier is a 0.75% position in the fund at this time. Again, these are more long term swing trades - 2-4 month holding periods, and they are now in one of their seasonal troughs. If you look at 2-3 year charts of the names you will see great rises and falls.

I have 3 cohorts in solar energy and my position is larger than usual simply because the names have shown some weakness of late so I am building the basket up of STP/YGE/TSL. STP/YGE are the 2 largest Chinese PV solar panel makers, and YGE if not 3rd is not too far behind. YGE/TSL in particular are high beta stocks - TSL also is set to report shortly so if the stock recovers a bit I will probably lighten my position going into earnings. But for the long run I think solar is an interesting place to be, despite the inevitable threats of commodization.

NIHD is my foray into foreign markets - I will write more later as this is a very interesting stock, but essentially it caters to the South American business cell phone market. The stock has been incredibly weak of late but the long term fundamentals are tremendous.

ATI is the 1 horse I bought in the titanium race. The other 2 popular plays in this space are Titanium Metals (TIE), and RTI International Metals (RTI). TIE's chart was weak even in mid/late July before this market selloff really took place, so I have been avoiding it, whereas RTI had a guidance warning so I have avoided it. Now generally when 2 of the 3 peas in a pod show weakness, it doesn't make much sense to buy the other pea. But in this case I like the long term story with ATI especially in its connection to the Boeing Dreamliner. So while the stock has broken down below key support in the past few days, it was in general holding up well RELATIVE to the other 2 names before the waterfall selloff.

Intercontinental Exchange (and CME Group), are two stocks I just love. However, with their valuations, I am not the only one. ICE had had tremendous weakness (CME has held up better). I think this is a case of hedge fund liquidations as these were momo stock traders favorites. CME was as high as $600 a few days ago, and in the darkest moments yesterday approached $500. Thats a 20% drop in just 2-3 days. Breathtaking. However, all this volatility does is print money for the exchanges and I like these 2 for their exposure to commodities and derivatives. I plan to add to my CME position once things calm down, as I'd like both positions to be "top 15 positions".

Riverbed Technology (RVBD) I've blogged about a few times already. It's my main play on the networking thesis but I have also started building positions in Juniper Networks (2.2% of portfolio), Ciena (2.1% of portfolio), and in 'related' 3rd party plays both Akamai (0.9%) and Broadcom (0.3%) could be considered offshoot plays off the same theme. While Broadcom is a chip play, it's relative strength has been outstanding and it never broke its 50 day moving average even during the waterfall selloff moment. One to keep an eye on.

Long MDR, RVBD, ICE, WNR, STP, TSL

Market already pulling back

This will be an interesting test; the market is already pulling back off the highs. A poor performance today would really be bearish. So let's see if it pulls back, shake some people, and then returns back to earlier levels or if we are truly in an environment where the only buying is short covering.

Will be a telling day.

Sold down some names into this strength simply to raise cash - either parts of very large positions that the fund is 'flat' on, or some of the positions bought yesterday during the downturn. Overall, I really like the names in the portfolio so it's just a matter of having some cash on hand in case the market turns for the worse and I can buy cheaper.

Will sit back and watch for most of the rest of the day.

Evercore Partners (EVR)

While I don't hold a position in the fund on this name, it continues its great performance, up 14% today. Shoulda/Woulda/Coulda.

Thornburg Mortgage up 30%

No positions

Strategy for today

As mentioned yesterday this market was way overdue for a rally, and also as mentioned it seems the financials will lead. This is a relief rally but a lot of smart people I read think we are not done testing the lows and I will have to agree with that, I would not be surprised to see a future retrace to test the lows we hit yesterday sometime in the next few weeks. So strategically, will lighten up some positions in the upcoming days to have 'some' cash for the next fall (if one does happen); along with re-establishing the TWM position (ProShares UltraShort Russell20000)

A lot of shorts got smashed overnight with this move; this market is not easy for anyone - although the short bet was the easier way of course the past few weeks - but they gave back a lot of their gains as of 8:30 AM this morning. I was trying to think what catalyst could possibly emerge to get us out of this malaise, and this certainly was a catalyst. With that said, the overall credit background still is a major issue.

Brilliant Fed move this AM

Just a quick note, but the move by the Fed was very sharp from a strategic standpoint in my opinion. It will be of course debated, is it enough, is it too much, etc - but rather than doing a full rate cut that would impact everyone, a 50 basis point in the discount rate offers a window and protects the banks and allows them to offload (temporarily) some of their risk until things 'calm down'. More important than the 50 basis point reduction is the fact that this mechanism usually is for 24 hours, but they have extended it to 30 days and on top of that made it renewable. (so if another 30 days are needed, they can be asked for)

Overall, the word I heard this morning which I liked best to describe this is 'surgical' - it's not a blunt instrument, it's more of a precision strike. So far I really like this direction of this Fed. Not to bailout those who took risks, just so they will take the same risks down the road (moral hazard) - but to help the parts of the market that have been hurt simply by emotion (i.e. the inability to price high quality paper) AAA mortgage borrowers are having trouble finding a home for their paper, so moves like this should really held grease the skids even more than the injections of capital the Fed has been doing the past 2 weeks.

Bravo. (no matter what the nay sayers will say this weekend)

How bad was it earlier today?

This was from RevShark over at Realmoney.com around mid day during the worst of the selling:

After two failed bounces, we are now hitting new lows intraday. The extent of the carnage out there is mind-boggling. Almost 30% of the stocks on the NYSE are hitting new lows, and the percentage of stocks that are trading above their 40-day simple moving average is down to less than 8%. That level is very close to the levels we hit at the bottoms back in 2001 and 2002.

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Really puts into perspective the level of carnage out there - the averages are NOT telling the story - it has been day after day of 8 to 2, declines to advances for weeks on end with just some minor rallies in between. I think anyone buying in here with new cash will be very happy in 3 -4 months, however, next week might be frowning :) or not! So many moving pieces, much of it out of the control of any sense of logic with the hedge funds so leveraged and unwinding - the extent still needed to be unwound is unknown.

It is very tough to subsist in markets like this where fundamentals are useless, but eventually there will be a return to a time 'things make sense'. Until then its mostly going to be emotion/liquidations/technicals. Generally the short term *IS* usually dominated by 2 of those 3, but this liquidation overlay gives this sell off an entirely different complexion.

Nice rally to end the day

Although a lot of stocks are down quite a bit for the day, I suppose its all relative. The day ended decently and the market is due for a snapback rally. The financials actually seemed to do ok with Goldman Sachs (GS), Lehman Brothers (LEH) - up, and the speciality M&A firm I follow, Evercore Parterns (EVR), up 7%.

Thornburg Mortgage (TMA), which I cited yesterday, was up nearly 20% again today.

Wouldn't it be ironic if the financials led us to a snapback rally? They are just so oversold, and even though their mid term expectations are relatively poor, they probably are to a point where a tradeable rally can occur. Home builders went through the same thing last year, despite a long downturn they had a tradeable (unexplainable) rally.

Now, for someone with a 10 year horizon Goldman Sachs is probably a great buy here, but I still think a better entry point could be achieved down the road, and while good for a trade is probably 'relative' dead money once this dead cat bounce action that is overdue happens in the financials.

No positions

Just coming out of lows of the day

The market just went into free fall mode (or even MORE of a free fall mode, I should say) in the past hour. With a technical bounce here, cutting some losses the next few hours will be of great interest. No follow through of this bounce could lead to one of those 'memorable' days of 400-500 pts down. With the market now down 7 days in a row, generally you'd assume some bargain hunting would appear but with so many forced liquidations I am wondering who exactly is out there to buy....

Housing woes

There is an unending supply of news about woes of the housing market, entire blogs are full of them.

One of the more striking things I have read of late is the outright fraud some mortgage brokers were engaging in, via a BusinessWeek article. While the parent companies of course claim these are 'rogue agents' and 'isolated' events, when something is systematic that means generally it was realized but ignored, or there was a total loss of internal controls. But some of what was going on was truly scary.

Another interesting story is the view from Europe. 20% down? What a quaint concept. While I believe there is a happy medium between the two (20% down makes it pretty tough for first time home buyers), that happy medium used to be here in the US in the late 90s. But all that fast money that was chasing NASDAQ stocks in the late 90s had to go somewhere, and another bubble was inflated.

There is so much blame to go around and so many paragraphs that could be written, but suffice it to say that when times were good a lot of people playing the blame game today were nowhere to be found. As long as the cash flow is coming in, these problems seem to swept under the rug. Now, only after the fact, do you see the 'moral outrage'. Why not preventative medicine for once instead of emergency care?

Long only mutual funds

I must say it stinks not being able to have short positions to hedge against longs....

Even a 10-20% short position vs 80-90% long would alleviate some pain. Instead one must twiddle one's thumbs at times like this being a long only fund.