Saturday, January 31, 2009

Weekend Reading

People always email me "where do you get your ideas from"? Basically, I am an information junkie. I try to read as much as possible, from as many sources as possible. Some I agree with, some I do not - but I try to assimilate it, mix it, think about it... think about it more... and then come up with my short and long term views. I try to post (regurgitate) some of the most pertinent stories on the blog, but frankly probably 90% of it what I'm reading never makes it back here as I am trying to not make the site overwhelming. Anything more than 6 to 8 posts a day I think is too much, and even with that I am trying to segregate some of the "stock trades" information out from the main body of the blog - still working on that.

We have a hodge podge of readers with different interests - some are economic focused, some are general market focused, some are specific stock focused, and some are trading focused. Of course some people float in between multiple of those categories.

Something I used to do in parts of 2008 was lists of stories that might be of interest to readers that were (mostly) lengthier in nature. Go forward I am going to make a list for weekend reading on things I have been filtering through during the previous week through various news sources or other blogs. A lot of this stuff is what I bookmark during the week to "get back to later" or consider "adding to the blog" but never get around to it. I think *during* the week I keep readers busy enough - so we'll limit it just to once a week during "downtime".

p.s. breaking news - you cannot even rest on weekends in this day and age. Obama says he will be giving 4% fixed mortgage rates to "ANY" credit worthy human being. Rejoice! I say we should be paying people 4% a year for the pleasure to own a home... because owning a home is a God given right. And our federal government pockets are limitless... see how it works? your children, grandchildren, and great grandchildren subsidize the newly formed home owners of today.


Bloomberg: Stiglitz Criticizes Bad Bank Plan as Swapping "Cash for Trash" (Stiglitz is one of my favorites - speaks his mind, and I agree with most of what he says. Just add him to the growing chorus)

Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt. That amounts to swapping taxpayers’ “cash for trash,” Stiglitz said in a panel discussion at the World Economic Forum in Davos, Switzerland today. “You shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage.

Stiglitz, a professor at Columbia University in New York and a former adviser to President Bill Clinton, says the plan would leave taxpayers picking up the bill for years of excess lending by banks. It would also deprive the government of money that would have been better spent shoring up Social Security, he said.


Vanity Fair: Fannie Mae's Last Stand

Many believe the government-backed mortgage giants known as Fannie Mae and Freddie Mac were major culprits in the economic meltdown. But, for decades, Fannie Mae had been under siege from powerful enemies, who resented its privileged status, its hard-driving C.E.O.’s, and its huge profits. Surveying Fannie’s deeply dysfunctional relationships with Congress, the White House, and Wall Street, the author tells of the long, vicious war—involving most of Washington’s top players—that helped propel one of the world’s most successful companies off a cliff.

New York Magazine: Stock Surfing the Tsunami (i.e. the life of a daytrader in this crazy market)

Ordinary investors may flee the market’s dizzying ups and downs, but Peter Milman and his kind hang on tight while riding the giant waves of uncertainty. There’s nothing more exhilarating than to catch the perfect surge.


Paul Kedrosky: Walmart & Target are like the Ebola Virus - quite awesome visual graphic reprentations of their spread across the U.S. year after year.

************************************ The Future of Housing - Think Small

“The very future of how real estate is bought, sold, and financed is under tremendous pressure,” says veteran Florida real estate economist Lewis Goodkin. “There’s no question that the years ahead will be sharply different from years past.”

One of the biggest questions swirling in property circles these days is how a reeling real estate industry will reshape and redefine itself for the future. Few signs of a quick reversal of fortune exist, but a closer look at the future of the industry reveals important trends and, surprisingly, reasons for optimism.


UK Times Online: The 10 People Most Responsible for the Recession

The global financial crisis has evolved into a worldwide recession of epic proportions. Analysts fear the sudden slump which has followed the credit crunch could even rival the Great Depression of the early 1930s and lead to global stagnation. But who is responsible?


Fortune: New York - the Next Housing Bust?

The Masters of the Universe have been dethroned. Now the question is just how much Wall Street's meltdown is going to hurt the city of New York and, by extension, its high-priced housing market. Even in a city where $20 million townhouse listings don't raise an eyebrow, signs of trouble abound. Fourth quarter 2008 sales volume was down a whopping 40% from 2007 according to New York brokerage the Corcoran Group.


The Atlantic: The State Competition for Federal Funds

As the stimulus made its way through the House this week, there was a great deal of talk about the infrastructure component. "Shovel ready" infrastructure spending is supposed to hit a very sweet spot, letting us spend large amounts of money on things that will boost economic growth when we finally emerge from the recession.

At least as currently proposed, the states face some very rough ground and two enormous hurdles. First, they have to get their projects to the contract obligation stage within the very limited amounts of time allowed. Then they have to get over the second hurdle of project completion within a similarly limited time frame. They only get federal funds for a project if they successfully jump both hurdles--but both jumps have to be made with considerable government process baggage weighing down the competitors.


Reuters: General Mills Says More People are Eating at Home

General Mills Inc and other food makers are benefiting from a sharp rise in home cooking in the United States and to a lesser extent in Western Europe, the head of the U.S. company said on Saturday. "We are seeing some very interesting changes in consumer behavior as we plunge deeper into the recession," Chairman and Chief Executive Ken Powell told a panel at the annual meeting of the World Economic Forum.

Two or three years ago, around half of the $1 trillion spent by Americans each year on food went into the tills of restaurants and fast-food outlets. But the fashion for eating away from home -- a strongly growing feature of the U.S. marketplace for the past 35 years -- has now been thrown into reverse. "What we see now, over the last year and a half, is a very, very significant change in the direction of that trend," Powell said.


Vanity Fair: The Year of Investing Dangerously

After eight long years of the Bush administration, it appears that we as a nation have lost any sense of shame—shame in the fact that our actions (the Iraq invasion, pathological deregulation) and inactions (Katrina) have consequences and that they have not been owned up to.

With the federal government now on the hook for what appears to be trillions of dollars in bailout money to U.S. financial institutions that have all but crippled the global economy, dollar amounts have become so abstract that no figure seems real anymore. When the 513-page draft report on the rebuilding effort in Iraq circulated in December, its description of a $117 billion failure barely registered in the public consciousness.

The absence of shame (and its corollary, accountability) appears to be a uniquely American problem. After the Zurich-based investment bank UBS announced huge first-quarter losses last year, its chairman and four members of its board of directors tendered their resignations. The top three executives at France’s Caisse d’Epargne stepped down last year in the wake of steep losses. And the head of the Royal Bank of Scotland offered his resignation when its losses caused its stock to decline by 91 percent since 2007. Nowhere in all the malfeasance on Wall Street this past year has the senior officer of a major bank publicly accepted responsibility for his actions and tendered his resignation.


WSJ: 2009 was Worst January in Dow's 113 Year History. Only 2 stocks were up: International Business Machines (IBM) and Kraft (KFT)


WSJ: Two Californian Towns Bail Out Local Auto Dealerships (this was my point in some of my late 2008 postings about "just let the auto companies die" - the boomerang effects in terms of countless jobs dependent on auto industry are not taken into account. That said I've called for a massive hemorrhage of auto dealers in 2009 - "right sizing")

Detroit's troubles are forcing some communities to attempt an auto bailout of their own: propping up their local car dealerships. Two California towns, hoping to preserve jobs and tax revenue, are bailing out local car dealers that are struggling to stay afloat amid tight credit markets and plunging demand for new vehicles. Car dealerships in these towns have been the economic engine of local government as well as pillars of the community, sponsoring everything from Little Leagues to rodeos.


WSJ: Nationalism and Protectionism Continue to Accelerate Across the Globe; including the U.S. (another of our long held predictions now is coming to fruition - protectionism and social acrimony) also UKTimes Online: Dawn of New Age of Industrial Unrest and NYT: British Unions Stage Walkouts Over Use of Foreign Workers

A "Buy American" drive in the U.S., spreading protests against foreign workers in Britain and various countries' efforts to prop up their own beleaguered industries are fanning fears of a rise in economic nationalism that could deepen the global recession.

In Washington, President Barack Obama faces an early test as international concern mounts over moves in Congress to bar foreign suppliers from winning business on most projects funded by a new economic-stimulus package.

In the U.K., Prime Minister Gordon Brown confronted a different test, as hundreds of workers at oil refineries and power plants walked off the job as part of spreading protests in the industry against the use of foreign labor. That's a new phenomenon for the formerly booming country, known for being open to foreign businesses and workers. Meanwhile in Spain, the government is offering immigrants money to return home, while France has introduced stimulus measures that would route many government-sponsored projects to French companies.


NYT: Lawyers facing backlash against billable hours as economy weakens

Lawyers are having trouble defending the most basic yardstick of the legal business — the billable hour. Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.

“This is the time to get rid of the billable hour,” said Evan R. Chesler, presiding partner at Cravath, Swaine & Moore in New York, one of a number of large firms whose most senior lawyers bill more than $800 an hour.

The system of billing by the hour has been firmly in place since the 1960s; keeping track of time spent provided a rationale for the amount charged. In earlier, perhaps more trusting times, firms stated a price “for services rendered,” without explanation. But one has only to eavesdrop on a table of law associates comparing their workloads to get a sense of how entrenched the billable hour is, creating a pecking order among lawyers, identifying the best as the busiest and the most costly.


Well not all lawyers - Bloomberg reports that bankruptcy lawyers are hot. So hot in fact one is charging $1150 an hour. Or $18.50 a minute. I am sure the creditors are happy with that - remember, no matter what happens; the lawyers will win. There is a reason 80% of the world's attorneys live in the U.S. See, in our service economy we need to push execessive compensation somewhere... I mean if the best and brightest cannot flock to Wall Street, we need a new place to stuff 'em! Engineering? Sciences? Math? Nah - litigation.

Lawyers at Kirkland & Ellis LLP, home to former Whitewater prosecutor Ken Starr, are asking as much as $1,110 an hour for bankruptcy work while creditors are recovering less of their loans through company restructurings.

Professionals’ fees in bankruptcy cases are growing at four times the rate of inflation, estimated Lynn LoPucki, a professor of bankruptcy law at the University of California, Los Angeles. “As the economy gets worse, the bankruptcy lawyers are charging more,” LoPucki said. “It seems that each month one sets a new record for hourly billing rates. $1,110 is, to my knowledge, a record for the debtor’s bankruptcy counsel.”


We'll finish it off with a series of stories that was a hot topic late in the week after Obama's infamous "it's shameful" and "outrageous" comments. We love to talk about the "Heads We Win, Tails We Win" culture of Wall Street (and in fact just about all CEO) compensation and our completely broken corporate governance system. CNBC already has called it "the class war on the rich"! I assume the past decade where wealth concentration hit its highest in upper 1% since 1920s and median wages stagnated was the "class war on the middle"?
  1. NYT: It's Theirs and They're Not Apologizing
  2. WSJ: On Street, New Reality of Pay Sets In
  3. NYT: Getting Theirs Cuts Both Ways on Wall Street
  4. NYT: It's Not the Bonus Money, It's the Principle
Something seems amiss here....

DealBook: John Paulson's Year End Review

If you don't know who John Paulson is (no relation to Hank); effectively he is the hottest investor on the planet. [Nov 18, 2008: Paulson Buying Mortgage Backed Securities]

That is John Paulson, the hedge fund manager who took in a cool $15 Billion in gains last year for his fund (and $3.7 Billion personally) betting against these stupid arcane mortgage instruments, that the former head of Government Sachs (and current US Treasury Secretary) completely missed the boat on.

After profiting enormously from the epic disaster we have on our hands in 2007, his latest move in the latter part of last year was to move over to the UK and short their banks - you would think after they had already fallen so much, it was "late to the game". Not so much - as anyone with the misfortune of investing in Royal Bank of Scotland (RBS), Barclays (BCS) [Jan 16: Barclays's Crushed] and a handful of others have found out.

Armageddon statistic of the day -the Royal Bank of Scotland alone has more liabilities than the entire annual United Kingdom GDP. Frightful. I am not an expert on the UK banking system but from my readings it appears they have much more of a concentration of assets in the top 5-6 players.

Anyhow, when someone is on a winning streak like this we want to hear what they are thinking. Even more impressive to me is how he is doing this with such a staggering amount of assets... generally the bigger you get the harder it is to outperform.

Courtesy of Dealbook
  • While his counterparts at other big hedge funds are trying to figure out whether they can stay in business, the fund manager John Paulson continues to rack up enormous profits. DealBook has obtained Mr. Paulson’s confidential year-end letter to his undoubtedly gleeful investors. The 20-page report details how Mr. Paulson’s firm, Paulson & Company, which manages nearly $29 billion in assets, avoided the huge losses plaguing other funds, and it gives his firm’s outlook for this year.
  • Paulson Advantage Plus, the firm’s largest fund with roughly $7 billion in assets, returned a whopping 37.6 percent net of fees for 2008. Another version of the fund, which does not use borrowed money to amplify its return, recorded gains of about 24 percent, according to the letter.
  • Most of the profit in the Advantage group of funds came from betting against a number of financial institutions. At the beginning of 2008, the Paulson firm sold short several large financial stocks including Fannie Mae and Freddie Mac, correctly predicting that they would either become insolvent or need to raise additional capital that would significantly dilute shareholders. (we also said, Freddie would go to zero and Fannie was in serious trouble but I thought it would take much longer to play out - the collapse was sudden and I infer the Chinese were on the phone with Paulson every day demanding they be nationalized to protect their interests) [Jul 10: Whose Bottom Will it Be? Lehman Brothers or Fannie/Freddie?] and [Aug 13: Bill Miller Continues to Boggle Me - Increasing Stake in Freddie Mac]
  • On the downside, the Paulson firm said its long portfolio focused on sectors that generally do better during a recession, including health care, utilities and consumer staples. But nearly every one of those positions declined in value, although less than the overall stock market. (there was simply no place to hide on the "long side" in 2008, unless it was in Treasury bonds - hence why ANY hedged strategy would outperform a "long only")
  • Mr. Paulson is still bearish on the economy going into 2009 and remains short financial stocks and slightly short of the equity markets in general. “We remain bearish on the outlook for the U.S. economy and believe the recession will extend into late 2009 and likely into 2010,” Mr. Paulson said in the letter. “The sharp contraction in the global economy, the instability of the global financial system and the ongoing credit contraction are unlikely to be resolved in the first half of 2009.”
As we wrote in the November piece, Paulson is starting to tip toe into distressed debt... what I see eventually happening is some very smart people are going to swipe out some assets (buy from the government) after the the government (taxpayer) will take a big loss on by buying "too high" to "save the financial system". This is not something the individual investor can really participate in and the complexity of assessing what price is a good price for such instruments is enormous. But when you place armies of PhDs that some of these hedge funds employ versus government bureaucrats - who do you think is going to pull one over the other? So we'll lose again as taxpayers....
  • The biggest opportunity Mr. Paulson sees this year is in buying distressed debt, and the firm has targeted about half the Advantage Fund’s assets to that strategy. His firm’s two credit funds were up about 19 percent and 16 percent respectively last year as they resisted the temptation to buy distressed debt such as mortgages and leveraged loans even though they were trading at what appeared to be attractive prices.
  • The firm also said it planned to open a new fund focused on distressed investment in real estate. The fund, called the Paulson Real Estate Recovery Fund, will have a private-equity structure with long lock-up periods.

Friday, January 30, 2009

Fund Performance Period 1

For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; our first 4 week period is now complete. (for newer readers, we've been at this for over a year and a half, but just switched over in 2009 to a more appropriate portfolio tracking system - hence I'm "starting over" in terms of performance with portfolio "B")

(click to enlarge)

We made a lot of transactions to effectively stay hedged versus quite a significant drop in the market. During the first part of this period our long positions held up quite well during a vicious sell off, and we had no government interference. In the latter portion, we got stung by the "invisible hand". If not for this past Wednesday when we got "Bad Banked" and fell 0.7% versus the market rising 3.3% (4.0% variance) performance versus the market would of been even better. Unfortunately, we locked in a nice loss in Goldman Sachs (GS) and our Ultrashorts took serious hits, but you have to stick with your discipline; otherwise you are just flailing around without a strategy.

Overall, it's a good start - we've been playing defense and jabbing in and out of a market that cannot be trusted. Investing is still not possible and we're stuck with trading. One day that will change. It's tiring and wearing to be making all these transactions to scrape up a buck. Until we get some panic in the market, we won't be materially deployed on the long side - and on the short side the government can destroy you overnight with a surprise announcement; eventually the market will overwhelm the government and we'll go where we deserve to go, but that does not mean those surprises won't harm you in the short term. For now, I'm sitting in extremely high levels of cash.

Quality Systems (QSII) Earnings Solid

Quality Systems (QSII) has "enjoyed"a madly volatile day thus far today, trading between $36 and $42 - ah the joys of lemmings running around with their heads cut off based on a penny here or a penny there via earnings report.

The 200 day moving average is down at $36 so if that is violated we will need to cut back to preserve capital; as for today I added a bit in the low $37s since I have so little long exposure and need to offset my recent additions on the short side with something. Full report here - revenue is mixed between organic growth and acquisition growth.
  • For the quarter, the Company’s NextGen Healthcare Information Systems division posted record revenue of $61.5 million, up 40% when compared with the same quarter in the prior year and record operating income of $22.8 million, up 28% over third quarter last year. The Company’s Healthcare Strategic Initiatives acquisition contributed approximately $4.9 million to NextGen revenue during the quarter. The Company’s Practice Management Partners acquisition, which closed on October 28, 2008, contributed approximately $2.6 million to NextGen revenue during the quarter.

  • Medical records and billing software maker Quality Systems Inc. reported Thursday that its net income jumped 17 percent in the third-quarter due to significant growth and acquisitions.
  • For the quarter ended Dec. 31, net income grew to $13.2 million, or 46 cents per share for the quarter, up from $11.2 million, or 40 cents per share in the same quarter of last year.
  • Revenue grew 36 percent to $65.5 million for the quarter. The company said its saw significant contributions from its recent acquisition of Healthcare Strategic Initiatives and Practice Management Partners.
  • Analysts polled by Thomson Reuters expected the comapny to earn 45 cents per share for the quarter on revenue of $62.88 million.

No guidance offered in the press release...

Long Quality Systems in fund; no personal position

Update on Gold Trade

Last Friday we said gold might finally have it's real breakout here [Jan 23: Could be the Real Breakout in Gold] I wrote

Things to like
1) a series of higher lows
2) the trendline of lower highs has been penetrated

Things to see for confirmation
1) any pullback is bought
2) price prints over October 2008's highs, signaling the end of "lower highs"

This was what the chart looked like at the time


Without benefit of the orange line - you can see condition #1 has been fulfilled - we "backfilled", tested the area we broke out of and people were eager to buy. On that, an aggressive trader would be buying. A reader mentioned this outcome yesterday.

For someone more conservative in orientation you want to see #2 "a price point over October 2008's highs" - then we end our half year of lower highs. We are withing spitting distance here with GLD @ $91.40 and the October intraday high at $92.

It's hard to get behind gold fully because there is no "earnings" behind it; it's all about sentiment. But the theory is as all the world's troubled countries race to devalue their currencies (print print print) to "save the system", a hard asset should retain it's value. Silver is likewise breakout out - although silver has a lot of industrial uses as well.

I hate to chase a move but from a technical set up, a lot of institutional money could be set to finally jump in here....

Now the question of what instrument to use - keep it simple or go with a miner, etc.

No position

Bookkeeping: Closing Regions Financial (RF)

Yowsers... Regions Financial (RF) is in a free fall. It is only a 0.2% position but it's just ugly. I bought this stock in my original portfolio as a "stronger regional bank" proxy so I had something when the Kool Aid was thick in the air that financials were "about to turn around". So I brought it over to the new porfolio at the beginning of the month.

For that, I am already down 30%+ in this name; only $1200 or so in real terms (about -0.1% of performance) but now that it is under $5 its become a speculative stock in a speculative sector. I guess the new darlings are the Morgan Stanley's (MS) or such. Regions was actually a bank that the FDIC handed a failing bank to, so in theory they should not be in "this" bad of shape. I can only assume that if Obama does this bad bank fairly the common shareholders should be diluted to a massive level... without any details who knows. But the risk level/speculative properties have now passed my threshold.
  • Regions Financial Corp (RF) may slash its dividend by 90 percent and there is no likelihood of the company's earnings turning positive in 2009, veteran banking analyst Richard Bove said.
  • The Ladenburg Thalmann analyst cut his price target on the shares of the large U.S. Southeast regional bank to $7 from $14. Bove forecast a 2009 loss, compared with his prior profit view, and lowered his 2010 earnings estimates for the company.
  • Bove, however, maintained his "buy" rating on the stock and said the bank retains the best franchise in the Gulf States, while states like Alabama, Tennessee and northern Florida continue to offer superior growth prospects.
If this is how they treat the "best franchise" in the area.... I'd hate to see what must be going on in the bad franchises.

I have Ultra Financial (UYG) to do the same "proxy" job as RF so I'm going to close out this mess of a position. These bank stocks can double in 3 days or drop 50% in 3 days - fun if your timing is perfect, but not for me.

Long Ultra Financial in fund; no personal position

Bookkeeping: Short Geron (GERN)


Geron (GERN) is an Obama hype stem cell stock; daytraders delight. The stock has been between $3 and $5 for the better part of the year but when Obama signed the stem call legislation daytraders rushed it. Once daytraders are done with it, I believe it shall collapse. This is "thesis" stock 101. There is no rational valuation you can put on a company like this; they will be lucky to do $1M in revenue in any quarter... it's "hope" and "promise".
  • Shares of Geron Corp. continued rising Monday, buoyed by the possibility that President Barack Obama might loosen restrictions on federal funding for embryonic stem cell research. The stock gained $1.06, or 15 percent, to close at $8.15. Shares hit $8.47 earlier in the day, their highest point in more than two years.
  • On Friday, the Food and Drug Administration cleared Geron's application to conduct early-stage clinical trials on its stem-cell based therapy, aimed at treating severe spinal cord injuries. The Menlo Park, Calif.-based company is the first to gain such clearance for embryonic stem cells, which are unspecialized cells capable of turning into a wide variety of other cells.
I'm shorting with a 3.5% stake in the $7.80s. The stock peaked today at $8.50, which is where it peaked Monday. I am going to give this one some room since it is volatile and full of people with a time frame of minutes - so I won't do a stop order right away but watch it. If it gets over $9, I'll probably sweat a bit...

My goal is that gap to fill in the $5.60s so I'm setting a limit order to cover at $5.80. That would be a tidy 25% gain from here.

Short Geron in fund and personal account

Bookkeeping: Taking Half Off Shorts in EZCORP (EZPW) and Brinker (EAT)

I shorted EZCORP (EZPW) and Brinker (EAT) at roughly 2.75% weightings each earlier this week; so together 5.5% of the portfolio. [Jan 27: Bookkeeping: Short Brinker] [Jan 27: Bookeeping: Short EZCORP] We have a quick 6-7% profit in each, so I am going to take HALF off the table in both.

By doing this, I am playing with the house's money if I get stopped out. If the stocks go back to my original short points, I will rebuy this "half" of each trade. If they fall another 4 percent or so I'll close out either / or.

EZCORP was shorted in $14.60s and now half is going out at $13.80s. Brinker was shorted in $11.70s and now half is going out at $10.80s.

Just realized after booking these short profits I'm at 90 percent cash. Oops.

Short/Long EZCORP in fund, Short Brinker in fund

Bookkeeping: Covering Jacobs Engineering (JEC) Hedge

Wednesday morning I put on a short for Jacobs Engineering Group (JEC) as the market was rallying on the bad bank news...[Jan 28: Bookkeeping - Hedging Jacobs Engineering Group] my timing was poor for the day, as I shorted with a 3% stake in the $42.30s.

The stock proceeded to rally in a 45 degree angle all day and actually breached $44 late in the session... so if I had waited a few hours I could of made an even more strategic entry. Either way I was targetting $38 for a downside level to take profit. Since I have a very quick profit (2 sessions) I am going to take this money and run as the stock hits $38.30s. When profits come that quick, you just have to take it in this type of market where a CNBC rumor monger can make the market reverse action at any moment.

This was a 9.5% gain with 3% of our portfolio. This was an especially satisfying trade due to the government/CNBC trying to pull a fast one with their bad bank hype... this offset the Goldman Sachs (GS) bum rush I received. I still have the minor long position in JEC.

The first round of this stimulus plan through Congress is such an affront to infrastructure spending....and the American people as a whole.

Long Jacobs Engineering Group in fund; no personal position

Royal Caribbean (RCL) Continues Free Fall

I mentioned cruise operator Royal Caribbean (RCL) Wednesday [Jan 28: Royal Caribbean to $1?]; frankly I wish I had thought about this sub sector of the economy some time over the past year and a half as I denounced consumer discretionary spending. Missed it completely. The stock was in the mid $9s Wednesday but with an earnings report coming - I did not want to place a wager in front of that event, but the stock has continued its implosion. RCL just broke below $7. I usually don't praise herding behavior analysts but looks like this was an excellent call by Barclays Capital; especially coming the day ahead of earnings.

Here is a snippet of their earnings
  • Royal Caribbean Cruises Ltd. said Thursday that its fourth-quarter earnings tumbled 98 percent, missing Wall Street's expectations, as cruise bookings fell and the company's fuel costs were higher than expected. The company also issued guidance for the first quarter of 2009 and the full year that fell well short of analysts' expectations. Cruise pricing remains very weak, although bookings have started to stabilize, the company said.
  • For the key "wave period" -- from January through March, when cruise bookings are generally high -- Royal Caribbean said it has stabilized bookings by cutting prices dramatically. Chief Financial Officer Brian Rice said onboard revenue also began to suffer during the fourth quarter as passengers trimmed their spending, particularly on gambling.

  • Royal Caribbean reported liquidity of $1 billion as of Dec. 31. On the conference call, managers stressed that they are comfortable with the company's cash position but said they may seek to extend the maturity date on some debt or take other action to enhance the company's financial position this year.

So this is a lot like what retailers are doing - to protect the revenue line they are slashing prices to create demand. That's fine for revenue; not so fine for profits.

The stock has fallen so quickly I'd expected a "rubber band" (reversion to mean) rally at some point relatively soon... it is nowhere near any resistence level. But I expected that with a lot of other "worst of breed" sectors and outside of REITs (government bailouts coming baby) most of the worst of groups are still far away from key resistence levels.

No position

Obama Hype Too Late for Oshkosh (OSK)? Black & Decker (BDK) Not Seeing 2nd half Recovery

I'll keep repeating this weekly; the market is not cheap, and earnings estimates for 2009 are a complete hoax. I said the same thing in early 2008 about 2008 estimates... the world of Kool Aid has no bound.

Now in a few hours you will hear the Gross Domestic Product (GDP) for Q4 2008. Aside from being yet another inaccurate government report that will revised multiple times...It will be horrific. You will be told "not to worry" - "it is backwards looking, of course it was bad because credit had frozen - it's getting better every day". "One more bad quarter - Q1 2009" and then "we have the second half 2009 recovery to look forward to... all this stimulus will fix it".

So as the pundits soothe your nerves, I'll be listening to the companies... As I look through numerous earnings reports in my quest to find the "soon to be here" turn in the economy; many of these stocks levered to "making things" are simply crumbling. Oshkosh (OSK) is one of those companies and if not for orders from (who else) the bottomless pockets of the federal government these guys would be toast. In fact, they are breaking bank covenants and might be toast either way.

Oshkosh Corporation designs, manufactures, and markets a range of specialty vehicles and vehicle bodies worldwide. The company�s Access Equipment segment offers aerial work platforms, telehandlers, scissor lifts, and vertical masts used in various industrial, institutional, construction, and general maintenance applications. Its Defense segment manufactures severe-duty, heavy, and medium-payload tactical trucks for the Department of Defense, including hauling tanks, missile systems, ammunition, fuel, and cargo for combat units. The company�s Fire and Emergency segment provides custom and commercial fire apparatus and emergency vehicles, including pumpers, aerial and ladder trucks, tankers, light and heavy-duty rescue vehicles, wildland rough terrain response vehicles, mobile command and control centers, bomb squad vehicles, hazardous materials control vehicles, and other emergency response vehicles.

Needless to say they pulled guidance, but that's not even the "fun" part... this was one of the Obama stocks - hey we're going to rebuild America; we need any and all of this company's Access Equipment - thesis! Buy Buy Buy!
  • Specialty vehicle maker Oshkosh Corp. withdrew its 2009 financial guidance on Thursday, citing volatile demand and uncertain currency and commodity prices.
  • The company also said it cut its work force by 7 percent, reduced production, announced facility closures and slashed spending to cope with the downturn. (but other than that, they look forward to the 2nd half 2009 recovery) Oshkosh said it lost $20.6 million, or 28 cents per share, for the quarter ended Dec. 31, compared with a profit of $37.3 million, or 50 cents per share, in the same quarter last year.
  • The company reported a 40 percent decline in sales in its access equipment division and a 0.6 percent sales decline in its fire and emergency division. A bright spot was its defense segment, which saw a 37 percent jump in sales, helped by additional orders from the Department of Defense. (<---- completely immune to economic tsunami; bottomless taxdollar pockets)
  • Oshkosh said business conditions have deteriorated more than predicted, and the company now expects to be in violation of "one or more" of its financial covenants under its credit agreement in the second fiscal quarter. The company said it is seeking an amendment to its credit agreement and expects to receive one in late February or March.
So how is business Mr. Bohn?
  • During a conference call, Bob Bohn, the company's chairman and chief executive, said that during the most recent quarter, "orders virtually stopped in some markets and order cancellations nearly equaled new orders for access equipment in Europe. "This near drought in demand is unprecedented," Bohn said, "and has really caused us to reassess near-term expectations for our access equipment and commercial segments."
Well just hang in there - Obama is coming.

Onto Black & Decker (BKD) which we are all familiar with...
  • Tool maker Black & Decker Corp (BDK) warned of a double-digit fall in organic sales for the first three quarters of 2009 on weakening demand, and said it would cut 1,200 jobs, sending its shares down 18 percent to a seven-year low.
  • The company, which reported a better-than-expected fourth-quarter profit, said it expects first-quarter sales to drop about 20 percent on lower demand.
  • Robert W Baird analyst Peter Lisnic, who termed the outlook "abysmal," said demand at the company's core segment, power tools, remained bleak. Sales at the segment fell 13 percent for the quarter... aid the company's cash generation ability was also diminishing.
  • It might also change its dividend payout policy if the situation worsens, the company said.
I won't even bother touching Allstate (ALL) other than to ask... what the heck are our insurance companies doing? I thought they were here to ... provide insurance. Not be hedge funds. Not to worry - all insurance companies were up 20-30% Wednesday since the Bank of Our Grandchildren will soon house their sins.
  • Shares of insurer Allstate Corp. fell more than 20 percent Thursday, a day after the company posted a loss of $1.13 billion for the fourth quarter and announced plans to cut 1,000 jobs. The property and casualty insurer posted a $1.13 billion loss for the quarter ending Dec. 31, as losses mounted in its investment portfolio. Excluding the investment losses, Allstate's operating income was $518 million, a 26 percent decline from the year-ago period as underwriting income fell.
  • S&P on Thursday lowered its counterparty credit and financial strength ratings on two Allstate subsidiaries, Allstate Protection and Allstate Financial, to "AA-" from "AA."
Look forward to owning Allstate's "investments" in our future Bad Bank.

No positions

Meredith Whitney Joins Roubini & Soros in Smothering the Kool Aid

First let's discuss the cost of the "bad bank" - remember how I said the original floated $1.2 Trillion won't be enough. Well overnight it's gone from $1.2 Trillion to $1-$2 Trillion (per WSJ story "New Bank Bailout Could Cost $2 Trillion") It's a worthy story to check out but I'm just copying over the pertinent fact for this blog entry
  • The so-called "bad bank" that would buy these assets could be seeded with $100 billion to $200 billion from the TARP funds, with the rest of the money -- as much as $1 trillion to $2 trillion -- raised by selling government-backed debt or borrowing from the Federal Reserve.
I still think that's too low and economists agree - they are now tagging the cost as up to $4 Trillion. That sounds more realistic. But we'll basically have doubled our national debt after this is all said and done when you throw in TARPs, bailouts, stimulus plans. And the now dawning reality of the scope of the problem is exactly why as each prior bailout has rolled out, I've been saying it's just a bandaid for a severed body part. (didn't stop the market lemmings for yelling in joy and bidding up stocks) This amount is simply scary but it's better than the normal politics in this country to sell an idea at one cost and then 5 years later find out its 2-4x the cost.

This amount might be so staggering that even the not paying attention American public might revolt. Hopefully Rush talks about it; that will cover 40% of the country. Maybe Oprah can bring it up to cover the other 60%. (can she squeeze in a minor topic like this? I mean it's only the next 5 generations of Americans that it affects)
  • The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets. The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
  • Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
  • "Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.
  • Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
  • New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.
  • At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product.
  • The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total. (yes, until the losses come month after month)
  • That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets. Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses. (exactly - we already have a bad bank called the Federal Reserve - no need to make another one) "If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.
Well, the thesis Wednesday was we're going to dump oodles of bad loans onto generations of taxpayer's backs - that's GREEEEAT! for banks. Of course we have no details... just like we had no details of a stimulus plan but that did not stop people from running up infrastructure stocks 100%+ in 4 weeks on "thesis". And now the House proposal says a measly 3.5% of the total boondoggle will be for infrastructure. I digress... let's get back to "help the banks, destroy the taxpayers" thesis.

One analyst who has been dead on all along has been Mrs. Whitney. I've been with Meredith on this whole train ride... any gal who is so anti Kool Aid, is my type of gal. It is starting to feel like Groundhog Day; the feds come up with a way of "saving us" - the rats in the market rush to eat the cheese, than the market snaps the trap. Yet the rats brain never adapts - they are ever hopeful. And keep getting their neck snapped by the "hope" trap.

We did this game after Bear Stearns [Mar 26, 2008: I'm on Meredith Whitney's Side] again in summer during FranFredron [Aug 4, 2008: Meredith Whitney Continues to be Negative on Financials (and Housing)] and during the Lehman/AIG saga[Sep 23, 2008: Meredith Whitney and I Continue to Agree, Bailout or No Bailout] So why stop now? The same rats who denounce government for placing any regulation on them now worship at government's altar. As long as their pockets are lined. Pathetic.


All the hype did was screw over people with legitimate short positions (Goldman Sachs skid marks still found on my behind) and drive up insurance companies and banks 30% on hopes they can screw over the tax payer. Bravo. "Mission Accomplished" Some gambling daytraders made their Etrade account go up 27% in 1 session - only going to cost us a few trillion. I've lost count how many "missions" of this type have been accomplished since August 2007 when Uncle Ben surprised us with a premarket Fed cut that blasted legitimate shorts out of their pants. (hand raised)

Via Clusterstock - let's see what Meredith is saying now. Hint, it sounds a lot like Soros and Roubini [Roubini & Soros on Bad Bank]

Meredith Whitney today punches a big hole in the notion that creating a bad bank to buy up troubled assets will rescue our financial system. And it certainly won't prop up failing banks. The problems at banks are deeper and broader than just too many bad structured mortgage products on the balance sheets.

  • Financials have lots of loans that are likely to default.
  • They don't new have a revenue model to replace the old, broken one.
  • They won't start lending just because you buy the bad assets.

Here's the report from Meredith Whitney:

Talks of creating a "bad bank" are once again gaining momentum, and accordingly, we feel compelled to repeat and review our thoughts on the subject. In brief, simply removing "toxic" assets from bank balance sheets will not directly cause banks to increase lending. Lending standards have tightened dramatically, and there is an unavoidable restructuring of risk taking place. Such causes money to come out of the system and lending to contract, with or without this "bad bank" structure. Lower asset bases, higher credit losses, and bloated expense structures will continue to pressure banks' earnings power and capital creation. We remain cautious on the group.

  • Capital contraction is accelerating throughout the U.S., and the economy is clearly showing the results of such. The economy will recover when the capital base or "denominator" reverses course. We do not believe a "bad bank" structure addresses the root problem of contracting system capital.
  • Writedowns from structured securities and illiquid assets is only one challenge related to the commercial banks. A challenge of equal importance is rising defaults from on balance sheet loans. Due to the pro-cyclical nature of loss reserving, banks are required to build reserves when their earnings power is weakest.
  • If a bank were to sell its "bad" assets into a "bad bank," it would still be left with lower earnings power from higher losses on "good loans" and the requirement to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both.
  • The greatest unknown regarding the "bad bank" is at what price the gov't would pay for "toxic assets." If the government elects to pay fair market value, the banks will likely not elect to participate as capital hits would be too dear; however, if the gov't pays above market, the burden on an increasingly "taxed" taxpayer grows.

  • We would be most encouraged by banks selling "crown jewel" assets to cover their own losses. We believe private capital will readily invest in businesses that make money and grow. However, the banks do not fit this description. We remain cautious on the group.

Thursday, January 29, 2009

Wall Street Journal: Jumbo Loan - Uh Oh

May I introduce you to part of your new portfolio - Jumbo Loans? Yes you, dear taxpayer - you are part owner via the Federal Reserve "Everyone gets a portfolio of Mortgage Backed Securities" gift. This way every American who pays a penny of taxes gets to be part of the "free market" and "ownership society".
  • The new relief plan would apply to the billions of dollars of mortgage assets the Fed is holding on its books because of last year's bailouts of Bear Stearns and insurer American International Group. Borrowers have no way of knowing whether their mortgages are held by the Fed, because their loan payments are collected by other companies, known as loan servicers.
  • Under the Fed's new foreclosure prevention effort, homeowners may get a reduced interest rate, longer loan term or a lower total mortgage amount.
  • In general, a borrower must be at least 60 days delinquent to qualify for help, although the Fed has leeway to make some exceptions.
So here's the moral hazard we introduce - go late by 60 days on your mortgage and if you are one of the lucky "chosen"... and the Fed already owns your mortgage - ding, ding: you win! What do you win? Your neighbor's tax dollars. It's Russian Roulette but in reverse. The people who pay their bills get the bullet to the head. Even though we already have evidence that people who get modified mortgages ALREADY are showing default rates in excess of 50% within the first 6 months - that's ok. Put our tax dollars to work... try try again! [Dec 8: More than Half of Homeowners with Modified Loans are Back in Trouble]

Fannie and Freddie were actually excluded from backing jumbos until the bright minds in D.C. decided in first half 2008 (just months before FanFredron imploded) to "increase the limits" (off top of my head from somewhere in the $430K range to $700Ks) Plus plenty of these are stuffed in Bear Stearns, AIGs portfolios (which we already are proud owners of) .... plus all the new mortgage backed securities that will soon be coming our way through Bad Bank/Good Bank.

So let's see what we're going to add to our portfolio shall we? As you read this remember these are the "prime" borrowers (cough) - not the Alt As, option only or those long forgotten subprime. Just repeat to yourself - as long as we are good boys and girls, and hold these securities for a long time, we'll all win in the end. On the Fed balance sheet only good things happen. Because the free market is not correctly pricing this junk (err, quality merchandise), and only 12 men in a room in Washington D.C. with a model know how to price it. Ah, happy endings - up there with unicorns, fairies, and Kool Aid.

Long and strong - we're in this together folks! (except you poor foreign readers - you do not get any piece of this action!)
  • Rising defaults by affluent homeowners are raising the specter of another cloud over banks and investors, which could get stuck with thousands of expensive homes. About 6.9% of prime "jumbo" loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. (hmm, I wonder what happens a year from now when unemployment rate is far higher and savings depleted?)
  • Jumbo mortgages average about $750,000 and can run as high as $5 million or more. More borrowers with such loans are being hit by layoffs that are spreading through practically every sector and pay level of the U.S. economy.
  • Defaults on jumbo mortgages tend to result in especially steep losses for lenders, because pricier homes are tough to sell in the current market. (just hold out for 2nd half 2009 when the recovery happens - should be easy to sell then)
  • Last month, the mounting defaults prompted Moody's Investors Service to downgrade hundreds of tranches of prime jumbo loans sold to investors as securities. Moody's has downgraded more than 75% of all prime jumbo loans originated in 2006 and 2007 that carried the top rating of triple-A. (oh, Moody's - where do I even start with these ratings agencies...)
  • From 2002 to 2006, banks originated an average of $557 billion a year in jumbo loans, according to Inside Mortgage Finance, a trade publication.
  • The top two originators, Chase Home Finance and Washington Mutual, both part of J.P. Morgan Chase & Co., made more than 25% of all jumbo loans, while Bank of America Corp. and Wells Fargo & Co. each accounted for 11% of the jumbo market.
  • Last July, J.P. Morgan disclosed that it had $34.4 billion in jumbo mortgages. "We were wrong," Mr. Dimon says. "We obviously wish we hadn't done it." (no problem Jaime - my unborn grandchild will take care of this one. Let's call it even)
  • Earlier this month, Wells Fargo stopped buying jumbo mortgages originated by mortgage brokers. (sounds like a good business practice)
Hmm makes sense now - JPMorgan was so weak going into this week... but that was in a different era. An era where the only bad banks had funny names like Citigroup or Lehman. Now we have the United States of Bad Bank.... where all our problems will go to disappear.
  • Other big jumbo-mortgage lenders still are advertising their loans but have "intentionally priced themselves out of the market" by charging high rates, says Peter Boger, operating chief at Ridgewood Savings Bank.
So now that old banks are reluctant to make bad loans and are going back to strict lending standards that they should of never wavered from.... what sucker would still be making these jumbo loans in a degrading economy where more and more borrowers will not be able to pay said lender back?
  • Jumbo mortgages aren't a big part of J.P. Morgan's loan business anymore; government-backed loans now account for more than 90% of originations. "We continue to make [jumbos] as an accommodation to customers," said spokesman Thomas Kelly. "It's not a big part of what we do."
Ah yes. When you look around the room and cannot figure out who the sucker is... well, then the sucker is you.
  • Nearly 25% of prime jumbo mortgages exceeded the value of the homes they backed in September, according to Credit Suisse. That figure would increase to 42% given home-price declines of 15% over the next two years.
The circularity of all this is something a fiction writer could not make up. Talk about lender of last resort.

Tech is Safe? Not so Much - See Qualcomm (QCOM)

I write this post every 3-4 months... I am completely at a loss at investors infatuation with tech stocks. These are, for the most part, cyclical stocks that turn with the economy. I wrote many pieces last summer about "tech is not a safe place to hide out" when the pundits said you can hide there. Each time this market turns, people flock to the technology stocks - aside from a handful with a fortress balance sheet (high cash) and a few nice growers - the rest are no different than buying Honeywell (HON). It's a decade later and I still think some people think its NASDAQ 1999.

Qualcomm (QCOM) is one of the old school names - solid company and gun to head if I had to buy tech this would be one name I'd say is ok for a 3-4 year horizon, but it's not impervious to the economy. Broadcom (BRCM) is another. Cisco (CSCO) is another. Juniper (JNPR) reports tonight and is another. EMC (EMC) is another. Nokia (NOK) is another. What's the infatuation? Outside of buying the router companies on "the Obama broadband thesis" I don't get it. My only guess is there are so few themes to play with financials and commodities beaten to a pulp that my process of elimination people keep coming back to "old tech".

Reality check.
  • Shares of Qualcomm Inc. came under pressure Thursday morning after the provider of chip technology for wireless phones posted lower-than-expected earnings tied to heavy losses on its investment portfolio. Qualcomm was off more than 7% to $34.20 at last check.
  • Late Wednesday, the company reported that net income dropped significantly in its first fiscal quarter despite a gain in revenue. The company also issued an outlook that was slightly below most Wall Street estimates, saying that the slowing economy made forecasting difficult. (yes, just like an industrial - what's the difference. These are not "immune" to the economy nor safe havens) The company said the global economic slowdown and financial crisis has slowed demand for its chips that run many of the world's mobile phones.
  • For the period ended Dec. 31, Qualcomm reported net income of $341 million, or 20 cents a share, compared with net income of $767 million, or 46 cents a share, for the same period the previous year. (50% year over year reduction; no different than most companies who own factories and make widgets)
  • Revenue rose 3% to $2.52 billion. (there's that "high growth" tech)
  • Analysts focused on the hit to the company's investment portfolio, as Qualcomm said it has determined that about $388 million of its investments were "other than temporarily impaired." It also said that, as of Jan. 23, it had "net unrealized losses" totaling $1.1 billion in marketable securities. (oops)
Reduction in future about 10%...
  • The company now expects sales for 2009 of $9.3 billion and $9.8 billion, down from a previous forecast of $10.2 billion to $10.8 billion.
Again, I actually LIKE Qualcomm all things being relative so I am not picking on it; but I don't get the love affair with tech. Too many people are still living in the late 90s. We spend more time in the media focused on a walking dead company like Yahoo (YHOO) than on the future leaders.

What is even more amusing are watching people pile into the most cyclical area of all - semiconductors - anticipating the "recovery in 6 months". They've tried this trade about 4x the past 10 months. Everything is by the "playbook" in Wall Street world - the herd is so predictable.

No positions

Bookkeeping: Cutting Back Emergent BioSolutions (EBS) and HDFC Bank (HDB)

Emergent BioSolutions (EBS) chart took a turn for the worse - acting poorly in a good tape the past few days... today, strangely the stock is up 8% in a bad tape. I am going to dump much of the rest of my position today and sit back and wait for the chart to set up one way or the other. The stock was as low as $21 this morning and has since surged back up to $23 regaining its 50 day moving average. But this is a General. So I'm selling down to a holding stake of 0.2%. Strategy go forward is to buy when it gets north of $24.

If the stock reverses it could set up an excellent short/hedge.

HDFC Bank (HDB) rallied strongly yesterday because the bad banks in the US will... um... help Indian banks. Or some nonsense. Frankly this chart is now a short set up as it hit resistance @ $62 and reversed. I'm cutting it back to a 0.1% holding position with intention to buy it back in the mid $50s.

If I could juggle more positions and watch the market full time I'd attempt a short on this type of chart. Instead I'm just shorting the general emerging markets....

Long HDFC/Emergent BioSolutions in fund; no personal positions

Sequenom (SQNM) Results Good; Limit Order Hit

I will edit this piece later in the day as I have not been online during the market hours so I'm catching up, but the Sequenom (SQNM) test results from last night were very good with only 1 false positive on the next 400+ sample size. I did not get a chance to listen to the conference call (will do that this weekend) but since I did not want to make an outsized bet heading into a "major news event" I had a limit order waiting at $21.75 which hit this morning (stock fell to $20 in fact)
  • Sequenom, Inc. (NASDAQ:SQNM - News) today announced new positive data from the prospective clinical studies using the Company’s noninvasive SEQureDx™ technology, enabling the detection of fetal aneuploidy from maternal blood.
  • The data presented today consist of 459 new, high prevalence samples from the prospective, blinded studies performed at Sequenom, bringing the total number of samples studied to 858. Based on the results from the total study samples, including samples as early as 8 weeks of pregnancy, the Sequenom SEQureDx RNA-based technology demonstrated a 100% positive predictive value (PPV) and a 99.9% negative predictive value (NPV).
  • The SEQureDx technology achieved a better than 99% detection rate, with less than a 1% false positive rate. The current standard of care, screening tests, perform at less than a 99% detection rate; however, statistically, if these screening tests could perform at a 99% detection rate, their false positive rate would be in the 10% to 25% range.
There is a lot of interesting talk of a next generation platform as well.

This was one of the "generals" that had been going sideways and now it's been hit, so I prefer to buy on the hit than chase. I am only up to a 2.2% stake (from about a 1.2% position) - simply because I do not trust this market, but it's currently the largest long position. The 50 day moving average is in the $20.70s area so I'd like to see that hold... if stock price breaks below I'll most likely cut back and wait for strength to re-emerge. Or buy down there in the $17s.

Again, this is more of a late 2009-2010/11 play so valuing it today is quite arbitrary. This is why I am going to let the price action dictate the short term positioning.... "net present value" is not so easy with this one. But I do not see anything to change the thesis and in fact, I thought this was a very good outcome.

Adam Feuerstein from has his take here.

EDIT 3 PM: Mike Huckman also has a story here, with video below - first time I've seen Huckman talk Sequenom (the stock is rebounding nicely this afternoon)

But after CEO Harry Stylli appeared "First on CNBC" on "Squawk on the Street" this morning and called the stock move an overreaction the shares began to trim their losses on pretty heavy volume.

And Mr. Stylli has some support from at least a couple of analysts.

Bruce Cranna at Leerink Swann, which specializes in healthcare stocks, writes in a research note to clients, "We do not expect the detection of a false positive to be problematic, as any result that tests positive will confirm diagnosis with an invasive procedure." And Dr. Sean Lavin at Lazard uses a phrase that gets thrown around a lot in the title of his note, "New paradigm in prenatal testing introduced." He goes on to say, "Sequenom's presentation last night demonstrated, essentially, that its tests should gain rapid adoption...." Lazard and Leerink have banked SQNM and make a market in the stock.


(return to original post) As I thought through yesterday, it was a lot of the laggards that rallied - the portfolio was hit not only with some of the short exposure working against us, but really outside of some tiny long positions in financials/housing/commodities almost everything else we owned went sideways. This was the same thing I noticed in the back half of last week and why I thought the oversold stocks would perform better in the short term.

I still believe before this round of correction washes out, the Generals need to be shot - many seem to be weakening. Now that the worst of breed has worked off its oversold condition the setup for a "everyone down" type of correction increases. Not saying that will happen - guessing the near term is a fool's game since it's all based on hope & government interventions - but we have a much better set up now for everything to sell off together. I still believe that retest of S&P 750 remains in our future, no matter what interventions they spring on us.

I don't want to over commit yet on the long side but now have some of the proper short exposure so on the next downfall I can begin buying more aggressively. Remaining patient.

Long Sequenom in fund and personal account

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