Friday, April 30, 2010

Did Lehman's Dick Fuld Lie Under Oath About Compensation?

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A quite fascinating piece in Bloomberg for those interested in the subject matter, that being executive compensation, how it is hidden by abusing the "spirit of the law", board of director cronyism, and the myth that the CEOs of failed companies actually felt any real pain. We have created a heads we win, tails we still win [Sep 27, 2008: Heads We Win, Tails We Win] executive compensation culture - which is leading to asymmetric outcomes.

But nothing will change in Cramerica, so let's keep the good times rolling. [Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain] [Jan 22, 2009: Merrill Lynch's John Thain Can Only Work on $87,000 Rugs] [Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work]. And it is not just with our oligarchs... Home Depot paid former CEO Bob Nardelli $200M just to leave (heckuva job Brownie!), and Chesapeake Energy ... well it's too long to explain. [Apr 9, 2009: Chesapeake Energy CEO Aubrey McClendon With New Shady Compensation Deal] Many only slightly less egregious events happen each quarter, and year. Be assured you can go company by company ... and realize public corporations have simply become feeding troughs for the few & proud - while jetissoning the American middle class worker to the unemployment rolls in proud fashion [Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay]

As for Dick Fuld, of failed Lehman Brothers, we'll see if years of lobbyist compensation will keep him out of the hot seat for misrepresenting (allegedly) his compensation status under oath. I realize it takes special "talent" to run a company into the ground, but really folks - we're talking half a billion in compensation to 1 individual for not even a decade's work.

As an aside, here is yet ANOTHER example of a whistleblower who contacted the SEC ... and the captured regulator could care less.


Snippets via Bloomberg:

  • On Oct. 6, 2008, three weeks after Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history, Lehman’s former chief executive officer found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform.
  • “Mr. Fuld will do fine,” Waxman said. “He can walk away from Lehman a wealthy man who earned over $500 million. But taxpayers are left with a $700 billion bill to rescue Wall Street and an economy in crisis.”
  • Fuld said he was a victim... Reckless management had nothing to do with it. “Lehman Brothers,” he said, “was a casualty.”
  • Fuld and Waxman went on to disagree about just how much money Fuld had taken out of Lehman before it went under. Fuld, now 64, said his total compensation from 2000 through 2007 was less than $310 million, not the $485 million that appeared on Waxman’s chart.
  • He said 85 percent of his pay was in Lehman stock that had become worthless. “I never sold my shares,Fuld said at one point. (errr!!) At another, he said he had not sold the “vast majority” of them.

Just typical charades up to this point.... now it gets interesting:
  • Among those closely observing Fuld was a 49-year-old former Lehman lawyer named Oliver Budde who was watching the hearing at home on C-Span. Budde (pronounced Boo-da) was certain Waxman’s figures weren’t too high. They were too low, and he could prove it. Fuld, he believed, had understated the amount he was paid during those years by more than $200 million, and now he had done it under oath, for the entire world to see.
  • For nine years, Budde had served as an associate general counsel at Lehman. Preparing the public filings on executive compensation had been one of his major responsibilities, and he had been infuriated by what he saw as the firm’s intentional under-representation of how much top executives like Fuld were paid. Budde says he argued with his bosses for years over the matter, so much so that he eventually quit the firm.
  • He contacted the Securities and Exchange Commission and the Lehman board of directors and says neither showed interest in meeting him. (well the latter group was just joke to contact, considering they are the people setting the pay hah! That's like telling the fox you'd like to met him about the matter between him and the hens)

The middle part of the story goes into how option grants were abused, reclassified, logged into footnote areas on annual reports rather than in plain sight, etc etc. All the usual obfuscation so that we have transparency. It is actually very enlightening...


Specific to the SEC, the organization looking over your back dear readers (watch for the knife):
  • Budde decided to go to the SEC as a whistleblower. He sent a detailed two-page e-mail on April 14, 2008, to the SEC’s Enforcement Division, under the subject line “Possible Material Noncompliance with New Executive Compensation Disclosure Rules.”
  • ... detailing what he believed was Fuld’s failure to disclose more than $250 million in restricted stock awards,
  • He got a standardized form thanking him for his letter in return. He never heard anything else. (thanks for playing!)

Bottom line:
  • While Fuld said he earned less than $310 million from 2000 through 2007, he actually had received $529.4 million, according to Budde’s calculations.
And about that "I did not sell any shares... err I mean I had not sold the vast majority of them"
  • In direct contradiction to Fuld’s claim to Waxman that he had not sold the majority of his shares, Budde estimates that Fuld earned $469 million from stock sales between 2000 and 2008. These calculations are supported by the working paper from a Harvard University study that was made public late last year and is scheduled to be published this summer in the Yale Journal on Regulation.
  • In “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman, 2000-2008,” Harvard Law faculty ..., calculated that Fuld earned $522.7 million from 2000 to 2007, only slightly less than Budde’s tally.
So it's not just a rogue ex employee detailing the "lies". (allegedly)

----------------------------------------------

Anyhow that is what the "free market"* will bear for compensation, just as the massive bonuses are continuing today as the "free market" is holding short term rates at zero so banks can print money in their sleep. Viva la free market.

*free market = a small subset of board members who direct compensation packages, many of which are CEOs themselves. You rub my back, I'll rub yours. Just think how awesome we'd all be paid if we set the pay for our peers at other companies. We'd all earn half a trillion in 8 years.

Thursday, April 29, 2010

Bookkeeping: Sold Some Skyworks Solutions (SWKS) Ahead of Earnings Tonight

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I usually try to cut position sizes ahead of earnings since I don't like the bipolar reactions that have little to do with how a company is doing, and everything to do with random reactions vs a bunch of analysts numbers thrown against a wall. That said, I have not done it this period simply because (a) I am underweight stocks and (b) stocks only go up ...or sideways, as the Bernanke Forcefield makes it a stock market of almost only winners. Thus far I have been lucky as almost all stocks reporting have either jumped or lost only a little. No big blowups.

However, last Friday I bought some Skyworks Solutions (SWKS) when it fell to the 50 day moving average of $15.50. I think the company will report a good number but thus far reaction to its 2 main peers have been mixed. The stock has done little until today, so I am simply going to sell the portion of the position I added about a week ago (about 40% of my stake) for a quick 4.5% gain (price was right near $16.20) which isn't bad work for 4 days.



As with TriQuint I think the stock is cheap for its growth... I continue to be boggled by the valuations people are placing in some sectors versus others based on ability to grow. Speaking of, I bought a little TriQuint to offset this sale, and keep my exposure to the sector somewhat consistent.

Aside from that, I am betting on black... no red... no black.

Long Skyworks Solutions in fund; no personal position

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When Momentum Stocks Attack: Green Mountain Coffee (GMCR)

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Investors in Priceline (PCLN), Netflix (NFLX), Baidu (BIDU) and the like are enjoying the best of times - these have become the classic momo stocks. (I am leaving out the las vegas casinos, commercial real estate stocks, and just about any US retailer who also now appear to be in this pantheon)

Momo investing is fun and relatively simple. It's the greater fool theory - buy high, and sell higher. Valuation is for wimps. It is among the most popular investing strategies nowadays & hard to argue with since it works. Until it doesn't.

Green Mountain Coffee (GMCR) has become one of these momo stocks, but finally last night expectations had reached the point the company could not deliver on. And today we see what happens when the music stops in the momo dance hall.



With that said, if you use technical analysis, your warning sign to either get out or at least reduce exposure actually came a week ago Tuesday, when the stock broke support (50 day moving average) on huge volume. If you believe Caesars New York City is all about malfeasance and specific groups with access to information before the masses... this was your sign.
  • Shares of Green Mountain Coffee Roasters Inc. tumbled Thursday, a day after the coffee seller posted a third-quarter outlook that fell short of Wall Street estimates. On Wednesay, the Waterbury, Vt., company said it expected third-quarter earnings of 50 cents to 54 cents per share before a 3-for-1 stock split, and earnings of $1.95 to $2.05 per share for the year. Analysts polled by Thomson Reuters had expected profit of 57 cents per share in the third quarter and $2.04 for the year.

While I respect American's right to love coffee, the 50x forward valuation seemed a bit rich but you could of said that at 45x...40x... etc. Valuation means nothing nowadays. Until it does.

This is how all good momo stories end.... eventually analysts behind the ball and constantly underestimating estimates, will finally raise numbers to a point that even companies executing well (as GMCR is) cannot keep up. Then the lemmings jump.

No position

Bookkeeping: Adding to Atheros Communications (ATHR) on Gap Fill

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We appear to have a textbook pullback on Atheros Communications (ATHR) - allowing a nice entry point. Technically, we see the stock gapped up after stellar earnings (one of the best reports I've seen this earnings season). I sold off 1/5th of the position that day near $42.30 simply to lock in some gains - even though it is wrong to sell any stock at any moment in the new paradigm market. The stock dropped sharply Tuesday on the -2%+ down day in the markets, and then yesterday filled the gap created by the earnings report. That also happened to be the same area as the 20 day moving average. Almost too perfect. In fact, it is rare to see a stock that has such a gap up, fill the gap within a week like that.


With the bounce today, I am going to buy back not only what I sold last week, but more... increasing the already good sized position by another 1.7% or so. This is fundamentally one of the best stories out there, and unlike many things people are chasing into at 40, 50, 60x forward earnings is VERY reasonable versus its growth rate.

To that end, analysts have increased full year 2010 estimates from $2.11 to $2.54 since last week's earnings report, so the stock just got even cheaper. Even a 20x forward PE ratio would give it a $50+ valuation. But I guess it is better to go buy a retail stock at 45x forward estimates instead...

Frankly, Atheros should be doing far better stock wise as the stocks people are chasing are so much more rich in value.

Long Atheros Communications in fund; no personal position

I Flinched on Wyndham Worldwide (WYN)

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Sometimes you are in a zone, sometimes you are not. It appears early to mid spring I get into a lull, since this is 2 years in a row of underperformance in April - hopefully not May too (like last year). That said, I actually was daring to short stocks in late spring 2009 (thinking that huge bounce off March 09 lows "should correct" - laughable in retrospect) whereas Ben and Larry have taught me how fruitless that has become this year. Call me Pavlov's dog.

With that said, old habits die hard. Yesterday as the S&P 500 touched lows of the day, testing Tuesday's intraday lows, I had a buy order in process for Wyndham Worldwide (WYN) as the stock had sold off on earnings about 5%. Since I had sold almost all my position a few weeks earlier, I was looking for a good place to re-enter, and finally the stock had pulled back to near the 50 day moving average. In the $25.20s I had a market order waiting for about a 2.5% allocation. But, I saw the market below the 20 day moving average, and testing the previous days low. Instead of buying, I just left the browser tab open with my proposed purchase, and wrote the piece "Another Retest of Yesterday's Low". My thought was if the S&P 500 broke to new lows, Wyndham would not hold the 50 day moving average and my new purchase would quickly turn into loss. My mistake as shown below... the stock has bounced from $25.20s to $27.60s in 24 hours and is almost at highs of the year. This market punishes you for not acting fast to buy any and all dips.



While only a lost opportunity rather than a loss, it is still frustrating.

Long (a sliver) of Wyndham Worldwide in fund; no personal position

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Just Another V Shaped Bounce

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Remarkable. A break of support means nothing. 2 days closing below support means nothing. Unless an "event" that brings in human emotion (hence real volume) happens each day, it seems the market can only go sideways or up. With premarket being the bulk of gains of course.


Color me lost without any old rules working.

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Looks Like a Potential "Double Top" in Ford (F)

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One of the stock stars of the past year has been Ford Motor (F). In fact, you could throw a dart into the auto sector space and make bundles of money, but Ford has name recognition among the masses, versus the supplier base. The company reported a very good quarter 2 days ago, and this has definitely been a "sell the news" reaction.



The stock might have formed a classic "double top" with mid March highs (bearish). Obviously it sits at the very important 50 day moving average. One would expect a cursory bounce here, but it will be interesting to see what happens after any such bounce.

I'll speak about this in another piece but one has to wonder as Ben Berananke's not stop easy money policies continue, when commodity inflation is going to begin to hit the bottom line of producers ... this was raised as a concern with Ford as they are benefiting from relatively low material costs versus the past few years. Lost in the (a) high gas prices and (b) loss of house ATM to fund purchase of cars was the fact the auto industry was demolished by high input costs. Aside from the obvious steel, "petrol" based products are found up and down the body - ask any chemical or plastic maker. We're beginning to see a repeat... [Mar 8, 2010: BHP Billiton Pushes Through 55% Price Increase in Coaking Coal Prices, Quarterly Pricing - Iron Ore Also Potentially Set to Soar]

No position

TriQuint Semiconductor (TQNT) Earnings Solid, if not Spectacular - Guidance Raised for Q2

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More of the same from TriQuint Semiconductor (TQNT) in last night's earnings... a solid showing, beating analysts by a penny, and then raising guidance by another 2 cents for the next quarter, along with a revenue bump. Keep in mind the company raised guidance mid March. I would prefer if this company and its brothers in arms did a 3:1 reverse split since it is hard to create meaningful earnings PER share with so many shares outstanding (issued in the halcyon days of a decade ago). Thus, while 2 cents extra does not sound impressive - considering the number of shares outstanding, it actually takes a lot of horsepower to generate.

Technically the stock is fine, so we'll see what the reaction is today. First support is $7.75ish and second is $7.35 to $7.40. We last sold some 2 weeks ago around $7.90... of course selling almost any stock has been a curse in this market.



A quick flavor on earnings (full report here)
  • Wireless communications products supplier TriQuint Semiconductor Inc's (TQNT) first-quarter profit edged past market expectations, helped by a rebound in its networks market and strong demand for smartphones, and the company forecast second-quarter results above estimates.
  • The company forecast second-quarter earnings of 15 cents a share, excluding items, on revenue of $200 million to $210 million. Analysts were looking for second-quarter earnings of 13 cents a share, before items, on revenue of $189 million, according to Thomson Reuters I/B/E/S.
  • For the first quarter, TriQuint earned $13.7 million, or 9 cents a share, compared with a loss of $15.6 million, or 11 cents a share, a year ago. Excluding items, the company, which supplies equipment to the latest version of Apple Inc's (AAPL) iPhone, earned 12 cents a share, while analysts were expecting 11 cents a share.
  • Revenue rose 52 percent to $180.8 million, above analysts' expectations of $175 million. Revenue from its networks market grew 42 percent.
Gross margins improved significantly:
  • Gross margin for the first quarter of 2010 was 37.9%, up from 19.6% in the first quarter of 2009. Gross margin increased due to an improved product sales mix and solid factory utilization.
[Feb 26, 2009: TriQuint Semiconductor - Solid Earnings, Guidance Good]
[Oct 21, 2009: TriQuint Semiconductor Destroyed in After Hours Trading]

Long TriQuint Semiconductor in fund; no personal position

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Bookkeeping: Stopped Out of 60% of Bucryus (BUCY)

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One of the principles of buying stocks on dips (near support) rather than chasing momentum stocks ever upward is you are often stopped out as the dip does not stop at the moving average. Usually there is at least one bounce off support - which is what happened after our purchase of Bucryus (BUCY), but in this case the bounce failed, which happens at times. So from here my standard operation procedure is to cut back exposure on the initial break of support and watch what it does with less on the line. If the stock quickly recovers we can continue the position; if not we are forced to exit and revisit another time.

I had not noticed until this morning but my stop loss for Bucryus triggered in the mid $65s, versus entry point of mid $68s so with 60% of the position I've been stopped at a 4%ish loss. I'll probably give the other 40% one or two more days and that's it, because it would be doubtful to see a break of support like this and then a reversal right back upward.* There is some support around $63 from mid March, so if that is broken it's probably a sign that HAL9000 has moved away from the stock.



*Caveat - it used to be rare, I've seen it happen a lot the past 13 months.

Long Bucryus in fund; no personal position

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Wednesday, April 28, 2010

2010 Fund Performance Period 4

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The mutual fund is now on schedule for a [late] summer 2010 launch. If, after reading the blog content you might have an interest in participation, please consider reading why this blog exists.


  1. [Jan 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
  4. [November 2009: General Updates, Questions]

Or if you are just here for daily market / economic commentary or stock trades to follow on your own, consider supporting the blog via donation (paypal buttons can be found on the upper right margin of the blog)

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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; we moved to a new tracking system in 2009 (Investopedia.com) as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence while the website and portfolio began in August 2007, we "began anew" in terms of performance with portfolio "B" as of early 2009. Detailed history on latter 2007 and 2008, as well as 2009, [Jan 7, 2010: 2009 Final Performance Metrics] can be found on the above mentioned tab. For 2010 our fourth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)


Period 4 was almost identical to period 3... almost every day was up or sideways. The only drama were 2 days in the final 6 of the period; Goldman Sachs Friday and last Thursday when the market opened down in premarket by a material amount for only the 3rd time in 2010. It's been a remarkable streak since mid February - volatility died away, the moves upward have not been large in any 1 session but unrelenting, and the selloffs almost non existent. China continued to struggle and the Greece drama continued but speculators were assured someone will bail them out so no worries there. Unlike last period, we were unable to keep up with the market since the majority of the gains were in sectors we were not focused on, and we were underweight on the long side. Without any large intraday surges in "breakout" fashion short term index plays were limited so we were hand cuffed.


For the fourth "four week" period of 2010 the fund returned +0.9%, versus the market's +4.7%, so an underformance of -3.8%.
On a cumulative basis in 2010 the return is +29.1%, versus the Russell 1000's +9.8%, so an outperformance of +19.2% for the year to date. (thus far 16 weeks)


Period 4 allowed absolute performance (making money) but failed in relative performance (outperforming the market). The yearly goal of beating the index by 15% is on track.

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*** Long/Short Fund Discussion below

Overview: The S&P 500 simply moved along its 6 day moving average for almost the entire period, mimicking performance in period 3. This string of grind up movement was finally broken by the Goldman Surprise, which took the S&P 500 down to 20 day moving average... and that level was retested on the Thursday of the last week of the period. However the NASDAQ and Russell 2000 were so strong, even Goldman Sachs fallout did not push them below their 6 day moving averages. From there a (now) typical V shape bounce occurred the next 3 days. Last Thursday saw a rare gap down open and -1.5% intraday move... which ended up also crushing bears as the market did a V shape intraday bounce. Summary - bears were crushed at every turn.

Below is the chart for period 4...




To show you how consistent the market has been for 2+ months, I cut and paste the chart for period 3 below... almost identical. In fact if not for the "Goldman Sachs event" they might of ended up almost perfectly aligned.



I was expecting SOME form of pullback at SOME point in these past 4 weeks and was wrong the entire period. Thankfully bets against the market were light but caution was punished. While the market was up, up, up, sideways, up, up... there were no big breakouts to play with index positions and we had a few blowups like Massey Energy (MEE). What little dips there were, in retrospect should have been bought. Consumer discretionary stocks remained monsters with the retail ETF (XRT) hitting all time highs... not yearly highs, but all time highs. The Financial ETF was hot until Goldman Friday, and industrials also were smoking hot.

Week 1: Cash 76%, Long 18%, Short 6%

Charts were already extended entering this 4 day week; 90% of stocks were over their 50 day moving average - which usually is an extreme reading. But nothing is too extreme in the new paradigm market. Oil began breaking out so some oil service stocks finally showed life after being massive laggards so I tried my hand there.

Long side moves:
  • I restarted a position in Diamond Offshore Drilling (DO).
  • I I bought more Atheros Communications (ATHR) on a breakout.
  • I closed the last remnant (0.1% exposure) in Telestone Technologies (TSTC) - the stock was not expensive but extremely volatile and is difficult to trade around on technical terms with so many days it moves 8 to 10%; plus the earnings report it gave out the previous week was not received warmly.
  • Some smallish index ETF exposure was bought this week as well.

On the short side:
  • Morgan Stanley China A Shares (CAF) was closed as the instrument broke out.

Week 2: Cash 70%, Long 25%, Short 5%.

On the long side
  • I restarted home builder Lennar (LEN) as nothing more than "people got frothy in 2009 when housing rebounded in spring/summer... I expect them to do the same and be 'surprised' in 2010'."
  • I cut back half of Massey Energy (MEE) after the mine disaster struck...and the stock fell below the 50 day moving average.
  • I sold half of Indian bank HDFC (HDB) simply because it had quite the run
  • I bought some SPY Index calls Friday afternoon.
On the short side
  • I bought back into the exposure against US bonds which I had covered a few weeks previous.
  • I was stopped out of AsiaInfo Holdings (ASIA) late Thursday for a loss.

Week 3: Cash 62%, Long 34%, Short 4%. Same old, same old - straight up. This was the case until Goldman Friday.

On the long side:
  • I sold almost all of our hotel chain Wyndham Worldwide (WYN) - one of our few consumer discretionary stocks - simply to lock in profits after a very nice run.
  • I closed a position (sold the the 2nd half) in Massey Energy (MEE), as the stock looked to be pressured by government scrutiny - instead I rolled that money into a more speculative Chinese equivalent L&L Energy (LLEN).
  • I yook partial profits (25 to 33% of the positions) in 3 names - Quality Systems (QSII), Triquint Semiconductor (TQNT) and NetLogic MicroSystems (NETL), simply to have some discipline.
  • I restarted Discover Financial (DFS) on the idea that many more Americans can now pay their credit card bills since they no longer have to bother with a house payment as delinquencies rule aka the new house ATM.
  • Restarted Rackspace Hosting (RAX) on what appeared to be a breakout - a big move out of a base, on huge volume.
  • I closed Diamond Offshore Drilling (DO) as it has been a major laggard and did not breakout as we had hoped.

On the short side
  • I put on some SPY puts Friday in reaction to Goldman Sachs news... just for some hedging purposes... not a big position.

Week 4: Cash 66%, Long 27%, Short 7%. The question going into the week was "would Goldman matter for more than 1 day?" This week we had 4 names really take off to the upside (3 on earnings, and Lennar on "housing data being stronger in spring"), and was the main reason we were able to scratch out a positive period. Certain stocks began selling off on earnings while other high value momo names were completely blowing out shorts.

On the long side:

  • Rackspace Hosting (RAX) was sold Monday for not participating in this epic rally.
  • After Atheros Communications (ATHR) rocked its earnings report, I sold 1/5th.
  • After some "surprising" housing numbers, I sold 25% of our largest position Lennar (LEN).
  • I was stopped out of half of coal name L&L Energy (LLEN) for a quite nasty loss
  • I restarted a position in Bucryus (BUCY) as the stock pulled back to support post earnings.
  • I added to [new breakout] Quality Systems (QSII) & Skyworks Solutions (SWKS) [fell back to first level support]
  • I added index positions (SPY calls and TNA ETF) in the closing hours as the S&P was poised to take out highs for the years, and "Magical Monday" awaited.
  • I closed Market Vectors Brazil Small Cap (BRF) for similar reasons to Rackspace Hosting... no life.
On the short side:
  • Hands remained tied, simply sold the index put positions I had bought the previous Friday on the Monday dip to the 20 day moving average.

[Apr 1, 2010: 2010 Fund Performance Period 3]
[Mar 2, 2010: 2010 Fund Performance Period 2]
[Feb 2, 2010: 2010 Fund Performance Period 1]
[Jan 7, 2010: 2009 Fund Performance - Final Edition]


For previous years please see tab 'Performance / Portfolio' (we were using other tracking mechanisms at the time)

Another Retest of Yesterday's Lows

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As opined this morning they should of never opened up the market today. It could of just been marked up the traditional 0.5%+ in premarket and never opened and everyone would have been happy. Err...

Also as opined, they did "mark it" right up to the 20 day moving average, almost to the nose. The question is what from there? V shaped run back to old highs immediately as has been the case over and over (and over... and over)? Or a stall. It seems to be stall for now.




If the S&P can break below yesterday's lows, I'd be interested in pressing new index shorts as technically it would be bearish. Obviously the 2:15 PM FOMC announcement causes some trickery, but really I can't see them changing one thing. (it's a shame rates are at zilch, or Ben could of done an emergency rate cut today since the market should not be down 2 days in a row) But until then we are in a very tight range of 1183 to 1193. Obviously any close below the latter number would be the 2nd day below the 20 day moving average. And then we can see futures up tomorrow to try to right that again ;)

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Remeber DragonWave (DRWI)?

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Ouch.

I was reviewing some earnings reports from the past week, and DragonWave (DRWI) competitor Ceragon Networks (CRNT) reported a nice quarter That reminded me to look at DragonWave as I tend to lose track of stocks not in the portfolio nor in my watch list to buy on a near term pullback, and we see a case example of "sell and ask questions later once a chart breaks". I stopped out of the majority of the position in early February when the stock broke support. The worse thing that can happen when you sell on a break of support, is the stock immediately reverses and runs off without you. While that smarts, all you did was lock in a small to moderate loss and missed an opportunity. (that actually happened inititially after my February sale) But it saves you from a protracted move down and much larger loss - which eventually is what happened here.




This is happening despite DragonWave trying to defend its stock by taking in "up to" 10% of its float.

Since the company is so dependent on 1 customer, I assume something has gone awry and "those in the know" have been getting out while the retail investor is being smacked down. But if there is any truth to the full year EPS estimates the company now trades at 9x forward estimates. It should be an interesting earnings report on May 6th.

No position

Wyndham Worldwide (WYN) Beats Estimates Again, Raises Guidance for Q2 & Full Year 2010

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After holding Wyndham Worldwide (WYN) since May 2009, I dumped almost the entire stake 2 weeks ago in the mid $26s, simply to lock in profits after a big move. The stock was once ultra cheap and now is probably a decent value - but not like it used to be. Not that valuation matters in this market. The company continues to execute and reported a solid quarter, with increases in guidance for Q2 and the full year of 2010.


A quick look at earnings (full report here)
  • Wyndham Worldwide Corp (WYN), franchiser of Days Inn and Super 8 hotels, posted higher first-quarter net income on Wednesday and raised its earnings and revenue outlook for the year. Net income rose to $50 million, or 27 cents per share, from $45 million, or 25 cents per share, a year earlier. Excluding items, Wyndham posted a profit of 34 cents per share.
  • Revenue fell 1.7 percent to $886 million, while expenses fell nearly 7 percent.
  • The company now expects annual revenue between $3.6 billion and $3.9 billion, up from its previous outlook of $3.5 billion to $3.9 billion. It sees adjusted earnings of $1.56 and $1.71 per share.
EPS bested analysts by 4 cents. Q2 was raised to $.38 to $.42 vs analysts $.37. Analysts were in at $1.60 for the year, while Wyndham had previously guided $1.48 to $1.69.


Considering RevPAR fell by 6.8% these are actually quite good results, but essentially it's a game of cutting costs by a larger amount than revenue fell.

The company continued to buy back shares, and increased its dividend:
  • ...the Company repurchased approximately 757,000 shares of its common stock at an average price of $24.20
  • ...the Company tripled its quarterly dividend, paying its first dividend at the $0.12 per share level on March 15, 2010
[Feb 10, 2010: Wyndham Worldwide Beats Estimates, Raises Dividend, Restarts Share Buyback Program]

Long Wyndham Worldwide in fund; no personal position

Thank the Market Gods for Premarket

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S&P futures were down in very early morning

S&P futures moved up to flat at 7 AM

S&P futures up half a percent by 8 AM

Not sure why they bother to keep the market open between 9:30 and 4:00 PM anymore other than to lavish 7-8 firms with huge rebates for providing "liquidity"... volume is dismal on up or sideways days and only shows up on down days.  Just open the market for a premarket session each day and we might be at S&P 3000 in no time.

S&P 20 day moving average bumped down a bit to 1193 level, one most certainly would assume we are lifted right to that spot and then we see if we are about to experience another "V shaped" move right back up.  As I said in the closing piece yesterday, a break of the 20 day moving average which sends us to lows of the past 2 weeks should have meant more downside.  But only in theory... not in the new paradigm market where something like half the gains of the past 13 months have been in premarket.  Mark down another "win" for premarket.

I will be dumping my SPY puts for roughly flat.

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Greece Bans Short Selling Until June 28

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What is this? 2008?  Somewhere Jim Chanos and a bunch of traders on the Goldman Sachs prop desk are indignant.

If there is one thing to learned from America's experience 2 years ago, it's letting banks pretend what is on their balance sheet while feeding them free money banning short selling fixes everything.
  • Greece’s securities regulator banned short selling on the Athens stock exchange for two months from today after shares slumped yesterday and Standard & Poor’s Ratings Services downgraded the nation’s credit rating to junk. 
  • “The Capital Markets Commission, taking into account the extraordinary conditions prevailing on the Greek market, decided a ban on short selling on the Athens exchange,” the Athens- based Hellenic Capital Market Commission wrote in an e-mailed statement today. The ban is effective today through June 28, it said. 
  • The ASE benchmark general index dropped 6 percent yesterday, the biggest one-day slide since December, and Greek banks, the worst performing shares on Bloomberg’s European banking index this year, may face further declines after Standard & Poor’s cut their credit ratings along with the nation’s on concern over Greece’s funding crisis. 
  • S&P, which also lowered Greece’s sovereign rating to junk, said the banks are at risk from the country’s “deteriorating credit quality” because of their holdings of government debt. Their asset quality and profitability will remain under pressure as the economy contracts and drives up loan losses, S&P said.

If only these rogue Germany taxpayers would get with the program and hoist debt upon their grandchildren to help pay for the largess in Greece (then Portgual, then Spain) this would not even be an issue.  What is wrong with these fiscally conservative folk?

Tuesday, April 27, 2010

Nasty, Tricky Day

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Despite losing money today and being slapped around, I am encouraged to see a market which seems to have a human pulse.  An hour ago, the S&P 500 broke the 20 day moving average again (I bought some SPY puts just as a downside hedge)... then 30 minutes ago popped back up to S&P 1194 enlisting "here we go again" thoughts.  I was beginning to think this was going to be "one of those days" where every move is a disaster, and I am just compounding them by trying to quickly make up what was lost.  Not only had I sold my long index positions I was now exposed to the downside with options.  Then out of the blue the market falls off the cliff.  Anyone who bought that bounce to 1194 thinking "V" shape bounce was hurt.



In theory, a downside reversal like we had today - breaking through the 20 day moving average and sitting at  last Monday's lows on the close - should lead to more downside to come.  In theory.  Downside test if it continues would be to the 50 day moving average at 1167.

In the weekly summary I proposed buying some long dated (Jan 2011) out of the money puts - something in the S&P 1100 range because eventually the market has to go down again and fill those (multiple) gaps.  But after being burned in relentless fashion for endless weeks attempting any shorting, it is hard to take the plunge.  I have however wanted to go long volatility but the darn ETFs to replicate VIX are horrid.

Anyhow let's see what tomorrow brings (actually the PPT is hard at work, with S&P up 3 already in the 10 minutes after the close), China fell to a 7 month low last night, and Europe has its obvious issues.  Fed meeting tomorrow where we will analyze if Ben Bernanke moves one comma in paragraph 5, sentence 3.... and the implications for the world from this action.

Ironically when I posted that Portugal debt story this morning (one I've posted similar articles to in the past), I assume it elicited many yawns.  "Here we go again, talking about something that does not matter".  But Moody's waking up (dear Moody's - you might want to review USA's "AAA" rating as well - speaking of jokes) seems to have made a little difference.  Cmon German taxpayers - do your moral hazard duty and make sure the average Greek public worker can retire at age 53... you don't want to "upset the markets".

As I always like to say, it only matters when it matters.  Knowing when the market chooses to care about something is the part that is very difficult to assess.

Bookkeeping: Sold the Remaining 50% of SPY Calls as Rebound Does not Appear

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I sold the 2nd half of the SPY puts (edit: calls) as there appears to be no miracle coming in the last 90 minutes. Main logic here is not to compound a mistake, go back to cash aka a clean slate and start anew tomorrow.  In the old days I'd also list overnight risk but since almost every morning we are greeted with positive futures it has not been a risk very often the past year+.

From here the only drama is to see if S&P 1194 will hold on the close.  If not, the first close below the 20 day since mid February.

Despite the drop today, it still remains a market that only seems to fall when human emotion is involved... if there is no specific news event, we just grind up.

[Also sold the TNA ETF]

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Cavium Networks (CAVM) - Another Good Quarter, with Raises Guidance; Still Pricey

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I seem to be writing the same commentary in almost all these earning report reviews.  A company which beat lowly analyst estimates, raised guidance, but still an expensive valuation.  All I do is change the name of the company and stock symbol.  Today we have Cavium Networks (CAVM) which I have been keeping an eye on for the past 6 months or so.  [Dec 18, 2010: Cavium Networks Raises Guidance, Breaks Out of 4 Month Range] [Jan 29, 2010: Cavium Networks Continues to Show Strong Growth]

Cavium Networks is a leading provider of highly integrated semiconductor products that enable intelligent processing in networking, communications, storage, wireless and video applications. Cavium Networks offers a broad portfolio of integrated, software compatible processors ranging in performance from 10 Mbps to 40 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access & service provider equipment. 

Estimates for full year 2010 have increased from 44 cents to 58 cents over the past 90 days.  With today's guide up for next quarter that number should be in the low to mid 60s now. But considering the stock is now near $30, it is still a 50x-ish type of forward multiple.  (record broken alert)



A look at the impressive growth of late (full report here):
  • Chipmaker Cavium Networks Inc (CAVM) posted better-than-expected quarterly results on strong bookings at its chip and software business, and forecast second-quarter results above market expectations.
  • The company, which makes processors for networking and communications equipment makers, forecast second-quarter earnings of 18 cents to 20 cents a share, excluding items, on revenue of $48 million to $50 million.  Analysts were looking for earnings of 13 cents a share, excluding items, on revenue of $43.2 million.
  • Cavium Networks expects gross margins of 63 percent to 64 percent in the second quarter. Gross margins were 59.6 percent in the first quarter.
  • "Enterprises seem to be finally loosening their purse strings and spending on enterprise infrastructure upgrades, which they had postponed," Chief Executive Syed Ali said on a conference call with analysts.
  • The company recorded a strong sequential growth of 25 percent in the enterprise and service provider market, which was 69 percent of first-quarter sales.  The company, whose customers include Cisco Systems Inc (CSCO) ,  Juniper Networks Inc (JNPR) and Alcatel Lucent , said it expects continued strength in the enterprise and service provider market.  Sales at top customer Cisco formed 27 percent of total revenue and grew 20 percent to $11.1 million on a sequential basis.
  • For the first quarter, Cavium posted a loss of $3.1 million, or 7 cents a share, compared with a loss of $6.5 million, or 16 cents a share, a year ago.  Excluding items, the company earned 14 cents a share.
  • Revenue more than doubled to $41.6 million.  (last year $20.4 million) Analysts were expecting earnings of 11 cents a share, excluding items, on revenue of $40.7 million.
  • Jefferies & Co. analyst Adam Benjamin told clients in a note Tuesday that Cavium is poised for "significant" revenue growth over the next few years, driven by the company's backlog of successful chip designs.


No position

Now That's a Failed Breakout

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It always is interesting to see how certain news, ignored for weeks or months on end, suddenly matters.  Today Greece and Portugal suddenly matters again?
  • Stocks have sold off sharply following the downgrade of Greek and Portuguese debt by Standard & Poor's. Broader market weakness has been underpinned by the downgrade of Greek debt to junk, and the accompanying downgrade of Portuguese debt two notches to A-. That news has also put tremendous pressure on the euro, sending it to 1.3212, its lowest level in over a year.
Having lulled me to sleep and dulled my senses, that drop happened too swiftly for me since I was not watching at the time and now am trapped a bit.  A nice drop there from S&P 1211 to 1190 in a matter of 40 minutes or so.  I was going to stay "long & strong" as long as the 20 day moving average held, and here we are... in fact we broke below intraday for a few minutes there.  Yesterday's breakout to new yearly highs was a nice trap.  On the positive side, this introduces some trepidation for bears for the first time.



For now I am taking on big time water with my index positions (oh the joy of options when they work against you), and I'll have to figure out if I will make them realized losses or not in the next few hours. Looks like the days where one can buy stocks and leave the computer for 4 weeks in a row might have taken a break.  S&P 1194 is key for today, right now at 1197.  Will we pull another miracle off as we did last Thursday when a 1.5% drop was bought and the markets actually ended green by end of day?

Watching and observing for now...1190 was the low last Thursday as well and 1183 the low the Monday after Goldman Sachs, so closes below these 2 levels would potentially be trend changers. Too early to get bear paw hopes up as it has been futile for months.

EDIT: To cut down some risk exposure I am selling half of TNA ETF and SPY calls on this bounce near S&P 1198.   This will obviously lock in some bountiful losses (4% on the former, 35% on the latter), but in case a real market returns (one that goes both up or down) will save some pain in the future.  If we "V" shape bounce right back up, it will have proven to be a bad move.   Normally these should have been sold (at least the SPY calls) no worse than S&P 1210. Live by the sword...

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Bloomberg: Portugal Suffering Greek Contagion

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Nothing new to long time readers as we've pointed out repeatedly that the newest, and biggest bubble of them all is the government debt bubble.  [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?]   In a world fixated only on benefits, and could care less of the costs as long as they are borne by taxpayers, very few seem to care these days.  It is now the ethos that whatever the problem, a central bank or government will throw a country's populace under the bus to "solve" it.

Some countries will stomp on their people, though backdoor defaults via money printing (Japan, US, UK) - but those within the European Union are stuck as their central bank is not set up to print Euros to "fix" things.  [Dec 13, 2009: Bond Vigilantes Prowling Europe]  If not for this minor detail, these countries could just go to the American way and print, stimulate, and print some more to make all their problems go away.  Which makes one wonder if this European Union is going to last through the cascade of multiple bailouts that surely look to be on the way the next half decade.

Portugal will be next on the radar [Mar 9, 2010: Portugal Tries to Front Run Bond Vigilantes] [Feb 3, 2010: Portugal Debt Costs Rise to 11 Month High] - while not in as bad a situation as Greece, we'll see if the bond vigilantes wait for the fiscal outlook to reach Greece's stage, or if they will strike sooner than anticipated.  According to this Bloomberg article, there might not be as much time as I originally though the markets would allow.  Which leads one to wonder how much time Spain has... [Dec 10, 2009: Global News - Ireland takes Responsible Budget Steps, Spain the Next to Worry About]

If only Ben Bernanke could make all these European countries "bank holding companies"... ah well.  All the US taxpayer can do for now is send the IMF more monies and then do backdoor bailouts that way with the IMF as the middle man.   Our pockets are endless and money trees plentiful.

  • Portugal risks becoming the new Greece.   With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala. 
  • “We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.” 
  • Portuguese spreads, the extra yield that investors demand to hold its debt rather than German equivalents, jumped to 227 basis points today, the most since at least 1997.
  • Portuguese Prime Minister Jose Socrates' push to convince investors his country will avoid Greece’s fate is being hobbled by an economy that’s expanded less than an annual average of 1 percent for a decade and is reliant on tourism and industries such as cork and pulp.  
  • While Portugal’s public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. (ah, I was wondering why the author said Portugal had higher debt than Greece)   The country’s 236 percent debt burden last year compares with 205 percent in Italy and 195 percent in Greece.
  • The lack of savings at home lies behind the Portuguese government’s dependence on foreign investors to fund the deficit, and the vulnerability of its bonds to shifts in sentiment.   The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development
  • About 15 to 17 percent of outstanding public debt is held by Portuguese investors, the debt agency estimates. In Spain about 54 percent of bonds and bills are held domestically; in Japan 94%.
  • “The reason we’re concerned about Portugal is not because its public sector debt ratios are excessively high, it’s more that the Portuguese economy doesn’t really grow,” said Kenneth Wattret, chief euro region economist at BNP Paribas SA in London. 
  • EU policy makers’ difficulty in containing the Greek crisis is stoking the threat of contagion, just as the near-collapse of Bear Stearns Cos. in 2008 undermined other U.S. banks, exacerbating the credit crisis.    The risk for Portugal is that investors who are trying to protect their portfolios from a Greek-like rout will dump holdings of small euro countries, such as Portugal. Once that happens, surging bond yields could put Portugal in the same spiral that Greece is trying to escape
  • Portugal plans to raise as much as 25 billion euros this year, equivalent to 15 percent of GDP. That compares with 21 billion euros last year, according to the national debt agency.  “As spreads get higher the problems are getting bigger: it’s a self-fulfilling prophecy,” Penninga said in a telephone interview. “It will get more difficult now for Portugal to tap markets.”
  • The IMF raised the prospect of contagion on April 21, saying “if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion.” 

[Dec 10, 2009: Ken Rogoff (Videos) - Sovereign Debt Defaults Likely in Next Few Years]

Monday, April 26, 2010

And You Want to Short Some Stocks to Hedge? Case Study - Whirlpool (WHR)

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It's called unshortable for a reason - ask any who bet against Chipotle Mexican Grill (CMG), Netflix (NFLX), or indeed even our lowly Atheros Communications, Riverbed Technology (RVBD) or F5 Networks (FFIV) last week.

Or indeed... you cannot even bet against refrigerator makers... cripes.  I think I was shorting Whirlpool (WHR) about a year ago and $60 lower.
 
Your silly stop losses would be no help here...
 

  • Whirlpool Corp's (WHR) quarterly profit and full year forecast surpassed Wall Street estimates, helped by sales in Brazil, Asia and North America, sending shares in the world's largest appliance maker up 14 percent.
  • The company has shut plants, cut jobs and moved some manufacturing to low cost-centers like Mexico.  (again the perfect nirvana for global corporations has arrived; the global race to the bottom in wages leads to the global race to the top in profits.  Thankfully the endless pockets of the US taxpayers are armed with appliance rebates ... you probably already forgot about that stimulus.  Really who needs jobs anymore when our government provides everything.)

Yikes

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Yep, It's Starting to get 1999ish Out There - Analyst Upgrades Mercadolibre (MELI) and Slaps 60x Forward PE Ratio

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First let me preface this by saying PE ratio is not the end all, be all of valuation methods.  But it's the 'common man's' way to look at things, even with the caveat that there are multiple ways to slice 'earnings'.  The more important take away is we are now seeing the same behavior we saw in 1999 -at least with companies that actually had earnings back then.  I called it the relative comparison valuation.   This is when analysts can no longer find valid reasons to justify prices, so to upgrade a stock that used the "it's not as expensive as company ABC" methodology.  This is a lot like how we pay CEOs nowadays.... "well if Chuck at company XZY is earning $X than I should be paid $X+10".  And so on and so forth you can go on forever, in a permanent spiral upward.  Unlike CEO compensation where there is no market force to keep this nonsense in check (board of directors are just rubber stamps in American corporatism), the market eventually washes out this "valuation method" in stocks.  Key word... eventually.

Last week, one of our old stocks Mercadolibre (MELI) was upgraded.  I eagerly went to see the reasoning behind it.  And our 1999 reasoning was here "it's one of the top 5 stories out there in internet land!" (hey I happen to agree with that idea, but that does not mean you should slap any valuation on it).  The real reasoning said analyst should have used is "it's cheaper than Baidu! (BIDU)"  Then when MELI passed BIDU in valuation the BIDU analysts can come out and upgrade Baidu with reasoning "it's cheaper than MELI".  And so and so the two bands of analysts can go at each other, ever increasing valuation on "it's cheaper than the other guy and a top franchise to boot!" as Greenspan morphs into Bernanke, and we repeat the same reindeer games.  Heck we don't have to even wait a generation or 2 anymore to revisit old lessons forgotten.  Thanks Bubble Makers in Chief.

The only difference (thus far) is in 1999, the stock price would have jumped from $50 to $70 in the opening 15 minutes of the session it was upgraded.  And then the next analyst could have come out with his $90 target within days.  This means we are not yet at Code Red status of bubble making... still in Orange.




  • Thomas Weisel Partners analyst Jordan Rohan has launched coverage of Latin American e-commerce play MercadoLibre (MELI) with an Overweight rating and $70 price target. The stock closed yesterday at $50.14.
  • “We believe MELI is one of the top-five secular growth stories on the Internet due to the growth in users, usage and monetization,” he writes in a research note.  “While valuation appears high today, (translation: "don't worry about it, we'll come up with a new valuation method" or "cheaper than Baidu!") we forecast upside to near-term estimates and strategically the Pago payments platform distances MercadoLibre from competition.”
  • Rohan expects MELI to post profits of $1.14 this year.
[Dec 24, 2009: IBD - Mercadolibre: E-Commerce Sales Soar as Latin American Households Get Wired]

No position other than deja vu

HDFC Bank (HDB) Beats Estimates but Valuation Getting Quite Rich

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I don't know how many more times I can write the same things... at what point is beating analysts expectations but being valued at some extreme level a warning sign?  Not yet. India's #2 bank, HDFC Bank (HDB) reported (Saturday?) and the results are again good.  But as I've written in the last few pieces on this company, I don't know how to justify paying forward 35x+ earnings as a great entry point, especially with a central bank that has begun to increase interest rates.  Yet as of last Thursday, as the stock broke over $150,  the chart said "buy buy buy"... a new breakout after a short consolidation.  And charts are apparently all that matter to HAL9000 and his merry band.  The stock is now at an all time high...



A quick look at earnings:
  • HDFC Bank (HDB) reported a 32.6 percent rise in its quarterly profit, beating market estimates, bolstered by a pick-up in credit demand in Asia's third-largest economy.   Profits were boosted by a 29% drop in interest expenses, which improved net interest income by 27%. 
  • The results were marginally better than analysts expectations.
  • Within retail — auto loans, commercial vehicles and home loans were the growth engines, followed by business banking
  • Strong growth in the loan book and better margins boosted net interest income, said Mr Paresh Sukhtankar, Executive Director, HDFC Bank. The net interest margin was up marginally at 4.4 per cent (against 4.3 per cent). Other income was down as treasury earnings were hit due to rising bond yields.
  • In the quarter, net NPAs dropped to 0.31 per cent (0.63 per cent). "The impact of the non-performing loans acquired from Centurion Bank is wearing off. With the economy looking up, the asset quality of the retail portfolio is improving," said Mr Sukhtankar.
  • The corporate loan book grew 40 per cent and retail 22 per cent.  


[Jan 15, 2010: HDFC Bank Earnings Rise 32% Year over Year]
[Oct 15, 2009: HDFC Bank's Earnings Propel Upward 30%]
[Jan 7, 2009: Bookkeeping - Starting HDFC Bank on Satyam Scandal]

Long HDFC Bank in fund; no personal position

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 38

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Year 3, Week 38 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 52.2% (v 65.5% last week)
19 long bias: 44.1% (v 27.4% last week) [Includes 1 option position]
2 short bias: 3.7% (v 7.1% last week) [Includes 1 'long dollar' position]

21 positions (vs 21 last week)

Weekly thoughts
After a hiccup on Goldman Sachs Friday, US markets made up all losses and more last week, with both the NASDAQ and S&P 500 gaining 2%+; the Russell 2000 doing even better.  There have been many days to wear out the bears the past 2+ months, but a day like last Thursday with a rare (perhaps 3x in 2010) material down day in premarket, and a swift 1% loss - is the type that kills a camel's bear's back.  What ensued is what has typically ensued since March 2009... a V shape bounce.  Since the morning touch of the 20 day moving average of S&P 1190, the S&P gained 27 straight points in a session and a half.  Debilitating for any bear.

I'll post the 3 major indexes below; I've been using a "6 day moving average" rule for this remarkable portion of the run... in which the S&P 500 was so relentless there was not even a pullback below this level for 2 months.  It took a fraud charge against the most powerful firm on Earth to crack that level, and Monday the S&P 500 touched the 20 day moving average before a quick bounce.  Then the fateful Thursday morning drop I mentioned above happened, and once more a bounce off that 20 day.  And late Friday, a squeeze to new highs of the year as S&P 1214 was breached. Until this 20 day moving average is breached there appears very little bears can hang their hat on - overbought or historic put call ratio or whatever else you want to use, thrown out the door.


The Russell 2000 has been even stronger... with still NO close below the 6 day moving average - even on Goldman Sachs Friday or this past Monday... only some moments intraday.  This chart actually broke to new yearly highs last Thursday, rather than Friday.


Ditto for NASDAQ ... so strong that it did not close below the 6 day moving average even during the turbulence.


Please keep in mind the 6 day moving average has no significance... it simply is the 5 day moving average with some rounding error room; it simply shows how strong the market has been.  Typically a market will pull back to the 20 day moving average if anything on an upswing, from time to time.  Aside from the S&P 500 (and it took some market moving news to do it), this has not happened.

The latest bear argument is something called the 200 week moving average.  Below is a handy chart, showing how rare it is to be below this level - in fact, before Alan Greenspan and Ben Bernanke went ballistic with blowing bubbles as official Fed policy, there had been 2 decades when the S&P 500 had not been below the 200 week moving average.  As you can see this past decade has not been so kind.



So what does the chart show us?  Being below the 200 week moving average is so rare it should provide resistance.  Even in the great 'recovery' early in the past decade (2003ish) the market tailed off for a period of time (what appears to be a few months) before it found enough energy to push through.  But this market is much more unrelenting than what we observed back then... so will there be a stall at this level (S&P 1225-1230ish)?  Any rest?  Anything?  Who knows... after 8 straight up weeks on the Dow Jones, you'd think so.  But anyone betting against this market has been made into mush.

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On the economic news front ... well does it matter?  Good news is great news, and bad news is future good news.  What we know is there will be some million census workers hired in the next 2-3 reporting periods through June which will cause celebration on national TV since very few analyze the figures.  The market will be "surprised" and we'll rally.  Housing will "rebound" just as it did a year ago in the spring and summer - before falling to record lows in some months in the fall and winter.  The only question is will round 3 of the housing bribery plan be announced once housing slows down again in the fall.  Bernanke won't raise rates ... and even though some of his minions are pressuring him to at least sell some of these mortgage backed securities off this balance sheet sooner rather than later; he is all about the Bernanke Forcefield.  All must be protected (except for assets of savers who return nothing) - risk assets must only go up because the "wealth effect" is the easiest bubble to blow up.  So they'll be some economic reports this week - they might move the market for 10 minutes... perhaps 15 minutes, before the grind up continues.  There is a FOMC meeting this week so maybe if they move one comma in the statement, CNBC can go to 24/7 coverage and we can all hyperventilate.  Obviously rates won't be changing, so the only analysis will be what sentences changed a word or two, and if any commentary about asset sales enters the fray.  Doubtful Ben will allow it.

Earnings continues this week, and this will be the last week of major S&P 500 companies... although the big hitters are mostly done.  What was very strange has been since a week ago Friday, many companies HAVE sold off on their earnings but the market continues to march up.   It's as if any company not reporting is fine to rally... very very strange.   It's not the first time I've said that when observing the character of this new paradigm market.

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For the portfolio, it remains (as I've said for over a month) an unshortable market.  When the only selloffs lasting more than a few hours require fraud cases, it's simply something you cannot stand in front of.  If I can see the 20 day moving average pierced I can at least make some case, but until then it's ride the train and realize this will end like all other have ended - badly.  But the level of desperation and meddling in this market & economy is multiples of what anyone has seen before, so no playbook.  Until then I will join the complacency crowd, knowing at some point I will get my head ripped off to the side. And look forward to how Bernanke is taken through the wringer in 2014+ for repeating, at 50x, what Greenspan did.

On the long side: Rackspace Hosting (RAX) was sold Monday for not participating in this epic rally.  Once more this week, it did not participate... not sure what is wrong with it.  After Atheros Communications (ATHR) rocked its earnings report, I sold 1/5th.  After some "surprising" housing numbers (all hail! housing figures are starting to bounce as we enter the spring season), I sold 25% of our largest position Lennar (LEN).  I was stopped out of half of coal name L&L Energy (LLEN) for a quite nasty loss, the stock sits right above a key support - if that breaks, we'll have to cut much more as a risk control practice - currently this is my only loser.  In a flurry of trades late Friday, I restarted a position in Bucryus (BUCY), added to Quality Systems (QSII) [new breakout] & Skyworks Solutions (SWKS) [fell back to first level support], and added index positions (SPY calls and TNA ETF) in the closing hours as the S&P was poised to take out highs for the years, and "Magical Monday" awaited.  I closed Market Vectors Brazil Small Cap (BRF) for similar reasons to Rackspace Hosting... no life.

On the short side... are you kidding?  All I did was sell some index put positions I was holding from late last week once the S&P 500 bounced off that 20 day moving average Monday.

A part of me is considering buying way out of the money puts perhaps for January 2011 since I do believe those multiple gaps must fill in time.  In fact, I thought mid April to mid May would be the time frame - which appears increasingly wrong.  It's quite rare for an index gap not to fill within a few months.  The only question is how soon I want to begin losing money on this trade.  Potential issues the market will be grappling with in the fall is (a) loss of 1M+ census jobs (b) seasonal slowdown in housing (c) election stress (d) China real estate slowdown (e) the first signs that Ben may actually relent on his foot on the pedal by Q1/Q2 2011 (f) producer price inflation and (g) do state budgets matter anymore as a "problem" or is the unspoken of "backstop" by federal government yet another moral hazard?

That said there is no reason the market can not be at all time highs (in nominal terms) with unemployment at 8.5%+ (that would be government figures, not reality) by end of 2011 - remember the less workers, the more profit for corporate America.  With the government having bottomless pockets to pay for the lifestyles of those out of work, plus many others employed no longer bothering to pay their housing bill - it's a nirvana economy.  In many ways this is the same economy we've had for the greater part of a decade+ - there is simply no bubble except government and healthcare to hide all the excess workforce.  A greater and greater portion of national profits are simply going to corporations, and workers are receiving less (as has been the case year by year the past 10-15 years) - so the government is taking the spot of the house ATM to fill the gap.  Until the US debt is called to the floor this can go on for years.

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