Wednesday, October 12, 2005

media stocks update

Most media stocks still hit 52 week lows as we speak. My bearish views were laid out here in July when the Street were still bullish.

Currently, media are trading at 8-9x EV/EDITDA, they may or may not get to 5x as I anticipated but they are getting close. I would like to have another round of misses in earnings before venture out in this space.

There are also some catalysts coming into view next year -- Winter olympics, election and costs (newsprint particular) facing easier comps (my bearish view on the economy should propel newsprint cost lower not higher). Those 2 major events still channel majority of its ad spending to traditional newspaper/tv combo, so they should be a nice boost. I can't stress enough that stocks have to be cheap first before one should make any move.

NLY - update

NLY just hit rock bottom 52week low and closed on the high ($11.95) which will be above our closing stop-loss that I talked about (i.e. continue to hold). Note that $11.95 were hit by big blocks at the last second before close - I figure shorts covering which is running at 10 days daily volume. That was part of my reasons for picking this stock. The shorts had been right, but right here below book, they are proactively covering as noted by daily bid size.

Tomorrow is another day - we'll see how NLY fare!

Monday, October 10, 2005

Refco RFX and receivables -- implications for Dell and others

Wow! Still couldn't believe it, someone actually has the guts to do it. REFCO's shares RFX was slashed 33% for not disclosing a $430mm receivables that was not an arm-length transaction. The receivables was in fact owed by an entity that is controlled by its CEO, Phillip Bennett. The loan thus far has been repaid in full and with accrued interest but the corporate governance has been shreded to pieces.

So what does that leave us? As I was blogging about Dell's hidden receivables, I just could not believe a real case involving this part of the balance sheet actually occurred. I am not saying Dell is actually having these types of loans to its executies but the mere appearance of conflicts of interest is enought to crater investor confidence. Only if DELL would fully disclose its receivalbes operation would serve to calm the investors -- but I guess we wouldn't see those until stock hit $10 or investors start to demand real answers from the board.

Thursday, October 06, 2005

Why I like Annaly Mortgage? NLY as a short term trade

This will be a first post of a stock I like -- a rarity due to my bearish posture, even rarer in the sense that I believe the housing bubble will soon implode. Having said that, I have absolutely no idea the timing of that happening. So my guide will be fundamentals and technicals, both of which will be my beacon of light in the darkening clouds of storm soon to hit the financial markets GLOBALLY.

Fundamentals: NLY is basically a hedge fund (one of the best in my opinion), by borrowing somebody's money, leverage it 9:1 and buy AAA rated MBS (Mortgage Backed Securities - to put it simply - your mortgage and my mortgage that may have been sliced and packaged in several forms). It's income is basically the spread between the assets and what they pay in interests. Times are good when spreads widen but recently spreads have been narrowing to the point of inverting (spread between 10yr and 2 yr treasure is as low as 12 bps at one time).
NLY also pays out almost all of its interest income in the form of dividends. Yields were as high as 10% at a time but due to the narrowing spread, NLY were forced to cut those dividends to only about 4% at current prices.

NLY has a book value of $12.5, which is what it is trading at right now with a yield of 4%. For a fiancial company such as NLY, book value is what you get literally if the company liquidates today, because they don't own many fixed assets such as a steel company that may need to be auctioned at prices most investors couldn't appraise.

Off course, there's always a chance that stock trades below its book but for that to happen, there may have to have yield curve inversion first. I personally believe there is a good chance that this may happen, however, I have learned from my investment career that don't invest in what you believe in (as you can be wrong in big picture, especially timing of which) but what you think you could make money on given the risk rewards. And I'll use negative yield spread as my exit signal or stock hit lower than $11.9 on a closing basis, whichever comes first. At that time I'll reevaluate and likely reinvest at a lower price.

The other risks, is off course, credit risks. 75% of its MBS are agency-guaranteed with 25% not. We could debate all day the debacle of the agency debt but I believe in the likely event of defaults, FNM and FRE will guarantee most of it in the first on slaught of defaults. Subsequently as situations get worst, then it is anyone's guess what's going to happen. So we have at least 75% of its asset taken care of, and the other 25% are all AAA rate as well. This is at least managable. Frankly, the best time to buy financials are when credit defaults manifest themselves to the fullest and there is fear on the Street. Then, you'll know who is the best credit risk manager and back-up the truck. That is the reason I'm shorting many financials but put a gun to my head, NLY would be the one I'm comfortable in buying (I may have said investing but buying for a short term trade is the only viable option due to my bearish stance).

This post is for educational purposes only and is not advice for buy and sell the aforementioned security! The blogger may have a position (long/short) on any of the securities mentioned in this blog

What multiple should Dell trade at?

Dell has publicly said that they'll shoot for 25% sales deriving from credit growth. That is not an insignificant amount. If that's the case, what should an investor pay for Dell in terms of P/E. Let's do a simple exercise.

For simplicity sake, we'll take this 2005 consensus estimates of $1.59 as the base and assume that they have already hit 25% mix in their revenue being financed. Since Dell essentially is running like a bank, investors should put a bank multiple for the 25% of its earnings which running at about 10x. (All multiples are forward multiple)


Dell current multiple 20x * 75% + 10x *25% = 17.5x

Current price of Dell should be around $27-28 vs market price $32.

Wait a minute, that's not fair, since Dell mix is not there yet. Yes, one could project x% of 1.59 in the future and project the real earnings but the point is at whatever earnings Dell is going to get, there will be a 10-12% hair cut in multiple due to its mix since it is carrying credit risks.

Strangely enough, banks have to disclose their credit experience such as % of delinquency etc. Dell not only not disclosing those, they are actually try to hide their receivables as I have blogged earlier.

Wednesday, October 05, 2005

U.S. Economy is red hot and better managed than the Japanese?

Stratfor - stands for Strategic Forecasting. They are very good in analysing geo-political events. However, today, they decide to wear an eonomist's hat and cheerlead the U.S. economy on. Their basic premise is that U.S. GDP is growing at 3% for the last few qtrs, therefore, economy is strong in spite of "bearish" media saying otherwise. I would have written a whole book just to counter this argument, but this post will deal the main points that Stratfor pointed as being U.S. strongest traits and why U.S. economy is so "resilient".

1) Capital is allocated on the basis of economic efficiency, not political perogatives. Asian capital allocation is extremely politicized with a lot of loans to companies that linked to the staes.

I don't disagree to the poor allocation of Asian capital, however, I take issues that U.S. is doing a better job. The recent highway bills are full of porks with $billions that are thrown toward projects that lead to nowhere. Secondly, how is U.S. capital allocated correctly when Fed micromanages interest rates to fuel the greatest asset bubbles of all time. There is even a running joke that Fed is throwing out free money out of its helicopter -- hence helicopter money!

2)Stratfor also speculates that heavy use of technology is the right allocation of capital.

Cheap money has been thrown everywhere and returns have been crushed! We had the tech bubble to begin with and that bubble is still being unwound as far as I'm concerned. And many people do not realize is that with increased productivity from technology, it actually leads to higher unemployment in the intermediate term! The economy may eventually adjusts but it may take a whole new generation to retrain and retool to the new economy. I'm not against the use of technologies but simply saying that heavy use of tech is the right capital allocation is wrong. This point has become so blatantly obvious that everyone is doing it. Why is there's not enough capital allocated to environmental causes for example or build better schools and a education system? On top of that, many tech jobs are outsourced overseas nowadays -- with U.S. middle class dwindling, how could that be the right allocation strategy?

3)The last claim is the most outrageous: U.S. practices Darwinism, bad companies are allowed to die unlike European or Japanese companies!!!

What!!! U.S. has this law called Chapter 11. It's a magic trick for unsuccessful companies to wipe the slate clean and do over. Some companies have been doing it for over 3-4 times and they are still doing it (think Airlines). Bad companies are not allowed to die, they simply reemerge with no debt - hence the industry do not lose capacity, rather every time some one is in trouble, they'll get a stronger competitor in the end. WorldCom, NTL and airlines which I mentioned are just a few examples.

Stratfor should stick with analysing Iraqi and Iranian threats, that's what they are good at! Don't destroy your reputation by sticking your toes into hot lava!