Capital Preservation --- preserve your nest eggs before it's too late!

NLY - sold

2006-05-30T07:27:00.000-07:00

Ok, back to biz. I sold my NLY at around $13.90. If market holds here, stock could fill the gap to $14-15ish but if my long term thesis is right, we may have seen the top of the market for the rest of this decade. So stay cash or go short for the aggressive.

media stocks update

2005-10-12T13:09:00.000-07:00

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

2005-10-12T13:04:00.000-07:00

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!

Refco RFX and receivables -- implications for Dell and others

2005-10-10T20:10:00.000-07:00

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.

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

2005-10-06T19:07:00.000-07:00

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?

2005-10-06T10:20:00.000-07:00

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)

Hence

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.

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

2005-10-05T10:32:00.000-07:00

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!

Credit delinquencies hit the highest level in Q2

2005-09-28T07:53:00.000-07:00

ABA (American Banking Association) just released its Q2 delinquecies data and showed a jump in every category. This is Q2 numbers, before Katrina and before gasoline hits $3 which curiousy was the main reason quoted by ABA as the reason for increased delinquency. I believe oil is only one reason among the many factors that is causing delinquency to go higher.

The main point I was going to make is that as people were looking at Q1 and Q4 of last year data, CEOs were confident that credit quality remains benign. As a result there was a big push to continue using credit as a boost to top line growth as I have detailed in my post, " Snapshots of receivable growth".

Now as delinquencies climb, will we see a drop in top line growth as manufacturers shun away from credit financing or will we need to dig deeper in SEC filings to see more underhanded selling of receivables such as DELL has been doing?

I vote the latter.

Where are those receivables, Mr. Dell?

2005-09-23T08:55:00.000-07:00

Vitally at Minyanville raised a very interesting question saying that it may be ok to have some receivable growth. Specifically, he questioned that DELL may not carry as much credit risks as it may appear on the Balance Sheet. So I took a peek a their 10Q.

Guess What I've found? Dell has a subsidiary called DFS (Dell Financial Services). It is a joint venture with CIT group but is 70% owned and consolidated. When a sub is consolidated, you'll include all income, asset and liabilities at 70% of whatever DFS owns onto DELL's profit and loss statement. That's strike one.

Now, for an even stranger note. DFS has been selling loans/receivables of $191mm or about 80% of total generated from DFS to, get this, UNCONSOLIDATED SPECIAL PURPOSE ENTITIES WHOLLY OWNED BY DELL. Why would someone do this? Even though receivables are generally good because they are assets but if run your receivables too big and too fast, you essentially become a bank. GE and BA are fast becoming banks even they are still classified as industrials. If you are a bank, you will run into credit risks eventually and that'll will wipe out all your previous and future earnings that you anticipate. DELL is fully aware of this risks and thus actively managing it, although the underhanded manner that it is being handled strike me the wrong chord.

Haven't we watch this movie before...wasn't it called "Enron & its special purpose entities?" IMDB rating 9.8.

FDX good numbers?

2005-09-21T12:54:00.000-07:00

Wall Street is going gaga over FDX's earnings. It was my bad not covering when a stock is selling down with upcoming earnings, it will typically do the opposite after the company reports (eg CSCO went up before reporting but reversed down 10% immediately after). Having said that and do away with the short term trading set-up, let's dig a little deeper into FDX's number.

I have 2 questions immediately having looked at the results:
1)How can a company as big as FDX turn on a dime? It's a titanic (yes I do imply it's sinking albeit noone sees it yet) that does not turn very fast. Only a quarter ago, they missed and now everything is hankytory? Let's pretend that biz do turn this quick, then what's to say that next quarter you could get lumpiness as things that drove this quarter suddenly goes away?
2)Oil is not the issue here: as I stated in my last post, oil is not the driver here as FDX uses surcharge to offset that.
3)Revs has been growing like weeds but how come margins are not improving? As I have pointed out, cyclical growth company such as FDX will continue to experience growth while their margins peak at the late stage of the cycle. That's the sign that things are deteriorating underneath (like the titanic)with the effects not seen until too late.
4)Besides, technically speaking, FDX is still trending in the downtrend even after today's spike.

Follow up on GCI and newspaper stocks

2005-09-14T10:28:00.000-07:00

GCI and TRB jumped on rumours that Icahn or other financiers may come in and scoup up the companies because they are cheap on EV/EBITDA basis. I have laid out why newspapers companies are not cheap (July Archive) even though they are trading near their median valuation for the following reasons:

1)revenues may weaken (a surprise to many bull pundits that expect economy to recover all prior to Katrina)
2)legacy revenues losing to upstarts like Yahoo and Google with a double whammy on increased legacy costs such as newsprints.

GCI just announced its Aug results, missing its estimates citing exactly the above reasons. Stock tanks hitting 52 week low. For media bulls out there, buyers beware, we ain't seen nothing yet!

3M boasts Chinese sales

2005-08-24T10:58:00.000-07:00

3M (MMM)hit 52 weeks low yesterday and suddenly Company are talking up their Chinese sales growth +25% for the next 5 years. Hmm, first of all, I would consider the timing fully suspect. Second, MMM still depends on 40% of its sales from domestic operations and Asian operation is about 26%. Now, Chinese operation is only 8% of operation, it immediately throws a red flag in my face as regular readers would know by now company's tricks to obfuscation tactics by steering attention away from potentially slowing main operations (past examples, VIACOM, EBAY etc).

When you have only 8% operation in China at this late stage of the cycle, YOU ARE NOT A CHINESE PLAY period. Plus, Chinese economy has been growing for decades, only now when Joe Investors are finally plowing their hard-earned money in BIDU (BAIDU, Chinese internet portal play) that MMM is finally waking to China? Too Late (read my thoughts on Chinese potentially being the catalyst for a melt down in global economy below). Simply extrapolate linearly for the next 5 years is downright dangerous planning. Think about it, if forecasting are so easy, try to extrapolate crude oil prices when it hit $11 in 2001. It should have gone lower by linear projection.

As I have said many times before, when the fastest growing but smallest part of a company's business is being touted by company executieves, you are forewarned!! RUN FOREST RUN!!

Snap shots of receivables growth

2005-08-17T09:13:00.000-07:00

They used to say that earnings are easily manipulated through accounting tricks but a sale is a sale. In that line of thinking, earnings growth in the absence of top line growth (sales) will typically not be rewarded. In the era of sales emphasis in order to attract investors' attention, CEOs are scrambling to boost sales. There are good and bad way of increasing sales. The right way is off course the best way when there is a genuine demand for your products and it naturally flows through your top line growth, creating shareholder value. The bad way is to artificially boost it by heavy discounting or give it away (BUY.COM model).

There is a third kind that is called vendor financing. This kind typically won't impact your margins such as heavy discounting would to your P&L. Basically, you give finance to your customers to buy your goods. What it does is that the company will book top line for that product sales and the relevant earnings, so it has a positive impact on the earnings statement. On the cash flow basis, it has a negative impact since the company has not received cash for it.

There are several reasons why a CEO may opt to do this:
1)financing costs are cheap, so why not
2)things may be slowing but I would to book more sales
3)look at that credit default, it's marvelous, who is going to default on me
4)look at that sales number, Wall street don't look at balance sheet data anyway
5)look at the response of my stock price whenever I print huge sales number
6)returns are through the roof, my board and shareholders are going to love me

Having said that, when a company are doing it excessively, it may point to potential problems down the road such as defaults as the portfolio of receivables grow bigger. Suddenly 1% default rate look big on a 1 billion dollar portfolio. In addition, a company may rely on debt as an incentive to continue its growth (sounds familar?).
So what is the metric we should look at in judging a company's financial health. One of the things that I'd look at is the receivables growth rate. If it is greater than sales growth rate, it is a red flag. I'm not predicting that all is bad when that happens but the odds of potential problems down the road is greater than a company that does not rely on receivables to generate growth.

The following is the highlights of several companies that showed receivables growth greater than its sales growth in its latest quarters:

Dell sls +15% rec +23% CSCO sls +11% rec +51% HD sls +12% rec +42%
WMT sls +10% rec +31% UTX sls +16% rec +23% GM sls -2% rec -1%

For GM, I have included their held for sales receivables without which receivables would have declined quite a bit. I figured the total amount of receivable is more appropriate as company do factoring (i.e. sls of receivable) all the time.

Real Estate Prices Will Not crash!!!

2005-08-17T08:25:00.000-07:00

Wall Street Journal and a guest on CNBC today both acknowledged that there is a bubble (or overvalued as they put it) in the real estate market but opined that if the bubble does burst, the decline in price will not be great and one of the major assumptions that the guest on CNBC is because:, "...especially if you're bullish on the economy and job creation in 2006 that should keep prices buoyant!". In addition, he mentioned that creative financing such as interest only loans (traditional mortgage payments consist of interest and principal payments while interest only loans is such that principals are rolled into your balance, in effect you have lower monthly payments but your loan amount increases every month, compounding) are adding to the aggregate demand.

Let me explain why this logic is flawed. First, basing your opinion on assumption (such as job creation) is dangerous to say the least. Job lay-off annoucements have spike to the highest level (this is fact according Challenger Gray Consultion firm) and the lamest excuse the general media can base their opinion good job growth to recommend that the housing price will not collapse?

Second, creating financing is equivalent to vendor financing done by the telecom debacles in the late 90s. Vendor financing is financing handed by suppliers to keep sales going (think GMAC, the finance arm of GM that finances all those 0% sales). Eventually everything will stop. This phenomenon is not just limited to the housing sector nowadays. Look at Dell's earnings (which was good by the way albeit short of expectations) for instance, Q2 sales were growing at 15% yoy but RECEIVABLES GROWTH were a whopping 23%. This is a major RED FLAG if you are financial analyst (In fact I will do another post on this).

The other more dangerous sign I have read today is the key word "few economist" think there will be a melt down in real estate prices. The contratrian in me rang a bell so loud that I have to cover my ears. In 1931, before the bottom of the stock market market and deepening of the Great Depression, majority of CEOs and Fed officials were bullish on the economy just as we are today.

Follow up on BAC (Bank of America)

2005-08-08T09:58:00.000-07:00

Also see BAC, trading off 10% since peaking in early July. If you're interested, you should read my post on my negative gauge of the stock even before negative sentiment starting to hit the stock since the KRB acquisition. watch this stock, because it is one the biggest component on BKX (bank index) and you know what they say about financials lead the market direction.

FDX follow up

2005-08-08T09:31:00.000-07:00

Stock is trading up $.20 following Barron's highlight over the weekend. I may speak early which is often the case but if there is no more follow-thru on the upside, it speaks volume of the tremendous supply of stock coming into the market and may bode well for the bear case in which I laid out in detail yesterday.

FEDEX is a buy according to Barron's?

2005-08-06T10:11:00.000-07:00

Barron's ran a very positive article on FEDEX this weekend. Let me first say that I have a short position on this stock and why I disagree with the assessment.

Barron's first said that the stock is down 16% and it's because of high fuel cost, higher capex and higher competition that weighed down the price.
The crude oil to fedex stock relationship just does not hold water. Why? If this argument will hold water, the negative correlation between the 2 factors will be consistent throughout history. During 2004, while oil was up 100% from $30 to $60, FDX went up by 35%. Immediately, you know that this relationship is not true. In addition, fuel surcharge imposed by FDX is having a positive on their P&L, so again this statement of higher fuel prices causing stock price to head down is downright misleading.

Costs did go up significantly, and that's not just fuel cost. That was the reason margins got crimped despite price increases (which was imposed almost across the board). Now, FDX is a cyclical growth stock, i.e., their cyclicality may not entirely depend on the economy as they do have strong international growth as correctly pointed out by the paper. Having said that, majority of their business is still cyclical and will be at the mercy of the U.S. economy (or global economy for that matter). The key to trading cyclical stocks is to watch margins, when they peak and trend down despite positive revenue growth, time to go. This is the part in which growth manager will overstay their welcome in the stocks.

Capex going up while margins continue to trend will spell trouble if and when things did not turn their way in 2006. That will significantly impact free cash flow and ROE if revenue start to turn down and they can't turn down the cost faucet fast enough.

The international growth story is by far the most telling part of the turning point in FDX. Why? Because typically when a company with significant portion of their business based in the U.S. suddenly EMPHASIZE their international growth proposition, especially having to spend to get there, you know that their are trying to distract investors attention away from the core business and justify slowing U.S. growth with higher international growth (smaller impact on EBITDA but look at the growth rate) in order to justify HIGH valuation. I just don't buy the argument that median of 16x is a bargain. Usage of 5 year median p/e is too short, especially using an expensive stock compared to an even more expensive S&P is a relative valuation game played in 2000 when analyst can't justify the multiples anymore but to compared against even more expensive metric.

There are other issues which I'm not going to go but I'll point out another critical point. Option expensing,if taken into account will crimp EPS this year by 2.5%. For a stock growing at low double digits, how much multiple contraction would we get, another 2-4x?

The paper's assumption of continued growth is flawed and the assumption that p/e will continue to expand is hope. The stock market is a discounting machine, just as it was discounting good 05 earnings during 2004, it well signal that growth is slowing going forward (see my Newspaper Media stocks comment lower). In additional, this stock still tout 75% institutional holding (50% would be consider unloved and worth a look) and put/call ratio and short interest are both low as well. Buy more folks and I'll borrow yours to short.

What Summer Redstone learned from Mel Karmazin

2005-08-05T12:26:00.000-07:00

Viacom will be splitting into 2 units by Q1 2006. I bet you didn't know that Viacom's Infinity division was bought and spun out several over its life, making Mel Karmazin, founder and recently left Viacom's CEO, very rich indeed. Should we enrich another CEO that instead of focussing on running its companies (in a rather difficult environment I might add), remain obsessed with driving the stock price up? Summer Redstone is a CEO that would not be shy about touting its company stock when its share price is under pressure (I personally can attest to this as he would repeatedly leave voice messages on my phone reassuring the positive case of its stock whenever there is a negative story that knock down the stock). Financial engineering may be a solution but it is only a solution to short term profiteers such as the investment bankers etc. The stock price would respond if VIA is trading at cheap valuation and/or the environment is getting better, neither of which has happened. Imagine my surprise when I heard Dick Parson of Time Warner chided on CNBC that not all stocks need financial engineering to boost the stock price up, referring to the oft debated case that they should spin off AOL.COM. Kudos to him, we should have more CEOs like and he just elevated his position among my most respected CEOs altar. No wonder Karl Icahn is buying a chunk of TWX, hmm, makes you wonder.

S&P 500 earnings growth

2005-07-29T11:58:00.000-07:00

Remember the VP from Thomson Financial that confidently predicted that S&P earnings growth in Q2 will be growing at a minimal of 10-15% versus the estimated 7-8% growth. Well, we are at the half way point this week, and the blended growth rate is 9.4%, hardly beating the bottom end of the expected range. The one stat that stood out was that not only companies in aggregate did not exceed the whispered high expectations, they beat by the smallest amount, +3.3% surprise and is below the 5% average surprise factor recorded over the past 8 quarters. So in Wall Street parlance, the rate of change has slowed.

Tech companies has the biggest upside surprise about 6% above estimates. This may sound good, but it wasn't mentioned in the report HOW MUCH tech companies typically beat in last recovery...6% upside sounded too little spread to me given their operating leverage. This is in light of no or little "option expensing" yet to be baked into their earnings numbers which over inflate earnings potential.

Consumer discretionary sector is reporting 4% decline in earnings growth. Strange, you'd think that consumers are shopping till thier pants drop, why are those companies not making money?? In spite of news that unemployment rate is running low, layoff announcement data tracked by Challenger, Gray is running at 45% above last year. This has to be the ONE THING that an investor needs to watch: especially the bulls that continue to argue that consumers are doing VERY WELL.

Once again, I cannot reiterate enough (if you can garner something from this blog), is that when people's expectations are high, make sure you look at the facts to support that expectations. If those expectations are based on thin air, then you have to decide to take appropriate actions.

MSFT is a value blue chip WOW, what a concept.

2005-07-22T06:44:00.000-07:00

Ms Mancin of Gabelli Value Blue Chip, told CNBC that she owns MSFT in her portfolio as she could made a valuation case for MSFT. As far as I'm concerned, anything that is trading above 20x trailing (not estimated P/E as the E could be influenced by high expectation as to compress the P/E) and 6x book is not a VALUE stock. Arguably, MSFT could be in a secular decline as the world is moving away from PC centric and open sourced application such as LINUX is getting on its tail.

Even with growth to P/E metric, assuming 10-12% EPS growth (probably lower after factoring in stock options compensation which would compress EPS calculation), it doesn't justify such a high P/E ratio. Many portfolio managers will look at its valution RELATIVE to its last 5 year (very misleading due to such short period after the bubble years), and say it looks cheap. That is the trouble with this kind of thinking, and I'm surprised Wall Street still hasn't adapted to the potential of MULTIPLE COMPRESSION of the years ahead even as earnings could continue to grow.

GOOGLE -- BUY BUY or BYE BYE?

2005-07-21T13:44:00.000-07:00

All eyes on GOOG, I'm not going to make a prediction. BUT, I'm going to let you know that if you follow GOOG over the next few days on how it trades, it could be the tell on how overall market is going to do. Citigroup (C) has already made its move by trading lower, now we need a strong Tech leader to do the same. The reason why banking and techs are important tells is this: banking is 20% of S&P index and it shows money flow sentiment of the institution and tech went to 20% in 2000 and crashed but still have a huge following among both institution and retails a major psychological tell.

GOOG is trading down $20 after the initial pop, so we'll track its movement and see whether it's a BUY or a BYE!

MSFT

2005-07-21T13:16:00.000-07:00

Just a quick post on MICROSOFT's Q2, missed top line by a mere $10mm in spite of 3 pennis beat. MSFT has been on my SHORT list (NOT ADVICE) since they announced the big special dividend since DEC 04.

China - the Black Swan

2005-07-19T12:20:00.000-07:00

As I stated below about the real risk of the market -- i.e. the black swan that has low probability of happenning but nevertheless exist, please read China's bad debt crisis and Chinese State Enterprises. These articles confirm for me that the risk of Chinese economy dragging down the global economy is higher than Chinese bulls that think China will be the next superpower soon. My contention has always been, yes, China may be the next Superpower but it may not be in my lifetime. They may have to go thru' what the Americans went through, the Great Depression, clean up the mess and then rise from the ashes.

For now, the risk is increasing that the hyperleverage Chinese economy could kick off the this hyperleverage global economic dominos.

Bank of America (BAC) beat numbers but stock down, why?

2005-07-18T12:50:00.000-07:00

Bank of America beat numbers handily this morning but the stock was down by almost 2%. Most people attributed this to sympathy trades as Citigroup missed their numbers as well. Yeah, but why? Did anyone bother to explain? Let me help:

First, BAC's technical picture (chart) has deteriorated since it peaked in late May. After the sell-off since the acquisition annoucements, it briefly rallied above its 200 moving average with light volume. Now, the bear on the stock is showing who really is the boss. Today earnings is merely a catalyst.

Second, fundamentally, the buy side is REALLY concerned about the acquisition of KRB (MBNA)(see my BLOG below when they first announced it). It is really late in the game to buy a credit card company especially they just did one big acquisition less than a year ago.

Third, now the concern has manifeasted itself from today Citigroup's and KRB's earnings. Narrowing of net interest margins is really eating into profits. What that means is that as FED is raising rates, long rates has not risen fast enough to compensate for the risks to underwrite the loans. As I have numerously point out about yield inversion (i.e. long rates are cheaper than short term rates SEE Posts below), this is exactly why I said it is really really late to buy a Credit Card company. The reason is yield inversion typically happens at the peak of the cyclical business cycle and it is predicting recession ahead. While credit quality still looks good, that is as good as it gets...and when credit quality goes bad which I expect as the business cycle heads south, BAC will have to contend with earnings implosion with the newly acquired company.

So has BAC traded down due to mere sympathy trade with Citigroup? Financial media will easily dismiss it as such because they REPORT on things but never done any HOMEWORK on it. If you don't believe me, look at the numbers that been reported and decide for yourself. The worst is that you don't agree with me, but at least you've done your homework.

If you really aspire to be a landlord, read this.

2005-07-16T07:51:00.000-07:00

Ok, I was rambling generally about housing bubble which I firmly believe is in the late stage. This doesn't mean that one can't make money on real estate, the odds are just getting slimmer especially if you don't do your homework. Just like bear markets, in its bear declining phase, only 25% of the stocks has the potential of going up. So will the real estate market when it goes down. With this disclaimer out of the way, if you decide today that you want to be a landlord, by all means, but please at least read Do your homework first. This is at least how the REAL pros are doing it, by the numbers.

Just in case you wanted to see how a real world example could screw up your balance sheet and cash flow, read this: Landlords have high hopes in Silicon Valley

P.S. More housing troubles in Denver (free registration required). What this article didn't point out is that what would happen to their nice profits if you factored in a 5-10% DECLINE in prices which happens even in price Boom (it's called a correction).
The profits that most people have may turn out to be losses due to how little equity there is in those speculative properties. Imagine having to pay your bank in order to get rid of your house, suddenly you realize you don't really OWN the house. Remember LEVERAGE works both ways, it'll make you rich and it'll make you poor, too.

HOT HOT HOT!!!!

2005-07-15T08:51:00.000-07:00

Ok, CNBC is running hot second home properties with gleaming agents and owners touting their million dollar second homes property from Aspen to Hamptons. Just as a coincidence (NOT), Fox News is running HOT PROPERTY at the same time??? WHOA!!! This is getting too creepy for me, the whole country's psyche is OBSESSED with properties!! HMM, I remember the country was OBSESSED with IPOs and venture capital once not too long ago time. HOUSEDAQ.COM. 'nuff said!

P.S. couldn't resist check out this link:You can quit your day job now

PPI, tame inflation? NOT. Fear Deflation

2005-07-15T05:35:00.000-07:00

Wall Street and main stream media is still obsessed with inflation, so is Federal Reserve. My believe is that due to the massive debt inflation during the last 60 years especially during the last 4 years in which fed tried to prolong the growth cycle, we are facing the coming implosion of the debt bubble. The result of that massive implosion will cause deflation not inflation.

So PPI is down 0.1%, and Wall Street is cheering? They should be worried now, especially with material costs going up and they can't pass through their cost by increasing prices. We're are already transitioning into stagflation environment which is the precursor of deflation.

KRI Q2

2005-07-14T20:22:00.000-07:00

Knight Ridder's earnings have the same theme as that of Gannett, namely cyclical part of the business was dragging the group lower in spite of good internet properties such as Career Builder etc. Newprints costs spike has also wrecked havoc to margins as circulation is down.

The other point that I wanted to make on GCI's post was that June advertising trend was down versus May and it fell off faster than anticipated. KRI experience the same case in June. This is important given the overall Retail Sales stats that came out this morning that in my opinion was much skewed by GM's incentives. Many bulls will point to strong consumer as the main pillar in this recovery, although I would like to caution you that Corporate advertising spending leads the economy 3-6 months ahead of the consumer cycle.

Yield Inversion

2005-07-14T10:22:00.000-07:00

This is pure FYI from Bernie Schaeffer's website.Conventional Press' wisdom on the economy versus Bernie's view

Review of Gannett's Q2 earnings

2005-07-13T20:26:00.000-07:00

Gannett is the first major newspaper/broadcasting company to report Q2. I always view old media company as the leading indicator to the economy (see post below), so I track them very closely.

For details: Q2
Press Release.

Here's my quick 2 cents:

There are 3 drivers to the story that you need to track.

The gem to story is USATODAY.com, its internet sites (and various other local papers that have websites). Today, web based revenues are only generating slightly over 10% of total revs. The other 90% of its revs are both cyclical and in structural decline. In order for the story to get exciting, I would like to see the mix to be at least 50% internet and/or valuation get really cheap whichever comes first.

Second, old media like I mentioned continued to plaque general growth. Newspaper circulation continue to decline and circulation revenues growth is currently helped by price increase in USA TODAY. However, this is unsustainable as we all know price boost on declining volume will do more damage in the long term. Advertising is very cyclical and right now GCI is facing tough comparision till the end of the year due to 2004 political advertising compaigns. The other key point that I would like to make is that job wanted ads are contributing as much as 40% of revenue. We are almost 3 years into this job recovery, and if anything, one has to discount a higher
PROBABILITY that job wanted ads may be in the last stage of this cyclical recovery.

Third, you need to track national versus local advertising. Typically, when CFOs get more cautious, they would most likely cut national advertising first as they are more costly and experiment with local advertising to get bigger bang for the buck. National is currently in decline versus local advertising, so this could be an early tell to the national economy that you may not hear from CNBC.

Overall, GCI is stuck between the rock and the hard place. Business is ok but has the potential to get worse and its valuation is not compelling yet (in spite of Wall Street analysts shout of BUYS). Estimates still run about double digits next year and P/Ebitda is around 9x, around median valuation. For a stock to be interesting to me, I need to see stock at 5-6x p/ebitda. By then, you'd likely see estimates running low single digits or even negative (a rare events on Wall Street). Then you'd BEEP BEEP, back the truck UP!

Expectations Versus Facts...Q2 earnings

2005-07-11T22:05:00.000-07:00

This morning, a Vice President from Thomson Financial (sorry, never good at remember names) was interviewed by CNBC and was asked about Q2 earnings. Interestingly, he mentioned that although, earnings growth is estimated to be +7% this quarter, he expects that the aggregate earnings growth would beat and most likely come in at around 10-15%, The main reason he gave was that preaanouncements have been running low till now, as result, he sees upside to the estimates. I didn't think much until I saw this : Preaanouncements
is worst since Q1 2003 .
Why the discrepancy, especially since both sources appear to be from Thomson Financials. Are they so optimistic that they chose to believe the positive data rather the the others. Well we'll find out soon enough heading into this earnings seasons.

What unsettles me with this interview was the manner this information was disseminated. It was presented as a matter of factly as facts rather opinions and why would USA article contradict this gentleman's preaanouncement data? Was he too bullish to see it and why didn't he disclose it on TV while he was making his predictions of companies beating expectations?

Is there too much to ask for financial journalist to separate facts from fictions?

Digging deeper into our beloved Dow Jones Industrial Index.

2005-07-08T11:59:00.000-07:00

DJIA (Dow Jones Industrial Index) has bounced nicely off its yesterday abyss and is retracing about half of its plunge from June Peak. So out of curiosity, I decided to look at % of its component that is trading above its 50/200mva, a conventional way of confirming the health of the general markets.
+ prices are trading above, - prices are trading below
AA -50mva/-200mva
Aig +50mva/-200mva
AXP +50mva/+200mva
BA +50mva/+200mva
C -50mva/-200mva
CAT +50mva/+200mva
DD -50mva/-200mva
DIS -50mva/-200mva
GE -50mva/-200mva
GM +50mva/-200mva
HD +50mva/-200mva
HON -50mva/-200mva
HPQ +50mva/+200mva
IBM +50mva/-200mva
INTC+50mva/+200mva
JNJ -50mva/-200mva
JPM -50mva/-200mva
KO -50mva/+200mva
MCD -50mva/-200mva
MMM -50mva/-200mva
MO -50mva/+200mva
MRK -50mva/-200mva
MSFT-50mva/-200mva
PFE -50mva/-200mva
PG -50mva/-200mva
SBC -50mva/-200mva
UTX -50mva/+200mva
VZ -50mva/-200mva
WMT +50mva/-200mva
XOM +50mva/+200mva

Here is the verdict: 11/30 above its 50day and 9 above its 200day. Only 6 are above both 50/200 day. Here's the facts, this is not an opinion. Decide for yourself if you think this is bullish or bearish.

Software Miss!

2005-07-08T07:06:00.000-07:00

This is the second indicator that things are slow in the tech land. SEBL and BORL both pre-announced earnings. Software are the second thing (right after Advertising $) that CFO could cut if things doesn't turn out as expected.

Should we listen to Larry Kudlow ? NOT

2005-07-08T05:39:00.000-07:00

I've had it, I can't stand it anymore. The ex-fed Fed reserve is the forever spin doctor...give him poop and he'll spin it to gold. There, I've said it...take his advice at your own risk.

Pricing in the risks?

2005-07-07T10:31:00.000-07:00

As an investor trying not to lose money in this wacky market, I am always cognizant of risks that are not priced in the security markets. Risks are not well documented and outlier or in other terms, out of the blue risks (the so called Black Swan) are the ones that you want to be cognizant about. Why am I talking about this when financial markets snapped back smartly off its low since the London attack this morning? Who Cares, right? Well, let me ask you how you felt this morning waking up and looking the stock futures down 150 points. Let assume for a minute that what if 150 became 200 then 500 and then....how would you have reacted then knowing that markets may not recover all the time (history tells us that market crashes all the time bull markets such as the one that peaked in 2000 only come once in a lifetime). Would you have cared then, I bet you would.! Unless you are one of those that bury your head in the sand when sustaining losses, I can't help you.

So what is the Black Swan that is not priced in the markets. PLENTY. Unfortunately, it may not be oil price hitting $100 (like the recent Goldman Sachs' analyst predicted, didn't hear him say oil price would be $40 when it was trading at $14. It always bothers me when people use linear projection to predict future events). Events risk that are most talked about often has either the least probabilities of impacting the market and or least impact on the markets if and when it actually happens. For instance, housing bubbles that has been talked about for 3 years now and it hasn't burst, yet. I'm sure it'll burst when I start seeing Business Week headlines such as Housing Golden Years or Quit your day job! Learn to become a millionaire landlord! etc.

So what is out of the blue that people don't talk about. It could be anything that you don't get to watch on CNBC. Let's start with something simple, how about some Chinese banks collapsing overnight because its customer couldn't meet liquidity requirements due to the economy growing ONLY at 9% versus the required growth rates of 10% to remain solvent. This in turn set off a chain of events due to inter-connectability of global instituitions nowadays that force some serious selling of financial assets to meet margin calls. Think this is far fetch, not by much, considering how leverage the Chinese economy is nowadays. But this is THE kind of events that noone is talking about and hence the impact would be the greatest.

I certainly can't make money betting on Black Swan risks but I could stay away when the markets is overvalued, option pricing is cheap (VIX all time low) and Bull/Bear spread on AAII has not inverted for weeks. Sure the market so far has shrugged off the London attack but next time the Black Swan would be bigger and darker and I'm not sure investors are prepared for that. The worst thing is that I don't even consider terrorist attacks as the Black Swan anymore...

5 quick steps in preserving your net worth

2005-07-06T09:50:00.000-07:00

Raise cash in your 401K. You should start trimming any funds that are investing in reits and growth stocks.
If you want to keep some stock in your portfolio, invest only 50% of your cash at this cycle. Personally I would go as low as 20% only and I'd be very selective in what I own. I'd consider only deep value funds and would inspect closely what the fund own in its perspectus.
If you are over 55, you shouldn't invest more than 50% of your cash in stock at any time. Keep some cash handy as there will be more opportunity to invest in higher yielding instrument.
Start paying off your debt, starting with credit cards, car loans and then mortgage.
Raise your emergency funds from 3 months to 6 months at the minimum.

Media stocks depressed, why?

2005-07-06T05:54:00.000-07:00

David Faber was doing an ed-op piece on the old media stocks, namely TWX, DIS, NWS and VIA, wondering why they are still depressed and not attracting any buyers. The morning guest (his name eluded me) offered that when they're split and separately IPOed then maybe there would be some interest (referring to VIA), especially after people focus on their cash flow.

I couldn't disagree more. There are 2 forces right now driving media stocks, one is cyclical and the other structural which both are pointing down right now. Cyclical forces such as ad sales, film box office are hitting cyclical down turns suggesting companies are not spending as much ad $ which is a major discretionary expense and reflects the psyche of the CFOs getting cautionary at best. Structural forces are also compressing Media companies ability to compete with the new media such as the internet, blogs etc getting the bigger pie of the ad pool. In additional, piracy is not helping the content department either.

Add these negative forces with stocks still trading at only median valuations (not depressed like the Street suggest), insane analysts' price targets assuming expanding multiples and complacent option crowd (still insanely bullish -- low Put/call ratio) as well as technical breakdown, you have disasters in the making. These are the forces that mere financial engineering such as spin-off or share buy-backs will cure.

IMHO, stay away with these stocks and you'd likely buy them a LOT cheaper, at truely depressed levels.

Earnings Season --- take a deep breath, wait till the dust settles!

2005-07-05T20:38:00.000-07:00

Totally agreed with this post from Reuters: Look through the numbers of this upcoming Q2 earnings season. Companies are already expert in managing expectations and earnings massaging will still be the norm in this reporting season. If a company beats, make sure they beat on revised up estimates instead of revised down estimates and vice/versa on the miss in earnings. Or better still, wait for the Balance Sheet and cash flow data to come out before deciding what to do with your positions or cash. Or better still, wait for the 10Q to come out for more details. With 8000 hedge funds and 8000 mutual funds shooting each other every day, it pays to be patient. Remember the Chinese Proverbs says "When the Snipe and Clam Grapple, the Fisherman Profits". So Hurry up and Wait, be the fisherman rather than the Snipe or the Clam.

GM sales precursor to a strong economy?

2005-07-05T10:12:00.000-07:00

There has been many bull pundits touting 41% sales pop from GM last month as the indication that consumer is still strong and the turning point to GM's profits. First let's talk about the fundamentals of GM's business.

In a manufacturing environment, when your gross margins (i.e. sales less gross costs to make goods) are declining 1-2% every year while sales are increasing is nevertheless a dying business. Using sales as a pure metric to measure success is equivalent to tracking buy.com's sales (below costs at the peak of 2000) or tracking yahoo's eyeballs. Those were misinformed tactics as we have witnessed time after time since the internet bubbles burst. In addition, when you have the manufacturer actively financing their wares so that their customers could buy on a consistent basis is unsustainable. Think Nortel or the others during the telecom boom...remember vendor financing? Just watch GM's receivables which ballooned from $98b in 2000 to today $200b at the end of 2004. Top line sales growth is sustanainable until your customers blow up, then you'll get both sales implosion and "on going concern" implosion.

Many people also touted the cash cushion ($35billion) held in GM's coffer but the total liabilities of this company of $450 billion dwarfs anything the company has to offer. In share price terms, cash may appear to be almost $60/share versus GM stock price of $35 today, however, total liabilities is about $795 just to give you a perspective.

Do the math yourself and don't let the Wall Street pros or CNBC spin and obsfusicate the truth. As to whether GM's sales pop in June indicate the resilience of the consumer, you'll have to wait for another post. But the short answer is no.

Market Randoms to start the week

2005-07-05T06:45:00.000-07:00

Batman Begins i s the best Batman made in movie ever...hope you had a great July the 4th as I did, spending quality time with my 5 year old and fireworks...
Would the market confound again by doing nothing for the rest of the week or negative preannouncements would shock and awe the slumbering analysts and traders?
More negative buzz on potential indigestion by BAC (WSJ online)...
Are Transports (TRAN) and 10 year yields telling us something about the economy. LEI (leading economic indicator) has already confirmed that we are sliding into a recession.
Trailing P/E on the S&P (measured on core operating EPS versus the doctored pro-forma) is still overvalued at 20x historically see Hussman on P/E>...buy at your own risk.
Dollar shorts are getting crushed again...avoid the most talked about trades, never works. You'd do better asking your friends what they are doing and run the other way.
If you still haven't figured out that this is a bear den, you're not READING at all. Also a closet contrarian if you'd like to know.

Market Randoms -- stealing a page from Minyanville

2005-06-30T06:39:00.000-07:00

Should everyone go to the movies on FOMC days? zzzzz At least there are potentially good movies to watch such as War of the Worlds.
FOMC is announcing its decision 2 days before the long weekend...anyone around?
No one is around trading this market anyway, they're flipping condos on the web
As I get more familiar with this blogging stuff, more primary research will be available...getting up to speed here.
How do you define rich? Rich is not having to work and have income coming in. That's rich...not making income of $200k and making payments on $600k mortgage.

Bank of America buying MBNA">

2005-06-30T06:25:00.000-07:00

Well, well. Another bites the dust, when will Bank of America (BAC) stop? It was less than a year after they integrated Fleet Boston acquisition and now they are doing it again. Serial acquirer often ends up badly, think Enron, Tyco just to name a few. Banks are especially late in buying stuff. Just remember they were buying up real estates in the 90s right before the real estate crisis was brewing, or BAC buying mutual fund/brokerage companies at the peak of the stock bubble. Now they are buying credit card companies at the peak of the credit bubble and the peak of credit quality. Track the banks and what they buy and run the other way will make you rich 9 out of 10.
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Test Post

2005-06-29T21:43:00.000-07:00

Read an interesting article about the recent Supreme Court's decision on file-sharing by another blogger: New Economy of Community. , in which he summarily stated that in the end, everything wants to be free....to be free of artificially inflated charges. This has been my contention that internet will enable deflationary forces to sweep through the corporate world and if this "force" is not dealt with or capitalized, profits will be in the hands of the masses.