Wednesday, October 29, 2008

Is Sears Holdings (SHLD) the Next VW?

If you missed the VW story from yesterday, Porsche bought basically all the outstanding float in VW forcing panicked trading by the 12% of shares short. Anybody attempting to cover or forced to cover had virtually nobody left to sell in the open market. This forced the stock trading on the DAX up nearly 500% and briefly gave VW the largest market cap in the world over Exxon. Gotta love the free market system that spins out of control.

  • Volkswagen’s stock soared to as high as 1,005 euros a share, about $1,258, on Tuesday before closing at 918 euros. The shares ended last week at 210 euros.
  • The rise appears to have come from a short squeeze of historic proportions, as speculators who had borrowed the stock and sold it scrambled to buy shares. Many had expected the share price to fall after Porsche gained control and stopped buying shares.
All this brings me to the story regarding Sears Holdings (SHLD). Most people commonly know it as the owner of retail gians Sears and KMart or by it's valuable brands like Craftsman or Kenmore. Neither retail operation is very impressive anymore so why would we care about the stock? Many reasons exist because of the valuable brands they control, but more importantly because SHLD is one of the largest commercial real estate owners in the US. As a owner of 250M square feet of valuable mall real estate with limited debt, SHLD has a very valuable asset that isn't being recognized by the market. Check out a good summary at seekingalpha.com if you want to read more about the value prospects of SHLD as this isn't really the point of this article.

Rather I want to focus on the possibility of a VW type short squeeze. Regardless of what people argue you can't deny that a long list of very successful investors are big holders in SHLD. From Eddie Lampert to Bill Miller to Bill Ackman. Its typically not wise to bet against these guys. If they see value, then it likely exists.

Looking at the list of holders from Auguest 31st below, you can see that more shares were short then the public float not controled by these strong investors. Now its very possible that a Legg Mason or some other fund was forced to sell shares recently to reduce this imbalance, but still its very likely that shorts also piled on to record amounts. All at the same time, SHLD continues to buyback shares further reducing the float. One by one these shares are being taken off the market, yet shorts continue to add. Betting that they can outsmart Lampert and the others. Don't be surprised if you find one day that a Pershing Square Capital comes in and buys 2M, or 5M, or 10M shares to dramatically reduce the float and squeeze the shorts. Combined with the buyback and all of a sudden you get a VW type situation where all the public shares are gone yet a huge short position exists with virtually no willing sellers. Not to mention the naked shorting implications or inability to short if these fund refuse to allow their shares to be borrowed.


Holder Name—Shares—% - as of 8/31/08

ESL Investments, Inc.—65,639,184—51.0%
Fairholme Capital Management LLC—16,110,090—12.5%
Legg Mason Capital Management, Inc.—12,503,168—9.7%
Pershing Square Capital Management—6,746,568—5.2%
ClearBridge Advisors—4,789,523—3.7%
Perry Capital—2,694,95—2.1%
Davis Advisors—2,020,96—1.6%
Dalal Street, Inc.—517,608—0.4%
T2 Partners Management LP—50,625—0.0%
Greenlight Capital, Inc.—11,240—0.0%

Total held by above—111,083,919—86.2%

Total Outstanding—128,800,000

Short Interest—33,656,888—26.1%

Share Not held by Above Holders—17,716,081—13.8%


Now I'm not that familiar with the VW story but the fundamentals of the auto industry are pretty weak so that part of the scenario matches SHLD. Hence the resilence of the shorts to ignore the resounding bullish case. Whether Prosche really sees the same compelling value in VW like these big funds do with SHLD thats beside the point. Many people with lots of money see value and thats all that matters. Betting against them at this point leaves you vulnerable for a epic VW type short squeeze. Will we wake up one day to find out a hedge fund drained the remaining float (don't doubt that they could coordinate this just like the financial bear raids)? Or maybe Lampert just sold a chunk of real estate for a huge premium to its current valuation (which at this point is virtually zero)?

I'm buying because of the valuation presented. One where I could easily conjure up the prospects of SHLD trading north of $400, but this new angle is hard to ignore and if it happens be ready to sell quick.

Long SHLD in both funds and personal.

Tuesday, October 28, 2008

Pickens BP Capital now at 100% Cash

Incredibly T. Boone Pickens BP Capital hedge fund has gone from fully invested in the global growth of energy demands to one that is no longer invested at all. According to this report, his fund has had over 50% redemptions. This just adds to the long list of funds that have now deleveraged and gone to significant cash levels. It also will add fuel to the fire of any rebound.

  • Roughly half the investors in T. Boone Pickens' BP Capital hedge fund have asked to withdraw their money after losses of about 60 percent this year, a source familiar with the situation said on Tuesday.
  • The Texas oil tycoon and his investment fund, which had invested primarily in the energy sector, have lost about $2 billion since peaking in late June, the source said.
  • BP Capital's losses this year come after five years of gains, with annual returns reaching as high as 119.5 percent in 2003 during the commodities boom that began in 2002.

Stat of the Day: Consumer Confidence Lowest on Record

According to the Conference Board, it's consumer confidence index fell to its lowest level since they began tracking it in 1967. This isn't surprising considering the large drops in housing prices and stocks. It's definitely a sign that consumers are gloomy. Does it mean that consumers won't spend? Thats yet to be seen as this report usually doesn't match what consumers actually spend. Some random consumer answers a phone and responds that they are gloomy then they go out to the mall and buy some clothes. Thats basically how the reporting works. Falling gas prices are more likely to impact consumer spending then the stock market or a house. Gas more directly impacts the monthly budget of most consumers, while big ticket items are the ones most likely impacted by housing and stock declines. So expect a weak holiday, but don't bet the house that this report accurately reflects spending.

  • The Conference Board said the consumer confidence index fell to 38, down from a revised 61.4 in September and significantly below analysts' expectations of 52.
  • That's the lowest level for the index since the Conference Board began tracking consumer sentiment in 1967, and the third-steepest drop. A year ago, the index stood at 95.2.

Monday, October 27, 2008

Stat of the Day: S&P500 Earnings Yield hits 10.76%

Doesn't take long for the yield to soar from the report I posted last week. We'll keep hammering home this theme that the market continues to be the cheapest valuation that we've seen in a very long time. Not much to follow up on this theme as this measure continues to be at the exact inverse of the 2000 bubble. Hmm....

ICICI Bank (IBN) reports decent quarter

How good is this Indian bank that they reported stronger results YOY even though they had nearly $300M more in loan provisions. The ability to lower expenses so drastically even though they grew deposits and loans speaks to the efficiency of this bank.


-- Profit after tax of US $216M; 39% increase over first quarter

-- 42% year-on-year increase in core operating profit (excludes the huge swings in treasury income)

-- 12% year-on-year reduction in costs due to cost rationalization measures

-- Capital adequacy of 14.01%

-- CASA ratio increased to 30% from 25% a year ago

IBN continues to launch both domestic and international growth where they can utilize non-resident Indians as customers and a low cost structure in India to run these international operations at lower costs.

  • At October 22, 2008, the Bank had 1,400 branches and 4,530 ATMs. (State Bank of India has 10,000 branches)
  • Current and savings account deposits increased 16% to Rs. 66,914 crore (US$ 14.2 billion) at September 30, 2008 from Rs. 57,827 crore (US$ 12.3 billion) at September 30, 2007.
  • Being the preferred bank for non-resident Indians: The Banks remittance volumes increased by 38.2% in Q2-2009 to about Rs. 11,946 crore (US$ 2.5 billion) compared to Q2-2008.
Not sure what isn't to like about the future of this Indian bank. India is still in the early stages of a infrastructure build out plan and banks will be big beneficiary of such a move. Any doubts this progressive bank in India will be substantially larger 10 years from now? Don't think so, but then why is the stock down to $12 from a high of $74? Based on the stock price, I sure thought this would be a horror report instead of one filled with lots of growth.

Wednesday, October 22, 2008

Stat of the Day: S&P 500 Earnings Yield at 9.88%



Considering that the 10 year note is at only 3.76%, this is a considerably wide and unheard of spread between the note and the S&P500 earnings yield. This is the widest spread in the last 30 years and maybe in history if I could find a report going back that far.

What this data shows is that anybody invested in a S&P500 stock would earn 10% on his investment while only earning 3.76% on a safe government note. Meaning that if credit was available, the market would see a high amount of leveraged buyouts. Borrow using cheap credit and make money on the spread. Basically a continuation of the private equity buyouts that began in 2002 when the market first got really cheap. Bankstocks.com has a nice little article that summarizes the bullishness now being seen in the private equity realm due to these very, very attractive valuations. When Henry Kravis and Steve Schwartzman become bullish on valuations, you should expect a big flurry of deals to be announced. Its only a matter of the credit markets freeing up.

Low valuations will continue to be a big theme. Lots of talking heads on CNBC continue to discuss the potential for another 20% drop in the markets. For that to happen, the markets would reach valuations never seen before. Thats a gamble worth taking.

Tuesday, October 21, 2008

E*Trade (ETFC) posts another big loss

Well at least thats the headline that you'll read. The real interesting note is that the CEO claimed that loss provisions have peaked in Q3. Stay tuned on ETFC as they still have a solid online brokerage that is very profitable. They also have access to the new government Capital infusion and TARP programs so the combination should provide any liquidity if needed. These options pretty much takes any bankruptcy fears off the table. Without BK fears, ETFC has a bright future once the current mortgage loans are run off. Anybody doing a quick valuation of Ameritrade (AMTD) will quickly gather that a E*Trade without the shackles of non-performing loans would be very valuable.

Stay tuned as this stock should get interesting!

Millicom (MICC) posts decent earnings considering

Thats the good news. Unfortunately Millicom International Cellular's (MICC) stock dropped 33% today. It's difficult to follow what the market saw that was so scary about the report. A 27% increase in revenues followed by a 25% increase in EBITDA seems rather impressive in this economy. Especially considering the low valuation level of 2.7x EBITDA that MICC now trades at. Does valuation not matter any more?

Highlights of the Q3 report:
  • 53% increase in subscribers for Q3 08 versus Q3 07, bringing total subscribers to 30.6 million
  • 27% increase in revenues for Q3 08 to $869 million (Q3 07: $686 million)
  • 25% increase in EBITDA for Q3 08 to $369 million (Q3 07: $296 million)
  • 17% increase in net profit for Q3 08 of $161 million (Q3 07: $138 million)
  • Basic earnings per common share for Q3 08 of $1.49 (Q3 07: $1.36)
Millicom International Cellular S.A. is a global telecommunications group with mobile telephony operations in 16 countries in Asia, Central America, South America, and Africa. It also operates cable and broadband businesses in five countries in Central America. The Groups mobile operations have a combined population under license of approximately 291 million people.

Though the list of countries includes unstable locations like DRC, Cambodia, and Laos to name a few the diversification in these 16 high growth, low mobile penetration countries reduces the risk that any one country might alter its mobile operations whether from political instability or economic problems. To me, this provides the ultimate emerging market growth vehicle. MICC is basically a mobile emerging markets mutual fund all by itself.

Unfortunately the market doesn't get my concept on the value of MICC. Sure the conference call mentioned several issues including currency translations impacting revenue. Other issues with local country energy and food inflation impacting customers ability to spend on mobile calls. Still though, MICC increased subscribers by 53% to over 30M. Sure the ARPU per user was down, but that only owes to the economic crisis the world now faces and short term inflation impacts in places like Africa that will surely disappear now that the input costs have substantially declined.

Liquidity issues might have sparked the selloff. The CEO mentioned putting off the early redemption of a $460M note that only seems prudent in a market where it's difficult to borrow cash. Why not preserve your $1B cash position (net debt is only $800M) until the markets reopen? Whats amazing is that the balance sheet is remarkable for a wireless company. Most domestic plays are loaded with debt. Makes you wonder if that market doesn't have it wrong about the riskiness of emerging markets. If this spooked the market, then MICC will rebound sooner rather then later.

Some subscriber growth numbers to ponder:
  • DRC (Africa) - 141%
  • Tanzania (Africa) - 110%
  • Laos (Asia) - 101%
  • Senegal (Africa) - 84%
  • Ghana (Africa) - 82%
  • Honduras (C America) - 71%
  • Sri Lanka (Asia) - 58%
  • Paraguay (S America) - 42%
  • Guatemala (C America) - 39%
From these numbers, you can see that MICC still has high growth from plenty of locations in all 4 regions. Africa added nearly 1M subscribers alone which provides a rare investment option in that continent.

Listen to the conference call and you'll hear plenty of questions about country specific issues such as competition, currency, taxes, and inflation. All in all though, MICC continues to perform in a difficult market. At a current market cap of only $3.8B and a Enterprise Value of roughly $4.6B, its difficult to follow why the analysts focus on such micro issues instead of focusing on the macro valuation picture. On all accounts, MICC is very cheap and the subscriber growth rates show that the product is in hot demand. Customers may use the service sparingly during the crisis but it seems almost assured that mobile service is a way of life in these countries now. As much, MICC should have high growth for decades to come. Buy when others are fearful.

Monday, October 20, 2008

Stat of the Day II: Unprecedented Low Valuations


Valuations continue to be at unprecedented low levels as this Valueline Appreciation Potential chart shows levels only matched twice in the last 40 years. This is a theme that we''ll continue to harp on over the coming weeks. As this chart shows, valuations match only the 1974 and 1982 levels. On these 2 occasions over the next 12 months, stock market returns were very positive with an average gain of 28%.
This is yet another confirmation of the cheap valuations as other methods show an even more bullish scenario for this time period. Low interest rates and high cash hordes as documented in other posts seperate this time period from even those prior low periods.

Stat of the Day: Southern California home sales up 65% from last year

Now this did occur before the Oct melt down in the financial markets, but it's a very encouraging that the price drops have finally led to more buyers. According to this LA Times story the median price is down 33% from the peak last year. Sales were also up from August and the hardest hit county of Riverside saw the biggest sales increase of 106%. Doesn't appear that there is a lack of qualified buyers when the price hits an attractive level. Thats an estimated $6B worth of new mortgages and roughly $9B as the original value that just left the books of weak mortgage holders and ended up in the hands of strong, financially solid holders.

  • The median Southern California home sales price was $308,500 in September, the lowest since May 2003 and down 33% from the September 2007 peak of $462,000
  • The number of homes sold in Los Angeles, Orange, San Bernardino, Riverside, Ventura and San Diego counties shot up 65% compared with September 2007.
  • A total of 20,497 homes closed escrow in the Southern California in September, up 5.8% from 19,366 in August.
  • Sales were up most in Riverside County, which posted a 106% gain from the same month a year ago. Riverside and San Bernardino counties also recorded the steepest year-to-year price declines in the region, with the median sales price down 37% compared with a year ago.

Wednesday, October 15, 2008

Stat of the Day II: Market Swings 2nd Highest in History



The guys of Bespoke came up with this interesting chart. The last 2 weeks have have had some of the most volatile intraday percentage swings on the DOW. In fact, only the wild drops in 1987 surpass the swings we saw on 10/9, 10/10 & 10/13. Todays move is close to making the list but might come up short. We're definitely in volatile times these days that favors traders over investors. The market looks like it wants to retest the lows or at least the close from Friday. My guess would be that alot of money is sitting around waiting for that confirmation. Should be an interesting next couple of trading sessions.

Stat of the Day: Gasoline demand down 9% YOY

Gasoline demand continues to plummett year over year according to Mastercard report. It seems that part of the destruction in demand could just be temporary as people spent the last couple of weeks sitting around watching the credit crsis and markets explode. Demand did pick up from the previous week. All in all, the national averages still haven't come down far enough to spark demand. As they approach $3 I'd expect a fair amount of pick up though still lower then last years levels. It'll be interesting to see how fuel efficiency plays into demand over the next couple of year. Would like to see a report that shows miles driven versus gas consumed.

Some highlights:
  • Average national demand for gasoline dropped 9.7 percent compared with the same period last year, MasterCard said in its weekly SpendingPulse report.
  • "This is the first time that we've had two consecutive weeks of pumping, in terms of year-over-year comparison, that were below 6 percent," McNamara said.
  • American motorists pumped an average of 8.762 million barrels per day in the week that ended Oct. 10, up 1.6 percent from the previous week, the report said.
  • the national average price for gasoline dipped 10 cents to $3.61 per gallon

Tuesday, October 14, 2008

Hedged Growth Positive for Oct

Though just slightly positive at $2,300 on a $1M virtual portfolio this is a really significant accomplishment considering the nearly 15% loss in the S&P500 for the month to date. The portfolio has a long mandate with the 1/3 position in Net Payout Yield stocks so this portion of the portfolio has been negative. Boeing, Disney, and Home Depot though are the only stocks that have worst performances then the market. Fortunately though the portfolio has been very heavy in cash due to the environment providing a mostly neutral stance for the Growth and Short portions. The Short position of the SRS ultrashort real estate position has returned 40% to offset some of the losses. The biggest benefit is that the portfolio leaned in with more Growth on Friday afternoon with purchases of Apple and NYSE Euronext. These positions have averaged 20% gains since those purchases. Also the Morgan Stanley and Regions Financial bets have combined for breakeven performances after being down substantially coming into this week. Its helped that MS is up more then 100% this week.

Prior to the close I purchased a 2.4% position in ROM (ultra tech ETF). With the tech sector down substantially today, decided it was a good time to add more exposure. After the bell, Intel reported a so/so quarter which apparently was better then the greatly reduced expectations. INTC is up about 4.5% tomorrow so the addition of ROM might have been pretty timely.

The portfolio is now mostly long with the additions to the Growth portion the last few trading days. All of the short position is still in cash except for the SRS position. For now, I'm still positive on a long term bull market starting, but its still too early to tell whether we've got the reversal needed. Earnings will be bleak and expectations for Q4 need to drop. We're seeing with the INTC report that maybe those expectations for Q4 are closer to reality then we expected. As we get out of the landmines that will be inherent in this earnings period, the market might be able to catch a rally. Then the rally could lead to better economic results in Q4 which would solidify the rally. Its all a vicious cycle and hopefully its now started for the bulls though this portfolio seems capable of handling either market.

Edit 10:30am: Looks like the ROM trade hasn't worked out so well with the market selling off again yet the portfolio is outperforming by 3.5% so far today. Added UWM (ultra Russell 2000) on the pullback to 26.15. With an 8% drop, this is ideal time to add more Growth positions to ensure the portfolio is ready for a rebound. Added to Growth portfolio as well.

Poll of the Day: Was Yesterday's Rally for Real?

The guys at Bespoke have this interesting poll today - Was the Rally for Real? As of this posting, over 51% of the voters think the rally won't last. While basically a 50/50 result, I still find it interesting that so many investors remain that bearish. After a historical 900+ point rally on the DOW, the market still can't find many bulls. Good sign that the rally might finally have legs. The experts say that it usually takes a 3 day rally to solidify a reversal from a bearish trend. We'll be watching to see if that happens and looking to add to the growth stocks in the Growth and Hedged Growth portfolios.

Sunday, October 12, 2008

Net Payout Yield Slightly Outperforms

Its difficult to get too excited by a portfolio down 17.3% last week. On a relative basis, it was over 0.8% better then the S&P500s 18.1% loss. Great, but nothing to write home about. This portfolio is definitely designed to outperform on a relative basis and hence doesn't have any shorts to benefit it on the downside. Considering its goal, it was a successful week since its goal is to just beat the market on a relative basis whether rain or shine. When the market is pouring losses, it'll likely do the same.

The portfolio has outperformed the market MTD and over the brutal last month. Not bad considering the portfolio has some growth stocks which will definitely lead to out performance in a bull market.

This portfolio continues to perform for those willing to accept market risk and not wanting to time the market. The best part is that this is the type of portfolio that should allow you to sleep at night. Net Payout Yield stocks gain market share and buyback large quantities of stock during downturns. This leaves them stronger then the competition when the recession ends and with less shares outstanding to boost earnings per share. Not to mention that dividend yields are higher as well. Holding onto these stocks will ensure you benefit from the coming market rally. Whenever that actually happens could be painful to wait on though.

Growth Outperforms by 3% MTD

For a portfolio that is very aggressively invested, I'm proud to report that it has outperformed the S&P500 during the worst week ever by 2.3%.The S&P500 was down 18.1% vs 15.9% for the Growth fund. The portfolio is also ahead MTD and over the last 3 months. This may be the first time in my investing career that I've done better then the markets during a 3 month period that the market is down 27%. This was achieved because of my bet that oil had peaked in July mainly due to slacking demand when gas hit $4. Hence I invested in DUG (Ultrashort Oil & Gas). This position has paid off nicely to the tune of a 150% and over $90K in gains in 3 short months. On Friday's open, DUG soared up to the upper 70s so I chose to cash in 2/3s of the position. After watching it soar further to 85, I cut the remaining position at 80 as it seemed like the typical blowoff top that is followed by steep declines. With this substantial sell, I bought an 8% position in APPL in the lows 90s on Friday still leaving me with a huge position in cash. Depending on the market, the remaining $114K cash will go to work this week likely on the long side on any weakness that holds the lows. We'll likely not see any huge follow through rallies the next few weeks since so much damage has been done to the markets that most funds will likely still face redemptions. Probably scale into longs over the weeks to follow unless we see a huge rally at which point I'd likely buy an ultrashort ETF like DUG or SRS.

Hedged Growth Outperforms by 17% in 1st 10 days

What a time to start this new portfolio. In its first 10 days of existence, the market is down 22.8% (thats a Bear market all by its self - wow!) while the Hedged Growth portfolio was only down 5.6%. Thats a whopping 17% outperformance. Considering the bearish tone of the market the portfolio stayed mostly neutral besides the 1/3 invested in the Net Payout Yield stocks. The Ultrashort Com'l Real Estate position (SRS) is up 41% so that helped as well. That was offset by the position in Morgan Stanley (MS) that hasn't paid off down 60%. Also helping was the 5% position buys in APPL and NYX close to the lows of the day on 10/10. Both ended the day with over 5% gains. Having $435K or 45% of the original value in cash or SHV (short term treasuries) helped keep the portfolio loss to a minimum though a much larger short position would've kept the portfolio closer to breakeven.

Next weeks outlook favors a market bounce after any initial drops on Mon or Tues due to fund redemptions. The world Governments have come to the rescue in full force so it's getting to the point that further downside is limited. Therefore, the portfolio is tilted towards a up market with the APPL, NYX, and WFC purchases on Friday. With any strong bounce, I'll likely look to add further shorts to keep the hedge going. On any weakness that holds the prior lows, I'll look to add more growth stocks. That portion of the portfolio is still roughly $200K low and I'm pretty bullish once we get out of this weak period.

Hold on because next week could be bumpy but we're already off to a strong start. I'm still intrigued to see how the portfolio does on an up day. Amazingly that hasn't happened since I started it on 10/1. Historical times to be investing for sure.

Friday, October 10, 2008

Trade: Buy Apple, Sell DUG

On the huge selloff this am I made the following trades. Bought Apple (APPL) for the Growth and Hedged Growth Portfolios in the low 90s. Sold 2/3s of the DUG (Ultrashort Oil and Gas ETF) in the upper 70s.

  • APPL has a $20B cash position and no debt. Currently trade at 10x cash flow with substantially higher growth even considering the slowdown. With the cash position, APPL should be able to gain market share in this downturn.
  • The growth portfolio has made a 150%+ gain on the DUG investment. With todays huge selloff, it just seemed the right time to cash in. Market wants to turn and we don't want to lose the gains.

Edit: Added NYX to Hedged Growth b/c it has a strong balance sheet and no credit risk. Sold the remaining DUG shares at 80. Added WFC & CAT to the Net Payout Yield portion of the Hedged Growth fund. Both are strong companies really beated up and that portfolio was still in signifiacnt levels of cash.

Thursday, October 9, 2008

Stat of the Day: 6 Day Losing Streak

While not all that rare, the six consecutive loses on all 3 exchanges hasn't happened since January 1991. As I post this, the markets are headed yet again towards another loss. While 7 days is somewhat rare, the longest losing streaks are 12 days on the DOW and S&P500 and an astounding 16 days on the NASDAQ. CNBC has a good summary of the 6, 7, and 8 day streaks for each market.

Edit: Make that 7 straight down days. Haven't ran the numbers, but it looks like record losses for that period.

Tuesday, October 7, 2008

Hedge Funds Shorting S&P 500 Futures like Mad?

According to acclaimed Bear Doug Kass, the tail might be wagging the dog. Ironically, he has become bullish because he sees excessive shorting of the S&P 500 futures. In his theory, this is being done to hedge against potential losses on long positions that aren't as liquid. Has the world gone mad? Perma bull Jim Cramer has been suggesting that investors sell, sell, sell and perma bear Kass has actually become bullish.

Beginning last Monday, I began to see a number of big hedge funds in the S&P 500 futures pit, boldly selling futures to hedge their core long holdings. As the market dropped precipitously on both Friday afternoon and Monday afternoon, they got ever more aggressive -- according to my sources, more aggressive today than at almost any point in a decade or more.

This strategy is a classic tactic one sees at panic/capitulation lows as hedge-hoggers sell short what they can sell easily -- the S&P futures market is deep and liquid -- while they retain what they can't sell easily (i.e., large blocks of individual equities).

That's what I see happening recently in the S&P futures pit, and even if I am only half correct, those hedge-hoggers could be on a sinking ship without a life preserver as the stock market might have bottomed under the weight and intensity of their aggressive short selling of S&P futures.

Monday, October 6, 2008

Stat of the Day: Commodity Costs Down for the Year

According to the guys at Bespoke, the average daily costs for commodities such as gas is now down $0.62 for the year. So the average consumer is now spending less then they were when the year started. Its also down a remarkable $5.39 per day from the peak in July when consumers were spending $4.77 per day more on commodities. That amounts to a lot of extra cash for consumers and should be bullish to financials and retailers as the market normalizes.

Friday, October 3, 2008

Why is everybody selling when Buffett is loading up?

It intrigues me when the greatest investor of our times has been on a buying spree and yet the markets have just had the worst week in 7 years per CNBC. Guess the heard mentality in the financial markets continues to live strong. After all we're just now coming off commodity and real estate bubbles. Why not have an overdone stock market sell off?

Below our the highlights of the recent Buffett purchases:

  • 9/19: MidAmerican Energy and Constellation Energy (CEG) reached a definitive merger agreement in which MidAmerican will purchase all of the outstanding shares of Constellation Energy for a cash consideration of approximately $4.7 billion, or $26.50 per share. Berkshire Hathaway (BRKA/BRKB) owns 87.4% of MidAmerican.
  • 9/23: Berkshire Hathaway is paying $5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend. Berkshire also gets the right to pay $5 billion more in Goldman common shares at $115 each.
  • 9/29: MidAmerican Energy today announced it has agreed to purchase 225 million shares, representing approximately a 10 percent interest, in BYD Company Limited (1211.hk). The investment is valued at 1.8 billion HK dollars, or approximately $230 million U.S. dollars.
  • 10/1: Berkshire Hathaway agreed to buy $3 billion of preferred General Electric (GE) stock. This stock pays a generous dividend of 10%. On top of that, Berkshire gets the option to buy $3 billion of GE common stock at $22.25 per share, well under the current trading price of around $25 a share.
  • 10/3: Wells Fargo (WFC) said early Friday that it would pay 0.1991 of a share of common stock in exchange for each common share of Wachovia Bank (WB) in a deal worth $15B. Berkshire Hathaway is the largest shareholder of WFC.
Thats a whopping potential for over $30B in deals with up to $16B in cash.

News by Bloomberg of the worst month ever for hedge funds in September might be a big reason for such a negative market this last week. As those redemptions come in the market might have faced a lot of forced selling this week. After all, we know the rescue plan passed on Friday should've been net positive to the market. Todays action after the passage in the House smelled of desperate hedge funds attempting to sell at the best valuation they could get prior to redemption payments.

Buffett may have been early in the market, but I'll be surprised to see him down much on any of his investments. Of course, his cash deals with GE and GS were clearly better deals then any small investor could get, but it's hard to see why anybody would be a net seller when Buffett has gone on a widespread buying spree. Heck, Buffett has even come out on more then one occasion and stated that the rescue bill approved on Friday would likely be profitable to the government. Yet, most taxpayers are overwhelmingly negative on the bill.

As he is famous in saying:
Be fearful when everybody is greedy and greedy when everybody is fearful.
Everybody is fearful right now.

Stat of the Day: Stocks undervalued by nearly 60%


The IBES valuation model continues to show stocks are very undervalued. The ratio is at record low levels. The current S&P500 yield is at 8.84% while the 10 year treasury note yield is at 3.66%. The fear is so great that people continue to favor low yielding notes for much higher yielding stocks.
Very interesting to note that the market is at the exact inverse of the 2000 peak. At that peak in 2000 the market was 60% overvalued. Since then though, the market has consistently been undervalued partly because people preferred to invest in real estate over the last 5 years and the stock market crash in 2000 scared people away from the market. Once stability returns to the markets, stocks should be in for a long run. This valuation model should return to the even mark at some point in the future.


Buffett continues to buy up distressed stocks

Today we get news that Buffett's bank - Wells Fargo (WFC)- has bought Wachovia (WB) swooping in and taking them away from Citigroup (C). Buffett is betting big on the rescue plan to be voted on in the House today. Recently he has bought stakes in GS, GE, and CEG. If Buffett is loading up, should you be sitting on the sidelines?

Great interview with Buffett talking about the rescue plan and his recent investments. Buffett continues to be the ultimate buy low, sell high investor. He continues to be positive that the rescue plan will be profitable.

Wednesday, October 1, 2008

Launch of Hedged Growth Portfolio

As of 10/1, I'm officially adding the Hedged Growth portolio as an option for clients. This portfolio will be the a combination of my existing Growth and Net Payout Yield portfolios plus a combination of shorts. Ideally the portfolio will include a combination of 1/3 of each component. So 1/3 of the stable New Payout Yield stocks, 1/3 of the Growth stocks, and 1/3 Shorts. This will ideally provide a less volatile portfolio that provides more consitent returns regardless of the markets. The Net Payout Yield stocks will provide steady, market beating returns while the Growth and Short sections will provide a market neutral approach with the best of both options. While the Net Payout stocks will be fully invested, the Growth and Shorts will be tweaked depending on the markets with neither to exceed the 33% threshold.

Starting today I've set up fund SFCHG at Marketocracy to start a model portfolio. The expenses on this fund at 2% will be higher then I'd charge clients, but this will provide the opportunity for potential clients to view the results of the portfolio. In addition, since shorting individual stocks isn't allowed on marketocracy I'd be forced to use short ETFs. Not ideal, but still a good example of the portfolio.

Intially purchased BA, UPS, HD, and BMY as Net Payout Yield stocks and RF for growth and SRS to short commercial real estate. RF has a tight stop if the rescue plan is not approved.

Stat of the Day: DOW has rare 4 straight quarters of losses

Its been since the 70s that the DOW has had 4 staright quarters of losses. Here are some other stats from CNBC showing how bad the world markets have been since the highs of last year. The Russell 2000 has been the best performing index with only a 22% loss. China with it's 62% loss has made our losses seem rather small. Guess it's all about your perspective in this market.

With todays start, the market is headed towards a 5th straight quarter of negative returns. If 4 negative quarters haven't happend in 40 years, makes me wonder how long its been since we've seen 5 negatives.