Friday, November 02, 2007

Oh Yeah! Bernanke!
As the Federal Reserve continues to throw water onto a grease fire, it seems there are a lot more unknown problems waiting to surface. My theory (stolen from other smart people) is that the subprime scare and current "credit crisis" is a function of too much easy-money and liquidity in the system. Instead, the Fed is acting as if no-money down loans on $500,000 Miami condos to NINJAs (No Income/No Job or Assets) is a worthwhile cause to fight for. The Federal Reserve continues to cut interest rates, which is decimating an already-weak dollar...which is going to really spike inflation (which has already been rising well above 5% per annum- excluding home-price depreciation)
I'm probably silly to be so picky about stocks right now, since this initial inflation surge will likely cause a lot of companies with tangible assets and low Price/Books to be revalued higher...along with rapid price inflation that allows companies to report large earnings increases (that maybe reflect inflation more than true pricing power). The markets focus on a few stocks like GOOG $700+, BIDU $390+, AAPL $180+, AMZN$85+, and RIMM seems silly and highly reminiscent of the nifty-50 from the 1970s. This will probably end with these stocks doubling from their current levels, before falling back to around 50% of their current levels. (Yes, Google, I'm talking about you!)
Current stocks I'm interested in:
AEA-$9, scummy payday lender, trading 5x trailing FCF. Once gas prices hit $4/gallon, people are going to need to borrow against next months paycheck if they want to afford enough gas to get to work.
MHP-$46- Owns S&P and some publishing businesses, 12x trailing FCF, but likely to get hit by scrutiny surrounding their ratings of subprime business etc. I guess i just like pain, at least when this thing goes down 15% on me, I can say that I didnt buy it at the 52-week high at $72.50. S&P makes 40% operating margins on its ratings biz and people will be borrowing money again soon someday, their business is something akin to a toll-collector...a good biz to be in.
LUV-$12.5- Another bad idea, buying Southwest Airlines. Not only won't they do something dumb like LBO, their fuel hedges don't give them a competitive advantage at current high levels. These guys have rapidly increased fares and are no longer a "discount" airline. All the same, low leverage and good service make it worth selling $12.50 didnt even stay below $12.50 after 9/11... so I doubt mortgage messes or high oil prices will either.
LOJN- $15- Lojack has 25% of their market cap in cash and no debt, 12x trailing FCF but low growth. Stock down from $24/share on worries about new auto sales. Im not super bullish, but selling $15 puts is earning me 3% in exchange for my willingness to buy this stock on a dip...not a bad tradeoff.
MRH-$17- strong insider buying, somewhat risky reinsurer that screwed up badly ahead of Hurricane Katrina, but appears to have recovered and learned its lesson. Earning strong returns, although the P&C market is weakening. Believe the insider buying is a show of confidence in strategy. Also like HCC, which underwrites niche insurance like aviation, bail bonds, etc. and is growing faster.
I'm also watching all the insider buying going on at mortgage insurers, but RDN/MTG/PMI have all continued falling even after the bullish signals. I cant get my hands around where the bottom is, but am torn between waiting to buy the stock or buying a crapload of calls. Banks continue to buy insurance from these guys, so this is one of the areas where returns could potentially be huge. (although 2007-2009 losses might be "huge-er"... is that a word?). If anyone wants to talk mortgage insurance, I've got some thoughts....feel free to share your own.