Peterson Cleaning

Interesting opportunity in AMR 7.5% 2016 Senior Secured Notes

2011-12-07T21:11:00.001-08:00

American Airlines (NYSE:AMR) recently filed for Chapter 11, following a standoff with its pilots union over wage negotiations. American is the only one of its peer group (aside from Southwest-LUV) to have maintained its expensive legacy liability structure, in the form of expensive union contracts, onerous work-rules, and large unfunded pension (>$5Bln underfunded).

Currently, most items on the McDonald's Value Menu are more expensive than AMR stock and its unsecured debt obligations have fallen precipitously to $.20. The secured bonds for AMR trade mixed, with 1st-lien secured (newer aircraft) bonds trading near 8% or par, 2nd-lien bonds near 10%, and older-aircraft deals in the mid-50s to yield 15-20%. American is expected to reject a number of leases on its 85 older MD-80 planes (45% of leased portfolio, which should result in significant cost-savings and additional unsecured claims. The estimates of unsecured claims range from $13-25Bln and is difficult to estimate, given significant issues like lease rejections on facilities, planes, engines and the potential for American to dispose of pensions to the PBGC.

While the newer secured plane deals are probably money-good, they offer unappetizing returns near 8% that do not meaningfully compensate for the potential headline risk and volatility that can occur in a bankruptcy. The unsecured debt at twenty cents offers significant upside in the bull case (200-300% return possibility), but there are massive uncertainties with respect to how aggressive AMR management will be on the union contracts, pensions, etc. If the restructuring and pension/cost-cutting is significant, it will incur sizeable unsecured claims that dilute bondholder recovery. In the bear-case, it could result in loss of principal and/or negligible return over the expected 18-months that the bankruptcy case may take to fully resolve.

My preferred security is the 7.50% Sr Secured Notes Due 2016, currently trading at $74 (near 17% YTM). The security package on these bonds is exceedingly attractive, as it is comprised of American Airlines profitable international routes to China, Japan, and London. The full security package also includes highly sought-after slots and gates in Heathrow and Japan, both of which would likely have strong demand from third-party buyers. My understanding of the indenture is that if American chooses not to affirm this bond and continue payments, then bondholders can force the trustee to seize each of these slots, gates, and routes which would effectively destroy American's international business (including their decade-plus relationship with British Airways, as their gateway partner into Europe). There are numerous reasons American would not commit such folly:

1) The most recent appraised value of the collateral package (gates, slots, route authorizations) was approximately $1.526Bln as of 09/30/2011. This exceeds the outstanding amount of 1st Lien Notes by a factor of 1.5x, which suggests strong over-collateralization and that American would be wiping out potential equity value that exists above the lien.

2) American's international business is currently profitable, their domestic US business is not. Disrupting the only profitable part of its operations would cripple the business and also damage international traffic that is being fed into its US network

3) Future access to capital will be needed- American just priced this deal in March 2011, at a time when its ratings were below investment-grade and potential restructuring seemed possible within the next few years. This deal was structured to protect investors during any likely restructuring, by providing them with collateral that was previously a part of its bank credit facility until 2009

4) Access to routes in Asia and London are highly sought-after, with London/Japan being the most slot-constrainged airports in the world. American would have a tough time ever regaining a foothold in international markets and jeopardize billions in enterprise value if it attempted to impair bondholders of this issue. This seems like a silly thing to do if the only upside was to squeeze bondholders out of a couple hundred million dollars. It would be much easier to squeeze costs by eliminating workers, pensions, excess facilities, and older planes. That is where the real fat seems to be.

5) American has left foreign trade creditors and suppliers out of its US bankruptcy filings. They have not cancelled flights or suspended frequent flyer miles, along with indicating an intent to remain a going concern. American is entering bankruptcy at a time of strong industry "cooperation" on flight capacity and pricing, along with having a cash hoard of $4Bln that ensures adequate liquidity during its restructuring. Based on this, they appear to have given every intent on maintaining current hub-strategy and international partner alliances (particularly British Airways alliance). As such, it would negate the possibility of American walking away from their leases and their note obligations.

What could go wrong?- Although there seems to be strong likelihood of AMR surviving and affirming payment of the 7.50% Notes, there is the risk that a significant economic contraction (i.e- European economic meltdown) significant decreases travel demand and the value of the underlying routes. If such an event caused American Airlines to liquidate prior to 2016, the value of the collateral may be negligible because the leases and authorizations would likely have no bidders and zero recovery value. We believe an AMR liquidiation is unlikely and that this scenario is remote, but worth considering given the severity of the recovery value.

Summary- Buy the 7.50% 2016 notes, believe bonds will trade up to par (35% near term upside) once the Notes are affirmed by the bankruptcy judge (in my estimation, 99% probability given the Trustee report that has been published).

Socialists Probably Hate Sports....

2011-11-22T10:26:00.001-08:00

Currently, many people are protesting in the streets against the phantom "1%" of elite earners that consume the majority of wealth in our country. Fashioning their agenda loosely on socialist principles, it seems strange that many of these people have no problem with how sports are run in our country. In many professional sports, a top-tier athlete (Michael Jordan, Lebron James) might earn 20x what starting players make on the same team.

Similar unfairness exists in the way the contests are decided. If a basketball team loses a close contest by the score of 100-98, it is simply recorded in binary fashion as Win=0, Loss=1. The losing team scored nearly the same amount as the winning team, yet receives 100% of the assigned losses. A "fair system" would reward the winning team with a .51-.49 record The distribution of win-loss records is completely skewed and fails to reward the loser for their skill and effort. Our "unfair" sports system has become accepted methodology that we have no problem with as a society (at amateur or professional level).

People hate to lose, especially when it feels like they are losing all the time. At the same time, it is crucial to realize that people accept the concept of "winner-take-all" competitions, provided that they have a fair chance at being that winner (who "takes all"). This basic idea of fair-play is twisted by those that attempt to relate fair-playing fields with a "fair" distribution of outcomes. Just because people want fair competition does mean that they want a fair and balanced outcome.

Take football for example, the sport demands a basic set of rules that are enforced by neutral officials. Basic rules outlining what areas are "out of bounds", a touchdown, or a penalty are what defines the competition.

While fans demand an objective set of playing rules that apply to all teams, this does not mean they desire equal outcomes. For instance, Chicago Bears fan wants their team to win 100% of games against the Green Bay Packers, by any method allowed in the rules. If there are subjective calls by the officials, they want to see 100% of them decided in favor of Chicago. If there are unfortunate injuries, the Chicago supporter wants to see 100% of them occur to Green Bay players. There is nothing "fair and balanced" about this distribution of outcomes desired by the Chicago fan, even though the process itself is fair.

Similarly, most sport fans suffer no moral dilemna or quandary when their favorite team has a disproportionate talent advantage versus its peers. Such examples include the NBA (Chicago Bulls had Michael Jordan/Pippen/Rodman on roster), NFL (Dallas Cowboys had Troy Aikman/Emmitt Smith/Michael Irvin), or MLB (New York Yankees with highly-paid all-star roster). While fans of these teams enjoy watching them win multiple championships, they admire them for succeeding on objective playing fields with objective rules. The Bulls had to dribble up-and-down the court like every other NBA team, much the same as the Cowboys had to drive a full 100-yard field like every other NFL team. Very few people would celebrate their team's win if it came about from a referee-bribe or clearly rigged match.

So what is the point of this? Fair rules and processes do not always lead to fair outcomes. When they do lead to "fair outcomes", such outcomes are not always deemed desirable, regardless of how random they are. At the end of the day, they don't split championship trophies into 1/2s or 1/4ths.

Danger from the Pursuit of Fairness...

2011-11-11T10:30:00.001-08:00

Academics often confuse fair-play with fair outcomes.An example of confusing fair-play with fair outcomes is economist Noreena Hertz, who wrote an editorial in the FT titled, "Women Still get a raw deal in business and finance". In her article, she states,

"That banks could be discriminating against women customers should not come as a complete shock. In the US, banks deemed single women poor credit risks until the 1968 Fair Housing Act. Until the Equal Credit Opportunity Act of 1974, women had to have a co-signor to become mortgage borrowers and before the 1975 Sex Discrimination Act in the UK, banks were legally able to reject a woman’s loan request because they were not seen as a good risk. In the absence of clear legislation and a commitment to enforce it, discrimination historically has been the default"

The thesis of the article is that banks unfairly discriminate against women and refuse them loans. Her examples ignore historical context entirely. For example, Ms. Hertz cites US/UK bank refusal to lend to single women in the 1960’s. But women were worse credit risks in the 1960’s, due primarily to the active discrimination against them in the workplace and in schools. The lack of maternal-leave and sexual discrimination laws hampered women’s ability to achieve sustainable employment that fairly compensated them for their skills. This societal discrimination impaired women’s creditworthiness by limiting their capacity to repay a loan. (What would Ms. Hertz say to the hypothetical Saudi banker that refuses a woman a business loan, due to the fact that she is not allowed to drive herself to work every day? Is the credit officer supposed to ignore the barriers that Saudi laws and society have imposed upon her? While unfair to women, it is difficult to blame the banker for not making the loan)

Without a doubt, sex discrimination is unfair and has impeded the progress of many capable women. However, it is equally unfair to blame the bank lender for the fault of wider societal bias. Banks are supposed to be in the business of making loans that will be repaid, not social engineering to fix broader societal bias (look no further than subprime CRA lending in the US, it hasn’t worked out so well for us). If Ms. Hertz really wants bank lenders to open their checkbook, she would do better to plead the case of how profitable/safe such lending can be, rather than demanding fairness (which only comes from broader political and social changes).

Summary- While people generally want a society that is fair and provides ample opportunity to succeed, but fairness will never come by expecting other human beings to act against their best interest. The good intentions of such socialistic ideas create a conflict, as lenders are forced to fund marginal-ideas that crowd out more innovative and interesting business ideas. As a result, the playing field is skewed towards whichever special-interest group has the ear of the country's leader, rather than who has the best idea.

Eric Falkenstein on Chance, Effort, and Ability

2011-11-02T11:18:00.000-07:00

Excellent post at Falkenblog on the critical linkage between Chance, Effort, and Ability-

"Success is the result of randomness, effort, and ability. If you omit one of these, you will be miserable. A lot of growing up is about finding what you like that you are good at, and usually you like things you are relatively good at. Then practice that skill until you become excellent at it. The rest you can't really worry about even though that too is important, especially in explaining things like why certain people are really rich, which is often being in the right place at the right time. This should make us content because it's all we can control."

Falkenstein's post was a rebuttal of the argument that most wealth attainment is the result of simple luck and randomness (versus skill, hard work, ingenuity). The key point is that success is most-often the result of a combination of elements: Chance, Effort, and Ability. On the other side of the spectrum, many institutional investors fail to understand this concept as well. Funds chase recent performance trends and managers promoting themselves with buzzwords like "portable alpha". More often than not, their returns are due to financial leverage or assuming risks their investors are not aware of. The investment process is the only thing that investors truly control, not the outcome!

Be extremely wary when someone promises a certain outcome with respect to markets or macro-events that are beyond their control. Hide your wallet, voting proxy, etc. and run the other way. An easy example might be a Presidential candidate promising the following:
     1) I will reduce the price of gasoline to $2/gallon,
     2) I will reduce unemployment,
     3) I will ensure that mothers do not have their homes foreclosed upon
    4) I will get government out of the way and let the free market work

This short list of contradictory promises/statements were all made by same politician (Rep. Bachmann). Take Promise #1: While $2 gasoline sounds like a great outcome, there is no substantive process for how it would be accomplished. Based on current technology, the most logical path to $2 gasoline would be a combination of crippling deflation, higher unemployment (lower demand for gas), or outright government intervention (price controls or banning automobiles). Each of these processes to achieve the desired outcome ($2/gallon gas) are clearly bad and have very negative side effects. This is why the process is so much more important than focusing strictly on outcomes!

Even when you implement a "good process" does not guarantee a good outcome. Some of this is explained concisely in a chart created by Michael Mauboussin for his book "Think Twice",

The lesson to take away is: implement a good process that you can consistently repeat and employ in both good and badtimes, along with not getting a big head over your success (it may be partly due to luck!) For investments, that means avoid being over-leveraged and concentrated in positions that you are not a control investor in. This allows you to take advantage of future opportunities that do not exist and cannot be foreseen. In the words of Louis Pasteur, "Chance favors the prepared mind"...and portfolio.

Jeff Matthews Is Making it Up... on Apple

2011-10-30T11:04:00.000-07:00

I like Jeff Matthews, he is an interesting guy and I followed him for awhile.

However, his recent post on Apple appears to be very poorly thought out and ignores fairly obvious facts. In the article "Apple: For What its Worth", Mr. Matthews suggests Apple is having a retail traffic problem based on his following observation:
"For example, from the December 2009 to the June 2010 quarter, retail visits rose from 51 million to 61 million. This year, visits from December 2010 to June 2011 did not rise at all—from 76 million to 74 million."

Mr. Matthews willfully ignores the different release dates for key Apple products between 2010 and 2011, hopelessly undermining any possible point he was trying to make. Apple is driven by a few key products, with current best-sellers being the Ipad 2 and Iphone 4S (released Oct 4, 2011). In fact, the Iphone 4S has had one of the strongest levels of demand (at-launch-date) of any product Apple has ever released.

Apple products are big events that draw huge crows for opening-day release. The previous Iphone 4 version was released June 28, 2010, thus fell within the bounds of Q2 2010. The recent release did not occur until Q4 2011, so why would Jeff Matthews believe Apple investors should focus on Q1/Q2 foot traffic in Apple stores? Perhaps Jeff Matthews believes investors visit Apple Stores simply to enjoy the aura and vibe of older Apple products (which they likely already own at home?)

The only relevant comparison is demand at-launch for relevant product releases. Jeff Matthews may be shocked to learn that consumers only wait in lines at Apple Stores for new Apple products, not old ones. Hence the difference in foot traffic. Ironically, Mr. Matthews post was reblogged by fairly prominent people from Josh Brown, to Barry Ritholtz and Herb Greenberg without making this fairly obvious observation.

A rare shortcoming for Mr. Matthews, but pretty silly one all the same.

"http://jeffmatthewsisnotmakingthisup.blogspot.com/2011/10/apple-for-what-its-worth.html

Beating Analyst Estimates Means Very Little (Apparently)

2011-10-30T10:28:00.000-07:00

Beating Analyst Estimates Means Very Little (Apparently)

An interesting chart was posted showing the number of S&P 500 companies "beating" analyst estimates.

As seen below, the number of "beats" has trended significantly higher over the past 20 years. So much so, that even in third-quarter of 2008 when the US market experienced one of the largest one-quarter shocks since the Great Depression, nearly 58% of companies still managed to "beat expectations".

Ironically, as more and more companies have beaten expectations, actual equity market performance has been abysmal (for more than a decade). Perhaps we can go back to the good old days of the mid 1990's when fewer companies met analyst estimates and their stocks performed strongly anyway.

Conclusion- While various studies have shown that changes in earnings expectations generate abnormal returns, the charts below suggest there is little value in trying to predict whether companies will beat analyst expectations (since most of them do "beat" consistently and the long-term market impact is negligible.

20-year S&P Chart

Netflix's "coming to jesus" moment arrives...

2011-10-24T13:52:00.000-07:00

My last blogpost noted that Netflix was in a bubble (at $165/share) in September 2010. In after-hours trade, the stock is down to $85/share, for a nearly 50% haircut.

As you might recall, the main reason for citing Netflix as being in a bubble was based only partly on valuation and the rising costs to procure content. The real catalyst was the utter hubris displayed by Netflix CEO Reed Hastings who deferred to his core subscriber base as "self absorbed" and ill-informed of anything going on the world. This hubris was evident in Netflix attempting to raise prices 60% and split their services, as if they were selling an inelastic product (i.e- milk, gasoline, etc).

I will defer to my prior post on Netflix, but needless to say the massive increases in content-acquisition cost have not filtered into the amortization on the income statement (Nor have they gotten Starz to agree to content deal yet).

Summary- I would say this, at an $87 price, Netflix is trading at a $5bln Market cap (<2x sales and 12x EBITDA). The company has a base of subscribers that have greater monetization and loyalty than any of the stupid coupon/groupon/deal sites that seem to be tickling investment banker's fancy. As such, Netflix has greater "network value" that is inherently more stable then a flash-in-pan like Groupon (who is wholly reliant upon retailers offering 50% discounts to Groupon for free on an ongoing basis).

IF Groupon managed to IPO at a ridiculous valuation of $10Bln, it would be an interesting long/short to buy Netflix/short Groupon. Otherwise, have no position (no current short position in stock, currently short Netflix streaming following service cancellation)

How To Spot A Bubble? (So you think you're a contrarian? Part Deux)

2010-09-23T12:28:00.000-07:00

In re-hashing my for-profit education stance, I came across another element of being a contrarian: spotting bubbles

Case in point: Netflix- $165/share. Yes, the stock has risen 800% Year-over-year. Yes, I am a subscriber and love the service ( I would cancel cable before I would cancel netflix). The reason I am comfortable calling Netflix a bubble is based upon the level of hubris displayed by Netflix CEO Reed Hastings in a recent interview. Here is an excerpt from the interview with "The Hollywood Reporter",

"THR: American services when they enter the Canadian market typically charge the locals more than they charge stateside. Why the discount for Canadians?

Hastings: We want to provide an incredible value for Canadians, and it's the lowest price we have anywhere in the world for unlimited screenings. And anyone can try it for free for a month. It's pretty addictive.

THR: Are you concerned that American Netflix subscribers will look north and ask for the same discount Canadians get at $7.99?

Hastings: How much has it been your experience that Americans follow what happens in the world? It's something we'll monitor, but Americans are somewhat self-absorbed.

THR: How will you will measure success for Netflix Canada?

Hastings: I'm certain we'll succeed, so it's kind of a matter of degree. We're not quantifying that in terms of subscriber numbers or profitability. What we're focused on is getting out there. We've got to get out on all of the devices, get the word out, and we need to be such a good service that people not only stay with us but rave to their friends about it. "

I'm not so appalled by the fact that he views Americans as ignorant and self-absorbed, as the fact that he does not measure success in terms of subscribers and profitability. It should be no-big-secret that Netflix was cashflow negative under its traditional 3-out-at-a-time plan for $19 (due to high postage and DVD replacement costs) and only turned free-cashflow positive due to its streaming business (subscriber growth exploded under its $9, one-at-a-time, unlimited streaming plan- due largely to lower shipping and dvd replacement costs).

Netflix's existing streaming agreements were priced opportunistically as content-owners failed to envision the subscriber growth that Netflix would generate from being able to stream through newer DVD players/TVs/gaming systems. Unfortunately, those contracts do not run forever and Netflix will find itself in the same difficult position as cable companies in a few years (forced to pay much higher rates for streaming). The difference is, Netflix posesses no major barrier-to-entry or competitive advantage like the cable companies do.....

I am not short NFLX yet, but at $8.3Bln market capitalization (4.4x sales/16x Ebitda) I firmly believe that NFLX shareholders will have a "coming-to-Jesus" moment at some point over the next two years.

COCO a Go-Go....

2010-09-23T11:48:00.000-07:00

Since my recommendation to buy COCO (Corinthian Colleges) and WAPO (Washington Post) on 08/16/2010, both stocks have increased in value by a substantial amount (+25%, vs +5% for the S&P 500). At its peak today, COCO was up more than 36% over the past month.

As it turns out, the Education Secretary Arne Duncan announced they were "keeping their options open" and that final DOE regulations could be delayed. This should lead to significantly more upside in both COCO and WAPO.

Previously, I laid out a number of potential problems with the bear-case, which included skepticism that: 1)Racially-divisive gainful-employment rules go into effect on schedule without any changes 2) Belief that upcoming Congressional elections might create uncertainty about final rule adoption (Republicans want to extend oversight of not-for-profits, not just for-profits) 3)Current valuations imply that COCO/WAPO shutter their entire programs overnight, giving zero credit to ancillary programs (Heald College) or foreign programs (17% of assets in Canada)

Essentially, if you priced a business at liquidation value (i.e- 2-3 earnings and below tangible book value then suddenly decide suddenly that the business will live a little bit longer... you will have made a huge mistake selling-out and materially underpriced the value of the franchise. There is uncertainty in all human endeavors and perhaps an above-average level of uncertainty in federal funding, but with 30% of the company's shares shorted and the forward business value priced near zero.... I believe the pessimists are over-confident in their analysis to the point of arrogance.

Remain long COCO ($6.50) and WAPO ($375), in spite of my disgust of for-profit education stocks.

Update on Washington Post

2010-09-05T12:30:00.000-07:00

Recently, I recommended Washington Post as a good contrarian investment that was considerably undervalued near $300/share. Since that post, the stock has rallied more than 25% to +$380/share. In the interest of full disclosure, I present my full valuation breakdown of Washington Post. My original WaPo valuation was published in Barron's (March 19, 2010 edition- Letters to the Editor). The analysis below updates that work and demonstrates where I come up with my $478/share sum-of-the-parts valuation (+60% upside from entry point).

Washington Post has 4 distinct business units and a significant pile of investments that comprise its value. The business units and my best-guess at valuations are as follows (in order of relevance):

1)Cash and Investments of $1.05 Bln= $660Mln cash + $392Mln stock (mostly Berkshire Hathaway shares). WaPo does have $400Mln Long-term debt, which doesnt mature until 2019.

2) Cable Television Business worth $2.0Bln= 1.4Mln subscribers (across cable, internet, telephony) in rural markets with limited competition. This unit generates EBITDA of $300Mln per annum and is likely worth at least a 7x multiple, based on below-average capital spending needs.

3) For-Profit Education Company Kaplan-worth at least $1Bln in= Annualized EBITDA for 2010 will be $425Mln, which suggests a low valuation multiple of 2.2x pre-tax operating profit. A significant portion of Kaplan's business involves recruiting minorities and unemployed individuals to go back to school and utilize available federal grants. Recently, the Department of Education has decided to crack-down on abuses in the for-profit space. They have proposed very stringent "gainful employment" requirements, which will be certain to shut-out minorities and at-risk unemployed persons from the higher education market. Virtually no college (non-profit or for-profit) will risk losing access to federal funding by "taking a chance" on someone with a high financial risk profile (i.e- low credit score, no job, no savings, medical problems, criminal record, etc.). I do not love the for-profit education business, but the ends do not appear to justify the means.

At a 2.2x multiple, Kaplan is priced to either be out-of-business within 2 years, or be severely distressed. By pricing for the worst-case, it leaves us a free upside catalyst in the event :1) Republicans win Congress and dilute for-profit clampdown 2) Kaplan alters its business model 3) Final regulations are delayed or otherwise watered down. 4) Washington Post steps up lobbying efforts. As Bill Clinton once said, "Never pick a fight with a guy that buys ink by-the-barrel", which is certainly the case given Washington Post controls the namesake newspaper!

4) Broadcast TV stations worth at least $500Mln- This unit is clearly on the decline, but is generating an annualized $110Mln in EBITDA in spite of overall ad-market weakness. Assigning a 5x multiple with a strong political ad-spending season ahead of us seems to make sense.

5) Washington Post newspaper worth at least $250Mln?- This is a total guess. Washington Post is one of several iconic newspapers that likely has staying power, although not as much clout as the NY Times/Wall-Street Journal. The Post is still important and holds some editorial sway in the epicenter of our fast-spending federal government. The Times is set to generate $700Mln revenue this year (-30% YoY), but a distressed valuation of 1/3rd times sales appears appropriate.

Summary- In total, my estimated enterprise value for Washington Post is $4.4Bln or $478 per-share(after subtracting $400Mln debt), with a free-call option on the Kaplan for-profit schools in the event that federal student-loan regulations are not altered. If Kaplan were worth absolutely zero, Washington Post would still be worth $3.4Bln or $370 per share under our analysis.

So you think you are a contrarian?

2010-08-16T11:48:00.001-07:00

Under-appreciated statistics on contrarians

1) 98% of contrarians at the Pamplona "running of the bulls" get run-over
2) 98% of people view themselves as having a unique and insightful opinions, when in fact it was simply derived from another commentator (i.e- Fox news, network media, blogs)

That being said, we here at PetersonCleaning.blogspot.com are ready to boldly assert we are considering a true "contrarian" play. Namely, we are looking at several stocks in the disgusting for-profit education sector. Congress is concerned about education quality and rapid-growth of for-profit schools, which tend to leech off of federal student loan programs. In particular, our efforts are focused on the least-liked names in the least-liked sector of the market:

1. COCO- Corinthian Colleges: $5.23 last trade, valued at 1/3rd of TTM sales, 1.9x Ebitda, or 3.2x earnings . The stock is down 75% since April 2010 (past 4 months) and trades at a market capitalization of $460Mln.

Ironically, COCO paid nearly $400Mln cash to acquire a higher-quality college chain (Heald) in 2010. Had they saved their money, they would be trading at/near their cash position on the balance sheet. The entire value of COCO appears to be comprised of Heald College and the 17% of revenue derived from Canada. There appears to be little value placed on the bulk of COCO's principal business unit "Everest College". Most of COCO's revenue comes from vocational programs (auto tech, etc) or 2-year associates degrees.

Washington Post owns 9% of COCO stock and my belief is this company is likely to receive a private-equity or third-party bid for the company. It is difficult to estimate what impact government efforts to limit Federal student loans will have, but I do not believe it will destroy this company (although it could cause sales/earnings to take a hit).

2. WPO- Washington Post: $318 last trade, valued at .48x sales, 2.9x ebitda, 10x earnings. WaPo is down 44% from its April peak ($2.3Bln enterprise value), following a Barron's analysis that WaPo "is the most undervalued stock in the entire media sector". If the statement was remotely true in April, then it is even more so today!

Interestingly, WaPo generates earnings from multiple segments outside of for-profit education. It owns a number of cable-tv monopolies that generated nearly $300Mln Ebitda, which at a 7x multiple= $2.1Bln valuation. The company also owns its namesake newspaper and broadcast tv stations which are worth between $500Mln-$1Bln. On top of this, it had more than $1Bln cash on its balance sheet ($600Mln net of debt outstanding).

Essentially, WaPo is trading at a 13% discount to fair value, entirely ignoring the value of its Kaplan education division ($2.3Bln enterprise value vs. $2.6Bln estimated value of non-education businesses). So, any valuation assigned to WaPo's education segment is "gravy", as some might say. Considering that the education segment generated $377mln EBITDA over the past twelve months, it is clearly WORTH SOMETHING, even if its business activity is viewed in a low-light. If we assign a distressed EBITDA multiple of 2-3x, that segment should be valued between $750-1.1Bln.

So, combining our $2.6Bln base-line value for non-education segments of WaPo with our $750Mln base-line value for WaPo's Kaplan segment, our estimate of enterprise value increases to $3.35Bln. This valuation equates to $507 per share and represents 60% upside to the current stock price. Warren Buffett owns nearly 20% of WaPo, although its unclear if he has any interest in buying more.

Key potential catalysts that drive our "contrarian" spirit:

1) Stocks are significantly oversold within a very short time-frame

2) Both businesses have segments that are "high-quality" or immune from proposed federal legislation on "gainful employment", as it pertains to eligibility to issue Title IV student loans.

3) The value of the higher-quality, "immune" businesses exceeds the current market valuation on COCO/WPO stock

4) Federal legislation on gainful employment will not occur until AFTER upcoming 2010 congressional elections. If Democrats lose control of Congress, I believe odds of current legislation being passed decrease significantly.

5)As currently written, the new student-loan requirements are specifically designed to exclude poor, highly levered minorities. In particular, the bill will effectively shut-out those minorities with low-paying jobs and difficulty with reading/higher math. Curiously, Democrats want to spend hundreds of billions putting subprime borrowers into homes, but now want to curtail loans designed to educate those same subprime borrowers (giving them a shot at higher-paying jobs)?

6) One other potential catalyst is that for-profit schools underwrite their own loans and become a hybrid teacher/student-loan company. Interest rates would have to rise, defaults would be problematic, but in such a scenario the core business survives

7) Costs at for-profit schools rise less than non-profits. Most non-profits are focused on expanding their campuses and building giant altars to the football-gods (massive stadiums) or their own hubris. As such, for-profit schools will be better able to manage flat/negative growth in tuition rates than non-profits.

8) It is unlikely that any politician passes a bill that bankrupts the for-profit schools overnight. Take Corinthian as an example. Their student enrollment is currently 110,000 students. They have been around since 1995, which means more than 1,000,000 students would have worthless degrees thanks to a legislative effort by Congress. How will an out-of-work constituent feel to re-write their work resume' and remove their education credentials? How would that make them vote?

Feds yell "bomb" inside a crowded savings account...

2010-08-10T09:01:00.000-07:00

Lets use an analogy: since the US Federal Reserve is the policeman for our monetary system, we will compare their actions to policing a theater. Their stated goal is to maintain stability (prices), while maximizing the number of people watching movies in the theater (full employment). Under normal circumstances, movie patrons are courteous, polite, and anxious to get inside and watch high-quality theater fare (i.e-such as "Black Dynamite").

But what happens when there is a slowdown and cinematic-poo like "Macgruber" is showing on the main screen?

People may still show up at the theater on Friday night wanting to see a movie, but would be unwilling to sit down and suffer the 90 minutes of pain called "Macgruber the Movie". While patrons may choose to wait quietly in the lobby for a better movie to start up, this is not politically or economically viable for our "theater police". The regulatory mandate is to maximize employment (people watching the movie, regardless of what is showing). As such, watching and waiting for a better movie or story to come along is not acceptable.

So, our "theater police" (Federal Reserve) spring into action... first they cut the price of movie tickets by half (lower interest rates). But what if people still choose not want to watch the current "movie" (i.e- spend money, shop, buy houses, consume)?

Well, what if the theater police used their power to scare patrons, with the following threat: "Go inside and watch the current movie, or we will make sure you can never see a movie again!". If the threat is perceived as real, many patrons would reluctantly go watch the film, no matter how bad. Does the outcome justify the means? Are such strong-arm tactics appropriate for regulators/authority to use? Does shattering any sense of stability to to achieve full employment make any sense at all?

This is at the crux of recent economic silliness (some would mischaracterize it as "debate"). Most recently, one of the Federal Reserve Board governors (James Bullard, St Louis) noted that the massive and unprecedented expansion of US money supply (trillions, with a T) has not caused economic activity to increase significantly. Bullard goes onto suggest that an appropriate course of action would be for the Federal Reserve to scare the populace by printing even more money (under the term "quantatitive easing"). Bullard's logic is that causing individuals to panic-spend their life savings (because they are scared of their government debasing the currency) is preferential to slow economic growth.

Going back to our theater analogy, we now have someone in authority suggesting that it would be appropriate to yell "Bomb" in the lobby of a crowded theater, under the auspices that it might make some people run further into the theater (perhaps accidentally into where the movie is being shown). The problem is that some people will run out of the theater altogether and never come back (avoid US$ currency exposure), while the individuals inside the theater will be panic-stricken about when the bomb is set to go off. The inadvertent horror of watching MacGruber the Movie will become the least of their worries!. Alas, that leaves us with a careless regulator that has witnessed the carnage and tries to undo the damage by saying, "Just kidding, I was not going to blow the place up".

Such thinking is not bourne of responsible, intellectual leadership. No, not even for the purpose of "evoking a debate". If you yell bomb on an airplane, you are arrested. End of story. If our Federal Reserve Governors yell "bomb" with respect to the savings of the average American, do they expect it to generate productive, long-term investment?

Lest you think the dissertation above is hypothetical, I have attached a link to an utterly embarrassing research paper posted by an irresponsible member of the Fed Board of Governors, James Bullard.

http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf

PS- Why do central bank decisions matter?

Your savings(if denominated in US$) are directly managed by our US central bankers at the Federal Reserve. Although hypothetically controlled by our Treasury Department, the Fed which actually controls the amount of currency in circulation. For example, while it may have taken you twenty or thirty years to accrue a fixed-income pension, a small social-security-stipend, and perhaps a modest sum in your bank account..... our central bankers can conjure up a similar sum within a millisecond.

In truth, our central bankers can conjure up many multiples of our country's net worth within a few milliseconds, thanks to the wonders of computers and electronics (no more waiting for an outdated printing press to crank out all those bills by hand!).

So why does this matter? Well, your "savings" only have value to the extent that a purveyor of physical goods/services(i.e- grocery store, Best Buy, etc.) has demand for your currency. If our central bank doubles the supply of currency in circulation overnight, the value of your currency is debased (cut in half). It may take awhile for most people to recognize this. If you are earning minimum-wage working at a bowling alley, you will continue to earn your minimum wage....but that person has taken a significant pay-cut relative to his real cost of living. Unless the minimum wage worker has significant real-estate holdings or hard-assets (i.e- gold) lying around, such currency manipulation harms his interests. It harms the citizenry as a whole.

Logic=Fail by Top Economists (Part Deux)

2010-08-03T11:17:00.000-07:00

Another example of absurd reasoning by the economists that drive our monetary policy and influence our political leaders:Nobel-Prize winning economist Paul Krugman, of the New York Times and Obama confidant

Krugman has criticized both Bush and Obama for "not doing enough" to either 1) Avoid a massive depression or 2) Create a magical economic recovery filled with jobs and growth in GDP (Gross Domestic Product- a broad measure of economic activity) .

First of all, we ARE NOT IN A DEPRESSION. It seems scare tactics are a key ingredient to creating headlines and generating an unnecesary response from politicians/central bankers. GDP for 2009 was $14.2 Trillion, near an all-time high and up approximately 1% from 2007. Thus, in spite of the massive housing and credit collapse in our country, our economy continues to hum along near its all-time high. Consumer prices and company profit margins remain high and deflation is virtually non-existent outside of technology/housing.

Second, a recovery in jobs that is driven by the government increasing its own payroll does not create productivity or sustainable economic value in the long run.In spite of our "GDP data" appearing strong, many people are unemployed as a significant number of unproductive jobs were shed from the system. Many of these jobs were associated with unnecessary car production, mortgage financing, realtors, construction, leisure, gambling, etc. So if many private-sector jobs disappeared, how has our economic data remained strong?

Answer- Massive increases in government spending. Since 9/11, our government spending has increased at a rabid pace, only more-so since the housing bubble reached an unsustainable size.Currently, the government is nearly 40% of our economy.

So our economy only appears stable because of the excessive government spending (Lesson of the day- When people spend more than they earn, its called going into "hock". When governments spend more than they earn from taxes, its called "stimulus"). So our federal government is akin to someone that has lost his job, but wants to feel good about himself by pulling out the credit card and treating himself to a few fun foreign wars (Iraq/Afghanistan), unnecessary new tech(defense) gadgets, and extra perks (massive increases in transfer/social payments).

Curiously, many cities and states are reporting massive deficits, in large part because of the high pension benefits guaranteed to their many workers. The suckle of permanent government employment ensures that budgets cannot be right-sized in a downturn, to the extent that the private sector rationalizes its profit/loss. Yet, economists suggest that the correct course of action is for the government to further increase its spending role in the economy?

How much government is too much? 50% of our economy? 60%? Once the government hires workers and subsidizes poor investments (i.e- our housing bubble in the 2000's), it typically has a long and ugly end. For markets such as Detroit, which have seen a massive exodus of people, it is equally difficult to tear-down excess housing stock as it is to fire highly-paid municipal workers. In fact, one of the drivers behind Detroit's decision to bulldoze thousands of homes was the high cost of employing unionized police/fire workers to protect their communities.

Logic=Fail on part of Top Economists

2010-08-03T09:56:00.000-07:00

A prime logic failure of many "economists" today is the circular reasoning that is employed. For many so-called Keynesians, if the economy is weak, its the responsibility of the government to "stimulate" it. It must not be left alone for a second! If the economy continues to weaken post-"stimulus", economists will confidently state the problem, " You did not use enough stimulus!" Upon firmly applying 20x the amount of "stimulus", the Keynesian economist would not second-guess the stimulus issue at all.

Although economics has claimed to be a science, it seems to rest entirely on theory and very little on empirical outcomes (see last post for other examples).

-In the real world, excessive use of antibiotics in hospital patients can lead to resistant bacterial strains ("super bacteria"). As such, if antibiotics are not having the desired effect, intelligent doctors will seek alternate treatment methods or prescriptions.

-In the real world, when you throw water on a grease fire and it simply spreads the fire further, a fireman will not tell you to throw more water on the grease. He will suggest a different course of action.

-In the real world, when a little child discovers that his square peg will not fit through a round hole, he plays around until he finds the right peg for the right hole

None of these empirical realities towards problem-solving is utilized by so-called "economists"

. Which begs the question, if economists have no benchmark to determine when their monetary experiment has failed, how will they know when to shut it down?

Economists- Argumentum Ad Absurdum

2010-08-03T09:30:00.000-07:00

Peter Lynch is a wise man and correct about many things. One of my favorite quotes from him is that "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes". This was never more true than today, when it seems neither amateurs or professionals are adding much value to the debate.

Silliness is widespread. For example, statements from our President that "we will lose 3 million jobs if we do not pass a stimulus bill". Then, after the stimulus is passed and we still lose MORE THAN 4 million+ jobs, a new study is engineered to show that the stimulus worked better than expected, even though the outcome is below the worst-case, no-stimulus forecast.

Keynesianism (a.k.a-government stimulus as savior in all circumstances) is truly a circular argument with no way of igniting any logical/factual debate. A great example of simple logic failute by the economist-elite is seen below:

http://www.truth-out.org/economists-tell-masses-it-could-have-been-worse61935

Economists Tell the Masses: "It Could Have Been Worse"
Monday 02 August 2010

by: Dean Baker,

"the economists are back telling us that we should be thankful that Congress and the Fed enacted the TARP and the other programs that saved Goldman Sachs, Citigroup, and the rest from bankruptcy. A new study by Princeton University Professor Alan Blinder and Mark Zandi, the chief economist at Moody's Analytics, examined the impact of the TARP and the related Fed and FDIC bailout programs. The study found that without the bailout, GDP would have declined by another 6.5 percent and the economy would have lost another 8.5 million jobs. In other words, things might be bad now, but if we didn't shovel trillions in loans and loan guarantees to Goldman Sachs and the rest of the Wall Street gang, they would be even worse.

Before we start thanking Goldman for taking our money, it is worth taking a closer look at the study. The big story here is the counterfactual. What does the study assume the Fed and Treasury would have done if we had not passed the TARP and the Fed had not come through with its vast array of emergency loan and loan guarantee programs?
The answer is that the study assumes that they would have done nothing. In other words, the question asked by the study is "what would the world look like if the federal government had done absolutely nothing to counter the economic and financial downturn resulting from collapse of the housing bubble?"

This counterfactual seems more than a bit unrealistic. Suppose we had let the market work its magic and put Goldman, Citigroup, Bank of America, and Morgan Stanley into bankruptcy. Suppose that once these firms were in receivership and their bank units were in the hands of the FDIC, the Fed flooded the system with liquidity. How would this situation compare with the situation where trillions of taxpayer dollars were put at the discretion of Goldman and the rest through TARP and the Fed's special facilities?

The Blinder-Zandi study tells us absolutely nothing about this scenario. In other words, Blinder and Zandi have constructed an absurdly unrealistic counterfactual and told us that the TARP was much better than this absurd scenario. This is like saying that people who don't eat chicken will starve to death. Under the counterfactual that people who don't chicken don't eat anything else either, they certainly will starve to death.

But that is not a serious analysis of the benefits of eating chicken, and Blinder and Zandi have not given us a serious analysis of the benefits of the TARP. This "it could have been worse" line should be flushed down the toilet. The reality is that greed and incompetence created an entirely unnecessary disaster. Tens of millions of people are still suffering from its consequences. And the Wall Street boys and the economists who are responsible for the disaster are all doing just fine.
People should be really angry about this and a silly study that might be used to tell them otherwise should just make them angrier.

Tempted to buy BP?

2010-07-19T10:02:00.000-07:00

Recently, Michael Santoli (Barron's, July 19 2010) posted an article suggesting that BP is clearly undervalued and citing a number of bullish hedge fund types that bought the stock "down to its low near $27 per share".

http://online.barrons.com/article/SB50001424052970203296004575363292085308912.html

Both of the hedge funds (buying BP) cited in the Santoli article appear to be at significant losses on their initial investments. According to Mr. Santoli, DLS Capital began buying its stake within a month of the spill, during which the stock traded at an average of $47 per share (-26%). Mr. Santoli also states that T2 Partners was a buyer of BP "down to its low near $27 a share". However, Whitney Tilson (of T2 Partners) was advertising his significant stake in BP as early as June 8th, 2010. Prior to June 8th, BP stock had not traded below $36/share. Based on Mr. Tilson's statements on CNBC, he had already built a significant position at higher prices. While it is possible that Mr. Tilson "averaged his loser" on BP down to $27/share, it seems likely he is at a mark-to-market loss on a large portion of his stake.

The article seemed to imply that Tilson was a buyer largely at the low near $27/share, which does not seem to be the case (even if his opinion is still meritworthy).

Casual readers might second-guess the article if they knew that both bulls on the stock had incurred significant volatility and mark-to-market losses from their initial investment price. For many speculators after the spill-date, current prices represent a cold-eyed statement that they need BP stock price to rise back to their cost-basis.

Thoughts on Goldman SEC settlement

2010-07-16T09:24:00.001-07:00

Bloomberg: Goldman Sachs Group Inc. agreed to pay $550Mln to settle a lawsuit with the US Securities and Exchange Commission, the SEC said in an emailed statement.

Wow, Goldman is going to pay less than Tiger Woods!

Confidence Game 101: Would you buy a used car from either of these guys?

2010-05-18T13:48:00.000-07:00

The Disappearing Inflation Act ( Japan Redux)

2010-02-12T13:32:00.000-08:00

The US is unlikely to experience any funding problems similar to the rumblings from Greece, Portgual, and overseas markets.

The US shares more in common with Japan twenty years ago, versus the current EU. The US has trillions in money market accounts and liquid investments that could be used to buy up Treasuries. Just like Japan funds its deficits internally with domestic savings being recycled at lower-and-lower interest rates...so can the US. Provided that economic activity remains anemic, Treasuries may prove the most viable investment alternative for this cash (vs stocks/non-guaranteed money market funds).

For example, lets say the US has $5 Trillion in debt maturing around 48 months (4-years) at an average yield of 5% (equates to $250Bln interest per annum).

If the US runs a trillion dollar deficit for 5 years, outstanding debt will double to $10Trillion. Assuming tax revenues remain flat and assets are not sold, the total interest expense might actually decline...how so? Our Treasury could shorten the average maturity date of newly-issued debt.

Here is the math: 2-year treasury bonds yield .8%. So if our government issues $5 Trillion addtional Treasuries at .8%, total interest expense will increase only $40Bln/annum.

Since older, higher-coupon Treasuries are maturing, lets assume the Treasury refinances at least $2 Trillion of existing bonds, reducing the average coupon-rate from 5%--> .8%. This reduces interest expense by $84Bln= ([5%* $2Trln]-[.8%*$2Trln]. So, net-net, our annual interest cost falls by $44Bln ($84bln savings from low-cost, shorter maturities-$40Bln from interest on new debt)

Ultimately, our funded national debt doubles in 5 years from $5 Trillion-->$10 Trillion, but annual interest expense declines from $250Bln--> $204Bln. Since credit-worthiness is partly determined by ability to fund your debt/interest expense, the US might appear to be a better credit risk by embracing such a strategy, even though it would be more indebted . A shady sub-prime lender might suggest that since doubling of national-debt is saving the US so much money, it would present a great cash-out refi opportunity! In fact, the US should increase deficit spending even more!

The strategy outlined above (shorten debt duration, artificially lower-interest rates, closed-loop system funded by internal savings) has carried Japan for the last 15 years, but seems close to exhaustion (they are nearly 200% debt/GDP, vs the US estimated to be 60% pro-forma for current budget). The strategy will eventually fail at some point in time...and will be ugly when it does. Regrettably, any true "deadline" for sound monetary/ prudent fiscal policy in the US is likely more than a decade away. The risk of losing China/Japan as buyers of US Treasuries could easily be offset by aggressive government actions/domestic buying.

In summary, Obama/Congress has free rein to run massive deficits, avoid cutting pensions, perhaps even avoid dealing with Medicare obligations. How do you make money off any of this? not clear, but Japan-style outcome seems the most likely outcome (weak long-term equity markets next ten years, stable/rising treasury bonds).

Prime example of not learning your lesson...

2010-02-12T13:11:00.000-08:00

Headline out today " Daimler AG to pay $200Mln to end bribery probe"

Ironically, paying money to end a probe related to illicit payments suggests they failed to learn any lesson whatsoever.

I wonder what restitution regulators would request if Daimler had been accused of prostitution? Shudder the thought.

http://www.businessweek.com/news/2010-02-12/daimler-said-to-agree-to-pay-200-million-to-end-bribery-probe.html

Thought on gold....

2010-01-05T18:33:00.000-08:00

Without stating a bull/bear case for gold, I simply had to comment on the horrible logic espoused by one of the "leading" gold advertisers pandering with the minds and pocketbooks of CNBC viewers.

In a recent ad, Monex (a "Cash4Gold" wannabe) states excitedly that "There has never been a better time to own gold".

Generally speaking, the best time to own an asset is when the price is low. The best time to sell an asset is when the price is high. Gold is at/near an all-time high above $1,110/oz, which indicates now is a better time to sell gold than to own it. As it turns out, 1999 was a great time to own gold, even if it didnt feel like it. Mind you, most people get excited about rising prices and tend to buy near the highs, but lets not confuse the issue of the "best time to own an asset".

This is what America is all about....

2009-08-12T08:26:00.000-07:00

So, we destroy perfectly functional automobiles (2 tons of metal, engine, and finished material) in order to sell a new vehicle that gets 2-5miles per gallon better fuel economy? The environmental payback on that is probably a nice 200-year time period, hope you keep up the scheduled maintenance on that new Ford Focus.

Is it really that important to destroy these vehicles just to keep union guys working on the line? Why couldn't we just keep subsidizing the unions AND NOT destroy decent cars. Who would've thought someone could get choked up seeing an Oldsmobile Aurora being read its last rites?

Goldman forcing CIT into liquidation?

2009-07-16T11:05:00.000-07:00

As analysts are furiously attempting to figure out whether CIT will be allowed further out on the government dole (and Geithner indicates they have authority/ability, but not necessarily the desire to assist CIT).......

It is interesting to note that Goldman Sachs claims no "net exposure" on its CIT secured credit line ($1.5Bln drawn/$3.0Bln commitment).

With Goldman in a secured creditor position and significant short positions (via long unsecured CDS), and a high likelihood that Goldman has "hedged" itself against more than its $3.0Bln secured exposure...... Goldman stands to benefit the most from no government intervention. As a secured creditor, their recoveries will be higher on their loans than the unsecured bonds. Additionally, if they push for immediate liquidations it could result in overly punitive haircuts on unsecured creditors (i.e- overly large gains on unsecured CDS long positions).

Given the fact that the government still has GE on the dole for north of $70Bln, what exactly is the major constraint on lending CIT a few billion (aside from the fact that it does not help Goldman's book?) I for one don't like any of this bailout BS..... but there is clearly something wrong with liquidating a company simply to benefit Goldman's trading book.

PS- If it were to be found out that Goldman had "net negative exposure" to CIT (i.e- $5.0Bln unsecured CDS long against a $1.5Bln secured exposure), would Goldman have committed a violation of securities law/disclosure requirements....since they claimed to have "no material exposure".

Interestingly, Goldman is reported to have "hedged" itself on $20Bln in AIG exposure, in spite of only $10Bln of insurance. One should expect a similar "hedge" on CIT....the real question, why did our corrupt regulators solicit Goldman's opinion when they have a profit-motive to see the company fail? Ironically, its not Goldman (whose stated purpose is to make large profits) that should have people going to jail, but the former Goldman-officials and bureaucrats that are abusing their office in an effort to bankroll Goldman.

Tobin's Q- Why Are We Seeking to Audit the CIA When We Can't Even Audit Our Own Federal Reserve?

2009-07-14T17:07:00.001-07:00

Ostensibly, our Congress and government (aka, Goldman Sachs) representatives would have us believe that auditing our Federal Reserve would a) destroy "sanctity" of independent Fed b) compromise monetary policy c)lead to economic collapse/ruin d)lead to politicization/economic favoritization e)etc., etc.

So given these potentially dire outcomes that would be associated with auditing our Fed (which is the only method to ensure it is indeed acting independently, appropriately, without favoritism towards a particular investment bank), it bewilders the imagination why our Congressmen are in such a hurry to audit the CIA and demand public accountability.

Imagine that..."public accountability" for a SPYING ORGANIZATION. We are too scared to even audit our public monetary policy, but believe making our SPIES publicly accountable to elected representatives is more appropriate?

Anyone care to chime in on this genius.

Goldman Sachs Looks Shortable at $146

2009-06-11T19:59:00.001-07:00

Short Goldman Sachs@$146, stop-loss around $155

-Goldman Sachs stock is up 200% from the lows six months ago. The stock hasn't taken a breather or shown any real consolidation since it was trading below $100/share. Goldman has torn higher, in spite of consistently lower trading volumes above $100/share. This suggests lack of strong buying interest and potential exhaustion in the move. In the words of Kyle from the Terminator movie: Listen, and understand! That Terminator is out there! It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead. (in spite of this, they do kill the Terminator in the end)

That being said, I believe Goldman Sachs stock is slightly more fallible. The stock was not trading much higher than its current price even in 2006-2007 before the extent of market losses could be quantified. In addition, they will likely show significant losses since the value of their public debt securities has risen in Q2 2009 (due to fair value accounting, major banks are able to report mark-to-market "gains" when the price of their debt securities declines below par). While Goldman may be raking in large gains from the recent surge in debt/equity issuance, even an optimist might view 10x earnings as a rich multiple to pay for an investment banker in the current environment. Essentially Goldman Sachs is arguably overvalued.

Shorting a small amount of shares here (may sell more short on a spike), along with implementing a put spread (buy $135 October Put/ Sell $105 put). A break below $140 might cause a severe decline to the $100 area (perhaps over 2 month period into August/September), although its fair to assume the Treasury would interfere if movements became any more severe than a 30-40% decline in Government Sachs' share price.

2009-05-10T19:35:00.001-07:00

Trade update- montpelier re (ticker MRH) is a good deal trading at $12.50 a share. Why? MRH is trading 20percent below its tangible book value of $15 per share. I have followed the company for 5 years and their investment portfolio is fairly low risk, which means the company could be liquidated at book value in a fairly short time period. At the very least, this suggests MRH is unlikely to decline much further, barring another hurricane like Katrina. Based on this, I am selling $10/ $12.50 puts for 1 month premiums of .25-1.00 (2-8pct one month returns), or up to a 96 percent annualized return. Alternatively, you could just buy the stock and write covered calls (sell the $12.50 call to generate income. I am ultimately more comfortable betting that MRH will not go down, versus betting that it will go up a lot

Best Buy near long-term resistance... appears to be a good short

2009-03-26T09:19:00.001-07:00

Best Buy near long-term resistance... appears to be a good short. $40 has repeatedly been a major resistance point for Best Buy historically, in year 2000, 2002, 2003, and 2004. This price point also served as minor support in 2008. Notice too, that long-term uptrend line around $18/share was never breached. While Best Buy "reported" EPS that "beat estimates" of $1.41/share, this excluded restructuring/layoff charges of more than $100Mln, which would have caused them to miss estimates.

Even with their "earnings beat", earnings still fell 6% YoY and are expected to be flat-to-down 10% over the next year. At a current P/E of 13.2x and earnings in a decline and unemployment continuing to rise, there are few positive catalysts for Best Buy. Best Buy may gain market share from Circuit City's implosion, but in the midst of a major downturn this will be offset by weaker consumer spending and credit contraction.

At the very least, selling near-term $42.50/$45 puts for a 1-2% premium seems like a safe bet.

Federal Reserve Promoting Accountability, Transparency and Safeguards on its Financial Counterparties

2009-03-25T12:40:00.000-07:00

(VIDEO) Federal Reserve Promoting Accountability, Transparency and Safeguards on its Financial Counterparties

Couple Points-GE, CCS, and HIG update

2009-03-16T20:30:00.000-07:00

GE-A preferred- Over the past week there was an exceptional opportunity in GE baby-bonds, those listed and traded as preferred-stocks on the NYSE (even though they represent senior unsecured notes of GE Capital). The one I honed in on was GE-A Preferreds. This is a 2048 $25 par bond that was trading at $14 (below 60% of par!, for an 11% yield). Currently, this has rallied back up to $80 (8.9% yield). This is in-line with where GE's other long-term debt is trading, so the arbitrage is out of this for now.

CCS (Comcast Senior Note) is trading up to $18, up approximately $2.50 from my recommendation price on this blog (and about $2 from my average-buy in price. It should still claw its way higher, but at the current yield above 9% it still trades too low versus Comcast senior debt.

Finally, Hartford senior holding company debt appears extremely attractive, offered at a yield of 15% ($56 price for the 6.30% 2018 bonds). The holdco of Hartford carries $2Bln cash vs. $6Bln debt, which suggests it could repay 33% of outstanding bonds. Additionally, it controls interests in a property-casualty insurance company and a life insurance company, each of which generate north of $2bln pre-tax profits per year. The life insurance company has been bogged down by variable annuity/investment portfolio problems and may wind up being a writeoff (or only worth a few billion $ in a firesale). The P&C insurance company carries $12Bln statutory capital and is probably worth at least .8x book value, or a multiple of 5x normalized pre-tax profits= $10Bln nominal value. Based on this analysis, HIG's holding company should be worth approximately $10Bln (P&C)+$2Bln (cash)+$2Bln (firesale value of life insurance co.)=$14Bln, which represents 2.25x coverage of the outstanding holding company-debt.

Based on this analysis, Hartford financial service's 6.3% 2018 senior bonds are very attractive at $56, for a 15% yield-to-maturity. While the stock may have additional upside, given the vagaries of the current marketplace, we believe the bonds represent the most attractive risk-reward opportunity.

Updated Chart of CCS (Comcast 6.625% Senior Notes Due 2056)

2009-03-09T14:38:00.000-07:00

At $15.70, CCS yields 10.5% and trades at a dollar-price equivalent of $.62 on the dollar (62% of par value). 30-year Comcast senior notes trade at a 7.6% yield ($95 avg dollar px) for similar risk. Why? we believe closed-end preferred funds (Nuveen) have been forced to liquidate shares of CCS in order to de-lever their fund. Based on this technical, CCS may decline further and I am buying into the drop. I would love to buy this at $15 or lower, where I bought it several months ago (before subsequently selling in the low $20s).

To refresh, Comcast generated more than $800Mln FCF in Q4 2008 and is cutting costs significantly. The bonds are actually on review for upgrade by the rating agencies. Leverage is low at 2x, given the stable business risk profile.

Recommendation: Buy at $15.70 and add as it drops. Regression-line suggests $18.50 as fair-value price (yield would be 9% at that price), but this issue could trade as high as $20-21/share, provided that the 30-year treasury yield does not rise significantly in the near-term. At a 10.5% yield for a stable, high-grade corporate bond, this looks attractive.

Ten Things Everyone Should Know About CDS(or, "Bad Stuff 'bout CDS)

2009-03-08T10:15:00.000-07:00

1. CDS represents a put contract (or, insurance) on a bond, that allows the CDS-purchaser to profit on the difference between par ($100) and the price of the bond on a default date (typically $0-30)

2. Unlike traditional insurance contracts, purchasers are not required to have an "insurable interest" in, or ownership of the underyling bond.

3. Why does this matter? [For example, your home-insurance agent sells you a $200,000 insurance policy on your home for a $500 premium payment. Then, your insurance agent goes to your next-door neighbor and sells 5 different $200,000 insurance policies on YOUR house. Then, the neighbor across the street buys 5 more $200,000 insurance policies on YOUR house. In total, your $200K house is now insured for a total of $2.2Mln... and your neighbors have much to gain from seeing your house burning down.

4. The premium on CDS contracts typically is incurred over time. As such, the insurance-buyer maximizes his gain the sooner a default occurs. For example, a purchaser might pay a "spread of +300 basis points", which equals 3% of the notional-insured value over time. Under our previous example, your neighbors would each pay $30,000/year (3% of $1,000,000 insurance) to insure your property. Since this is a very expensive premium to pay on a property with no insurable interest, your neighbors need one of two things to happen in the near-future: 1. Your house burns down/you default/you go broke 2. Someone else to buy their insurance from them at a higher price

5. The purchase of CDS (insurance) creates a self-fulfilling prophecy, which increases the probability of default. How does the probability of default increase? Using our prior example, it increases the cost of insurance to you, the homeowner, while simultaneously incentivizing your neighbors to see your house destroyed. Okay, but why does the cost of my homeowner's insurance increase(since I have a need and justifiable purpose for having insurance against my property)? Your cost to insure your property rises because there are multiple bidders vying to purchase insurance on your home.

6. The lack of "insurable interest" requirement for CDS(insurance) caters primarily to speculative and destructive elements of human nature. Humans tend to purchase commodities (homes, internet stocks, tulips, etc.) when they are increasing in price. Thus, when your first neighbor buys insurance on your home as a speculation, it causes the price of additional insurance to increase. Your other neighbor (across the street) hears that the price of your home insurance just rose 10% overnight and that your next-door neighbor has already made a "killing" on his insurance policies covering your home. So, your other neighbor decides to buy some insurance (on your home) for his personal-account, which causes your home insurance premiums to increase another 20%. Both neighbors begin bragging about their large gains, which incentivizes neighbor #3 to buy insurance, thus driving up the price even more. This continues and the price keeps rising. Rumors about you walking around your garage with open gas-containers begin to circulate (never mind that you were filling up your lawnmower!) and word leaks back to your insurance agent.

Although you have never had an insurance claim against your property, so much insurance is being purchased against your house that your insurance agent refuses to renew YOUR homeowner insurance policy at year-end, due to the "high risk" associated with your policy that the market is pricing in. The insurer insists that the only way to insure your policy is if you pay 15% of your home's value as a deposit on the insurance, along with a 5% premium per year. Since you are required to carry insurance to hold a mortgage, you have no choice but to pay-up (15%+5%= 20% *$200K =$40K insurance premium, significantly above your previous insurance costs and your total mortgage payments). Given the high costs of insuring your home, YOU the original homeowner are now unable to afford to live in the home anymore and do not qualify for refinancing (since the lender will factor the insurance costs into his analysis).

As your ability to pay bills and maintain your creditworthiness is challenged by the rising financing costs and rumors, your neighbors are incentivized not to help you out. Assuming no one is interested in buying your house, you figure out that the only way out of your mess is to burn down your house and collect the insurance premium. Naturally, your next-door neighbors are all-too-eager to provide you with the gasoline, matches, and alibi (given their vested interest in your home's destruction).

6. CDS purchasers do not have to pass criminal background checks and are not obliged to even indicate their reason for purchasing insurance on an entity (all they need is a signed ISDA agreement!). Using our previous example, how would you feel if your insurance agent knowingly sold $1mln insurance policy on your $200K house to your neighbor* (in spite of full knowledge that your neighbor was a convicted arsonist and had burned down previous houses that he'd bought insurance on?). My guess is, you would be pretty pissed off.

7. CDS (insurance) sellers are not required to notify companies that they are issuing derivatives against that entity, or allowing others to be on their demise. Using our previous example, although you and your insurance agent are aware that an arsonist lives next to you, your insurance agent is not obligated to notify you that he has issued insurance policies against your home. (If this were required, my guess is that you would keep a fire extinguisher in every room and double-check your smoke alarms each night!)

8. CDS (insurance) is perversely designed to allow manipulation by purchasers rather than sellers. How is this done and why does it matter? Buyers of CDS pay a small premium (generally a 1-3 % of notional insurance value) and generally do not have to post margin/collateral on their purchases, since their total premium-payments are not viewed as large risks to their counterparties. In our example, a 5-year CDS contract might only represent total premiums of 5(years)x 1%x $200,000=$10,000 in premiums spread over five years. As such, if your neighbor has $200,000 in a bank account, he could easily purchase 20 insurance contracts on your home, without your insurance agent questioning his ability to live up to his counterparty obligations. Now reverse it for a second. You (the homeowner) see your insurance rates increasing and decide to sell insurance on your home, because you believe the rates are too high and you have no intention of burning down your home.

Assuming you have the same $200,000 in your bank account, that is sufficient capital to sell 1 (ONE) insurance contract against your home. How come $200K in capital is sufficient to buy 20 insurance contracts betting on your home's destruction, but is only sufficient capital for you to sell a single one of them (betting on your home's survival)? The answer is obvious, because to guarantee a $200K insurance payment would require the full $200K in capital. Thus, buyers of protection (aka, short-sellers) have a 20-fold advantage in purchasing power versus sellers. Perversely, if you did sell an insurance policy on your home and your neighbors began driving up your insurance rates, you would have to report "mark-to-market losses", even though you have no intention of burning down your house.

9. Collateral requirements ensures there will be more buyers than sellers of CDS (insurance), which virtually guarantees that rates will increase over time for any insurable entity. As protection buyers chew through each entity (with low insurance costs) and drive the rates up, the buyers will report "mark-to-market" gains on their "trading" books. These reported profits will increase their book-capital, thus enabling their ability to purchase more and more insurance contracts and drive CDS spreads ever higher.

Purchasing CDS insurance is virtually riskless for speculators determined to drive spreads wider, given the near-limitless upside potential. For example, Portfolio.com cites the following about a John Paulson bet against Lehman, "Long before the financial crisis hit, Paulson, according to one person briefed on the trade, invested $22 million in a credit default swap that eventually paid $1 billion when the federal government opted not to rescue Lehman Brothers. That amounts to a staggering $45.45 for each dollar invested. "

10. As structured, the CDS (insurance) market appears singularly designed to support massive speculative trading and wreck companies. This dire view is based upon the skewed upside-potential on CDS insurance, lack of an "uptick rule" (preventing a single buyer from pile-driving spreads and wrecking a company from a spread-standpoint), negligible collateral requirements on purchasers of CDS insurance, lack of reporting requirements on purchasers or sellers, and perhaps most importantly............ no requirement of "insurable interest" for purchasers of CDS insurance. Is it any wonder that CDS spreads on Berkshire Hathaway of GE are significantly wider than the cash-spreads on their underlying bonds (what a "mystery")

If you read this, it should be clear that the risk/reward of CDS is skewed against sellers of CDS (those betting on stability) and favors the buyers (those betting on defaults and panic). Unlike equity markets, there are no real reporting requirements and negligible collateral requirements on "short-sellers" of credit. Most disturbingly, CDS spreads directly affect cash-spreads on corporate bonds, which represents the life-blood by which many companies fund their operations and payroll. When massive CDS speculation squeezes out and eliminates a company's ability to fund their operation, it represents more than a zero-sum game between two disinterested counterparties, it represents an unnatural destruction of a company/entity. In presenting my "homeowner example", I tried to analogize how horrible this market would be if applied to individual people. The negative outcomes are obvious. believe in capitalism and free markets, but CDS represents a flawed and contorted anomaly that has warped corporate bond markets for too long (largely within the last five years). CDS markets have been a critical driver of this "credit crisis". So the next time you hear someone cry about "naked short selling" of equities (which is regulated, reported, and restricted by margin constraints), point out how trivial their concerns are next to the +$60 trillion CDS markets and the issues I have laid out.

PS- In case you are curious, it is illegal for your insurance company/agent to sell insurance when there is no "insurable interest"

P.S.S- The next logical question you might ask is, "Wouldn't your hypothetical insurance agent [from my example above] go bankrupt from writing all these CDS (insurance) policies that are designed to self-destruct? The answer: Yes, your insurance agent would become insolvent. The name of your insurance agent is AIG. :)

Best Regards, Troy

2009-03-06T16:13:00.000-08:00

Bought more CCS @ $16-16.50 (10.2% yield)

Bond yield above 10.2pct now, versus non-listed comcast 30yr bonds that yield only 7.5pct.

Some other ones that are dicey include hjv (jc penney) yielding 22pct and trading at 30pct of par, or cpv (cbs corp) yielding 17pct at 40pct of par.... Not 100pct on those ones

2009-01-26T10:34:00.001-08:00

Look who is out calling for a stock-market bottom now......?

Unfortunately, the stock-market bottom was subsequently intercepted and returned for a six-points by the other team.

In all seriousness, this chart doesn't look like the "preferred scenario" for many people calling a bottom.....

2009-01-25T17:07:00.000-08:00

XOM long-short idea- Barron's published over the weekend with the title "Buy Oil". Ironic, given the last Barron's cover to blithely beg readers to "buy" anything was its "Buy GM" issue, when the stock was in the teens. Not a good omen, but the proof is in the pudding.

In fact, there may be buys in the oil sector, but they might require more intellectual insight than simply "buying the sector". One idea that stands out slightly is to short XOM (Exxon Mobil). Currently, Exxon is trading at a market capitalization of $400Bln. After netting out $36Bln cash, less $10Bln debt we derive an enterprise value of $375Bln. This suggests that Exxon alone is worth more than 5% of the S&P 500.

Interestingly, at $78/share, Exxon stock is trading roughly 15% below its mid-2008 price (when oil prices were above $100/barrel). Given that oil is close to $50/barrel now, this alone suggests that the price may have further to fall.

Another signal that Exxon may be overvalued is that you could construct an oil conglomerate by purchasing BP($106Bln), Chevron ($144Bln), and Conoco($72Bln) for a combined $322Bln. The combined reserves of this "conglomerate) is roughly 39.2Bln BOE (17.6, 10.8, 10.8, respectively). This reserve total is 73% greater than XOM's reported reserves of 22Bln BOE.

From a revenue standpoint, this "conglomerate" would have generated combined revenue of $886Bln in 2008, vs $457Bln for XOM (94% higher).

While Exxon has the strongest cash position, it is not nearly large enough to justify the valuation differential. Thus, either Exxon is dramatically overvalued, or the other oil companies (collectively) are significantly undervalued. My guess is that the answer is somewhere in between. As such, there is a compelling case for doing a long-short (buying a basket of oil names vs. selling XOM), or simply selling Exxon (buying puts)

Recommendation to buy USM bonds- UZV, UZG, GJH

2009-01-05T14:47:00.000-08:00

USM analyis-
Recommendation to buy USM bonds- UZV, UZG, GJH
I previously recommended buying UZV preferred (see earlier post for cursory credit analysis). As a refresher, UZV is a preferred-stock whose underlying asset is 30-year senior unsecured notes of US Cellular (USM 7.5% notes). Based on current price of $15 (60% of par), the yield on this senior note is approximately 12.5%, whereas peer-company bond yields for Verizon, Telefonica, Vodafone, DT (Tmobile), and AT&T average nearly 6.5% (+350bps over 30yr treasury rate of 3%).

US Cellular is a good credit risk, with minimal leverage relative to the underlying value of the business. For example, Verizon recently purchased Alltel (in cash) for $28Bln, which equates to a valuation multiple of $2,500 for each of Alltel's 11Mln subscribers. Although Verizon dramatically overpaid for Alltel, let's assume that US Cellular is worth at least half of this multiple ($1,250/subscriber). Based upon 6.3Mln subscribers x $1,250/subscriber=$7.9Bln implied enterprise value. Since US Cellular has only $1bln in debt and a core business intrinsically worth at least $7.9Bln, its debt is well-protected and safe (by a factor of 7.9x). In addition, the company also owns a 5.5% interest in a major Verizon wireless asset (SMSA LP) that generates an additional $80Mln income per year. I assume this is worth an additional $800 Mln ($80Mln/10% discount rate).

In total, US Cellular's enterprise value is worth $8.7Bln ($7.9Bln for core business + $800Mln for partnerships owned). After subtracting out net debt of $820Mln ($1Bln gross debt- $180Mln cash), the remaining intrinsic value of the equity is $7.9Bln. This equates to $90/share in intrinsic value per share ($7.9Bln/87Mln shares outstanding). Currently, USM stock is at $45/share, which implies a 50% discount to the intrinsic value of the company.

Recommendation- USM bonds appear to have at least 50% upside and are generating significant current income, regardless of whether management maximizes the value of the company. As such, I recommend buying UZV. Full disclosure- I have owned UZV since $11.50 and have been a buyer as high as $14.50. I would only buy the stock if it fell into the $30s (200% upside), as the bonds (traded on NYSE under UZV, UZG, GJH are more attractive and safer at current levels)

Buy FJA preferred (Embarq 2036 bonds)

2008-12-23T17:45:00.001-08:00

FJA is a preferred listed on the nyse. The underlying asset interest that is owned in the preferred trust is embarq long- dated senior debt securities. The preferred pays dividends of 1.78, which equates to 17pct current yield and a discount to par of 55 percent (paying 45 cents on the dollar). Embarq is a decent, but not great credit... Wireline subscribers are shrinking 5-7pcercent, and debt leverage is high, but manageable for the business risk profile (2.2x levered). The company is switching subscribers of phone service over to dsl, which should limit the defections of subscriber base to digital cable. Another plus is that centurytel is acquiring embarq, which should result in better efficiency, larger size, and improved credit profile ( centurytel is more rural, thus more protected from cable penetration). Aside from these factors, long embarq debt trades around 65$, which is 20$ (42pct) higher than the implied purchase price via the FJA preferred. Thus the below-market price, high yield, and potential upside in credit profile make this security extremely attractive at prices below $12.50. Recommendation- buy FJA

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BUY UZG/UZV Preferred

2008-12-11T12:42:00.001-08:00

The UZV/UZG are preferred stocks traded on the NYSE. The preferreds represent ownership interest in a trust, which owns 7.5% and 8.75% US Cellular Senior Notes, due in the 2030s.

The "par" amount of the preferred shares is $25, although the UZV currently trades at $13.25 (14.16% yield) and the UZG currently trades at $18.9 (11.7% yield). There is another US Cellular baby-bond listed under GJH, which trades at $4.80 ($10 "par" value), for a yield of 13.2%. I am ignoring the GJH issue for now.

US Cellular is 70% owned by TDS and represents the primary asset of TDS.. US Cellular currently has $1Bln in debt vs. $177MMln cash. Trailing EBITDA over the past twelve months is $1.06Bln, on revenues of $4.2Bln (25% ebitda margin). US Cellular also owns some partnership interests in Verizon's Los-Angeles cell network In 2007, US Cellular generated operating cashflow of $863Mln, less capital expenditures of $565Mln, for free-cashflow of $298Mln. The company has adequate liquidity between its cash holdings and $700Mln revolver (expires 12/2009) and is currently profitable. USM is the last independent carrier, following the acquisition of Alltel by Verizon. Currently, Verizon bonds trade at +500/30yr (8.1% yield). Verizon Wireless bonds trade 50bp tighter than the holdco bonds.

As such, buying the US Cellular bonds appears to be attractively valued, in the form of this structured note. At current yields, I would recommend buying UZV, as the 14% yield and $13.25 price is very attractive (53% of par, a high discount for a non-distressed credit.. In fact, the dislocation in bond pricing actually presents an arbitrage opportunity, in which you can sell the high-priced UZG (76% of par, $18.90 price, 11.6% yield) and buy the lower-priced UZV notes for a positive arbitrage of 240 basis points and a significantly lower-dollar price relative to par. Its a win-win, or you could keep it simple and just buy UZV. I've tried a little of both, K-dawg

2008-12-04T12:44:00.001-08:00

Okay, if you bought CCS at my recommendation at $15, I am currently selling that at $17.10 ( 9.76% yield) and putting all proceeds into CCW at $17.35 (10.1% yield).

Even with a bit of commission, it is a nice pickup in yield. More importantly, CCW is larger/more liquid and generally trades at a lower yield than CCS (by like 20bps). That means CCS will normally trade $1.50 below CCW.... so this should be an easy trade.

Or, you can just sell CCS and pocket your 13% over the past week! I like the swap better though, as 10% is a nice yield.

ClearChannel for Cowards...

2008-02-12T13:21:00.001-08:00

ClearChannel for Cowards...

Right off the bat, I don't like ClearChannel, they seem to ruin every radio station. That being said, they can do whatever they want since Sirius/XM is the only real radio competition and I'm too cheap to pay (for now, anyway). CCU is currently involved in an LBO that appears to be on the rocks. The stock is trading below $30, in spite of the LBO bid at $39.25 (>33% higher). The LBO bid is ridiculous and values a radio company at 13x EBITDA, which is about where recent station-sales have been executed at.

I think a more reasonable multiple for a monopoly provider is closer to 8-9x Ebitda, which is way below any historical trading level for this company. The last time it traded at $20/share was in the recession of 2002 (its debt was $2.2Bln more than current levels) and before that, you have to go back to 1996 when it was much smaller. This company should generate around $2Bln Ebitda, which puts valuation around $16-18Bln EV. Minus $7Bln debt=$9-11Bln market cap/500 mln shares= $18-22/share.

I am not willing to buy the stock at $29 on the hopes an overpriced acquisition goes through. However, I am willing to sell one-month puts at $20 for $.40 (2% absolute yield b/f commissions) on the notion that the stock will be a decent buy if hell-freezes-over and the share price drops 30+% within the next month. I do not view this as highly likely, although I do expect weakness when the company reports earnings on February 14th. If you are a little bit braver, you can sell $22.50 puts for $.90 (4% absolute yield). I have only done this on a couple contracts per account, but its an interesting idea and arb play.

Snipes

2008-02-01T14:10:00.001-08:00

"ALWAYS BET ON BLACK!"

- Snipes found not guilty of defrauding the government, after not paying taxes for 7-8 years, filing fraudulent tax returns, and fraudulently applying for tax refunds. He was also bouncing checks that he did send into the IRS.

I have a new favorite action hero. It is you, Mr Snipes. (Even if you do have a bad-taste in neckties)

http://www.reuters.com/article/entertainmentNews/idUSN2959375320080201?feedType=RSS&feedName=entertainmentNews&rpc=22&sp=true

Joke of the day

2008-01-30T11:42:00.001-08:00

Joke of the Day- " Hey Ben Bernanke, Home Depot called, they want their tools back".

I'd better start making a lot more money in my stock portfolio, because inflations gonna be rippinig America a new asshole...as if it hasn't started already.

In other things, Robert Olstein listed his twenty financial-analysis criteria....thought it was worth posting
OLSTEIN’S TOP TWENTY QUALITY
OF EARNINGS ALERTS
1 Material deviations between net income and free cash flow
2 Material differences between the tax books and shareholder books as
measured by deferred taxes
3 Material changes in balance sheet debt and liquidity ratios
4 Inventories, especially finished goods or raw materials, increasing or
decreasing faster than sales
5 Accounts receivable increasing or decreasing faster than revenue
6 Deviations between depreciation and capital expenditures
7 The repetitiveness and materiality of non-recurring write-offs
8 The role that non-trend line changes in reserves contribute to, or negatively
impact, current earnings
9 The repetitiveness and materiality of non-recurring gains such as sales
from venture capital portfolios
10 The impact and reality of a company’s deferred expense capitalization
policies as it effects reported free cash flow
11 Discretionary expenses deviating materially above and below trend lines
12 The reality, consistency and conservativeness of revenue recognition
techniques when measured against the passing of cash
13 The impact that acquisitions have on sustainable free cash flow and the
growth thereof
14 Changes in other asset accounts
15 The impact of transactions with special-purpose vehicles
16 Pension income and expense recognition measured against the pension
plan’s assumptions and the funded status of the plan
17 Large deviations between pro forma and reported earnings
18 The impact of option transactions on reported free cash flow and the
impact on future results and valuations of the company
19 The capabilities of management as measured by their long-term decision-
making capabilities; especially when problems develop; their attitude
toward risk as measured by the quality of the balance sheet; and
their preparation for a rainy day; their methodology of communicating
with shareholders; and finally their ability and emphasis on returning
value to shareholders
20 Disclosure of material information needed to assess the value of the
company
T

Troy Peterson, CFA
Credit Analyst- Americo Life
Phone- 816-391-2039
Fax- 816-391-2037
Email- Troy.Peterson@americo.com

300 W. 11th St.
Kansas City, MO. 64105

SELL FDX and WM- I'm starting my shot clock

2008-01-30T11:25:00.001-08:00

SELL FDX and WM- I'm starting my shot clock

Markets maybe got a week or two to rally more, but think the lows will be retested

Troy Peterson, CFA
Credit Analyst- Americo Life
Phone- 816-391-2039
Fax- 816-391-2037
Email- Troy.Peterson@americo.com

300 W. 11th St.
Kansas City, MO. 64105

2008-01-29T07:51:00.001-08:00

CTL- Centurytel at $35, this is a phone-line company in mostly rural areas, about a $3.8Bln market cap and $3Bln in debt. 11.5x P/E, with approximately $600Mln in trailing free cashflow (actual). Calculated a different way (with more onerous tax assumptions), Centurytel's profitability is mapped out below.

Ebitda- 1325
-interest -220
-taxes(.35)- -350
Capex -300
FCF- $455 (ebitda method fcf)

That equates to about a 12% FCF yield ($455/$3.8Bln), but its actually closer to a 16% yield since I overstated their actual cash taxes. They have a share repurchase authorization for $750Mln, which is like 18% of their shares outstanding. 10% of their stock is held up in 401K/esop plans which means even fewer sellers will be out in the marketplace. This should easily trade up until the implied freecashflow yield is something closer to 8%, which would equate to about $48.80/share , based on a low-end free cashflow forecast of $430Mln/8%= $5,375Mln $5,375Mln/110Mln shares= $48.86 per share This implies 40% upside in the stock.

The company has a lot of debt, which will likely increase given the buyback, but they continue to do a good job switching old phone-line customers over to DSL packages and they should trade at a premium to Citizens Communications (CZN). Currently, CZN trades at EV/sales of 3.7x and ev/ebitda of 6.7x, while CTL trades at 2.6x sales and EV/Ebitda of 5.14x. Both of these multiples imply a 30-40% valuation gap between these similar companies. The free-cashflow numbers make Citizen's still look cheap ($740Mln/$3600= 20% FCF yield), but I believe this represents lower capital investment spending in their infrastructure, which may ultimately come back to bite them. I think the valuation gap mostly exists due to CZN paying a cash dividend of 9%, while CTL pays a yield of .8% (CTL pays its cash through share repurchases, which should prove more efficent as long as they avoid dilutive acquisitions).

Thought this was an interesting equity idea, but would be hesitant to buy the bonds due to the fact that they pay out all of their cash.

Next Idea- Long/Short on MW/JOSB

2008-01-14T09:34:00.001-08:00

MW is 3x the size of JOSB, but both in the same business. Both have ebitda
margins of around 16%, but MW has been growing faster than JOSB. MW recently
warned on sales growth and their stock tanked. MW trades at .45x EV/sales, JOSB
trades at .76x sales. I think this is likely to converge, with most likely
outcome being that JOSB falls to MW (rather than MW rising significantly).
I'll map out the idea more fully this afternoon, but it looks pretty
interesting, given how obvious and straightforward the valuation disconnect
appears to be. The JOSB store I drive by every other day always seems to be
empty...

2008-01-10T22:11:00.001-08:00

New spec plays possibly worth a multi-day trade.....

Mostly reflective of the market and possibly a number of other stocks, I noticed that these two stocks had interesting island formations. My personal experience is that stocks that are A) Sold off more than 30% from their 52 week highs B) Trading at/near their 52 week lows C) Shown an Island formation at the lows (that resulted in a stock falling at least 3% intraday, but recovering and ending near the opening price of the day) and D) followed up that island formation with a strong bullish-engulfing candle (long white candle) - tend to have the potential for significant outsize gains over the next few weeks. Sometimes the reactions are very explosive, and my target would be for a significant rebound.

In Wamu's case, a minimum of 25% should maybe be targeted, FDX maybe 10%? In either case, the chart pattern shows strong buying and a major reversal on good volume and on oversold conditions. If the chart pattern closes below the bottom of the island formation, its definitely busted and you should just take a loss on the trade. I would tend to say if the stocks close below the top of the island formation that the upside is likely to disappoint, so I may set my stop-loss there.

Since you are reading this blog online, the best way to explain it is that Island-reversal formations are the Jenna Jameson of chart patterns. And by that I mean the Jenna from 10 years ago, not the old-and-busted anorexic Jenna from now. Hope that gives ya some good perspective.

PS- Sadly, my fondness for historical valuation multiples and Chili's salsa has me licking my chops over the 15% decline in EAT (within the week after i bought, of course :), nonetheless this was a long-term trade 6-18 months thats targeting $30/share. The biggest hindrance may be the fact that management blew a bunch of money on share repurchases at high prices in 2007, but restaurants are definitely looking very interesting to me... think the Darden's and Brinker's of the world have the financial wherewithal to outlast a lot of the smaller, lower-margin also-rans. (by comparison, recent LBO's of Outback Steakhouse and Applebee's both occured at >10x Ebitda, with Chili's trading for 5x trailing Ebitda, there appears to be a significant margin-of-safety even if earnings were to temporarily decline for these guys. I may look to add to this position if it declines further, although seeing some insider buying might make me a bit more bullish.

2007-12-27T13:46:00.001-08:00

Brinker International(ticker symbol EAT) trades at .7x sales and 8.5x trailing operating profit. There seems to be a glut of restaurants in most fast-growing suburban marketplaces, which could be a problem if consumer discretionary income falls off and cost-inflation continues to ramp up. All that being said, Brinker's share price has fallen from $35 to $20...they may not have as much hidden real estate value as Darden owns, but it does own more than 1/4th of its stores and owns some strong concepts in Maggiano's, Chili's, and On-theBorder. Now that I mention it, Darden might be a good buy eventually too....

As the chart above shows (w/green line, Brinker is trading at a historically low Price/Sales multiple, my target would be to see it increase from .55x sales to 1x sales, which would be an increase of 90% from current levels.

2007-11-02T09:14:00.001-07:00

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 puts...it 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.

2007-08-24T10:20:00.000-07:00

ISYS is doing a tender offer on its stock at $27 a share. They are a small, $270MM mkt cap tech company with too much cash and a slightly rich stock valuation that has gone nowhere the past five years. Their price is $24.50, I am recommending that you buy 99 shares of the stock at any price under $24.50. The tender offer runs through September 11th, so you just have to notify your broker to submit your shares at $27, with "odd-lot-preference" treatment.
I bought Oceans Seven their 99 shares, and am buying 99 shares for my and Jennys personal accounts. The trick is that no more than 99 shares are registered to each person, that ensures you will get all your shares bought once the tender offer is completed. At $24.50, your gain is $248, less commissions, for about a months investment of $2450..... oh, and if you buy today you will pick up a $6 dividend (woo hoo!) as well.

2007-08-10T12:23:00.000-07:00

SUBPRIME AND CRAMER FOR THE RECORD-

Cramer two weeks ago in mid July....

Cramer now....

I think he gives a pretty accurate picture of the two-faced nature of a lot of these Wall Street guys....they leverage up irresponsibly, then when they wreck the system they want Mommy (or Bernanke) to bail them out. The Colbert followup is hilarious. As it stands, I am currently short an ACS $50 put (that is now in the money) and am at a loss....hope to get "put" the stock, as the potential buyout price on the company is above $60/share (30% premium to current price). Also am long some Broadridge stock and Discover Financial, both hedged with covered calls. Idiots are hoping the Fed will add liquidity to the market so they can get big market rallies....not "save the economy".... sometimes its just annoying to watch the market.

2007-06-15T13:57:00.000-07:00

The buyout/LBO-boom has just witnessed its first major casualty....

Ronco, Maker of the Veg-O-Matic, Files for Bankruptcy (Update2)
2007-06-15 13:05 (New York)

(Adds sale of company in third paragraph.)
By Jeff St.Onge
June 15 (Bloomberg) -- Ronco Corp., maker of the Veg-O-Matic
vegetable slicer and Pocket Fisherman, filed for bankruptcy two
years after founder and television pitchman Ron Popeil sold the
company.
Ronco, which marketed products as perfect for ``grads and
dads,'' sought protection from creditors owed more than $32.7
million. It listed $13.9 million in assets in papers filed
yesterday in U.S. bankruptcy court in Woodland Hills, California.
A sale of Ronco ``in the coming weeks is the best and most
viable mechanism for preserving'' the company's value, Chief
Executive Officer John S. Reiland said in the bankruptcy filing.
Reiland said Ronco will be sold through a court-supervised
auction and already has a potential buyer.
Popeil, 72, started the Chatsworth, California-based company
in 1958 and became a household name by hawking products in late-
night television ads. He was known for infomercials selling his
products, and got his start pitching his father's Veg-O-Matic
manual food processor with the phrase: ``It slices! It dices!''
Ronco was sold by Popeil to a holding company, Fi-Tek VII,
in June 2005, according to court papers. The buyer kept the Ronco
name and the right to purchase products Popeil invents before
they are offered elsewhere. He continues to work for Ronco as a
consultant and spokesman.
`But wait, there's more'
Popeil Inventions, owed more than $11.7 million, and other
companies owned by Popeil are listed in court papers as Ronco's
largest creditors. His inventions include a machine that
scrambles eggs inside the shell, a food dehydrator, an automatic
pasta-maker and a spray to cover bald spots on people's heads.
Among the company's best-selling gadgets is the Pocket
Fisherman, a compact rod and reel.
Popeil is listed as an inventor on more than two dozen U.S.
patents, according to the U.S. Patent and Trademark Office. His
fast-paced TV ads added phrases to the lexicon, such as ``But
wait, there's more'' and ``four easy payments.''
Popeil placed Ronco under bankruptcy court protection in
February 1984, and the company stopped doing business until he
resurrected the business with a former company salesman.
Fi-Tek VII's buyout in 2005 left Ronco with about $250,000
cash, Reiland said in court papers. The cash ``problem was
compounded by the fact that Ronco was entering the period where
it required significant working capital in order to acquire
inventory for the busy holiday season,'' he said.
`Wow, That's Terrific Bass!'
Stacia Neeley, Ronco's bankruptcy lawyer, didn't return a
call seeking comment. Popeil didn't return a message left with
his assistant.
In August, Ronco fired President and Chief Executive Officer
Richard Allen. He was replaced by Reiland, who first joined the
company in June 2005, according to court papers.
Ronco shares, which peaked at $2.60 in June 2006, almost
doubled, jumping 6 cents to 13 cents at 9:30 a.m. in over-the-
counter Bulletin Board trading.
Ronco's television ads were so familiar to viewers that they
were spoofed by comedian Dan Aykroyd in a famous 1976 sketch on
the television program ``Saturday Night Live.'' In the sketch,
Aykroyd advertises the ``Super Bass-O-Matic '76'' by ``Rovco,'' a
blender that turns a whole fish into a brown liquid, which is
then drunk by Laraine Newman, who co-starred in the segment.
``Wow, that's terrific bass!'' she says.
The case is In re Ronco Corp., 07-12000, U.S. Bankruptcy
Court for the Central District of California (San Fernando
Valley).
--With reporting by Anthony Aarons in London, Susan Decker in
Washington and Bob Van Voris in New York. Editor: Rovella

2007-03-05T14:35:00.000-08:00

DGX-LH long-short trade closed out

The chart indicates the approximate gain, although the ride has been a bit more volatile than I had expected when i got into the trade. The original thesis was that DGX was 25% undervalued versus Labcorp, but Quest lost a second major contract (following UNH loss) that made me question their aggressiveness in their core lab business. As originally predicted, Quest Diagnostics picked its skirt up from around its ankles and got back to work, with the recent announcement that LH would no longer be serving as Aetna's in-network lab provider.

This helps Quest marginally, but more importantly signals the potential for a major price war, which could hurt both companies longer term (fighting for market share, cutting each others throats). Quest will probably still be a good long-term investment at these levels, but I have decided to speculate a bit and close out both sides of the trade. Net-net, I exited DGX around a 1/2% loss, and LH at a 7.5% gain. I'm sure the trade levels will continue to collapse, but will look to re-enter DGX within the next month or two hopefully.

2007-02-25T21:27:00.000-08:00

Another Day, Another buyout... for those not keeping track at home, Florida Rock and Hydril have both been bought out at massive premiums versus my recommendations (to buy) that were made within the past six months in this blog. FRK is trading at $68 (up 58% from my $43 reco. price in Oct. 2006 and 78% from my buy-in price) and HYDL is trading at $95 (up 86% from my $51 buy-in price). They have been bought at heavy premiums above what the public market value would have reached, but reflective of the control premium that a private owner would be willing to pay to acquire these high quality franchises. Unfortunately, I unloaded most of my stock in both names after I had made 25% and 41% in the respective names. I have had more annoying problems in my life than selling at a 40% gain within a one month period though!

I continue to like $2-5Bln market cap companies, but have lately been looking at some slightly larger entities that also represent high quality businesses with strong brands and franchise quality. Several of these names are trading just above levels where I would consider them to be cheap. For instance, SAIC(federal IT/professional-services contractor-$18.50) and MRH(Bermuda reinsurance-$17.70) are names that I like. SAIC's main business risk is political, in the form of potential Democratic meddling with Federal outsourcing.... MRH's is hurricanes and nonsense like Florida's restructuring of its excess-of-loss reinsurance pricing.

In spite of these risks, MRH is increasing its book value by 15-20%/year and trades at 1.1x book value, with one of the best underwriters as its CEO and a more conservative risk policy (which is why book value isnt going up even faster). SAIC is not "cheap" per se, on an earnings basis, given its nearly 20x forward earnings, but this is one of those beauties that earns more in free-cashflow than it reports in earnings, due to the amortization of fixed-contract costs that are incurred up-front. Given that nearly 22,000 of their 45,000 employees have high-level security clearances (tough to acquire), this gives them a reasonable barrier to entry. On a FCF basis SAI earns above a 5% yield and should improve this figure now that it is a public company. On both companies I have bought a small amount of stock and sold out of the money calls. In addition, I have sold $17.50 puts going out to April for a 3% implied yield-to-put (22% annualized return, assuming I am not put any stock). If either SAI/MRH falls below $17.50 I would be okay owning these entities for the long-term, based on my current view of management and the companies.

I do not think either of these companies will be acquired by private equity, although SAI would be extremely attractive in an LBO if it were to fall much below $17.50....so I am not expecting a grand slam like FRK/HYDL to occur. The market appears frothy with too many things hitting 52 week highs, companies that people were shunning back in July. (PS- If I am not "put" any MRH/SAI, would look to roll and sell forward additional contracts, although MRH should carry a huge premium through the summer if you think hurricane season migh pick up).

2007-02-07T07:29:00.000-08:00

Site of the Month- Check out http://valuediscipline.blogspot.com/

They had a pretty good writeup several days ago on MMM. From what I can tell, this company generates nearly $4.5Bln in normalized cashflow from operations, approximately $3.5Bln actual cashflow (due to working capital expenses) and nets out to $2.5Bln actual free cashflow per year. This assumes continued R&D and growth expenditures, however on lower growth assumptions this company trades at 16x free-cashflow in a low growth scenario, for a 6.25% free cashflow yield. While not the sexiest yield in the world, people have historically paid a lot more for this company's earnings...which have continued to increase in the face of a flattish/declining stock price over the past few years. The chart below tracks the company's stock price (white line) vs. its P/E (green line). MMM is under-levered ("AA" credit rating) and appears to be somewhat cheap on an absolute basis, but very cheap on a relative basis (versus its historical trading range). It is difficult to gauge competitive threats and how much LCD pricing will hurt some of their film divisions, so I am just buying a half position and watching it. This is more of a long-term IRA stock.

2007-01-12T12:22:00.000-08:00

Quest For The Championship? Although the Bears playoff game on Sunday is probably the Quest most sane people are focused on, I have noticed a disturbing discrepancy between Quest Diagnostics(DGX) and Laboratory Corp.(LH) valuations. The discrepancy has arisen from LH bidding aggressively on DGX contracts. Both companies run diagnostic lab/testing facilities and are the largest players in their industry. Vital stats are below.

For similar businesses in a commoditized industry (in which DGX is the leader and has historically outperformed LH in) Laboratory Corp is trading at a higher sales multiple (55% premium) and a higher Ebitda multiple (33%). The fact that Laboratory Corp is willing to sacrifice margins and risk its own book of business to engage in a price war does not appear to be priced into the market. Given that Quest is likely to engage in similar guerilla-type market-share theft, I believe a short of Laboratory Corp. makes sense. At the same time, I like the overall industry and believe Quest Diagnostics is trading at a 'slighly' compelling valuation that could be attractive to a private equity buyer (particularly if it fell any further.

As such, I am recommending a short of LH ($73) and a buy of DGX ($50.10) and have executed this trade for myself and my Oceans-7 account. I am considering selling LH $75 calls and/or buying longer-dated $65 LH puts. Below is a historical spread comparison between the two companies. Note that since 1995, DGX has significantly outperformed LH (in spite of recent drop), which tends to indicate that DGX's near-term underperformance may revert towards the historical average. I have not done any mean-regression analysis, apart from what I can accomplish by eye-balling the chart. This looks like a winner though, as I think the market is reading too much into DGX's loss of a contract with United Healthcare (which accounted for 7% of DGX revenue). The thesis behind the trade idea is, if DGX is in trouble....LH will be too in the not-too-distant future. This has been true for both companies historically.

2006-11-21T12:23:00.000-08:00

Con Artists at Cornerstone (CRF)- Of course the best short idea in the universe did not have shares to borrow at $19.39!!!!

You might be interested in checking out CRF(see also CLM), a closed end fund that trades at 170% of its NAV (was 190% recently before a drop). It owns a bunch of Dow stocks as its top holdings (nothing special) and is only 85% invested. The kicker is that the fund carries a current yield of +11.5%, which equates to paying out nearly 21% of its NAV. Clearly this is not the modus operandi of a "going concern" closed end fund, however the meat of the story appears to originate with the fund's largest holder Ron Olin and his relationship with Doliver Capital and a firm called "Deep Discount Advisory"....oh the irony! My best guess is that these firms are engaged in selling shares of CRF to small investors in cash/retirement type accounts where they cannot be margined. There is a distinct lack of large holders, with the thirteen largest stockholders (behind Ronald Olin and related entities) holding a mere 2% of the outstanding shares. Thus, there are no shares to borrow for a short position against this overvalued asset, which is a shame since there appears to be an obvious incentive for Mr. Olin to market his overpriced stock to unwitting investors, who are no-doubt focused on the current yield of the fund (rather than the all-important NAV).

This essentially amounts to selling people a one dollar bill for $2, not exactly a fair trade...especially when you consider the distinct lack of special assets in the fund. Note, being 15% invested in cash has not stopped the fund manager from charging fees on the assets under management. To put it another way, in the chart below, figure that the "white line" should be trading somewhere south of the "blue line"...which implies a 40% plus drop is in the cards for this turkey sometime in the near future (assuming the Dow Jones average does not double...in which case it could remain flat!)

Thought given your position this might be worth passing along, as this would be an excellent case where short sellers would be able to save future investors from "getting their faces ripped off" by Mr. Olin. Note, I am short zero shares due to the clever scheme that has been set up here. (PS- note that CRF is a long-dated fund that traded at a discount prior to the 2000's, but since undergoing manipulative marketing it has been on a rollercoaster ride)

2006-11-17T07:42:00.000-08:00

Best Investment Idea of the Year- Overweight recommendation on Chipotle Gift-Certificate Cards (literally)

Sell your house, take out a second mortgage, this is the idea you've been waiting for..... For a pittance of a sum, you can buy a $25 Chipotle gift-card and receive a coupon for a free burrito. Based upon an implied value of $5.50 per burrito, this works out to a 22% return on investment. While the coupon must be used before year-end, estimating by my current rate of Chipotle consumption...that would be good for at least 10-20 trips before year-end (and the gift cards remain valid for at least another year). Thus, the rate of return on your investment increases substantially when you discount the fact that you would have eaten at Chipotle a couple hundred times next year, whether you had bought the gift certificates or not. Essentially, that money is a future "sunk cost", so taking advantage of the gift certificate is equivalent to getting free money.

2006-11-10T09:18:00.000-08:00

Democrats win Congress

2006-11-08T10:56:00.000-08:00

Hydril Update- I couldn't take it anymore and sold my Hydril at $69.30, as it continues to rally out of control. Nearly a 40% gain from $50.50 entry price. Too bad I never got to my full position, because it rallied so quickly. Next time I get to buy this good of a company on the cheap (while the cycle is still in their favor), will put on a full-position in the name right away. Meanwhile, my hold-discipline on FRK is not paying off yet, as the stock has fallen off of the $46 high from a week or so ago. Not too worried, have been reading that the Cemex bid for Rinker Group would need to climb nearly 10% for certain fund managers to consider accepting that offer....which would bode extremely well for the prospects of the less-expensive Florida Rock.

QOTD from Will Rogers- "A holding company is a thing where you hand an accomplice the goods while the policeman searches you. "

2006-11-08T06:48:00.000-08:00

More Dirty Politics.....

2006-11-07T11:12:00.000-08:00

Vote or Die

2006-11-06T12:22:00.000-08:00

Bubblin' Crude- HYDL- Hydril Corp

Ben Graham (1976-FAJ)- "The stock market resembles a huge laundry in which institutions take in large blocks of each other's washing...without true rhyme or reason."

The spasmic market decimated Hydril's stock price following the decline in oil and nat. gas prices. I do not believe that I have any crystal ball or special edge in forecasting future oil prices. However, as seen by all of the johnny-come-lately hurricane forecasters predicting another "storm of the century" in the year AFTER Katrina hit, it appears that many "expert forecasters" offer much ado about nothing. After seeing Berkshire's reinsurance profits rise 5-fold, I have a bold prediction myself(with a 99% certainty) that Buffett will have a very funny, smart-ass quip in his upcoming 2006 annual report about the various weather experts and forecast models!

Onto the subject at hand, am up significantly on HYDL. Originally wrote up at $55/share, but the stock fell so fast at the beginning of October I wound up buying a half position at $50.50. Following an awesome wedding for my brother in Austin last week, I was incommunicado for the last 10 points of stock movement (luckily, as it did not tempt my fate to sell my shares). HYDL earnings will likely be limited in the near-term, as excess drill-pipe capacity needs to be worked off by E&P companies. At $50/share, HYDL traded at 7x Ebitda with a huge order backlog and a strong management team ( I worked with them as a private lender at Principal, top shelf guys...even when the market was not overly favorable towards them). Am not buying any more here and debating whether to sell some (just so I can say I made 30% within a month :) ). The RSI on this was near 20 and way oversold in early October and is now nearly 70 (overbought).

In other news, notable LBO/buyouts that have occurred today include SWFT (Swift Transport- Walmart trucking co.) and ELK (Elkcorp exploring strategic actions and company bid....stock is up 23%), ELK was a name I had ordered up annual reports on due to its valuation and the fact that all of my neighbors get their roofs replaced every 5-7 years unnecessarily (insurance money). Interestingly, SWFT first peaked my interest more than a year ago based on the insider buying by their CEO at $22/share. Their CEO is back for the rest of the company with a $29/share bid that may increase. No position in either of these companies unfortunately.

2006-10-30T12:07:00.000-08:00

Where is the LUV???

G. Gerswhin-" Life is a lot like jazz... It's best when you improvise"

Sold the $15 November Put (20 days to expiration) for $.30/share. Net of commission, this amounts to a target return of 2.0% on my $14.71 VAR (value-at-risk). This amounts to an annualized rate of return of 35% on VAR that is invested in one of the best airlines EVER. I could cite labor costs, lack of strikes, no bankruptcy, consecutive years of profitability, hedged fuel costs below $40/bbl of oil, its own reality television show, but instead I think the most telling feature is that Southwest manages to accomplish its historical profitability without compromising on customer service (i.e- they still give out peanuts and an ENTIRE can of soda), unlike those bastards at other airlines.

The stock is at a 52-week and multi-year low, while I think it could have near-term downside to the mid $14 area, it should have some support at current levels...particularly given that the company has been earnings money the past five years and trades at a lower valuation than it did then...

Here is a chart-printing of the option. If you prefer to own the stock, but want a yield higher than Southwest's meager .12% payout (perhaps the major chink in the LUV bull argument), you can always write the $15 call. Again, these strategies only make sense if you have ultra-low commissions(similar to Southwest's ticket prices)

Is free peanuts a valid investment thesis? (The answer to that rhetorical question is yes, in case you didn't know). Look what happened to Lone Star Steakhouse when they removed the peanuts from their restaurant. There were some other problems with sales and earnings, which were probably due to the lack of peanuts I imagine.

2006-10-29T20:53:00.000-08:00

I Wanna (Florida) ROCK!

Pat Riley- "Giving yourself permission to lose guarantees a loss. "

Florida Rock rallied 15% on Friday (at the high of the day), before finishing up around +8%. I continue to own this position, which performed this rally on NO news and no earnings announcements. The key driver of the stock gain appears to be a buyout offer that Cemex launched to acquire Rinker. The buyout offer values Rinker at nearly 10x Ebitda, while at the same there is a private equity push at TXI (Texas Industries) , which is also trading above 10x Ebitda. While Florida is not currently considered the "hottest" residential housing market around... it has historically rebounded and still holds a lot of what can't be rebuilt on the prairie (namely, waterfront property).

Florida Rock is only about 40% exposed to the residential market in Florida, due to its diversification in the Southwest and maintains a very strong balance sheet, with negative net debt. At 7x Ebitda (trailing), its hard to want to sell this stock on a 15% up-day in trading, especially when one considers the chronic cement shortages that have plagued builders in that state for the past three years (state is a net importer). Perhaps I'm being greedy, but historically selling (too soon) good companies as they start to overcome investor pessimism has been my weakness. I would expect to see this stock approach the $50-55 area within the next few months, if only to move in-line with where other cement/aggregate companies are valued at in the marketplace.

Long FRK (up to $43, from purchase price at $38)- Writeup from Sept. 06 Journal below

2006-10-26T09:58:00.000-07:00

It A'int Pretty But Its Cheap!
Have noticed that some of these bank stock options are not paying close attention to the dividends on the underlying stock, too focused on volatility numbers, etc.

Here is the trade, sold $45 November calls on Citigroup @$5.80, while buying the stock at $50.80. If Citigroup closes above $45 (or does not fall 13%) by November 18th, then this trade will net me $50.80 per share, versus my cost basis of $50.80. Not a great-sounding trade you say? Lest I forget, Citigroup will pay a dividend to holders of the stock on November 6th.... of $.49/share.... which is really all you get out of the trade.

So doing the math, we are really only risking that the stock falls below $45, with that being our net investment in the trade. For a 23 day holding period then, we will earn ($.49-.02 commissions)/$45 at-risk =1.04%,annualized gain*(365/23 days)=16.5%

2006-10-24T09:19:00.000-07:00

EXP- Eagle Materials: Attached to this post is a sample of one of my note-book writeups on Eagle Materials. They recently had several large insider buys in their stock, but hopefully this gives a sample of some of the info I focus on when analyzing a company/industry. I am extremely impressed with the grasp of EXP management on their market dynamics... however I would probably wait to buy the stock if it gets to the low 30's again.

2006-10-21T22:24:00.000-07:00

Well... the market is at a 52 week high and up about 12% for the past twelve months (depending on which market qualifies as "the market" to you. For the past 2-3 months, a lot of stock I have been following are up 15-20%, with very few of the decent-quality companies trading near their lows.

The only recent market overreaction has been in the energy sector, with many drillers and oil service companies getting clobbered due to oil price declines. I bought HYDL at $50.50, which has rallied up about 7-8 points in about a week. I only bought 1/3rd of a position, as I was buying into it as a falling knife. I like management, company has >10% of market cap in cash, no debt, and dominant market position in premium connections (deep sea oil drilling). I should have bought more exposure in this sector, possibly including GRP (grant prideco) below $35. Recent buyouts of NSS and MVK (steel tubing for drill pipe) bode favorably for this sector, possibly affording buyout interest in either GRP or HYDL longer-term.

Recent strong performers for me have been GTRC, CPWR. AGYS, FRK, CCRT, DEBS, IUSA,JBHT, YUM, HYDL, DRI, EAT, and several others. Am debating buying some WSM in the low 30s due to strong insider buying and decent niche retail concept. JLG is a solid trucking company (aerial lifts) that was oversold and had just hit my low-debt/valuation screen....prior to receiving a buyout offer more than 25% above its prior closing price. Ironically, even after the huge jump in stock price it is still on my low-valuation screen! Deluxe Corp (check printer) is also up nearly 50% from its $14-15 bottom of a few months ago. I hated this company and their extremely weak former management, however new CEO Lee Schram appears to have the right stuff and has made some tough decisions to preserve cashflow. Based on their high debt leverage and strong current cashflow, DLX is LBO bait if the stock price fell below $20/share, although I am less excited about it at $22/share (upside to $30?) Am not excited about a lot of names and am waiting for some opportunities to develop. Will continue waiting for some exciting names to go on sale....

2006-07-17T19:07:00.000-07:00

Jon Stewart the Daily Show - Internet Tubes

Awesome....Just awesome

2006-06-30T14:36:00.000-07:00

A Couple of Ideas I'm working on....

BUY CSC @$48 range. CSC announced their company was not going to be sold to a buyout group, but that they would be going ahead with a $2bln stock repurchase, which represents 22% of their floated shares. The company is also subject to an options-grant investigation that most companies are facing, but in any event their stock fell 13%...half of which occurred intraday. On a technical basis I think their is support at $48, and additional longer-term support in the $43-45 range. I would have liked to sell the puts, but their options pricing is way too skimpy and doesnt compensate for the risk associated with writing them.

I am recommending putting on a trade position in 1/4 sizes at a time and hope to sell the puts at the right premium level.CSC trades at 4.3x ev/ebitda, vs. the market average valuation multiple closer to 7-8x. Any stock repurchases below $50 should enhance a buyout firm's ability to step back into the picture and pay a larger premium on the remaining shares, so I am fairly positive on the outlook.

MWY- Short Squeeze Part deux?

MWY is also forming a killer short squeeze, 95% of the floated shares are tied up and Sumner Redstone appears to be moving in tor the kill, buying 1% of the outstanding float per day. Sumner's buying in the single-digits and low-teens in 2005 caused the stock to move from $8 to $24 last year. After he ceased buying MWY stock in the high teens, it has since fallen to $7 (admittedly, the company is a terd). However, since he has restarted stock repurchases in the past two days the stock is up 15% to $8.09. With approximately 2MM shares short and 7.6MM in the float, there is the distinct possibility of a short squeeze into the low double digits... as Redstone owns 85% of the company and is very near the 90% threshold required to take the company private.

BUY PSUN under $18- continue averaging into position as stock trades down

Am also looking at value in CLE- Claire's Stores (less fashion-sensitive than other retailers), and DG (which is less economically sensitive than other dollar stores and is trading at approximately 12x peak free-cashflow. All of these names are oversold,
PSUN is down almost twenty percent from where I first noted it as being potentially interesting. While I was more concerned after checking out some of their stores, they are now trading at around 4.5x trailing ebitda ( versus 6.5x for the group, which is still below the market at 7.5-8.0x). Essentially, if PSUN's earnings were chopped in half, they would have a P/E of around 21x. While that P/E level is high, for a depressed earnings multiple and worst-case scenario it would seem to indicate that current levels offer a good entry point.

2006-05-26T12:15:00.000-07:00

ACS- Affiliated Computer Services- Sold the July $50 put

ACS has been extremely volatile over the past few years, as evidenced by the attached chart. From looking at the volatility, one might never guess that their underlying business activities are fairly benign, such as processing student-loan payments and setting up toll-booth collections for various states.

After 5 years of back-and-forth activity in the stock price, the company decided to implement a dutch-auction buyback for half of the company (in response to an unsolicited buyout offer from private investors). But like a tree that falls in the forest, what happens when you do a dutch auction and nobody is there to tender their shares at $63? I can answer that question.... your stock price will fall to $49. The company now has a $5Bln credit facility and a $7Bln enterprise value, which would allow them to buy-back up to 2/3rds of their stock if they really wanted. Conversely, if their stock price were to fall much more, me-thinks that whatever LBO buyer was interested at $55+++ would be back in the game buying up shares at sub-$50 stock prices.

So, between a potential buyout above $50 and a potential new share buyback, there seems to be downside protection below $50. Additionally, the long-range value of the company is about $50-$55/share from my estimates, so I feel comfortable writing (selling) a $50 put expiring in July. I collect $200 if the stock finishes at $50 or higher and my adjusted purchase price if it falls is $48. Given that the odds of a shareholder buyback increase significantly the more the stock price falls, a price decline might actually be a positive event. While I am bullish on the company, their name is involved in an options-backdating scandal and several other negative headlines events that should not be overly material to them (i.e- less than $100MM aggregate for all items).

Recommendation- Sold the July $50 puts (conversely, you could buy the stock at $49 and sell the July $50 calls). This basically provides you an income while negating upside above $50. In actuality, it may be a better risk/reward trade to just buy the stock (in the event it gets bought out at $60/share), but I like to make things complicated sometimes. My last idea like this (WLS) worked out way better than I could have imagined, rising from a price of $73 to $128 within the past two months.

2006-04-11T08:40:00.000-07:00

Housekeeping Items.... (in reverse chronological order)

Recommend taking profits on half of Neumarkets position (NEU), stock is up about 10 points from where I recommended it at $36...in spite of being off nearly 10 points from yesterdays high at +$56!!!

Other trades, ALKS shouldve stopped out for a small loss at $25.50 a long time ago, CONR should have stopped out for at least a 5% gain, JOYG is up about 10% to $64.88 and could easily fall 5% (without breaking its current uptrend.... I would tighten stops on this name),

Inco (N) is a trade that has done very well, although my initial recommendation for a stop-loss at $44.70 would have allowed a lot more upside than my greedy followup advice to raise your stop (after the stock had advanced some. Copper fundamentals and technicals are strong due to chinese demand and mine outages. Hell, these miners can't even find enough tires to fit on their big dump trucks because the demand is so strong ( I'm not kidding, either). Stock is currently at $54, up from $46 reco- price... and up a lot from the $47.08 that I i got stopped out at!

Homebuilders appear played out, have already taken my gain in WCI (which was up more than 10% from my $25 reco-price. WLS had a 36% gain in ten days, after "the General" bought out his company.

Ryerson Inc is up about 10% from the $24 reco-price, while the cup-and-handle looks intact, would still raise your stop loss price to lock in at least half of the current gains. These guys had some accounting issues, unbeknownst to me when i first glanced at their chart.

ASEI- Stock muscled from $84.65 to $92 after I recommended it on a pullback. It has since come down to $81, although fundamentals of port-security and xray machines appears intact. If you were following trailing-stop-loss rules though, you should already be out of this name, hopefully with a gain. Last resistance/support level on the chart is in the $73 range...

HRS- recommended the stock at $43.2 before it powered up to $47...only problem was it gapped up the next day, so entry would have been impossible. No position was seriously looked at due to this glaring issue.... (although I look like a genius for posting the chart when i did! lol)-

NYX/ISE - All of the stock exchanges have been battered, and are down 20%+...interestingly, I was fundamentally negative and was specifically citing a technical breakdown in their charts.... for instance, NYX had a dark cloud, then a gravestone doji (w/ negative follow through at $87 level) and ISE had a huge bearish engulfing day in mid-March. This was a major missed opportunity for me, which I didn't engage in because I was too wussy to initiate the trade with tight stop losses (fear of getting executed?) - missed out on +20% within a month

GCT- This REIT has traded higher between 1-5%, as well as paying out a 2% dividend since my posting. In classic rock-paper-scissors style, I'm hoping potential for a buyout trumps any accounting issues. Also, they canned the CFO for being a pansy-ass...can't say I blame them. Continuing to hold (+3% currently)

ERTS- Shorted some ERTS at $54.90. Should have shorted more at $56.30. Some buttwipe at Lazard Capital actually said this company is a buy, because its trading at 30x PEAK earnings in 2010, which figures in all these optimistic assumptions panning out over the next 5 years. Inco and Phelps Dodge are 10x earnings RIGHT now at their peak...what kind of weenie pays 30x earnings 5 years from now? I thought all that "new age" and "internet" crap went out of style already? Someone needs to call that analyst up and tell him " Year 1999 called, it wants its hype back". This stock is a total terd trading at 50x earnings...i saw their recently released James Bond Game trading at $18 used at Gamestop yesterday.... War of the Monsters (circa 2003) is still trading at $29??? Talk about precipitous decline in pricing.... I promise to cover my short-shares when ERTS stock is priced less than the cost of their average new game price (currently $39.99).

Insider plays- this wasn't a recommendation of the companies I cited, so much as an example of situations where perhaps buying off of insider trading is much more helpful than trying to fundamentally grasp what is going on at a small public ocmpany.

2006-04-05T15:14:00.000-07:00

"ALL YOUR INSIDERS ARE BELONG TO US...."

These are several examples of small cap companies that hit my radar screen, for which the insider buying would be the primary factor motivating a purchase of the shares... either due to losses at the company or extremely limited insight/disclosure from the company, due to their small size, etc. NKBS was actually found on my value screen back in the 1's, while CFS and KNOL I've been watching go up 50-200%, respectively.

GCT/KRG are examples of REITS with strong insider buying that I've put a little bit of money into, but I'm nearing the point where I will simply put a significant amount of money in these small caps without forcing myself to do a complete due diligence on the company. KNOL and ARTG are terrific examples of why I would be willing to buy based on insider activity alone, although that does create a dilemna on where to set a stop-loss level at.....

2006-03-27T10:57:00.000-08:00

GME vs. ERTS- Approaching shortability???

I originally wanted to buy Gamestop back at $19.50, on decent valuation(EV/Sales<.8x, P/E<20x), modest growth targets (10%/year), and a decent chart buildup....that was back in mid-2005, literally the day before they agreed to buyout Electronics Boutique.

This has added nearly $1Bln in debt to the balance sheet, but has also leveraged the company's sales and profitability as well. In all, the company's sales have roughly doubled while their enterprise value (mkt.cap+debt-cash) has nearly quadrupled since their April quarter-end.
Ironically, the historical Gamestop operations would have generated $260MM Ebitda versus the $1.15Bln Ent. Value (at 04/30/05), or roughly 4.4x!!!! A lot of the earnings upside has been driven by trading in used games and movies, versus new consoles and new software sales (which have significantly lower gross margins attached). Ironically, the Electronics Boutique acquisition ($1.2Bln) reduced overall earnings, even after eliminating the one-time merger expenses.

So where does that leave me??? Well, GME has outperformed largely due to arbitraging the used video game market against the likes of Electronic Arts, which has responded by cutting prices on newer video games (i.e- Godfather released at the $39.99 price point). It certainly appears that BBI/MOVI are too disorganized and "grabass-tic" to effectively compete in used video games, however I do see potential negative catalysts for both EA and GME. Namely, lower new-game prices will shrink margins on used-game and new-game sales, while the upcoming launch of PS3 and current XBOX 360 release should result in lower sales of existing PS2/Xbox inventory. While earnings have remained strong to date, the significant inventory growth (+150%) could be difficult to deal with in late 2006. For now, Electronic Arts (EA) appears to be the more compelling short, as it is getting squeezed by GME and has consistently missed earnings over the past 18 months (not to mention, it trades at a higher valuation). Both of these companies should be viewed as potential shorts...particularly when you hear analyst comments about them being properly valued at 25x 2010 Earnings(which also conveniently assumes customers are buying all their games at $59.99/title)

2006-03-21T13:32:00.000-08:00

GCT- GMH Communities Trust $11.18

For much of 2005, GMH was the subject of strong insider buying, by multiple officers and directors. In addition, Vornado Realty Trust even bought 700K shares in the company's September secondary offering at $14.25/share. GMH is a REIT focused on college-student-housing and military family-housing. Based upon increased college enrollments and military base realignments, there is decent demand for both of these sectors and GCT has a number of projects in its backlog.

The chart below shows the dramatic dropoff in the share price, which reflects the CFO (was not an insider buying the stock) having written a letter to the board-of-directors whining about a "tone at the top", whatever the hell that means. Presumably, the top management was pushing the CFO to be aggressive, but not do anything illegal (so says the company's internal investigation). From what I see, they adjusted pro-forma earnings down about 10% for the year, but made no adjustments to cashflow for 2005 (which is the important item to watch).

http://finance.yahoo.com/q/bc?s=GCT&t=6m

So why am I looking at this name if there is potentially aggressive accounting? 1) There have been no problems identified at any of the company's properties/developments that I am aware of. 2) Company insiders were buying the stock at much higher prices, including the CEO that was purportedly pressuring lower level management to be overly aggressive. 3) Subsequent to this "tone at the top" letter being disclosed, it appears that the CEO upped his stake to 1.2MM shares and issued a 13D filing that indicated he may make an offer for the whole company (it also implied that he had "shared voting rights" covering an additional 5.8MM shares, which implies that GCT's largest holder, Cohen & Steers, is supporting his prospective bid for the company).

Recommendation? Maybe dip your toe in for a few shares... like most REITS now, this is trading well above book value, yields an 8% dividend and trades around 12x FFO... implying that an 8-9% dividend is sustainable in the event the company is not bought out. (current yield is 8.14%). I believe the CEO is seriously considering buyout the company, however I'd put only a 50/50 probability on this occuring, given the serious disclosure /sarbanes-oxley issues that might be brought up by those investors currently underwater.... (unless the buyout were to come at $15...which is just rampant speculation)

2006-03-17T08:20:00.000-08:00

THE BIG SCORE-WLS

Stock just ran past $100. "The General", my favorite new counterpart next to "the Colonel", just offered to buy out the company at $93/share (we had previously alluded to his $82 offer price that was rejected in mid-2005).

From the post-close recommendation at 03/07/06, the stock is up 36.9% over a 10 day trading period. Unfortunately, if you listened to the recommendation you also put only about 1/3rd of your normal-size trading position into the name. Still, not a bad trade for a 10 days worth of work.

Recommend selling here at $100, given the stock is trading 7 points higher than "the General's" tender offer level.

2006-03-16T21:17:00.000-08:00

Mexican Jumping Beans & Overpriced Stock exchanges....

Okay, first I'm going to talk about a company that makes something near and dear to my heart...tacos! Namely, Chipotle tacos (of the barbacoa variety). A distinct product of value that is created by hand and sold at a reasonable price. People are required to eat and tend to buy more of their products and form lines out the door due to the high quality and reasonable prices....

All that being said, Chipotle trounced analyst earnings estimates and managed to earn only $.16/share (implying $.64/yr, or approximately 80x earnings). Unfortunately, that $.64/year will probably go down next year by at least 20% (even if they grow earnings 40%), due to the fact that the current year earnings do not reflect corporate income taxes that the company is not yet paying (due to prior year tax losses). While the company is impressive and actually had insiders buy stock in the low 40s after their IPO, I'm going to save my money for the tacos instead...as they are the only thing cheap enough for me here.

Now onto part 2, I've compiled a list of stock exchange charts....much like the aggregate market indexes (Russell 2000 at all time highs) brokerages and stock exchanges are experiencing strong growth and record profits. However, stock trading is shifting from phone orders to a highly fragmented system of smaller, low-cost orders, with better execution spread across multiple exchanges. As an example, on the day the NYX (NY Stock exchange) officially IPO'd its own stock on its own exchange, they handled only 60% of the orders in the stock! That is pretty embarrassing and shows the extreme level of competition and technological innovation occurring in this space. LOOKING TO SHORT NYX, ISE, and maybe ICE...watching also BOT, CME

The chart with the most compelling reversal is ISE, with a strong bearish engulfing that sucked away several weeks worth of hard-earned gains on very strong volume. This might be ripe for a short on an upward retracement.

http://stockcharts.com/h-sc/ui?s=ISE&p=D&yr=0&mn=6&dy=0&id=p76940969904

BOT also had a nice gravestone doji (around its prior peak-point during the IPO hoopla) that was followed up by some weak performance. It looks like it may weaken further from here.

NYX is owned primarily by former exchange seat-holders, who may begin to sell their holdings towards the end of this month (initial lockup expiring). Its interesting that NYX is finding such strong resistance towards the end of that dark cloud formed several weeks ago. I am probably speculating too much because these guys are horridly overvalued, but this (and other stock-oriented trading outfits) would seem to be ridiculously overvalued. Instinet and Archipelago were valued like dogshit not even 1 year ago.... so unless they are abusing their monopoly position to increase exchange fees, I fail to see why these companies should be trading so highly.

Other publicly traded exchanges.... given the craze, I'm probably way too early in this speculative BS to be shorting....so will be usign TIGHT STOPS! Note, ICE and CME are highly cyclical and exposed to the commodity cycle, but would appear to have much better control of those markets than the stock-exchange outfits listed above. They are probably too expensive as well, but the commodity floors are likely to be less exposed (still exposed) than the stock-based exchanges.

2006-03-13T22:05:00.000-08:00

2006-03-13T19:13:00.000-08:00

Ryerson Inc- Trading near support @$24, put a stop loss underneath, upside potentially to 30s?

2006-03-13T14:51:00.000-08:00

INCO LTD (N)- $46.20

Bought N@ $46.08 (recommended
stop-loss order @$44.70).
Stock is off 12% in the last few weeks and it looks as if its near longer term uptrend line. Copper prices have stayed at 52 week highs as well. These guys are buying out Falconbridge (copper/nickel commodity company), but there are rumors that they may have to raise their bid price to complete the acquisition. There is likely to be no additional information on this topic until May 15th, although the scuttlebutt started in the UK last week (the rumored bidder is Xstrata PLC, which owns 20% of Falconbridge

In any event, I'm looking for a bounce to around $51 (gain of 10%) and have set a stop-loss at $44.70 (downside loss would be 3.5%) and this would appear to be a decent risk/return tradeoff. I probably wouldn't be using a stop loss order if i was bottom-fishing at the trough of a commodity cycle, however breakdowns have historically been nasty in this name (ranging from 33%-7! 5% declines).

2006-03-07T15:37:00.000-08:00

William Lyons Homes (WLS)

WTF? ANOTHER HOMEBUILDER? You have got to be kidding me. If that isn't enough, its one exposed wholly to southern/northern California, Nevada (read, Vegas), New Mexico, and Arizona... the juiciest and diciest markets going. Anyway, to the point, Last year, General William Lyons (yes, the Chairman is a general!) made a formal tender offer to acquire the 48% of the company he doesn't own at a price of $82/share. This caused the stock to jump and promptly run all the way up to $160/share. Currently, at $73 and change the stock is well below the previous takeout price... which doesn't reflect the earnings the company has generated the past few quarters. Last quarter, the company turned in $10/share, which would put it at 7x last QUARTER'S earnings!

Before I get too excited and start talking in all caps, this company does have a fair amount of long-dated debt ($620MM net debt vs. $633MM market cap) and forward 2006 earnings are supposed to be $14-15/share (per lowered co. guidance, which could be tenuous given their >25% cancellation rate for existing orders). Still, "the General" has been building homes for more than thirty years and seen enough cycles to have known something like this might happen. My guess is that a buyout could still come, particularly given that another insider owns 23% of the company which leaves a very small float out there(2.2MM shares out of 8.6MM outstanding). Interestingly, .67MM shares are short, which represents 30% of the float and would seem to be a dangerously high short position for a company with easy "takeout potential". Also, WLS could be a takeover candidate for a larger homebuilder looking to gain exposure to the "zoned zone" and juicy southwest real estate markets while gaining the benefit of WLS' pre-existing balance sheet leverage.

Recommend buying 1/3rd of position in low 70's and buying more if it dips to the mid 60's. Although a smaller, highly geared homebuilder concentrated in hot markets is a bit risky, I believe the takeover potential is too high with this company and the slightest change in builder sentiment may cause a short squeeze.

http://stockcharts.com/gallery/?wls

2006-03-02T15:30:00.000-08:00

WCI had recent insider buying by CEO Jerry Starkey- 37,000 shares at $26, or just under $1MM for a guy that gets option grants and compensation worth $3MM a year. Not a small investment..... Some support exists at $25/share

2006-03-01T21:33:00.000-08:00

http://stockcharts.com/h-sc/ui?s=JOYG&p=D&yr=0&mn=6&dy=0&id=p76691122479

http://stockcharts.com/h-sc/ui?s=NEU&p=D&yr=0&mn=6&dy=0&id=p76691122479

2006-02-28T20:15:00.000-08:00

PZZA is at/near its highest level in years, with strong insider selling and highest valuation in years. Trend seems to point towards a cup and handle...with upside retracement...

2006-02-27T22:19:00.000-08:00

ALKS having a beautiful breakout of its 52 week high... put a stop at 25.50 and let it ride??? Should it get easier than this? time will tell....

2006-02-27T21:43:00.000-08:00

Conor Medsystems breaking out to new 52 week high. Well off the lows, but strong earnings growth. Recent spike up was due to revocation of an Angiotech patent, which is currently being appealed. buy on pullback?