Tuesday, November 30, 2010

Nasdaq weakness related to European Union action

Today's market continued to be volatile and driven to a material extent by news from the European markets, with a possible downgrade of Portugal leading to a late sell-off after an all day struggle to get back to par after a very weak start. That's the truth and that's the story being told in all of the market synopses read here.

One market result is being overlooked. The Nasdaq declined 1.07% while the S&P was off .61% and the Dow .42%. Google was down 4.6% and Ebay 3.6%. The announcement that the European Union is opening an antitrust investigation into Google's search practices had a much more meaningful impact on the overall market than is being recognized, at least that's the opinion here. Tussles with the European Union's antitrust commission often end badly. With the troubles in the EU today and the rumbles of protectionism rising around the world, their agenda could go beyond Google's specific actions, actions which from this distance seem defensible.

Sure, part of Google's decline today could be the announcement of their interest in buying Groupon at a price that seems extraordinary for a two year old firm in a business with low barriers to entry. With that taken into account Google's decline may have been in line with Ebay's hit today.

Everything suggests that the EU investigation is big news in investor's minds, and the Nasdaq result today relative to other markets is definitely not related specifically to Portugal credit spreads.

Monday, November 29, 2010

A Taxing Issue

For those of us who are ambitious enough or naive enough to manage our own money, now is the time to make decisions about capital gains to be recognized in a tax efficient way. 2010 has been a year of short term gains taken and some long term gains realized on the sale of both some long held mutual funds with expense ratios that are no longer justifiable in the age of Vanguard and ETF's and some stocks that have been beneficial but are perceived to lack potential. Some losses have been taken to offset the gains but not nearly enough, yet. Fortunately, or should I say unfortunately, there are still embedded residual losses from the dark days. It's harvest time for some losses.

For those who mostly stood firm during the equity market collapse in '08/'09, or perhaps even added some at lows with a "what have I got to lose now attitude", they have been rewarded with a stock market that has recovered, in the S&P 500 for example, more that 80% of the losses that existed at the bottom in March of '09.
Many stocks have more than fully recovered but some never woke up. Those still sleeping stocks were at one time bought for a reason but either were small caps crushed by lack of scale or credit or they were companies like U.S. Gypsum that found themselves the market leader with a decent balance sheet in a business that was uniquely destroyed by our economic woes(USG is the market leader in wallboard and sheetrock for residential and commercial construction).

Today was a day of selling, all of three positions and a portion of eight others. ENS circumstances are rarely unique. This tax inspired selling is being and will be repeated across mutual funds, pension funds, and many individual investor portfolios, over the last month and through December. The rationale for selling is a calculated one that is based both on the benefit of offsetting capital gains taxes and a judgement on the near term opportunity on individual stocks. This type of selling presents opportunities to those with the liquidity and insight to spot undue pressure on underperforming stocks that is not justifiable by the fundamentals.

Is it worth the time? Who knows. Opinion here is only if it happens to stocks that have been followed long enough and well enough to spot clearly the aberrant trend.

Friday, November 26, 2010

A wrinkle in the high brow

In this week's "The New Yorker", James Wood has a "personal history" piece entitled "The Fun Stuff - My life as Keith Moon". That's James Wood the erudite literary critic, former chief literary critic of "The Guardian", former senior editor at "The New Republic", currently a visiting lecturer at Harvard and a staff writer of "The New Yorker".

Wood's usual essay style in reviewing books is to spend the first 1000 or so words on a tangent that is unclear until he actually mentions the book he's reviewing and then moves to the central points of his commentary. It's a compelling approach that respects the intelligence of his reader. The reviews are a mosaic that eventually pull themselves together, often in a rewarding way. That said, it was refreshing to see him start right in on this topic, detailing the parallel lives of his music education as a child and young man. On the one hand he was focused on classical music, playing piano and moving on to various horns as well as particating in choral training, singing daily in the cathedral choir. At the same time he secretly taught himself to play basic rock and rhythm and blues drums at a friend's house and played in a band in high school when his musical and academic studies allowed. His idol was Keith Moon, the wild man drummer of the Who.

This opening section reads easily. Within 500 words or so, however, Wood is describing the patterns of the rock and jazz drummer in trained music afficionado language, and the way in which Moon broke all of the rules and pulled it off in a way like no other(John Bonham of Led Zeppelin rates a distant second in Wood's mind but no one else comes close to either of them). The writing is precise and disciplined as one would expect in a Wood's essay. Then comes the following:

"A good dry snare, properly struck, is a bark, a crack, a report. How a drummer hits the snare, and how it sounds can determine a band's entire dynamic. Groups like Supertramp and the Eagles seem soft, in large part, because the snare is so drippy and mildly used(and not just because elves are apparently squeezing the singers' testicles)."

Didn't expect that. There is much to like in this essay. For Wood among many, Moon's death at age 31 and Bonham's two years later at age 33 were tragic and final as in "and then English drumming went quiet". Moon's famous comment that "I'm the best Keith Moon style drummer in the world" foretold this end but the Who soldiered on with the "little eunuch toms" of Moon's successor.

Wednesday, November 24, 2010

"The Quiet American" and its relevance today

A few days ago I watched the 2002 film "The Quiet American" based on the novel by Graham Greene and starring Michael Caine. It was a thoughtfully paced story of powerful historical fiction set in early 1950's Vietnam. I had actually seen the film at the time that it was released and enjoyed it then, but that was back when I was working 12 hours a day in the bank mines and could at times lose a few minutes of attention when sitting still in a darkened room. This time it was much more compelling.

Perhaps my understanding of this kind of literate espionage novel, which is not characteristic of the overall genre, had been moved to another level by reading every Charles McCarry novel of this type in 2008 and 2009. "The Quiet American" is the story of a time and place, it is a love story, and above all it is a vivid story of the roots of U.S. involvement in Vietnam in the early 1950's that was orchestrated by former OSS officers, by then called the CIA. Money in, manipulation of puppet leaders, murders, and terrorist bombings all resulted from these efforts. To the world press and even the normal political process, it was all behind the scenes.

The next day in a bookstore I sat on a vacant radiator at the end of a set of bookshelves to skim the book, which it is obvious now that I had never read, and see if the film was a faithful adaptation. It seems so, with the exception of the fact that the book may have had more time for double dealing, atrocities, and killings. What I really wanted to see, however, was the date of publication - 1955.

So forces that were in place that would lead to 500,000 U.S.troops in Vietnam 10 years later were laid out plainly by Greene and published openly. Of course that's just a comment of hindsight, but even the story that Greene told was startling, or appalling. I wonder what the reaction by readers at the time was. Was it seen as an excellent piece of creative writing. Was their any broadly held thought that the basic construct might be the truth.

Greene, a member of Britian's M16 during WWII, lived in Vietnam during parts of 1951 and 1952. He did his research well. What was reported in the world press of record at the time saw nothing. There was no monopoly on fiction.

In what ways have we and do we now play out the same scenario. What has just happened in Korea? We know, or think we know, the basic facts of the North Korean attack on South Korean territory. We know that North Korea just let the world know that they are vastly expanding their nuclear weapons program with state of the art technology from somewhere. We know that the uncompromising face that we see from Chinese leaders on financial and economic issues is one that they are afraid of losing domestically. We know that South Korea was bitterly disappointed in the uncompromising approach of the Obama administration in recent failed trade treaty negotiations. We know that North Korea is going through a leadership change and only a look at the sickly brat who has been running the country for almost 20 years can tell you that he has enemies there who have no interest in seeing his roly poly 28 year old son assume power.

Who are the actors that we don't see. Where are the relationships not seen. "The Quiet American" reminded me that we cannot expect to find these answers in the established news media. The creative among us may have some ideas but even they may need to be lucky to actually see the truth if its right in front of us. Isn't there an old blues song called "Them that know don't talk". If not there is definitely Sonny Boy Williamson's "Whole lotta people talking, mighty few people who know".

From Graham Greene to the Mississippi Delta - this post is over.

Tuesday, November 23, 2010

J. Crew sells itself - fashionable and inexpensive

Today it was announced that J. Crew(JCG) is being sold to two private equity firms. Whoopee, I should be saying, having purchased a reasonably sized position in the stock on November 12 for $34.03 a share and now receiving $43.50 a share on November 23, over a 30% gain in less than 2 weeks. I'm not complaining but as a long term investor my view was of JCG having a market beating return over several years at least.

I had done the analysis. First the research came to me in the form of a New Yorker profile of Micky Drexler, the CEO of J. Crew. Really interesting and he wears my favorite dress shoes every day, and stocks them at the stores. The starting point of my research was asking my daughters(bought Lululemon Athletica(LULU) in early September at 33 with this first step, LULU now 54). The older one had just bought a terrific casual jacket at J. Crew at a discount price. It looks great on her. She gave me a catalogue. I looked almost solely at the men's stuff which is by no means even remotely an expertise but surely way beyond anything in the women's section. This phase of the investment thought process made me really want to like the stock.

The next part was the financial analysis. Everything looked solid. Revenue was growing, earnings too, and no issues with the balance sheet. Then came the stock price analysis. JCG had traded to a level of 50 in May of this year, doing the retrace from the debacle that bottomed in March '09. The company expressed concern about the softness of the consumer recovery in the late summer and the stock slid to a low of 30 in October. It was just building some momentum for a recovery from a market overeaction.

And the final part, I went to a store in Manhattan. The service was there, some customers too, and the thoughtfully stylish, carefully chosen, quality products at decent prices, not cheap but not wasteful for the quality, all came through. The locations have not been fully built out in the U.S. yet. The website seems ready to sell the customer anything as well.

I wanted to buy the stock immediately but waited a few days and then hit it. My own little personal price target was, without some major interference from the economy, that it was back to 50 by May. So today's announcement was rewarding but I was looking forward to having my own little ownership interest for a much longer time.

Afterword in fairness - 2010 has been a good year for stock picking given that the volatility presents opportunities. I do make some not too bright mistakes of course, so here are two.

I bought Dreamworks(DWA) six or seven months ago based on the advice of a newsletter I follow. Since this same newsletter convinced me to jump into Netflix(NFLX) in January(zoom) I tended to pay attention. Bought DWA at 39, within a month it was at 31 so I added more. It fell further to 28 and now thankfully it is at least back to 31. I did minimal research, saw good management, and an extremely strong balance sheet. In fact I had no idea what I was buying. DWA is only the animated films and related products and I was thinking Band of Brothers and The Pacific, things that I understood. Red faced when no one was even around when I learned that.

Several years ago I had made money on a trade in Broadwind Energy(BWEN). At that time I had bought it at 4 but then sold at 8 when I saw Jim Cramer recommend it in his know it all way. Earlier this year it was down to 4 again so I jumped in. I saw that revenues were struggling and they were losing some money but also saw that they had modest debt and at least two years worth of capital to burn if they kept losing money. When does a green energy windpower company go bankrupt - worst case scenario someone buys them. The stock then moved down to 2 over several months so I doubled up. Why not. Because now it's at 1.62. Why? Listening to an interview with Boone Pickens a few days ago I learned that natural gas is so inexpensive now that wind power cost more that twice as much and of course has build out challenges while the gas pipeline infrastructure is well in place. Windpower may be green but so is money. I did no research on the overall energy market. There was a reason that the stock was low.

Monday, November 22, 2010

Bigger fish to fry

Today's raids on three hedge funds by the FBI as coordinated by the SEC confirmed the new SEC approach of leak and destroy rather than privately interview and take the information to a grand jury. Following the Front Point charges last week and the big Galleon case earlier in they year, the SEC is taking an aggressive approach to the taint of insider trading.

They should absolutely be on the case and they certainly haven't been as the hedge fund industry grew rapidly over the last twenty years. Whether the reputation destroying approach without due process that they have taken today is cool, I would say not. That they are focusing on the issue with intensity, however, is long overdue and can't be done daintily, one could say, if they are familiar with some of the amoral and crass and abusive folks that represent a small minority of the hedge fund community - small but they are definitely there and a few are "deans" of the darker side of the industry(LC or RR anyone).

As to the title of this comment, BIGGER FISH TO FRY, I have a hunch. These actions are setting up what some would say is the long overdue takedown of SAC Capital. SAC is a hyper short term trading firm that exploits, for the most part, negative information and innuendo that somehow finds its way into the market. It manages around $18 billion in assets which is by no means the biggest or baddest if that number is correct, but its significance is much greater than that. Because of its almost day trading approach, its equity trading volumes are often the number 1 ranked for many major trading houses.

What does that mean. They were the first phone call from an analyst after a new company sell side comment is released. They are prepped by those analysts thoroughly before any conference call that they participate in. Before RegFD this was "like taking candy from a baby". After FD only biggies like SAC could really exploit the information advantage fully, but the "float the rumor game" could still be played by gangs of interlocking friends and acquaintance big and small.

Is this illegal. That's for the SEC to work on and deal with. Is it unfair to many other investors - of course. Those of you who viewed posts here in 2006 and 2007 read about SAC quite a few times in my various rants, no need to go further. Some have always thought that there was more to that firm than just the promoted "intuitive market genius" and intense work ethic of their leader Steve Cohen.

Two of the firms raided today were founded and run by former SAC traders. I couldn't find out the pedigree of the third. Some Galleon traders and analysts had former relationships and current contacts with SAC.


Thursday, November 11, 2010

Manhattan food trucks

Ten years ago it was still a town of food carts on busy corners, the ones that sold coffee, rolls, and donuts in the mornings and those that followed selling hot dogs, pretzels, and halal food or similar fare during the lunch hours. Today the carts are still around but food trucks abound.

Much has been written about the food truck phenomenon in New York. Over the last year the trend seems to have accelerated. The variety of cuisines has expanded. What once, with the carts and trucks, was concentrated in dense office district locations, the mecca being 53rd and 6th, has spread throughout Manhattan. My vision of Manhattan as a living theme park is continuing to evolve.

As an example, several days ago I was walking from Union Square to Penn Station. On 6th avenue between 16th and 17th streets, an area with no high rise offices or even large apartment buildings in the immediate vicinity, there was a mottled grey metal food truck labeled "BISTRO". There was a line. I was hungry, looked at the menu, and stood looking forward to couscous royale or salade nicoise, french fries or merguez. With my Algerian bundle in hand I continued the walk to Penn Station and only a few blocks later came upon a Greek food truck surrounded by construction workers. A "Rookie of the Year" in the food truck awards seal was prominently displayed. I picked up a lamb shishkabob to eat as I walked and pretended not to notice any more temptations on wheels.

Level Three replaces Akamai at Netflix?

Netflix announced today that Level Three would be their video streaming and storage server provider, replacing Akamai in that capacity. I am clueless about the technology involved and the rationale for the change. As someone who looks at financial strength as one important metric for a company, I am perplexed.

LVLT has $6.4 billion of long term debt and no measurable shareholder's equity as of their last reporting period. It is consistently unprofitable and their stock price reflects that, meaning if they needed to raise additional equity for investment purposes it would be a challenge. AKAM has no long term debt, $2 billion of shareholder's equity, a record of consistent profitability, and a stock price that provides exceptional financial flexibility.

Netflix is growing rapidly and its stock has certainly been rewarding, and those observations are both understatements. Continuing its almost inevitable build out, it is simply a question mark here as to why they would choose such a fragile primary vendor. There must be a good reason, but it is a choice that's eye-catching.

Sunday, November 07, 2010

Time for the big banks?

The big U.S. banks, Bank of America, JPMorgan Chase, Citicorp, Wells Fargo, and U.S. Bancorp, may be ready to join the equity market recovery. All things being equal, meaning no unpredictable global catastrophes, an equal weighted portfolio of these names would almost certainly show 15% gain over the next six months. It could be much higher. That's an opinion.


---The Fed is analyzing the companies and will almost certainly give three of these banks the go ahead to raise dividends and initiate stock buybacks in the near future. The firms that may still have some restrictions near term would be Citicorp and Bank of America.

---Much of the financial reform bill is in the form of broad rules, guidelines, and goals with the implementation details still to be filled in by government agencies. Some implementation could require congressional approval for additional funding. With the election results, some of the potential for worst outcomes in implementation(for the banks and their shareholders) are now unlikely.

---Elizabeth Warren will be in check. The intent of the consumer protection legislation is positive, and much of the regulation is needed. Warren, however, is perceived as a zealot whose beliefs if followed would destroy business models and deprive banks of profitability and leave a broad group of consumers with severely limited credit choices. If approved by Congress, she would have reported to no one under the legislation, sort of like the head of the Federal Reserve. To get around opposition President Obama appointed her as an advisor to implement the consumer protection rules. Now she could never be approved and if she remains the de facto head of the agency she will still report to the White House. Bet here is that she will now be practical and focus on the most constructive parts of the needed regulation. That reassures investors.

---Credit costs are leveling off at high levels, the free fall is over, and adequate reserves are on the balance sheets. This has been a horrific recession on the credit front, but the traditional pattern may be intact. This could be the point at which investors begin to believe that the uncertainty lies in the timing of the upside, less reserves set aside, declining charge-offs, and the ability to step back and think about lending again(making money) rather than spending all of management time playing defense.

---This big brouhaha about banks being required to buy back mortgages with technical flaws from Fannie, Freddie, Pimco, and others is a fight among titans for financial advantage. To assume that the GSE's or Pimco were naive participants in this market is bizarre. They are not illiterate home buyers being led into a toxic adjustable rate mortgages to buy something they can't possibly afford. This will end up in the courts and evolve over several years.

---The mentioned banks have formidable franchises. USB, WFC, JPM, and BAC combined have an almost oligopolistic competitive advantage in U.S. retail banking with their scale and reach. JPM has a leading global investment banking capability as well while Citi has a completely underappreciated global consumer franchise that may well be worth more than what the stock is trading at today on its own.

When this blogger begins to offer opinions on individual stocks, rather than sticking to macro market comments, it could well be the sign of a frothy market. Be careful. Nevertheless I did start eating my own cooking this past week, adding to Citi, and starting new positions in USB and BAC. JPM is already full here and as to WFC, probably incorrectly, I am still concerned about that Golden West franchise embedded in the Wachovia purchase. The Countrywide trash at BAC seems exposed, the WAMU junk at JPM as well, but WFC seems to have Golden West covered. Maybe they are the best of the bunch but I don't know. WFC had the largest gain of the group for the week.

Thursday, November 04, 2010

GM IPO launch to be well grounded but in the air

Bloomberg News today reports that the government owners and the labor unions pushed for a $30 a share IPO price but eventually compromised with the company and underwriters to settle on a range of between $26 and $29 a share. The company and its bankers had originally sought a range of the low to mid-20's.

From this seat it appears that the government and unions don't quite get the IPO market. It's not a "we'll price it here, get it, and live happily ever after" event. It may well be that the price rises after the IPO is placed. It is unlikely to rise dramatically. That situation is what the goal should be, especially in this case. There is a ton of stock left to eventually follow into the public markets and the company and government should want satisfied investors with their heads above water out there in the investment community.

If experience is any guide it is likely that the stock will price near the $26 area. Any quick gain by the investors is the reward for the longer term risk that they are taking and the immense amount of immediate liquidity that they are providing. That's just the way the market works and with any luck it will make the next offering in a year or two significantly more rewarding for the government and union beneficiaries. That's the "well grounded" part.

As far as "in the air", The NYT business section today chose to make a front page story out of the fact that GM executives are allowed to fly on "chartered"(private) aircraft for the deal's road show. The article notes that after much criticism and the government requiring that GM sell all of its corporate aircraft "as a condition for accepting emergency federal assistance, GM has required its executives to travel on commercial planes".

This is news? The thought of flying commercial on a road show is incomprehensible to anyone familiar with the process. Imagine calling on investors in seven European cities in five days, with both group presentations and one-on-ones with the behemoths in each city, and flying commercial. Consider the same sort of challenge for a company team in the U.S. at the same time. It was impossible to do anything but fly private back in the late 1980's in my first experience with the process and doing so today with the security screenings and cramped planes is just unthinkable. Of course, why get in the way of a "there they go again" story that might aggravate a few more people.

Fly away GM, blue suit, white shirt, regimental stripe tie, firm handshake, make eye contact, and be positive. Sell that stock.