Where are we going? Where have we been?

I’m really starting to get a better sense of the psychology right now. I’m preparing a speech to give about the direction of the market, and I’ve been a little ruffled about that. I just haven’t felt that I’ve had a strong sense for the market as a whole of where it is going. Here’s the truth, I’m now quite confident that we will see no movement outside of this huge band we are in. Specifically I’m suggesting that in the next year, despite large and increasing volatility I think we wont see north of 12k nor south of 9k. I am (as I said) quite confident of that in the 1 year range, but I’m increasingly confident that barring some huge shock to the system (good or bad) we will stay in that admittedly wide range for an extended period of time, maybe as long as three years.

So, how do we take advantage of this?

Here’s my first thought, distressed CDOs are now incredibly cheap, and I believe they are now appropriately priced for this two to three year span, and after that the value of the assets like this that still exist will be incredibly undervalued. I was hearing a thing on the radio the other day about a CDO made up of MBSs, where 41% were not paying, but only 15% had actually gone under, and they bought it for about 1.5 cents on the dollar. That doesn’t mean that I’ll have a near 40 banger, but I suspect ove half the damage is done, so even if another 15% go into default (bringing the total up to 30%) and 82% stop paying you’re still buying this asset for under a fifth of what it should be valued at.

-HT

Not news…

So I took a good length break both from writing about and actively trading. It was relaxing, I spent a week neither reading the news nor drinking. I wrote an annual report, went camping for a few days, and worked on some home projects. I’m nominally back, but I’m not making any promises.

My purchase yesterday was more of a new style. I’ve been thinking about how I traded when I first started, and my style always relied heavily on dividend payers, and then using those proceeds to take my risks with.

I’m going to take some time and maybe set some new criteria and try something new for next year. We’ll see how it goes.

-HT

Post!

So I’m back, we’ll see if it sticks or not. To spice things up a bit I made a purchase. 30 shares of PTNR for 15.51 a piece. I’m not sure how this company has fallen beyond my notice for so long.

Oh well.

-HT

Cheap vodka is expensive the next morning.

So my research is going slowly. Er, my private research. Things are going well on other people’s time. Last night I spent my time watching stupid sitcoms rather than reading about grocery companies (as I had said I would). I’m thinking about SPTN, WMK, FRED, BGS, and SVU. A year ago I was looking at DLM, but that ship has sailed.

The moral of the story is I feel like my brain was pickled, and my other parts don’t feel great either…

-HT

Notes

Going back to Sunday, during one of my conversations I was asked what I thought would be happening, in the larger sense, longer term, and my answer was that I thought nothing much would be happening in net. I suggested that we would likely see sharp correction in three of the next nine quarters leading to the next year and a half as ending about where it started.

At this price I think BKS is a good buy in a reasonable time frame. Of course books are a dying industry, but not a quickly dying one.

Last night I was supposed to do research, or something. Instead I sat and I drank. We’ll see if tonight goes any better.

-HT

Falling, Falling, Fell!

Checked out EPCT yesterday, It’s a kind of gamble that I’ve taken profitably before. I don’t have a history with EPCT like I have with other pharma companies I’ve taken this risk with. It makes me hesitant, but of course that’s been the story of my actions (or lack of actions) of late.

Here we have a company with a half dozen drugs the first of which is hitting the market basically as we type. They had a successful offering of additional shares which should have set the price at $1.10 (less than where it was trading yesterday). Sure the price should fall, but below $1.10? And there’s good news on the horizon, not only for sales of their drugs both in the US and in Europe, but also for their other drugs which aren’t that far from market. This is a company that just made a good move to fund it’s coffers until their product sales can start really carrying the company. Of course it’s also a time where everything can go wrong. Maybe no one will want their drug. Maybe not long after its release the drug will be linked to some terrible side affect or condition. Who knows? But of course that’s true of any small pharmaceutical company.

I asked someone else (just to get another set of eyes looking at it) if they thought it was over punished, and they asked when it last had a profitable year, which of course they never have. I dunno maybe I’m trying to make an opportunity out of nothing. Maybe this company is still just too risky.

I would need to be confident enough to buy at this level to read some actually study results about these drugs. We’ll see if I find the time / motivation to do so this week.

-HT

I’m Old

I declared yesterday whiskey day. Friends came over in shifts, and we drank.

It’s fair to say that I was reasonably inebriated by nine. A buddy of mine who works as a portfolio manager came around ten, and he was curious if I was going to act on BP. He thought it was a bad idea, still fearing a political bankrupting of the company. He pointed out that this is an election year, and that Democrats will need to do something fairly drastic to try to not lose their shirts come November. I didn’t have a whole lot to counter that with. Even if my estimates say that this company is going to be worth 2.5 times what it is trading for now, and that int he long term their dividends will seem huge compared to the purchase price (if I were to buy now) I cannot deny that there is still a lot of risk associated with this company. Of course there always is when there’s a good good buying opportunity, the risk is what drives down the price.

Around noon another friend came over, he works for an insurance company, and (I’ve mentioned him before) I consider an expert on inflation, and fixed securities. We talked about an elaborate idea for a consulting firm based on increasing productivity per worker by reorganizing away unproductive workers. It’s hardly a novel idea, but we had some novel specifics that I think were brilliant, if anyone reading this is a manager who has unproductive or obstructionist employees you should drop me a line, and I may be able to help you with that.

Around two we were joined by a pair of kids (early twenty-somethings) who drank with us, but were so focused on their toys that they couldn’t really contribute to the conversation. As these things tend to go, eventually the discussion turned into a kind of wild throwing out ideas, suggestions and comments both pertinent and not. I was on about my sixth drink, and generally we were moving in a quieter direction. As these things tend to when we don’t have some structure (a meal, a specific project, a topic with a real decision to be made about, or a real action to be taken) things fell apart and all we could agree on was that the whiskey was good.

Around five we ordered pizza, and after dinner they dispersed.

It’s interesting, how the conversation fell apart when two people came glued to their cell phones. The phones rang buzzed, and vibrated. They talked texted, and even played games at the table even while we ate. I have so much trouble talking to kids now. I know there are those out there who think this new technology is the wave of the future (famously Howard Lindzon) to me it seems like this technology might be the end of human interaction. The ability to communicate anything that can be fit into 144 characters is neat, the inability to communicate anything over 144 characters is tragic.

Bah, when I was young and spry I probably would have loved it, taken advantage of it, and thought anyone who didn’t was a dinosaur who should be retired. Now just thinking about all that inane chatter just makes me tired.

-HT

Seven days of nothing

So things seem to be settling down again. I was at a funeral on Friday for a great uncle of mine. That guy worked hard basically til the day he died. I don’t want that to be me. So with that in mind I better get to making myself rich. I’m still watching BP, which apparently doesn’t stand for blowout preventer.

I really need a day with literally no distraction. Comically as I was typing that line someone came to lobby me to speak to him about his investemnts after work today.

Really I’m not doing anything until next week when things will start again in ernest. My great aunt is still sitting shiva. Bah, I’m an old man.
-HT

Still on this.

I’ll be the first to admit that my fascination with BP is bordering on obsession. I’m an old Jew with old Jew mannerisms, and habits. I wake up and look at news about BP, I go and get my bagel and coffee from the bagel place on the corner. I get to my office and look at news about BP… I look at XOM, I look at CHV, I look at BP.

I haven’t bought anything yet. I haven’t moved, but I probably will.

Just for ease of comparison let’s just compare BP to XOM. There are certainly some business differences between the two companies, some of which I would argue make BP a better buy when oil prices are in the $70 range regardless of what else was going on, but for simplicity let’s just say they are similar companies that both drill collect to some degree refine, store and distribute oil. The big difference is that XOM is about 20% larger (in terms of revenue for ‘09 and ‘08 and farther back).

So we have these two similar companies and BP normally trades at about two thirds the value (okay so something BP is doing has been worse). That equates to about a 200B market cap for BP before the disaster compared to an approximately 300B market cap for XOM… Now in the span since the disaster BP has lost approximately 100B in market cap. We’re now talking about a price to book below 1, and a price to earnings below 5. XOM on the other hand is still trading with a price to book around 2.8 and a price to earnings close to 18.

Last night, while sipping my chivas and ice, I was checking the BP futures. They hardly seemed moved by the president’s remarks. They weren’t the only ones.

Where am I going with this? Well, I expect BP to still generate nearly 80% of the revenue that XOM will this year, and next, and the year after that, and the year after that, etc. Although this disaster will almost certainly mean HUGE costs over a significant span of years, it doesn’t mean that much to me for their long term business compared to what it means to XOM’s (new regulations and such will affect them both).

So I guess where I’m going with this is that we’ll eventually get some sense of the size of the damage in a sheer dollar figure. I’ve heard guesses as low as 10B and guesses as high as 100B. We’ll get a number from Obama later today which they will escrow. When we do I’m going to take that number, say something like “look if it costs twice this much, they should be worth about X”, and then I’m going to wait and watch the news, and if it falls enough below X I’ll buy.

Then I’ll have to stop watching it.
-HT

It’s better than gas lines.

I’ve heard it claimed many times that this is the worst economic downturn in generations. I don’t know about that. I seem to remember that there were worse ones in the 50s, 70s, and 80s. What I’ll tell you is this is the worst economic recovery in memory.

This recovery I’ve started calling in meetings the Cowardly Lion of economic recoveries. If people could just stop being scared into inaction by bad news we’d be booming again. But instead every debt ripple from Europe, every jackass thing done by AoE countries, every man made disaster which some people call an affront to the gods, every blip of bad news regardless of the pertinence seems to freeze companies into not hiring, not buying stock, and putting off plans for expansion. I honestly think if we could just get a starting gun shot from somewhere we might be off, but where is it going to come from? Will Buffet come up with a hundred billion in cash, and invest it saying he no longer believes we’re facing systemic risk? Will some emirate find itself with that kind of cash on hand, and decide now is the time to publically go all in to the US economy? Will the Chinese realizing that a lot of their economic and industrial growth has the gold content of sea water, start moving money into the US as a hedge for whatever monetary policy might come?

I don’t know, is of course the answer. But I can tell you that things are out of whack with the fundamentals. People are starting to spend again, housing is rising from the floor (still only at ankle height but rising) unemployment is slowly starting to retreat… It’s time for growth.

-HT