Hand Holding

Want to know why handholding and coddling people and businesses is bad? This blog has a cornucopia of information regarding the subprime nonsense that's been plaguing the news lately. Below is an interesting (if somewhat nauseating) tidbit:

“Aside from violating the sanctity of a contract and scaring off potential investors, what’s the good news here? ‘It’s a big misconception to think that (mortgage) resets are responsible for the delinquencies,’ said Andy Laperriere, a managing director at the ISI Group in Washington.”

“Of the subprime loans made in 2006 and scheduled to reset in 2008, some 25 percent are already delinquent, he said. ‘What’s driving the delinquencies is that people can’t afford the initial payments,’ Laperriere said.”

“That’s a problem Paulson’s plan won’t fix.”

My personal thoughts?

1) Every entity that loans money to people without figuring out if they can pay it should go bankrupt.
2) Every person who takes a loan they can't possibly afford deserves to foreclose.

The reason why this is bad for the rest of us even if we are not investors or homeowners lies in the subtle question, "Who is buying all these loans?"

The answer to that question is the states. Municipalities (states, cities, etc) buy up these loans repackaged as bonds to support their pension obligations. Who is going to pay to put more money into those funds? If that isn't bad enough the states are also going to be funding the "rate reset freeze" plan of Paulson.

So in other words the rest of us will eventually pay it only it will show up as increased sales tax, public transportation costs and land taxes. Those of us whom are fiscally responsible will have to pay to keep the wonderful world of bottomless lines of credit going because if it stops so does the entire economy.

In many ways this is why you cannot help but want to invest in banks, lines of credit and retail. With so much in the way of support to keep this scheme going I would rather be on the side that benefits to some extent even as I watch it erode my savings value year after year.

It is sort of like gasoline. You can pay $3.50/gallon at the pumps and be a sucker or you can invest in the energy sector and "outperform".

E*Trade

Just a quick update since I haven't commented on this. I bought E*trade @ $3.84 and I intend on selling it for between $5.75 & $6.50 per share. This is, in my opinion, an easy buy. With a $630M write down (using the same write down as Citigroup, which isn't dead accurate given different CDO portfolios but works for a quick rough figure) they are worth $8/share in book value. At $3.84, it was a steal. I don't view this as a long position though, I'll get out of it in a day or two from this point (I bought last Tuesday). I'm not very bullish on the company from the standpoint of long term investment.

I generally don't go after short term price movements but every once in a while opportunities appear that are simply too good to pass up in terms of risk & reward. This was one of those rare opportunities. I'd like to thank the negative speculators who were willing to part with their shares for less than half book value. Since the stock market can often be zero-sum, its handy to have people around that will freak out and panic easily - so I appreciate your lack of intestinal fortitude.

Update: And I'm out of this with a 60% profit :).

Cyber Monday

I hate this phrase. Cyber Monday? What the hell is that supposed to actually mean? Cyber as an adjective doesn't describe online shopping. What's next? Digital Thursday? Can't we do better than this?

At least "Black Friday" is somewhat clever.

Lessons in Rationality

It never ceases to amaze me how much push back there is to decentralized government. By this I mean, the predominant political push focuses on governance and guidance and subsidization from the US Congress and the US Senate. In all candor, if a matter is important to me I would like to have as much influence on the vote as possible. Yet when you ask your Senator to put a bill to vote you're taking an issue and putting it into a court where you can only vaguely influence two out of a hundred people who get to make decisions on it. No matter what the possible issue is, I cannot imagine it being an easier sell nationally, across the vastly heterogeneous United States, than amongst the people of my State or County or City.

There's a flaw in the concept of centralized government and an obvious one at that. As a nation we're far too diverse in terms of economic, political and religious beliefs to institute any methods nationwide which will appeal to everyone. In fact, a system that claims to favor all in truth obviously favors none.

If you look at Massachusetts as an example, they have been able to, with far more meager tax collection from their people than the federal government is privy to, subsidize health care. Now, personally, I'm not in favor of health care subsidization as I think it is something of a band-aid for a larger more complex issue. But that aside, the point I'm driving at is that this is something the nation has been batting back and forth for a half century and it was passed in the state of Massachusetts. It was passed in Massachusetts because the political beliefs of the people of Massachusetts are far more like minded than those of the nation as a whole. That's why we have a federation, for that very reason and its a shame that people forget that.

Growth

The bears were out in force this week, which I generally like. Not because I'm short on the market but because my securities gave up little ground and are poised for some excellent growth. Most of the issues I own have been tracing out falling wedges this week and have dropped 1-2% while the NASDAQ has eaten 6% losses. Which one do I think is going to do the best by year's end? EWZ without a doubt.

Here you have an ETF that's on a strong upward trend and has been a rampant bull. The DOW pulled back to lows it saw in August while this stock has held its ground and gained. Nasdaq got kicked in the shin and this stock is tracing out minor gains. What does that tell me? This stock will be 30%+ ahead by the time the DOW retraces its highs.

Update (11/27/07) - The bull trend has reversed on this stock since this posting but I still like this fund - especially at this price - for the next 12-24 months.

Baidu, Google & Apple

So I pretty much pegged the downward spiral Baidu has seen over the last couple of days. Even though it was fairly obvious, I can still brag right? It recieved a downgrade to sector perform and well, the air let out of that balloon in short order. Its still looking overbought at this point and its going to let out some more air over next week. I'm anticipating it will make a short term rally, in a true distribution pattern, possibly double topping before taking a major plunge. There aren't any foreseeable resistance points for this stock. I'd wait a few days and short it if I was a day trader - but I'm not so I'm just going to sit on the sidelines and watch the chaos.

Google and Apple took hits as well. Google was based on the news that there really is no G-Phone and that the project is simply a software package which will help Google deliver ads to phones. With diversification out of the picture, a lot of the positive speculation is being rethought. This also might see a short term rally, but the technicals and fundamentals don't look good for Google.

Apple on the other hand seems to have primarily sold off due to some inside selling to the tune of $129 million. This stock is still, however, on a strong upward trend. It doesn't look like its going to see long term losses, but its hard to say. I have to think with the golden retail quarter coming up its not going to see sustained losses. I'm not in this stock and I don't intend on buying into it, because its at best fairly priced and at worst severely overvalued.

That being said, I'm not as bearish on Apple as I am on the search engine bellwethers. I'll be keeping my eye on Google, which will take hits as Baidu plummets. If it catches a downgrade that will signal a massive sell off triggering a price target of at best $615.

Citigroup - Good price?

I've been keeping my eye on Citigroup. The contrarian and value investor in me can't help but rub my hands greedily looking at the huge amounts of negative speculation. Over the last couple of weeks I've heard everything from people speculating they'll go bankrupt to cutting their dividend. All the while the stock has plummeted, at this point trading slightly under $33/share. In reality, Citigroup is not going to go bankrupt. Analysts are anticipating a minor loss per share of .25-.30 cents. They can sell off assets to meet obligations if need be and their credit rating is still strong so I'm not concerned about that.

If you look at the technicals, this stock is trading at the lowest its seen in years. Its been encountering very little resistance on the way down as well and hasn't managed to hit any major resistance points until yesterday when it bounced off $31. The technicals are pointing to oversold but the price hasn't reversed trend and doesn't look like its going to for the next day or two. To be fair, I would buy this stock at $40/share, but I use technicals to determine a good entry point. Value analysis allows me to determine what would be a good stock to buy but it fails when it comes to figuring out near term entry prices, so I've been using charting to figure out where sentiment is going to go for the next few days. The idea being to try to catch it at a high resistance point bottom.

For Citigroup, I've determined the next truly major resistance point at $26/share, but I don't think it will make it this far. I'm going to set a price target early next week of $30/share and I'll revise as necessary if it doesn't reach any intraday resistance at that price.

At that price, year over year I'm looking at roughly 100% appreciation based on concensus estimates plus dividends. I'm anticipating by year's end this stock will trade in the upper 30's, early 40's but my ultimate price target is $60/share by end of year 2008.

Banking Buys?

Banks are scary at the moment but possibly a good value play. The scary thing about banks? These SIV instruments which are orchestrated to get risky debt off of their balance sheet. The question you need to ask yourself at this moment is whether or not the write-downs were sufficient to handle the expected losses.
If so and if you find the estimates for FY 2008 to be conservative enough, there's a lot of value to be had in a bank pickup at the moment.

My initial impressions of JPM and BAC are that they are value steals. JPM is currently trading at a P/E of roughly 10 in an industry that typically trades at a P/E of 17. Assuming a P/E constant, the mean estimates would place the stock at an intrinsic value of $54.67 (it is currently trading at $45.05). In reality, the P/E will come in line with historical trend. Estimating a P/E of 14 (still conservative), I see a price target of $74.55 (65% margin of safety). That's conservative enough of an estimate for me to take to the bank.

I see the worst case, a misestimate on the annual earnings by conservative analysts of 20% difference as a break even number on the current P/E and still holding upside at a normal P/E. If the estimates are too conservative I could easily see a 100% appreciation over the next 12 months. Bank of America has slightly less but still moderate upside.

Is Google Overpriced?

You know, if you would've asked me when Google was selling at $423 whether or not the stock was overpriced I would have said yes. Does that make me a fool? Perhaps - but a conservative fool.

I view Google's rise as primarily a matter of the "greater fool theory" in practice. Google will eventually miss expectations. There will be a natural slowdown, its weight will catch up with it and momentum will begin to reverse. Is that to say I don't like the company? No, far from, however if history teaches anything it is that no growth company can grow forever. There is no immunity card that protects you from the inevitable business cycle.

Most importantly, I don't want to be the person unfortunate enough to not have a "greater fool" to rescue me from that bad decision. I don't view Google as speculation at this point, I view it as placing a bet on how long the irrational optimism can last. Equally I wouldn't short it either, its just too dangerous of a stock to associate with at the moment because it has fled the realm of fair value.

Interestingly enough though, its not the most overly optimistic choice in the search engine industry. Both Yahoo and Baidu are even more dangerously overvalued. Baidu is currently trading at a P/E of 187, with a forward P/E of 57. In other words, it has the next decade of astronimical growth already priced into it.

Does that mean Baidu or Yahoo or Google are going to deflate tomorrow? Probably not but its a certainty that they will over a long enough period of time and I'm not going to be caught holding one when they do.

More Efficient Market Hypothesis Debunking

On the words of the CEO of Caterpillar, Inc. and with the 20 year anniversary of the crash of 1987 the market decided to take a nose-dive on Friday. What's the exact opposite term for "irrational exuberance" I wonder?

While there's a lot of uncertainty about the future there is an abundance of certainty that this latest sell-off was irrational panic. Oil prices are at dangerous levels but ultimately this isn't a correction related to oil prices. After a terrible market week this is an ideal time to rebalance my cash position.

ASFI - Asta Funding, Inc.

The silly sell-off on Friday prompted me to relieve my portfolio of some of its cash and see if I could pick up some bargains. I've been eying ASFI for quite a while but hadn't gotten around to doing a formal analysis and price target for the stock. I'm bullish on credit collection as a whole in light of expanding consumer debt. ASFI has kept their debt in check and has ample access to credit to take advantage of future declining debt prices. Furthermore they've maintained their margins and have a good solid history of stability and profitability. Insider ownership and institutional ownership are both favorable as well.

My target price for this stock is $44-$48 (it's currently trading at $33.78) and I view that as conservative (I used consensus estimates for FY EPS with a small P/E adjustment to bring it in line with the industry). I see this as a welcome hedge against future economic downswing as well, which makes it a perfect fit for my portfolio.

Yahoo - Dealer of Communism

Google fights dirty! We can all see why Yahoo hasn't faired so well. Is this just bad programming or a calculated smear campaign?



I'll leave it up to you to decide.