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Wednesday, May 30, 2012

thought... GS

GS - Goldman looks really interesting here. Looks like its setting up for a pop toward 101-102.

I think the negativity bank stocks are incorrect due to the lack of exposure to Europe, stronger US housing data and better MBS data. But I understand why JPM's situation causes concern, and adds fire to incorrect assumption of fallout from Europe's banks.

The time to worry about contagion was in August to Nov of 2011, not now.  If GS is firming up, JPM may benefit from the sector move. But in order for JPM to really out perform is to prove to investors that they got their shit together again.

The above is for a short-term pop, but I still very much believe the stronger US banks should at least trade at book value. For GS its around 120-130.

Sunday, May 27, 2012

Market Thought... correlation

The SP500, FXI (China), Euro, WTI (oil), Copper, and BKI (BRIC) were moving in the same direction since early May.

The correlated decline in commodities, China and BRIC makes sense, as they are mostly tied to each other. (Although the BRIC, green line, index saw some divergence recently.)

The past four days saw the SP500 shift from the correlation.

Looking at the trends more closely, the Euro started the decline a few days prior to the rest (except copper). Seems like the Euro sparked the general sell-in-may action.

Regardless of what the action is currently saying, I do not fully understand why the decline in the Euro would cause the rest of the markets to decline. The decline in the Euro was highlighted by many, and the recent PMI data made it clear the Euro decline was pretty much a certainty at this stage of the crisis.

With the Euro decline, we should start to see the European manufacturing PMI begin to rise (which should correlate to the economic activity within the EU zone).

I am not sure what would cause such a strong correlation.

In a recent Market Thought post 're-evaluation', I highlighted the potential drags on the market. Looking at the trends more closely, seems to be the above correlation at work. Pointing to the declining Euro as the catalyst.

However, the correlation with respect to US equities, and possibly BRIC equities, appears to be ending.

Thursday, May 24, 2012

Market Thought... EuroBonds

The chatter is getting interesting. The renewed sense of a EuroBond turned the market.

The Telegraph has a good article highlighting the dynamic unification of EU perception, with Germany standing alone. Interesting indeed.

I never bashed the Germans for their desire to promote responsibility.  EU states have been sucking the tit for far too long, but since 2007 the troubled states have been in recession. (And I would argue the economy in the PIGS has been in real recession, for the average person, since 2001-2002. I witnessed it qualitatively first hand visiting Greece year-after-year, and the systematic decline in activity within a 10-15 year period.)

Five years worth of documented recession. Over 10years worth of meager economic performance. The breaking point appears to have arrived.

Over the past 8 months, the progress in the EU, with respect to structural reforms is nothing short of historic. Governments changed hands, ideologies shifted, drastic change in policies were put in place and all of this was completed within months and without a war. The driver of reform was a couple of trillion dollar paper-losses in the markets. (I truly am fascinated by the course of recent events.)

I do not think the Germans will ignore the progress that was already created.  Nor are they immune to heavy pressure. Bonds specific to infrastructure will find buyers via the Chinese. (They have not made their interest in such investments a secret.)

Will there be a EuroBond?  

I fucking hope so!  This maybe enough for the market to trade at a 15 multiple.  Then the SP500 could be on track to close higher then 1500 by the end of the year.

With reforms in place, the only major structural hurdle left within the EU would be to implement a universal EU-wide tax collecting mechanism (like US Federal Tax).

I know the counter intuitive nature of more debt to counter the current debt, but there is validity to the strategy. Its no different than Ford massively leveraging, using the funds to reposition the company and now a few years later, has less debt than cash on its balance sheet, huge cash flow and considered investment grade.

There is light at the end of the tunnel.  If EuroBonds become reality, imo, the markets are an outright strong buy.  Europe will not collapse. No country will need to exit the Euro (does not mean countries can not default). European concerns will no longer be front page news, at least in the near to mid term. The SP500 will remove its massive discount.

I am beginning to feel giddy. I hope this chatter is real.

Tuesday, May 22, 2012

Google is ready for MMI

If there was ever a 'tell' that Google is ready to merge their awesome software capabilities with hardware its their Google Glasses.  And quite frankly, the industry needs Google to step it up. Apple is far-and-way the leader in the post PC transition. Every leader needs a true competitor, if not for the sake of constant improvement.

In late January I highlighted the combined company desperately needed to improve their margins.  Since then, Google has seen a systematic increase in overall margins.

This positions the combined company pretty well, especially considering the low-hanging cost-cutting-fruit via MMI. (The most obvious being the elimination of at least 20 of their 27 product offerings.) The combined company is approaching overall margins similar to what Google did in Sept of 2011.

If Google acts on the low hanging fruit by focusing their products on smart-phones and tablet, and removing excess manufacturing capacity from the lower product offerings, the combined company can approach margins toward the mid 30s.

The above became evident after Google reported, and the benefit will become more obvious as the merger develops.

Saturday, May 19, 2012

Market Thought... re-evaluation

Every now and again, I do a complete re-evaluation of my market thesis. Even though, I consistently monitor and change the thesis as new data develops. Since the SP500 is at a support level I did not think we will see this cycle, I wanted to re-review the macro economic picture.

1. US growth

The markets have told investors US growth will move toward the direction of job growth. The disappointing jobs data two months ago started the collapse in the 10yr, which triggered unease with the big boys. (The 10yr is used to measure US GDP growth. A low 10yr yield means a lower assumed US GDP.)

Since the crappy Jobs number, the jobs data got a bit better. Jobless Claims continue to point to a left-to-right trend, which is good news for the US economy.

Obviously claims need to continue to trend lower.  Then the Employment Situation needs to confirm the jobless claims' trend.

2. Europe

The situation in Europe seems just as fucked up today as it was at any point over the last 3 years.  However, the situation is fairly different. I have highlighted this before:

1. EFSF + ESF + IMF = +1trillion at the ready. 

2. An ECB proven to facilitate, now that cost controls are in place. 

3. A mechanism to cutoff a troubled country. (Cut the leg off to save the life.)

4. Banks in troubled countries can be re-capitalized, and supported for far less than the 1T available

5. Spending reforms have already been implemented

6. The Euro is declining, a needed by-product of the EU mess to promote economic growth. A correlation of Euro to PMI is obvious, a declining Euro will provide some economic growth.

This link redirects to a previous post with a good video highlighting the EU situation.

The above alone should mitigate fallout from Europe, but there is also the current willingness from global Central Banks to ensure contagion does not spread.

3. China

Since the beginning of May, China has been in a straight line down.

Everyone knows China's GDP is going to decline as they transition to a more consumer based economy.  Right now, the negative chatter will continue as the negativity is corroborated with declines in Chinese share prices and the commodity complex.

Investors are looking for data points that show an increase in Chinese consumer demand or stimulus that will facilitate the transition.

But there should be no over-stating the obvious. Chinese middle class is growing, their savings rate is large and their buying power is sizable. Companies selling into the Chinese middle, upper-middle and upper class in China will see no impact on their earnings.

4. Fucked-up coincidences

I don't know how else to describe the course of events over the past couple of days that had a definite impact on market performance.

a. JPM's stupid trades. Any positive sentiment on the banks, due to improvements in housing, was thrown out because of JPM. Regardless of the bank's balance sheet and actions, the bank-bear's negativity became re-enforced, and contributed to the overall negative market sentiment.

b. Facebook's IPO. Talk about a fuck up. Nasdaq fucked it up. What ever the reason, around 12:30pm every stock basically declined on Friday, imo, due to the botched execution of the IPO.


The fear of Europe, along with global economic slowdown fears caused the markets to decline, to levels I generally was expecting, near 1340. But the "Fucked-up coincidences" gave us enough negativity for the market to touch its longer-term support, the 360 SMA.

I was not expecting the market sentiment to be so negative to allow for a retest of the 360SMA, especially after consolidating at the SMA for 5 months prior to the market's leg-up.

The markets are very oversold, and are now sitting on an important support level. From a technical stand point, now is a really good time to start 'loving' (not liking) the market.

But a dilemma persists: Are equity shares cheap enough in relation to the above concerns?


Regardless of what anyone says, a stock, the piece of virtual paper, has value. To ignore this is to ignore the truth.  Despite the axiom "cheap can get cheaper". Barring a systemic event, "cheaper" has to be justified.
Value is always a relative term. But if anyone had the ability to buy into a company that has an earnings yield far higher than the vast majority of other investments, that is involved in a secular growth curve, would anyone say no? (That is what is currently being said with respect to GOOG, AAPL, QCOM and many others.)

Currently, the SP500 has a trailing multiple of about 13.3, which is an earnings yield of 7.5%. (Earnings yield being the inverse of the trailing PE, 1/13.3).  The 10yr is at 1.7%. But this relative basis valuation has been the case for a few years now.

In Oct 2011, when Europe was facing a true Lehman x1000 event (because the stop-gaps mentioned above were not in place), the SP500 fell to around 1070. Looking back, the SP500 had an EPS of around 94.6, which means the SP500 saw a multiple of around 11.3. If the market was to see a similar multiple with current EPS, then the SP500 would achieve around 1100.

Historically, a trailing multiple around or below 12 is really really low, if not rare. Real fear surrounding EU wide bank runs, not just Greek or Spanish banks, but all of Europe's banks. The mechanisms mentioned above, while financially unhealthy if sustained for a long period of time, prevent systemic bank runs. If a systemic event is prevented, then a trailing multiple of 13.3 is far too low!!

This does not mean countries can not default. They can, and maybe will (and in Greece's case, default again). But for those who think government can not maneuver out very difficult situations, should familiarize themselves with the history of NYC.  For a city's who's GDP was larger than many other countries in the world and expected decline declared irreversible, NYC never defaulted, and still thrives.


The situation can look shitty, if you want it to look shitty, but Apple stores are still packed. Chip demand for mobile is so high manufacturers can not keep up with demand. Google is still growing Revenue by 20-25%. SP500 earnings grew by 5-6% when they were projected to be flat to down. Global GDP is still humming along.

IMO, the biggest (most realistic) risk to multi-national earnings is if they are not properly hedged against the coming Euro decline. But these guys actively hedge, and the currency risk should be minimal.

Wednesday, May 16, 2012

Market Thought... ?

The sentiment is obvious, and the mood has been the same 'blahness'.  I don't agree with the current sentiment, but I understand it.

I found the below perspective interesting.

The Euro has declined over 5% in two weeks. This should translate to better info on the EU PMI front.

The dollar is at its Oct highs. I don't know if this move is safe-haven play or a result of the declining Euro. The fact that the dollar is at levels where Europe was facing real systemic bank runs, I found interesting.

Similar set up for the treasury. IMO, the yield signals the safe-haven play.

Two indicators that act as safe havens are suggesting the market is at a heightened level of fear, similar to where we were prior to the ECB's willingness of intervention, structural reforms, support from the EFSF, ESF and IMF, and a mechanism allow for country exits from the EU.

The data, in relation to the current macro conditions, does not jive with me. (But I have been trading like shit these past few months, so I currently suck.)

The SP500 seems to want to touch its 150SMA.

Sunday, May 13, 2012

A ton of JPM chatter

Obviously the JPM chatter has exploded. Everyone is dishing out their opinions, and trying to assess the scenario. What I find most interesting about the chatter is that many are highlighting this as "the tip of the iceberg", then in the same breath saying it "could be a one-off".

Since my fund owns a chunk of JPM common, I revisited the numbers this weekend re-examining their recent 10-Q.

Here are some facts that many are choosing to ignore:

1. JPM tier one leverage is 7.1.

2. JPM total tier one capital is around $155Billion.

3. CIO group saw profit from 2009-2011, but generally they don't. (As a hedging vehicle this is an obvious expectation as this time period was the start of the credit bubble bursting.)

4. CIO assets significantly grew after 2009. (Again, this is obvious because JPM absorbed two massive organizations, Bear Sterns and WaMu. The organization had to adjust to the new assets.)

Aside from assumption, from an actual data perspective, JPM (as per the CC) will lose $800M to potentially $3billion from their CIO group.  This represents 0.05% to 1.9% of total tier 1 capital. (All I care about is tier 1 capital because this measures a banks viability.)

From a asset perspective, the numbers speak for themselves.

From a risk management perspective, much of the chatter was harping on how 'late' JPM was to acknowledge the issue. JPM took about 30days to reveal the information they had to investors. While I would love absolute real time red flags, within a 30 day period, JPM noticed red flags, highlighted the main issue and revealed it to shareholders.  As an outsider looking in (and from someone who has direct and extensive experience investigating regulatory issues and deviations within an uber regulatory environment, then reporting on the issues), the timeline is not extreme.

Make no mistake, the current situation sucks. But JPM is a low leveraged, highly capitalized bank with their CIO group having a history of doing what they were suppose to be doing. To say this issue is anything other than a classic fuck up, is kinda disingenuous.

JPM maybe dead money until this situation is better clarified, but I will wait. Not looking to sell into this negativity.

Saturday, May 12, 2012

28nm and QCOM, NVDA

When QCOM reported its recent quarter, the stock took a big hit due to the perception of supply chain issues related to the 28nm chip.

Looks like QCOM is not alone. NVDA is seeing the same supply constraint. The issues with the 28nm chips looks to be an industry issue, not company specific.

Based on what NVDA had to say, looks like the demand for mobile chips is quite strong.

Thursday, May 10, 2012

What JPM giveth, JPM taketh away

JPM giveth. Around March 13th JPM front loaded the stress test results and announced a huge buyback and nice dividend increase. This caused the SP500 to break out, and start a new trading range.

JPM taketh away. Tomorrow, JPM maybe the straw-that-breaks-the-camel's-back on the SP500.

Sucks to be a bull right now, especially a bull buying JPM as it got very oversold. (Here's looking at you kid, as I stare at myself in the mirror typing this :) or rather, :(

Even as I am annoyed at the development, after listening to the JPM conference call Dimon is still one of my favorite CEOs. The shit he says just makes me laugh, in a good way.

My biggest concern was a retraction of the buyback and dividend. But after listening to the issue, and potential losses, I think they can off-set them across their other businesses. The only pisser was that he left the uncertainty open for a 1-2 quarters.

Perviously, Dimon made it clear that they will be using the $15Billion buying back below 45. Well, the stock will open tomorrow about 15-16% below their target. If this issue really is a potential blimp to an other wise healthy company, they should be.

Europe - feels different

The Europe situation seems different this year. Probably because it is different.

How can investors be as scared as they were in August 2011, at a time of legitimate bank runs taking place, when the following are in play:

1. EFSF + ESF + IMF = +1trillion at the ready.

2. An ECB proven to facilitate, now that cost controls are in place.

3. A mechanism to cutoff a troubled country. (Cut the leg off to save the life.)

Am I being too optimistic? Maybe. Not trying to down play the hurdles Europe face, cause those hurdles are powerful, but the scenario from last year is simply not the same.

Wednesday, May 9, 2012

Lakshman (ECRI) on CNBC

He continues to call for a US recession. Been touting the same tune since Oct 2011.

If I keep saying something for 7 months, will that 'thing' eventually be proven right? Will I be right if I was proven wrong for 7 months?

Although his interview today is a hell-of-a-lot less certain then previous interviews.

Greece's options

Now that the election cluster-fuck is over, Greece still has basically two options:

1. Follow the current path of austerity and policy reform.

2. Break from the current path, get kicked out of the euro or leave the euro.

Regardless of what happens, if Greece does anything the powers that be don't want, Greece will literally be on their own. No one, and I mean no one, will purchase 'new' Greek debt. Whatever austerity pains Greece is going through now will be HUGELY worse.

And not for nothing, global banks are capitalized enough to handle a greek euro exit. Greece no longer holds any real cards to re-negotiate.

The markets should know this by now.

Monday, May 7, 2012

Carrier subsidies and quality phones

The chatter has increased regarding carriers reducing subsidies for mobile phones. The most obvious example of this is with two carriers in Spain.

I have been following AAPL for far too long, and truly understand how utterly STUPID the current chatter is. I want to emphasize the word stupid, its stupid.

I use the word stupid because in the data centric world we currently live in, people making the claim are simply ignoring the obvious data smacking them in the face. (Kinda the same reason there is a company growing at over 50% free cash flow, earnings and over 20% revenue, yet selling at 13x multiple.)

For anyone who does not remember how the iPhone rolled out (and it appears there are too many):

1. iPhone was rejected by Verizon due to the subsidy.

2. ATT took on the iPhone. Their user base and profits grew.

3. The success of the iPhone on ATT was the proof of concept for the rest of the carriers to follow suite.

ATT and Verizon are currently trading at multi-year highs. MULTI-YEAR HIGHS.  Let me repeat that, despite the negative chatter about the "subsidy issue", the carriers are trading at multi-year highs.

Carriers are trading at highs because the model works. (Oh, lets ignore the fact that the carriers created this model.)

In this big data driven world, if we look at the data correctly, the current situation is a mutually beneficial agreement.

As for the two carriers in Spain, they just ceded new costumers to the third largest carrier, Orange, while maintaining the cost of upgrades from current costumers. (Basically, they cut off new costumers while maintaining high costs. Its the opposite of smart.)

For the record, I want to see carriers succeed too. I like VZ, and think they will benefit regardless of the above bullshit issue, as the data out of VZ suggests. This is why I maintain it for my timeless portfolio.

Sunday, May 6, 2012

Market Thought... sheep

Whether I like it or not, the market is a game of sheep, especially during times of uncertainty.  And because of the weaker jobs data, we are in a time of uncertainty. The majority of players will stick with the conventional thought, until told to think other wise. (Data or some really big fish influencers will change their thought process.) Until then, too much money controlling this market falsely rely on price action as a fundamental tool. The problem with price action is that there is an inherit assumption that the market is always efficient, but everyone knows thats not the case.  Its the whole premise of "buy high, sell higher".

I have been in the school of thought that the jobs data may lead this economy.  Last months jobs data caused the SP500 to begin to consolidate, and many stocks have seen a huge multiple contraction. (Because earnings are still coming in better than expected as global growth is still intact.)

Fridays jobs number was less than expected, but I do not think it was so bad to merit an almost 2% decline (on an already multiple contracted) SP500.  A few points of highlight:

1. Private job growth was +130k. (While I wish it was growing at +200k, it is still growing at +100k.)

2. More importantly, the Average Weekly Earnings increase from last week to $806.61. (IMO, this better reflects the overall income availability for the economy. I was really concerned by last month's big decline, and the increase is something I wanted to see. 

The current information we have from jobs data suggest this hiccup is already starting to pass.

Regardless of the above trend, the sheep are looking at the 10yr yield, and the decline in the yield is what is guiding their market thesis.

A contributing factor to negativity was the price of oil. Oil's decline probably spooked some players as well, even though some of Friday's decline was most likely attributed to margin increases to pure speculators.

The other main contention of negativity is Europe. Everyone, and their mother, is already aware of the negatives Europe brings to the table. The global economy, and arguably the 21st century civilization as we know it, was at the edge of the abyss in Oct 2011. And despite a rally from the Oct lows, the market has not removed its "systemic financial system crisis" discount. (The current trailing multiple of the market is now in the high 13s/14.0, pending the tail end of earnings. But more importantly many of the secular growth stocks have seen huge discounts despite continued growth, and proven growth within economic "soft patches". ie GOOG, AAPL, QCOM and many others.)

Despite the current progress within Europe,  the most important indicator I have been paying attention to in Europe is the Euro-to-manufacturing PMI correlation.  With a lower Euro, the EU will see an improved PMI, and the economy will begin to grow again. The peripheries are very much in need of this. They needed it yesterday.

The Euro currently looks like it wants to break down from its current 129 support. If it can break, the next stop is 126.

From a global GDP perspective, this is good.

The SP500 is sitting on support levels, and given the continued earnings strength many stocks look really really interesting here.

From a momentum perspective, traders will most likely continue to take their cues from market indicators like Oil and the 10yr yield. However, imo, all market player are being reactive to the jobs data, and whether anyone cares to admit it, the trends suggest the Jobs data is coming out of its hiccup.

Some side notes

1. Financials -  Some financials are 6-10% from book value. IMO, this is a buying opportunity. Not for normalized earnings. Normalized earnings will not be clear until the 10yr yield increases above 3%. The current play on financials is to purchase below book value. The US housing and MBS market has improved so much that the US bank values merit book value valuation. Once yields improve, then they will be measured by normalized earnings.

2. AAPL, QCOM - Their multiples are now below their Oct 2011 lows, despite their leadership positions within mobile growth. I do not like characterizing the growth as "mobile" because the current shift in computing is really a fundamental shift in how people utilize computing. AAPL, QCOM and even Google are at the forefront of this shift. (Even though many do not want to acknowledge Google as one of the leaders in this shift.)

Thursday, May 3, 2012

Market Thought... 10yr coiled spring

Tomorrow's market action will be an interesting. There seems to be a low expectation of the employment number, but at the same time the market has been discounting bad data for a few weeks now.

The market has absorbed 10yrs worth of growth. The question is when, not if. When will the market remove this big discount.

Even if tomorrow's number is bad, the market's current multiple reflects bad, and I do not think the market will correct severely unless there is a threat to the financial system. As the days pass, and there is no financial system collapse or threat of a collapse, as soon as better data begins to trickle in, this market will rally hard.