Wednesday, May 28, 2008

Old Tech, New Tech. Crap.

Cramer is continuing to sing his siren song about "New Tech". Donny Deutsch joined him today on "Mad Money" and they sang duet. It's becoming funny. Couple more sirens, to form quartet, and it's pathetic.

I have nothing against the idea itself. There are companies that solve (or pretend to solve) some of the world's problems. But lumping them all together and calling them bigger than "Old Tech"? Come on. I'd rather believe in South Sea Company. Or Panama.

Cramer calls all high-tech and internet companies "Old Tech" now. Yeah, right. They only changed the world completely in the last 30 years. Just that and nothing more. Even 15 years ago it would be impossible for me to have this blog, and Cramer's "Mad Money" wouldn't have a chance to exist. "Old Tech" also completely changed the way companies do business. Just take a look at India. Or imagine how current Just-in-Time methods would work without computers. Or just try to build modern car without computers. Or modern anything for that matter.

And what is the "New Tech"? Company producing pumps and filters. Companies related to wind power, which still depends on government subsidies. Agribusiness companies. Mining equipment companies. And they all depend on a new bubble: commodities. If anybody thinks that era of bubbles ended with real estate crash, think again. Parabolic chart never ends up good. Doesn't matter if it's gold (in 1980), or internet stocks (in 2000) or real estate in hot markets (in 2005). Now we have similar charts in many commodities. Oil, grains, steel, you name it. It will go down. It always does. And "New Tech", at least most of it, will go down with commodities. It's just money jumped from real estate and mortgages to commodities. Herd mentality at its worst: almost everybody predicts inflation (they lived through it and it still scares shit out of them), and they think that commodities are protection from inflation. Did anybody hear about commodities inflation?

Cramer easily gets enthusiastic. And he's got a point: you can really make money in these companies. He himself made money in internet stocks and sold them close to peak. But. You need to be like Jim to be successful in this game. You need eat, breath and sleep stock market. You need to be able to turn on a dime, and feel the exact moment when to do that. Parabolic charts and how they end up tell me that most people, even professional investors, can't.

"New Cramer Tech" will work. Short term. Maybe. But be ready to sell everything when you hear of commodities crunch. When tankers start to be used as floating storage (there are rumors already). Wheat prices are already down 30% from the peak, they are below Jan 1 price (look at this beautiful chart. Rice down more that 20% (here). Others will follow, sooner or later.

Commodities can't grow in price forever. Not even for a long time. Once price is high, production picks up, and prices will stabilize. Or crash, if enthusiasts overestimated demand and increased production beyond any reason. Oil is a little bit different, because of OPEC. But long term, price will go down anyway. At current price, most oil sands and most chalets are profitable. Insanely profitable. Almost any deep sea extraction is profitable. They will come online. It takes more time, but it's doable.

For a long term, we need real new tech. Technology which will solve next big shortage: shortage of labor. I wrote about the end of cheap labor already: here and here. This is a real problem, not an artificial one. And it needs real solutions. Company which will develop technologies to automate labor intensive industries will be real New Tech. There isn't much money there yet. Businesses are still mostly under impression that you just have to publish "Wanted" ad and they will come. But even China is running out of cheap labor now. Birthrate is falling all over the world, they just don't make many new workers anymore.

I don't see such companies. Yet. I will be looking for them. They will come.

Monday, May 26, 2008

Is TSCM Dead? Or Just Hibernating.

I'm long (TSCM). And I'm starting to think that I'm dead wrong. Latest two quarters were just so-so. Web site, after latest redesign, stinks. It's not that there is one or two things which are wrong with it, I can't name one thing which is right. Advertising model is intrusive and looks obsolete. Sister sites are nothing to right home about. might me close to be OK, if not for web site design, which is close to design and sucks the same. who cares? Maybe OK, but can it make any money? Or bring users to other sites to make money? Because, in the end, business is about making money.

I bought TSCM in order to cash on Jim Cramer. Unfortunately, he is either neglecting his responsibilities as a director and biggest shareholder, or just doesn't understand how to build financial web site. The former would be bad, the latter, pathetic. I understand that Jim is up to his eyeballs in Mad Money and all conflicts of interest between CNBC and TSCM, but he has no right to sit aside while TSCM becomes irrelevant. I was reading it a lot before, now I only read Mad Money recaps and Doug Kass articles. Sometimes there is other interesting stuff, but it's close impossible to find. Quite often I read some article after finding it on Yahoo! Finance or on Google.

I'm going to wait a little bit. If things don't start to improve, I will have to dump my position.

Full disclosure: at the time of publication author had a long position in TSCM and doesn't have any positions in other companies mentioned in this article. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Friday, May 23, 2008

Buying back BBD

Bought back portion of Banco Bradesco shares (BBD), which I sold earlier at 25.10. Maybe it goes down more, I can increase this position still.

Oil bubble is growing. How much more? Unfortunately, shorting parabolic chart is a known kind of suicide. Maybe some long term options on DUG or OIH. Doug Kass is long former and short latter, but he is kinda two heads above me in the shorts game. Kass is short oil, Cramer is long. Who is right? We'll see.

Microhoo saga just can't die. Ballmer now says that he doesn't want Yahoo! and never really wanted it. I can translate it two ways: either he wanted amicable agreement (why hostile offer then?) or he just wanted to destroy Yahoo! by tying it in the proxy battles. The former doesn't look right, things are not done this way in Silicon Valley. Not unless you are Larry Ellison, but he is from Silicon Valley, he gets more slack there. The latter is just absolutely against law, which is mentioned in today's "Fast Money". I don't know if SEC is going to investigate this, our current administration doesn't believe in antitrust enforcement, but it should. Way too easy for big company to destroy competitor: make an offer which most probably won't be accepted. Icahn probably doesn't understand what he bought. I think Motorola debacle would be peanuts compared to Yahoo! He either loses proxy battle and money, or wins and if MSFT doesn't make an offer, loses money again. The only way Icahn can make money is if he wins proxy battle and Ballmer makes an offer. Would be this offer above $30? I doubt it, who's going to overbid when seller is desperate? And the main question is: what if Ballmer doesn't want Yahoo! without Yang and Filo? I have sneaking suspition that that was the main problem of talks between Yang and Ballmer.

Full disclosure: at the time of publication author had a long position in BBD and doesn't have any positions in other companies mentioned in this article. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, May 20, 2008

Local Peak For Oil?

According to yesterday's Mad Money, Iran is stockpiling crude in tankers. That's quite like the end of 2006. Spot price for tankers is sky high, oil is sky high, oil is getting stockpiled in tankers for the lack of other options.

In 2006, that was a local peak for oil. Shortly after that, oil price dropped sharply. Are we going to get another?

Thursday, May 15, 2008

Microhoo? Not Again.

I don't know if Carl Icahn uses Internet. Or ever used it. Judging by board he nominated, he doesn't understand Internet business at all. Only Mark Cuban has some (very limited) understanding of Internet business. There are several people from entertainment business. Yeah, right, just what Yahoo! needs. It's less than a year since they got rid of their own CEO from entertainment industry.

I'm afraid Yahoo! might be much bigger problem for Icahn than Motorola. There Icahn found out that you need to have a backup plan. Initial idea was OK: sell the cellphone business. After long fight, board changes he's got board agreement. Small problem: no buyers. Now Icahn is up to his ass in alligators. Let's assume he's got his board at Yahoo! Yang and Filo, understandably, quit. Then Icahn finds out that Microsoft is not interested. Now what? Where dear Carl finds people to head Yahoo!? There are currently exactly four big international Internet companies, which are profitable: Yahoo!, Google, Ebay and Amazon. Only Google has somewhat similar business model. So who is going to be CEO? Les Moonves?

Why Microsoft might be interested? They have two goals: Improve abysmal performance of MSN or kill Yahoo!, second biggest competitor in the Internet. Sure they are ready to pay 47 billion for MSN improvement, but to kill Yahoo!? I highly doubt it, even though it would be final result of Microhoo anyway. Ballmer walked out because, by rumors, someone said to him: those guys are going to burn furniture. Of course, it's not about furniture, it's about people and knowhow. And you can't just buy it. And that's why Yang and Filo are so powerful at Yahoo! They are Chief Yahoos, both by table of organization and by Yahoo!'s history. Without them, Yahoo! costs much less, no matter what Jim Cramer, Mad Money guys, Carl Icahn et al think. Yahoo! balance sheet reflects it perfectly: 1.36 billion of hard assets and 4.81 billion of goodwill plus intangibles. I wonder how much Yang and Filo represent in intangibles?

There is some speculation in press that Icahn was somewhat encouraged by Microsoft. That might be the perfect coup: make Icahn to kill Yahoo! and pretend that MSFT has nothing to do with it. Not the first case, remember SCO (SCOXQ.PK)? The easiest short I ever missed... Paul Allen was one of investors in it when that UNIX/Linux intellectual property fight broke in. Lots of investors lost money there. Icahn, Paulson, read about it. Now. Before it's too late.

Full disclosure: at the time of publication author had long positions in Ebay and Google. Author doesn't have any positions in other companies mentioned in this article. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, May 13, 2008

What To Do About Apple?

I'm thinking a lot about Apple (AAPL) lately. My small sum invested in it in 1999 and 2000 grew up to the biggest position in my portfolio (more than 1600% gain). I know, I know, if I did it by classic Jim Cramer book, I'd have to sell half after first double. Yeah, right, I'd lose thousands of dollars of upside. I don't follow Jim blindly, even though his advice made me many thousands. I have different investment philosophy: don't look at where have the stock been, look where it's going. In short, I constantly reevaluate my positions, and stocks I consider as candidates to portfolio. No matter if I already made a lot on the stock, if I think it's going up, I'm keeping it. No matter if I lost or didn't make enough, I sell it if I see problems with it.

OK, sorry for a longish introduction. Now, where Apple is now?
Computer sales are up. Huge! Market share is amazing! By some estimates, during last Christmas season Macs accounted for 14% of PC sales. There was some report lately with 19% number, I don't believe it until I see confirmation.
iPod sales are flat or a little bit down. Unit sales are up, but prices are down.
iPhone sales are huge. It's a new product and it sells better than hot cakes.
Accounting practice is excellent. Revenue is recognized by fact. Compare that to some companies (Microsoft, for example) where revenue is recognized when product is "shipped". In case of iPhone, Apple doesn't even recognize real money already received, spreading it through future couple of years.

Now, possible headwinds.

Steve Jobs is a very big part of Apple. I estimate that Steve is worth about half of the company. In other words, if Apple loses Jobs for some reason, stock is going to lose about half of it's price.
Market saturation. It's here for iPod. No growth visible here. It's strange to me, because I thought that world is not saturated yet, unlike US. But something else is going on here. Maybe cheap music players are better accepted outside of US?
Market saturation for Macs. Not there yet. But pretty close. Apple competes great at high level. And it makes a lot of sense: for the last 20 years at least, Apple computers were engineered better, had better driver support and customer support than anything else. These things matter for those who pays $1500 for a desktop or a laptop. Those who pay $500? They don't care. They only want basic functions anyway. Linux suits them just fine, most of them just don't know it. Yet. So I'm afraid that Apple market share in personal computers can't ever get over 25%. Maybe 40% if Apple can seriously get into enterprise. The difference between 19% and 25% is negligible, between 25% and 40% not as big as it seems. Much less significant than difference between 3% and 14%.
Market saturation for iPhones. We'll get there. Fast. It's amazing how fast cellphone market gets saturated, despite huge growth. Maybe we'll see couple more years of explosive iPhone growth. Three years would be unheard success.
Proprietary technology. Most people assume that OS (stands for operating system) lock-in (for Macs and iPhone) is a good thing. It is, to a point. It is good while you have the ability and resources to develop OS. Somewhat improved for Apple by the fact that base of Apple OS is actually a free OS developed in Berkeley (FreeBSD). But proprietary software is quickly becoming past. No company has resources to develop really big closed source software product. Microsoft Vista is a good example. Apple is trying to make iPhone OS even more closed, to the point that Apple will decide what applications can be run on the device. Yeah, right. Millions of hackers are working against Apple on that, Apple just doesn't have resources to outwit all of them. Proprietary software is a weakness of Apple, not a strength.

I'm not sure yet how it all plays out. I thought of reducing my position in 2005, when I "only" had about 500% gain on it. Decided to wait, wisely. Let's see if Apple can continue to innovate at current pace.

Sunday, May 11, 2008

Rational Agents, Inefficient Market

I was thinking hard about Efficient Market Theory. Yeah, right, that widely criticized EMT. For a log time (about last 6 years) I thought that main problem of that theory is "rational agents". The very basis of the theory. The idea that all (or most) of stock market participants act rationally. That was especially hard to believe after internet bubble. But now I have second thoughts.

Two pieces of information changed my opinion.

1. New amateur traders survive at average only 7 months before burning through money.
It tells me that market is at least efficient to weed out least rational agent. I assume that people without experience on the market have least rational expectations.

2. Jim Cramer's book "Mad Money, Watch TV, Get Rich". The phrase from it "Big mutual funds and big hedge funds are The Market" (or something similar, sorry, I'm to lazy to scroll through the book).

So, to sum it up: Big mutual funds and big hedge funds make the market, because of their sheer size. And market, as any more or less free market, efficiently sets prices based on trades those big "agents" do. Those big companies employ very good people, most of them are in business for decades, we just can't assume that they don't act rationally. At the same time we saw a lot of irrationality on the market. What's wrong?

It's plain economics 101: Those big institutions act rationally in their best interest. We might assume that it would be to make maximum profit from portfolios at reasonable risk level. Wrong! Mutual funds get most of their profits from fees. They rationally don't (and, from economical point of view, shouldn't) care about performance, at least until investors start leaving in droves. But in most cases, unless fund is really run into the ground, investors can't leave. Now how it works: I, as most of you, have a 401k plan at work. Do I have much choice in what funds that fund is invested? No, no way. My company, as many big companies, made a deal with an investment bank, which offers a "choice" of about 15 mutual funds. Most of which are plain crap, and couple I chose just barely beating indexes. Now, all decisions from all "agents" are rational: my company made rational decision to work with this bank, bank made rational decision to offer very limited number of funds and I made rational decision to invest in 401k because I'm getting about 80% income from this money right away, in form of employer's match. I calculated that I need more than a dozen years to beat this performance with my (not bad) 17% return for the last 10 years.

So, really, EMT is killed by, well, government. Because it makes it profitable to me to invest into crappy funds instead of investing in stocks of companies I really want to buy.

I could rant here in real libertarian fashion for real free markets, except for the fact that such animals never existed in nature. Let's think instead what can be done about it on the level of individual investor.

There is only one answer: take more risk! Because big institutional investors are risk averse, because they don't care about performance (or not much), we can beat them by taking more risk than they do. We need to find good companies when they are young, when big guys don't see them or just don't think they are big enough for them (like Intuitive Surgical couple of years ago). We need to invest in great companies which are not loved by big guys for different reasons, like Google (it doesn't follow unwritten Wall Street rules) or Apple (Wall Street doesn't like companies taking big risks). We have to avoid stalwarts at all cost, unless they consistently pay good dividends and increase them at every opportunity.

There are, probably, other ways to beat big guys at their game. But that's what was working for me for the last 10 years.

Full disclosure: at the time of publication author had long positions in Intuitive Surgical, Google and Apple.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, May 6, 2008

The End of Cheap Labor, Revisited

The first part is here.

Different industries will be affected differently. First to feel the pinch are, surprise, old, smokestack industries. Metalworking first of all. They require knowledgeable workforce, there is no way around it. Even if you install programmable machines instead of simple cutting equipment, you still need people with at least middle high school on the floor. Qualified labor is first to expeirence shortages, because China is out of it. And China was a last source of educated cheap workforce. Gone. We will see increased automation in the third (or is it really a second) world, but in won't make labor any cheaper. And other sources of cheap labor can't be used here at all, because there is no other source of educated labor. You can still get uneducated labor from rural China, India, Africa, but it's expensive to educate people. Assembly is a little bit easier, but since quite qualified work.

Apparel is a little bit different. You don't need much time to train people to work sewing machines. So we probably will not see increased price of labor (and increased prices) there, for a while. It will come to that, but we need some time, something between 5 and 10 years to get there. Then you can expect a rush of automation in that area. It's possible, there isn't anything preventing it now, except for available cheap labor.

Agriculture. It's a mixed bag. Grain production is mechanized better than many industrial processes. Fruit and vegetable production is always partially local, so cost of labor depends on availability of cheap (and often illegal) immigrant labor. Which might be in tight supply soon in US, because, surprise, birthrate in Mexico is way down from what it was just 15 years ago. Expect big price readjustments. Also expect a rush of automation (robots!, like I said already).

IT (informational technology). Despite all cries about outsourcing, even Indian labor is not cheap in this area. Companies I know about charge in range of $40-$50 an hour for OFFSHORE workers, i.e. those sitting in India. For people at location, it's $60 and up. Sometimes way up. IT people might think it's not much, but ask people in other industries if $40 an hour is a low pay.

Transport. Unless there is huge progress in legal area, drivers will cost more. Much more. It's probably possible to put a robotic driver behind the wheel in 5-10 years, but I somehow doubt it will be allowed. Too many legal issues here.

Mining. Probably least affected. Cost of labor is a very small fraction of total costs, so it probably won't be affected much.

That's all I can think about right now. Your thoughts?

Sunday, May 4, 2008

Microhoo Is Dead!

That's for now. Couple of missteps from Yahoo! and MS will be back with vengeance.

I have mixed feelings about all this. As Yahoo! customer, I didn't want it happening, because I don't trust Microsoft, I don't like its services and I hate most of its products. As investor, I think that it was the best possible deal for Yahoo! shareholders now, although I believe that in the end that deal would end up as total destruction of Yahoo! and huge financial burden for Microsoft (partially outlined here). On other hand, smart investors were better off if they sold Yahoo right when the offer was announced, so they only have themselves to blame. After all, significant part of Yahoo! shares belongs to people who would rather see them going down to zero (highly unlikely) than selling to Microsoft.

Unlike many commentators, I didn't believe for a second that Jerry Yang had any intention of selling Yahoo! He and David Filo created this company, it's like a child for them. You don't sell your children to enemy, and, make no mistake, they always saw Microsoft as an enemy. He didn't say that directly because many shareholders would be outraged. I know, emotions are bad for business. Looks like Ballmer desided not to act on emotions (and here Cramer was wrong, Ballmer can be stopped when business logic requires).

I think I need to act more on my hunches. On Friday I was thinking of either buying Yahoo! puts or 25/30 straddle. Could've made a lot of low-risk money. Well, coulda, woulda, shoulda doesn't work in investment.

What's now? Short term, MSFT is going up a little bit, probably a dollar, YHOO is going down to a little bit higher than it was before the offer. Probably to 18-19. Long term: MSFT is still a sell. To make it investable, Ballmer has to go and company should switch gears and become a value investment. Yahoo! might go up. Depends pretty much if current improvement continues. Outsourcing search to Google is a great idea, but probably can't work because of untitrust concerns. But if they can outsource at least part of it and increase monetizing of display advertising, it might be great internet business. It's a great internet media place already, all it needs is good business management and better technology (technology is very important for internet companies, Microsoft and Google are good opposite examples).

I'm really considering buying YHOO under 17. It still in my "Tech Have Been" portfolion on, but I consider it on parole right now.

Great weather in Midwest. I hope everyone had a great weekend!

Full disclosure: at the time of publication author had long position in Google (GOOG) and did not have any positions, long or short, in Microsoft(MSFT) and Yahoo!(YHOO). Positions can change at any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Friday, May 2, 2008

Old New Tech.

I almost forgot that Cramer might be interesting. But this week he really was. I didn't get excited for food companies, but old new tech might be something.

Way to go, Jim! Stop ranting about uptick rule. Find something for me. Like Intuitive Surgical.

Some changes in my portfolio today. I sold last bunch of Gilead, for reasons outlined in earlier posts. I also sold a little bit of Banco Bradesco (BBD), just because discipline says that you have to sell something after 15% run in 2 days.

Full disclosure: at the time of publication author had long position in BBD and no positions in GILD. Positions can change at any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.