Tuesday, February 23, 2010

Buying Brocade

Good idea by Philip Davis here.

Usually I don't look at biggest drops, most of the time these are companies which are not investable. Today was different. I wouldn't know about Brocade (BRCD) if not for Philip. I completely agree with his estimate: company reported better than expected profits, lower than expected revenues and reduces expected income for 2010 by 5%. Stock dropped more than 23%! Way out of proportion. This is not some wreck, this is a profitable company, with P/E about 12 even at reduced earnings projection.

I snapped some BRCD today. I don't know yet if I'm going to sell options on it like Philip did. Need to do some research.

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Thursday, February 18, 2010

Fed Changes Everything

Today's decision is hard to comprehend. Fed behaves like inflation is at the gate. Cutting discount rate, shortening loan maturity to overnight, stopping quantitative easing.

Looks like we are following Japanese way, the way of the samurai. I don't feel enough guts in myself for that. My guts don't like an idea of seppuku.

Short term, we are going to see a sell-off. Long term picture changes as well. Last April, I wrote quite an optimistic piece Fork On The Road. Last November, I updated it to even more optimistic view: 4 Possible Market Scenarios, Updated. Below is a review of the secnarios.

Inflation and stagnation = stagflation

Ain't gonna happen. People are too scared of inflation (something most of currently active people lived through in 1970s) and Fed members are just people. They are scared of every shadow of it.

Probability: 0%

Japanese disease (Zero growth with zero inflation or low deflation)

Fed's decision, together with obviously coming tax hikes, makes this scenario much more probable.

Probability: 30%

Great Depression 2.0

Welcome back to the jungle. We can have depression either Japanese way or American way. I don't know which one is worse. American way is probably better, Great Depression ended in a dozen years. But it's still a big question for how long it could last without World War II.

Probability: 50%

Great Recession

If what we had was Great Recession back in the beginning of 2009, we are out of it already. Maybe. There is still some hope. But not much. Combined forces of Fed (rate hikes), Government and Congress (tax hikes and/or spending cuts) can kill current recovery quickly and efficiently (is it the only thing our government can do efficiently?)

Probability: 20%

I'm getting less bullish. Careful, the path ahead of us is through unknown waters. "There be dragons".

I usually don't believe in conspiracies, but one little thing caught my attention. Yesterday and today somebody (or a group of somebodies) was going against banks the usual way (short common, long preferreds). At least action (banks down, preferreds up) suggested that. I just wonder, maybe information of coming rate hike somehow fell in the hands of those somebodies?

Full disclosure: at the time of publication author had long positions in banks: GS, USB and long positions in bank preferreds: BWF, PGF. Positions can change any time.

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Tuesday, February 16, 2010

Up Day: What Was It?

Sometimes market action can't be explained, it just is. Such was an action today. Anybody tell me please, why Dow was almost 170 points up? Why S&P 500 pierced important technical level of 1080 without any hesitation? I didn't see any great news, Greek situation is still not resolved, Dubai essentially declared bankruptcy, so what happened? M&A activity? Some deals, but nothing out of ordinary. Barklays earnings report? Nobody cared about good earnings last couple of weeks.

The only reasonable explanation: funds received a lot of new money lately and put it to work. Now let's see what happens tomorrow, next S&P 500 level is 1120.

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Monday, February 8, 2010

Defaults in EU: Zero or One?

Action in Europe is becoming interesting. In a sense of Chinese proverb, which, they now say, doesn't exist. The whole bunch of countries has trouble financing budget deficits, most troublesome are Greece and Spain (for now). Half a year ago, Hungary and Latvia had similar problems, but they managed to get loans and can breathe, for now. In the nearest future, we might also witness panic regarding Portugal and Italy. Maybe even UK.

There are two big unknowns in this situation. First unknown: will EU bail out every country nearing default? Or maybe they will decide to play strict parents and let one of the countries default? I an almost sure that there will be maximum one default in EU (one of my non-predictions for 2010). But honestly, even one default will be too much.

Another unknown is even bigger. There are hundreds of billions of dollars in dollar carry trade. Part of those dollars were borrowed to make loans and buy debts denominated in Euro, to play on difference of interest rates and on the idea that dollar is nowhere to go but down (remember, everybody was saying exactly that just three months ago). The biggest question now: at what exchange rate most of carry trade players set their stops? Because if carry trade unwinds, even its part which is related to Euro, it might get ugly.

I'm watching action with mixed feelings. There is a big temptation to buy stock of Greek and Spanish companies, which are selling well below book value now. But in case of default and/or carry trade unwind, they will be selling at huge discount even to current prices. And, in such case, it's a big question which of these companies are going to survive.

For now, I am going just to watch.

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Friday, February 5, 2010

EAD has nothing to do with Airbus

During today's panic I added to my position in Evergreen Income Advantage Fund (EAD). It was down almost 5%, in line with European stocks. Of course, EAD has almost nothing to do with Europe. It invests in bonds issued mostly by US companies. But ticker symbol EAD on AMEX is the same as ticker on various European exchanges, where it refers to EADS, airspace conglomerate, parent of Airbus.

Money is made in the gap between perception and reality. EAD today is a very good illustration.

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Thursday, February 4, 2010


"We don't have problems, we have challenges and opportunities".
Applied to market, this old management saying can be rephrased as "we don't have drops, we have buying opportunities". I'm almost ready to agree with that, except for one thing: technicals. They are not just bad, they are awful. Only one thing can be judged as optimistic: major indices are still above major downside trend, which started in November 200.

Sentiment, on the other hand, is quite gloomy, which is good, because sentiment is a contrarian indicator.

Fundamentals are getting better. I really like most of the earnings reports coming in. But in global economy other countries matter too. And we see Europe sinking on concerns about Greek finances, and China finally trying to do something with huge bubble built there. I'm not worried much about Europe, they will recover, eventually. About half a year after European Bank start quantitative easing (helped here and in UK). China is a different matter. Bubble built there is so big, the whole world will be sprayed when it bursts. But I still think it will not happen this year.

I'm with Cramer on current drop of stock market. I also think that main reason is a huge sell-off by hedge funds which use every excuse to sell. Unfortunately, we don't know how big this sell-off is going to be. There is only one strategy which is probably going to work: start buying on the way down. I have my shopping list ready, so far no target price was hit. Waiting for lower prices.

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