Thursday, May 31, 2012

How To Fix Eurozone

There is a lot of talk on what to do with Eurozone. Greece should leave. Spain and Italy should follow. Blah, blah, blah. There is only one sensible idea: create analog of FDIC in Europe. It will really stop runs on banks and protect depositors. But to implement this, Eurozone should get rid of just one country. It's not Greece, not Ireland, not Portugal. It's (hold your breath) Germany!

Thing is, Germany reaps all the benefits of Euro without sacrificing much. It's currently on a roll after many years of stagnation caused by unification. Economy is strong, exports are strong too, most of them are going to Eurozone. Now, other countries should make Germany face a choice: adopt sensible policies, like bank deposit insurance, stimulus for Eurozone economies, help to troubled countries (conditional, yes, but please, no austerity which completely kills economies). Or other countries kick Germany out of Eurozone. There are ways of doing this, for example they all leave Eurozone, and create their own common currency. Most probably Germany would be forced to agree to reforms. If not, well, it's going to lose the most: new Euro would be much weaker than new Mark, resulting in stagnation imported by Germany.

Still Feels Like A Bottom

Market is down after my last post: feels like a bottom. It might slide even more. But I don't see big downside from here. That is, if our wise leaders, in US and EU, will not push us into next step of Great Depression 2.0. If everybody is going to push austerity, economies of the world will continue contracting. And contracting. And contracting. Some people may argue that in 19th century such contractions stopped sooner or later. Right. The structure of economies was much simpler then and any contractions ended at the point when people couldn't cut their expenses anymore (everybody has to eat, have at least some clothes and live somewhere). In current economies, there is much more room for contraction.

Anyway, I don't think it's going to go that far. That's why I added to my portfolio today: added to position in Red Hat (RHT).

Disclosure: I am long RHT.

Additional disclosure: Positions can change any time.

Tuesday, May 29, 2012

Feels Like A Bottom

Markets are calming down. Last week wasn't that bad. This week started bullish. Let's see what we have in cards.

Fundamentals are still good. At least in US. Economy maybe not growing fast, but it's growing. More to the point, profits are growing faster than economy, and profits define stock valuations. Big headwinds are Europe and China. I hope Europe will get its act together. As for China, things are much worse than they appear. If Chinese economy is growing slower than expected, it's no big deal. There are much bigger problems with China. Statistics are not reliable, to put it mildly. Banks still work in communist era, decisions to issue credits are made in governments of different levels, not in the bank offices. And political situation is not that stable as Communist Party wants you to believe. But even China matters much less than growing US profits.

Technicals are awful, but they are usually awful at the bottom.

Sentiment is great. I mean, it's so bad that I feel good.

In short, it does feel like a bottom. Of course, I might be wrong. Should stay humble, or market will do it for me (yes, this is what Todd Harrison is saying).

Thursday, May 17, 2012

Buying Panic

Bought panic today, again. Added to my Red Hat (RHT) position. Current market carnage might well continue, sure. But today's action close to the end of the session was a panic, and I an a buyer, not a seller of panic.

Disclosure: I am long RHT.

Additional disclosure: Positions can change any time.

Tuesday, May 15, 2012

Trading Around

Today sold my position in Managed Duration Investment Grade Municipal Fund (MZF). Again, this CEF traded over 4% premium to NAV. So far, it's quite easy and I hope to make more such trades in the future: buy below 1.5% premium, sell over 4%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MZF over the next 72 hours.

Additional disclosure: Positions can change any time.

Monday, May 14, 2012


Market is going down. About as fast as it was going up in January. Again, when Jim Cramer and Doug Kass are both bullish, it's a very bearish sign. Cramer became bearish lately, which might help things a bit.

Fundamentals are OK. Earnings are really good, interest rates are low, commodity prices are going down. I don't see anything bad with the latter, quite the opposite. Especially oil. By the way, people forgot why oil went over $100 in the first place and now blame economy and Europe. But in March, oil went up because if Iran. Everybody expected Israel to hit Iran. Didn't happen. Not likely until winter. Might not happen at all. I think taking Iran out of equation took 10 dollars from the price of oil. The only problem so far is Europe, and I don't really see difference between January and now. That's more a perception of problem than the problem itself. Of course, we know that perception is reality until proven otherwise.

Technicals are awful. Indices went down through two levels of support. Markets are oversold, so what? They can be oversold for a long time.

Sentiment. There is a positive change here. In the end of April, almost everybody was bullish. Now, after two weeks of relentless sell-off, many analysts turned bearish. Cramer is bearish too. That's something. Sentiment is always a contrarian indicator.

So we have bearish technicals, bullish fundamentals and neutral to bullish sentiment. I'd like to call bullish outlook, but this sell-off is too persistent.

Friday, May 11, 2012

Why I Bought Intel (Back)

I reopened position in Intel (INTC) on Thursday, May 10. I actually had Intel position through 2011, trading around. In January, I closed position, because it was at the top of the trading range. What I didn't see at the moment, was the huge bull market which just started.

Of course, I'd prefer to reenter position at lower price than I closed it. But we play cards served, not those we wish we had.

Intel is a great company. It produces unique product, has unique technology. In words of Warren Buffet, Intel has a moat. Company increases earnings at decent rate and pays big (more than 3%) dividend, which was increased three times in the last 18 months.

I waited for an entry point. And waited. On Thursday, I pulled the trigger. Tech was being killed by Cisco (CSCO) warning. As usual, it was killed just in case, without discrimination. And it was wrong. Cisco problems: reduced government spending in the world. In other words, it looks like dictators of the world already bought enough Cisco equipment for internet censorship. At the same time, Cisco is having great sales related to the cloud. And Intel doesn't produce equipment for internet censorship and produces the heart of the cloud: almost all servers in the world have Intel CPUs.

Intel has only one weakness: mobile platforms. Smart phones, pads, other mobile devices usually use ARM (ARMH) CPUs. There is a good reason for it: Intel CPUs are way too complex, it's impossible to make them energy efficient enough. Even though Intel technology is better, their CPUs have many more transistors than ARM-based competition. I don't think Intel can win here. There isn't much money to be made, and expense might be significant. I actually will be worried if Intel spends a lot of money on mobile. There is a lot of money to be made on servers and PCs.

I don't know if Intel hit the bottom. If it's going lower, I'm going to add to position.

Disclosure: I am long INTC, ARMH.

Additional disclosure: I have no positions in CSCO. Positions can change any time.

Monday, May 7, 2012

Why I Bought Red Hat

On Friday I opened a position in Red Hat (RHT). I follow this company for a long time, always liked it, always thought that it was way overpriced.

What changed? One word: cloud.

I have an opportunity to look at enterprise IT from inside. Saw how it's organized in different big and medium companies. I see the trend. And this trend is plain suicidal. Corporate IT, the way it's managed now, has no right to exist.

For a long time, corporate IT was managed by IT professionals. Such management had a lot of drawbacks. IT professionals are not easy people to get by with, they have strong opinions, talk to other people like to children who don't understand simple things. Unfortunately, they are usually right. Their strong opinions are based on knowledge and experience. And other people really don't understand how IT works.

Starting around 2000, things started to change. People in charge of corporations thought that Y2K problem was invented by IT people (the problem was real). CEOs and shareholders decided to change IT culture. At the same time emerged the whole new class of corporate management people, who are professional managers. We all know that they are called MBAs. MBAs were charged with changing many things in corporations, including IT.

First sign of that change I saw in one big company, when at one meeting in 2003 decision was made to call another meeting to discuss allocation of 200 MB of disk space for some project. I couldn't believe my ears. At that time 200 MB of disk space in enterprise environment cost something around $200. Meeting including at least half a dozen people would cost at least the same money! Next came change management. For people who are not IT professionals, change management is a way to ensure stability in things they don't understand. For IT professionals, it looks like this: you propose an absolutely trivial and necessary change and then defend this change in front of at least half a dozen people who don't understand what are you talking about. For me, the picture became clear: MBAs in charge of IT don't know what they are managing, so they approach the problem on their own terms. To make a career, you need to make yourself valuable. To make yourself valuable, you need to take over some resources (whether it's hardware, people, software development or updates), make these resources scarce and distribute them. Welcome to Soviet Union economy at the enterprise level.

This wasn't the end of it. Outsourcing was an attempt to reduce costs. But cost of Indian programmers quickly reached almost US levels. We are costly because only about 20% of people can do our work. Other 80% leave this high paying profession. Because they just can't do it. And you don't know who would leave until they tried it. So you can roughly estimate that cost of educating an IT professional is about 5 times cost of education. No way around it. Next came outsourcing of parts of IT. Many big corporations hired other companies to take over parts of their IT. Network, server farms, software installation and maintenance are often managed by other companies. You'd think those specialized companies would do a good job here. Wrong! They don't care about anything but money. It's even harder to make necessary changes, to ensure proper system and network management. There is no feedback, because companies managing server farms or network are not responsible to local IT department. They are only responsible to your corporate management.

This is not sustainable. Corporate IT costs huge money, it's inefficient, and getting more expensive.

I can only see one way out of this corporate IT nightmare: cloud. You don't have any server farms. You don't bother with software installation, system and network management, security, availability. Feedback is easy, because you can see real picture: IT services either perform or not. Easy to understand even for MBAs.

Clouds in most cases use Linux operating system. In enterprise environment, Linux means Red Hat.

That's why I opened position in Red Hat. I expect much bigger installed base than most analysts expect sooner than they expect.

Disclosure: I am long RHT.

Additional disclosure: Positions can change any time