DASAN 大山

A New Home For Dasan

2009-09-11T12:10:00.000-07:00

A New Home For Dasan: http://www.davianletter.com/blog

I’ve been taking notes of my daily market observations while I was at Merrill Lynch since 1993. I have hundreds of pages of notes – for about 15 years straight I wrote a daily note every single day that I traded the market.

I did it for three reasons:

1. To learn to be become a better trader/investor. I made a lot of mistakes and wanted to learn from them. By recording my thoughts, facts and actions concerning the stock market, I find I’m more honest with myself.

2. I am going to write a book on investing some day. Soon. Really – even though I’ve been talking about it for 15 years.

3. Writing about losses is cathartic. When I’m losing my “shirt” in the market, it’s often helpful mentally to write it down. (I advise other serious investors to keep a journal)

When I was getting my MBA a few years ago, a lot of my classmates and friends wanted to know what they should invest in. I made a name for myself in school because I won several “stock picking” contests. (I was lucky; I was older than most of my classmates and was impervious by then to business school brainwashing.)

Since I had advised clients on their investments for over a decade in a professional role for pay, I felt uncomfortable telling friends what to do with their money. For one thing, I did not know their financial situation such as risk tolerance, time frame, etc. For another, at Merrill Lynch I used to always say “you can always get more clients; it’s harder to get more friends.” However, at the same time, I wanted friends and family to have a way to hear my stock ideas instead of getting lousy ideas from sloppy analysts on Wall Street or unscrupulous brokers. I knew from the inside how poorly stock recommendations of major brokerage firms had actually done.

I wondered: how can I let friends and family know how I invest money for myself and clients so they can follow along if they want? So I started a small blog on investing and discreetly let a few people know about it. I write under a pseudonym because I am still actively managing money. Any ideas on my blog are not investment recommendations, but instead something more valuable – facts and ideas for serious investors to empower them to make their own investment decisions.

I love technology, but I don’t love programming HTML, so I started my blog with Google’s blogger.com. Meanwhile, I learned of Anthony Davian’s Davian Letter and started reading his articles. Here was a young gun with a disciplined approach to trading a variety of commodities and options. I have a lot of respect for Mr. Davian’s irreverent, yet well-thought out approach to the markets. Whatever he lacks in the usual “Wall Street polish” he more than makes up for in reasoned analysis. That’s refreshing.

Mr. Davian invited me to put my public (free!) blog up on his well-run website and I quickly said yes. It frees me up to do what I like most – invest money, and occasionally write about it. (It also lets readers see my blog without being bombarded by weird Google Adsense ads for Trojans) Furthermore, davianletter.com is becoming a hub of very valuable financial information. If you go on his site, you can see a number of very smart, interesting financial bloggers are also there –I’m honored to be in their company.

This is only the first step for the Dasan blog- there will be many more exciting things to come – I’ll let you know as they come.

Nothing But Tech...

2009-09-10T05:42:00.001-07:00

Initial jobless claims 550k, better than 560k survey, cont claims 6088k, below 6200k survey. Trade deficit popped up to $32B v $27B survey.

TXN: held midquarter update, raised revenue guidance to $2.73B- $2.87B (from 2.5-2.8), eps to 0.37-0.41 from 0.29-0.39. My DRAM/NAND price tracking indicated this, what’s more important is they said demand is strengthening. Nice “tell” for state of semi and technology industry.

Citi is holding a big technology conference this week and there has been a lot of buzz and excitement over technology. Many sell-side firms including MS, C, BAC/Merrill Lynch, and Bernstein have published positive reports on technology.

AAPL: event yesterday was underwhelming other than Steve Jobs return. Feels like the rumors of camera module problems for iPod touch were spot-on. NTDOY and CSCO must be a bit irked that their functionality is being “given away” in iPod products.

PALM: : iTunes 9 again disables Palm Pre sync. (a patch from Palm will surely follow, but this has to be irritating for Palm users) Cowen says Pre was in short supply but now has excess supply in some channels.

LVS: Citi says “sell”

YHOO: BofA/MER raises to “buy.”

Why I Hate Shorting Stocks

2009-09-09T13:00:00.000-07:00

One of the main reasons I felt strongly that the stock market could really rip in 2009 is the fact that everyone was so excited about shorting stocks earlier this year. Seeing the vast number of people bragging about shorting stocks on twitter almost paid for my lost productivity on twitter itself. Since my shop is an equity long/short fund, I’m obligated to put on at least a few shorts. Despite some failures, I’ve held my own shorting stocks, with such past successes as CROX, NOK, and even NFLX.

But I really hate shorting stocks. Here’s why:

1. Statistically, the stock market goes up a lot more often than it goes down, 2008 notwithstanding. By shorting a stock, I’m really swimming upstream.

2. The entire Wall Street manipulation machine is against the shorts. Anytime a the buggy whip manufacturing company stock starts to fall, the CEO gets booked for a conference and touts “amazing trends in the horse-drawn carriage industry.” (I’m not talking about NFLX here, as far as you know)

3. When I’m right about shorts, my position gets smaller. This is a big deal. When my BKS (Barnes & Noble) short started working by dropping 20%, my position size got smaller. This is like compounding in reverse. Your best position gets smaller. When I’m long a stock that works, when it goes up, it becomes a bigger percentage of my fund and contributes even more to performance. I’m “playing with the house’s money.”

4. Good shorts are usually crowded. It’s almost impossible to “find a borrow” on all the good shorts. Even if you can borrow shares to short, borrowing costs are sky-high.

5. Short Squeezes. Any whiff of success, and a heavily shorted stock can pop 10-20% in a day as the market punishes the shorts and hedge funds lose conviction. When I’m long stocks, they can drop, but because of long-term holders they usually don’t plummet as quickly in one day.

6. Crooks are hard to unseat. The CEOs of various bank stocks (such as LEH, MS, etc…) vowed to punish the shorts, and even got their friends in government to publish a no-short list last year. Corrupt management takes years to unseat - consider that Madoff was on a list to be SEC chairman.

7. The furthest the stock can drop is zero. So when I short a $15 stock, the most I can make is $15 per share. If I'm long a $15 stock, it can easily double to $30 and go on to over $100.

"It's Only Rock 'n Roll..."

2009-09-09T04:05:00.001-07:00

AAPL: iPod event today at 1:00 EST. Munster raises estimates of iPhone units for SepQ to 7.0M, up from 5.2M last Q due to checks indicating 3Gs supply improving.

Dollar is crumbling in value… gold over $1000/oz.

PALM: S yesterday effectively cut the price of Pre today to $99 for new customers only, providing a $100 service credit for any new customers porting line to S. Shows they are having a hard time selling the PRE for $199 against $99 iPhone 3G. Then they abruptly pulled the promotion, calling it an error. No wonder S is such a mess.

ALTR: raises guidance on mid-Q update from revenue -1%/-5% to 0%/+3%, slew of upgrades from analysts.

Digital books: Asus plans to build a lower cost, color ebook reader to compete with Sony and AMZN. Great for consumers to have more competition. Question remains: what “store” will they have?

WYNN: Opco upgrades, says Vegas challenged but Macau starting to grow again.

"Buy The Ticket, Take The Ride"

2009-09-08T05:42:00.001-07:00

Stocks still cheap? S&P P/E is 19x trailing 12 months earnings, fairly high. However, 13.5x 2010E EPS, the lowest since 1989. So if you believe the economy can recover in 2010, stocks are still cheap – “trough earnings?”

KFT/Cadbury deal- didn’t happen, but are we getting back to M&A Mondays?

PALM: rumored to cut price to $150. Many stories out there that sales of Pre are collapsing and return rates are as high as 35%. App store still nascent. Pali research says sales “remained stable” over the past week. Only about 4M app downloads.

MGM interview with CEO J. Murren notes: CityCenter opens 12/16/09. MGM will lower prices on condos in Oct. 70% of units are “sold” and 75% of those will close at the new lower prices. Trying to exchange more debt, if that fails will look at other options, but bought 2 years. In May, knew the company was going to survive. Phil Ruffin’s buy of Treasure Island may have “saved MGM.” Murren expects visitation to Vegas to be up 5-10% in 2010, still down this year, but getting better.

Week ahead: big Citi technology stock conference starts Weds. AAPL iPod event Weds. AC and Vegas gaming data out on Thurs or Fri. Comscore search data on Fri.

Junk bond mega-rally: Baa corporate yields are at 6.58%- same as the credit-boom levels of 2004-2007.

IBD says ave life of PC hardware at SMB enterprise is +26% to 50 months, up from 40 months. 56% plan to buy new hardware in next 6 months.

GPS: another one…CS raises to outperform.

Harrahs: plans to issue $720M of senior secured notes due 2017 in a private offering. Shows how much more lenient credit markets are – even this nearly bankrupt company can do a debt deal. Same indenture as the 11.25s2017 issued on 6/10/09.

Penny slots: the new hot thing. In 2000, there were 540 penny slots in all of Nevada, now there are 37,943. Due to technology, and coinless machines. Revenue was $1.8B on penny slots, 25% of total $7.2B slot machine win last year.

Late Friday Musings

2009-09-04T12:53:00.000-07:00

NOK: N900 is first handset that looks close to iPhone in quality. Nice touch screen, great graphics, and slide out keyboard. Would be nice to see an iPhone with a slide-out keyboard – but that’s like a 2 button mouse – just not likely to happen. Also nice camera – with cropping and tagging of photos right in the handset.

ISI says best employment report since last August. Recession is ending, read GDP will rise 4.0% in Q3 and Q4.

IDC is raising PC forecasts, after raising handset forecasts yesterday. Expect global shipments in 2009 to decline 1% instead of prior view of down 3.2%.

ISI research saying “unprecedented synchronized global recovery”

Consumer Discretionary is the most heavily shorted sector. Wonder if those shorts come off when everyone returns to Hedgistan next week?

Vacant Hedgistan

2009-09-04T05:56:00.001-07:00

LVS: Bernstein’s Brashear raises price targets on WYNN and LVS based on Macau gaming revenue trends. Raises 2010 EBITDA estimates for LVS by 8% to $721M, and WYNN to $526M. Also trends in Singapore positive, raises EBITDA estimate for LVS Marina 2010 EBITDA from $409M to $543M. (Shows the value of tracking these numbers – I analyzed these numbers early this week.)

NVLS: says Q3 orders may rise 55% (from previous 50% guidance), reflecting improving demand for semiconductors. (Semi sales have been improving as seen in our monthly tracking numbers issued by SIA)

ANF: Citi cuts to sell from hold, saying SSS will continue to decline. Looks like a buy at the 50 DMA 28.78.

change in NFP (Nonfarm Payrolls) -216k, better than survey -230k, prior revised upward to -276k from -247k??? Unemp rate to 9.7 v 9.5 survey?? Conflicting numbers here.

In Victory, You Deserve It, In Defeat...

2009-09-03T06:32:00.001-07:00

Champagne industry estimates there are more than 1.2 billion spare bottles of champagne sitting in warehouses. Global champagne sales in 09 will be 260M, down from high of 339M in 2007. 405M bottles were produced last year.

AIG: New CEO derides “the crazies in Washington” and says Cuomo “doesn’t deserve to be in government” and often curses at company meetings. Says “I don’t want to feed Goldman Sach’s bonus pool anymore.” “I am very easy when it comes to doing business, but I’m just not cheap. So if you want me, you can have me, but you’ve got to pay. The money is about what I am worth…”(I like this guy)

Initial jobless claims 570k, slightly worse than survey 564k.

ANF:Same store sales worse than expected, down 29% v -24% street estimate. May be an entry point- historically the best time to buy is when they “miss.”

For long-term oil bulls: BP made a “giant” discovery in a deep well in the Gulf of Mexico. New technology allows for better oil finds and deeper drilling.

NFLX: studios are working with GOOG’s youtube to add a rental service. Model will be similar to iTunes, $3.99 per rental, not the NLFX unlimited model. Also Blockbuster got to reduce letters of credit with Viacom by 2/3, helping liquidity.

V: WMT will pay workers in “check cards” using MA debit card. Will save 257k lbs of paper each year.

CSCO/EMC: may “broaden and strengthen alliance” combining EMC storage products with CSCO’s new unified computing blade server/nexus switch combo. Positive for CSCO: 50% JV ownership, results below the line, so no margin pressure.

AMZN: objects to GOOG book-grab attempt.

NOK: first netbook at a very high price: $818. (I think trying to attack this market is a mistake – they should stay with their core market and try to stop the market share bleeding in smartphones instead)

Dollar bulls beware: China buys $50B in IMF notes – to give the quasi-currency legitimacy. This is probably great news for Gold Bugs.

IPO resurgence and M&A is good sign for equity market bulls. This quarter we may start getting the M&A wave that usually accompanies an improving stock market.

CIEN: beat, lost only 5 cents vs 14 cent estimates. Box makers have had huge rally from depths of despair, still skeptical about their acquisition strategy.

LVS: Berstein’s Brashear says $600M pre-IPO financing will be enough to get past the looming Q3 and Q4 debt covenant breaks that would have occurred otherwise. 2010 covenants do tighten, from 6.5x in 2H09 to 6.0x 1H10 and 5.5x in 2H10, but IPO could re-pay $1.4B intra-company loan.

The SEC Admits They Helped Madoff Attract Suckers!

2009-09-02T11:48:00.001-07:00

From Case OIG-509, SEC office of Inspector General’s Report of Investigation:

“Moreover, we found that Madoff proactively informed potential investors that the SEC had examined his operations. When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions or investor doubts that may have arisen while due diligence was being conducted. Thus, the fact the SEC had conducted examinations and investigations and did not detect the fraud, lent credibility to Madoff’s operations and had the effect of encouraging additional individuals and entities to invest with him.” link to full document here: http://www.cbsnews.com/htdocs/pdf/Report_Summary.pdf?tag=contentMain;contentBody

In other words, the SEC admitted today that by bungling investigations, they actually helped Madoff sucker more people in. This outrage is not unusual, it happens everyday in a hundred ways as the SEC blesses the products that Wall Street sells to the unsuspecting public.

Below is my Blog entry from a couple of months ago, which said the same thing. I never imagined the SEC would agree with me, and put it in writing.

From the movie Casablanca:

Captain Renault: “I’m shocked, shocked to find that gambling is going on in here!”

Croupier: “Your winnings, sir”

Captain Renault: “Oh. Thank you very much.”

The SEC was created in 1934, after the great crash of 1929. According to their website, “there was a consensus that for the economy to recover, the public’s faith in the capital markets needed to be restored.” In other words, the public lost a boat-load of money and were tired of being scammed by the people that were manipulating the markets. So the government had a brilliant solution – put a fox in charge of the hen house – and they did, with Joseph Kennedy, bootlegger and inside trading king, as the first Chairman of the SEC.

The SEC – there to protect investors, right? Well, let’s take a closer look at that idea. The Securities and Exchange Commission is the Federal Agency responsible to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” according to their website. The very existence of the SEC lulls investors into a false sense of security, fooling them with the false notion that markets are fair, orderly and efficient.

This very mission statement is preposterous. Are the markets really fair? Do you think individual investors have a fair shot against the trading desks at Goldman Sachs which know who owns what and at what price? Orderly markets? The crash of 1987, in which the Dow dropped 22% in one day would make that idea seem like a fairy tale. Efficient? Nice academic principle, but statisticians on the stock market would tell you that the conditions in the markets that occurred in 1998 that imploded Long Term Capital Management would have occurred only once in a billion years. Some of the volatility of the S&P, according to Wall Street models, would happen only if the history of the world was re-run a billion times, yet we’ve had about 5 of these “black swans” in the last 20 years.

A kind-hearted soul would say the SEC is understaffed, charged with a nearly impossible mission. They do the best they can, but human nature can’t be legislated away. Their well-intentioned public servant lawyers and financial staff are no match for the sophisticated, highly-paid criminal minds on Wall Street.

I’m tempted to take a more cynical view. The SEC, due to its very existence, ludicrous mission, and gross incompetence, is worse than not having one at all. The SEC, like the ratings agencies, gives investors a false sense of security that they are being “protected.” Need some examples?

The most galling example of SEC incompetence is the Madoff case. Bernard Madoff ran a multi-billion dollar Ponzi scheme under the noses of the SEC for decades. The SEC never did catch Madoff. His sons turned him into the SEC. (Some have speculated the whole manner he was turned in by his sons was part of a ruse to protect the rest of his family). It wasn’t as if the SEC didn’t have warnings – more than once people sent them letters pointing out the fact that the Madoff scam was a Ponzi scheme.

The SEC failed in dozens of cases to fulfill their mission. I’ll share some examples without using names, to protect the guilty, and myself from their lawyers. The world’s biggest hedge fund hired a former Microsoft employee as analyst, who got inside information from a friend at Microsoft. The fund quickly earned large profits by buying options. Then when investigated, it came out that they paid off the analyst more than a million dollars for his silence after he left the firm. The founder of the firm eventually closed the fund, but the SEC has yet to file charges. The original case was closed due to strong-arm tactics from a man who currently runs one of the largest firms on Wall Street, which owes its continued existence to government largesse of the TARP program. As they say, you can’t make this stuff up.

The SEC is the lapdog of the major brokerage firms. When Lehman Brothers and Morgan Stanley were on the ropes during the credit crunch due to their ill-advised “bet the firm” foray into mortgages, the executives blamed the evil short sellers. They promised to cause them pain. One highly vocal short-seller of Lehman Brothers stock, hedge fund manager David Einhorn, was investigated and hassled by the SEC. Of course, he ultimately proved to be right about Lehman, as they filed the largest bankruptcy in history. David Einhorn also chronicles his travails with the SEC in his book “fooling some of the people.” He uncovers fraud at a company, makes it public, shorts it, and for his efforts got hassled by the SEC.

The list of SEC failures is long, the successes few. Wait, I guess they did get Martha Stewart, although she spent less actual time in the slammer than Paris Hilton did for parking tickets.

Investors cannot rely on the SEC to protect them. We cannot even count on them to “keep things fair.” The stock market is not a fair game, anymore than Caesars Palace is. But like the game of Black Jack, or Poker, a lot of money can be made despite the tough odds. I will get into specifically how next chapter. For now, let me say the best way to think about the SEC’s role in the markets is to assume they will do nothing to protect you. Every investment must be analyzed using your own rational thought process, with no expectations of “bail outs” or proper policing by the SEC.

American "Mexican Standoff"

2009-09-02T06:14:00.001-07:00

BAC, WFC want to pay off TARP before bonus season to avoid government limits on big paychecks to slow down the talent exodus. Yet they will be financially weakened if they do so. No one wants taxpayer money fueling these huge bonuses, but who wants zombie banks instead?

ADP Jobs – US companies cut 298k jobs, worse than 250k expected.

GM: despite govt “clunkers” giveaway, sales still off 20% yoy. F much better, up 17%.

VMW: says 970 of the top 1000 companies are using their software. Claim to be years ahead of MSFT.

CME volume: Aug vol down 7% yoy, up 5% from july09, best yoy comp so far in 2009. (This is a key metric for CME as pricing is usually firm)

LVS: secured commitments for $600M for exchangeable bonds.

MGM: trivia: Sanford, Antiguan ponzi swindler, owes Bellagio $258k. MGM Chairman Murren said worst of recession is over, and Bellagio was “sold out again last weekend.”

GPS: as expected, after the stock doubled, sell-side is starting to upgrade the stock. Raymond James upgrades, citing international and online opportunities, and increasing profitability at US stores.

LVS/WYNN: Macau gaming numbers soared in August, as rumored. Up 20% from a year ago. However, these numbers are not as great as they initially seem, as last August the numbers were muted by the Beijing Olympics. Either way, 20% growth in this recession is nothing to sneeze at! Sept numbers will be interesting. June numbers were up only 1.9%. (Update Sep charts on 9/2)

How To Blow Money

2009-08-31T05:46:00.000-07:00

How to blow money: Harrahs LBO recap: TPG bought company for $30B, took debt from 5.0x EBITDA to 12x at year end 2008. Interest coverage ratio is only 1.1x EBITDA. Take out CAPEX of $800M and company actually burned cash.

Distressed: flavor of the month – Cerberus will raise money for a new distressed fund. Marty Whitman’s Third Ave fund will as well.

ADBE: will acquire GoodBarry (what is this?)

SIA says global semi sales 18.16B in July, up 5.4% sequentially, down 18% yoy, 5^th consecutive month of improvement.

VMW v MSFT: WSJ article (sorry - I mean NYTIMES) says VMW gaining more customers.

AAPL: Munster at Piper says PRC will sell 10% of the 32.5M iPhones he expects them to sell through Sep 2010. Deal is NOT exclusive with CHU. In France, with multi-carrier model, iphone has 40% share vs 15% elsewhere.

AIG: press and talking heads really hate it, and the stock move bothers them even more- as seen in many articles this weekend. Andrew Bary hit it in the weekend Barrons.

AIG: Lessons From a Lazy Investor

2009-08-28T12:45:00.000-07:00

I’m writing a quick story today to help others not be the fool I am when it comes to investing. Hopefully by writing this down, I’ll also learn from my own stupidity.

Some investors really hate taking losses. For most people, losing money on a stock that goes wrong hurts them much more than missing an opportunity to make money on a stock. I am not one of those people. It hurts me much more to see a stock I believed in and didn’t buy go up like crazy. Even worse is when I buy a stock that goes up and I sell too early. I recently made a mistake that was even worse yet – I made money on a stock, sold it out at almost the right time, but didn’t buy it back when it fell after I sold. Let me tell you the gory details in a minute.

Some people will tell you “no one ever went broke taking a profit.” This is one of the most inane statements I’ve ever heard. The cost of selling out too early and not making money on your winning trades is huge. It’s like never winning a big pot with your best hands in poker – it feels fine until you look around and realize that you have the smallest chip stack at the table.

Early this year, I was wracking my brain, trying to do work on AIG. The stock was trading for under a dollar, and yet it still was worth over a billion dollars. There was intense hatred of these guys since the government was lending them billions and they even had to pay a bunch of it to Goldman Sachs. Most of the problems were all caused by the Financial Products division that was selling lottery tickets hoping no one would hit the lottery. The business was great as long as subprime didn’t blow up…until it did.

Anyway, after looking carefully at the divisions within AIG, and assigning them conservative multiples, I figured if the Financial Products division problem could go away, AIG stock would be worth about $1.40 per share. I took a flyer, and bought a few lotto tickets myself – I bought some AIG.

Shortly thereafter, all hell broke loose in the media when it was discovered that the very Financial Products guys that blew up the company were going to get hundreds of millions in bonuses. What happened? The stock actually went up! It rallied to around $2.00 a share, and I was in hog heaven. I sold the stock (and as always, had some champagne).

Why did I sell at around $1.80? First, it had fallen back from $2.00 to $1.80 and I was afraid it would keep dropping. Second, in my model, it was only worth $1.40. Third, I had just read Seth Klarman’s comment that he usually sold early rather than round-tripping stocks. I had more than doubled my money in a few weeks. Finally, they were going to do a reverse 20-1 split and I thought it would be disastrous like all other reverse splits.

Sure enough, after the reverse split, the stock collapsed from $30 to around $12 before stabilizing. Hedge funds were shorting the thing all the way down and like always, the stock overcompensated.

I was so proud of myself that I pulled a muscle from patting myself on the back so vigorously.

And then I…well...I totally forgot about AIG.

How lazy! If I would have used my brain, I would have done the simple math of dividing $12 by 20, and I could have gotten about $0.63, which was less than half of the $1.40 I thought the company was worth. I’m not saying my number is exactly right – it certainly isn’t. But if I thought it was worth $1.40 why in the hell didn’t I buy it back when it was $0.63?

The stock proceeded to run from $12 to $50 as I write this today. I missed the single fastest stock opportunity of the year due to laziness. Don’t do what I do, or you’ll be in the poorhouse.

Meanwhile, everyone still hates AIG, yet I haven’t seen anyone do a bit of coherent math to figure out what the businesses are really worth. In my optimistic model, the stock is worth $5.88 a share pre-split, which is $117.60 in today’s shares. So even though it’s already $50, this thing could easily double.

Just don’t be a dummy like me.

What If a Trickle Becomes a Flood?

2009-08-28T06:15:00.001-07:00

INTC raises revenue guidance to $9.0B, up from $8.5B- first one we’ve seen like this from a major technology company.

MRVL, ALTR, ARUN doing well. Time to branch out from triple-A tech into smaller fast growers? Next theme may be M&A tech.

TRMP: court rules he can’t slam his plan through, which would wipe out $1.25B worth of bondholders. Examiner also ended his right to reorganize without competing plans from bondholders.

Trump plan: Trump and Beal Bank get entire company by investing $100M and Beal extends maturity of existing $486M loan. Bondholders get nothing.

Bondholders plan: Bondholders get 95% of company, raise $175M in new stock offering and sell Marina for $75M.

DELL: pretty solid beat quarter. No guidance other than better 2H that 1H. Bernstein says wait to buy later on pullback – company is levered to recovery but pricey here.

AAPL: it’s official- CHU chairman Chang Xiaobing said will sell iPhone 3G/S in Q409. PRC market size: 692M wireless subs, CHL has 497M, CHU #2 with 141M. (in PRC, very easy to “switch” because you only buy SIMM cards anyway, no contracts) CHU WILL subsidize the handsets, no details yet.

AAPL: wow – app store is bringing in $200M/month, or $2.4B/ year.

MGM: debt tender offer to swap $782M 8.5% due 2010 fro $500M in 10% due 2016.

Green Shoots Are Saplings Now...

2009-08-27T06:07:00.000-07:00

570k init jobless claims, a bit worse than 565k survey, but still below 600k.

GDP only down 1.0%, much better than 1.5% decline expected. Don’t hear the term green shoots anymore – there is a mountain of data indicating the economy is getting better.

AAPL: WSJ says CHU to get iPhone soon. Old story, must be in the stock price now. I can no longer call this a “catalyst.” New iPods at 9/9/9 music event? Beatles music on iTunes?

AMT redeems $162M of 3% converts due 2012.

EQIX: opens $95M LA data center.

NFLX: kiosks could take 30% of DVD rental market in 2010 according to NPD. They have 19% share now, NFLX has 36%.

MSFT: cuts top Xbox price, following Sony. May pressure NTDOY to cut Wii price.

SPSN: group holding more than half of the secured floating rate notes filed with judge for permission to sue Samsung, who went to the ITC over the patents involved in the case.

Is This The Final Chapter For The Kindle?

2009-08-26T10:10:00.000-07:00

My thoughts on Sony reader and implications for AMZN:

low-end sony readers don’t have wireless. I think this is a mistake. I think a core feature of every mobile device is wireless.
high-end product is $100 more expensive- the main complaint about the Kindle so far is the high price.
Touch screen sounds good, but isn’t that important for the e-ink screen – likely to smudge the reading surface and when reading long form, rarely need to push any button other than page forward and back
iTablet, if Apple is smart, will ally itself with AMZN’s library. A deal together would be a blockbuster. I’d still prefer the Kindle for long-form reading because the eink screen is much easier on the eyes than a back-lit LCD screen
Content, content, content. What made the iPod really take off was when millions of songs were available on the iTunes story. This is why I’m tracking ebooks titles so closely on Amazon. Bezos has said the goal is “every book, every language, available anywhere.” He also said they are attacking the problem starting with the books people want most, and “we know which books they are.” Barnes & Noble and Sony claims of having more titles is misleading, because most of these titles are very old titles that are already available, free, to anyone with a Kindle that wants them.
Amazon store: I believe the customer reviewing ecosystem and algorithim is much more valuable than they are given credit for. Many readers use amateur reviews to influence their buying decisions. I guess Sony could replicate this, but it will take quite a bit of time.
Sony’s aggressive move into ebooks is great for consumers. The best thing for all readers is the existence of a determined competitor to Amazon, that will pressure prices downward for both books and devices. Ultimately, the publishers will win if they see the error of their ways and freely adopt the ebook format.

"Give me a one-armed economist!"

2009-08-26T05:55:00.000-07:00

Durable goods 4.9% (clunkers boost) versus 3.0% survey. (I wonder why these economists didn’t factor in the clunkers?) Other durable goods were +0.8% v. +0.9% survey. Common sense would tell you consumers would delay buying a washing machine if they were buying a car the same month. If market sells off on this data, it’s silly.

BGP: same store sales off 18% yoy. Moving away from DVD/CDs and into kid’s games and toys.

AMZN: Sony eReader announced. Key differentiators: library access, ePub open format, touch screen. No working model at press conference – that’s weird.

NFLX: coinstar’s Redbox got deal with another studio.

GS says Hedge Funds net long exposure to US markets 31%, highest since June 08 before LEH collapse. Ave fund up 11% year to date.

LVS: BMO raises price target to $18 from $15 based on valuation multiple in DCF. (flimsy reason if you ask me). Also raises WYNN price target to $68 from $57 same reason. General thesis is Asia operations are more valuable than previously thought

ANF: Why I Love It Even Though Everyone Else Hates It

2009-08-25T11:54:00.000-07:00

(And the stock keeps going up anyway)

In the wonderfully photographed Gilly Hicks Film (link here: http://www.gillyhicks.com/gh/index.html#/DIVISION/FILM/ Not safe for all workplaces) a beautiful 20 year-old blonde in her underwear enjoys a beautiful vacant beach with an equally stunning naked man. Then they ride around on a motorcycle sans helmet and later frolic in the surf, etc., etc., you get the idea. Of course there’s no helmets on – that would remind of us the “real world” that is dangerous and scary. How such a beautiful beach is vacant is hard to understand. But just suspend disbelief, enjoy the fantasy for a moment.

This scene on a very visceral level, explains perfectly what the Abercrombie brand is all about. Who can watch this video without wanting to be in the scene somehow? Straight or gay, young or old, who would not enjoy this idyllic existence?

What are they selling? Sex? No – you’re getting them confused with the trashy American Apparel. What they are selling is a sexy, strong, youthful version of the American Dream. Not the McMansion in the suburbs American Dream. The REAL American dream – or at least what foreigners and tweens think it is. They are selling the dream of being young, popular, sexy, cool and carefree.

For many non-Americans, this clip represents the American dream. They’re smart enough to know its bullshit, but they still have hope. This “city on a hill” is loaded with sexy healthy clean cut teens. For “tweens” growing up in the U.S., they look at Abercrombie and can only dream that this is what High School and college will be like. They dream to be the cool kid, the popular girl, the guy with the washboard abs that gets the girl.

How does this square up with $100 torn jeans and $50 t-shirts? The dream is aspirational. It’s not achievable by all. Sad, but true. Not everyone can be popular in high school. Some people are just geeks – and not successful rich Google geeks, either. Have you ever seen a fat person wearing an A&F t-shirt? No – you haven’t and you won’t because they don’t sell extra-large sizes. One prominent retail analyst recently assailed Abercrombie, claiming girls were buying men’s T-shirts because they couldn’t fit into the small girls’ sizes. You can’t even work at Abercrombie unless you meet their “look policy.”

Wait a minute, isn’t Aeropostale the “poor person’s Abercrombie?” Aeropostale’s same store sales have been going through the roof. Aren’t we all trading down due to the lousy economy? Sure, it’s OK to wear Aeropostale as a kid, but it’s still not as cool as Abercrombie. Many smart kids, squeezed by the economy, are settling for one Abercrombie T instead of 6 Aeropostale Ts.

When I was a kid, Ocean Pacific T-shirts were cool. (This was when you could still see pterodactyls flying around). My well-intended father, who worked at Montgomery Ward at the time, got me some generic surf T-shirts and never did understand why it wasn’t the same thing. How could a T-shirt be worth $15 in the eighties? Abercrombie may be ridiculously priced, but wearing Aeropostale is like carrying a Canal Street “Guccy” or "Plada" bag.

But aren’t people “trading down” permanently? We Americans may be raising our savings rate, but we don’t like it. Not one bit. We may all be drinking “two buck Chuck” for now but you can be sure we’ll all be gorging ourselves on Bordeaux again as soon as we can.

In London, the Abercrombie store is doing three times as much revenue per square foot as the NYC 5^th avenue flagship. The only way I’d bet against “aspiration” is if I thought we were going to go into a decade-long depression. If US kids give up on being cool, there are British, Japanese and Italian kids willing to aspire – and all of these are where new Abercrombie locations are going up in 2009. Yes, Abercrombie is “malled out” in the U.S. But I’d sure like to be long Abercrombie the day they open a store on Huaihai road in Shanghai.

But wait, people tell me, the Ruehl stores were a disaster. Yes, they were, and the company is closing them down. Why did they fail? The Ruehl target customer image was “the young career people in their mid-20s, perhaps living in Greenwich Village.” Even a fool like me could have told you that was destined to fail. First, anyone in their mid-20s, living in NYC is miserable and broke. That’s not the American dream – that’s called reality. In your mid-20s, you have to buy your own clothes and pay rent and go to an awful place every day called work. What I like about the Ruehl disaster is management’s willingness to cut their losses quickly. Jettisoning this failed concept will save them millions. Many other companies are not this agile.

Management admits they “missed some fashion trends this spring” but they remain steadfast in their commitment to protecting the brand. They will open 4 of their highly profitable flagship stores in 2009. Most of their poorest-performing mall stores have leases coming up in the next few months. They can renegotiate those leases or close those stores altogether. Management is clear and right when they say: “the biggest long-term trend in the world is flight to quality…there will be aspiration.” In the meantime, they have altered their sourcing for their fall line-up to cut costs so they can offer merchandise that is a better value. This way, they can continue to avoid the massive bargain-bin sales their competition has succumbed to.

OK, enough touchy-feely stuff. How about some real numbers? Same store sales have been disastrous lately for ANF. Last month sales were off 28%. There are no immediate signs that things are going to get better soon. But by next quarter, they will start having some very easy comps. It’s just simple math. The street thinks they’ll earn 0.91 per share in FY2010, and 1.59 in FY2011. These numbers are too low. They earned 5.11 in their peak year in 2007 and 3.37 in FY2009.

Normalized earnings for this company as they rationalize mall stores and add international flagships is at least 3.50 per share. If this is right, you can buy the company now for only 10 times normalized earnings. The company also has $320 million net cash, almost $4 per share. The best time to be long retailers is as the street raises their estimates. Once it’s clear the economy is getting better the street will fall for ANF stock like a tween girl falls for the topless male Abercrombie model at the Fifth avenue store.

Now leave me alone so I can go watch that Gilly Hicks film again…

Revenue by Segment	Q109	Q408	Q308	Q208	Q108	Q408	Q308	yoy%
Abercrombie & Fitch	264.70	404.40	385.79	383.59	357.72	522.40	419.27	-26.0%
Hollister	262.40	449.60	383.63	350.77	330.17	530.90	414.49	-20.5%
abercrombie - Tween Apparel	69.10	120.10	109.51	94.75	96.18	159.80	127.57	-28.2%
RUEHL	10.40	17.10	13.53	12.50	13.04	15.60	12.60	-20.2%
Gilly Hicks	5.50	7.00	3.88	4.19	3.07	0.01	0.01	79.2%
Total Revenue	612.10	998.20	896.34	845.80	800.18	1,228.71	973.94	-23.5%

Same Store Sales %
Abercrombie & Fitch	-26.0%	-23.0%	-8.0%	3.0%	3.0%		3.0%
Hollister	-32.0%	-25.0%	-18.0%	-9.0%	-8.0%		-1.0%
abercrombie - Tween Apparel	-33.0%	-30.0%	-20.0%	-11.0%	-7.0%		3.0%
RUEHL	-34.0%	-25.0%	-25.0%	-22.0%	-17.0%		-7.0%
Number of Stores
Hollister	507	515	499	482	460	450	434	10.2%
Abercrombie & Fitch	354	356	357	357	357	359	362	-0.8%
abercrombie - Tween Apparel	212	212	210	209	202	201	198	5.0%
RUEHL	29	28	27	25	23	22	20	26.1%
Gilly Hicks	16	14	13	8	5	3	0	220.0%
Total Locations	1,118	1,125	1,106	1,081	1,047	1,035	1,014	6.8%

Gross Margin	63.30%	64.40%				67.20%

Street estimates:	2005	2006	2007	2008	2009	2010
Q1 Apr	0.3	0.45	0.62	0.65	0.69	-0.31
Q2 Jul	0.44	0.63	0.72	0.88	0.88	-0.12
Q3 Oct	0.69	0.88	1.11	1.29	0.72	0.23
Q4 Jan	1.15	1.8	2.14	2.36	1.1	0.97

Year	2.55	3.75	4.59	5.16	3.37	0.9
Cal Yr	3.65	4.52	5.11	3.52	1.11	1.53

Ratio	P/E	P/B	P/S	P/CF	EV/EBITDA	DVD Yld
Actual	5.3	0.85	0.44	3.16	4.68	3.92
Estimate	36.76	1.58	0.97	12.38	7.54	2.14

Better the Evil We Know...

2009-08-25T06:13:00.001-07:00

Bernanke backed by Obama today.

CaseShiller -15.40% v 16.4% survey for 20 city composite. Overall -14.92% v -19.75% survey, pretty big swing.

CHIC: Fast fashion apparel retailer Charlotte Russe going private, stock jumps 27%. Valuations? Other retailers? (if only Forever 21 was public)

AAPL: Steve Jobs working on a tablet according to the WSJ. Snow Leopard ships Friday (may not have much financial impact – priced cheap at $29)

Now “W or V” recovery is the latest meme – “green shoots” is dead. Nice level of skepticism here, which could propel the market further as it climbs the wall of worry.

ADBE: Piper, long-time bull (and correct so far) says checks with half of US license distributors suggest Q3 upside.

GRMN: expects Nuvifone carrier within a month. (still wonder about subsidy, price to subs, which carrier, competition with iPhone)

NFLX: IBD says chart may be basing, but is technically weak.

TRMP: The Donald working hard with Beal Bank to make bondholders shoot craps - $1.25B of second lien bonds would get wiped out under his chap 11 exit plan.

V: JEF initiates with buy. Likes debit business, says $80 target based on 23.5x $3.41. (I love the false precision – but anyway agree with thesis)

GS: regulators will “probe” them over trading tips

NOK: Sears of Handsets Wants To Make PCs Now

2009-08-24T06:04:00.000-07:00

NOK: still floundering – if low-end handsets aren’t competitive enough, they want to challenge DELL with a 10” laptop.

GS gets grilled in WSJ over improper sales techniques: telling “best” clients in advance when they will upgrade/downgrade stocks. (Practice is actually quite widespread on wall street – another reason independent research is so valuable).

Dr. Doom Roubini says risk of double-dip recession. (as a contrarian, I’m happy to hear this)

LVS: South China Morning Post is reporting that Guangdong province may relax Macau visa restrictions beginning Sep 1^st. Visits will be allowed monthly, up from once every two months. Macau gaming on track in first half of August to be up 20% year over year – but against easy comps due to Olympics last summer so not clear.

Snap Judgement: A Book Review

2009-08-21T05:42:00.000-07:00

I recently finished reading "Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money" by David Adler.

Here's a review:

David Adler has written a good book, which summarizes behavioral finance basics with a summary of the credit crisis. He describes a few basic psychological biases and writes very brief summaries of relevant research in laymen's terms. This book is not an in-depth treatment of the subject, but rather a high-level summary written at a very basic level. I think he promises a bit much by claiming to share with the reader techniques for profiting from behavioral finance "anomalies." On balance, I would recommend this book for those wanting an introduction to behavioral science in practice.

The simple thesis of the entire book is that we humans have two types of decision-making systems: Type 1, which is pure intuition, and Type 2, which is rational and analytical. Type 1 intuition worked well for us for millions of years, telling us when to run away from predators, but is woefully inadequate for complex, mathematical decisions like investing. Type 2, the more rational thought process works better (but certainly not that well either) for investment decisions.

The author expands on this point in several ways:

An oil trader "explains why so much of investing is nonintuitive: The natural instinct is to follow others. As we were evolving on the plains of Africa, if everyone in the tribe started running, you had better start running. But in investing, if you act after everyone has started running, you are catching the late end run of an asset and your timing will be atrocious."

The author explains how mutual fund managers rarely "persist" in outperforming the markets, but he offers no practical solution. He mentions my favorite example, of Bill Miller: "Miller had a 15-year winning streak, only to be followed by a 10-year losing streak...This culminated in his disastrous 2008 presentation at an investment conference in New York...Miller recommended financial stocks as a great buy. He singled out Bear Stearns, in which he was one of the biggest investors, having committed $200 million of his fund's money. An audience member raised his hand and asked Miller a question: Was he aware that Bear Stearns was in crisis, in fact was cratering that very morning? Miller seemed shaken. He quickly left the conference. His $200 million dollar investment was soon worth only $15 million dollars."

On "The Risks of Risk Tolerance Questionnaires: A questionnaire completed in an office using a pen or pencil while you are calm misses out on how you would react under stress."

From "Deconstructing Stock Analysts: The Enron bankruptcy is a good example of the intellectual bankruptcy of some stock analysts: only 6 weeks before the company went under, 15 of the 17 analysts covering the company rate the stock a "buy" or "strong buy."

On Value Investing's Behavioral Origins: "the reason value investing works has everything to do with human behavior and our faulty financial intuition."

He cites the famous "Linda is a bank teller" example in which most people answer questions totally wrong by using information that anchors them incorrectly instead of using obvious simple statistical math.

He points out that even experts that should be better at using Type 2 rational thinking make the same mistakes, just on a bigger scale: "Following the crashes in the real-estate and credit-market bubbles, savvy investors were on the lookout for new bubbles everywhere, under every rock and behind every tree...One recurring theme in this research (...) is that experts are prone to these same sorts of intuitive errors in judgment as everyone else."

The author cites research in which most people pick the less-risky gamble than the one that has 300 times better expected value. One interesting piece of research the author cites points out that instead of differences in risk-aversion, these faulty decisions can be attributed to differences in IQ. Quite simply, those with higher IQs are more likely to take the gamble with the higher expected payout.

However, most gamblers overestimate the probability of long-shots winning. For example, horses that pay 100 to 1 are actually usually 200 to 1 odds against. The same thing is probably happening in the stock market, as can be seen easily in the penny stock markets. Many penny stocks that are truly worthless trade for a few cents, which is certainly much richer than their odds of payoff would indicate. However, the author admits that this inefficiency is not exploitable in practice.

The author explains how humans have false confidence, especially when we know some detail about the investment (or horses on the track) even though these details may have nothing to do with the performance. Just the fact that we have this information gives a sense of confidence. I have personally seen this error often in the Hedge Fund industry, in which analysts often know minute details about the stocks they own, but overlook obvious negative macro trends.

The vast majority of this book is excellent, but I believe Adler misses the mark in a couple of places. First, when discussing credit cards, he lukewarmly advocates changing credit cards every year to get free miles and better deals. I think he is missing the impact this would have on your credit rating with all of these inquiries.

He makes a much bigger mistake by putting Gary Loveman of Harrahs up on a pedestal. He writes admiringly of the man's genius in figuring out how to use mass mail and the fabled Total Rewards program to target customers effectively. I would point out that Harrahs' is nearly bankrupt, having done several tender offers to reduce its massive debt load. While the author extols Loveman's genius, thanks to his poor management Harrahs itself is radically underperforming its peers. Loveman could have done some analytical work on the effects of excess leverage. The author should have also included Loveman in his chapter on "CEO Hubris."

On "CEO Hubris", the author rightly points out the common Wall Street knowledge that mergers are awful for investors (but usually great for CEOs). He writes: "Mergers are so predictably damaging to acquiring firms' stock prices that you can make money betting against them." True. I would like to see some hard data here. This is typical of this book; the author makes outstanding points, leaving out the hard data that would prove them. He is probably watering his book down for a mass audience. This book could have been even better with a few charts, graphs, and appendices detailing the data from studies.

Some of his quotes are quite enjoyable, though, and add color to what could have been a dry subject. I especially liked the quote about Dick Fuld, the CEO who helped to destroy Lehman Brothers: "It was vintage Dick. Dick was being a dick."

The author changes gears for the last quarter of the book and details the credit crisis and Wall Street meltdown of 2008. He ties in the behavioral science theories he writes about in the first part of the book. One quote I like that has been widely reported but bears repeating is what Charles Prince, the CEO who helped destroy Citigroup said in 2007: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

In my opinion, the author offers no concrete solutions, other than perhaps the awareness of a problem is the first step toward solving the problem.

A final quote I like: "The human imagination, shaped for thousands of years by a small, simple, and static world, today cannot grasp, is not match for, the reality that surrounds it."

Link to book at Amazon: http://bit.ly/2lIb0g

Macau Drama Unfolds...

2009-08-20T05:47:00.000-07:00

LVS: files 8k for possible Hong Kong stock listing. No timing set. This is a big step toward dealing with liquidity problems once and for all. Stanley Ho getting better according to his third wife (I’m skeptical – he’s 87 and had a stroke and/or brain surgery.)

Init jobless claims 576k v 550k survey – yikes. But this data will bounce around a bit and it won’t be a straight line up.

V: C will charge annual fees on some credit cards. Law of unintended consequences: they are trying to recoup income they will lose under laws intending to “help” the consumer. Signalling to competition – will the fees stick?

PERY: name from the past – up 17% yesterday. Need to re-look.

NFLX: Starz CEO departing. He’s the one that made the deal with NFLX to stream Starz content, which is the only premium content available on NFLX streaming platform.

JDSU: solid Q, management still wants to do M&A (please, no). No catalysts – fairly valued, probably range bound for now.

GOOG: pc search only growing single digits now, mobile search growing 50+%. Street expects smartphones to be 25% of search by 2011.

EXPE: Citi says corporate travel has evaporated, leisure has held up, so EXPE has a lot of inventory to offer. Elimination of booking fees has been a “home run” for them. Will continue to take shares from agencies and direct web sites.

Summer Squalls?

2009-08-19T05:51:00.000-07:00

Redbox wins in a round against Universal over windowing. Case still pending. Lions Gate and others did deals already. Antitrust lawsuit will proceed.

DELL: shows prototype smartphone for China.

Govt efficiency at work: after massive layoffs, due to cash for clunkers, GM has added overtime shifts to keep up with demand. Blip or economy improving?

Record in 2007: top .01% of US taxpayers earned 6.04% of the nation’s income. In 1928, before the great depression it was 5.04. Top 10% of earners have gotten 65% of total real income growth since 2002. (Modern tech/knowledge economy or crony capitalism?)

“Public option not needed” trial balloon was full of lead for democrats – pushing back today.

AAPL: rogers in Canada runs out of 3Gs. The high-end 32GB 3Gs is number one phone in Japan, in stark contrast to reports earlier this year that Japanese hate the iPhone.

Bernstein says they can get to 50M iPhones in FY2011! (20M in FY09) simply by maintaining share and broadening distribution. How? Market growing 27%. Add carriers in existing countries = 19M incremental units. Says if add VZ in US in 2011, could add 11M+ phones. Software differentiation and platform lock-in.

The crowded inflation trade: wholesale prices dropped 0.8% this month.

Sony will delay OLED screen tvs. Too expensive: $2000 for 11” screen. Yields too low – 60%. LCD technology improving.

QCOM: incremental data point from Digitimes in Taiwan –implies conservative guidance at last call.

RST: a good short? Seems like so-so, expensive product, with high marketing costs and limited demand. WSJ runs a "fluff piece" today - they are undoubtedly a big advertiser with NewsCorp so take it with a grain of salt. More work to do here.

Sony cut PS3 price by $100, as expected, to spur slumping console sales.

V: JPM credit card default rate fell to 7.92 from 8.04, second month in a row. Will offer a “Sapphire” card (Visa or Mastercard branded) to compete with AXP. (AXP seems like a short, need to do more work)

HPQ guidance a bit light. Printer Ink down revenue down 13.2% year over year. (my read: not that bad considering everything). Notebooks pricing getting crushed: units were up 19% but revenue down 10%. Yikes. Company emphasizes that printing volumes are good, says inventory dropping.

AAPL: wow – iTunes has 25% market share of US music sales. WMT number 2 at 14%. iTunes only joined the top ten 4 years ago. CDs now 65% of total music revenue. WMT #1 in that market, 20% share, AMZN number 4 at 10%.

"Panic" Michael Lewis's Lastest

2009-08-18T05:07:00.000-07:00

First, what this book isn’t, then what it is. Panic is NOT a “Michael Lewis Book.” In other words, it’s not “Liars Poker” or “MoneyBall” the classics written entirely by him, which will disappoint some readers.

This book is a series of articles that form a coherent whole, discussing the four “once in a millennium” financial meltdowns we had in the last 25 years. Michael Lewis weaves them together by contributing a chapter to each of the four parts. His portions are of course the most readable and interesting (although Dave Barry gives him a run for his money writing about how to get rich in real estate). For readers that lived through these times, this book is a nice recap to jog memories for brains that may fade with time and for those that are new to the markets and think the crash of 2008 in unusual, this may be an eye-opener.

Michael Lewis’s message is “financial panics have become almost commonplace; events that are to meant to occur once in a millennium now seem to occur every few years. Could this be because the financial system was built on an idea that badly underestimates the risk of catastrophes – and so conspires with human nature to create them?” After studying all four of these major panics, he also concludes that the press was at least partly complicit in the inflation of these bubbles.

Lewis starts with the crash of 87, writing “Black Monday was the first of a breed: a crash the suggested disastrous economic and social consequences but in the end had no serious effects at all.” He writes: “the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics.” It is truly dumbfounding how a theory that seemed to have been proved invalid on one destructive day persisted anyway, in a different form. He writes: “This is interesting: The very theory underlying all insurance against financial panic falls apart in the face of an actual panic. A few smart traders may have abandoned the theory, but the market itself hasn’t.” After this introduction, Lewis and others take us on a ride through not one panic, but four gnarly collapses.

The Crash of 87. Lewis marvels at how wrong observers were in the aftermath of the crash of 1987, which wiped out more than 20% of stock market value in one day: “New York Times wrote that these yuppies are unprepared and unconditioned for the hard times to come. But as it turned out, those yuppies were so well prepared that they survived to create many more crashes.”

Before the crash, the atmosphere in the markets was akin to that of the dot-com bubble – some of the quotes are priceless. An LA screenwriter and amateur stock investor says: “It’s so simple, it’s insane. If you do this carefully, it’s like picking money off trees.” But no party lasts forever, and “with the stock market crash the market in junk bonds, inextricably linked to the asset values of corporations, temporarily ceased to function altogether.” Sound familiar? One of the reasons people prefer Michael Lewis’s style of writing to typical Wall Street journalists is this line: “It was striking how little control we had of events, particularly in view of how assiduously we cultivated the appearance of being in charge by smoking big cigars and saying f—k all the time.”

The Asian/Russian/Long-Term Capital Crash. Wall Street always finds a new confidence game. Lewis starts this section by writing: “This section, describes not the fall, but the rise of the ever more highly mobile financier, running ever more highly mobile money…obviously the poor guy in Thailand who lost his company doesn’t think of his crisis as a Wall Street subplot. But on Wall Street, that’s what it was. Capital was fast. It was about to become even faster.” This panic occurred during the rise of widespread use of computers on Wall Street. In this panic, “traders are glued to their screens whenever stories flash across about Clinton’s sex life or Yeltsin’s drinking habits. They have no interest in what Bill Clinton or Yeltsin say about the Russian Ruble – they prefer to hear from George Soros.”

The L.T.C.M debacle is neatly summed up: “the best minds were destroyed by the oldest and most famously addictive drug in finance, leverage.” Also mentioned is the fact that Goldman Sachs saw the LTCM “book” and may have traded against them – more fodder for those that question the practices of Goldman.

The best nugget on the LTCM was John Merriweather, quoting one of his analysts: “I like the way Victor put it: The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen.”

The seeds of the current subprime debacle appear to be sown in 1998. Lewis writes: “In October 1987, the markets took power from the people who traded with their intuition and bestowed it upon people who trade with their formulas. In August 1998, the markets took power away from people with formulas and bestowed it upon the large Wall Street firms that oversee the marketplace.” This sounds prescient today.

The dot-com collapse. Lewis tells the tale of the dot-com bubble as he describes how Jim Clark couldn’t even get a meeting with Salomon Brothers to take Silicon Graphics public, but a few years later had people fighting to take ill-fated Healtheon public.

My favorite part of the dot-com portion of the book is how Madoff, now public enemy number one, would not allow trading in Amazon on margin. Lewis writes: “To Mr. Madoff, it was insanity. This thing was getting out of control.” No worries, Madoff made it through the October 1987 crash – as Nasdaq’s chairman. No wonder he survived – the money wasn’t in stocks.

Even Cramer got hurt by the dot-com crash saying “I feel I went from being, you know, top of the game to pretty humiliated.” Of course, he reinvented himself from dot-com company founder to discredited CNBC TV guru.

My favorite part of this section is how a Sr. VP for marketing for Britannica.com derides all the other dot-bombs that spent $6 million for 30 second commercials during the superbowl. He says “I have the luxury of saying this because we have a brand.” Today, they don’t even have that.

Also wonderful for schadenfreude is revisiting the fact that Launny Steffens of Merrill saying the internet was “a serious threat to American’s financial lives” weeks before launching internet mutual funds and having Henry Blodgett as pitchman for money- losing internet IPOs. Lewis says Wall Street will never be cleaned up and “A boom without crooks is like a dog without fleas. It just doesn’t happen.”

Suprime/Real Estate/Wall Street collapse of 2008. Lewis calls this “The People’s Panic” since it “has yet to find its one big culprit, and not sure it ever will.” This panic was different from the others due to “the sheer amount of destruction it’s caused inside big Wall Street firms.” Of course, like every other panic, Lewis caveats: “But that doesn’t mean the game is over.” He discusses John Paulson, who took home over $3.7 billion in one year by shorting subprime – more money than anyone has ever made on Wall Street in a year.

Dave Barry’s “How to get Rich in Real Estate” in this section is fantastic. The silliest part is a picture of Suze Orman with the caption: “The most deadly critter is the dry-rot fungus, an organism made up of tiny but voracious spores that, when magnified 127,000 times, look like this:” He says mistake number one is to buy an old house, and follows it up with mistake number two, buying a new house: “Unlike old houses, which fall apart over time, new houses start falling apart immediately. Often the last subcontractors on the job have to spring from the house as it begins to collapse around them, like Indiana Jones in the Temple of Doom.” The house price collapse was not unique, as he reminds us in a chapter which says that between 1989 and 1995, house prices in San Francisco fell by 40%.

Lewis skewers Jim Cramer, recalling the “buy” rating on Bear Stearns at $62 only days before it was sold for $2 and eventually $10 per share to JP Morgan. No one on Wall Street is spared – in one part of this section the book makes the assertion that the Hedge Fund industry may be built on a series of lies. “For the past decade, it’s explosive growth has been based on a simple claim: that skilled money managers, motivated by high performance fees, could outperform the market when it was going up – and sidestep the trouble when it was going down. And yet the credit crunch has shown that to be a myth.” Academics claim returns were distorted, and some fund managers were “outright con artists.”

Ultimately, the ending is the conclusion that there is no end to financial panics. “The cycles of euphoria and panic have become more and more thrilling: whoever has been seeking to minimize drama in the financial markets has been doing a poor job of it.” Perhaps this is the nature of global capitalism – “ever more complex, ever more opaque, ever faster booms and busts.”

Dog Days of Summer

2009-08-17T05:37:00.000-07:00

China story fading? Inconsistent that the GDP can grow 10% while exports have fallen 25%. Feels unsustainable.

AAPL/GRMN: TomTom app selling for $99. (too expensive to be a major threat to regular PNDs). DELL to sell smartphones through CHL? Story in WSJ.

NPD data on videogames: horrible – consensus was for 15% drop, we had 29% drop, 5^th straight month down double digits. Are console price cuts needed? Consoles sales down a whopping 37% to 281M. Wii units down 54%, PS3 down 45%, only XBOX up 10%. One of three problems: 1. recession hurting demand 2. consoles getting “long in the tooth” 3. secular shift of casual gamers to handsets?

NFLX: TWX may also try to “window” NFLX like they did CSTR to protect DVD sales. This could get messy. No one is going to win in this war, but the Studios currently have the most power – they own the content and don’t want to get “iTuned” by NFLX and CSTR.

Don't Kid Yourself...

2009-08-12T13:14:00.000-07:00

We've all seen the same thing - a crime is committed and the family is interviewed and says "Johnny was such a good boy - he never could have done this crime." Yet Johnny is easily found guilty and goes off to jail.

One of the most important traits of a great investor is Honesty. I’m not talking about following the rules or about not insider-trading. Those are a given. I’m talking about being brutally honest with yourself when it comes to your true investment results.

I was at a meeting a while ago in which the portfolio managers were assessing their own performance. Well, assessing might be the wrong word. Patting themselves on the back might be the more accurate description. They were looking at their performance and had deduced that they had done very well because they had made 5% in a trade. However, missing from their analysis was an honest comparison to the indices during that same time period. They were happy about a 5% gain in an asset class in which the whole index moved 40% during that same time period.

Investing is hard. It’s so hard and mentally debilitating that often to just keep going we have to look at the bright side of things. We have to focus on the victories and shake off the many defeats. I’m an eternal optimist, and I think all good investors are. By definition, stock buyers believe the future will be better – we are putting hard-won money into a venture that we expect will be worth more in the future.

But in the quest to look at the bright side of things, we may also gloss over mistakes, or overestimate how well we are actually doing. We may have a selective memory – “well, I other than that one bad investment, I’m doing very well.” Or we may only remember the good trades, and without having hard numbers, overestimate our true performance. We may "confuse a bull market with brains" without realizing that we only did well because the entire market went up and we actually underperformed on a relative basis.

It’s absolutely critical to investing success to take time to occasionally look back in an unemotional way at how you are doing. The only way to do it is to have hard numbers on every single trade or investment done, the time frame, and the data for how the indices fared during the time period. We cannot "mentally account" for the bad trades. We need to see them all to learn from the mistakes.

Brutal honesty is the only policy when it comes to honing investment skills. And if it’s a group effort, it’s even more important because egos are involved. Otherwise we end up like the terrible off-key singers that don’t make it through the American Idol auditions who think they are the next winner while their parents let them believe the same foolishness.

Pearls Before Swine...

2009-08-12T05:57:00.001-07:00

If you swing the club too hard, you shank it more often. Use the right club – don’t just swing harder with the wrong club.

AMAT beat, real metric is new orders were up 65% sequentially, street was expecting 40%. Backlog down, working through orders?

AMZN: Cowen says 09 ends with 1.5M active kindle users. ’10 sales of 1.8M units, 3M in use by ’10 year end. Within 5 years, 17% of active AMZN customers will own kindles – 4% of total US population. Why? Cheap customer acquisition cost due to promotion on AMZN webpages, more titles, wireless download, product reviews. In 5 years, 10% of AMZN US sales, $2.3B in GAAP revenue.

SCOR says ecommerce spending in US was $30.2B in Q209, down 1% from year ago. Improving, though: Q107 +17%, Q207 +23% Q307 +23% Q407 +19% Q108 +11% Q208 +13% Q308 +6% Q408 -3% Q109 0% Q209 -1%. Good news for AMZN: fastest categories: toys/hobbies +21%, books/magazines +17%

NFLX: CSTR’s Redbox got a 5 year deal with LGF to distribute their DVDs in rental kiosks. Terms disallow sales of used DVDs. LGF President says “we have secured placement for our product in the biggest growth engine in the industry today” Also, Redbox sued NWS’s 20^th Century Fox for 30 day windowing of DVD sales. “At expense of consumers, 20^th century fox is attempting to prohibit timely access to new release DVDs at redbox locations nationwide.”

Gartner says smartphone units up 27% in Q209, overall handset units down 6.1%. AAPL share jumped from 2.8 to 13.3%. NOK lost share, to 36.8 from 39.5. RIMM lost some smartphone share – to 18.7 from 19.9.

GGWPQ: Denial of motions – good for equity holders. Also calls into question debt on specific properties in these cases – may not really have any stronger protections than general creditors. (MGM casino case is similar)

"Work It Harder Make It Better"

2009-08-11T05:55:00.000-07:00

Nice productivity gains, +6.4% v +5.5% survey.

BKS: some online e-textbook business as well

PCLN: also blew out numbers, travel getting better, gained share, shift from hotel websites to PCLN and EXPE

Buffett: paid out $825M in 2Q and $350M in July, and $675M in Q1, more than half the $3.4B they took in on his derivative trades.

25% of mortgage holders are underwater now.

LGF: beat on higher TV revenue and TV guide channel, up 15% pre-mkt.

VMW: paid $362M for SpringSource, Java software maker.

S: Piper downgrades: Cuts target fro $5.00 to $3.50. Cites wireless competition- higher subsidies, lower prices in pre-paid. S still losing subs in a growing business – and using WiMax for 4G, nonstandard. Says as a take-out, with spectrum and subs, co is worth $5.00, but with declining post-paid subs, the value is shrinking. (I agree and I’m tired of seeing Dan Hesse in TV ads)

PANL: weak Q due to slowing sales in chemicals to Samsung. Business model is royalties and chemical sales. Second part is in doubt, so OLED better pick up.

GGWPQ files MOR – has $500M cash.

AC gaming win -12.7% for July, better than June’s 13.6% drop. LVS Bethlehem Sands may be hurting them, so these numbers are actually better than expected. Meanwhile, Stanley Ho’s third wife says he’s in very good condition, as she left the hospital he’s been in for 2 weeks.

Fishes, Donkeys, Bulls and Bears...

2009-08-10T13:10:00.000-07:00

I spend a fair amount of time in the poker room at the Borgata in Atlantic City. Besides being loaded to the gills with “Teddy KGB” types with thick Russian accents, there are actually a few wall street people there, too. What’s funny is you would expect them to be good at poker, but most of them are not. The dealers tell me they come down from NYC and literally give their money away to the savvy players – like they don’t care about money.

So what can we draw from the game of poker to help us be better stock market investors? There are several parallels, which I plan to discuss in this article.

First of all, when I say “poker,” I’m referring to No-Limit Texas Hold’em played in a tournament structure or in high limit cash games. I’m talking about what Doyle “Texas Dolly” Brunson calls the “Cadillac of Poker games:” No-Limit Hold’em.

Poker and stock market investing:

Element of Luck. No Limit Hold’em, for the uninitiated (is there anyone left in the US who hasn’t played Hold’em?) is a game consisting of luck and skill. Why is it so popular? Because it has a huge component of luck in the short run. If I play one hand against Phil Helmuth, and just go all-in, he has no advantage over me. In fact, many beginning poker books advocate an extremely aggressive pre-flop game as a way to neutralize your disadvantage against more highly skilled players. This is why you often see Helmuth go into a childlike tantrum when he raises the standard 3x raise and some amateur that raises him all-in pre-flop. This is an important point – in the short run, luck dominates, but in the long run, skill dominates. Stock price movements are the same thing- in the short run they are close to random, and the most skilled analyst has no “edge” at all. In short periods, even lousy investors can make money in bull markets. But over medium to longer term periods, a skillful investor will completely blow away the performance of a lesser-skilled investor.

Element of Skill. The luck and skill cocktail is what gives poker and investing it’s amazing allure. It’s just Pavlovian – it’s so addictive that Hold’em has been called the “Crack Cocaine of Poker.” If the game was 100% skill and no luck – it would be chess. How many big-money chess tournaments have you seen on TV lately? How many casinos have chess games in them? This skill factor entices players into the game, who think with practice they can beat it (and they can, sometimes.) They say in Poker, the pros overestimate the influence of skill and the amateurs overestimate the influence of luck. The stock market is the same way and it’s common for experienced investors to make mistakes by over-estimating the value of their knowledge of a company’s fundamentals.

“Bad Beats.” No matter how smart the investor, he can and will be wrong often. Even if you get your story right on a stock, you can be totally crushed when something out of the blue happens. Just like in Poker – you can make the perfect move, get all your money into the middle with 95% odds of winning, and some donkey can hit a 2-outer and beat you. These “Bad Beats” are part of poker, and part of the stock market, and you have to get used to them. In fact, the better player you are, the more likely you’ll take bad beats, because by definition you should be getting your money in with the best of it. In my stock market investing efforts, I don’t ever want to invest in a company unless I feel like I have a significant edge in understanding the story. The best way to know if a poker player is any good or not is to listen if he is whining about bad beats.

Psychological pain. Tournament poker is mathematically crushing on your ego. Even the best players always “Bust out” unless they win the entire tournament. Even if you took 10^th place in last year’s World Series of Poker, beating 8000 other players, you were beaten by 9 others, who all made much more money than you did. The payout structure is so steep that finishing one place higher is a huge amount of money at the top levels. Stock market investing is the same – it is exceedingly rare if not impossible to truly buy at the low and sell at the high. Almost every investment I make I don’t sell or buy at the right exact times.

People game. Like poker, stock market investing is a “people game.” Most novices think the psychological element of poker is the ability to read someone perfectly by looking at their facial expression. That’s a bunch of hogwash. The real psychological element is controlling your own emotions. Greg Raymer, WSOP winner, said recently that his advantage is he has the experience of playing for big money on the line in pressure situations and that allows him to make good decisions and not get emotional over short-term losses. Great stock market investors are the same way. When the rest of the world is panicking (like they did 1Q09) they keep their wits about them. I actually think this is the single most important facet of success in stock market investing and poker. This is NOT the same as being fearless or overly aggressive – it’s much more subtle and powerful. Any idiot can train themselves to be aggressive by just “pushing all in.” The poetic beauty of the game is grace under pressure – applied, controlled aggression. The greats of the poker world and the stock market are able to do this.

Ruthless Desire to Win. Great poker players are said to have “alligator blood.” In a big tournament, only one player wins. Pots are often won by “the player that wants it most.” Stock market investing is also a zero-sum game in the sense that if you buy a stock, you are saying that the person selling it to you is wrong. They are stupid. They are scared. You are getting the best of the trade. This is especially true if you are buying a stock when it has dropped big that day for some reason. The flip side is if you are buying as the stock breaks into new highs, it is very possible you are a “sucker,” being strung along by that devastating player, the stock market, who is just “slow-playing” you to entice you to get all your chips in the middle. Like they say, if you don’t know who you are, the stock market is an expensive place to find out.

Good players can “get away from hands.” Great poker players like Gus Hansen can play almost any two starting cards for two reasons: first, they read flops well, and more important, they can “get away from hands.” This means Gus Hansen can lay down a pair of aces when a flop comes that you bet big on because it obviously helped you. The aces looked good until the straightening, flushing board came out. I think this is one of the single biggest advantages pros have over amateurs. Because they can lay down hands, they can see more flops. Just think of the mathematical advantage this must give them! In stock market investing, the analogue is stopping losses with a disciplined selling program. Imagine how much money you’d make if on every good position you rode it all the way up, but on losing positions you immediately got out with only a 10% loss. Great investors DO NOT ride stocks down very far. They get out. They just GET OUT. Maybe they were wrong, maybe they should stay in the stock, but either way, they lay down those cards.

Charlatans. Earning money playing poker is not easy. Some people have figured out that getting their face on Full Tilt and writing books provides some much-needed income to supplement their meager poker winnings. The stock market is the same way: beware of those books by people that promise to make you rich overnight. A lot of great pros like Dan Harrington or Gus Hansen have contributed to the game by writing great books, as have Ben Graham and Seth Klarman. Just be aware that some of the catchiest titles written by authors who swing from great booms ahead to great depressions depending on what sells are just not worthwhile. Like poker, the best way to find out what books are worth reading is to ask a truly great poker player.

Distractions. Some of the greatest poker players of all time were unable to deal with the distractions of Vegas. Mike Matusow, a brilliant poker player, got caught up in a drug deal and went to jail for a year. Stu Ungar, probably the best all-around card player of all time, literally destroyed his nose from doing so much coke until he died in his forties. The stock market has quite a few of these stories as well, although they usually include too much leverage and lifestyle. Even a piker like me has to be careful – letting yourself get out of physical shape by eating wrong or by using excessive drugs can destroy investing effectiveness. One of the reasons Doyle Brunson is so good is he is like a tough old turtle, the oldest one in the pond, wiser than his competition. So drink that green tea, exercise and have an outlet and take some time away from the casino from time to time.
Sex. Women are naturally better at both poker and investing but for some reason they don’t play either in great numbers. Maybe it’s the fact that they have to be surrounded by all the irritating men in order to play.

iTablet Speculation

2009-08-10T08:00:00.000-07:00

RIMM: UBS cuts to neutral from buy – says AAPL may announce a tablet with VZ in the fall. Also says “short-term buy” on AAPL.

Pequot – 36 reports in last 4 years flagged possible insider trading – trading closely preceded 36 material events. Talk about an edge!

VMW: cut to sell from hold by JEF analyst.

NFLX: Epix, new movie service owned by Paramount, LG and MGM will offer Fios customers access to movies before broadcasts on cable.

CTXS: JEF cuts to sell, says valuation too high, they doubt VDI boosts rev, and doubt they get taken over. (up 52% ytd, best of any large cap software stock). SOTP says 17% overvalued now.

BKS up big today – BKS paid 596M for college bookseller with revenue of 1800M, about .35 p/sales, which is about where BKS trades – but college business is much more profitable and growing 6.2% a year vs retail down 3% last year.

AAPL: Bernstein weighs in on “Tablet” upside: says anywhere from .06 to .18 per share. High end: 3M units, 5% cannibalization, low end 25% cannibalization. Key is whether offered with subsidy by carriers.

"In Vegas (and Wall Street), Everybody's Gotta Watch Someone Else..."

2009-08-07T06:35:00.000-07:00

Ace Rothstein, in the movie Casino, said "In Vegas, everybody's gotta watch someone else." He was running the Tangiers (actually Stardust) casino which was getting skimmed by the Kansas City mob. The movie ends by showing the demolition of the old mob-run casinos, implying that the gambling business is all run by "clean" corporations now. Yeah, right. Even Wall Street has it's own "skim" now, with GS and Renaissance frontrunning the street. These HFT guys make the Kansas City boys look like petty theives.

LVS/WYNN: Old age has caught up with Stanley Ho, Triad Boss and politically connected Macau casino boss. His ability to hold a monopoly on all gambling in Macau for 40 years indicates his power and connections. But he’s sick and probably dying now. He is the Arafat of the region for the other casino operators and there is no heir apparent with any of his skill as an operator.

LVS: Brashear of Bernstein says “If you are following LVS right now, it might be dangerous to go off to the beach without your Blackberry….There will be no summer vacation for this company.”Q3 is the quarter they will breach covenants, unless they get a waiver and do an IPO. She says if they can restart Cotai 5,6, have to recalculate target price (currently at $10). Says a “comprehensive solution” that takes care of covenants and restarts coati 5&6 is worth $5-10 pop on the stock price. (lots of short interest, too. I agree, and fully expect a solution soon.)

Harrahs may be in hot water – they sued high roller Watanabe for failing to repay $14.7M in markers. He lost $112M total in 2007, he says fueled by drugs and liquor fed to him by casino staff. Good thing these "clean" corporations are running Vegas instead of Ace Rothstein - he would have provide Watanabe with hookers, too.

Jobs number great - -247k v -325k expected, and down from 443k prior.

Hedgistan news: many funds are above their high-water marks now, and investors are starting to add money to the $1.4T industry. Fund of funds industry shrank from $530B from $825B a year ago. Average hedge fund is up 12% in 2009 through July.

LEAP also weak – their demo getting crushed by this economy – unemployment among high school grads and drop-outs is close to 15%. Net adds weak. Looks like S is trying to take the pre-paid market.

AAPL: Piper bull Munster expects tablet by late 09, $500-700 price, basically a large iPhone.Could have 3G and be subsidized by carriers. Sell 2M units at $600 each to generate $1.2B in sales, 3% of revenue.

YHOO: Bartz defends, saying “Yahoo was never a search company” (Sorry Carol, but this is wrong)

The Gift of Poverty

2009-08-06T11:42:00.000-07:00

When Roberto Benigni won the Oscar for Best Foreign Film, “Life is Beautiful” he said the following:

“I would like to thank my parents in a little villa in Italy; they gave me the biggest gift: of poverty and I want to thank them for the rest of my life.”

For a while, I worked at a small hedge fund that was in the process of imploding. The portfolio managers I worked for were incompetent, dishonest and disengaged, and their performance was terrible. As the clients starting pulling their money out, the fund was no longer paying much in commissions to Wall Street prime brokers. When a hedge fund goes into a tailspin like this, the first thing they do is cut expensive research like ISI, IDC, Gershon Lehrman, OTA – all the firms that cater to Hedge funds and claim to do independent research.

The next thing that happens is sell-side firms start cutting the fund off, by no longer allowing calls with their analysts. Soon, calls from the salesmen into the firm are more strained, hinting that without more commission dollars, they will no longer offer their research. Then finally – poof – like Kaiser Soze – even website access to the sell-side research is gone.

I worked in this situation for almost two years. I was getting water boarded daily. But nothing could have been better for my development as an analyst. I could no longer lazily copy the earnings models and ideas of the sell-side (as my colleagues at said hedge fund did). I had to do something unthinkable on Wall Street – I had to THINK FOR MYSELF!

This “gift of poverty” forced me to go back to basics and analyze my stocks myself using free public information available to anyone with an internet connection. I used company presentations on the web to get up to speed on industries. I actually built my own models from company filings. I built nice clean one-page investment summaries for all of my stocks, tracking the metrics that I thought were important. I actually listened to company earnings calls myself instead of reading an analyst’s recap. I formulated my own opinion of how I thought the quarter was, instead of reading what someone else said.

What was the result? After the initial shock of looking at the same data and coming up with entirely different conclusions, something funny happened. I was a lot calmer. I started making a lot more money. I noticed that sometimes six months after I took a long position in a stock I researched, the sell-side would follow me into a stock. Soon a couple more would follow until most of the street was bullish.

I’ve never looked back since, and I still do my own work. (And so can you)

I guess I should actually thank that little hedge fund that collapsed – for giving me the “gift of poverty.”

"Ain't Sayin' She's A Gold Digger..."

2009-08-06T05:50:00.001-07:00

34 million in the US now on food stamps, up 21% since last year. This can't be only “baby mama Gold-diggers”

Wow- DB saying underwater mortgages to hit 48% by 2011.

CSCO beats eps with cost controls and Chambers sounds very optimistic that the bottom is in place. Company still unfocussed, plans to do more acquisitions.

Lenovo took a loss, but also sounded optimistic. Units +1.1% vs 3.3% decline industry wide. (they sell low-end PCs)

NWS: Murdoch still miffed about AMZN Kindle pricing/revenue share on WSJ. WSJ recently raised prices to 14.99 per month from 9.99. Murdoch still wants more, plans to cut a tougher deal with Sony. WSJ ad revenue dropping double digits, no wonder he’s miffed. He plans to charge for website access across all properties (good idea, but good luck with that). FOX #1 in cable news for 90 consecutive months! Also says re: Redbox that “$1 rental is clearly an issue for us” and will hold new DVDs from Redbox for 30 days. (not sure if this is “legal”)

Macau government approves law to cap junket fees. Big casinos are already playing well together, question is whether law will be enforced on S. Ho’s triad-influenced casinos.

MGM: Bernstein’s brilliant Brashear begrudgingly sees the light! I thought she had a bad truffle at Robuchon’s the way she liked LVS and hated MGM. She upgrades MGM today to market perform and raises price target to $9 from $7. (Stock is $8) Cites possible loss of Borgata. (I believe this is imminent due to NJCC problems relating to Macau) Company only needs $900M EBITDA per year under new covenants, which should be easy, considering they are earning 1500M per year now without CityCenter.

PCS: ugly Q2 results, net adds half consensus, ARPU below $40, margins below 30% and only 11% growth in EBITDA vs 20% consensus.

CMCSA beat, .33 v .26 consenus. ARPU increased 7.4% to $117.74/month as HBO cancellations declined and Video on Demand increased (UFC?)

ANF – still a lot of haters, but stock has gone from 23 to 30. Same store sales no worse than expected (for a change). BKE comes unbuckled. APP numbers uglier than its stores today.

Swagger....

2009-08-05T05:37:00.000-07:00

Wow- Equifax data says 24% of owner-occupied single family homes are “underwater.” 5% of owner-occupied houses have mortgage debt worth 150% of house value.

AMZN: Sony cuts prices on ebooks to 9.99, matching AMZN. Looks like 9.99 is going to be the defacto price for new ebooks. AMZN and Sony are taking only a small (probably 12%) of the pricing in contrast to 50% on dead tree books. But this will not last. Good news for readers, publishers are fighting a losing battle here. Also Sony is cutting device cost below $199. (main complaint I hear about Kindle is too pricey- but who really thinks price will stay high for long? Look at handset market and MP3 players for a clue…)

“Cash for Clunkers” distortion continues: economists all raising GDP forecasts for Q3. May add 0.5 to GDP. Metals prices have soared. Dealers now say no inventory left on lots. What other unintended consequences will occur? Time will tell.

CME volume fell 25%, worse than normal seasonality. Pricing firm 81.6 v 81.2.

TRMP: The Donald tries to steal the company for $100M. Bondholders will fight.

NFLX/CSTR: expanding Redbox kiosks, threatening NFLX further. Gained share, 14% of DVD rental market from 9% on 12/31/09! Will have 21-22k kiosks by Jan10, up from 13.7k Jan09. Co may also go into blu-ray and video game rentals. BBY is also testing kiosks in Texas. (yikes! – they have plenty of space in their stores). Some even say retailers can give away the $1/day rentals to drive traffic to their stores.

CCC rated bonds have gained 80% since 3/9/9, soaring more than dot-com stocks did before the bubble burst in Mar 2000. Some wise bond investors are quietly ringing the alarm. Pimco corp bond chief says sell high-yield now. Ave CCC bond went from 31.6 to 73.1 in last 6 months, fastest recovery in history. “Bigger fool” trade now.

GRMN: big beat: EPS .83 v .51 consensus. REV 669M beat 658M street. Auto segment big drop (PND) down 31%. (pretty obvious correlation with auto sales) Co beat extremely low expectations. GM up to 52.6% from 45.8%! OM up to 29.8 from 13.3. (Some smidiots I know in Hedgistan are heavily short this name and are going to get a cattle prod up their rear today - stock is up $7.52 pre-market)

AKAM: insider buying. Stock crushed, but has $3+ per share cash, 10x p/e multiple and durable business model. Worth a look – may buy soon.

Starting To Feel Like August

2009-08-04T05:51:00.000-07:00

Volume was very strong yesterday, especially considering it was August. This is a good sign. Today things feel like they are slowing down.

Wow- Dasan Fund up 45% ytd. Unusually good year.

Miscellaneous notes:

Many funds are in “reconstructing stage” thinking about when & how to get back into equities. Many raised cash last year and haven’t deployed it yet.

Wow – HY 1.5T market, default rates expected at 25-30%, $500B restructurings

IG is $5T, even at 5% default rates, $250B restructurings

ISM up 4 pts to 49 range.

May buy back ANF today. Nice move from 23 to 29, still "cheap," and if economy is indeed improving, great play.

VCLK, ERTS after close.

EXPE: JPM raises est. bookings, margins improving. Co says local tax ordinances don’t apply to it as a “re-marketer.” NYC law is specifically targeted at “re-marketers.”

WMS: FY09 may be trough demand for slots. Replacement demand may rebound in next 12-24 months. Eps .49 beat .47 est, REV 195.8M below est of 203M.

AAPL/GOOG Smackdown Imminent?

2009-08-03T05:45:00.001-07:00

“Regret for the things we did can be tempered by time; it is regret for the things we did not do that is inconsolable.”

Just idle thought- maybe AAPL and GOOG will compete a bit more vigorously now that Schmidt is off the board? Or will the two tech titans warily eye each other like bears in the wild and agree to avoid conflict?

Best Dow month (up 7.8%) since 1997.

GDP down only 1.0% vs 1.5% expectation

AAPL: users buying mainly 3GS. iPhone hurting NTDOY. iPhone saving T, Softbank.

YHOO deal. Market hates it.

VZ/S deal. Market hates it.

SIA: global semi sales up17% in 2Q to $51.7B, from 44.2B in Q1, still off 20% yoy.

AAPL: Tablet rumors. $699-799 price? Coming 4Q09 or 1Q10? Schmidt resigns from AAPL’s board. AAPL up on the news.

ISM at 10:00 am.

NFLX: deal with Disney to stream old seasons of Lost, Desp Housewives. Probably rev neutral, save on postage, pay for streaming.

TRMB, EXPE beat: .38 v .30, REV 768 v 731M. 26% room night growth and 13% air ticket growth fuel unit share gains. WW hotel rev dropped 1%, 26% increase in nights, 19% drop in ADRs.

RVBD, YHOO positions both stopped out. WYNN, AAPL strong.

Who messed up: MSFT or the street?

2009-07-24T05:52:00.000-07:00

MSFT: just across the board disaster. Video game was area that missed the mark the most, as did office. Should have been expected that office would be weak – enterprise isn’t spending a penny and Apple is taking share in PCs and netbooks. NPD data on video games has been weak for 4 consecutive quarters - shouldn't analysts have factored this in?

Failure of the street in my opinion, not MSFT. They did say PC market is bottoming. Win 7 still could be a big driver short-term. I do not interpret this as “tech is weaker than we thought.”

JPM follows C, BAC, MS and will raise salaries to make up for loss of bonuses.

Defense stocks: NOC, GD reported. Big cuts in backlog ($2B!) but say they can navigate the cutbacks successfully.

JNPR slight beat on eps and Rev. Street says valuation too high, stock off 8% pre-mkt. Carriers still not spending, enterprise growing.

NFLX: met, but not a big beat and raise as expected. Churn went up to 4.2%. No big bump in subs from Sony deal- ARPU dropped instead of going up as expected. Street negative, even bulls fairly muted.

RVBD: slight rev miss from previously bullet-proof growth story. Stock hammered 20% premarket (but only back to week ago’s levels) High expectations missed, street saying secular growth story intact. “slippage of deals.” Stock is up 123% ytd and 35% in last month so priced for perfection.

AMZN: met eps, but Rev a bit light due to slow video game sales and slow sales across the board in US – Intl outperformed by a wide margin. Street still positive, “MS: best growth story on the internet, buy on pullbacks” Stock lost the 5 pop from yesterdays Zappo announcement. Still not cheap – stocks this expensive need to exceed expectations.

GRMN: nuvifone on sale in Taiwan 7/27 (as expected). Real issue is whether this handset can get on American or European carriers with a subsidy.

HET: reports “earnings.” Rev -12.7% from 2Q08, EBITDA -9.4% to 585M.

Beat Quarters, Conservative Guidance

2009-07-23T05:51:00.000-07:00

Too much to write- many of my companies are reporting earnings last night and today. The overall theme so far is tech companies have beat expectations, not only due to cost cutting, like last Q, but due to some top-line growth. Many have said "things are stabilizing." Most have issued conservative guidance. Many stocks drop in reaction, but recover later as the impact of sell-side research reports fade a day later. Smart money will stay in the strong, recovering tech companies despite noise around the quarter. I have seen none of my companies report a bad quarter so far. Even EBAY looks like it's turning around.

AMZN buying zappos.com for 10M shares of stock- win-win deal. Bezos has said at last 2 calls how he’s been surprised by amount of shoes AMZN sells.

SNDK: beat – profitable! .36 v -.16 street. Good pricing, royalty deal with Samsung. Guidance disappoints, stock up 5% after pr, down 5% after call. Sell-side bears that missed the call defending the bear case today.

CTXS: beat, guidance a bit light. Sell-side that was wrong defending bear case again.

VMW: beat, license a bit light, stock up 2 pts.

EQIX: huge beat, great recurring business model, every metric improved.

EBAY: turnaround appears to be working. GMV bottomed out Q109.

QCOM: beat, but flattish guidance bothers street.

TomTom: PND unit volumes +73% qoq, ASPs +13% yoy.

IGT: beat .23 v .18 est

T: beat, but should have been obvious with AAPL nums. 2.4M iPhones activated.

Cash For Congressmen

2009-07-22T06:02:00.001-07:00

“Cash for Clunkers:” How much of the $3500 will the auto companies capture on the dealership lot? I’m guessing most of it. Some salesmen are saying cash-for clunkers rebates only available at the sticker price – (which is about $3000). A cynic would say this bill was passed because govt owns car companies now.

A lot of bears still – this is a great thing for the market.

YHOO: beat eps on revenues in line with street.

AAPL: huge beat, and guided gms higher than expected.

AMD: missed eps, -0.62 vs -0.490 est. Revenue beat 1.184B vs 1.129B est. Still suffering from misguided acquisition of ATI. Feels company-specific.

BKS: Plastic ereader said to be like the DX – bigger screen, PDF reader, may include wifi. Will use AT&T wireless network.

GRMN: TomTom beat estimates, sales off 19%. Beat was cost-savings, and market share gains from 18% to 20%.

STX: beat and sell-side raises targets. Good read-through for WDC.

Semi book-to-bill up to 0.77, up every month this year, charts look like it’s stabilizing.

Apple Does It...Again

2009-07-22T05:11:00.000-07:00

My notes from the earnings call:

highlights: "best non-holiday Q3 in history" "sold 5.2M iPhones, users downloaded 1.5B apps in 1 year"

beat eps, revenue, iphones, macs, gross margins. iPods slight miss. Guides revenue 8.7-8.9B vs cons 9.0B - pretty good, and 34% g.m.s

iPhone ASP only dropped from 637 to 590, despite $100 "price cut," so some upgrading took place, good for margins.

iPhone on Non-GAAP basis was 32% of revenue in the Q

On an adjusted basis, AAPL is earning over $8.00 per share, with $34.75 per share in cash, core business trading for 15.2x eps. Not bad.

Why iPods missed: they cut inventory by 400k, and sell-through declined 4% yoy in iPods purposely cannibalizing themselves in iPods with touch and iPhone

over 70% share of MP3 market

over 8.0B songs downloaded ltd for iTunes!

1.5B REVENUE from stores, 492k macs vs 476k ya., 1/2 were new to mac 16 new stores, 258 stores total. Ave revenue/store 5.9M vs 6.8M last year

GROSS MARGIN beat due to: less increase in components than expected, less warranty, good product ramps, FX

31B cash, $34.78 per share in cash. Will keep.

prepaid $500M to Toshiba for Flash.

AT&T: "excellent relationship, we are happy with it"

education business: "saw very little stimulus money flow to schools"

mix on iPhones? Significant acceleration in total units sold, won't give mix numbers. iPhone 3GS is currently constrained in every country it's sold in.

multiple corporations that bought more than 25k iPhones- strong penetration in enterprise now guided 30 gross margins, did 36, now guiding 34.1 - based on back to school promotion

No update on iPhone in China.

Street reaction: sell-side raises FY10 eps to 6.32, NG EPS to 7.77 from 7.00, happy with iPhones and gm guidance

Barnes & Noble's "Vaporware"

2009-07-21T05:55:00.000-07:00

AMZN/BKS: ebooks legitimate as Barnes & Noble will open e-book store to compete with AMZN. Supposedly will have more titles, because it will have the 500k free titles from GOOG. Will be selling on iPhones, no reader yet, but eventually the Plastic Logic reader, not out until early 2010. (That’s a pretty big lead time for AMZN – the key to Kindle success so far has been the wireless delivery and the integration with AMZN store. Also BKS will still be stuck with stores- Blockbuster tried this approach of “hybrid” model and was driven into bankruptcy). Also Plastic logic has shown no public trial, and no pricing specifics. Weird thing for BKS is by selling best-sellers, they make almost no profit because they don’t have the high margin hardware to subsidize the ebook cannibalization. Merits of their strategy is unclear to me, feels more like desperation – what do they do with their expensive stores then? This is great for consumers, competition. May also be good for AMZN- brings awareness to the ebooks, which they have a solid lead and competitive advantage, and also hastens the shift from bricks & mortar to online distribution.

CIT: finally the government stands aside and the bondholders come in like they should have in BAC, C, case. Great sign for markets going forward.

AAPL: NPD data: Mac up 16% yoy, vs 0-5% consensus. For entire Q implies units of 2.6M, upside to street, inline with recent bulls. iPod NPD -13% yoy, inline with consensus, implies 9.6M units, street at 9.5M.

T: to begin selling netbooks in “coming days.”

TXN: decent numbers, nothing exciting. Guidance slightly above estimates, but stock gone hyperbolic in advance due to high expectations.

NFLX: Sony made a deal with Redbox.

PALM: wow – checks show 1 in 3 devices being returned for build quality problems: dead pixels, bad keyboard. Pre Central says 40% of devices being exchanged.

YHOO: will launch new home page today, weeks ahead of schedule. Supports one leg of bull case: New CEO Bartz can execute well and turn property around.

CTXS: BAC cuts to underperform. Not sure why yet.

EXPE: DB says “buy” – price target $19 - not sure why yet.

HET: says they’ll hire replacement workers in strike in AC (Ballys, Caesars)

LVS: BMO raises price target to $15 based on stabilizing business in Vegas and Macau, and possible IPO to raise funds. $15 target based on DCF (ugh)

WYNN: WSJ says they will also do IPO of Macau assets in Hong Kong. In Q4, to raise $1-2B

Place Your Bets Ahead of AAPL Earnings This Week

2009-07-20T05:50:00.001-07:00

AAPL: if they get 2% share of PRC market in first 12 months (some claim they can) that’s 14M iPhones!. Weisel upgrades today, says 5.5M iPhones in Q, consensus is 4.8M iPhones. Also 2.6M Macs, street closer to 2.5M. They raise price target to $185. Raise GAAP 2010 EPS to $6.51 from 6.14. (implies nearly $8.00 NG EPS). Mac and iPod NPD data for June will be released today. Jaffray says likely co guides inline, which would be positive, vs their usual below-street guidance. RBC also raises target today.

CSCO: raised to buy by CSFB, citing “improving business trends”

ADBE: another one – Piper Jaffray (who’s been bullish all along) reiterates “buy” based on CS5 shipping in Apr2010, says weak CS4 means strong CS5. Valuation inline with CS4 pre-cycle peak.

BKS: glad I’m short – “channel checked” the new East side flagship store. Stunning, beautiful store. Best book store I’ve ever been in. 10 idle cashiers. Could have played Frisbee in the store it was so empty.

AMZN: Janney Mont upgrades in front of earnings, says FX helps.

CCI successful $250M note deal at 7.1% ave interest rate.

LVS: moving on Hong Kong/Macau IPO.

Harrahs: Ballys and Caesars facing strike by UAW union

NFLX: story in WSJ highlights some studios are quietly cooperating with Redbox, which is bad for NFLX. 12k to 17k redbox terminals in one year.

V: C, BAC card stats support expectations for V. Card volumes: BAC -10% yoy, but up 8% seq. JPM -7% yoy, up 10% seq. C -18% yoy, +6% seq. Cons for V is -10% yoy, -13% seq. (V is lagged on Q, though)

Sunshine In A Bag

2009-07-17T05:59:00.000-07:00

GOOG slight beat, street disappointed. Some are saying that means tech isn’t recovering. That’s simply wrong. Advertising is recovering slowly. GOOG revenue is generated through advertising, not “tech.”

IBM beat, street happy, stock up afterhours. Better tell for tech – software was very impressive, over 5.1B with 85% GMs.

YHOO/MSFT: close to a partnership on search & ads per unnamed source. Clay Moran of Benchmark says MSFT payment of “several” billion dollars. If $3B, YHOO could rise to $18-20 per share.

Manhattan store space vacancy 12.4%, highest since 9/11. “we don’t want another cell phone store, we don’t want another nail salon and we don’t need another bank”

ADBE: Opco raises PT to $34. (It’s nice to be ahead of sell-side when they decide to start upgrading) Opco cites meeting with management yesterday, and product pipeline, $30M of backlog, says Q3 guidance conservative and likely marks the bottom.

AAPL: JPM raises pt to 167.50 from 155.00

NOK: Cut to neutral by UBS. won’t return to days of 40% share and 20% OMs…multiple smartphones means developers unwilling to develop – need one platform like RIMM/AAPL. (I’ve said for a while that scale is not a competitive advantage for them because MOT had scale and that wasn’t enough). It’s not that hard to get scale in such a huge market (1.1B handsets sold in 2008) N97 sold 500k 1^st month, AAPL 3Gs sold 1M in first 3 days.

HET: Wow, T. Watanabe’s play amounted to 20% of the REV for Caesars and the Rio in 2006 and 2007. He lost $112M in 2007, paid all back except for $14.7M, which HET is suing to get on “bad check” rule (which may get overturned)

NFLX: DEG (kiosk rental co) says kiosk channel 150% yoy growth. Threat to both NFLX and existing studio DVD rental business.

NPD says videogame sales down worse than expected, 4^th month in a row, but largely due to tough comparisons, no blockbuster titles this year. Rev off 31% in June.

GOOG detail:

NG EPS 5.36 beat 5.07 est, Gross REVENUE 4.072B beat 4.061B

Notes from the call: highlights Chrome OS - says company will keep spending money on innovation

Youtube now "on trajectory we're pleased with" Seems like ads there gaining traction "Relative stability in business"

"a Q ago we had no idea where the bottom was - now all verticals save for financial appear to be recovering"

NOK: The Sears of Handsets

2009-07-16T07:15:00.000-07:00

revenue miss 9.912B v 10.156B consensus

company cuts 09 share gain predictions to "maintain share" - big disappointment to bulls

Starts call by saying "Biggest change in 20 year history" must be integrated hardware and software (AAPL & RIMM model)

admits smartphone and pc convergence, says past competitive advantage of scale & product orientation no longer works, says "however, devices must be integrated solutions"

ASP dropped again, down to 62 euros from 65 last Q and 74 a year ago.

company lost share in US, LatAmerica and Asia. Gained share in low-end of market in PRC, EMEA

Says industry was 268M handsets in Q, -12% yoy, +5% seq. Smartphones 41M of that total. company says 2nd Q in a row of improving smartphone share- but suspicious because depends how they define smartphone

N97 selling slowly, only 500k units in first month, not as well as N95. (iPhone competition?)

JPM Flips Fed the Bird

2009-07-15T05:31:00.001-07:00

Wow JPM has $81 trillion in derivatives! 40% of all derivatives held by banks. That is an astounding number. JPM says notional value does not equal risk facing the bank. (but is that risk really borne by taxpayers, since the rule now is that the “too big too fail” get bailed out?)

INTC: nice beat, GM 50.8%, beating expectations. In contrast to the dog DELL’s recent negative outlook. Strong rebound in laptops. (good for AAPL)

ALTR 20 cents eps ex-items, beating consensus by 24%

CSCO & JNPR: C call buy – “expect shares to outperform in early stages of economic recovery”

GM: what a joke: will use “sophisticated electronic marketing techniques” to target Pontiac owners. (after killing Olds brand, they lost the customers) Spam for clunkers?

ADBE: Kaufman raise pt to $32 based on 20.5x new 2010 eps of $1.56. Says CS5 can come as early as 2Q10.

PALM: consensus for units in FY2010 is now 5.0M units? 2.7% share

MPELgained 10% in Hong Kong as the casinos in Macau agreed to cap junket commissions to 1.25%. LVS, WYNN should be up today. WYNN was already capping commissions.

S: cutting pricing on Boost mobile, adding $50 plan for prepaid CDMA subs. “this price action positions S as a discounter” Craig Moffett, Bernstein says. (cuts prices by $20 per month)

NFLX: Janney says “sell” $34 fair value. Street missing extent of Redbox threat, costly streaming investments, sustainability of recent marketing gains. May lose subs on 20% premium for Blu-Ray rentals.

AMZN: some friendly democrats want “A kindle in every backpack: etextbooks for US schools” Say govt should furnish digital reading device so textbooks could be cheaply distributed and updated.

Great Boom to Great Depression: Charlatan Harry Dent

2009-07-14T13:05:00.000-07:00

Charlatan Harry Dent made a cottage industry out of his "The Great Boom Ahead" books in the 90s. He made a lot of money, not only from copies of his book (which were mainly unread except for one neat graph that predicted the market to keep going up for 25 years). He made even more money parading around the country, funded by mutual fund companies, who marketed him to financial "advisors" (Stockbrokers/mutual fund salesmen) who put him in front of their clients. What a great tale he told. He was a mutual fund company's dream salesman, so they even made up mutual funds based on his book.

Inconveniently for Harry Dent, the market did not keep going up for 25 years. In fact, it collapsed in 2008. Conveniently for Harry Dent, all he had to do was change the title of his book to "The Great Depression Ahead: How to Prosper in the Crash..." What a great racket, just change the title of your book each year to whatever is happening at the time.

Do what he says in this book and find yourself in the poorhouse. The only nickel Harry S Dent has made for himself or anyone else is the money he's made selling books to the poor gullible public and mutual fund companies complicit in his falsehoods.

Government Sachs Blows Away Expectations

2009-07-14T05:46:00.000-07:00

Elliot Spitzer: “Banks made a bloody fortune while taxpayers subsidized them, without a proven benefit to the wider economy.”

TTWO: reduced forecast due to delay of Biohazard 2. Shows risks of hit-driven videogame publishers. NPD video game sales -30%?

DELL: rev stabilizing, margins weak. Netbooks taking share from low-end Dell notebooks? (I still don’t like DELL – tough turnaround). gross margins to decline when street was expecting 35 bp improvement t o17.92%. They blame component costs. Makes some sense with DRAM/NAND ticking up this year, but doesn’t square with slump in demand we’re all hearing about . Risk with CIT, which financed 31% of Dell’s originations in Q1. DELL might have to use their own cash to fund these sales.

TSTR: switched accountants from Friedman to Ernst & Young.

AAPL: Craig Moffett of Bernstein says AAPL is wrecking T and the wireless industry. He cites the jeers directed at T during WWDC. Says AAPL has radically tilted the balance of power from T to AAPL, says if AAPL changed carriers, so would all iPhone users (I would). “In short, the iPhone seems to be doing just fine at wrecking the wireless business without the government’s help”

eBooks- The Two Things To Watch

2009-07-13T12:51:00.001-07:00

Is this Kindle thing just a silly fad?

Traditional book publishers are resisting the kindle/ebook revolution. They are being dragged along, kicking and screaming into the digital age. The reigning champion of book sales, JK Rowling of Harry Potter fame has famously said “None of my books on Kindle.” When my 8-year-old asked why that was the case, I had only one answer: “Because she’s JK Rowling.”

It’s interesting, though, to note that Stephenie Meyer of Twilight fame does not share this luddite view.

There are as many Kindle-haters as there are iPhone-haters. When it comes to change, we all tend to get pretty worked up. Many of us have spent a lot of very enjoyable time with a good book. I still remember the wonderful, comforting aroma of my Lord of the Rings paperbacks that whisked me away from my Minnesota basement to Middle Earth, allowing me the purest form of escape. That smell will be forever ingrained in my brain in a very Pavlovian way. (Funny thing is I still remember the smell and feel of my old Jimmy Buffett and Disco LPs, too)

Ok, change is tough. But in the case of books, it’s inevitable. Look at the music business if you have any doubts.

Here are the advantages to reading an ebook on my Kindle:

Portability- even the thickest fantasy trilogy is only a quarter of an inch thick.
Multiple books carried at once. OK, not everyone reads more than one book at a time, but I do.
Built-in dictionary. I can instantly look up word meanings with my kindle.
Free samples, available instantly, wirelessly. I can read the first 20 pages of a book for free before deciding whether to buy it or not.
Classics for free. Shakespeare, F. Scott Fitzgerald, Sherlock Holmes, many classics are available free.
Font size can be changed. What a gift for sore eyes.
I can read faster on the kindle, as I can turn pages with only a single button push.
I have more than 300,000 books available wirelessly instantly. Soon to have all of them?
I can read newspapers like the NY times with no ads, more cheaply than the print edition, and I can buy them instantly or have them delivered without fail early in the morning
I can annotate and highlight books just like I can with physical books. Better yet, I can search them with a “Google-like” text search.
I can read the ebooks on all of my household’s devices: my iPhone, my daughter’s Kindle, my Kindle.
My books bought from Amazon are backed up on the cloud so I’ll never truly fill up my device.
When I go to that big library in the sky, my entire book collection will pass on to my heirs.
Ebooks save space – I no longer need to keep buying new bookshelves for my apartment
Editting on the fly- when there is a problem with the ebook edition, like there was for “House of Cards,” Amazon can instantly send me a new copy
Good for the environment – 40% of books are unsold and destroyed. Saves physical shipping of books.

Disadvantages to ebooks (specifically on Kindle):

I cannot pass the book on to someone outside of my family unit due to DRM restrictions.
I have to trust that I will still have the digital rights to books I’ve bought from Amazon forever, even as technology platforms change.

Both of these disadvantages exist for iTunes, by the way, and occasionally I wake up in a cold sweat, worrying about my massive music collection.

Google books will supposedly sell eBooks as well, but they will allow the publishers to offer any price they want. Presumably, all of the titles that publishers offer to AMZN to resell in digital format will be available for sale by Google. The big question will be pricing. The publishers are dealing with Google to provide a competitor to AMZN, to avoid another iTunes situation. Google will not be willing to sell any books at a loss, because they are not subsidizing a “reader” with high margins.

Only one problem with this approach – it didn’t work with music.

One interesting thing to look at is how Amazon’s physical music sales were passed up by Apple’s digital sales. The music companies then did deals with AMZN to start selling digital music to provide a viable competitor to iTunes. It didn’t help much, because iTunes still has 70% share of global music downloads.

Google books could further spread adoption of eBooks, in which case the overall pie grows so quickly that GOOG and AMZN both win despite share shifts. It seems pretty obvious that books will go the way of music over time – digital books are as enticing as digital music was, once the price of players drops and content is widely available.

The only two things you need to watch.

Music went massively digital despite industry objections when 2 things happened:

1. Price of players dropped, which meant the user base grew to 400 million. (By the way, Amazon just dropped the price of the Kindle 2.0 to $299 from $359)

2. Content became available, as all major studios were in a “prisoners dilemma” situation and had to offer it. (There are now over 330,000 ebooks available on Amazon, and Jeff Bezos says 35% of the books available in both kindle and dead-tree version are being sold in kindle version.)

Once these two things happen, no matter what the publishing industry wants, books will become digital. This is why I track kindle books weekly.

Harry Potter may be doomed to dead tree books for a while, but the Vampires of Twilight, who are younger and cooler are available on an iPhone, Kindle, or Sony eBook reader near you.

Sell-side Slumber Ceases...

2009-07-13T05:42:00.000-07:00

Earnings begin. Asia lower overnight.

NOK: Bernstein says they’ll beat, regain some lost market share, but says ASP decline could be steeper than they expect.

C says short AKAM/long LLNW – AKAM losing share due to attempts to hold pricing high.

VMW: MS says tide is turning, near term risk/reward is better. Expects co to meet low expectations for Q2 based on channel checks. Were bearish, but now believe Q3 cons realistic, checks show vSphere having a positive impact on ASPs. Survey was based on 150 VMW resellers. 78% of the resellers met or exceeded expectations in the Q.

AMZN: MS reiterates buy, says co will be a share gainer. Says co will significantly outperform SPX in 1-5 year time horizon. $95 base case DCF value. MS put out “deep dive” very well-researched report. Say EGM growth (39% of Rev) will more than offset declines in core books/music segment. Organic rev growth 31% despite recession.

SNDK: upgraded by TWP, cites Flash demand for cellphones and SSDs.

AAPL: Barrons positive article.

Tech green shoots: servers and storage declined only 5% and 4% vs 7% and 6% in Q1. But printer sales expectations still tracking below plan.

GOOG: JEF, and others raise estimates/expect a beat ahead of Q2 results. Most cite recent comScore data and “checks” that show good paid click growth.

AMZN: Stanza 2M downloads and 12M book downloads. Shows there is demand for ebooks, and people are willing to read them on their iPhones

"Conviction Buy" beats "Buy with lack of conviction"

2009-07-10T05:40:00.000-07:00

Geithner testifies today concerning Tsy getting bad price for bank warrants. I wonder if it will be the same circus as the Bernanke grilling.

AMZN: Kindle to sell law books. Law ebooks at 20% discount to paper copies. Advantage for Kindle users is light weight, easy to search. Goes along with thesis that textbook/reference book publishers have incentive to shift to ebooks quickly. Bernstein forecasts .35 Q2 EPS vs .32 consensus. North America Revenue up 17% yoy. Margins may disappoint again – street expects 5% GAAP.

DELL raised to conviction buy from neutral at GS. (They’re better at manipulating the government and NYSE than they are at stock picks)

STX: raised to buy by GS from neutral.

IDC says HDD makers shipped 130M units in 2Q09, beating IDC estimates of 120-123M units. IDC expects to revise upward its 3Q09 estimate of 130-132M units.

SNDK: MS raises estimates on stable NAND pricing outlook, says they prefer MU. Expect beat and raise Q from SNDK due to demand from smartphones like AAPL 3GS.

GOOG: RBC raising est for 2Q, has $500 price target, and would buy on Bing related weakness.

ADBE: RBC says stabilizing trends seen since mid-Feb, strength in educational vertical expected.

"I'm shocked, shocked to find that gambling is going on here!"

2009-07-09T12:03:00.000-07:00

From the movie Casablanca:

Captain Renault: “I’m shocked, shocked to find that gambling is going on in here!”

Croupier: “Your winnings, sir”

Captain Renault: “Oh. Thank you very much.”

The SEC was created in 1934, after the great crash of 1929. According to their website, “there was a consensus that for the economy to recover, the public’s faith in the capital markets needed to be restored.” In other words, the public lost a boat-load of money and were tired of being scammed by the people that were manipulating the markets. So the government had a brilliant solution – put a fox in charge of the hen house – and they did, with Joseph Kennedy, boot-legger and inside trading king, as the first Chairman of the SEC.

The most galling example of SEC incompetence is the Madoff case. Bernard Madoff ran a multi-billion dollar ponzi scheme under the noses of the SEC for decades. The SEC never did catch Madoff. His sons turned him into the SEC. (Some have speculated the whole manner he was turned in by his sons was part of a ruse to protect the rest of his family). It wasn’t as if the SEC didn’t have warnings – more than once people sent them letters pointing out the fact that the Madoff scam was a ponzi scheme.

One highly vocal short-seller of Lehman Brothers stock, hedge fund manager David Einhorn, was investigated and hassled by the SEC. Of course, he ultimately proved to be right about Lehman, as they filed the largest bankruptcy in history. David Einhorn also chronicles his travails with the SEC in his book “fooling some of the people.” He uncovers fraud at a company, makes it public, shorts it, and for his efforts got hassled by the SEC.

The list of SEC failures is long, the successes few. Wait, I guess they did get Martha Stewart, although she spent less actual time in the slammer than Paris Hilton did for parking tickets.

Investors cannot rely on the SEC to protect them. We cannot even count on them to “keep things fair.” The stock market is not a fair game, anymore than Caesars Palace is. But like the game of Black Jack, or Poker, a lot of money can be made despite the tough odds.For now, let me say the best way to think about the SEC’s role in the markets is to assume they will do nothing to protect you. Every investment must be analyzed using your own rational thought process, with no expectations of “bail outs” or proper policing by the SEC.

GOOG v MSFT: Battle Ensues

2009-07-09T05:56:00.001-07:00

AA early tell with earnings beat.

Init jobless claims fell by 52k to 565k, lower than survey 603k.

AMZN up yesterday on K2.0 price cut to $299. Bberg (I believe erroneously) reporting that AMZN pays $12.99 for $9.99 e-books. My estimate is closer to $8.73, leaving them with a scant $1.26 Gross margin on ebooks. But still profitable when shipping costs go away for them.

GS: quant system may have actually been using access codes to acquire trading info on NYSE to effectively front-run EVERYONE. Wow. Profits estimated at $100M/day. This is better than the Kansas City skim on the Flamingo.

GOOG: WSJ runs story saying Chrome OS won’t gain traction. They’re getting the story wrong. It’s classic “signaling.” They are saying to MSFT: you mess with our Search dominance (with recent Bing launch) and we’ll mess with your OS share, and we can if we want to. GOOG has had ability to launch an OS for months, but hasn’t. Suddenly, Bing is launched, and boom – GOOG announces an OS. The caveat is it won’t launch until late 2010- making it a threat, but giving them room to back off if MSFT does. (GOOG guys are math geeks who study game theory for a living, there is no way this is all random)

China passes US auto market for 1H09 sales – 6.1M, +17.7% for the year, US bought only 4.8M.

MS CIO survey: tentative signs of stabilization in IT spending. Survey shows 09 IT budget growth improved by 70 bps to -2.8% yoy, vs 580 bps drop in Dec survey. Software most resilient, growth expected at -0.8% in 09, hardware -1.6% vs consenus -8.6% forecast.

New GM: no bed of roses, will emerge chap 11 with 48.4B of debt. New equity will be about 63-73B, with 10% going to unsecured creditors and accident victims (about 1.5B estimate

"Thanks! That's Helpful!" (You Schmuck!)

2009-07-08T12:59:00.001-07:00

Stock market phrases that I really hate:

“Cut your losses.” You’re down 20% in a position, you better “cut your losses.” Are you kidding me? You’re not cutting your losses, you’re locking them in! I’m not saying you shouldn’t sell a position that’s down, I’m just saying it’s ludicrous to call it cutting your losses. Cutting your losses would have been selling when you were down only 1%. Or better yet, if you would have sold when the stock came back down to where you paid for it – then you would have had no losses.

“Profit taking.” As in, “today the market is down due to profit-taking.” This is asinine. This is what CNBC and others say when what they really mean is “the market’s down but we have no earthly idea why.” Markets go down in the short term because there are more sellers than buyers. How the hell do they know that the sellers on any given day are selling with a profit? Do they somehow know they sellers’ cost basis? Even if the market went up for awhile recently, it’s impossible to say that it’s “profit-taking.” Maybe the sellers were just tired of losing more money and couldn’t take any more pain.

“Book profits.” As in, “we’re going to water our weeds and sell something that’s going up instead of stopping out of our losing positions.” Let’s book profits! I say keep an eye on profitable positions, or sell something for a reason, but yes, you can “go broke by booking a profit.” Don’t make it sound courageous – make it rational.

“If you loved at $10, you’ll really love it at $5.” No, I don’t. I hate it, in fact. If I bought something for $10 that drops to $5, I’m pissed. I made a mistake. I paid too much for it. And with stocks, I don’t even get the enjoyment of using them, like I do my electronic gadgets that instantly drop in price after I buy them. If I buy a stock at $10 and it drops to $5, maybe something changed or maybe I blew it, but I DON’T love it at $5. I’ve seen a lot of supposedly smart people on Wall Street repeat this stupid old saw.

“It’s a no-brainer.” I guess I gotta agree with you. It IS a no-brainer. As in, you’re not using your brain. Any investment that is so obviously smart that people call it a “no-brainer” must be a piece of crap. If everyone agrees how easy it is to buy a stock because of the same light-headed reason, it’s not a good idea.

With earnings season soon upon us, we will be flooded with these and other inane Wall Street clichés:

“Thanks, that’s helpful.” This condescending, smug phrase from a “smarter than you” analyst on a company earnings call just grates on me. Some operators of a real company making and selling real products with real world experience are asked some arcane, irrelevant question by an ivy-league educated pretty-boy pasty skinned analyst. Company management answers politely, while thinking what a schmuck the guy is. But the guy has achieved his real goal, which is to show the rest of the participants on the call both how brilliant he is and what a tool he is. So his rejoinder? The dreaded “thanks, that’s helpful.”

“Can you give us some color?” Screw color – I don’t want any color, I want the exact answer. This question is inevitably answered with a vague, long, meandering non-answer. Stop this nonsense now!

“Great Quarter, guys!” This silly little gem usually comes from the analyst’s associate’s associate, who simply must endear himself with management in order to hide the fact that he can’t find his own ass with both hands. This “great quarter, guys!” really helps because tomorrow when he needs IR to answer a basic question about the business model someone will take his call.

The thing that gives me a lot of joy in life is purposely using malapropisms with these people to throw them off. The best way to construct one is to combine two stupid clichés together in one asinine phrase that subtly makes fun of the speaker by the very fact that he understands what you are talking about.

Don't Bet Against the American Eater

2009-07-08T05:46:00.000-07:00

RT: Ruby Tuesday booming – don’t bet against the American eater!

Merriwether of LTCM fame shutting down JWM hedge fund (was $1B, never made money for investors, lost 44% last couple of years)AMZN: upgrade by Susquehanna: weaker $, low expectations, spending shift to online.

GOOG: Chrome OS – shouldn’t be a surprise, the browser was the obvious Trojan horse. Launch 2H10, still will take time to gain traction.

LVS: may do $2B offering of shares in HK, to get cash to restart Macau Cotai strip construction.

My Investment Philosophy

2009-07-06T13:15:00.001-07:00

My investment philosophy rests on these principles:

The market for stocks is inefficient and can be beaten.
Control of emotions is as important as rational thought.
Value-type investing works but there is no such thing as a “margin of safety.”
Growth-type investing works but there is no such thing as permanent competitive advantage.
Momentum-based trading only works for the lucky and liars.
No one can consistently get an informational “edge.” (But it doesn’t matter).
Letting winners run and cutting losses is imperative.

In a portfolio of investments, 2 out of 10 will drive almost all of the performance. In 10 investments, 3-4 will be wrong immediately, and sold out quickly for a loss. 2-3 will muddle along, making market-type returns. 1-2 will outperform, doing 5 times better than the market. 1 out of 1 will be a super grandslam homerun, going up 10-fold in 3 years. (Apple, MSFT, Nintendo, HD, WMT, DIS, MCD, history is full of these companies).

The good news is 1 or 2 great stocks out of 10 is enough. In fact, 1 world-class stock out of ten is enough, but the key is that losses must be cut on the “losers.” 1 out of 10 is capable of dropping by 80-90%, like GE, CC, ENE, NYT, GCI, F, etc. And the “rating” of the company has no bearing on it’s ability to drop by 80%. The ratings agencies and major brokerage firms will have their highest ratings on the companies that are currently doing well, and no rating at all on the up and coming stocks.

NYC deserted after long weekend...

2009-07-06T06:11:00.001-07:00

AMZN: Think Equity says reduced emphasis on price and more on selection and customer satisfaction positive. Kindle adoption much faster than expected.

CTXS: rating cut by OpCo. RBC raises price target to $34 from 30, says good checks for XenApp business.

WDC: raised to buy at BAC/Merrill Lynch

AAPL/DELL/HPQ: Bernstein says corporate PC upgrade cycle could boost annual PC growth by 200-300 bp per year above forecasts of 10% normalized unit growth. Dell has 80% of revenue PC related, skewed to corporate markets. HPQ only 30%, AAPL not tied to corporate PC upgrade cycles.

WYNN/LVS/MGM: Bernstein’s extremely capable analyst J Brashear raises earnings estimates for LVS by .01, cuts WYNN by .09 and MGM by .04.

Roughest Draft for Rough Times

2009-07-02T08:34:00.001-07:00

This is a very rough draft of my 2Q/1H09 letter:

“Dasan” portfolio.

We had a good first half. It wasn’t easy, though. Just as we find that sometimes our biggest gains come from the stocks we least expect to drive performance; some months surprise us with their gains. This was one of those time periods.

Performance numbers:

	2009
	Jan	Feb	Mar	Apr	May	Jun

Dasan%	-4.7%	-7.2%	12.6%	24.3%	9.0%	-1.3%
SPX %	-4.1%	-15.2%	8.5%	9.4%	5.3%	-0.5%

DasanYTD%	-4.7%	-11.6%	-0.4%	23.7%	34.9%	33.1%
SPX YTD%	-4.1%	-18.6%	-11.7%	-3.4%	1.8%	1.3%

I do not expect to do this well in the second half of the year. In fact I will probably give back some of the gains. Why not go to cash and wait out the rest of the year? Because that would be a sure way to miss out on potential gains. The stock market doesn’t care about annual returns or high water marks. It does not follow a set season, like the tides. So like a fisherman, when the fish are biting, we will stay out in our boat, even if it gets dark.

This was one of the hardest investment periods I have seen in my 15 years of professional investing. January and February were debilitating, awful battles against legions of doomsayers and panic. If you look carefully at Smith Barney’s excellent report on mutual fund flows, you will see that record amounts of investors cashed out of funds in January and February, which pushed the market to unnatural lows.

Contrarian thinking doesn’t make money. Independent thinking does. Even Apple, with $28 cash per share, was pushed down to $85 per share, which valued the company at about 8.7 times earnings when you adjust for subscription-based accounting of iPhone sales. 8.7 times earnings for a company that will still grow 6% in the worst recession in our lifetimes. The orcs were definitely winning the battle for Rohan!

The gaming sector also got crushed, as all the market observers declared the major casinos all likely to go bankrupt, even though the operators had yet to pull the many levers available to them. Due to good work, done months in advance on Las Vegas Sands, we were able to buy shares for the ridiculous price of $2.25 in March. Our analysis indicated that the company was worth $10 if it could navigate it’s covenants successfully. It had many ways to do that – it could sell property, it could do a stock offering (which even if dilutive would have made the stock double) or negotiate covenants. When it went up to $10 we sold 2/3 of our position. We still think LVS is worth $20 in two years if they get the Singapore casino built and operating.

The major contributor to performance this year was staying in “Triple A Tech” through this storm. By Triple A Tech I mean AAPL, ADBE, AMZN. Three companies with rock-solid defenses and enormous moats. I was told by many that “shorting AMZN is a no-brainer – the consumer is dead.” My thought was the world’s most efficient e-tailer becomes even more valuable as high costs and collapsing sales put their competition out of business. Now that brick and mortar companies are cutting back lines of business and product selection, we can see the value that “long-tail” retailing will have.

Now that the Nasdaq is up 16% for the year after being down low double digits during the panic, here is how much Triple A Technology has gone up year-to-date:

Apple +66%, Adobe +32% and Amazon +62%.

Independent thinking wins out again. Not contrarian thinking – simply buying the stock that was down the most in the Dow didn’t work – nor did avoiding AMZN because it had a high multiple. (General Motors would have been the contrarian play – and it effectively went to zero)

Mistakes I made and what we can learn from them.

ANF- made 17% but should have stayed with ARO which went up 90% during the same period. I was too early on the high-end side, but still think it will be the best trade.

Good: sold NTDOY after a nice long run- at the peak I had tripled the money, but sold at about 2.5x, so I could have made more on this one. Metrics on consoles sales and video games have weakened drastically. Video games are recession resistant, but I believe they are finally being affected by the recession. The current generation of consoles is looking dated and the only way for them to grow now is with add-on products like Wii fit, which has not had that much success in the US. (Wonder why?) Also with the rise of the iPhone, I believe much of casual gaming will migrate to mobile platforms, so that leg of the bull case for NTDOY is in danger.

General motors “preferred”: paid 4.988 per share, with 10% chance of getting $25. Didn’t get it. I thought downside was about $2.50 with securities worth about $5.00 in chapter 11. The mistake was not selling when it jumped to about $8 right after I bought it. In Chap 11 now, trading hands off-market at about $2.80 now, will probably get about $5.00 when it’s done. This is why I don’t really like these types of speculations.

Macro situation.

Right now our assessment of the macro situation is the market is entering a new bull market phase or at least in a fairly durable bear market rally. The economy will form a “V” recovery and improve. We are seeing signs of that. However, I’m still afraid of the administration’s power grab and so I’m staying with bigger, better capitalized companies. I want companies that don’t need government money and aren’t on the government’s “bad list.” That describes tech stocks perfectly. I also think things are still shaky so to use a golf analogy I’m using a 5 wood, not a 1-iron. I want to have a little more margin for error than usual. I also think missing this rally was and will be devastating for investors because by the time everything looks great, the stocks will have much of that priced in already. But of course, I could be wrong.

Criteria for investing.

We are biased toward holding on to things instead of selling, or trying to outguess everyone that’s trying to outguess each other. We may have just seen a “generational low” on the stock market. Since we still like what we own, we think we’ll hold our winners for a while.

After 20 years on Wall Street, the most common two mistakes I’ve seen are #1: selling too soon – “booking a profit” and #2: buying what everyone else is buying. Much of the regret I have is investments I didn’t make big enough that I knew were right, or selling stocks too early that kept on going. Seth Klarman says the opposite – he says he sells early but is fine with it. I admire his mental strength, because I round trip stocks more often than I sell early.

On holding stocks, I find it’s so hard to get the story right on a stock that everyone else on the street is missing and it’s fairly rare to find a big mispricing that when I’m aboard a good position I don’t want to pitch it too soon. It’s like getting a pair of dress shoes that fit and are comfortable – I’ll re-sole them 10 times before buying a new one. New shoes always look and feel good in the store, but after a month don’t usually measure up to the old ones.

We buy companies that are either out of favor, or have a great business with competitive advantage. We don’t usually buy financials as they lie like hell in their accounting. We like companies that have 10ks that we can read.

We do have a couple of companies that if people knew we owned them, they’d be quick to point out how stupid we are. Here’s an example: ANF: Abercrombie and Fitch. The street hates this company because sales are plummeting of their expensive clothing. The company says they will not dilute the brand by mass discounting, and will cut OPEX instead. I believe their goods are aspirational and as soon as the economy gets better, sales will boom and the multiple will go from the 14x it is today to 20x+. Their international store openings are the key to this “out of favor growth story.”

Competitive advantage.

In tech, it’s tough for competitive advantage to last, so the best companies morph and adapt. For example, Apple has morphed from PC maker to Smartphone maker. My simple thesis: the iPhone is a platform, not a hardware product, and vastly more profitable than GAAP accounting profits indicate because they are using subscription accounting. On actual earnings power and free cash flow basis the company is cheap versus its growth rate. With a minuscule 1% share or less of the worldwide handset market, they have a lot of room to grow. Contrast AAPL to INTC, MSFT, or CSCO, three big techs that are more like General Motors than tech companies. These companies have spent more money acquiring other companies and on marketing than they have on innovation.

Commodity businesses.

Some people are clever enough to make money investing in commodity businesses, picking the right spot in the cycles. I don’t like investing in businesses that are commodity-like in nature. SNDK and WDC may be exceptions to this rule now. The reason I’m involved with SNDK is I think NAND, especially 3D and MLC technology is not commoditized yet – as evidenced by the Samsung-SNDK licensing deal. Clearly, Samsung was not able to make the newest NAND chips with their own IP. Sandisk is coming out with newer and faster flash products on a weekly basis. Also, we think the street is missing the massive amounts of NAND demand due to smartphones and MP3 players. In the case of WDC, we are playing the cycle a bit. Our WDC investment is more of a “record low inventory” play. Coupled with record-low valuations and only 3 rational players left, I’m allowing myself to buy WDC. The key thing to watch in these situations are if competition becomes dysfunctional – the early tell is price cutting.

Buyout targets.

I love buying companies that are buyout targets. I’ve had a lot of luck with my companies getting bought out over the years. In fact, I bet about 1 in 20 of my positions get bought out. I made a ton on the Harrahs buyout. Sometimes I don’t even need to get bought out to make money, because the stock goes up in advance. I’m involved with YHOO, CTXS, and RVBD now as potential buyouts. However I have to love the business or management too- buyout rumors are not the reason I buy. I buy companies that are a natural fit with someone else and that someone else needs to have a lot of appetite for buyouts. Usually it’s smart to sell when the deal happens, because buyouts actually have a terrible track record.

I see the second half of the year unfolding in a few possible scenarios:

Positive economic data continues to arrive, and Gandalf helps the Fellowship of the Ring beat back the Orcs. All metrics get better except perhaps Unemployment, which is a lagging indicator. Massive stimulus and monetary expansion starts to take hold and the wheels of commerce which have already started slowly grinding forward begin take on speed. Stocks go up in anticipation, and we get multiple expansion ahead of actual improving numbers. Our companies are lean, with record low levels of OPEX and record amounts of cash. As the market improves, Hedge Funds and investors quickly put cash back into the markets, out of “performance envy”. Remember, many Hedge Funds in 2009 will be facing the difficult decision of whether to close down since they’ll still be under their high water marks. In this scenario, our good quality stocks will be bid up, but probably not as much as the higher beta lower quality stocks. Even the terrible financials will probably go up in this setting, but I doubt we will buy them. (70% chance)
The economy muddles along, the banks stay pretty sick, and talk of a “double dip” becomes in vogue. The banks are zombies anyway, but with the government will keep them afloat. There will be calls for another stimulus package, and the stock market will re-test lows or at least give up half of its recent gains. This is the scenario that I am most afraid of. I find solace in the fact that this is the viewpoint most in vogue on the street right now, so I think it’s unlikely to happen. This scenario will be tough on us in our current investment posture. However, our stocks are still loaded with cash with durable business models so they should survive. In this scenario, we will probably lighten up our exposure to stocks a bit, but will look to be opportunistic buyers when we have signs the market has turned. (20% chance)
“Long Tail” scenarios: the dollar is lost as reserve currency and the US has hyper-inflation. Or, the economy rolls into depression and total financial collapse and we are all forced to barter. I don’t think much of the depression scenario. But the runaway inflation or stagflation story could have some credibility. I don’t have a great answer for this scenario. We are in great danger of government “crowding out” and high interest rates. Everyone on the street is talking about inflation – in that scenario our stocks are fairly well insulated. Most of them have cash and no need for borrowing money at expensive rates. For example, inflation would actually be a positive for Visa. It would help CME. It wouldn’t hurt technology much, as they live with constant deflation.(10% chance).

It’s going to be an interesting second half of 2009. I’m guessing quite a few funds will decide in the 4^th quarter that “managing money for free” is not worth it. If they haven’t gotten above their high-water marks (I doubt most will) they will be tempted to shut down and restart in a different incarnation. Even if they only manage 20% of what they were managing before, it’s still worth it to them because 20% of something is better than 100% of nothing.

Lagging Indicator - Remember?

2009-07-02T05:50:00.000-07:00

NYC real estate finally catching up to the US, down 20 to 40%. A good example of a lagging indicator. These are contracts closed months ago. Real estate in NYC has further to go in my opinion. Real estate goes in very long cycles, and there is never a need to "jump in quick" to catch a bottom. It just doesn't work like that.

Jobs report today. Init claims 614k, a bit better than 615k survey. Cont claims down to 6702k, survey expected 6740k, prior was 6758k. weird though, change in payrolls -467k v -365k. (50k census temp workers cut, so numbers distorted) These numbers are volatile week-to-week and month-to-month and inaccurate, so hard to nail down specifics. The numbers will all be revised after the fact and we’ll only know things have gotten better after they already have. In other words: job numbers are a lagging indicator. Using these numbers to trade the markets is a mugg's game - although many are trying to do it.

CSCO: DB says “buy”, attractive valuation. (I’m not convinced, but it probably goes up if the entire market gets going again 2H09 – better technology picks out there though)

Markets in Slumber

2009-07-01T05:54:00.000-07:00

MJ music sold 400k+ copies last week – over half through iTunes or AMZN. That’s a big shift from years ago.

California officially broke- it will issue IOUs to creditors.

TSTR launch today, Arianespace says 12:00EST starts

MS raises global PC forecast for 2Q09, says demand has stabilized. (suspect, because analyst can’t even forecast iPod sales, how can she forecast entire PC industry)

MSFT: eps estimates raised by MS. May be something here.

VMW: RBC raising price target to $30 from $23, says checks indicate Q2 better than expected, company will report in-lie to slight upside v. consensus.

Madoff Was A Piker

2009-06-30T05:09:00.001-07:00

Madoff wasn’t a psychopath: he was rational. He lived an incredible life, set up his kids for life and downside was jail time for last 20 years of his life. He flipped the “inverse pyramid” most people endure, which is finally having money but being too old to enjoy it. He was very rational because he knew the system was easy to game. He also would have toiled in obscurity, retiring with modest means, like most everyone else if he didn’t take a chance on his ponzi scheme. He played an “option” and the upside was higher than the downside. The worst that could be said of him was that he was greedy. In that way he was no different from his so-called “victims” who greedily looked the other way when investing with him. He simply bet (correctly) that there were people out there that were as greedy as he was. Much of the anger of the so-called victims is actually angst and embarrassment of being seen publicly as greedy and stupid.

Madoff was not the biggest crook of this stock market cycle. He caused a lot less damage than Stan O Neal at Merrill Lynch who dragged his company into collapse, while taking almost $200 million with him on the way out, destroying the livelihoods of tens of thousands of people. Dick Fuld, Jimmy Cayne, and the kind folks at the AIG swaps department make Madoff look like a piker. Madoff only ripped off about $13 billion. The AIG swindle is over $100 billion now and counting.

All this talk about “evil” is ridiculous. Is he any different than the artificially tanned lizard Mozillo of Countrywide fame, who paid off politicians with sweetheart loan deals in order to keep his house of subprime cards afloat? In fact, if they wanted to publish a “victims list” for Mozillo’s crimes they can just publish a list of everyone that paid taxes to the IRS last year because we are all paying for his “evil” deeds. In one way, I admire Madoff – he cleverly protected his family with his stone-faced silence. At least he had some sense of honor. He used the charade of turning himself in to his sons so they could gallop on white horses to the unwitting feds.

Maybe Jim Chanos is right, and we should abolish the SEC, because all it does is give investors a false sense of security. It’s easier to blame the SEC than to do your own investing homework. It’s OK, Daddy “Moral Hazard” Fed will make things better.

Haven’t we all been taught “if it sounds too good to be true, it probably is” by our parents? What about the idea of diversification? What happened to hard work and effort? Are we born entitled to riches without effort in the United States? I say enough with the “evil psychopath” talk already, and get back to work.

Sleepy Week

2009-06-29T05:47:00.000-07:00

Stock indices are in a very constructive pattern, held moving averages. AII Bull/Bear numbers are constructive. Real estate still years away from a recovery – high unemployment, tight lending, and the “smart money” isn’t buying yet. Major NYC, LA,SF markets haven’t fallen with rest of the country yet.

JCP upgraded by MS, says it will beat estimates 2H09. Good valuation, potential gross margin beats vs market expectations.

AMZN: Kindle DX sold out. Wow – this thing was panned for being too expensive. No kindle in Germany – publishers refuse to accept lower prices on ebooks than printed books. Also wireless fees too high.

MPEL: City of Dreams attracts 1M visitors in first 27 days of operation, 37k/day. (Massive Venetian attracts 70k daily)

HPQ: may be increasing notebook orders in Taiwan. Raised guidance recently to 38M units from 34M units. Slight dethawing in frozen PC demand?

80s Icons Falling Like Dominos...

2009-06-26T06:37:00.000-07:00

King of Pop is dead. Wow. Elvis of the 80s is gone.

MU: less REV than expected, eps beat. But GM 11% when street was expecting negative 1.8%. Street is mixed on results today, but some are saying there are looming DRAM shortages as early as 2H09. 18% increase in bit shipments of DRAM – strong demand persists.

China again makes call for world reserve currency. They understand the economic power that owning the reserve currency printing press gives. Meanwhile US consumer savings rate may be up to 7%, which would help offset deficit spending.

PALM: less loss than expected, no clear numbers on handsets yet. Key thing is they burned only 72.4M in cash rather than 92.1M expected. They claim they’ll be FCF positive 2HF10. They may not need to raise more capital – which was a key concern.

RVBD/CSCO: Opco says CSCO’s WAAS solution is catching up to RVBD.

The best way to rob a bank is to own one...

2009-06-25T05:50:00.001-07:00

GDP down 5.5%, better than expected 5.7% drop. Jobless claims worse though, 627k v 600k survey. Cont claims 6738k worse than 6714k survey. This is a sticky point. Even though it's a lagging indicator, it's hard to get too excited about other green shoots as long as unemployment is rising.

AAPL 3GS iphone much faster than Pre, and even the old 3G faster with OS 3.0 according to medialet benchmarking study.

Crowdscience smartphone study: iPhone 73% satisfaction vs 52% bberry. 97% iphone would recommend, 82% would buy again, 60% would buy Apple over other brands.

New smartphone buyers: 38% would buy iPhone, 14% bberry. iPhone highest penetration among male, and age 25-44 years. Top uses of smartphone: 80% internet, 74% camera, 73% email, 50% mp3, 40% GPS. iPhone users are 86% email, 90% internet, 74% music, 67% gps.

T plans to add 850MHz band to 3G in NYC and SF, since older 1900MHz 3G network is completely bogged down, almost unusuable. Will also add 2100 extra cell stations to give iPhone more headroom.

SNDK: worlds fastest 32GB SDHC card. (still innovating)

Apple: The Street Misses the Story Again

2009-06-24T12:28:00.000-07:00

There is suddenly a lot of gnashing of teeth in the blogosphere and on CNBC again about whether Steve Jobs should have disclosed his liver operation publicly. The “usual gang of idiots” has rolled out lawyers pontificating on how “Apple OWES us this information.”

Meanwhile, the street is missing the real Apple story.

Let’s take a step back. The Wall Street Journal published a story on Sunday saying Steve Jobs had his liver replaced two months ago, without attributing the information to a specific source. This is fairly unusual reporting. To me, it’s obvious who the source was: it was Apple. They have played the media like a fiddle. Every launch of new iPhones is accompanied with an phalanx of satellite trucks and TV reporters outside the Apple Stores around the country, waiting with bated breath to interview the early buyers.

Is it coincidence that Apple planted this story in the Journal on the same weekend they were able to say they sold 1 million units of the new iPhone 3GS? Probably not.

OK, let me make myself totally clear. The Apple story is about a company culture, a platform, and a cult of fanatics. It is increasingly NOT about Steve Jobs.

Steve Jobs is a mercurial visionary: a great pitchman, maybe the best ever. He’s sorely missed. WWDC and other Apple events are almost dull and boring now compared to when he was there. But Steve Jobs is not a mobile phone engineer. He’s not an expert at supply chain management. He’s not a software designer.

Even without Steve Jobs, Apple is still innovating. Some have bemoaned the “lack of a new product” since he’s been gone. This is nonsense. Apple’s modus operandi is “come out with new product, and refine, refine, refine based on customer feedback.”

For example, the 3GS is a major improvement over the 3G phone. This is the best handset in history. (You can read my review on it on my blog). This happened without Steve. In fact, the 3GS sold 1 million units in a weekend while the first iPhone, which Steve Jobs “pitched” took almost 3 months to sell that many. (I know, this is not an exact comparison).

Apple is an “execution” story now. The delicate dance of the global supply chain, ordering the right amount on NAND chips, getting the best deal from Asia on each chip is very important now. Apple used to be terrible at this. Now they easily “out-Dell” Dell in this area. They were able to have one million of the 3GS ready, and even in most cases delivered on time to homes even when the street’s most bullish analyst said they’d only sell 500,000 of them. Wow. The bill of materials for the 3GS 16GB model is only about $5 more than the previous 3G model. Wow. They’ve convinced thousands of developers to build 50,000 apps that have been downloaded a billion times by users. Wow. They’ve negotiated deals with telecom carriers around the world in different languages and business models. Wow.

Meanwhile, what analysis do we get from Wall Street? W. Piecyk from Pali research goes on Bloomberg and says “you better not upgrade to 3G OS 3.0 because we hear it’s slowing down iPhones.” Others say, “well of course they sold more units, the price was cut” (it was not cut on the 3GS, it sold one million for $199 or $299) We don’t even know how many people bought the 3G model after the price cut. Katy Huberty of Morgan Stanley missed her iPod estimate last quarter by about 25%!

I personally use and buy every iPhone model so I can do my own thinking instead of listening to some idiot on wall street saying “it can’t do X, people don’t like Y.” For being one of the most widely “followed” stocks on the street, Apple has among the worst “analysis” ever. (Imagine the opportunity in thinly-followed stocks!)

Hence, the opportunity. Apple trades at 24x p/e on the Bloomberg screen. This doesn’t account for the $25 billion in cash, which is about 20% of the market cap. It also doesn’t account for accounting adjustments for the subscription accounting for the iPhone. This stock is cheap, even with a 58% move this year. The stock has pulled back 10 points as I write this, so it’s a nice entry point.

Catalysts? Other than beating street estimates on number of iPhones sold, what about the tablet that is looming over the horizon? I would not want to be short Apple stock if and when Steve Jobs takes the stage again to announce the new iTablet. I even want to be long if only Phil Schiller announces it.

So I’m long while the street continues to get the story wrong.

A Durable Order Green Shoot

2009-06-24T05:54:00.000-07:00

Durable goods orders jumped, +1.8% vs -0.9% survey. Wow.

MGM: no longer going concern doubts in filing.

ORCL: 46 eps beat 44 est. 50% op margins! Maintained guidance of 29-31, est were 30. Acquisition-fueled – the Q is can they continue to grow or acquire enough to be meaningful? Database and application business upside in Q. good base of recurring revenue, diverse business.

ADBE: brought Flash platform to Android. (only AAPL left)

RVBD: FBR initiates with only $22 target.

PALM: sold 150k Pre so far. (poor showing – first model of highly anticipated handset) AAPL sold 1M iPhone 3GS in first weekend – even though reviews said it wasn’t an upgrade.

Macau visitor arrivals released – more later. Problem is not 100% correlated with gaming win. Operators have said people are coming at same rates but gambling less.

Summer Doldrums 2

2009-06-23T06:48:00.001-07:00

RMBS cuts guidance, citing weak demand for CE devices.

PCS added to S&P 500

MOT upgraded to buy at BAC, based on new products.

AAPL: 1M GS sold, street starting to raise unit estimates.

AMT: PJ says FX could help, Indian tower co could surprise, Mexican spectrum auction could add carrier, US wireless cos will raise capex in 2H09, share repurchases