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Friday, March 6, 2009

The slaughter of the sacred cows

In a rout like the one we’ve had, eventually the market gets around to slaughtering the sacred cows.  Apple, Baidu, Goldman Sachs, Amazon are all down 5+% right now.  And believe it or not, this is a good sign.  When the fear infects even the stocks perceived to have a good opportunity regardless of current market conditions, it’s becoming broadly factored into expectations.  Typically the leadership is the last to fail and I think that’s what we’re seeing.  That said, I wouldn’t touch these sacred cows with a ten foot pole until at least Tuesday morning.  They need to correct – they’re behind and will make up for it quickly.

This also likely means we’re moving into a new rotation for the market.  Some groups will start to firm up first.  I wonder if the financials will be that group – it would be logical, though somewhat unfathomable.  The REITs are still getting slammed on a daily basis and there’s no sign of a resolution there for the time being – we know Bernanke is working on a way to help the commercial real estate debt market.  At the same time, the rating agencies are stepping up the danger by moving their ratings lower today.

So far I’ve only started nibbling at KLAC and AMAT.  I think when Taiwan Memory unveils their bailout plan, you’re likely to see the semicap group rally.  There’s no way any of the memory companies are spending a nickel of their own money when the government is about to dump a boatload of cash on them.  My guess is a budget, even a lousy one, will restart orders and it will probably look like a tidal wave relative to the dry spit of current business.  Most of the group trades near book value, which could be trough valuations.  They act like garbage still and I should be waiting for them to firm up first.

I’m thinking on Tuesday the leadership will be sufficiently demoralized for there to be a rally from the ashes.  Two days is an eternity in this market.  Keep your powder dry.

Thursday, March 5, 2009

Gamestop about to get Amazon’d?

Amazon has started a video game trade-in page, reports.

Clearly investors in GME are freaking out as the stock is down 20%.  My first reaction was the same as theirs.  Upon further investigation, however, I find myself more sanguine about GME’s prospects in the face of Amazon’s inroads.

Amazon provides a shipping label.  That’s it.  You need to get a box, package it, possibly go to your post office to mail it.  The title is then sold to a “third party merchant” – nowhere does it indicate who this is but there is some speculation on the discussion page that its Toys R Us.  2 weeks later, Amazon will issue a gift card to you for the amount of the sale.

Gamestop, on the other hand, gives you cash in hand at point of purchase.

It seems unlikely we’re looking at Netflix vs Blockbuster the sequel here.   Gamestop is unlikely to be unseeded by Amazon’s lanky attempt to enter their market.

Though I harbor certain suspicions about Gamestop’s used game accounting (mostly because they get all Madoff when you try to ask them about it), I don’t think Amazon’s entry into the used game market is the end of their franchise.

I will buy a little GME at $22.40 and a lot at $20 if they give me that kind of chance. 

Juniper at MS conference

The note from MS reads pretty negatively.

Carriers have excess capacity and the service provider market could remain cautious for several quarters.  Enterprise budgets could drop another 10-15%.  The first quarter is more back-end loaded than the prior quarter, which was described as very back-end loaded.

Still short Juniper.

Wednesday, March 4, 2009

Palm blows up

Why consensus was so high remains a mystery as it was clear from the moment the Pre was unveiled that the existing Palm line-up would stop selling.  This was likely the last near-term negative catalyst for the stock.  Short interest is an unhealthy and dangerous 40% of the outstanding shares.  The shares are a bet on the success or failure of the Pre now.  The smartphone space is very crowded and while the Pre is the most iPhone-y of the alternatives being offered, it’s certainly not a guaranteed success.  People who want an iPhone-like phone should get an iPhone, not a Pre.  Despite longer-term concerns, my guess is the move in the stock is higher later as stocks with 40% short interest tend to be covered on weakness and buyers of the stock have been betting on the Pre, not the legacy Palm business.

Geithner not really wowing ‘em; Bernanke pitches shorting commercial reits

Treasury Secretary Timothy Geithner emerged from his bunker to testify before congress on the merits of the new budget plan.  Congress seemed upset that their blank checks aren’t helping the stock market and Geithner was catching blame for things like AIG, which happened under the prior administration and while he was on watch at the New York Federal Reserve.  Recall the day Obama selected Geithner as Treasury Secretary, the market rallied 10%.  He has certainly had a quick fall from grace.

The administration continues to try to provide financing to consumers, unveiling a 200 billion dollar program to buy consumer-related debt such as those backed by student loans, car loans and credit card accounts.  It is likely this program will expand to cover heavy machinery and agriculture in its next stage, according to officials.  At some point this will benefit Caterpillar and John Deere, who rely on a rollover market to sell receivables to perpetuate working capital.

Bernanke also testified yesterday before the Senate Budget Committee.  He had this to say:

"There's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or to pay for new construction because the (commercial) securitization market is completely shut down," Bernanke said during an appearance before the Senate Budget Committee.

Is Bernanke the new David Einhorn and announcing his favorite short picks in front of congress?   That would be AWESOME, but no, that’s probably not happening.  The more likely scenario is the Fed has identified commercial real estate as a nuclear zone on bank balance sheets and is trying to float the issue before congress so they’re not blindsided by it when he suggests solutions to the problem later.  As congress likes to accuse officials of missing the ball, he’s telling them in no uncertain terms that there will be an issue here and he’s aware of it.  Almost all of the damage control from the Fed has been after the fact – AIG and Citigroup received bridge loans because they would fail if they didn’t.  Bernanke is highlighting a problem that hasn’t gotten to the podium yet and by doing so, is calling attention to what is likely to blow up next.

Rents are getting slammed as occupancy rates fall and sub-leased space is hitting the market in droves.  Current square footage rates are likely to be reset significantly lower as leases come up for renewal.

Reits have grown aggressively through leverage under the assumption that pricing remains somewhat constant and that real estate prices always go up over time.  In fact, analysts value these stocks based upon their “funds from operations”, or FFO.  FFO is net income excluding gains/losses and depreciation expense.  It’s the depreciation expense removal that utterly distorts results.  Depreciation should be accelerated and included in FFO in a down real estate market, not ignored.  The assets are depreciating in value, why would you exclude that when looking at their operations?  It’s a ridiculous convention, like looking at internet stocks on price to sales in 2001.  Don’t bother, it’s over.

The problem is these businesses have been extended significant credit under those very optimistic assumptions.  When it comes to refinancing in a down market, there’s likely to be a very different evaluation criteria and one that many reits will not pass.  Don’t forget, banks are being told not to take risks.  Why loan to the over-levered?  They won’t.  The precedent has clearly been set by the many other crises of the last year.  It’s not up to banks to make bad loans to over-extended borrowers -- anymore.  It’s the Fed’s self-chosen mandate to make all the bad loans now.

Measure B narrowly defeated

Election results are in.  Measure B received 1300 more no votes than yes votes.  Results are still unofficial.

My guess is no harm no foul to the sector one way or the other.  It would have really benefited only Solar Integrated Technologies, as they’re LA based, and I didn’t read any notes suggesting it would be a catalyst for Energy Conversion Devices (ENER) besides mine.  Trade over, buh bye.

Tuesday, March 3, 2009

30 Rock

With GE stock in a downward spiral due to weak markets and flame fanning from television news, panic sets in on New York City.

March 3, 2009

Apple rolls out updates to iMac, Mac Pro and Mac Mini line.  As Apple has product introduction meeting scheduled for March 24th, speculation will quickly turn to what will be intro’d on the 24th.  The iPhone nano is likely to be the speculation.  Long Apple.

Xilinx and Altera both guide higher, Xilinx somewhat more dramatically so.  Both cite strength in 3G shipments to China.  Licenses were awarded last month.  Nokia and Qualcomm are likely beneficiaries of this trend also, though handset shipments remain punky.  Temporarily long Nokia.

First Solar (FSLR) acquired assets of defunct Optisolar for $400 mil, who had big PGE contract.  Cost of contract estimated at 5-10 cents/mw, which is a decent portion of margin to give up.  Co says will add ~55 mil to revs this year but cut EPS, will be accretive in 2010.  Raymond James upgrades the stock to a strong buy from a buy.  I’m offering stock at 109.  If it trades at 112 I’ll get stopped out.  I bought ENER yesterday in anticipation of Measure B passing in California – mandatory quotas for solar panels in Los Angeles – ENER is tied to Solar Integrated, which gets bid preference in the event of Measure B passage.  California is obviously our most eco-friendly state and likely to pass the bill, despite its problems.  Also on the radar, there’s a solar conference in Munich starting today and the news flow there is likely important as Germany is the biggest subsidizer (100%) of solar technology in the world at present.

DJ 6760 is pretty close to the next line I have – I’d prefer 6700.  I’d rather see the VIX 65 or higher.  There’s lots of fear, not enough panic.  We’re eligible to rally but I don’t know how strong it can be with the sell-offs so methodical and the lack of a climactic low.

Monday, March 2, 2009

March 2, 2009

Barrons profiled Dell, highlighting the company’s $5 in cash, its global presence and its cost cutting efforts.  I’m long some Dell from Friday for essentially the same reasons.

Intel and Taiwan Semiconductor are set to announce an agreement whereby Taiwan Semi will produce Atom processors for Intel.  This is a milestone event for Intel – their first foundry outsource agreement, I believe.

Citibank says Xilinx and Altera will at least meet if not raise guidance when they give their mid-quarter updates.  Altera has their mid-q scheduled for 3/2 post-close, Xilinx for 3/3 pre-open.  As the companies won’t give much more information than this brief snapshot of revenues and margins, there isn’t likely to be much follow through.  Xilinx indicated at the Goldman conference that demand had stabilized – the stock traded up $1.5 to 19 and then came right back again.  Business has remained somewhat stable, relative to their abysmal lower guidance.  A quick and powerful upturn is likely not in the cards.  This isn’t just an inventory correction – demand has plummeted also.

The NY Times ran an interesting op-ed piece where they asked a dozen economists when the recession would end.  It’s here if you’ve got some time.

Micron has allegedly offered their entire patent portfolio in the hopes of running the new DRAM conglomerate Taiwan is putting together.  If Micron doesn’t get the deal, people will be concerned about their competitive position, though encouraged by the inevitable capacity rationalization of the industry to come.  After competing with Samsung (who has the support of the Korean government) for so many years, Micron would rather not duke it out with Taiwanese chaebol if they can avoid it.   A decision from Taiwan on a proposed restructuring of the industry had been expected on 2/28 but the government postponed until sometime this week.


AIG got mo’ government money – their third dip into the kitty.  Their losses remain staggering.  Insurance stocks got absolutely slammed last week – expect to hear a lot about how they’re going to need bailouts soon as downdrafts in the markets bleed directly into their commitments now – annuities have guaranteed payments and those payments tend to be recouped in the stock market.  Insurance is based on the odds of an event not happening – as long as the counterparty doesn’t die prematurely, if their house doesn’t burn down, if they’re not robbed then the insurance company wins.  As insurance companies take premiums and invest them in the market, though, they’re all becoming undercapitalized as the market plummets.  The black swan event they typically model for is the counterparty getting paid off.  This time, the risk is in the market and none were prepared for this.

Markets typically wash out when there’s massive capitulation.  Government intervention removes risk of failure.  Without risk of failure there’s no incentive to sell.  By saving bad institutions, you keep the better capitalized and managed ones from reaping the gains of the losers in their industry.  By propping up all these institutions, guess what – no capitulation.  So guess what.  No bottom.

Good luck today.

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