Posts Tagged 'Italy'

Am I Still Bearish? Sort of Not

I have had very light equity exposure for an extended period of time with periods of being net short to being fairly long. Fortunately, with the indices having been range bound, the opportunity cost has been insignificant. As I mentioned in a prior note being bearish is exhausting, lonely and counter to my natural optimism (although I do admit to always maintaining a healthy dose of cynicism). Imagine taking your child to see 101 Dalmatians and loudly rooting for Cruella deVille to come out on top. Your kid shrinks away to another seat on the other side of the theater while others shun you. That’s how bears are treated.

I continually second guess my investment thesis, trying to see what the other side sees. I weigh the inputs underlying my stance, marking them to market. I try to remove the bias of my position as I seek additional data that is either supportive or unsupportive of my position. And of course, there is always the fear of acting from emotion that prompts a change in thinking, a feeling that you weren’t invited to the party, of being left out. And most of all, there is that greatest fear of all, of having reversed course at absolutely the wrong time. And in full disclosure, I have not always made the turn in a very timely fashion. I did well in 2008 but hardly made any money in 2009. Although I was still ahead of the game, it still didn’t feel good missing out on a ripping bull market move.

So where am I now? I am warming up to the market. Why? Well, I have often said I have seen this movie before and it ended badly but maybe there will be a different ending to this installment because everyone else had also seen the prequel to the 2011 financial crisis. My ending has banks struggling to raise capital, some, like Dexia or perhaps Greece, going belly up, credit continuing to tighten, economies contracting – the culmination of all these fears and others I haven’t listed causing a massive wave of selling. But guess what? Merkel and Sarkozy and the more responsible members of the G-20 and EU were also around in 2008 and they have no interest in revisiting that scenario. Granted they have waited too long and the cost of delay has ratcheted up the price of a cure. Germany and France have the most to lose by not putting forth a viable solution. While expectations for a total and complete solution are still high, they have been ratcheted down enough to be attainable, or near attainable with the promise to be completely resolved in the next 3 to 6 months. Shock and awe is not in the cards and everyone knows it. But will they give us enough to put a floor under the market and cause under invested funds to chase performance? I think so.

Swimming upstream, against the tide of bullishness that is the unwavering stance by the vast majority of pundits and market participants is difficult enough but imagine the flood gates being opened and the water gushing at you as you flutter kick your portfolio like a foam kickboard. The world is awash in liquidity. It all comes down to not fighting the Fed. But the much maligned U.S. Fed has recruited a legion of Central Bankers to fight the battle: the EU, IMF and China. This is a massive liquidity push by every printing press on the planet. So for now, I am entering into surrender negotiations and further increasing my exposure further.

I am by no means becoming fully invested for I still have that evil twin whispering in my ear. The global economy is in terrible shape but what do I know that others don’t? I don’t have an edge on China – it’s a property bubble that has already begun to leak – but the Chief Communist (as opposed to Chief Economist) knows that. I think that will end ugly but they can throw enough money at it in the interim to allow the S&P to rise to 1250, a random number, while their market declines. Europe is in recession but that thinking is convention and is nothing that $1.3 trillion can’t cure.

The most alpha will likely be generated through commodities and materials – the most economically sensitive investments – but I can’t go all that way in. There is too much risk in case I am wrong. I do like the fertilizer companies for the long term and although recovering, they have been beaten worse than a Middle Eastern dictator. I still prefer the more boring fundamentally, bottoms up investments epitomized by MDRX, KO, QCOM, WLP, NIHD. My risk is in bottom fishing on HPQ and, dare I admit it, RIMM. I cut back my Euro short against the dollar but will rebuild that position again at some point.

How long the cure lasts is what keeps a lid on my exposure. At some point austerity leads to slower growth and U.S. economic policy is non-existent as Washington remains rudderless. Everyone believes China will bail out every local government, corporate and individual spectators but I don’t. After all, they are communists and not prone to providing handouts to failing billionaires or local governments who have repeatedly disobeyed central government directives. There will be some pain to teach them a lesson.

I won’t be discouraged if there is a sell on the news mentality once the EU deal is announced. And I am rooting for another delay in the announcement because that means they are still arguing – eh, negotiating. And I expect leaks from the negotiations to cause some volatility. We should continue to move higher, perhaps rally 20% before going lower, likely hitting prior lows.

Whoops, there I go again.

The European Sucker Play; US Stock Bargains; Apple

The most important real near term news coming out of Europe will be the ECB rate decision tomorrow. Trichet is bidding adieu at the end of October and this is his last opportunity to reverse the prior rate hike. Does he head to Hotel du Cap admitting a mistake or stick to his guns and allow Mario Draghi to cut, although he has previously said it isn’t necessary. Perhaps the economic releases this morning may spur the correct decision, in conjunction with recent declines in commodity prices. Eurozone services PMI fell to 48.8 from 51.5 according to Markit survey, first month since August 2009 below 50. In other releases, Germany was sub 50 as well, France barely above 50, Italy and Spain continue below 50 at very low levels of 45 but they are already in recession. My guess is that France and Germany experience contractions in economic growth as well.

More importantly, does the troika come up with a major bail out prior to Trichet leaving and before Draghi takes over. Not sure how many EU members want an Italian telling them they have to pony up vast sums to save Italy. Fox guarding the chicken coop? Not quite but this will ratchet up the opposition or lengthen the time to cure if Trichet doesn’t act first.

The Financial Times had the story that wasn’t a story. The following 2 lines squeezed the shorts, lit a fire under those with light exposure and gave us all something to talk about.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.…”

Rehn’s statement was nothing more than an attempt to put a temporary halt to the market crisis, an admirable goal, but hopefully there is ultimately more substance behind it. With the public division in the EU about solutions, I fear any resolution will be a long time in coming. Even the ESFS is flawed with Italy and Spain committing to guarantees of 79 billion Euros and 52 billion Euros, respectively. And, of course, Greece has agreed to be on the hook for 12 billion. I feel better now.

So the market basically did a hosanna that it has dawned on the EU finance ministers that they have developed a sense of urgency and will act together. Truth is we don’t know that they will act together but ultimately there has to be a plan. Unfortunately, from where I sit, the plan won’t be good for anyone, particularly the banks. We need a flush of the credit markets with tremendous pain being visited on the private sector because the political will for government to bail out all troubled banks and PIIGS does not exist. The result would be to wipe out the equity of a number of French banks as we are seeing with Dexia, which was originally bailed out in 2008 by France and Belgium. Now here they go again. Public shareholders have twice suffered significant losses. Dexia is also a good example of contagion as the municipalities in the US that do business with Dexia will likely see their borrowing costs increase as a result. And this is a minor case of contagion; it will get worse (Plus the 2008 similarities continue with good bank/bad bank solutions that don’t work.)

My bet is that Greece defaults in a “controlled” manner (not sure that exists) with limited alimony payments from the EU as a going away gift. At the same time, Italian and Spanish debt issues are ring fenced, the French banks recapitalized after taking significant write downs which almost wipes out equity holders with new shares or debt being backstopped by Germany and France as the main players. France loses their AAA, which is past its sell-by date anyway. We will also see massive liquidity injected into the European financial system causing a further decline in the Euro.

I’m waiting for this event to increase my exposure. With the slowing in China, Europe and the U.S., I’m highly confident that I can get a better entry point and keep more hair from falling out.

AAPL – still a cheap stock and the issues are well discounted in the stock price. I’m not going to beat up on Street research – well yes I am. The Street clearly has no idea what is going on with the company. If they can’t get major product launches correct, how are they doing the more difficult task of forecasting. It took me a few days to get a number I was looking for which is what percentage of ipads sold are wifi only. I’m going with the only answer that I got which is 65 – 70%. This is interesting because much was made of the fact that the new Amazon product is only wifi. Well, at a $300 difference for a product with a great brand name and very good functionality, if I didn’t own an ipad, I would seriously consider the Kindle Fire. I know that the ipad has 425,000 apps and the Fire doesn’t, but frankly, I ran out of patience after putting the first 150,000 apps on my screen. My issue with AAPL is margins. With strong competitors like Amazon and Google (android) at lower price points, is yesterday’s pricing of the iphone 4 and 4S a harbinger of lower margins and more competition? Apple has never been one to price to competitors’ levels but shouldn’t hat have to change? Tim Cook noted that 92% of the Fortune 500 are testing ipads. The opportunities in the enterprise space are interesting but keep in mind that most likely this is demand push by Apple, a common sales technique which I am glad to see them employ. I’m sure there is reverse inquiry as well. I would also guess that corporate procurement execs are more concerned with costs in a challenging economic environment and agnostic as to which quality brand they purchase. The dominant corporate usage is also likely wifi since it will be on premises as ipads are not a good substitute for laptops. Nonetheless this is a great revenue opportunity particularly if it scales into other Apple products.

Finally, on the US. We’re still without a plan and the economic numbers continue to look punk, today’s non-mfg ISM the latest example. Freight stocks are moving higher despite yesterday’s IATA airfreight numbers remaining below seasonal trends indicating a slow economy. Asia and the US showed particularly poor.

Even though the market is oversold and will have bear market rallies, I remain on the sidelines for the most part but do like a few stocks.

Wellpoint’s valuation seems compelling at less than 9X 2011 EPS. Company guidance is in a tight range either side of $7.00. They just added $5 billion to their buyback, an astonishing 21% of the company. Management said it will be completed over several years but they just bought back $1.5 billion since announcing a $1.6 billion program in February. That was about 5%. Plus I’m getting an okay yield of 1.6%.

I also like KO. Not huge growth but very dependable, the risk to earnings from currency being discounted by recent downgrades from the Street. At a 12 P/E and 3% yield it provides good, lower beta market exposure. If market explodes higher, neither WLP or KO will lead the pack but I will participate in the upside with limited downside.

QCOM remains a core holding. Tim Cook is an engineer and over saw procurement so he’s definitely on board with QCOM as the relationship, started in earnest this year, has taken root on his watch. They own CDMA and are embedded in android as well as ipad and iphone. QCOM ahs also been very friendly to shareholders, often returning capital.

HPQ is also inexpensive, even with a haircut (all the rage in financial circles these days) to earnings. My primary concern management, including the BOD. Still wish Meg didn’t speak about making the quarter. Would rather have had her reset bar lower.

Yesterday’s Blog – Nat Gas; Netflix (NFLX) Hastings Has A Solution for Europe; President Obama, Merkel,

My sources provided unique insights into the European Finance Ministers’ Meeting in Poland this past weekend:

Germany: I would like to invite Herr Geithner to our little party.

Poland: Whatever you say, boss.

Austria: Absolutely not. He has no personality and is way too American, always telling people what to do.

France: It’s a long trip and he probably won’t even come. He’ll probably just send a really big check as a gift with his regrets.

Belgium: Rubbish. I heard he’s in debt over his head and his boss is soon to be out of a job which means he’s also on borrowed time.

Germany: Look, I am paying for the party and I want him to come. Hopefully, he says nein and sends a check. If we don’t invite him we stand no chance of getting anything from him.

Austria: Fine. He’s your friend but I’m warning you that if he starts bossing us around, I won’t be able to hold my tongue.
And so it went.

NFLX continues to be a short, the CEO’s mea culpa aside, if for no other reason than content costs will significantly crimp margins. Perhaps the Europeans should look at Hastings strategy and separate insolvent Greece from the rest of the union, the Greeks being the NFLX version of a legacy DVD business. Apparently, Hastings doesn’t want his company’s valuation in the market to be painted with the broad brush of a declining or slower growth business so he is separating the 2 businesses. Perhaps Merkel et al should invite him to their next get together. At least he is sure to bring the entertainment.

So here I am in Nashville sitting at the gate waiting for my flight to Newark. CNN is on and everyone seems to be transfixed by the conversation leading up to the President’s speech on deficit reduction and taxes. I don’t think I have ever seen this level of interest before. Most have barely taken a bite of their deep fried bagels – everything is deep fried here, even the sushi. This is America, Nascar country as their attire attests, Dale Junior’s number featured prominently. I often wonder why they revere Junior given he’s crossed the finish line about as often as an Obama legislative proposal on taxes.

Like an Earnhardt fan, expectations were apparently incredibly high going into the weekend. But like an Earnhardt fan, the experience only resulted in disheartening disappointment. I’ve noted before that our two party system can’t agree on much these days so any expectation that the Euro’s 17 backers, some with effectively more than 2 party systems, will agree on a bailout measure for the banks and the PIIGS in a compressed time frame is folly.

Merkel is losing her mandate as yet another election pointed out this past weekend as her FDP partner suffered defeat. This conceivably puts Europe in a precarious position without a strong voice. Clearly, the coalition is fracturing, unable to even offer a carrot to the markets when they knew one was so desperately needed. Expectations are possibly higher for the FOMC to release a Q3 type statement on Weds. But even if they do, it will only provide a short term lift to the market for the economic fundamentals continue to worsen. Yes there are pockets of strength, the high end has been the savior, and the Apple ecosystem has done more than its share, but there is no disputing the declining economic picture and I would not continue to look for the upper end consumer to thrive, not in the face of higher taxes. Bullish prognosticators note the decline in the averages from the peak as more than having discounted any perceived economic malaise while hanging onto the belief that we are in a soft patch. Need I remind them that when the market rose to such heights, the global economy was on an upswing and the European sovereign mess just a twinkle in a dollar bull’s eye. Now the economy has slowed, if not reversed, and the collapse of the potential for a collapse of the Euro is real.

But the President has an answer for us. He wants to tax investment income as ordinary income, essentially removing any incentive for assumption of risk. In a perilous market environment, why put any capital at risk if there is little chance for reward? Less investment means less money sloshing around the economy and fewer jobs being created. And while we’re watching the acrimony in Washington, how about drafting the rest of us into a financial civil war, dividing the citizenry into two classes, pitting one against the other, all in the name of politics?

None of this is positive for the economy or the markets which is why I continue to be bearish

I added to my Euro short against the dollar on Thursday and still believe par is where the Euro will ultimately reside even if the new Troika comes out with a bailout package. Actually, that will further fortify my already strong conviction. Given my view on the slowing world economy – yes, even China will slow – I have exited my energy positions for the most part recalling that crude got decimated in the ’08 financial meltdown as demand suffered and speculative traders lost their appetite for risk (and their margin). The one bright spot is LNG as global demand is increasing sharply as a function of Japan and Germany using less nuclear power and Japan, China and India looking for a next generation solution to their burgeoning energy demands supposedly willing to pay as much as $20/btu all in. As more tankers and terminals are built for export, this will help sop up our overabundance of natural gas. And although I have little faith it will happen, should the administration ever propose a real energy policy, that, by the way would also create a number of jobs, natural gas would have to be in the equation.

I guess I’m not really surprised by the muted reaction in gold to all the negativity since gold is a risk asset and the appetite for risk is waning once again and margin requirements more lofty. It’s not a bad thing to see a high flying trade enter into a consolidation phase. I will keep my eye on it, looking for opportunity but will probably miss it again.


Latest Tweets

Enter your email address to follow this blog and receive notifications of new posts by email.


Follow

Get every new post delivered to your Inbox.

Join 6,119 other followers