by Kris_Tuttle on December 28, 2009
The market has been acting much as our friends at GaveKal have discussed as prices have “melted up” here in Q4. Fundamentally prospects for better business momentum in 2010 are good and valuations on many stocks we follow still offer reasonable upside.
As we enter the final few days I expect self-interest among many investment managers will push prices toward the best possible “market to market” at the close on December 31st. With volume light it will be easier to lift prices with concerted buying than usual. 2009 returns should allow many investment managers to post a strong annual return and pocket nice performance-based fees for the first time in a while. It’s also an ideal time to be getting a cash performance bonus as many popular asset classes like real estate are attractive if you have cash.
However after December 31st the motivation for pushing prices higher to maximize current compensation will evaporate and be replaced with speculation about Q4 reports and 2010 guidance updates later in the month. If true it argues for a little pull-back in prices with the first trading day in 2010 and into January depending on likely guidance versus expectations for 2010. (R2 will compile and publish our spreadsheet on that by mid-month.)
On the flip side tax-loss selling also applies to the few names that have lost a great deal of value in 2009, especially given the triple digit gains in so many stocks. In some cases this will push share prices down to levels where I’d add or own shares for a bounce in January.
I’d never pretend to know what the market is going to do in the short term but starting with a scenario helps to manage positions and exposure of a long-term portfolio.
No matter what happens in the last week I think Champagne sales will be healthier this year than last…
by Kris_Tuttle on December 17, 2009
The news is simple, in a rush to raise capital and reduce government control (to pay higher compensation) Citibank priced an offering “in the hole” as they say and in the process spooked the treasury out of selling their 34% stake.
We’ve seen most of the informed commentary that suggest the entire episode was “pathetic” and bad for stockholders. Although the transaction process was a mess (isn’t that one of their core businesses?) it’s not the big story.
The fact is the massive Treasury stake is now a major overhang and they have basically said that they are ready to sell but at a slightly higher price than the recent deal. In other words you have a monster seller sitting above the stock waiting for a price.
Now it’s possible that results will continue to improve at Citi and eventually there will be enough demand to “clear out” the supply but we are talking about one hell of a large supply of stock.
There could be some interesting trades here knowing all this. For example selling calls above where the Treasury would want out could be a safe bet given the right options strategy. (See related post on options as a strategic investment.)
[Disclosure: We have no position in Citi.]
by Kris_Tuttle on October 6, 2009
We’re listening to the latest economic and market analysis from the smart gents at GaveKal research and during the talk we were reminded of some conditions that existed during the most intense phase of the technology bubble of 1999 and 2000.
It’s obvious that China has been financing US consumption so that they could enjoy the growth that has helped to propel their economy. Equally true but less obvious is that Germany has been doing the same thing for weaker countries in Europe to the tune of a few percentage points of GDP.
Some may not remember that in 1999 we witnessed some extreme business practices. A startup company would accept a large investment from a larger company. At the same time the large company would be come a “marque customer” of the startup. On top of that cozy mutual reward system the startup would offer the larger company payment terms, basically financing their purchase.
In retrospect it is difficult to imagine that investors tolerated this type of activity. But tolerate they did and until the dam broke early in 2000 many embraced it with both arms.
Right now this same type of activity is going on with respect to China and the US and Germany and many of the EU countries. Of course the scale of these operations are vastly larger than what happened in the US technology sector back in 1999. But it has been going on for some time and there is no way to know how long it will continue. Some have speculated that the Germans tolerate it because the average man on the street doesn’t realize that it is going on and those that do realize it’s a bit like a fatal embrace. If Germany were to clamp down, their own economy would tank. The same situation vis a vis China has been discussed ad nauseam.
What should one make of this? In the short term there doesn’t appear to be much to do about it. The US and the global economy has stabilized and is recovering. All economic players are committed to maintain easy money for some time and the current worry is more deflation than inflation. Nearly all the players have a strong shared interest in maintaining this broadly faith-based system of measures to keep all the plates spinning.
We thought that a piece we published back in April of 2007 “What would Godel do?” was now very much out of date but it may come in handy again.
by Kris_Tuttle on June 4, 2009
The U.S. stock market has been described as “painful” by many of our colleagues. The recent rally left many on the sidelines. The move up came because “things stopped getting worse at a faster rate” but now it may start to feel that the next stage of “things actually not getting worse and likely to improve” isn’t quite clear enough to support a further rally.
Unfortunately there is no way to predict the short and medium term moves in the market. We’d love to ignore them but no matter how narrow our stock selection process they get caught up in the tide of market ebbs and flows.
As has been said for a long time, all one needs to understand is fear and greed and know which one is operating at the moment. But in this market they seem to be hand in hand and in the market every day. Witness the inflation debate. While most experts actually agree that there is no real evidence of inflation and cases can (and have been) made by GaveKal, Krugman and others that we will dodge this bullet. We may even do it in a fairly routine and predictable fashion.
All that reasoning doesn’t matter of course. We actually read a piece today from a sell-side firm (we will leave out their name to protect the innocent – there must be some there right?) that actually brought the hyperinflation of Nazi Germany into the argument. Seriously?!? Yes they did!
Now their piece goes on to say that their analysis suggests that we remain in a structural period of tame inflation and they don’t think that would change. But of course this shows up later in the piece, after the up front fear stoking comment about Nazi German hyperinflation.
This is what makes a market. That’s all fine and good but the schizophrenia in evidence makes it very hard to manage portfolios. It demands a daily analysis, affirmations and adjustments along with a healthy dose of risk management.
We are dealing with some pre-summer positions that will have to be closed or inoculated against losses. Palm is launching the Pre this weekend and thankfully Mr. Mossberg has weighed in with a pretty positive review. He rightly points out that the applications are missing and just a few days later Apple will be updating their iPhone which may kill off some Pre enthusiasm. Others have all given Pre a pretty positive review so the stock may continue to act well into the weekend. In the short term however it may well have run the course until more carriers come online and we see how the WebOS develops as a platform. It’s hard to have a reliable IV on Palm but $15 is reasonable at the high end.
Nvidia had a positive but muted reaction to the ION newsflow out of Computex this week. After hitting a high of $11.20 or so it has settled back to just above $10. Investors are still very worried about margins and remain very much in a “show me” state of thinking for the most part. However the company has their analyst meeting on the 16th where we expect mostly more of the same from management but an incrementally positive reception from analysts who continue to “dig in” to the story more and more. IV on NVDA is $15.
The Apple story plays out just as it should and there are few surprises there. This is a massively over-covered stock to be sure so doesn’t require much work beyond knowing where the IV belongs. Right now we are at $150 and are sticking with it until after the summer.
Emerging markets have had a great run. The group we bought (China, Brazil, Canada) is up 25% but should continue to do well (perhaps not as well) for the rest of the year so not much reason to reevaluate at this point.
Although our decision could change at any time our plan is to move from 25% cash, 75% long and 20% short to 50%/50%/15% by the Summer and keep a watchful eye on what still feels like an unsettled market.
[Disclosure: Research 2.0 has positioned in all the securities above that would be described as net long although some have options and other short components involved.]