The Interest Rate Isn't the Problem.

Hey everyone,

I realize my posting schedule has been non-existant;however, it is not without reason, Intigril Capital Management has been working towards putting a lot more money into the market and I've been tied up. That and a little thing called EARNINGS SEASON.

However, I'm not going to talk about earnings today. I want to talk about the federal reserve's recent decision to cut interest rates. Now, there has been a lot of talk about this decision- isn't there always? - and two camps have been:

1) It was really important the the fed cut rates
2) Who cares about the rates, they aren't going to make a difference.

I agree with the second opinion, but it is for the reason that the first opinion is correct.

Confused?

Right now, despite the rate cuts, you are still seeing mortgage rates increase, regardless of whether they are credit card interest rates, 15 year mortgages, or 30 year mortgages. The problem isn't the supply of money. Its the demand for it. For years, via subprime lending, we greatly magnified demand for home loans and further amplified this demand by mass approving Home Equity Lines of Credit (HELOCs).

If a bank assumes that very few people default on their loans and at the same time increases the number of loans, then you can lower interest rates, because losses on a few defaults can still be covered by the few defaults. However, volumes for mortgages are down. Instantaneously, the interest rates go up, because their aren't enough people to spread around the losses to.

Therefore, a major component of the credit freeze is not the supply, it is the DEMAND.

Now, supply is really the best that it can be. With federal rates this low , banks do have a reasonable margin. So the reward for banks who chose to lend is still there. However, with lower demand AND a weak economy - the risks simply outweigh the reward.

So, was the rate cut important?

Yes, because it helps keep supply up.

But will it make a difference?

Not until the economy recovers and demand returns. Until then, the risk of lending will outweigh the rewards of lending.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

I am so sick of Japan./ Earnings seaon is here!

Dear Japan,

Please stop crashing every time the wind blows. Seriously, I'm sick of trying to figure out which obscure currency shift is causing your daily "THE END IS NIGH!" selling. Thank you for your attention to this matter.

Sincerely,

Mansij Hans, E.I.T.

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Hey everyone,

Thank you for indulging my letter to Japan. Anyway, earnings season is already in full swing, lets re-cap a few companies:

Jones Apparel and Liz Claiborne:

Down after weak earnings reports. You might remember that awhile back I specifically told you not to invest in "specific retailers". I told you so.

Ebay:

Down on poor outlook. Honestly, the word on the street is that ebay is really upsetting their US customers. They fired something like 10% of their employees and are using what would have been their future salaries to buy two businesses in Europe. Because the economy is SOOO much better in Europe. Morons.

Intel

Beat earnings estimates. I can't say I'm that suprised, they are really wiping the floor with AMD.

Alcoa

This was by far the dumbest reason for a stock price to drop. The stock price went down because profits were down 52%. Now, normally that's a good reason for the price of a company to drop. However, was it really that suprising that a company that sells metals had a bad quarter if you can see that all metal prices are plummeting?

On October 16th:

Google - The proble with Google is that people are becoming incredibly bearish on technology stocks. This is part a result of the fact that a lot of hedge funds are just dumping stocks to raise cash. The other reason is because technology is perceived to be the most negatively leveraged to an economic downturn. The basic idea is "Who is going to spend cash on $299 Ipods?"

So, Google is a falling knife. It is going to have somewhere in the range of a 10% drop or jump as soon as the earnings report comes out. If it goes down, I would buy it if you can hold onto it for a long time. If it goes up, I would wait until the wind blows again and the price drops for another random reason and then pick it up if you can hold onto it for a long time.

Prediction: 10% swing, one way or the other.

CapitalOne - I've made no secret of my belief that I think CapitalOne is undervalued. I think that unlike the other banks, they will not lose money and while their profits will go down from last year, their stock price will increase as a direct result of this earnings report.

Prediction: Up to at least 45 unless the market goes down 5 or 6% that day.

AMD - Like I mentioned before, this report is going to be a disaster. They still haven't answered Intel's Core Duo 2.

Prediction - 5% or greater drop. Perhaps a multi-year low.

Gap Inc. They just don't have the "cool" feel to them anymore. Take a hint from Liz Claiborne and Jones Apparel.

Prediction: They've been hammered about 33% in the last MONTH. The earnings report will likely be bad. Considering their P/E ratio is about 9 and a lot of their competitiors have a P/E ratio of 2 or 3, Gap has a good chance of dropping another 10%. Best case scenario is that it remains unchanged. I think this best case is highly unlikely.


That's it for today, let's see how I do. More tommorrow.


-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Dead Cats will Bounce.

Hey everyone,

8 days ago -or 6 trading days ago - I said the best trading strategy was to, "Sell the days that go up. Don't buy the days that go down"

Hopefully, you listened to me, because despite today's rally, the Dow is still down 1000 points from close on Friday, October 3rd to close yesterday, October 13th.

Now, the real question is what do we do from here. Buy, Sell or Hold?

The answer is all three.

If you were long in the financials (why you would do that to yourself, I have no idea) - take today's rally as a gift and sell. They may go up again with the government's big announcement today, but let's face it - good news in the financials is that a given company won't go under. Is this really where you think you you'll make any money in the next few months?

The above is also true for insurers. Insurers are screwed.

If you have a position in technology - stay there. Yesterday's rally really helped tech because they got disproportionetly hammered over the last several down days. If we see the stock market drop a little tommorrow, there are a few tech stocks that ICM is eyeing to pick up, but we won't pick them up unless they hit certain valuations. I think over the next few days you'll see some recovery in tech...but if the markets go down, that recovery will only be that tech doesn't go down as much as the rest of the market.

So what to buy? Aspirin.

But seriously, as far as I'm concerned, as of market close there is nothing that is screaming "BUY ME!!!". At 40/share, I think COF is a buy, not a screaming buy. They report earnings this thursday, and I expect the stock to be above 40 by the end of the week, but I'm not a 100% that it will be above 50 by the end of the week. I'd dump it at 50 (or even at 45) for the short term play. However, long term - by which I mean in 2 years or less, its going to be at 60 AT LEAST.

SHLD is a buy too, and considering it declined today because of the resignation of the CFO, it is very close to a screaming buy. However, I wouldn't say its a screaming buy until it is below 60. Buying it at 67 is still the right decision, but it's not fool proof. Also, anyone that thinks that the CEO and chairman Eddie Lampert isn't the de-facto CFO is a moron. Who cares about the damn CFO when Lampert is running the company?

Also, I'm in the middle of earnings season right now, so I expect that I'll have my usual earnings season predictions up tommorrow or the day after.


-Mansij Hans, E.I.T.
Member, Intigril Capital Management


P.S. I'm just getting in details on the 250 billion capital injection that was being whispered around Wall Street and it looks like the federal goverment is forcing banks to give the government big equity stakes in exchange for cash. This is heavily dilutive and and I imagine that the banks are going to see their share prices cut. The only problem with this drop prediction is that with the extent of negativity in the market, you may still see prices go up short term for some of the banks because the risk of bankruptcy may been priced in.

Why I wish I was right.

Hey everyone,

So trading in Japan opened about an hour or two ago, and I can't tell you how worried I am. The Nikkei - Japan's major stock index - is down over 3% in that time. The dollar is up about 1.4% and mortgage rates today are less than that of the same day last week - but the market is still plummeting.

Right now, the European governments are scrambling to save their banks and the word on the street is that they may need an emergency rate cut to keep their banks alive. The problem is that a rate cut from Germany doesn't help the French banks or the English banks or the Spanish banks or the Portuguese banks. Unless all the individual countries band together and all cut their rates, Europe is going to be a disaster.

I know my prediction for the S&P bottom was dead wrong - it breached 1,200 and has continued to stay below that level - I am sorry.

Do I think its going to get worse? I think its very possible that we'll see the S&P breach 1000...and continue to go lower.

However, even if the S&P doesn't breach 1,000, I do not expect the US economy to be in the midst of a recovery for at least a year - and I think that's being generous.

What the trading strategy?

Sell the days that go up.

Do not buy the days that go down.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

This Week - A Perspective From A Hedge Fund Manager.

Hey everyone,

This week has been nothing short of awe-inspiring. On Monday, the largest point drop in the history of the Dow Jones Industrials.

I was actually in the Detroit airport when the market closed and the scene was unbelievable. There were more people huddled around the TVs showing CNN than were looking at the TVs with the flight information. I've been flying since I was 2 months old, and I've never seen anything like it. Same scene played out when I was in the Salt Lake City airport later that day. People were just in complete disbelief and trying to make sense of the collapse.

We had an emergency call to find a few buys, but really even with 20 point drops in companies like Apple, we still weren't convinced of a strong abrupt rise for the rest of the week.

We wanted to buy Goldman Sachs, but it "only" dropped 10 points, which wasn't down far enough for us to make a trade.

The nearly 500 rally in the Dow Jones on Tuesday was nerve racking. The problem was the market was going up for no identifiable reason. We saw loan rates go up that day and there was no real reason for people to be buying.

Of course, the subsequent days validated that assessment - with the S&P dropping 5%

We did manage to use Wednesday to lower the basis in one of our investments.

Thursday hit me very personally. My employer's stock, Monsanto, dropped nearly 20%, in a matter of minutes following a downgrade by Merrill Lynch. I own less than $100 worth of Monsanto stock at any given time, and not by choice - only because of my 401(k) match which I need to manually diversify every two weeks. However, many of my fellow employees own major stakes in Monsanto in their retirement portfolios - hundreds of thousands of dollars worth.

As I was working that day, I thought to myself with much empathy, I told you so.

Normally, ICM does one long conference call every Sunday.

This week, we talked to each other every day and were constantly firing emails back and forth to explore advanced strategies that we could quickly execute.

Today, Friday was an unusually twisting day. We were trying to execute an options spread on some fairly illiquid options positions while the bailout was being voted on a second time.

My computer had an internet stream from CSpan.com, real-time quotes from Yahoo! Finance, and our brokerage website up at the same time making sure that I wouldn't execute the order under unfavorable conditions.

At the end of week, after what we hope (perhaps in vain) is the most tumultuous week we will see, we were still beating the market by 19.5%.

Tune out the noise. Not the market.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

My Bailout Plan.

Hey everyone!

TEN BANK FAILURES!!!! WOOOHOOO!!! Or rather, WaMu! That's right, the bank who's nickname sounds like a hybrid goat created somewhere in the caves of Pakistan, has now been seized by the feds!

JPMorgan, the hahawegetnoriskthanksunclesam-purchaser of Bear Stearns, has bought up several thousand WaMu branches and billions in their assets.

(50 bucks says they buy Wyoming next)

Anyway, with the economy tanking, Congress has been scrambling to throw somewhere in the range of 700 Billion to buy out the bad CDOs....

...that is after it already:

1) Given JPMorgan a no-risk deal to buy Bear Stearns
2) Sent out $150 Billion in stimulus checks
3) Rescued Fannie Mae and Freddie Mac
4) Rescued AIG

Here's my question...does anybody actually know the percentage of foreclosures? I mean, really, do you?

Here lets do a multiple choice:

A) 10%
B) 20%
C) 30%
D) 40%


The answer is....NONE of the above. The answer is 2%-3%. The problem isn't the number of foreclosures!!! Most of the CDO's are paying near the correct amount of interest. The problem is that no one wants to buy them and so, because they were bought with borrowed money, the value of them needs to be written down, and the banks need more cash to remain what is called "A well-capitalized institution". If the banks had bought these with cash, they could hold onto these CDO's to maturity and just get a constant flow of interest and the principle repayments

So, we need to give $700 Billion dollars to these banks because they made one bad business decision?

NO WAY. NO HOW. NO BAILOUT.

So, how do we restore confidence to the banking system?

Increase FDIC insurance to $1 million/account. Hell, make it $100 million per account.

Insure every dollar in cash that every hard-working American has. This way, even if your bank goes under, you know you'll get your money.

This way people don't keep on causing runs on banks. The banks remain well capitalized institutions and the fear leaves the market. Now, with their deposits run-proofed, the banks have enough time for the CDOs to come to maturity and yield profits.

This will cost MUCH less than 700 Billion. You know, unless like half the united states had the entirety of its savings in WaMu.

(it doesn't)

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

Disclosure: The other members of Intigril Capital Management do not necessarily share my views on the above proposed bailout discussion.

Someone! Quick! That squirrel needs a bailout!

Hey everyone,

Anyone else think that the stock market has bipolar syndrome?

...and do you think that Paulson, when he was CEO of Goldman Sachs, ever thought that would end up being the Treasury Secretary during the biggest financial collapse in nearly a century?

Most of the business news media has been discussing whether bailouts are ethical or not and a lot of philosophical questions associated with what has happened over the last few days.

Considering I graduated with a double major in chemical engineering and biology, I'm not interested in discussing philosophy. I want to know what to expect come the opening of international trading on Sunday night (and the opening of the NYSE on Monday morning).

Immediate effects and recent events:

1. Oil
Spiked from its recent low of around $92 all the way back up to $105. Not suprising considering the dollar depreciated about 2% versus the euro.

2. Heavy rallies from the financials - and satellite companies?
However, there was another effect - other non-financial stocks which were heavily shorted also rebounded significantly. Sirius XM is a great example - outperforming the S&P by 15% this week.

3. The miracle company - CapitalOne

I've been extolling the positives of CapitalOne for quite a while now. Their stock - DESPITE NOT BEING ON THE SEC's NEW ILLEGAL SHORTING LIST - SKYROCKETED FROM 46 TO 56! By the way...for those of you who are paying attention - I recommended this stock when it was at 36.

4. I'm Eddie f***ing Lampert.

Eddie Lampert got his first job at Goldman Sachs when he was 15. He was a child genius who became one the best traders on Wall Street. He now owns Sears.

Now, his company's stock is under attack. TWENTY-FIVE PERCENT of outstanding shares were being sold short.

So what does he do?

He says, "I'm Eddie f***ing Lampert" and then...

...proceeds to buy back 4% of shares in THREE MONTHS (normally takes 1-2 YEARS).

The price of the stock goes from 70-ish to 100/share.

Some people shorting his company lose as much as 33%.

Why did he do that?

Because...he's Eddie f***ing Lampert.

**********************************************************************************

So, what does all of this actually mean?

1) Trust the book value. Companies that should not be trading below book values - such as Sears and CapitalOne - are now buys.

2) If you lost money on energy companies recently, I would use the momentary spike in oil prices - and the increased price of oil companies - to sell off the energy companies. Collapsing demand can only be buoyed by the weaker dollar for so long.

3) Covered calls are probably a winning strategy for companies whose only major concern is consumer slowdown. I would be more reluctant to do very specific retail -such as Guess and Ralph Lauren, but I think covered calls on APPL and BBY are probably solid strategies. Don't touch Circuit City or Gamestop. Circuit City is slowly dying and Gamestop is just too risky as their trade in service is starting to upset customers. I think covered calls on pharmaceuticals are a great idea too - especially GSK and SNY are great too. I don't expect the market to be up 30% in the next year or so and a covered call can often net you 30% with only small upward movements of the stock.

I think that's all I have for right now. Keep on reading!

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Buy EVERYTHING (also, ICM is awesome)

Hey everyone,

As I'm sure you found my pictorial posts about yesterday's stock market hilarious, I wanted to make the point that the title suggests:

Buy everything on 9/16/2008

(except for energy, financials, and AIG)

Buy some damn index for all I care....sell a kidney to finance it for all I care. Just buy SOMETHING that isn't going to tank. Buy some Best Buy. Buy some Sears. Buy some Apple. Buy some CapitalOne. Buy some Discover Financial Services (Those last two are financials, but I am highly confident about them in the long term).

In reference to Sears, I TOLD YOU SO.

Awhile back, I told you that I was a 100% sure that the S&P would not close below 1,200. Today, it closed at 1,192. I was a whole 0.67% wrong.

After today, you might ask, "Mansij, how is ICM managing its money since they made their first trade on 3/14/2008? I mean, I guess since you were marginally off about your prediction for your bottom, your investments probably aren't doing that well."

The investment decisions made since ICM's first investment on 3/14/2008 to market close on 9/15/2008 have outperformed the S&P average by 8.44%.

I was definetly wrong about the bottom by 0.67%, but I'd rather be wrong about a largely irrelevant metric and up 8.44% than be right about the S&P and be down 95% because I decided to buy Lehman Brothers.

Needless to say, we're all pleased with the results, but much of our strategy is expected to come to fruition in the next six to twelve months, so hopefully we can return even higher by next March and next September.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Update on Today's Stock Market

Hey everyone,

Here is my pictorial update on today's markets:

and furthermore:

That's enough for today (you know, until Asian markets open tonight).

-Mansij Hans, E.I.T.

Intigril Capital Management

My take on Lehman

Hey everyone,

Here is a little something I've whipped together to describe my sentiments on the Lehman filing for bankruptcy protection:


Thank you. That is all.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

Why Boeing Doesn't Need 18 Billion Dollars Right Now

Hey everyone,

Right now 27, 250 unionized machinists at Boeing have been on strike for about a week. The union has 140 million in the bank to support striking workers - a 6 month supply - and analysts are estimating that each day the machinists are not at work, Boeing has 100 million dollars of deffered revenue. That is, Boeing cannot charge its customers 100 million dollars each day that the workers are on strike. Therefore

30 days/month * 6 months * 100 million defferred revenue/ day = 18,000 million = 18 billion in deffered revenue

Now, I'm not categorically anti-union. I don't want to see worker's conditions like we had in the days of Andrew Carnegie. However, Boeing is in a situation which it cannot, under any circumstances, allow these workers to get what they want. Airbus, once an afterthough, is straining Boeing. Northrup Grumman is also voraciously fighting for that $35 Billion tanker deal that should have been a shoe-in for Boeing. The airline industry and the military needs new planes at a time they cannot afford them. Boeing is fighting for its place as the undisputed leader in aviation design.

Now, details of who wants what are confidential, so for all I know, Boeing could be wanting to cut workers pay by 50% and be asking for the sacrifice of their first born child. But I doubt they are. I would be suprised Boeing could be that heartless.

Striking during this time when Boeing's standing in its industry is under attack is unethical on the part of the workers. They should continue to be working on their old contract while working towards a new one. If Boeing had gotten the $35 Billion tanker deal, I'd probably be okay with the workers striking. But with the frequent delays on the new 787 dreamliner and the nebuluous state of that tanker deal, the workers need to invest in their own company.

How?

Agree to the old contract until the first 787 Dreamliner is produced.

Everyone knows that the new 787 Dreamliner will destroy Airbus' market share. Tell Boeing they'll accept their old contract until the unions crank out the long delayed dreamliner. Then, when the first 787 dreamliner comes out they get a bigger increase than they otherwise would have gotten. This allows Boeingto become an effective competitor with Airbus and Northrup Grumman and the workers show they care about Boeing, not their own salaries.

Unless of course the workers don't care about Boeing.

If you want a viable business, you need to be willing to compete. The workers don't want Boeing to meet the challege that Airbus and Northrup has given them.

These workers don't deserve to call themselves Boeing employees.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: My views on the Boeing Machinist Union strike do not necessarily reflect the views of the other members of Intigril Capital Management.

Layman...oops, I mean LEHman.

Hey everyone,

I was worried as I drafted this article about Lehman that there would be a concluding development around whoever the heck decides that a share of Lehman is worth more than an extra large value meal at McDonald's. But, oh well, here goes:

So, for the whole year Lehman has constantly been saying, "We're fine, we're fine, we've got tons of cash."

What they neglected to emphazie is that the still have 42 Billion in subprime CDOs.

So, of course, they said on Wednesday, we'll sell part of us, and that'll make people feel better!

- Apparently, it made people feel so good the stock dropped 40%.

Then on Thursday they say, "Okay, Okay, we'll sell all of us"

- That made people feel so good, the stock dropped ANOTHER 30%

Paulson then says that he will not bailout Lehman.

- The stock drops another 10%.

The CEO orders chicken salad for lunch.

- Stock goes up 2%.

My favorite part happened after Lehman said they wanted to sell the whole company:

Goldman Sachs, about 5 minutes after Lehman's annoucement, has an anonymous source through some news publication say that they have no interest in Lehman.

Prefontaine couldn't have run away that fast from Lehman.

But seriously, there is something odd going on with the share value of Lehman. As recently as a week ago, Lehman was believed to be valued at between 8 and 10 billion. This is the value of their Neuremburger unit- which is their super-excellent investment banking arm....and has been generally accepted as the value by analysts and investors. Therefore, Lehman should cost between $11.50 and $14.50 per share.

As of 12:18 pm on 09/12/2008, it is trading at $3.55 - a total value of 2.47 Billion.

Now, a week ago, I would have been shorting Lehman...but at this valuation - it seems the right thing to do is to BUY Lehman. Unless there is some magical reason that the value of all the CDOs has magically changed by as much as 7.5 BILLION dollars in the last week. The other factor which makes me think that Lehman may be undervalued - and that is what led to the purchase price of Bear Stearns being raised from $2 per share to $10 per share. Bear Stearns, like Lehman has much of its shares held by employees. Therefore, the employees are much more likely to argue for a 8 to 10 billion valuation.

One critical difference though.

JP Morgan's buyout of Bear Stearns was backed by the federal government and, as Treasury Secretary Paulson said, Lehman's may not be. Therefore, its not exactly the same low cost situation for any potential Lehman buyer...and that's the big risk anyone who buys Lehman stock is taking. A buyer could argue that with Lehman's leveraged position - the total assets Lehman owns when sold cannot cover the money borrowed to purchase them. Without federal backing - no bank is willing to take what has a reasonable potential to amount to a severe loss.

Honestly, I think Lehman should just default on the debt. The more deflation we have, the lower gas prices go. I'm always a fan of that.

-Mansij Hans
Member, Intigril Capital Management

A slippery, oily slope.

Hey everyone,

I had to refresh my browser....repeatedly...when I saw that OPEC is cutting oil production.

Cutting production by Five hundred thousand barrels a day:

500,000 barrels *42 gallons/ barrel = 21 million gallons of crude per day.

However, despite the temporary price pump, I can understand why they are doing it.

It goes back (a whopping 48 hours) to Fannie and Freddie. If the US currency stabilizes or appreciates - the non-US demand for oil decreases. Oil is traded in dollars (except in Iran) and therefore appreciation in the dollar increases the price of oil to people in countries that don't use the dollar.

Let me explain this further - if you are a Brazillian company and you want to buy oil on the open market you need to take your Brazillian Reals (pronounced ray-ALS) buy US dollars and then buy the oil contract. If the US dollar appreicates, it takes more Reals to buy enough US dollars to buy a full contract. Therefore, you see a higher price and are less likely to buy oil.

Now, the most critical reason why production was cut in an effort to temporarily boost prices or stem the decline is any country that SELLS oil in currencies other than the dollar makes less money when the dollar appreciates.

So, if you are Iran, the only country which doesn't sell oil using the US dollar AND the traditional price hawk, you are going to do everything in your power to keep the price of oil as high as you can. Normally, OPEC votes with Saudi Arabia. This time, Iran, Algeria, and Venezula must have had enough push to override the Kingdom. Algeria has nothing except oil and Venezula's Chavez needs to prove to people that he is willing to fight for higher oil prices which basically keep him viewed positively by the poor - who were the source of his rise to power. Put this all together and you have an output cut on your hands.

Yet...oil seems to be holding around $104 (@ 1 AM EST 9/10/2008) in international trading. But with the dollar still having room to appreciate...OPEC is probably wishing they kept prices at $70 and didn't encourgae every American to dump their SUV.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Apple's Big Presentation

Hey everyone,

I already have a post up for Tuesday - see below - but I've been reading endless speculation about what the big Apple presentation is going to come up with. So, I thought I would add my own thoughts. Here we go:

1) A 4G iPhone. It has faster internet and the cure for cancer.

2) A music subscription service - and for an additional fee - a direct line with God.

3) Apple TV. That sounds like a can't miss idea...right?

My point with the above sarcasm above is that you should forget the speculation and tune out the noise. Apple is a great company. Its stock is going to do well over the next few years. It doesn't matter what happens today. Apple stock is a buy.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

Note: I do think that they will unveil a music subscription service. The Ipod is their least profitable segment. They need a way to amplify it's earnings. A subscription service is the best way to do it.

Additional Notice: My views on Apple do not necessarily reflect the views of other members of Intigril Capital Management.

Analysts Go Googly Eyed.

Hey everyone,

As expected the stock market rallied yesterday. However, Google dropped from $452/share at open to 420/share at close - underperforming the Nasdaq by 6%. Actually, since the Nasdaq is weighted by market capitalization, Google's decline likely represented one of the reasons why the Dow Jones was up 2.6% while the Nasdaq was up only 0.6%.

Anyway, every business journalist, analyst, investment bank, and underground troll was trying to explain why Google was declining. Here are the reasons below (and why they are wrong) :

1) The dollar is getting stronger so Google makes less off its international business

- This is been happening for about 2 months now. You don't honestly believe that traders decided to make that their excuse to sell today, do you?

2) They are vulnerable to the consumer slowdown.

- Ummm....we've know that for awhile, the current Fannie and Freddie take over only make the consumer slowdown less likely to become a depression, so this isn't the reason.

3) Multiple Contraction - That is, people are speculating in it less because they don't think its going to have high growth - this is related in part to the consumer slowdown rationale above

- Multiple Contraction is really how financial journalists say, "We have no idea what is going on"

So what is the real reason why Google dropped today when everything else was rallying?

A press release from the association of national advertisers - an organization which represents a lot of big companies - Coca-Cola, Exxon, etc. - saying that it strongly opposes the Yahoo-Google advertising alliance

Its funny, yesterday on the ICM conference call, I was talking about how Google seems to be immune from prosecution from anti-trust because the product it offers is free to consumers. Google has somehow managed to look like a benevolent organization which offers all of its products free to consumers. I thought, unless businesses bind together and work against Google, this search company can have a defacto monopoly.

Now, Google needs to hire lobbyists. Lobbyists will make them look bad. Google and Apple have been able to maintain their clean image because they haven't gone to court over anything. While privacy issues have come about, Google has never really had to fight for marketshare in the courts. They've only use their engineering abilities to steal that from Yahoo. Now, when they start using legal efforts - they become "the man". This is bad press for Google. Perhaps they will be able to shrug off the critisim, but its not guaranteed. Even Apple and Steve Jobs were able to get out of the options back-dating issue relatively unscathed. But that's probably because no one understands what options backdating IS.

Everyone knows what a lobbyist is. Everyone knows what the word "Antitrust" means. When they get associated with Google....then Google becomes evil. Google becomes Goliath.

People pay a huge premium for Macs even though their functionality is no better than a PC. Sure they might have a shiny interface, but deep down, they are all the same. Google is much the same way. Maybe the search results are a little better, but in the grand scheme of things, you pretty much find what you want with Yahoo or MSN or Ask.com. But if you make Google look evil - the dedicated anti-"The man" fan base may start moving away.

That's why Google stock went down. Not "multiple contraction"

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management in long Microsoft at the time of publication of "Analysts Go Googly Eyed"

Kicked in the Fannie, the economy Mae now recover.

Hey everyone,

I'm not sure if the title of this article is terribly clever or horrendously terrible.

I'm going to go with horrendously terrible.

Anyway, the government now owns 79.9% of both Fannie Mae and Freddie Mac via preferred stock. Basically, if you own common shares....over the last year your share value went from somewhere around being worth 20 gallons of gas($80ish) to...ummm...does a sub-nano penny stock listing exist?

On the positive side - the stock market is going to rally on Monday. Asian markets opening on Sunday night are rallying a colossal three and a half percent. I expect that the European markets will rally as well on Monday morning. I think there is some short term risk to the dollar - but likely it will be incredibly short term - think a week or two. Oil will likely stabilize between 105-110 over the same time period. By buying out Fannie Mae and Freddie Mac the government did technically increase liquidity and devalue the US dollar. However, because this is in a much more defined arena - and not a more broad action like a rate cut - we shouldn't see too much negative pressure on the dollar or upward price pressure on oil.

I suppose there are some people that might critize this move as far too interventionist. While I agree with them on prinicple...I disagree with such critics on reasonability of such policy. The american economy is not a business like the corner deli or even an international conglomerate like General Electric. The focus of the economy and those who regulate it is a basic quality of live for everyone (well, let's hope that's their goal). Businesses don't have the same aims. So running a business and regulating the economy shouldn't be dealt with using the same principles and methods. Letting a company go under because they couldn't understand what their customers wanted is acceptable (Think American Automakers).

But punishing future Americans for the poor decisions of today is irresponsible.

Americans have been punished enough. The point has been proven. I don't think people are going to forget this travesty that easily. It wasn't only a consumer slowdown like in 2001. It was high food and gas prices, inability to obtain student loans, 6.1% unemployment, declining home values, and unbelievable inflation. Punishing the American public for a huge cascade which was amplified by a few banking institutions refusing to do due dillegence is unfair and unnecessary.

Like I said a long time ago - the credit crisis is a consumer problem, and the take over of Fannie Mae and Freddie Mac, will ensure the bedrock of consumer strength - home equity- is preserved.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Why the American Automakers Should Go Bankrupt.

(Yes, I know about the current developments around Fannie and Freddie, but the federal government has yet to outline exactly what is going on, so I want to hold off until I have the full details before I provide my 2 pence on whatever is going on.)

Hey everyone,


Despite ICM being long MSFT, I love Yahoo. Not the company, but the website. They have great content. One of the superb articles that I ran across this week was a discussion about the new features that the 2009 cars will have. Much of the article discusses safety features such as emergency brake assist, blind-spot detection, and forward collision warnings.

However, all the safety features discussed in the article, there was only one being considered by a domestic automaker - the adaptive cruise control. This was being considered by Chrysler.

The second half of the article talked about some features that were being put into cars and trucks. What is Ford doing?

They are putting in a refrigerator. That's right. A refrigerator that is big enough to hold a lunch and a few bottles of water.

Ignore the pathetic fuel efficiency. Ignore safety. Ignore common sense. Put in a refigerator.

Nissan is coming up with paint that repairs scratches by itself. Now that's pretty cool. What does Ford do to answer that?

A tool monitoring system on its trucks. No, I'm not joking. You see, you register your tools with RFID tags and the truck keeps track of what tools are in your truck.

To those of you who think this is a good idea - I'm a chemical engineer at a chemical plant which uses trucks for hauling and what they were actually built for. I work with operators who spend $35,000 on trucks which serve as their family vehicles. But I know that none of them are going to be motivated to tag every one of their tools with RFID tags. Why?

1) Because the RFID tags on the tools would be constantly damaged

2) Tools are expensive. They keep track of them like crazy already.

3) You might alter the ergomics of the tool with the RFID tag - smaller tools like screwdrivers have grips which become uncomfortable to hold with RFID tags on them.

One could reasonably argue that such a system might spur an impulse buy amongst people who have tools and are interested in purchasing trucks.

Trucks - especially considering their low gas mileage and high price - are not impulse buys. Getting a truck is a big image issue amongst truck owners. Power, speed, features are closely compared. So someone who sees a more powerful truck for the same money as a less powerful truck with this RFID system is likely going to take the more powerful truck.

So, when the whole world is worried about high gas prices and has always worried about safety on the road, american automakers automakers worry about fridges and RFID tools. They don't DESERVE a bailout.

-Mansij Hans, E.I.T
Member, Intigril Capital Management

Disclosure: Mansij Hans' first car was an American car. It was a '97 Dodge Intrepid and he loved it to death. He now drives a Nissan.

Shorts - Not just for the weekend barbeque.

Hey everyone,


I can't tell you how sick I am about hearing about how evil people who short sell stocks are. Apparently, its okay to think a company is going to appreciate in value...but oh no!

Companies can't decrease in value!

You shouldn't make money over their demise! That's terrible!

I'm just jealous that you weren't mesmerized by constant refrains of buy and hold like I was!

If it weren't for the short sellers, the stock market would have made me a TRILLION BILLION GAZILLION dollars by now!

These incredibly narrow-minded attacks towards short sellers are simply people venting about the fact that they couldn't see the crash before it happened.

What happened to their glamorization of Warren Buffett? What happened to riding out the drops and enjoying the bumps?

My point in all the above sarcasm is that betting that a stock is going down is just as legitimate as betting a stock will go up. Plenty of traders use margin (def : borrowed money) to buy shares, betting that they will appreciate and they can pay back the loan.

What is the moral difference between borrowing stock to sell as opposed to borrowing money to buy stock? I can't see one.

The stock market isn't about making a point or proving a new statistical analysis tool. Its about MONEY. Its about profiting off of the rise AND FALL of companies. Or betting on the rise and fall of the economy of the United States.

Stop complaining about short sellers. It doesn't make your returns any better.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

What we might do next.

Hey everyone,

I was watching oil prices march to my standing prediction this weekend in international trading after Gustav was downgraded to a Category 1, and I thought to myself:

What next?

Since I called a bottom a week or so ago, I'm ready to buy up some more stocks. But the problem is that I'm impatient. I want higher returns now. I could probably getting back into day trading for a week or two if I were so inclined, but since I started this hedge fund, I try to keep myself in a value investing mindset.

Anyway, someone from my high school contacted me a few days ago asking about a few stocks and indicated he had written a covered call for his picks.

While I really didn't like his picks, his use of covered calls in this environment was exactly right.

Why?

When the market drops, it drops like a rock. But a recovery will occur of an extended over a period of time. A covered call provides some protection if the stock price goes down AND if the market flounders for awhile. The only additional risk that he is taking beyond the standard market crash scenario- is that if the market rises fast he'll misses out on making more money than if he hadn't taken a covered call strategy.

Tomorrow, on ICM's conference call, I'm going pitch to the other members that we explore the covered call strategy on some fundamentally strong companies.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Dirty Tricks

Yesterday, I was on the Yahoo Home page and I saw the following:



That circle in the upper left hand corner is trying to highlight a Yahoo advertisement for the new Firefox 3. I find this absolutely ridiculous in light of the recent failed hostile takeover attempt.

Now, had they done that the day after the hostile takeover talks finished, I probably would have thought, "Okay, Yahoo is trying to be funny or even obnoxious, but at least its kind of topical and timely"

However, considering that the new version of Firefox came out about two weeks ago...its not obnoxious or funny in a good way. Its being done immediately before the release of the new Internet Explorer 8 update.

Well Yahoo, if you guys want to stoop to that level, here is something for you:



Apparently, despite using the great new Firefox 3, they can't notice that they spelled "Flat" wrong for over 75 seconds ON THEIR BIGGEST HEADLINE.

For the longest time, I thought that it was only the management was incompetent. Apparently, EVERYONE in that entire company is incompetent.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management is long Microsoft at the time of publishing of the "Dirty Tricks" article.

My 401k Strategy

(We've enabled commenting on our blog for right now...we'll try it out and see how it goes)

Hey everyone,

A bunch of people in the news media have been talking about how 401k values are declining because of the languishing stock market. 401k choices are necessarily less risky because people intend to use those funds to provide them with a comfortable nest egg. However, I have been more actively managing my 401k to prevent massive losses that others have been seeing.

First of all, I was 100% in bonds from October to March. I avoided the major crash from a 14,000 Dow to a 12,000ish dow in march. Since then, I have slowly been moving my money from bonds into the index fund. My bi-weekly contributions go into bonds (with the exception of my company match - which is in company stock).

Over time, I have been shifting a few hundred dollars from my bond funds into the index funds when the stock market would pull back at least half a percent. Therefore, instead of losing around 15% if I was just investing in index blindly, I controlled my index purchasing, and have only lost 2% as of Monday August 25th. Actually, at market close on Friday the 22nd, I was only down one tenth of one percent whereas the market was down 16 percent.

Much of my savings came from avoiding the major crash in February - but my management also lead me to beat the market by about half a percent after that time period. Now, I'm a 98% index fund and 2% bonds. I'll be a bit more bonds every friday, but it is my current intention to stay well above 90% in index from here for at least a few years.

Also, I will never, ever touch the mutual funds that are offered in my 401k. Their fees are ridiculous.

Half a percent? Are they out of their mind?

Just to note, most people who actively manage their 401k tend to lose more money that the market would have. But for the time being I've found this "bond to index" strategy effective.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Siriusly?

I’ve liked Sirius for a little while. Actually, for a long time. When I first was learning about how to enter in a stock order online (I preferred phone calls), my first online stock order was for 10 shares of Sirius – which I still own today.

Not a great investment, but oh well.

Really, my interest in Sirius started well before my interest in stocks. When I lived in Virginia, there was a radio station called Q94. I’m ashamed to say that I have terrible taste in music and that most of what I listen to is pop music. But I remember listening to a song by…I think it was Busta Rhymes? Or maybe it was Le Ann Rhymes?...and then later that night looking up the song online. Well, I listened to it online and the song was just a little bit slower.

After asking a friend who had lived in Richmond a few years before I had about my observation, he told me,

“Oh yeah, I remember that radio station, they always sped up music like that.”

It blew my mind. A radio station was actually distorting its only product!

A few months later my brother, a complete music snob, had gotten XM radio. I spent an hour listening to it on the car ride to my alma mater, the University of Virginia. He was listening to a station dedicated entirely to British punk rock. There were no commercials and while I didn’t like any of the music, even someone with terrible taste in music could perceive that the music sounded like it was mixed by a very capable and professional disc jockey.

I finally understood why people liked this thing.

A few years later, when I actually became interested in stocks, I followed the saga of the Sirius and XM fight, and was mentally cheering for them to become profitable. I did not own their product, but I knew it was a high quality product deserving of the attention of the American public.

I bought a portable Sirius Radio - Stiletto 2 – about 6 months ago, and I now know without a shadow of a doubt that it is a better product than free radio.

Sirius and XM, have after well over a year of lobbyist fueled politics, merged.

Sirius’s stock price, once flying high at nearly 10 dollars in the last few years, and even above $60 at the height of the dot-com era, is down to around a dollar and a half.

That’s right, 1 share of Sirius XM, or 1/3.18 Billion of the value the newly merged company is now worth less than the extra large soda at McDonald's.

Other items worth more than 1 share of Sirius XM stock include:

1) A can of peanuts

2) A screwdriver

3) Four first class postage stamps

4) A cookie from the Mrs. Fields – which just filed for bankruptcy protection.

At least it is worth more than anything at the dollar store.

Anyway, my point of this article is to relay two of the most important lessons I (many other traders) learned over my trading life:

1. Liking a given company’s product, no matter how well developed it may be, cannot be the sole reason for an investment. Bad companies can have good products.

2. If politics – and not the market- will decide whether you will turn a profit on an given stock investment – don’t enter into that investment. The market has forces which can be interpreted, but politics is indecipherable.

Just for the record, I had bought those 10 shares for $3.53. So, I’ve lost a little more than $20.

Just half a tank of gas.

-Mansij Hans, E.I.T.

Member, Intigril Capital Management

Disclosure: Most importantly, Intigril Capital Management has never touched SIRI stock. Intigril Capital Management was started after I learned how to invest, and all of the members of ICM knew better.

The Elk Average

One day, three statisticians go hunting for the first time. They do everything right – they wear camoflouge, the walk quietly, and they each bring a quality, well-maintained gun. After a day or two, they find their first elk. The first statistician, takes out his gun, pulls the trigger, and the bullet passes 50 feet to the left of the elk. The second statistician takes out his gun, pulls the trigger, and the bullet passes 50 feet to the right of the elk.

The third statistician yells, “WE GOT IT, WE GOT IT!”

After I called the bottom on my last post, I don’t want anyone to think that just because the US stock market is going to go up means that I think we at ICM or at any other investing institution has it easy until the next major economic collapse. The problem with the market is that Dow Jones Average and the S&P average are simply averages. Some companies do better than the average and some do worse.

As the research point-man for Intigril Capital Management, I try to determine how a given stock will react to a change in broader economic conditions. Will a given stock go up harder and faster than the market average or will it go down harder and faster than market average?

Let me give you an example. There is some talk amongst analysts that Warren Buffett should buy a homebuilder. Everyone says that a homebuilder is a great buy right now because the homebuilder stocks are so beaten down. However, I know that Warren Buffett will never buy a homebuilder stock.

Why?

Because Warren Buffett already owns Home Depot. Warren Buffet knows that if housing recovers - which it always has - Home Depot and Lowe’s are the only game in town. Lowe’s is actually a conglomerate of a lot of different businesses, so Buffett focused on the company which is associated only with home improvements and small scale construction.

So, if you expected oil to go down, should you buy oil refiners such as Sunoco, who make money when crude prices are cheap?

Well, it is probably not a BAD idea, but I’d rather look at companies which sell potato chips and energy bars at the gas stations with the cheaper gas prices.

Another suggestions is that while buying home builders isn’t a great idea, but eventually, you should be looking at timber companies. Those would likely respond positively to new home construction.

Jim Cramer made a grim, although very shrewd, stock pick back during the start of the Iraq War :

He didn’t buy a gun maker – he bought a company that made bullets.

Right now, everyone is talking about how the high prices of energy is going to make solar a viable source of energy. So, should you buy a company that makes solar cells?

Maybe. But I don’t know which solar company is better than another, but I know that semi-conductor manufacturers will profit regardless of which solar company does a better job (and also have positive forces from more people in the world using computers too!).

Remember, the man who made the most money from the California gold rush never tried even once to shift through dirt looking for gold.

His name was Levi. He just made good jeans.

-Mansij Hans, E.I.T.

Member, Intigril Capital Management

How Confident are You?

The consumer confidence index didn’t rise as high as expected on Friday. The stock market struggled all day to rally. This less than expected rise occurred in the context of the following:

1) $112/barrel oil, down $3 from the day before, and $35 from about a month

- Do I really need to explain why this is positive?

2) The dollar rallied to a 2 month high

- Apparently, other people’s economies are worse off then ours. Which means US business regains competitive advantages on the domestic front…instantaneously.

3) Wal-mart reported strong sales the month of the tax rebate

- Everyone said that they would save their tax rebates…but they spent it at Wal-mart. I just hope they didn’t buy any of those ugly crocs shoes. Based on Croc’s stock price…I seriously doubt they did.

4) Sears only lost 64 million dollars

- This company has 1.4 BILLION in cash in a horrible retail environment and they only lost 64 MILLION? That’s a pretty good record in my books. I couldn’t tell you how shocked I was when I saw this article predicting a Sears bankruptcy. Here is a very excellent response to those assertions.

5) Ralph Lauren posted strong numbers

-I like the fully button down versions of their short sleeve shirts.

Consumers are cautious is downturns…and morons in good economic times. For god sakes, the consumer confidence index was 90 before the Bear Stearns collapse! It was even higher the month before! Some of the rebound in July was likely a result of headlines discussing the crash of crude oil futures, but everyone knows the cynical phrase about oil prices:

“Up like a rocket, down like a feather”

My point in all of this is to say that simply because consumer confidence is not as high as expected, doesn’t mean the consumer shouldn’t be optimistic. In other words, consumer confidence is a lagging indicator- it indicates the PAST consumer environment, not whether the environment will get better or worse in the near-term.

In light of the above described positive events - I’m calling the bottom:

It is my assessment of current market conditions and expectation of future market trends that the S&P will not close below its 52 week low at 1,200 before it exceeds its 52 week high of 1,576.

I think the italics makes my statement look more dramatic.

*Smirks*

I called the top of the oil bubble about a month or so ago, so it only makes sense that I make some assessment on oil prices:

My research has shown that under the most likely demand scenarios oil price will continue to extend its slide below $100/barrel by January 16th, 2009.

Furthermore, I believe there is a very strong possibility that oil will reach a more permanent valuation no lower $75/ barrel, but no higher than $85/barrel at the latest by January 15th, 2010.

Finally, the non-trivial possibility of a moderate to severe economic contraction in China in the next 6-12 months as a result of over-expansion of manufacturing infrastructure presents the possibility that there is further acceleration in the decline in the price of oil. Another major downward pressure which has already started to show is a slowdown in the European Union. Under these pressures, the price of oil may reach the above proposed price of $75-85 before January 15st, 2010, potentially as early as market close July 17th, 2009 but also by market close on October 17th, 2009.

Wow, those italics look dramatic AND authoritative. I should write like that all the time.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Note: My views on the market bottom or oil prices do not necessary represent the view held by other members of the Intigril Capital Management board.

Money is a funny thing...

Hello everyone,

When I was 14, I used to play a videogame called Caesar III. In this game, you were essentially a city and economic planner for a city which you laid out. I would first start out and build a small water infrastructure, then lay down a few houses, then build some food production infrastructure, and build more houses. This would continue and you would have to carefully manage resources. Sometimes a fire that ripped through a housing district would cause your population to go down and then you didn’t have enough workers to sustain your water infrastructure or your schools or some other important aspect of the society. This break down in infrastructure would cause emigration and then furthur stress critical resources. Poor management could cause your electronic city, painstakingly developed over the course of 2 or 3 hours, to crumble in ten to fifteen minutes.

Needless to say I was the biggest nerd in 9th grade.

Anyway, in the manual for the game, there was one line which I still remember as if I had just read it yesterday:

Money is a funny thing….it’s a means, not an end”

Business would do well to heed these words. Even after a short time as an engineer for corporate America, it is too easy to see that margin expansion has become the only solution that businesses explore to expand their products. While getting more out of what you have is certainly a worthwhile endeavor, big business has always struggled with ability to move and adopt new trends. For sure, Microsoft has been getting hammered in the press for its inability to develop a significant presence in the search and advertising business.

We’ve seen XOM stock simply plummet the moment crude oil prices have gone down. Potash, Monsanto, and Agrium have seen the same responses to oils slide.

By the way, you might remember that I predicted that oil was going to peak in between 141 and 171. I told you so.

Exxon made the decision years ago not to invest at all in renewable energy. BP, Conoco Phillips, and other oil and gas companies have had token efforts, mostly to enhance public image. But if they ever hope to have true stability and true faith of the public, their profits should be used to construct easily profitable ventures in renewable energy. Some ventures are profitable using existing technology. Oil is burned in cars. They could become diversified ENERGY producers, not simply diversified oil producers. There is no loss to Exxon’s oil production and refining business if they make wind farms in the west. Those generate electricity for homes, not oil for cars. In fact, this would allow XOM stock to grow because they expand their total available market, let alone justify less regulatory scrutiny because of some positive environmental actions. BP and Conoco Phillips should utilize their profits to do the same. XTO energy, which has an absurd amount of natural gas reserves (I think its more than 10 TRILLION cubic feet, but don’t quote me on that), should use its profits from the recent natural gas spike to form a joint venture with an automaker and make CNG (Compressed Natural Gas) vehicles a major presence on the road. This is essentially using their profits to create sustainable demand in the future. At the current high natural gas prices, the amount of CNG equivalent to a gallon of oil costs $1.03/gallon. Can you imagine the demand for a readily available car or truck which fuel only cost $1.03/gallon?

I still think that right now is the perfect time for one of these oil companies to purchase an airline. You take a small loss now, but when the price of oil comes back down, you have a great, high-margin hedge against a sustained period of depressed oil prices.

Oil and gas companies need to realize that they can’t just wait another 25 years for another oil boom to boost their profits again. Vertical and horizontal integration is what made Standard Oil, Exxon’s legacy company, into the colossus it currently is. These companies need to understand that even your customers can become vertically integrated and finding new arenas to compete within is not a headache, it is an opportunity.

Money is a means, not an end…

…and if these oil companies use their current influx of cash as a means to generate additional, non-oil sources of revenue or create new sources of demand; their record profits may never see an end.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management is long Microsoft at time of publication of the "Money is a funny thing..." article.

Additional Disclosure: Mansij Hans is an employee of Monsanto Company.

Barron's made a interesting point!

Hello everyone,

While I spend much of my weekends wishing that the markets were open on weekends, I do spend a significant time (read: all my time) reviewing analysis of the markets by analysts. So, I was intrigued by an article in Barron's Online which proposes a Microsoft breakup as a means to achieve ultimate value.

Give me a second here...I need to think up a terse response to Barron's comments with a slight word play.....

You know, I don't know how Barron organizes itself internally, but I bet there is a research department.

I imagine they call it Barron Research.

That is ... BARE ON RESEARCH.

You know the article is a sure classic for the record books of analysis when it quotes an anonymous comment on an internet website in its opening. But aside from quoting random internet posts as the opening basis from proposing an idea, the Barron's article proceeds to discuss that by spinning off the internet division of Microsoft, which has a horrendous margin of nearly -40%, Microsoft can unlock value and let Microsoft's computer based businesses come back into focus.

Bare on research is right. In theory, Microsoft should just spin off its losing divisions and focus on the zero-growth, high piracy prone divisions. They should focus on pursing legal action aganist 14-18 year olds who don't want to pay $100 for Windows Vista, instead of winning them over with the $300 Xbox 360. Maybe, just maybe, they just only focus on the divisions which you can calculate exactly what the market is for their product and know that you'll get whatever cash flow no matter what you do. Forget the fact that you can't fabricate a Xbox 360 by yourself and free programs such as Firefox and Linux are adding pressure to the core divisions.

What "Bare On Research" may not realize is that business isn't about focusing on cash cows. A cash cow doesn't need focus. Microsoft has been making operating systems for a long time, and they do a pretty good job with it.

You don't focus on the cow, you just take the milk, sell it, and buy what you want with it. Microsoft wanted to buy a entertainment division which might become a cash cow later on. They wanted to buy a website called Yahoo which might become a cash cow in a while. They want to make some progress into cloud computing, so they are using the profits from the milk to drive that. My favorite site for analysis, Seeking Alpha, said that if Microsoft insitutes a buyback, such action is tantamount to admitting that they have run out of ideas.

Hold on, let me make sure I understand what I'm hearing - somehow, by reducing investment in the only parts of your business that have any meaningful growth prospects in the long term, you are securing your company's future? That doesn't admit that you're out of ideas? Did I hear that right?

Cows don't need much attention to produce good milk. They need to be fed and treated along the guidlines of PETA. A Microsoft buyback allows them to return value to shareholders while ensuring there is enough cash flow to fund new ventures to find new cash flows. Just because something isn't profitable now doesn't mean it won't be profitable in the future. Believe it or not, there was a time where Microsoft Windows wasn't profitable.

Businesses which are willing to take short term losses are called Microsoft and Berkshire Hathaway.

Barron's Research should look into that.


-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management is long Microsoft at the time of publication of the "Barron's make an interesting point!" article.

How Wall Street makes money

Hey everyone,


So yes, earnings season is now over, and out with a bang for sure. A few multi-billion dollar hedge funds just went under.

Why?

They bought about 400 million oil futures contracts at a basis of above 135. Most of this money was borrowed at a high leverage ratio. In normal human words - they borrowed A LOT of money, used ALL OF IT to buy oil contracts (which you only need 10% of the money up front). Then the price of oil dropped to 115.

I don't know exactly what's about to transpire to those funds...but the drop this week in oil prices has been in part a result of the assets being seized and liquidated. You can thank them for your previously high gas prices.

Anyway, the title of this article is "How Wall Street Makes Money" - and I fully realized I didn't tell you how wall street makes money but rather, how wall street loses money. So, what I have been desperately trying to figure out is how quickly those assets were liquidated and at what cost basis were they liquidated at.

Why?

Because the loss on those futures contracts was on borrowed money, if those loses are greater than what those hedge funds were worth (and I'm willing to bet they are), some bank out there just lost a few billion dollars. If that bank was a Washington Mutual or someone that wasn't very stable to begin with, there could be another bank collapse on our hands. Obviously, for the amount of money these funds had to borrow to execute trades of this size - it had to be one of the big ones. There are only a few banks that could give out loans this size - probably either a Bank of America, Washington Mutual, Wells Fargo, and Wachovia. Wachovia and Washington Mutual are on thin ice. Wells Fargo and Bank of America are stable, which is why I am most inclined to believe its them....but it seems so unlike the businesses themselves. Bank of America and Wells Fargo don't seem the type to allow a major line of credit this large to go unmonitored in this kind of lending evironment. I don't think it would be one of the investment banks (Lehman, Goldman Sachs, etc. ) because they really don't do this kind of thing.

The whole thing is very odd.

Anyway, the way Wall Street makes money is by shorting the bank whoever loaned these hedge funds enough money to make stupid bets like these. Every time someone goes under, knowing who they bought or borrowed from, sold or lent money to, and competed with is critical to exploiting short term and long term movements in the stock price.

That's how Wall Street makes money. Its not easy...but it is simple.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

I told you so!

Hey Everyone,

Yes, I haven't posted in three weeks - however, this is not because everyone at ICM hasn't been following the market, but rather its because we all have been following the market very closely. Lets look at what I predicted last at the beginnings of earnings season:

Coca-Cola -

My prediction: Neutral to Negative after the earnings report.

Actual: Down about 4% after the earnings report.

Verdict: Pretty good.

Google -

My prediction: Either up 8%-13% or down 15%-20%

Actual : Down 12% immediately after earnings, currently down 13%

Verdict: Probably too zealous when estimating the downside, but was within 2% of my range...not bad at all.

Ebay:

My prediction: A blind guess of down based on likely consumer spending slowdown

Actual: Down because of undesirable growth rate.

Verdict: I guess I did have a 50% chance of being right here, but I suppose my previous two correct answer do add some validation to my guess here.

Capital One

My prediction: Technically, I didn't make a prediction in my earnings season article, but I did talk about Capital One and Discover in the article immediately following my earnings season article. My views, if you don't remember, were highly favorable

Actual: When I wrote my favorable review of CapitalOne, the stock was trading at about 36. A day or two after the earnings report the stock was resting at about 42....that's 17% for the mathematically disinclined.

AMD

My prediction: My exact word were "AMD better get its act together or Intel will have another antitrust suit on its hands"

Actual: Before the earnings report AMD spiked up to $5.30 from $4.70

...and immediately after the earnings report AMD dropped to $4.65

...a week later it hit a new 52-week low of $4.19

Verdict: Good for me....bad for AMD.

Microsoft-

My prediction: I said it wasn't going to go down, but it probably won't go up either

Actual: The two days before the earnings report it spiked from 25.15 to 27.52 and after the earnigns report it settled back down to about 25.50.

Verdict: Looks like no up or down from Microsoft yet. Like I said during my prediction, the whole proxy battle will obscure any positive results.

Financials

My prediction: Bad, Very Bad

Actual: Well, I suppose they weren't as terrible as I thought, but the momentary rally that we saw the day of the first major financial releases quickly subsided. So I suppose, the response wasn't great...but its not the very bad that I had anticipated.

Verdict: My mistake was not recognizing that most of the downside had already been priced in. Can't win them all I suppose.

Pharmaceuticals:

My prediction: Unrealistic stock inflation

Actual: Dow Chemical bought Rohm and Hass, Briston Meyers Squibb just made an offer for ImClone, Genetech had an earnings miss but their stock still went up, Glax0SmithKline announced its drug didn't do what it was supposed to do and the stock still went up, Pfizer reported great numbers and the stock went up about 4%.

Verdict: Mostly right, but had a few misses in the sector.

Overall Score: About 6.5 out of 8 right. I'm counting my pharamaceutical prediction as half right and my finacials prediction as wrong.

Predictions for stocks only: 6 out of 6.

*Smirks*

I told you so.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management is long microsoft at time of publicationof the "I told you so!" article.

Give Me Some Credit Here!

So,

Lets re-cap what happened today:

1)Depositers of IndyMac lined up and are now learning that the FDIC only insures up to $100,000.

- At least IndyMac has been reimbursing 50% of non-insured deposits. Lesson : If you have more than 100,000 worth of deposits - SPLIT IT INTO 100,000 INCREMENTS AND PUT IT IN MULTIPLE BANKS!

2) Microsoft drops the price of its Xbox 360 "Premium Edition" and puts out a statement saying that its Xbox will continue to maintain its lead against the Playstation 3 and beat it.

- Now, dropping the price of the Xbox is interesting enough...but do you really need to make a random statement declaring your supremecy?

3) Another Microsoft offer for Yahoo.

I'm not even going to bother commenting on this one. I'm just waiting for the proxy fight on Aug. 1st. The Wall Street Journal has a very short piece which accurately describes my sentiments regarding this massive trainwreck called a negotiation.

4) Genentech Reports (Stock Symbol: DNA) an earnings miss...yet the stock price goes up in aftermarket trading.

- I just mentioned this was going to happen. Yesterday. Check the Pharma predictions.

5) Washington Mutual and First Horizon share plunge on mortage worries

- I haven't been tracking First Horizon...but I have no idea how Washington Mutual manages to stay solvent. Anyone want to bet it is a direct result of the Fed Discount Window?

Now getting onto why I'm writing today. The credit card industry. Right now, I'm pretty sure I am the only one left in the world that thinks that buying into a select credit card company is a good idea.

Let me throw two out there : Capital One (COF) and Discover Financial Services (DFS) .

Any one who is familar with the operations of the two companies will probably think that it would be crazy to pick both instead of just one or the other.

Now, if I recommended just CapitalOne, you might think that I'm banking (no pun intended) on CapitalOne's large customer base and the high amount of debt owed to capital one by its customers. In theory, the amount of cash they get in from all the interest on the debt owed to them by their credit card uses would keep them going strong. Their ownership of banks in Lousiana, with growing depositors as a direct result of the re-population of New Orleans, should allow them to keep their margins, even in the face of rising credit card defaults. Since they went public in 1995, they have yet to have a quarter where they lose money.

However, if I just recommended Discover Financial Services, you might think that I was going for the conservative approach. DFS has very strict requirements for credit cards and they have some good cash back benefits (I certainly enjoy the 5% cash back on my gas purchases). Even their default rate is lower than American Express!

So, why would I recommend CaptialOne, which everyone on the street is half-expecting to go under because of their exposure to auto loans and credit cards?! Why would I recommend DFS, which since it was spun off from Morgan Stanely, has only one of three quarters in the black?

I'll give you a hint:

It starts with a "V"

It ends with an "N"

It has a "aluatio" in the middle.

Thats right, VALUATION!

At CapitalOne's current stock price, the market believes that it is worth 13.4 Billion

CapitalOne currently has 24.6 Billion in equity. It has 10.6 Billion in TANGIBLE ASSETS. So, depending on how you slice inherent worth of a company - Capital one is trading at a 30% premium to its tangible assets and at a 55% DISCOUNT to its total equity. Remember, this is a company which has yet to lose money in the 13 years that has been public. When you are being discounted this much, I just can't see it going down further. If it does after this weeks earnings report...it will return to the pre-release value within one business week as a result of interest from value buyers. With nearly 20% of the shares sold short, I expect a short snap and a resulting violent skyrocket in price as a result of the earnings report.

Now, what about Discover?

Remember how I said that it only has 1 of 3 quarters in the black? In a sense, thats not true. The first quarter since its spin off from Morgan Stanely, it was in the red in every sense. However, the second quarter it was only in the red as result of a one time charge. Without this charge, the company would have been profitable. The third quarter and the most recent quarter, it made a profit...and it was HIGHER than the year before when it was a part of Morgan Stanely.

Thats right. Discover mad MORE money than during the credit crisis than before it!

By the way...Discovers share price values the company at 6.2 Billion. Its tangible assets? 5.2 Billion.

Let me be very clear right now.

The terms "Credit Crisis" refers to a CONSUMER PROBLEM. The businesses will always do just fine.

But wait, other banks are going under, why are COF and DFS different? Those were INVESTMENT banks. Bear Stearns didn't originate loans. They just bought them from shady lenders. CapitalOne and Discover Finanical are loan orginiators which don't sell their loans. That means their own practices are known to them. And therefore, they know which loans are going to default and which aren't and can manage accordingly. The other banks have no clue whether their loans are going to default. That's the key advantage. Furthermore, many of the subprime loans by the other banks were made without doing a credit check. Do you think either of these companies has EVER issued a credit card without doing a credit check? I'm willing to bet that the same is true for their auto loans. When you are the guy holding the bag, you want to know whether there is a bomb or a wad of cash in it. People have never defaulted en-mass on their mortgages like this. But with 4-5% default rates in good times, credit card companies have lots of nerds dedicated to finding out who is going to default and how to profit from them.

If you're interested in proving me wrong (or watching my predictions be validated) the earnings report hits the wire on thursday.

-Mansij Hans, E.I.T.
Member, Intigril Capital Mangement

Disclosure: Mansij Hans personally owns one call contract on COF for July 18th expiration at strike price $40 at the time of publication of the "Give Me Some Credit Here!" article. Intigril Capital Management is not short or long DFS or COF.

Additional Disclosure: Intigril Capital Management is long MSFT at the time of publication of the "Give Me Some Credit Here!" article.

One of the Four Most Wonderful Times of the Year!

Oh yes,

The air is crisp (with fear), the green is around us (perhaps leaving our bank accounts), and blue skies (or blue faces) are never ending.

Yes, earnings season is here. One of the four periods of the year, spanning about 3 weeks, where every company's CEO has to get on a conference call and fess up to the shareholders the fact he/she has spent way too much time on the golf course. This week we are going to find out about Google, Ebay, Microsoft, AMD, Apple, IBM, Citigroup, Coca-Cola, JPMorgan, US Bancorp, Wells Fargo, State Street, and much more.

Generally, you see sell offs before an earnings week because day traders pull all their investments out to avoid any major surprises.

What did you think - the Dow hitting 11,000 on Friday was for no reason?

The value investors (such as Intigril Capital Management) stay in because earnings reports validate our predictions (and our total assets). I can't wait to listen to the conference calls of the above mentioned companies and find out what .0005% shortfall in some obscure earnings metric causes a company's stock to plummet by 33%.

So below are a few of my predictions for select companies/sectors:

Microsoft:

I expect results that would have normally sent the stock going up. However, with the YHOO-MSFT merger any good news is probably going to be obscured by uncertainly surrounding the Icahn proxy fight.

Verdict: It's definitely not going down, but it may not go up, even with stellar results.

Google:

It's going to move. Hard and fast. Right now, Google has become a speculative short target because Google has never had to face a recession. However, their results last quarter blew the doors off and everyone shorting Google lost a lot of money. However, economic conditions have deteriorated significantly. Google may not be invincible. I wouldn't be surprised if the stock moved down, hard and fast. But with the best nerds and a determined management, its likely to go up.

Verdict: Big move. Likely up 8-13% , but a fall is still a possibility, and if it does happen, were talking about 15-20%

Coca-Cola

A energy drink company called Hansen Natural reported weak sales at convenience stores. I expect Coca-Cola to be hit by this trend as well. Word on the street is that they are making heavy discounts on their soda at gas stations to spur impulse buys. So either the market is going to get mad at the margins if this discounting rumor is true and if its not true, its going to get massacred because of declining revenue.

Verdict: Neutral to Negative. Some metric is going to upset someone. But they might be already be expecting it. Just don't expect this stock to react more than a percent or two in the positive.

Ebay:

I have yet to figure out what global market forces cause this company's stock to do well. You would think that maybe they would get increased revenues from liquidation companies during economic downturns, but this is likely counteracted by decreased revenue from long-standing businesses because of consumer spending slowdowns.

Verdict: No clue. But if you really want a completely blind guess...I'd say down because of consumer spending slowdowns.

AMD:

A long time ago, I was a complete computer geek, I knew what chips were better and which ones were no better than silicon goo. AMD used to be the preferred chip of the PC-enthusiast. Now, Intel's Core 2 Quad remains unanswered by AMD. One of AMD's major suppliers AMAT, Applied Materials, had weak sales. All signs point toward a bad earnings report.

Verdict: AMD needs to get its act together. Or Intel may have another anti-trust suit to deal with.

Entire Financial Sector:

Bad. Very Bad. Expect dividends to be cut. CEOs avoiding discussing how they haven't bought back any stock even though they said they would. We may have a gem or two, but I'm willing to bet that with IndyMac fresh on everyone's minds, people will be out for blood. ]

Pharmaceuticals:

Up. Most major financial institutions are buying pharma. Even mildly positive results will cause momentum player to come in and cause their prices to go further up. Get on the momentum bandwagon! Who cares about FDA probes and excessive debt? Everyone's sick of losing money calling a bottom on the financials! Its time to inflate some prices!

Ooof...talk about putting myself out there. Its going to be a busy week. Don't forget to listen to Bernake's speech to Congress this week. Oh, his recommendations on what the Federal Reserve wants to be done about Freddie Mac and Fannie Mae - the two federally back mortgage insurers (well...supposedly) are going to be critical in evaluating the direction of the market for the next few months.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Full Disclosure: Intigril Capital Management is long Microsoft at time of publication of "One of the four most wonderful times of the year!" article

Short the dollar

Hello,

So I suppose when we first mentioned that we wanted to clarify what was going on in the stock market for as long as we and the internet were around, we probably should have added the line "and we verify all legal issues regarding a website".

Well, they are all verified now, so we can continue.

Of course, since the last post, quite a bit has changed. Carl Icahn has stepped into the fray (read:lunacy) of the Microsoft-Yahoo merger. The federal reserve is more worried about inflation than the interbank loan rate. I've been on so many flights that I actually am starting to think those cheese crackers they hand out for the in-flight snack actually taste good.

(Hasn't helped my opinion of airline stocks. )

But of course, one cannot make a bad joke about airline food on a financial blog without discussing oil prices. With $4 gasoline, airline stocks have been taking a hit and the Dow dipped below 11,000 yesterday. My current evaluation of oil price is that they will peak between 141-171. Of course I realize that oil has already gone up into this range ($147 intra-day yesterday), but I made this prediction a few months ago, and I'm sticking to it.

Now, every analyst (and conspiracy theorist) has some prediction. There were some nutjobs expecting $200 a barrel oil by the end of this year.

There are two problems with this assessment. First, misunderstanding the connection between the dollar and oil and secondly understanding the influence of speculation. There are other factors, including Iran's hoarding of oil, but those are going to increase the rate of a crash, not actually cause it.


By increasing the interest rate, you increase the value of the dollar - if there are less dollars, each individual dollar is more rare, and therefore more valuble. Money follows similar supply and demand pressures that goods do. The beauty of the re-valuation of the dollar is that this decreases demand for oil as oil will no longer serve as an inflation hedge. Decreases in volume of oil futures trading will make a major impact on oil prices.

Now, there are many that say, because oil contracts are eventually closed, that means any upward pressure when buying contracts will be counteracted by downward pressure when closing the contracts later on. In theory this is true, but in practice oil futures trading determines long-term, non-open market contracts between companies. In other words, if your a oil supplier, you are going to make long term contracts based on publically visibile, current open market prices, not at some arbitrary premium on your production costs. So, if you see that you can sell your oil on the open market for $140 a barrel, you are going to go to a company and guaruntee oil for $135 a barrel outside the market, even if that oil cost you $10 a barrel to pump. This way, you get a guarunteed rate and the company gets a small discount. Considering a small fraction of all the oil in the world is bought and sold on the open market and most is done via non-open market private contracts, any increase in oil speculation on such a small percentage is going to create upward pressure on private contracts which will then create upward pressure on free-market contracts. By eliminating free-market speculaton on oil (and not private contract speculation) you can allow business which actually consume oil to hedge against oil price increases while ensuring consumers pay a price somewhat related to the cost of production.

Oh, and for the traders which want a hedge against inflation....SHORT THE DOLLAR.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Managment is long Microsoft at the time of publication of the "Short the dollar" article.