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.
Monday, July 14, 2008
Sunday, July 13, 2008
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
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
Saturday, July 12, 2008
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.
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.
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