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.