Thursday, January 24, 2013

Hello sportsfans!

An awesome day for the underdogs and not so for the favorites.  AAPL and Duke both suffered routs.  Duke will get to take it out on it's next opponent.  AAPL perhaps will take some time.

For me, this is the market at it's most puzzling.  This company is the envy of any operating company in the world.  I think the only thing that supercedes it is the hedge fund business.  Margins are tremendous and, yes, they probably only can come down, but, truly that would only be coming down to merely great instead of insane for a company of this size.  They have $137 billion dollars in cash which means you are paying about $330 billion for a company that will generate over $40 billion in EARNINGS this next year.

I actually read a comment from an analyst stating that "AAPL is a broken company".  Wow.  If they are broken, how is everyone else doing?  I guess he is short everything (probably not putting his money where his mouth is).

About the only thing negative that I can gather is that revenues are not going to be growing at 18% a year ad infinitum.  Ok, but not only would that be truly shocking if they could grow at that rate given their size, but the key point is that the company is not priced that way.  A company that is expected to grow earnings at that rate would trade at, I don't know, say 158 PE like AMZN?   I am not expecting AAPL to trade at a lofty PE but I don't think it should be a stretch for it to trade around the market multiple of 12-15.

We may be witnessing a different phenomena.  AAPL is clearly owned by many and is perhaps in the unique position that there is no one "left to buy", or rather needs an impetus to get fresh buying interest.  I have been thinking that an increase in the dividend to the 3-4% level would perhaps get the market to price the stock with a more reasonable multiple.  The company clearly generates a lot of cash and does not necessarily look very acquisition hungry.  Either way, the stock is cheap.


Friday, January 18, 2013

A few days ago, I grew so annoyed with the price action in AAPL that I took the "going down with the ship" approach.  It is now my largest  individual stock holding at about 5% (up from about 3%).  The general idea is that the stock is very cheap based on current earnings and ridiculously cheap based on forward earnings.  Now, the forward earnings may not come to fruition, but I believe they are not as optimistic as one might think.  AAPL has tended to beat estimates precisely because it has done so well and analysts are loathe to seem too optimistic on a stock.  Right now, anyone who has been a naysayer is coming out of the woodwork and the stock is suffering for it.  We shall see when earnings come out on the 24th.  For me, the stock is cheap with insane margins and one of the best brands in the world and still trades at a significant discount to the overall market.  It is worth buying in my book.

Also worth a look for the techies is option volatility.  February calls are trading at 10%  implied volatility which, while overvalued for the current amount of movement, is very cheap in absolute terms.  Therefore, if you have any view, options can be a great way to express it.  I have bought some March calls (as I have said before) and am looking to add in the February expiration.

MHN and VVR are trading at premiums to NAV and so make me a bit nervous for short term pullbacks.  I still like them at NAV.   They are not so liquid so it not so easy to trade them, but if I could have no impact, I would sell them and look to re-establish at a lower price.  At the minimum it is worth watching and if you flows that you can trade against, it is worthwhile.

S is pulling back some, which I think represents an opportunity to build up positions there, which I am doing.

XOM, I am persuaded so sell that stock.  I have done ok with it, but it's dividend is no better than the S&P 500 and I think COP provides a better payout with similar exposure.  CHK is good too.  The payout is lower, but I think the upside is greater and it is a stock that is unloved.

I am trimming my position in JNK as I think high yield bonds in absolute terms are a bit expensive.

Friday, January 11, 2013

BBY is having a great day.  I'll take my wins when I can get them and sell out here at 13.6+.  I was trying to hold out for some more buyout news, but somehow I think I may get another chance to bite at the apple.  Any hint of bad news and we are back to 11.7 where I think it is a buy.

CHK disappointed yesterday but I think it will be a good long term buy, so I am tempted to use this as a buying opportunity.

Bill Gross of PIMCO has upped his treasury weight to the highest in a while.  In addition, he is keeping duration shorter in the 5-10yr bond area and I think he likes TIPS as well.  I tend to agree with this is you are a bond only fund (as he is managing).  TIPS are interesting because you get the government credit and you also get some protection from inflation.  I have said previously there are two likely ways rates go up - from growth, or inflation (credit quality deterioration would be another, but I don't consider that likely).  Buying TIPS would hedge out one of these so it may make sense.  They are not particularly cheap right now,  with a 2.62% "breakeven"rate.  But they still offer some protection.

[The breakeven rate is the amount of inflation we would have to have to do better with TIPS than with the regular bond.  So fro example, the 30yr TIP yields 0.44% + inflation while the regular 30yr is yielding 3.06%, the difference is the breakeven rate.  Historically inflaiton is in the 2.5-3% range so we are on the lower end which is not bad.  We have seen much lower breakeven yields in the 2% area where I think TIPS are a screaming buy]

As treasuries have declined, credit has continued rallying and so the credit spread has compressed further, making those instruments (HYG, JNK, MHN, LQD) just a little less interesting.  At some point, I believe the absolute yield will be too low on these instruments and it will be better to hold stocks for instance (I believe we are there and stocks that pay are very attractive).  I still have some of these other bond exposures but I am pondering reducing them.

Monday, January 7, 2013

Happy New Year!

I've updated performance on the other page.  In December, my portfolio was down 1%.  Apple hurt as did some previous winners.  I attribute some of the performance to profit taking ahead of the expected tax rate increase.  I was up 5.18% for the year with extremely low volatility so I am happy with that result.  Based on media reports that would have put me in the top half of hedge fund managers, but I didn't have to pay big fees ;)

Now that we have passed that particular episode stocks have gone up and government bonds have been blasted.  The stock move was somewhat predictable and was the reason I had taken my exposure up to greater than 25% (big for me).  The treasury bond move is a bit overdone in my opinion as we have still not shown any real signs of growth (or inflation).  I have added a bit to my bonds (TLT is now about 13% of my portfolio) and added a bit more to equity by buying SPY March 150 call options to give myself some added exposure if we get a rally.

I do expect a rally despite our governments best efforts at confusing the general population.  Earnings will be good driven by increased efficiency (productivity in government parlance) and that is what we are buying when we buy stocks - earnings and the dividends they can ultimately support.  Yes, we want top line revenue growth, but the reality is that our economy is still suffering from deflation attributable to globalization.  Ultimately this will be a great thing as the market for our goods and services becomes global.  Short term, we suffer from lower wages because we are the big dog.

Sprint (S) has had a nice run and this year should mark the close of the Softbank deal and we should earn a nice profit.  We may get an additional benefit if S manages to stop the bleeding of market share and takes advantage of it's improving network infrastructure.

MHN has had a mad rally and is now at a big premium again.  Again, the lack of liquidity makes it difficult to trade this stock.  I tend to buy more often than sell when things get weak or the discount becomes big then sell only a little bit when the premium is high.  I will be looking at this one closely to trim the position I added below $16.

AAPL I still think is cheap.

TLT is a buy I think as we will continue to be disappointed in our overall growth numbers.  In addition, if we ever do strike a deal to contain our runaway growth in debt, bonds will be a buy.

Loand (VVR and BKLN) are still good and high yield (JNK, HYG) will also have another good year I think as we muddle through and corps get leaner- and still pay their bills!

On the speculative front, I expect another buyout offer for BBY.  At $12 it looks like a decent buy.