Model Portfolio ahknaten:KAI

Jim Cramer thinks AAPL (AAPL) is worth $300 and I think AAPL is worth less than $100. To borrow Jim Cramer's line, 'Where do I get this stuff?' I'll point it back at him and ask, 'Where does he get that stuff'? Perhaps all he did was multiply two numbers? I can multiply two numbers, I have a passion for the markets and I too am opinionated. Can I have a TV show too, please? Jon Stewart, would you like to multiply two numbers? You can do it too. I'll show you how. I'll come on your show and multiply them for you if you like.

Now, just to be clear, I'm not attacking either Cramer or Stewart or their shows. I like watching Cramer, and I like watching Jon Stewart. I like the passion that Cramer has for the markets, but I don't have to agree with all of his stock picks, nor do you have to agree with mine. He'll make some stock picks that he'll get right, and he'll make some that he might get wrong. After all, I think we're doing this to 'entertain and educate'. Stewart, he too does some entertaining and educating (or so I believe). So, let me entertain and educate you just a bit. And if you make money, I'm happy for you, and if you lose money, it's not my fault... this is just entertainment. In fact, probably all of this is B.S. and so don't take anything I say seriously.

A few weeks ago, I was giving an overview of valuation techniques to a student group, and I had decided to demo a variety of valuation tools in the market. So, I'll demonstrate these tools to you as well.

Method #1: What funds own the stock?

Taking a look at the top mutual fund owners of AAPL in MSN Money, I notice that I see a bunch of funds that are called 'index', 'growth', and 'blue chip'. From that first glance, AAPL does not appear to be a 'value' stock, but more of an index, growth and information technology stock. In the top mutual funds, I don't see one fund that is called 'Value'. I'm a 'Value' investor, short AAPL.

Method #2: Some key 'Value' ratios.

Generally (but not all the time), value stocks tend to have a low PE, a low price/book and a low price/cash flow. Utilizing FactSet, I found a PE of 34, a price/book of 6.9 and a price/cash flow of 17.5 for AAPL. Now, the weighted median PE in the market is around 17, price/book is at 3 and the price/cash flow is at 11. All three ratios are higher than that of the market. From that perspective, short AAPL.

Method #3: The Dividend Discount Model (DDM)

I generally do not like the DDM model, as it places an emphasis on dividends. But, I need to mention it as it is commonly used. I read a paper the other day by Richardson, Tuna and Wysocki called "Accounting Anomalies and Fundamental Analysis: A Review of Recent Research Advances", and in it, they asked practitioners, "What valuation method do you use?" and in 5th place at 26% of users, they list the DDM model. Now Bloomberg has a DDM model, and I've noticed that although most stocks that I try don't pass this test, if something passes it, then it's probably a value stock. So, I typed 'AAPL Equity DDM' and it gave me a default target price of $209.

At first glance, it looks like the model and the street are at an agreement. There is a huge problem in this argument, because valuation models depend a lot on the terminal growth rate. In this example, it assumes that AAPL will grow at 18.8% FOREVER, and that gives the target of $209. If I assume that AAPL will grow at 22.7% forever, that gives a price target of $300 (Cramer thinks it's worth $300). Personally, I'll assume that as time goes on and 'forever' occurs, I'll assume the company grows at a growth rate similar to that of the GDP, and so when I enter 5% as the terminal growth, I get a price target of $54. Short AAPL.

Method #4: The Residual Income Valuation (RIV)

Bloomberg also has a model called the RIV model in its system. To get it in Bloomberg, type 'AAPL Equity RIV' and the default price target for AAPL is listed as $94. By including the EPS for the next period, I get a target price of $114. In both cases, the stock is worth less than $300 or even $200. Short AAPL.

Method #5: The AFGView Model

My favorite quick valuation method is through AFGView. You can certainly read about it at www.economicmargin.com. From personal experience, if the stock doesn't pass this test, it's not a value stock. Mind you, sometimes I'm wrong and this is just an opinion. Anyways, if I take the default assumptions, and assume the default of a competitive advantage period of 21 years and a discount rate of 7.68%, I get a price target of $114 for AAPL. Short AAPL.

I can get a price target of $300 for AAPL, but I need to assume a discount rate of 6% and that AAPL will dominate (AAPL fans rejoice) for the next 35 years. Now, when I run models, I like to use a discount rate of 8%, and I'll assume that AAPL has a competitive advantage over its peers of 10 years. That gives me a price target of $64. Short AAPL.

DISCOUNTED CASH FLOW MODELS

Analysts spend a lot of time trying to figure out the EPS for this period and the next, but the power in the DCF model does not come from the short term, but the long term. If an analyst does a DCF model, many will focus in on the EPS estimates, but ask them these 4 key questions (and you might be surprised by their answers). If they don't have an answer, but claim to do DCF, think a bit more about their analysis.

• What is the time horizon you used? Was it 5, 10, 20 years?

Personally, I like to use 10 years for consistency.

• What is the 'discount rate' that you used? Was it 6%, 8%, 10%, 12%?

Personally, I like to use 8% for consistency. Some will argue that it should be higher/lower depending on the industry, but I'll disagree with that as I like to know over time how the valuations change, and know that they changed while I kept some value constant. When I value the discount rate for the market, almost always I get a target between 7% and 9%. So, I use 8%. With regard to AAPL, AFGview gave me a discount of 7.7%, Bloomberg's WACC default model had it at 9.7%, FactSet's WACC default model had at 9.1%, eVal uses a default of 10% and I use 8%. Which one is right? I don't know. I use 8% for consistency.

• What is the terminal 'sales growth' that you used? Is it much higher than long term GDP?

Personally, I like to use 5%. Generally I see numbers between 3% and 6%. Anything higher and you better justify the number.

And this question can destroy some of the best valuation models / analysts:

• What is the terminal ROE in your model for the company? Why is it so high? Was it historically that high?

In general, if a company is making a profit and you increase the time horizon, lower the discount rate, increase the sales growth and increase the terminal ROE, you can get a very high target price. If you do the opposite, you'll lower the target price. An analyst that wants to be optimistic about a company might actually use a short time horizon, a low discount rate and a low sales growth, but by making a model that has a high ROE they can make almost any company look good. Let me try to demonstrate.

Method #6: The Discounted Cash Flow Model (eVal model)

Using a product called "eVal" by Lundholm and Sloan, I entered AAPL's 10-K and did a bit of analysis. I made a model that had a 10 year forecast and taking the default assumptions that it had, I got a target price of $291 and EPS estimates of $9.35 this year and $11.89 for the next.

But that model had many flaws. Modifying the shares outstanding to reflect the number I see in Yahoo finance and lowering the discount rate to 8% from 10%, I was able to get a stock price of $527 and estimates of $9.27 this year and $11.79 the next year!

Notice, the strength wasn't coming from the EPS assumptions, but from other factors. What was causing the difference? It was primarily the terminal ROE, as it was saying the AAPL would have a ROE of 23.5% forever! Perhaps I would accept that terminal ROE for AAPL, but look at AAPL's history and you'll see that through the years the ROE fluctuates as they innovate and stagnate, innovate and stagnate, and so I'll argue that they cannot maintain that high ROE forever. I'll change the model, so that as time goes on and more competition occurs, their COGS/Sales, R&D Sales and SG&A/Sales will increase, but they'll stay within historical levels and AAPL's ROE will approach that of the cost of capital of 8%. That model gave me a target price of $76 and EPS estimates of $8.01 and $9.36.

Next, I modified the model so that the model reflected the analyst estimates of growth, but that it also reflected the EPS estimates given by analysts. According to Cramer, he argued that analysts would increase their earnings targets as AAPL would change their revenue recognition and EPS would sky-rocket. I'll give a simpler argument... analysts should change their EPS estimates, because the consensus estimate of 30+ analysts missed AAPL by $0.37 last quarter. How 30+ analysts can miss this EPS so badly I'm not sure. Perhaps AAPL is superb? Is there an accounting anomaly? Are the analysts just missing the boat? You do realize that next quarter, if AAPL doesn't beat by $0.37, the stock could drop? According to MSN Money, I note that the highest EPS estimate for 2010 is $7.87 and the highest is $11.04. Presuming that AAPL will beat by $0.37 each quarter, I'll make a model that reflects a model with $9.35 for 2010 and 12.52 for 2011.

I get a target price of $80. Note... by changing the short term ratios, it only moved the target from $76 to $80, the strength of DCF on AAPL is at the terminal assumptions. Once again, short AAPL.

Method #7: The Discounted Cash Flow Model (FactSet template)

FactSet has a cool DCF model as well, and within it I was able to create a similar model and 'justify' a target price between $247 and $292. Again, the results relied not so much on the short term, but on high terminal revenue growth estimates. And if you look a bit closer, you would realize that the price target came from the default assumptions that AAPL would grow at 36% forever! That's not a mistake of FactSet, that's a mistake of the user or the analyst.

Adjusting the numbers, once again I got a price target < $100. Short AAPL.

Method #8: The Quant Model

There are a number of ways to run 'quant models', but to simplify the process it can look like this: Take a bunch of 'anomalies' that are illustrated in academic literature. You can go to websites like www.aaii.com or www.ssrn.com to find such anomalies. Test the anomalies, weight the anomalies, and give stocks a score on how it performs in each anomaly. For example, suppose I create a quant screen (and this is best done in FactSet), and in that quant screen I place a lot of factors relating to value, 'smart money', quality, and momentum. Stocks that appear nice on such a screen can appeal to a wide variety of investors, as I can take the stock and pitch it to a value firm, a momentum firm, a quality firm, and that in turn might lead to more 'investor recognition' which would drive up the price more. Now AAPL has some 'nice' qualities that 'help' the stock: it has low short interest, a decent 'Piotroski Score' (financial health score), earnings momentum and price momentum. AAPL also has some negative qualities that can hurt the stock, as it has a: high PE, high price/book, high accruals, some insider selling and a high fscore (read the paper called 'Predicting Material Accounting Misstatements' by Dechow, Ge, Larson and Sloan). So, there are some good qualities to AAPL, but there are also some bad qualities to it as well, and since I hate to say 'HOLD' as analysts love to do, I'll say.. AAPL... short.

Method #9: Muliply PE * EPS. Hey Jon Stewart, check it out.

Multiply PE * EPS. That's it. Forget everything I told you and multiply those numbers. I hate this method, but it's quite common. In the paper listed earlier, Richardson et al. ask practitioners, 'What valuation method do you use?', and 74% of them look at earnings multiples (59% use DCF)! Wow. It's quite common to hear something like this: "Taking the forward EPS estimates by our distinguished panel of analysts, and multiplying it by the industry PE, we get a price target of $$$". Then, for the next 20 pages, the analyst will discuss how they got the EPS estimate and spend 95% of the time marketing the product. If they don't like the stock, instead of saying 'sell', they might just drop the stock. After all, people don't like to hear about bad news. The problem is, is that analysts sometimes only focus on the EPS estimates now, and they forget to look at the future beyond. Some look at the EPS estimates now as they'll get in the news, and if their estimate matches that of the company, it sure makes the analyst look good. But, how do you do this? A few weeks ago, I was looking at Yahoo Finance and noted that the highest PE listed for AAPL was at 30.37 and the highest EPS estimate was at 8.68.

A few days later, Cramer came on his show and gave a price target of $264. Then, just a few days ago, Cramer came on his show again and gave a target price of $300. Guess what? On the night of his show, I saw the 8.68 and this time the PE was at 34.75.

Perhaps Cramer did some fancy math to get his target price and deep analysis like I did above with the valuation models, but I was able to get the same result by multiplying two numbers. Who knows what procedure he followed, but I was able to replicate it rather easily.

Here are some common questions I get about AAPL:

Do I hate AAPL?

No. I actually love I-Tunes, I-Phones and I-Pods. It's important to note that although I love the products, it doesn't mean that I have to think the stock is undervalued. I hate it when I see or read stock pitches and 95% of it sounds like a marketing commercial. I'm concerned about numbers, risk, ratios, insider transactions, and earnings. I know the company gets products for a widget, makes the widget, and sells it. If I want to hear a marketing pitch, I'll go to the store.

What about the change in revenue recognition?

As Cramer explains on his show, he mentions that AAPL should have an increase in EPS as they recognize some revenue earlier. Although perhaps true, this confirms one of my beliefs that analysts spend a lot of time on the near term EPS estimates and sometimes neglect the long term estimates. Realize that if AAPL recognizes some revenue earlier, that is revenue they would have announced later, so although it might produce a short temporary jump in EPS, at some point the upcoming EPS should be lower than expected since they won't be announcing the revenue that they would have recognized then (and instead announced it earlier). Also, some companies like to smooth earnings and although I'm unsure AAPL would do this, I don't like seeing EPS numbers that fluctuate wildly.

What about Steve Jobs?

A common argument about AAPL relates to how Steve Jobs is loved by AAPL users and so the stock should go up as he is a creative influence. Fine, I'll agree to that argument, but... if that is true, then what do you think of DIS? Why is it that when DIS announced that they were buying Marvel comics, that I don't remember hearing one interview asking Steve Jobs, "Steve, what do you think of the Punisher character and the image of him carrying a machine gun with Mickey Mouse ears"? Oh, you didn't know... I was looking at FactSet and noticed that Jobs has about $1 billion (0.6%) ownership of AAPL, but he also has about $4 BILLION (7.4%) ownership of DIS. Which company do you think I'd be concerned about if I was him? AAPL or DIS? If you like Jobs, perhaps you should buy the company he has more of, buy DIS. Analysts, next time you talk about Steve Jobs, talk about DIS, please.

Haven't I had bad luck with timing AAPL?

Yes and no. In 2007, I wrote a blog about how I thought AAPL was worth $75 and that blog went on MSN Money when it was trading around $130. The stock shot up $200 and I looked like an idiot. The stock ran down to $120 in 2008 and MSN had an article called "One Who Saw Trouble" and I felt good. Bad luck came around to me, and AAPL flew up to $190 once again, and I felt crappy. It dropped again, but it fell more than the S&P 500 and it came close to my target with a low of $78 - I felt good once again. Now, in the past year, AAPL is up at $200 and again I look dumb. So, yes, I do think AAPL is worth $80, but timing is critical with this stock. I might be wrong, I might be right, but unlike most of the 30+ analysts covering the stock with high target prices, I'll say sell/short to AAPL.

This is too long. Write shorter sentences.

So, there you have it. Take it as entertainment. Here's an opposing view to the crowded world of analysts who love AAPL. I'm bearish on AAPL, and I think it's worth $80.

-kai

If you're interested in some photos, check out www.theworldbetweenmyears.com

And here's my CNN I-report page

Posted by Kai Petainen at 6:00 PM | Permalink

My recommendation:  LONG
My target price:  $23

I like stocks that have a value, growth, momentum and a smart money story.  Those stocks I can pitch to a variety of funds and perhaps a variety of funds might purchase the stock.  I'm not the type to spin a cool story about their product, as there are plenty of blogs, analysts and others that have a tendency to pitch the product and not the stock.  I specialize in another form of analysis... where I try to find stocks that might appeal to 'investor recognition', and as such will rise as more funds, analysts and investors find the stocks appealing.
Endo Pharmaceuticals has a value story that could appeal to a value fund.  It has a trailing PE of 9, a price/book of 1.7.  Using a discount of 8%, terminal sales growth of 5%, matching EPS estimates (but 0.05 higher) than that of other analysts, and a terminal ROE of 8%, I made a DCF valuation of ENDP and received a target price of $23.  With a target price of $23, and some favorable value indicators, ENDP could appeal to some value funds.

ENDP could appeal to some growth funds.  Analysts' estimates forecast 13% sales growth this year and 6% in the next year, but growth can be analyzed in other ways as well.  Perhaps one of the largest catalysts for ENDP could occur as the company grows just a bit more, as it is teeters on the edge of small cap vs. midcap classification.  If the stock were to cross over into midcap territory then it would be picked up by more funds as it could be applied to more index funds, and it could have enough market value to meet eligibility requirements in certain funds.

ENDP could appeal to some momentum funds.  It has had some earnings momentum, as earnings increased from 0.49 to 0.67 in the past quarter (from the year before) and from 0.52 to 0.69 in the quarter before that.  ENDP has also beat analyst expectations by 0.05 or more in the past 4 quarters (with 20+ analysts covering the stock?!).  One cautionary note - as the company has beat by 0.05+ each time, one could assume that they should beat by 0.05 in the next earnings announcement.  If they do not beat the earnings by at least 0.05, then expect at least a short drop in the stock.

ENDP could appeal to some 'smart money' funds as well, as insiders have picked up some shares in the past few months at $16.  Although institutions have been selling the stock, some of those trades could be coming from small-cap funds that need to reduce their holding in ENDP as it crosses into midcap territory, and then midcap funds will pick up on it.

Lastly, I won't bother going into the specifics, but the quant-heads know who they are and what I mean, ENDP has a low F-score and a decent Piotroski score, and so ENDP could appeal to the quant funds as well.

I really haven't spoken much about the actual business of ENDP, but that is simply because I am not an expert in that manner.  I'll note that Endo Pharmaceuticals is a small-cap, Pennsylvanian based company that specializes in generic and brand name pharmaceuticals for pain relief, bladders, early puberty, prostate cancer, and hypogonadism.  They're also involved in research relating to HIV prevention, diabetic pain and treatment for acromegaly.

I like Endo Pharmaceuticals (ENDP) and I have a price target of $23.  I believe it could appeal to a variety of investors, as value, growth, momentum and 'smart money' funds/investors may find the stock appealing.

Posted by Ken Kam at 11:42 AM | Permalink

On The Academic Frontline


Economic Thoughts in a Turbulent Economy

I’m not an economist, but I like listening to others. Even economists disagree with economists, and it’s hard to tell what to make of the economy, when a lot of it is driven by politics. Anyways, I’m going to give you a bunch of links that relate to stuff that has happened in the past few months. Enjoy, and if you’d like my opinion, I’m just listening as well…

“Do CEO’s Matter”.
“Noel Tichy discusses whether CEOs really have the ability to make or break a company's performance on CNBC's Squawk on the Street.”

“A New Chapter For General Motors”.
“Professor Marina Whitman predicts shock of Chapter 11 may finally change culture at GM.”

“Government Motors?”.
“Political pressure is sure to come with the financial aid package at GM, says Professor Martin Zimmerman.”

“Are the Taxpayers on the Hook in the GM Deal?”.
“M.P. Narayanan details how well GM must perform for the government to break even on its loan.”

“The New Healthcare Prescription”.
“Professor Tom Buchmueller talks politics, pricing, and the bitter pill of shaking up the status quo.”

“Ball and (Supply) Chain”.
“As economic pressures threaten longstanding supply chains, manufacturers and suppliers seek solutions.”

“Bad Loans, Suffering Banks”.
“Research shows link between mortgage securitization levels and financial distress”

“Cause Marketing: Altruism or Greed? “.
“Companies that join with social causes to sell products not only enhance their image, but also improve their bottom line”

“Managing the Economic Crisis: The VC Way”.
“Experts analyze stimulus, healthcare, and cross-border investing at ZLI conference.”

“Customer Satisfaction Rises Again”.
“Strong showings for Southwest, DirecTV and Domino's; gains for Comcast and McDonald's.”

Walter and Endo (WLT and ENDP)

In a previous blog I had mentioned the MII stock pitch competition at the Ross School of Business. Well, one of those pitches was highlighted on Forbes a while back. Matthew Schifrin, wrote up an article called “Wolverines Love Walter” on Apr. 2nd. Since the Mar. 23rd blog, it’s up 58% at $36, which puts it above the $35 target price quoted in the Forbes article. Nice. I should also point out that only one other stock performed better than WLT since then, RIMM is up 85% (the only stock that was pitched by two different groups).

I read a Forbes article this past week that I found curiously intriguing. Check out the article “Endo Plays With Pain”, by John Dobosz. I’m long on ENDP, and have bought it numerous times, starting back in Mar. ’03 at $14. Right now, I value it at $23.

WAS I RIGHT OR WRONG? The Quant of Life


THE LONG STORY

Back in Sep. ’08 I had blogged about the financial sector, it’s time to go back and take a look.
I have a Financial sector portfolio and in the past 12 months it is down -18%. During the same time, the sector is down -46%. My financial portfolio is beating the sector index, so I am quite happy. Since inception, the fund is up 80% and the sector index is down -42%, and I’m happy.

In general, I am bullish on Financials. Although my portfolio has about 20-30 stocks, I have a list of 50 stocks that I like. This is a list of stocks that I may or may not put in my virtual portfolios. I'm not going to give the stocks on that list, but I'll show you an idea of what I like.

Here are a few notable stocks in my current Financial sector portfolio:

FAS up 202%, UNM 116%, PNSN 114%, TMK 102^, AFG 67%, AZ 58%, HMN 52%, BMA 48%, BFR 42%, TICC 34%, THG 26%, PMACA 26%, XL 15%, MIM 14%, AEA 11%.

Here is the industry breakdown of that list:

This gives an idea of the market cap breakdown of that list:

Comparing the % weighting in the industries with the market, this graph shows which sectors I am overweighted in:

If I use a bit of qualitative analysis, what do I feel should be over weighted and underweighted in Financials?

OVERWEIGHT

Property & Casualty Insurance, Multi-line Insurance, Life & Health Insurance, Consumer Finance and Reinsurance.

UNDERWEIGHT

Capital Markets, Diversified Financial Services, Diversified Banks, Real Estate, Regional Banks and Thrifts & Mortgage Finance

My diversified fund list has 7 (14% of 50) Financial stocks in it. The fund is down -4% vs. the S&P 500 in the past year and up 126% since inception. In the long run I am happy, but in the short run I'm not happy.

Here are the stocks: ACE AEA AFG AHL CODI IPCC PRA

I bought:
AEA at $4 in Apr. ’09. It’s at $5.
CODI at $10 in June ’09. It’s at $9.

My global-non-US fund list has 8 (16% of 50) Financial stocks in it. The fund is up 21% vs. the S&P 500 this past year and up 180% since inception. I am happy.

Here are the stocks: AXA AZ BFR BMA CIB ENH FFH MIM

I bought:
AZ at $17 in May ’06, $7 in Feb. ’09 and $6 in Mar. ’09. It’s at $10. Yay.
BFR at $2 in Nov. ’08. It’s at $4. Yay.
BMA at $20 in Sep. ’08, $9 in Nov. ’08 and $11 in Jan. ’09. It’s at $15. Yay.
FFH at $234 in Apr. ’07, $240 in Aug. ’08, $280 in Nov. ’08 and $263 in May ’09. It’s at $248.
MIM at $7 in Apr. ’09. It’s at $8.

THE SHORT STORY

I have a short fund that shorts Financial, Material, Consumer Discretionary, Industrial and Consumer Staples. The fund is up 76% vs. the S&P 500 this past year and 149% vs. the S&P 500 since inception. I am happy.
I won't list all the stocks, but here are some notable Financial stocks that I have yet to cover:

FRE -92%, MPG -84%, MLP -40%, PNFP -16%, WAL -11%

My LTCM fund list has 8 (16% of 50) Financial stocks in it. The fund is up 315% this year vs. the S&P 500 and 225% vs. the S&P 500 since inception. I am happy.

Here are the stocks:
GHL ISBC JOE WAL WHG SIVB

I shorted:
GHL at $68 in Feb. ‘09. It’s at $72.
MPG at $17 in May ‘08. It’s at $1. It rose to $$$$ and dropped. Yay.
WAL at $6 in May ‘09. It’s at $7.
WHG at $38 in May ‘09 . It’s at $43.

Here are some stocks that I have yet to cover:
MPG -87%

Just the Bear News.

I’d like to hike the Akshayuk Pass on Baffin Island in Nunavut, Canada and recently I read this on a map by Chrismar:

“Potential Polar bear hazard. Do not linger near sea shore. Move inland 5+ kilometers as soon as possible”.

YIKES! It’s on my bucket list. Maybe I’ll hike it next year?

In the mean time, I’m heading off to Isle Royale National Park for a nice hike. The park is famous for its moose/wolf population. Sorry, no bears.

Oh, bears in Florida? Yup. This past month a bear was caught at a campground in Florida. If bears can afford to vacation in Florida, perhaps the economy has turned around. Perhaps.

Cheers and sisu,

-kai

I make a list of 100 stocks that might suck and 40 that might look good.
http://www.earningstorpedo.com

I also have a webpage that links to the trips and photography that I’m involved with
"World Between My Ears"

Posted by Kai Petainen at 7:16 PM | Permalink | TrackBacks (0)

Dredge #4 National Historic Site

On The Academic Frontline

A Few More Thoughts from the Michigan Stock Pitch Competition

In my previous blog I mentioned the MII stock pitch competition at the Ross School of Business, and listed the stocks that were pitched. This week a press release went out that you can see here. Here's a quick quote from that article:

"Our model for financial institutions is fatally flawed," Gelband said. "What we will evolve into over the next decade will look like a newer version of the pre-modern era financial system. If a firm is too big to fail, they're going to be so heavily regulated they they're going to be forced to operate as a utility."

But Gelband also made clear that a slew of new startups will be born from the collapse of the old system. He spoke with hope of startups like investment bank boutiques, dealer brokers, electronic marketplaces, and aggregators.

"That's what's going to drive our financial system back to health and create job opportunities in the future," he said. "The marketplace and the regulators will demand better alignment of incentives, better risk management, and a more rational cost structure and size."

"Ross Investment Club Debuts Intercollegiate Stock Competition for Undergrads". Leah Sipher-Mann. April 1, 2009.

Insight From the RISE IX Dayton Investment Conference @ the University of Dayton

So, after the event at Ross, I made my way to the University of Dayton and attended the RISE IX academic student investment conference. Although the market has sucked, an eye-popping 2600 students/professors/investment professionals came to the event this year and participated in a forum that touched upon the economy, markets, corporate governance and global investing. The first day had a series of keynote sessions followed by Q&A from students, followed by workshops for the next two days. Perhaps due to the economic downturn the event was a bit more subdued this year, as the year before they held a closing NASDAQ bell and a fancy dinner in the National Museum of the US Air Force. Needless to say, I'd strongly encourage others to attend the event next year. It's a huge event and big thanks certainly should go towards David Sauer, Bob Froehlich and a plethora of volunteers.

I participated as well, speaking at a session entitled 'Enhancing the Investment Education Experience"; but, I also had a chance to ask some pertinent questions at the sessions. Here are summaries of my questions and the answers:

Session: Equity Portfolio Management reps from Fifth Third, Capital Guardian, Morgan Stanley, Wilshire Funds

My Q: Last year quant funds performed poorly. At that point in time, did you alter your strategy, remove/add some quant measures. What worked and what didn't?

A: We have a team of analysts who keep watching the markets and staying top on things.

My opinion: They avoided the question and it made them nervous. I knew they wouldn't answer the question, but I had fun asking it. It is a great question though!

Session: Socially Responsible Portfolio Management with reps from Legg Mason, Region VI Coalition, Fund Evaluation Group, IW Financial

My Q: Academic studies find that for 'faith-based (socially responsible) funds', the returns aren't necessarily better, some 'window-dress', and the higher fees are charged. Although the funds may find 'socially responsible' companies, are they actually 'socially responsible' to the investor? Is it socially responsible for a faith-based fund to walk into a church, tell the congregation to invest with them as they believe the same thing, but then charge more, underperform and window-dress? Isn't it just marketing?"

A: That is a problem in some of the profession, and yes the academic students do find that. Some charge higher fees as they would argue that they are performing a service, but mutual funds are increasing fees as well.

My opinion: They answered the question. It made them uncomfortable, but they answered the question. Thank you.

Session: Forensic Accounting Investigation with reps from National Corporate Governance group and Ernst & Young (retired)

Someone else asked the Q: "Are there any quick quant methods that can detect some of the fraud?"

A: Look at neural networks and how people inter-relate with one another.

My opinion: They avoided the answer and started pitching neural research they did. It was a good question, but there was an easier answer that they could have given. I told the audience to look at the 'Predicting Material Accounting Misstatements' paper by Dechow, Ge, Larson and Sloan.

Session: Financial Media & Journalism with reps from CNBC and Bloomberg

My Q: I like Jim Cramer, I also like Jon Stewart. Was the incident good for the business, or bad for the business?

A: Criticism is good, and when people care about what we do and still watch, that is good. But, the public relations department may not like it.

My opinion: Good answer. That’s straight to the point. My respect for CNBC has increased, and I still like Cramer's passion for the markets.

Quotes overheard at the conference

About media:
"Media talks about things better than they are when good and worse than they are when bad"
"Inform and reflect society"
"Blaming media is a scapegoat"
"Financial media doesn't exist to make you money. It makes money for itself from advertising"

Q: Last year, you thought the S&P 500 was undervalued by 15%.
A: This is the problem with coming back (to the conference)... and I'll see you outside after class"

About gold:
"For #$@'s sake, don't get sucked in"

""Gold has one really good use, it's for saying 'i'm sorry'"

Accounting and valuation:

"Nothing on the left is left, nothing on the right is right""

"Valuation matters less today"
"Valuation is not the catalyst"

About tax havens:
"Hide assets from IRS or wife"

About the Auto Industry:
"I don't know what I think about this"
"Sympathy that we need to preserve American icon"
"Fewer people benefit from bailing auto companies"
"Let bondholders suffer"
"We'll just call them Toyota"

Favorite economic indicator?
"I don't have one, perhaps how the market is doing"
"How angry Rick Santelli is"

When is the USA in trouble?
"When Asians realize it's better to finance in Bangkok than in New Jersey"

About Fraud:
"Absence of evidence is not evidence of absence"

About short sellers:
"Get a bad rap, do a service to investors"
"Neither more or less evil than long"

About regrets and mistakes:
"I regret that I didn’t' take statistics"
"Unthinkable can actually happen"
"Faith in human nature. Didn’t realize how prevalent bad debt was"

"Worst Mistake? Trying to implement quant techniques at the track, especially if alcohol was involved"
"I was not pessimistic enough"
"My worst forecast... aside from 401K investment?"

About the crisis and policies:
"It may seem like dark days... exciting times... the industry is reformatting itself."
"It took 3 decades to understand the depression"
"Programs are done under duress... at 2am... eating pizza"
"Not the perfect policy, but they mean well"
"No natural political ally for what is happening now"
"90% of the market doesn't understand banking"

"Everyone is smiling in this photo, because none of these pictures were taken in the past 9 months"
"Is there such a thing as a non-toxic asset?"
"Like shooting hogs with a shotgun"
"Populist orgy of ridiculous legislation"
"Favorite topic in class, was how to get ahead without working very hard"
"Ethical behavior cannot be enforced through legislation"
"It’s like going to the Rolling Stones and getting Jonas Brothers instead"
"Hot dog style of investing, no idea what goes in it, but it's delicious"
"Is there anything the fed could have done differently? No."
"Annus horribilis."
"I’d take a position between cash and fetal"
"Stocks have become historically and hysterically volatile"
"Always agree with your boss who signs your check"
"Behavioral biases are very valuable"
"How do you fix the big fix? You need a big fix to fix it"
"protectionism is the crack-cocaine for contemporary economics"
"We always seem to be in a bubble"
"New rule: if you don't understand this, you don't sign"

Just the Bear News

Perhaps in this mess, there is some hope for the future of the industry. Perhaps.
The gold rush, the market rush. I was reminded of "The Spell of the Yukon", written on a house in Dawson City, Yukon.

I wanted the gold and I sought it; I scrabbled and mucked like a slave.
Was famine or scurvy -- I fought it; I hurled my youth into a grave.
I wanted the gold and I got it -- came out with a fortune last fall.
Yet somehow life's not what I thought it, and somehow the gold isn't all.

Cheers and sisu,

-kai

I make a list of 100 stocks that might suck and 40 that might look good.
http://www.earningstorpedo.com

I also have a webpage that links to the trips and photography that I’m involved with
"World Between My Ears"

Dredge #4 National Historic Site

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Me. Climbing the highest waterfall in Michigan. Bridal Veil Falls at Pictured Rocks National Lakeshore.
(Photo by Lars Jensen)

On The Academic Frontline

This past weekend, the Michigan Interactive Investments club, at the Ross School of Business, held their first BBA Intercollegiate Stock Pitch competition and 17 schools competed for the $3000 prize. Carnegie Mellon, Chicago, Georgetown, Haas, Illinois, Indiana, Miami of Ohio, Michigan, Michigan State, North Carolina, NYU, Penn State, Syracuse, Villanova, Wharton, William & Mary and Yale pitched stocks in the competition. The event also had guest speakers, including: Michael Gelband, Marina Whitman, Dwight Cass, Mark Senn, Robert Van Order, Rich Bunch, Jack McHugh and James Walsh; as well as a stock trading competition sponsored by BP. It was certainly a well organized, professional and cool event. I took a few notes, and found a couple tidbits that were rather interesting (this is a quick summary of thoughts that I heard).

"It was basically an arms race. You feed the machine, if you didn't others did. There was a rise in prices that distorted the perception of risk. Huge firms with little experience were competing against hedge funds, and hedge funds robbed the banks of intellectual capital. Early on there were debates about risk, but as time went on more risk was taken. To get comfortable with risk, computer models were created to help explain it. All models were about the same. There was a false sense of security, as spreads narrowed and models said less risk and firms had to meet quarterly earnings targets. Firms had little derivative experience, they grew in size, but without feel or intuition. It was like a drunkard who uses a lamppost for support instead of illumination."

"Boards must understand business and not just pick friends. Let's not have larger than life CEOS, who don't listen to those that challenge."

On grading the stimulus package:
"I'd give you an incomplete"

"Tough luck you're a bad bank. Smart banks succeed. Dumb banks suffer."

"I don't want to depress everyone here."

"It might not be popular to mention at a cocktail party that you're in banking."

"People are still in denial. We hope to return back to normal, but in reality, what we had is over and we have to change."

"It's not value at risk, it should be 'your own money at risk'"."

About the future:
"Standardization of products. No ones failure will jeopardize system. New boutiques, clearing houses and better risk management."

There was a student stock pitch competition and groups were judged on a variety of factors. Out of the 17 schools, the finalists were: Michigan State (DHT), Ross School of Business (WLT), Penn State (RTN) and Villanova (RAH). Michigan State won... Congrats!

So, what stocks were pitched as longs?

BAM BHI CHL DHT DSX FCN GOOG HAE KFT MOS RAH RIMM(pitched twice) RTN WLT WPI XRAY

I should mention that I'm not ecstatic about all the stocks, but I do respect the time/effort put into them, and all the groups created very professional pitches. So although I might disagree with some stocks, the groups were outstanding. That's how it is in the market. There will always be at least someone who disagrees with your favorite stock.

Of the stocks listed above:

I bought CHL for my Information Technology portfolio at $17 in Apr. '05, and then sold it at $29 in May '06. I'm happy.
I bought FTI for my Energy portfolio at $22 in June '03, and then sold it at $21 in Nov. '03. I'm not happy.
FTI was not forgotten, as I had shorted it at $33 in Apr. '05, and then covered it at $40 in Aug. '05. I'm not happy.
I bought KFT for my Material/Staples portfolio at $35 in Mar. '04 and then sold it at $33 in June '06. I'm not happy.
I bought RTN for my Industrials portfolio at $28 in Mar. '03 and then sold it at $44 in June '06. I'm happy.
After the stock pitch competition, I bought RTN at $35. Wharton did a great job with this stock pitch!
I bought WLT for my Industrial portfolio in Jun '04 at $13 and sold it at $13 in July '04.
I bought WPI for my Health portfolio in Mar. '04 at $46 and still hold it. That begs the question, is it a value trap? I'm not happy so far.
I bought XRAY for my Health portfolio in Mar. '04 at $44 and then sold it at $47 in Apr. '04. I'm happy.

Was I Right or Wrong?

About 6 months ago, I started posting a series of blogs that analyzed my perspective about various sectors in the market. It's time to go back, and for the next few blogs I hope to revisit those thoughts. In Sep. '08, I had 50 stocks that I liked. Although I never purchased all 50 stocks for my diversified virtual portfolio, this is how that portfolio was segmented:

Discretionary 20%, Financials 18%, Information Technology 18%, Energy 12%, Health 10%, Industrials 10%, Materials 6%, Utilities 4%, Consumer Staples 2%, Telecommunications 0%.

That breakdown implies that I was bullish on Consumer Discretionary, Financials, Information Technology, Materials and Utilities. It also implies that I was bearish on Energy, Health, Industrials, Staples and Telecommunications. Combining that data with a bit of valuation, I was bullish on Information Technology and Utilities, and bearish on Energy and Industrials.

Now, 6 months later, the segmentation for the 50 stocks looks like this:

Information Technology 32%, Industrials 20%, Discretionary 14%, Financials 12%, Health 8%, Energy 6%, Materials 4%, Consumer Staples 4%, Telecommunications 0%, Utilities 0%

If I combine a bit of valuation into the mix, I'm bullish on Industrials and Financials and bearish on energy.

Markets have changed quickly, and keeping with my discipline of quant/value style of investing, the holdings in Information Technology have increased from 18% to 32%, Industrials from 10% to 20%, and Consumer Staples from 2% to 4%. On the flip side, Energy holdings have decreased from 12% to 6%, Financials from 18% to 12% and Consumer Discretionary from 20% to 14%.

Let's be critical.

I was bullish on Consumer Discretionary, Financials and Materials, and bearish on Health, Consumer Staples and Telecommunications and I WAS WRONG .

I was bullish on Information Technology and Utilities and bearish on Energy and Industrials and I WAS RIGHT.

In the past 6 months, my diversified virtual fund has underperformed the S&P500 by -2%. That's not good and I'm not happy. But, in the past three months, it has outperformed the S&P 500 by 4%. So hopefully, things have improved.

Just the Bear News

Alright, so this isn't about a bear, but it deals with analysts who are afraid of being a bear.

By now everyone has probably heard about the Cramer/Stewart fiasco and I have a few thoughts to add. Analysts are wrong, analysts are right, and although it is oky to call out an analyst when they are wrong, I think it wasn't completely fair that Stewart nailed Cramer. I love watching both of their shows. I had the privilege to see Stewart live in Detroit, and I've had the privilege to meet up with Cramer in person. Both are entertainers and both try to educate their viewers. Even if you hate Cramer's or Stewart's opinions, you can probably agree that they have passion for the markets and fascinating personalities. It should be noted that analysts make mistakes, but it should also be noted that some analysts just don't have the guts to give sell recommendations. Think about it.

Suppose I'm an analyst and I think that a company might have 'shenanigans', or it might be committing some 'fraud', or it might be 'cooking the books', then I'll be very afraid of accusing them of such a thing, in case I'm wrong. After all, the company might get mad at me if I say something "bad".

Now, on the other hand if I say something cool, then it might increase the stock price, but I doubt the company will get upset with me. People in general aren't upset if things go up and markets go up, even if there are shenanigans at play. It's only when the markets collapse, grandma loses some of her money and people suffer, that suddenly people complain. People blame hedge funds, but some of those hedge funds have fancy models that perhaps have some predictive power as to which companies might be commiting some sort of shenanigan. The hedgefunds won't accuse the company, but they'll short it, and sometimes they are right. Sometimes they're wrong. The general public is usually not aware of such things, but then again it's not aware because its hard to say, "i'm shorting this because they might be cooking the books". Perhaps it's not the 'sell recommendation' that people should look for, but the number of analysts that suddenly stop covering a company. I hope the culture can change a bit, where people can be more outspoken and give true opinions of stocks, even if those opinions are unpopular -- if they had, then perhaps the market wouldn't have been so overvalued. If CEOs were a bit more honest, and the investor relations were a bit more honest, and the analysts were a bit more honest... then hopefully things could have been a bit better. But this mess is a combination of everything and everyone and they're not the only ones to blame. So Cramer will make some good calls and he will make some bad calls, don't expect him to be perfect, but do expect analysts to practice better stewardship, think outside the box, create true critical commentary of stocks, and develop some... errr.... sisu... as the Finnish would call it.

Cheers and sisu,

-kai

I make a list of 100 stocks that might suck and 40 that might look good.
http://www.earningstorpedo.com

I also have a webpage that links to the trips and photography that I’m involved with
"World Between My Ears"

Signal Hill National Historic Site

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Kenai National Park

Looking Back

Looking back on the past year, I have a sense of bewilderment. It reminded me of a statement a CEO once said:

"everything that we could have done right, we did wrong
everything that we could have done wrong, we did"

I could go through a list of things that happened, but you can easily use wikipedia and look up "2008" for that. I think about CNBC and Bloomberg and all the blogs and funds and newsletters that spoke of the crazy markets. And I can't help but wonder, in all the political correctness and proper language, how many really wanted to say something like, #$@$@%@%@^@$ !

In some ways, I was "happy" what happened in the markets. But I say "happy" in quotes, because although the price targets that I had for many stocks were realized, they came at a huge cost. When I thought Apple was worth close to $75, it never occurred to me that the market would have to plunge before the stock would realize that value. I was also right that growth would have to slow down and people should avoid those momentum/hot stocks that I kept complaining about, but again, it took a market collapse to realize that. So, I am "happy", but I'm also quite sad and upset at the market.

Looking Ahead

But, to me, being a quant, not everything is bleak. Then again, I'm not a great economist either. So what do I think of the market?

To quote the great 'Groo the Wanderer',

"My Mind is Void"

"My mind is void". I'm not sure what to think. In the past, when I did my overall market forecasts, I always found a discount rate between 7.5% and 8.5%. Nowadays that number has exceeded 10% at times. To me, the high discount rate, indicates that the market is quite undervalued now. So from that perspective, I think the market is undervalued by about 36%. But, if you were to ask me about the market last year, and I was following the same technique, I would have thought that the market was overvalued by 15%. So what do I know? I may have thought the market was overvalued, but I never saw this mess coming. So, this year, yup, I think the market is undervalued by 36%, but I'm certainly nervous about that number. Oh, in case you're curious, I'm overweighted in Financials, Industrials, Materials and Telecommunication Services.

One of the gurus at Marketocracy, "auminer", runs a cool competition each year whereby everyone picks 5 stock for the year. So, I'll pick 5 stocks as well. I'm honestly not sure how I'll do with these picks, I just hope that they work. One of the competitors, jmfunes, has chosen the 3X ETFs, and perhaps they'll actually win. I have no idea if I'll beat them, but I hope I will. So, since I'm pessimistic about the U.S. economy, I'll choose foreign stocks that have a bit of value, growth, and hopefully some luck. Here are 5 stocks that I'll pick for the competition this year:

AZ BCE CAST NCX PHG

Are you curious as to which stocks I'll avoid? =)
Here are ten large stocks:

AAPL ABT GE GOOG ORCL PEP PM QCOM T WFC

Here are ten smaller stocks that I'll avoid:

AMSC ESLR ILMN LNG LULU OESX RVBD SFSF SVNT TSON

Ultra, Supreme, Super bull and bear ETFs. Ah, they came into focus this year, and I presume we'll have a bunch more. These ETFs are rather amusing, but I'm curious to see if they'll run into problems in the future. Who knows, but they're certainly fun to watch. Expect more ETFs to show up, and as they come out, expect the names to get more creative and obnoxiously absurd. By the end of next year, perhaps we'll have the 'Kowabunga 5X Sweet #$@$ ETF'. It would track the number of bungee jumpers in Finland, but leverage it up by 5 times. Not to mention, we'll also have the 'Life-is-gloomy-I-want-to-eat-worms Bogus -4.5X ETF'. That ETF would track the number of red-nosed clown costume sales.

Just the Bear News

Perhaps this year could be remembered as the year of the 'bear'. Bears really dominated the news this year, and I don't mean the 'bear' market. We had maulings and bear deaths and crazy attacks and bear hunts were stopped in some areas. There was a ton of stuff dealing with bears. But do you know that perhaps bears weren't the coolest animals? I was on a bus in Denali National Park, and suddenly the bus stopped and the bus full of foreigners ran to the side of the bus, shouting and pointing their cameras. It wasn't a bear, or a moose or even an elk that they saw. It was a lonely beaver in a little pond that they were excited about. You gotta realize, I come from northern ontario, those kind of things are common to me. Why a beaver would get more attention than a grizzly... I have no idea.

So, in the spirit of "holidays" and in keeping with the sensitivity of hurting some Americans, and following the "not so free speech" protocol, I wish all of you a 'happy holiday'. For those in Canada, and your lack of political correctness and retainability of humour, I wish you all a very 'eh, happy Christmas."

Cheers,

-kai

Denali National Park

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On the Chilkoot Trail.

Quality of Life

The Academic Frontline

I noticed a few neat articles at the Ross School of Business:

What do some business school alumni think about the financial crisis? Click here.

In the mood for more political stuff? Scott DeRue, talks about Obama. Click here.

Do you gamble at the casino (or would you like a reason not to)? You may want to check out some thoughts by Puneet Manchanda. Click here.

Congrats to Carolyn Yoon for the "Best Paper in The Journal of Consumer Research. She studied "How Warnings about False Claims Become Recommendations"Click here.

Congrats to David Hess for being noted by the Financial Times as "Rising Star Faculty Pioneer". Click here.
And see an interview here.

Spike Lee is going to talk at the Ross School of Business. Cool.

Quant of Life

THE LONG STORY

I have spoken about each of the sectors, and we're down to the last one -- Health Care.
Here's my quant 'slice of life' with regards to Health Care stocks.

I have a Health Care sector portfolio and in the past 12 months it is down -41%. During the same time, the sector is down -25%. It’s not beating the index, so I am not happy. Since inception the fund is up 73% and the sector index is flat at 0%. Although I’m sad about the recent year, overall I am happy.

In general, I am bearish on Health Care. Although my portfolio has about 20-30 stocks, I have a list of 50 stocks that I like. This is a list of stocks that I may or may not put in my virtual portfolios. I'm not going to give the stocks on that list, but I'll show you an idea of what I like.

Here are a few notable stocks in my current Health Care sector portfolio:

EMS 13%, ENDP 13%, NOVA 12%, BVF 11%

Here is the industry breakdown of that list:

This gives an idea of the market cap breakdown of that list:

Comparing the % weighting in the industries with the market, this graph shows which sectors I am overweighted in:

If I use a bit of qualitative analysis, what do I feel should be overweighted and underweighted in Health Care?

OVERWEIGHT

Health Care Services

UNDERWEIGHT

Biotechnology, Parmaceuticals, Health Care Equipment, Health Care Supplies

My diversified fund list has 3 (6% of 50) Health Care stocks in it. The fund is at 1% vs. the S&P 500 this year and up 116% since inception. In the long run I am happy, but in the short run returns I'm not happy.

Here are the stocks: AET BIOS MRX

I bought:

MRX at $15 in Oct. '08. It's at $12.

My global-non-US fund list has 0 (0% of 50) Health Care stocks in it. The fund is down -9% vs. the S&P 500 this year and up 86% since inception. I am not happy about this year, but I am happy about the long run returns.

Here are the stocks:
There aren't any. I told you I was bearish on Health Care.

I bought:
- nothing notable at this moment.

THE SHORT STORY

I have a short fund that shorts Health Care. The fund is up 90% vs. the S&P 500 this year and 21% vs. the S&P 500 since inception. I am happy.

I won't list all the stocks, but here are some notable ones that I have yet to cover:

DDSS -92%, JAV -75%, BIOD -50%, RIGL -45%, CYTX -44%, CRME -42%, ACAD -40%, ALXA -34%, EXEL -28%, MIPI -26%, NSPH -25%, RDNT -24%, ARNA -22%, SVNT -19%, SGMO -17%, RXII -15%, AMLN -15%, PODD -13%, XNPT -10%

My LTCM fund list has 12 (24% of 50) Health Care stocks in it. The fund is up 315% this year vs. the S&P 500 and 225% vs. the S&P 500 since inception. I am happy.

Here are the stocks:
ACOR AMAG AMLN BJGP ESC OREX PGNX PMII PODD RDNT SQNM VRUS

I shorted:

ACOR at $22 in Feb. '08. It's at $19. It rose to $36 and dropped.
AMAG at $25 in May '06. It's at $37. It rose to $73 and dropped.
AMLN at $18 in Aug. '04. It's at $7. Yay... it rose to $53 and dropped.
BJGP at $9 in Feb. '08. It's at $6.
ESC at $27 in July '07. It's at $8. Yay.
PGNX at $9 in Aug. '04. It's at $11. Yay... it rose to $31 and dropped.
PMII at $5 in Sep. '08. It's at $2.
PODD at $17 in Feb. '08. It's at $5.
RDNT at $7 in June '08. It's at $2. Yay.

Here are some stocks that I have yet to cover:
ACAD -59%, ASPM -51%, PURE -40%, APPY -25%

Just the Bear News. Is a dead bull a bear?

In case you missed it, check out the dead bull. The article 'The End', by Michael Lewis has a neat digital image of a fallen bull by Ji Lee. Or perhaps it is just sleeping?

So there you go. Have fun!

-kai

More on the Chilkoot.

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Life on the Chilkoot Trail

Quality of Life

#@%@ Paper Hits the Fan

Georgia-Pacific is suing Proctor and Gamble over their toilet paper design.

Now this isn't the first time the companies have had fun suing over toilet paper. Proctor and Gamble had previously sued Georgia Pacific over toilet paper.

Do they just keep suing each other over designs of toilet paper?
Can I patent the design that I place regularly on toilet paper?

Olympic Timed Race to the Fed Decision

FED DECISION 41:12:31

Ever notice that when CNBC annouces the FED DECISION, they have a countdown timer with miliseconds?
Is it really necessary to know that the Fed will announce in 41 minutes, 12 seconds and 32 miliseconds?
Oh oh, was that 41 minutes, 12 seconds and 31 milliseconds, or 33 milliseconds?
CNBC, can you stop the timer so I can verify what the actual time was?
That millisecond matters to me. I blinked my eye and missed it.
And who verifies that the millisecond is correct? What if they are off by a few seconds?
Perhaps they should have a timer for the next time people will sue over toilet paper. Now that might be interesting!

FED DECISION IMMINENT

Later, CNBC was closer to announcing the Fed decision but instead of showing those vital milliseconds, they changed it to read 'IMMINENT'. I think CNBC might want to borrow the clock from the show '24'. They could put the timer between segments and add some movie-style dramatic music to go along with it. But even in '24', I don't think they include milliseconds?

NEXT TOILET PAPER LAWSUIT : ##:##:##:##

The Academic Frontline

Are you out on the west coast and interested in attending a 'Mortgage Meltdown Symposium'?
If so, check it out. Bernanke will share his thoughts as well at the UC Berkeley symposium.

In November, Haas also has a finance conference entitled, "Navigating Through Financial Turbulence"

The Ross School of Business has put together a neat video about the 'Ross Leadership Initiative', "a series of unique experiences designed to draw you into scenarios that will develop and test your leadership capabilities in real time." You can check out the video here.

Was I Right or Wrong?

This can be egotistical, or not. This week I'll tell you something about myself.

I was right:
Last year, I had predicted that there would be a slowdown in growth in the United States.

I was wrong:
As a result, I had alocated a large portion of my retirement in foreign equities (I'm willing to take the risk) -- but, it never occurred to me back then that the US market meltdown would have such a dramatic effect on the world market. Oops.

Also, I figured that a slowdown in growth would come naturally (as growth rates seemed rather high for some companies), but I hadn't forecasted that things would drop this far, this fast and through these crazy circumstances.

Quant of Life

THE LONG STORY

Here's my quant 'slice of life' with regards to Consumer Discretionary stocks.

I have an Consumer Discretionary sector portfolio and in the past 12 months it is down -47%. During the same time, the sector is down -43%. It’s not beating the index, so I am not happy. Since inception the fund is up 38% and the sector is down -12%. Although I’m sad about the recent year, overall I am happy.

In general, I am bearish on Discretionary. Although my portfolio has about 20-30 stocks, I have a list of 50 stocks that I like. This is a list of stocks that I may or may not put in my virtual portfolios. I'm not going to give the stocks on that list, but I'll show you an idea of what I like.

Here are a few notable stocks in my current Discretionary sector portfolio:

SCC 31% (I'm bearish on the sector, so I have an ultra short)
RCKY up 20%, HD up 12%

Here is the industry breakdown of that list:

This gives an idea of the market cap breakdown of that list:

Comparing the % weighting in the industries with the market, this graph shows which sectors I am overweighted in:

If I use a bit of qualitative analysis, what do I feel should be overweighted and underweighted in Industrials?

OVERWEIGHT

Auto components, Computers & Electronics Retail, Textiles Apparel & Luxury Goods, Apparel Retail, Automobiles

UNDERWEIGHT

Automotive Retail, Diversified Consumer Services, Homefurnishing Retail, Home Improvement Retail, Media, Multiline Retail, Hotels Restaurants & Leisure

My diversified fund list has 9 (18% of 50) Discretionary stocks in it. The fund is at 0% vs. the S&P 500 this year and up 113% since inception. In the long run I am happy, but in the short run returns I'm not happy.

Here are the stocks: ALOY ALV CFI DWRI EXPE GT HWK M TKTM

I bought:

ALV at $41 in Jan. '04. It's at $21. Ouch.
DWRI at $4 in Aug. '08. It's at $2. Ouch.

My global-non-US fund list has 4 (8% of 50) Discretionary stocks in it. The fund is down -9% vs. the S&P 500 this year and up 86% since inception. I am not happy about this year, but I am happy about the long run returns.

Here are the stocks:
DAI MC NED TMS

I bought:
- nothing notable at this moment.

THE SHORT STORY

I have a short fund that shorts Discretionary, Staples, Financials, Industrials and Materials. In that fund, Discretionary takes up 10% of the fund. The fund is up 708% vs. the S&P 500 this year and 544% vs. the S&P 500 since inception. I am happy.

Here are the stocks:
APEI CSTR KMX REVU UA

I shorted:
APEI at $40 in June '08. It's at $44.
CSTR at $24 in Feb. ‘05. It's at $22. Yay… it rose to $39 and dropped.
KMX at $21 in May '08. It's at $10. Yay.
UA at $30 in Feb. '06. It's at $23. Yay... it rose to $73 and dropped.

Here are some stock that I have yet to cover:
CHB -71%, WCIMQ -62%, NYNY -62%, DIET -42%, CPY -34%, MHGC -32%

My LTCM fund list has 4 (8% of 50) Discretionary stocks in it. The fund is up 444% this year vs. the S&P 500 and 261% vs. the S&P 500 since inception. I am happy.

Here are the stocks:
LNET LULU LVS MHGC

LNET at $11 in Feb. '08. It's at $1. Yay.
LULU at $29 in June '08. It's at $12. Yay.
LVS at $37 in Dec. '05. It's at $9. Yay… it rose to $149 and dropped.
MHGC at $14 in Apr. '08. It's at $4. Yay... it rose to $20 and dropped.

Here are some stocks that I have yet to cover:
DIET -41%, WALK -32%, GSIC -5%

Just the Bear News. Bear Attacks and Cave Bears

In case you missed it, cave bears have a genetic link to Polar and Brown bears.

Plus, there has been another bear attack. On Kodiak Island, a deer hunter was attacked while he was carrying his deer. He lived, the deer did not.

So there you go. Have fun!

-kai

If you get a chance, hike the Klondike Gold Rush / Chilkoot Trail -- risk and return baby. Risk and return.

Continue reading "Consumer Discretionary -- Kai's Opinion" »

Posted by Kai Petainen at 4:59 PM | Permalink | TrackBacks (0)