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Christopher Atayan |
| Morgan Stanley: Chinese Transactions Will Enhance Deal Flow for Years to Come |
1/2/2008 7:30 AM EST
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One of the by-products of the China investment in Morgan Stanley will be significant Chinese deal flow. That may have been overlooked in all the hysteria over Morgan Stanley's large mortgage writedowns.
Remember, that deal flow will continue for years to come. I continue to believe that Morgan Stanley has considerable momentum in the businesses that count for its long term, namely M&A, private fund management and structured finance. It will eventually figure out what the appropriate trading risk levels are.
Position: Long MS
For the fourth consecutive year, the final trading day of the year resulted in a loss for the S&P 500 (SPX). However, the first trading day of the next year was a mixed bag the past three years. It certainly looked like some markdowns and last-minute tax selling took place on Monday.
With the SPX closing up 3.53% in 2007, the year turned out to be more like 2005. In that year, the SPX rose 3.00% and provided a fair amount of volatility throughout the year. In 2005, the SPX did not turn in consecutive rising months and had back-to-back losing months only once (March/April).
Welcome to 2008, where the hottest ticket will be a pay-one-price for all rides and attractions, as volatility will be worth the price of admission.
Position: none
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Steve Birenberg |
| News Corporation: The Best Big-Cap Media Idea for 2008 |
1/2/2008 8:08 AM EST
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News Corporation is my best long idea for large-cap media in 2008.
Following my swap of Comcast for News Corporation, a client asked for a simple explanation of why I liked News Corporation. Here is what I sent:
News Corp. has an excellent growth profile over the next few years and a strong balance sheet. I think EPS will grow at least 20% in 2008 and 2009. This growth is highly predictable, as it comes from built-in fee increases for Fox News, fixed-cost leverage at Sky Italia, advertising gains from the Google deal with MySpace, display advertising growth at MySpace, the elimination of restructuring expenses at the U.K. newspapers and reduced spending on growth initiatives such as Eastern European TV, Fox Business Channel and the Big Ten Network in 2009.
In addition, I feel there are a couple of identifiable near-term catalysts. First, 1Q results were well above analyst estimates and guidance. However, Rupert Murdoch refused to raise guidance for the full year because he is worried about the U.S. economy. With the December quarter looking good, I believe there is an excellent chance that guidance will be raised when the company reports in about one month. Second, the deal to sell the controlling stake in DirecTV should close any day and will be accompanied by announcement of a big share-repurchase program. Longer-term catalysts include receding investor concern about the Dow Jones deal and upside surprises at MySpace.
The risks are related to the company's exposure to economically sensitive advertising spending and Murdoch's passion for empire-building. About 45% of revenue is ad related. However, a big chunk comes from outside the U.S. or MySpace, reducing the impact of a U.S.-led recession on News Corporation's revenue and operating income growth. As for empire-building, you can never count out Murdoch, but the company has done a lot of asset shuffling in the past year, so a period of less action could be at hand.
Position: NWS.A is widely held in client accounts. NWS.A is held in personal accounts.
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Doug Kass |
| Forecasts Are Useless? |
1/2/2008 8:15 AM EST
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I usually agree with Rev's comments, but I can't today, with regard to his view that forecasts are useless.
Unless one is a daytrader, assumptions and baseline cases must be made to frame the construction of a portfolio (of individual stocks) and the market's outlook.
The best investors (and traders) incorporate a number of technical and fundamental factors into their investment mosaic.
Position: None
I tend to consider the market from the viewpoint of small individual investors. I strongly believe that most small investors squander the great advantages they have by trying to mimic the approach taken by large institutional investors.
It is much more important for big funds to develop a thesis and be anticipatory. The small investor has the great luxury of being able to react in the blink of an eye to changing circumstances. While it certainly is helpful to consider how events might unfold, it not only isn't beneficial, it's a handicap to place bets on what might happen months from now.
I agree that it is helpful to have some context to consider when you approach the market, but no one, and I mean no one, has ever consistently called market direction over the course of years. Some will inevitably get it right, but yesterday's seer usually is tomorrow's fool.
Predictions are great business for market pundits, but for the average guys trying to make a buck, they lead to inflexibility and over-anticipation.
Position: n/a
Lazard biotech analyst -- and Amgen bear -- Joel Sendek upgraded the stock to hold from sell this morning. It's a valuation call, as Amgen sank to his $46 price target.
From the note: "We currently believe the stock is fairly valued at these levels. Given the recent drop in share price to our $46 target, we now believe the risks to the ESA franchise and competitive threats to Enbrel, denosumab, and the NEUPO franchises are priced in."
Position: none
Qualcomm (QCOM) held a conference call this morning to discuss the Dec. 31 decision by a judge to review the Qualcomm/Broadcom (BRCM) patent disputes. You can read the specifics of the decision in numerous releases.
On the call, the company actually provided very little new information, other than to say it may have more details as to the impact on its Jan. 23 call announcing FQ1 results.
What's important from a QCOM investment perspective is management maintaining its defiant position questioning the validity of the underlying decision of the courts. The attitude is understandable given the company's business model, but it's another leak in the hull of the good ship Qualcomm.
Unfortunately, none of this is going away anytime soon.
Position: The Telecom Connection Model Portfolio is long QCOM
CME reported today that December volume rose over 20%, below the third quarter's panic-driven volatility surge north of 30% but still pretty healthy growth. The slightly better news for CME was the average "rate-per-contract," or RPC, which rose slightly to $0.623 vs. $0.618 in October (the RPC is reported with a one-month lag, thus the $0.623 figure is November's RPC.)
Globex (i.e. electronic) volume was 81% of the total volume in Q4 '07, thus the trader standing in the pit or "open outcry" execution continues to go the way of the Model T and BetaMax.
Nymex energy and metals volume continues to hit records; this isn't a surprise, given the price action in the base commodities.
Position: long CME
Compass Diversified (CODI ), a stock I mentioned in September as an undiscovered and undervalued name picked up additional research coverage today. CJS Securities initiated on the stock with a Market Outperform and a $19 price target (which would imply a 35% total return including dividends). CODI is presenting at CJS's conference on January 9th which should be a good catalyst for the stock.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Compass Diversified to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Position: Long CODI
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Robert Marcin |
| Marcin's Top 10 Surprises for 2008
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1/2/2008 10:13 AM EST
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1. Chuck Price/Zoe Cruz compete on "Still Dancing With the Stars." Naturally, they finish in last place. But, in an unusual move, the show's producer awards the couple a $65 million exit package/consolation prize.
2. Ben Bernanke and the Fed finally get ahead of the curve with a 2% fed funds rate after subscribing to RealMoney. Bernanke credits the editorial content with setting the Fed straight.
3. Due to the LBO bust, Blackstone (BX:NYSE) returns the bulk of its capital to investors. With the stock in single digits, it takes itself private at a discount to the current market price. The CEO concedes it's better to be private anyway.
4. Sears (SHLD:Nasdaq) comps reach positive 2%. Don't get excited, it's only for one month, as the government permits homeowners to replace mortgage payments with do-it-yourself refurbishment expenses. There is a run on Craftsman tools and Kenmore appliances in May.
5. Berkshire Hathaway (BRK:NYSE) acquires both Fannie May (FNM:NYSE) and Freddie Mac (FRE:NYSE) ... for $1 each, plus assumed liabilities. Subprime debt prices soar on the transaction and Goldman Sachs (GS:NYSE) get caught short. Robert Rubin returns to Goldman as wxecutive vice chairman of strategic cocktail parties. Goldman share decline.
6. The American Petroleum Institute hires David Lereah as chief economist. Lereah contends that supply/demand factors suggests a secular bull market for the commodity. Oil exits 2008 at $65 a barrel.
7. Ron Paul teams up with Michael Bloomberg to mount an independent run for the White House. Their platform is to abolish all government activity, except the good kind.
8. Stocks continue their rally in 2008 with the S&P 500 up 11%. However, only 21 stocks in the index appreciate. This "new terrific twenty" -- predominantly a large-cap, growth and momentum group -- soars about 200% while the rest of the market declines on economic concerns.
9. Scientists determine that smartphones cause brain tumors due to excessive RF exposure. Both Apple (AAPL:Nasdaq) and Research In Motion (RIMM:Nasdaq) suffer. Bears score big in what becomes known as the "Short RIMM/Jobs" trade.
10. After rampaging through the playoffs, the New England Patriots suffer a last-minute defeat to the Green Bay Packers in the Super Bowl. Gisele Bundchen, a closet day-trading fiend and RM subscriber, ditches the QB for a funny hedge fund manager in Philly.
Position: It could happen ...
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Jay Somaney |
| Unlocking a Tiger of a Stock in India |
1/2/2008 10:34 AM EST
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It is finally happening.
My sources in Bombay said that MTE, which I wrote about recently here on RM, will make a huge announcement on the plans to unlock shareholder value by developing its land in Bombay.
MTE has over a million square feet of developable land in Bombay which is now free to be developed after the repeal of the arcane Urban Land Ceiling Act in India.
My sources say that top company officials have said that the company will make a big announcement over the next 30 days.
The company has also already developed their land holdings in Delhi into an IT park.
My sources are also saying that Telecom Minister, A Muthuraja, was also not averse to allowing MTE to become a pan Indian carrier.
In my article in September-October on MTE, I had explained why being a Delhi and Bombay operator only could impede MTE's growth.
Looks like that impediment might be finally removed as well.
Great for MTE if both happen and it is looking increasingly likely to happen -- sooner rather than later.
Position: none
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Bob Faulkner |
| QCOM, BRCM Royalty Structures |
1/2/2008 10:44 AM EST
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The difference in the royalty structures between the Broadcom (BRCM) designation by the judge and what Qualcomm (QCOM) charges is that the BRCM royalty is on the value of the chip; the QCOM royalty is on the wholesale value of the device containing the chip.
Additionally, in the BRCM situation, it is a royalty for the patents involved, whereas QCOM rationalizes its royalty rates by saying they're for the entire QCOM patent portfolio (whether you want the rest of it or not).
Position: The Telecom Connection Model Portfolio is long QCOM
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Jeff Miller |
| ISM and Employment Report |
1/2/2008 10:57 AM EST
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The ISM index for December came in at 47.7, the lowest level since a couple of months in the Spring of 2003. If this level were annualized, it implies GDP growth of 1.8%, according to the ISM's own research.
Before each payroll employment report we look at a group of indicators which are all collected at about the same time as the report data, the middle of the preceding month. While the regression model "predicts" monthly employment changes from the other variables, the correct interpretation is that they are simultaneous but slightly different reads on the economy.
The model has a nice fit to the jobs data that is eventually written as history, duly revised and benchmarked.
Economic growth of less than 2% is certainly below capacity and costly in many ways, including employment. Last month's data suggest a jobs gain of only 7000. While most reporters fail to mention it, the 90% confidence interval on the monthly change is +/- 100,000. That is just the sampling error on the survey. It does not include any non-sampling issues such as the adjustment for new job creation.
Since the market is looking for a gain of 70,000 jobs, the potential for a negative surprise is larger than usual. Slow growth is not enough to absorb all of the new workers, so unemployment is likely to move higher.
Position: nm
The ISM report suggests that the economy is slowing much faster than the Fed realizes. Get a clue Fed. Stop fighting the inflation war. Focus on the great debt unwind and the real estate bust. Deflation is the problem, not oil prices.
Position: none
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Adam Oliensis |
| The First Two Weeks of the Year |
1/2/2008 11:17 AM EST
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How important will the first two weeks of the year be to the S&P 500 (SPX)?
Looking at data back to 1962, if the SPX closes higher after the first 10 days of trading in January, then historically there has been an 82% probability (23 of 28 iterations) that the index would work its way to a still-higher close at year-end. And the overall average gain beyond that mid-Jan close has been 10%. The average mid-Jan to year-end gain in the years that continued higher was 14.5%. The average loss in the down years was 10.8%.
Conversely, if the first 10 trading days of January lead the SPX to a close that's lower than the end of the prior year, then the odds have been just 56% (9 of 16 iterations) that the index would work its way higher at year-end, with an average gain of just 3%. After a down mid-January close, however, the years that rebounded to higher year-end closes showed an average +16.4% mid-Jan to year-end rally while the years that closed lower than the mid-January close averaged a 12.8% decline.
So, if the first two trading weeks of this year generate a positive trend, then there's a very high probability that the balance of the year will be pretty strongly positive. If the first two weeks of trade generate a negative trend, then it's basically a crapshoot as to whether the year will show a net positive or negative trend.
Position: The Dynamic Trading System is currently out of the market, awaiting its next signals.
Hey Bob, maybe I am too cynical but I have to say that the FOMC will be looking at rising crude and gold prices and likely note that the employment picture is still strong rather than taking its lead from the ISM or credit markets. The result will be a slow and steady diet of 25 basis point cuts. I wish they would act faster but I am losing faith in the Bernanke Fed to take decisive risk management actions.
Position: none
No, not that HP, but Helmerich & Payne. Just a rebalancing trade to take some money off of the table.
With the value/growth cycle turning from a tailwind into a headwind for me, my results lagged the S&P by less than a percent. I don't try to play the value growth cycle, or the size cycle, so I have to live with the fallout there. Industry selection helps me out somewhat, but stock-picking is what I most try to do, so if some macro factors are cutting against my style, I live with it, because:
I don't know how to choose stocks on a growth basis, at least not in any way that gives me confidence.
I do well enough with value stocks, and I want to be there when the cycle turns back to value.
I can't predict when the cycle will turn to growth or value.
I don't want high turnover. I buy, and I hold for a while. It fits my character; I'm not a trader by nature. (Though, when I was a bond manager, I was a trader; I wonder why I was different there...)
I have a longer-term horizon; I can live with the market going against me for a while. I don't have to make money every day or every year even, if my results are good over the long haul.
One of the nice things about RealMoney is there is no "house view." There is no one way to beat the markets. There may be methods that are more congenial or less congenial to your character. Your job as investor is to find a method that makes you money in a way that fits your lifestyle and risk tolerance. I like to think that my methods have a good risk-return trade-off, but there are many intelligent people to listen to and learn from here at RealMoney.
With that, I wish you a Happy New Year. Together, let's make some Real Money.
Position: long HP
All sorts of inflation-genie-out-of-the-bottle price action in progress today. Gold is spiking up to a new high and crude oil is running toward 100 as I'm typing this.
Something tells me crude oil hits the magic number, and keeps on going this time around. Happy New Year.
Position: long CDE OXY MUR
Scott, the Fed is still "data dependent," which is another phrase for backward-looking. Unforunately, they will do the wrong thing and cut slowly. If the employment report is poor, perhaps we can get an intermeeting move. I am on the record calling for a 3% Fed funds rate yesterday.
Position: none
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Bob Faulkner |
| Beneath the Headlines in Clearwire/Intel |
1/2/2008 12:23 PM EST
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Today's Inquirer is highlighting the recent departure of Intel (INTC) Capital President Arvind Sodhani from the board of Clearwire (CLWR). Aside from the fact that this took place Dec. 27, it's being characterized as an "obvious" negative for Clearwire.
The article suggests that CLWR is falling out of favor with Intel, hence Sodhani's departure. What the article fails to mention is that Sodhani is being replaced on the board by an Intel employee. Intel has a lot invested in WiMax, and its investments in that area will be plentiful.
With Sodhani responsible for those investments, there could clearly be a conflict of interest down the road. Suggesting this is some ominous "black cloud" is a bit far-fetched.
Position: Long CLWR; The Telecom Connection Model Portfolio is long CLWR
At 2:00, we will see the FOMC minutes from the last meeting. It will be interesting to see the tone, since the official statement avoided the question of the bias for future moves. Also, we might find out something about the TAF discussion.
Of course, the real story is the market reaction in the three weeks since the meeting. We will learn only what concerned FOMC members then, not how recent data and market action may be affecting their current thinking.
Position: nm
Commodities are having a banner day today, with gold
finally breaking its 28-year-old record and oil jumping
into three-digit territory. Still, the long term hasn't
treated commodities well.
So before you go melt down
Grandma Bertha's silver, consider this graph of the CRB
Spot Index, adjusted for inflation.
Position: n/a
I agree with Doug's position that the overall economy may be better off with a recession than a slow dose of rate cuts. There is no question that the rate cuts will help things economically. In the last downturn,a number of businesses survived because of the artificial stimulus of low rates. The unintended consequence was that the normal cleansing process did not happen and many industries were weakened as a result of too many weak competitors. It should be noted it is not in my personal interest to advocate this posture as I am responsible for enterprises that employ short-term borrowings and benefit immediately from these rate cuts.
Position: none
Those Fed meeting notes put some fear into the shorts because they allow for emergency cuts that I do not think will occur.
Position: none
No help whatsoever ... as always.
Position: none
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Tom Au |
| One Happy Camper |
1/2/2008 4:13 PM EST
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I agree with Mark Manning that gold will shine in 2008 as it breaks its old records on the back of "expansionary" Fed monetary policy.
I am a happier camper today (stock-wise) than on any other day during my three-year tenure at TheStreet.com, being seriously long gold stocks including the following: Newmont Mining (NEM), Barrick Gold (ABX), Seabridge Gold (SA), and Exeter Resources (XRA), among others. Not to mention the Prudent Bear Fund (BEARX).
Among my nongold stocks, Pfizer (PFE) has been the lone green Dow stock in a sea of red, although Alcoa (AA) and Johnson & Johnson (JNJ) didn't do so well.
Position: Long NEM ABX SA XRA BEARX PFE AA JNJ
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