Jeff, I owned BSET in my personal portfolio several years ago. I was attracted by a low price to book value and thought they could improve margins and be like Ethan Allen. I eventually gave up and took a small loss.

At the time I blamed low cost competition from China. With housing slowing down I think you're right, there isn't any good news likely to act as a catalyst.

Tom

Speaking of humility, I thought you might like this quote from Ken Fisher: "I refer to the market by its proper name, "The Great Humiliator" (TGH for short). I've come to accept my goal is to interact with TGH without getting humiliated too much. TGH is an equal opportunity humiliator. It doesn't care if you're rich or poor, black or white....it wants to humiliate everyone." From The Only Three Questions That Count p.5

Another personification of the market is proposed by Ben Graham: "Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers to either buy you out or sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly." From The Intelligent Investor p.108

I think you would be happier dealing with Mr. Market than TGH.

Vad, on Financials, total market cap 2.7 Trillion, down 15.4% past six months, that would be 491 Billion decrase in market cap.

WSJ 11/08 had a headline grabbing estimate of 250 to 500 billion total carnage on sub-prime/credit crunch, to include FASB 157.

Overall, the losses may be priced in - the question would be whether the amounts in individual stocks are correct. Meanwhile the P/E for the Sector is 11.0.

Tom

Eileen,

I trade pretty much the same group of stocks in my personal portfolio as in SLO. Feeling for the bottom can be frustrating, I buy stocks that I think are dirt cheap and then they go down. At least with the two portfolios I have more funds to keep doubling down.

What I have been learning, or relearning, is about time and patience. Value investing hasn't been working very well this year, particularly for those of us who have been too optimistic about the housing slump.

At this point, it's "wait for next year."

Tom

The scandal was on the timing of stock options, very common a few years ago, in APOL, Apollo Group. It tanked the stock and it was a good buy as became apparent after they restated earnings and the smoke cleared.

I personally would resist the segment because of the very high P/E, P/B, P/S, P/CF characteristic of a growth situation. A graph of revenue for APOL is beautiful, up & up for 10 years. I like the growth but don't like to pay the high multiples.

Duff Beer and Viking Warrior note the popularity of education in difficult economic times, retraining for new careers, etc. I went back to school in the 90's and could relate to that. My concern or reservation would be that the industry could be like specialty retail: expansion is rapid until outlets have been located in all available locatons. Then it hits the wall and growth stops and multiples contract rapidly.

Perhaps management outlines growth plans abd projections somehwere in the financial statements or on conference calls.

Tom

My credentials as a commentator: wrote a long analysis discouraging investment in Mastercard while the stock stood at 147. It closed yesterday at 195.79, with a P/E of 32.5.

I do not invest in IPOs on the grounds that the smart money is going to take all the easy pickings and I don't want to make a contribution.

Because MA has done so well since it went public, the expectation of similar results could wind up being built into Visa's price from the beginning, so there would be little chance of a big run up.

Tom

Russ,

Good call. I think the U-verse will create a lot of excitement. I own VZ in my personal portfolio based on the belief that the capacity and speed of fiberoptic will make it the best technology for digital video, data, etc.

VZ has been unpopular at times because of the perception that the capex for FiOS would be excessive. But you are correct in noting the power of the dividend in today's risk averse market, plus the cash flow and buybacks - there is little downside risk here.

T probably has room to increase margins as it integrates acquisitions. P/E expansion is possible because it might be seen as more like a tech stock than a utility. The combination could be powerful.

Tom

James,

In Connecticut where I live houses are still selling, so perhaps that makes me more optimistic on housing than you are. I own TOL, KBH & RYL in both SLO and my personal portfolio. I think homebuilders are a good investment at less than book value, if the balance sheet is strong.

I agree with you that banks did not lose as much as they claimed. There are still plenty of homeowners who are paying on their mortgages and some of the mark to market on MBS will be reversed. I read in the WSJ that Goldman Sachs continued to sell CDOs to their customers, meanwhile betting against them for its own account using CDS on the ABX. I don't like this type of thing because it makes it hard for honest investors to invest safely.

Tom

Vad,

I think the point on P/B is well taken - I have a number of cases in my SLO portfolio that rely on book value; and, even using tangible book value, 1) assets can deteriorate (land owned by homebuilders gets marked down), or 2) interests other than shareholders may wind up getting the benefit of the assets.

For example, MBI was forced to raise capital at disadvantageous terms, reducing the adjusted book value per share from 80 to approximately 62 when accounting for all possible dilution involved.

P/S I think is useful as a reality check: if a stock trades at a higher P/S than its past history, frequently that is a sign that margins have expanded, perhaps unsustainably, or perhaps due to improved operations.

I appreciate your efforts to explain your philosphy and look forward to more on the topic.

Tom

Doc,

I have been coming around to the same opinion, that it is important to have some cash on hand so you can take these opportunities that may be short-lived.

I hadn't noticed, but it does agree with my experience in SLO that this works better with growth than value. My largest gain in SLO was in a temporary decline in a growth stock, in and out with a very nice profit. Some value "opportunities" are just sitting there.

We all know a competition is different from ongoing investment with real money, so don't let your standing discourage you from sharing your insights.

Tom

Vad,

I did a little exercise a couple of weeks ago, on the top ten, comparing to see how many had the same stocks, sort of a rough correlation test. Many of them shared the same picks, "hot stocks."

Your portfolio didn't correlate too much with the others, which I took to mean you had done some independent thinking a/o research.

Congratulations on an excellent performance.

Tom

I am still holding MBI. I sold it at 35 and added it back at 31. With the stock trading down to the 20 area on recent news I have been re-examining my assumptions. I posted a longish article under the heading "Broken Thesis? - MBI."

It has now become clear to me that the major risk here is dilution due to the need to raise additional capital. I read an article that quoted Marty Whitman as being satisfied that the Warburg Pincus deal would not result in "massive dilution" which he considered the biggest risk. His fund had 5% of MBI as of 9/30/07.

With 3 rating agencies having completed a stress test under realistic assumptions, I see a safe triple A investment, if and when the additional billion required by Fitch is added. I am waiting for management to explain how they expect to come up with the additional capital. Hopefully it can be done by reinsurance or something else that avoids further dilution.

Another issue is the details of the shareholder rights offering they expect to do during the first quarter next year. I want to get that information before making further decisions.

Until I get that information I am guessing MBI could be worth about 42 within a year, perhaps 50 in two years. If I were putting new money into Financial Guarantors, I would favor their competitor ABK, which now seems to have greater transparency on their disclosures, more skillful underwriting, and more adroit management.

Tom

James,

I think you would do better to limit your performance credentials to those demonstrated by what you have done on SLO.

Tom

Reply to Don, Duff, Krishna, and Don(2)

First I appreciate your condolences as none of us likes to lose money or admit mistakes, certainly doing both together at one time is just a cramp. I would be less sad and somber if I didn't own MBI in my personal portfolio. I could lighten up anyway. The SLO after all is play money and next time around we get a refill back to 1 million.

Krishna, I think you are right to suggest I look at other possibilities in the beaten down or distressed area. Having lost some money there is no need to insist on getting it back by waiting for MBI to recover. If my remaining value in the position can be put to better uses, with the prospect of a quicker recovery, I need to consider that as one possible resolution to my concerns.

Playing it from where it lies, MBI has an adjusted book value/share of 52.92 if I assume S&P's stress scenario losses were actual and allowing for dilution from the Warburg Pincus deal. Its credit rating is 3 Triple A's with one threatened one notch downgrade to AA- from Fitch. There are no liquidity issues and the passage of time improves MBI's capital position, assuming they don't write a lot of new business. With the stock in the 19 area, I can afford to wait.

Don (comment 2) you mention Warren Buffett. He is starting a bond insurer, licensed in NY so far with an initial capital of 105 million. He also bought NRG, a reinsurance company which has been in runoff since 1993, from ING. Presumably it has regulatory approvals in various jurisdictions that will make it easier for him to do reinsurance on ....whatever he thinks will make money for Berkshire Hathaway.

I am puzzled at the market reaction because Buffett's involvement in bond insurance seems to me to be a plus. As one commentator put it, it's good for a battered sector when the smart money wades in. Buffett is beyond smart money: he is prudent money, sagacious money; indeed, wise money. I dare not say, omniscient money, omniscience is an attribute of the deity. One of the big questions about the bond insurers has been the viability of their business model. If Buffett does it, it's viable. If it's done by an outfit with financial credibility, there is plenty of demand for it.

Buffet knows insurance, bought GEICO when it was bankrupt, made money on that, wrote catastrophe reinsurance after Katrina, made money on that, so on and so forth. He could, before lunch on any day, buy MBI and/or ABK and make money on that. He would be lauded for his usual good judgment, paying well less than book value, savoring the huge cash flows, etc. It really is the type of situation he understands - frankly, I am amazed that he has missed it. Perhaps age is finally catching up to him. I have been wondering if I should send him an email and bring this oversight to his attention. I am not quite sure whether to address him as Warren, War, Warry, War'ny, or Mr. Buffett. My wife suggests Mr. Buffett. Maybe Dear Sir or Hola Warren...

Don, I know you would like William Ackman. He has been on MBI's case for years, a beef that started long ago, a veritable war of the titans, battle to the death, surely a Viking Warrior would fit right in. He said they were busted long before you did, and he says it louder and more publicly and people listen to him and keep selling the stock. . He is going to give all the money he made shorting it to charity, big of him. That's all personalities, I am a facts and figures type, hanging my hat on the book value and cash flow from business already on the books.

I have been through this kind of stuff before, I was holding Allstate when Katrina hit and then they announced they didn't have reinsurance. Then their CEO sold his stock the day it hit. I lived through it and actually made some money. Allstate had a bad case of asbestosis when I bought it, I made some money. The same with CB, the same with HIG. Typically with these insurance cases the what ifs get to be too much, there is never an end in sight, and then it's over and there is money to be made.

In any event, I am not going to atone for my errors by compounding them and selling this thing at the absolute bottom.

Tom

Vad,

I think you will be turning pro sometime soon. You have a pleasant, low key blogging style that wears well: also, you have ideas that work and are worth communicating.

I wondered when we started if the winner would be someone with a style that was bound to crash and burn, but from your selections and from how you describe your thought process I think you will be able to replicate your results in the big time.

Congratulations and good luck,

Tom

Good job getting that much info together, result is a few graphs which present a case very clearly.

I am starting to wonder about stagflation as a possible outcome. I looked up Paul Volcker online, found an interview where he mentioned excessive values placed on collectibles as a symptom. Then Barron's this morning had an article on collectors, 40 thousand for an antique fishing reel.

Where to hide from stagflation?

Tom

d_l,

I had signs of some writing ability back in high school but elected to pursue a career in insurance and then accounting - both fields where creativity is problematic. I notice you also liked my conversation with Warren Buffett, another post where I used my imagination.

What's happening here is being retired I am sort of looking at the road not taken, working on skills I never developed. I think the combination of imagination and humor helps me deal with a frustrating year for investments, whether in SLO or my personal portfolio. I'm not sure there is any connection between writing and investing ability - we had some contestants who did awfully well investing but never blogged at all.

My NAV is nothing to get too excited about. My particular brand of value investing served me well from 2001 to 2006, but has done poorly over the past year. Over time, first one style works, then another. The chameleon tactic is good if you can manage it. I compounded the problem by being excessively optimistic about the seriousness of the housing/mortgage/credit crisis. The experiment with "high conviction" investing was less than helpful. I still believe in the idea, but perhaps I will need to improve my analytical skills before taking any more outsize positions.

In any event, I like to take a break from being a guru wannabee and express my thoughts and feelings about investing with a little humor and imagination. I'm glad you enjoyed my latest efforts.

Tom

It's pretty amazing, what the combination of illiquidity and dilution can do. The shareholder watches in anguish as third parties feast on assets that he thought were his.

Good post, and good luch in the big time.

Tom

Welcome back,

My father was sitting on the back porch once, having a beer, he liked it so much he bought some stock in the company, which soon went bankrupt - crooked management. That method of picking stocks didn't work for him but I know your methods work for you...

As you know I use heavy amounts of analysis but when you get down to it sometimes if enough people dislike a stock I have that contrarian streak and I become enamored. Then I apply determination, willpower, etc., to see if I can make the stock go up. Lately I have tried using the Force, preliminary results have been encouraging.

Good luck,

Tom

Now they have "priced" the offering at 12.15, raising a billion. From 9/30/2007, when adjusted book value was 80.08 per share, it has decreased, after estimated losses and dilution, to 33.71, or 58%. That includes the 500 million at 31 per share from Warburg Pincus and now this latest development, 30% the way they did it, as well as an estimated 1.6 billion of losses beyond what they have booked so far.

Very painful, I will have to write it up and post another update. Every time you go through the cycle of increasing loss estimates and raising more capital, the per share value decreases another 20 or 30%.

You are right, the dilution is too much.

Tom

Robert,

I recently did a post on DRYS, to answer the question of the week, venturing onto your turf, or maybe surf would be more like it.

Anyway, I thought you might be interested, maybe you could post something on it where it's the question of the week and Jamie is looking for comments.

Tom

I like the Yahoo update - Steve Ballmer could look at how he made out the last time they turned him down... Yahoo's bargaining position isn't going to be improved by earnings over the next few quarters.

As you say, you could just look at the trend.

Tom

Jonathan, it warms my heart to hear you made some money on MBI & ABK. I think the idea of starting small and doubling down repetitiously is helpful, that way you have the courage and cash to increase your position when the stocks are near a bottom.

I doubled down on ABK at 8.01 and elected to hold as it ran up on 1/23. It has since given back some but not all of its gains.

Good post,

Tom

Good post. There is nothing wrong with a quick, easy profit. A 5% gain over a few days would be 100% or more annualized. Meanwhile your cash can earn interest and wait for opportunity to arise.

Tom

Ric, there is an article in Barron's 2/18/2008 issue very favorable to MSFT, an interview with a well-regarded investor sees 80 within a few years.

If you agree with that type of value, maybe it would work better to do a buy and hold and avoid being stopped out.

Tom

Good post John, as you know I feel strongly about the issues here.

I think you are right that a resolution of this problem would be a very big plus for the market.

Tom

Reply to fo9999:

Suggested reading:

Both MBI and ABK have released the text of their responses to Ackman's "Open Source Model." These responses are available on their websites at www.ambac.com and www.mbia.com. Both companies make very cogent cases - based on the facts and correcting distortions Ackman has used to fabricate his estimates.

Ackman's loss estimates are a self-serving ploy to provide some evidence that he had any reason to believe his wild assertions about potential losses. Please remember that Ackman is a short-seller, with a personal vendetta against MBI which dates back to the demise of Ackman's previous hedgefund, Gotham, which went under due to short-selling MBI and other misguided speculative activity.

Ackman's tactics also rely on buying CDSs on MBI's debt. He is using negative publicity, including seriously distorted misinformation, to support his speculative activities and personal vendetta. He needs for them to have an Event of Default in order to make money, and he is trying to make that happen.

If you wish to continue as Ackman's Acolyte, that is your privilege, my friend, but it is perilous to your financial health.

Tom

tradingbr,

Everyone acts in their own self interest. However, most members of society do so in a manner that avoids unreasonable harm to others, and conforms to the laws enacted to protect us all. This is a point that I think you either do not understand or are unable to relate to.

I question whether Ackman ever had any reasonable reason to believe that the loss projections he publicized had any validity. The apparent purpose of his statements has been to harm MBI (and, incidentally, everyone who is protected by their insurance or is dependent on the financial stability of this country.) Analyses prepared by MBI and ABK show that the loss estimates Ackman claimed were prepared by an (anonymous) Global Bank were in point of fact prepared by himself on software purchased from Credit Suisse. In order to get losses high enough, his "analysis" was he "plugged" assumptions that would result in the intended amount of losses.

I personally am of the opinion that Ackman's actions will prove to be illegal when properly investigated by the SEC. I have filed a complaint with them by the means provided on their website under securities fraud.

If you think he will be successful in his vendetta, then by all means go out and buy puts on MBI, or short the stock, or buy Credit Default Swaps on MBI's debt, if you feel that is in your own best interest. I personally do not desire for anybody to lose money, but can hardly wish you luck.

Tom

First let me tell you a little bit about myself, it may make my attitude toward the losses more understandable. I spent over 20 years in the Property & Casualty Insurance business, part of that time as an underwriting analyst, and noted that in any insurance business losses develop over time, and it is not possible to estimate them accurately when they first appear. An example would be the asbestos liability crisis, which caused severe losses a number of years ago. Over a period of a year or more, the ultimate size of the losses became clear and the companies adjusted their reserves accordingly. Even earlier, there was a similar pattern as the Products Liability Crisis unfolded.

The same situation is going to apply to these bond insurance losses. What drives the insurance losses, ultimately, is the cumulative loss rate on mortgages. Various rating agencies and others have made estimates of cumulative losses on 2006 sub-prime ranging from 6 or 7% a year ago to as high as 23% (Fitch) as of this moment. These curves stretch out for 10 years or more, and it is impossible to predict their shape based on early data. I personally believe the curves will prove to be front end loaded - and annual additional losses will be closer to historical averages as the 2006 vintage ages.

That stands to reason since a large number of the early defaults in all likelihood consisted of speculators who were caught when the music stopped, or of outright fraud cases. Once that group has been cleared through foreclosure, things are going to quiet down a bit. Have you checked LIBOR lately? It is way down, and resets are going to be less onerous than projected.

Also, the rating agencies are applying the requirement for a cushion of excess capital to their 99.77% stress test which would approximate a Depression similar to what we had in the 1930's. There are a lot more safety nets in place now than there were then and that scenario is extraordinarily unlikely.

This is complicated, and that is why it is so easy for those who want to create a climate of fear and uncertainty to manipulate the market. The loss estimates that the companies use are checked by independent CPA auditors who could be put out of business if they mess up on a pending insolvency on something like this. They are tested by three different rating agencies using three different methods. They are reviewed by the Insurance Departments of several states, including New York, where the department is large and professional.

It is normal for losses to develop over time. This is not a question of management hiding anything and then pulling a rabbit out of the hat, its just how the business is. If losses could be known beforehand, why would anyone buy insurance? And why would anyone write it, knowing the losses were going to occur? But the losses, when all is said and done, are extremely unlikely to exceed the hypothetical stress test levels used by the rating agencies, and would not exhaust the claim-paying resource of either ABK or MBI.

In any event, I am 60 years old: I have watched a lot of crises unfold, many of them in the insurance business. My past experience has been that everybody exaggerates the seriousness of these situations. When it's over, the companies increase their rates and make up for what they lost. The higher rates attract competition, and then everything settles down. There have been several crises over the years in bond insurance and it all worked out fine in the end.

I don't have 20/20 foresight to predict the future, but as I get older I just figure it will be like the past. The past as I interpret it is that these things always provoke an over-reaction. The only difference this time around is the severity of the over-reaction, which is way off the charts.

And yes I support management. Insurance is a mighty popular political football, always has been, and sniping at management is part of the game too. Poor Mike Callan, he's like a quarterback being blitzed, maybe he will take a hit, the game goes on and on, there are no timeouts - then, surprise, surprise, somebody takes the ball and goes home and its all over.

Tom

John, it's about whether your thesis is broken or not, you add investment vs. trade which would be a time element, how long does it take to verify/refute your thesis?

Something I have thought about off and on along these lines would be what the expected annualized return is if your stock hits your target within your timeframe. If I buy a stock looking for a 20% increase in one year and it increases 10% in two or three days, now from where it lies my annualized return is 10%. If I take the quick and easy profit, my annualized return for the two or three days I held is huge.

So far so good, where I maybe get in trouble is when my treasure goes down instead of up. Now my reasoning says, from where it lies, I have a larger expected annualized return. I have a tendency to hold through which has not always been helpful.

Anyway, it's a good topic...

Tom

Russ, good post, a summary of conference calls is always helpful.

Usually I can come up with a bearish view on anything that's hot, but I look at them starting to do contracts for 2010 already and I can't get too worried about a slowdown. They don't build on spec, so they're unlikely to wind up overextended.

I wrote up DRYS for the quesiton of the week, and those folks were getting into Ultra Deep Water. They seem to have a knack for getting into where the action is.

Maybe $100 oil has a credibility problem and that is keeping a lid on things. But if we're heading into a period of stagflation caused by high energy costs, something like this would be very good. I might take up a starter position Monday.

Tom

Mark,

What stocks are you going to invest in?

Tom

Kai, I located an analyst (at Morningstar) who had done a DCF on SIRI. He was almost apologetic, he plugged it with all kinds of optimistic projections years into the future, and still couldn't get near the current share price.

Once a stock gets to where the value has no relationship to EPS, Book, Cash Flow, etc. then news and opinions pushes it up and down..

Tom

I thought the single letter gimmick was interesting, if SLO permitted shorting you could go long or short and that would be the judgement item.

I have thought sometimes of making a portfolio of various combinations of 3 letters, such as IBM, MBI, IMB, IM, etc. The rule would be, all stocks have to have some combination of certain letters, then you can go long, short, or do something with options.

Tom

Good post, all too often on a new technology multiple entrants soak up investor money and go broke, leaving only a few survivors, and its hard to pick the winners. On Sirius I think the technology is good, maybe it's the business model.

On solar, my only play is Applied Materials AMAT. They are working on being the equipment maker in the solar business, the same as they are in the semiconductor and flat panel TV busineses. They have the resources to buy various technologies and develop them to profitability.

Its along the line of the theory that the only people who made money on the California gold rush were those who supplied the miners, picks and shovels, jeans (Levis), etc.

Tom

Good job, I think you covered everything but the financials...I didn't want to be mean to Jamie and tell him to give up on it, but so far I don't think he has any support on this one.

Tom

Good post, we need someone to remind us to use a little common sense and keep an eye on the fundamentals.

Tom

John, nice post, not much to do on a day like today, but at least I can laugh a little, reading your poem.

Tom

Tday is one of those days that makes me think of Chesty Puller. I put what little cash I had left into action in the SLO, where I am all long.

In my personal portfolio I closed one of two remaining short positions and sold a sprinkling of puts.

There is a military term for retreating forward, I forget what.

Tom

Don,

Good post, this is a welcome relief from GOOG, RIMM, BIDU and GRMN.

I'm adding it to my watchlist.

Tom

The stock market is the only game where you can leave your chips on the table indefinitely and not lose money. That is less true now than it has been in the past.

The problem right now is bear raiders, a loose confederation of hedge funds and other miscreants who have discovered they can take down legitimate players by a combination of short sales, rumor, and credit default swaps, and in the case of Bear Stearns, withdrawing their accounts.

The market will stabilize when the Fed a/o SEC intervenes to restore order and prosecute manipulators. In the meantime, any business that is vulnerable by reason of leverage should be avoided.

Tom

Cass,

I regret that I didn't buy gold a while ago but would not buy it now. I remember when the Hunt brothers tried to corner the market on silver. What they learned was that there was a lot of silver above ground, in the attic, grandma's silver service.

At a certain price there will be a lot of trinkets that will get melted down.

Meanwhile, like anything speculative, the heavy hitters will leave about the time the small players get sucked in.

The Fed's actions - lending against verious less than stellar forms of collaateral - will take the pressure off and the economy will muddle through, so there is little need for gold as a safety ploy.

Tom

I give you credit for going back through your calls to see how you made out...speaking of BSC, Bill Miller of Legg Mason was giving a talk, why he was still holding the stock, when somebody pointed out it was down 15% as he spoke. He looked surprised.

You had some wonderful short calls.

Sometimes a decision looks different depending on how long afterward you look at it. In my personal portfolio I have successfully shorted stocks which later quadrupled...several years later...

Tom

P/E? P/B? P/S? P/CF? 5 year Growth? 1 year Growth?

It's a good story, protein from fish, it's good for the brain too.

But I would like to see you include some discussion of fundamentals.

Tom

Russ,

I like the tactics you are suggesting. There seems to be a lot of value out there right now but markets as a whole seem to be jiggling up and down, there is a lot of volatility but no long term trend.

Tom

Whatever you're doing, it seems that you only have the one big loser, without GOOG you would show a profit.

I am very studious, go over the financials with a fine tooth comb, and I haven't done as well as you. A little knowledge is a dangerous thing...

But if you avoid stocks with extremely high P/Es, such as Google, over the long run you will probably do better.

Tom

I like the point about made of sand. Fiber optic is made of sand and it got to be mighty cheap, dark pipe and so on and so forth. Corning (GLW) went from around 100 to somewhere under 3.

Possibly polysilicon will go the same route.

Tom

Fact is so similar to fiction.

Tom

Excellent.

John,

I give you credit for taking a look at your performance and coming up with some insight as to what has been going wrong. That is hard to do but necessary in order to get back on track.

SLO can be distracting because it exposes you to such a variety of strategies and viewpoints and places such a premium on short term results. It seems like whoever is on top of the leaderboard must have some mystical knowledge that the rest of us lack.

The distinction between double or nothing as a gambler's strategy, and cost averaging down as an investment technique is dead on - it's about whether you believe in the stock. A martingale is a gambling term, for any system of increasing bets in order to recoup losses...

Its good to have you back posting again.

Tom

Becky,

After spending some time on solar while trying to write up LDK, I think its happening now, the only problem is picking the winners.

Jim Cramer (in Real Money) suggests a scatter gun approach, buy a bunch of them and then weed it down to the winners as the situation develops. That's generic advice for anytime the next big thing comes along.

My only exposure is through Applied Materials, which has been buying and developing solar technology and has booked some business. I felt they had the resources to try and pick winners.

Tom

I wish you would restrict your bragging to what you have done on SLO2.

Tom

You have good company on WFC, reportedly Warrren Buffett owns some of it.

In my personal portfolio, I have been buying a little bit of BTO, John Hancock Bank & Thrift Opportunity. The idea is that between the discount to NAV and their presumed ability to tell the good banks from the bad banks there will be profits in due course. Usually there is a lot of acquisitions after the banks get in trouble, and BTO did well during that phase last time around.

Tom

nice post, I like the section on banks.

Tom

Russ, very good, factual, you did your homework.

Thanks for the mention.

Tom

Good post, when stocks don't perform you have to look at your thesis.

Warren Buffet on airlines - "Frankly, no airline is going to be a wonderful business."

But I think your points 2 & 3 may hold up over time, so there could be some money to be made.

Tom

Dave,

Congratulations on making it onto the leaderboard. I was going to counsel you, that you needed to change both your beverage and your career, maybe drink wine and become a stock broker.

What you're doing works, checking out blogs and listening to what others have to say, so you could stick with your choice of beverage, but make a living out of stock trading.

Maybe go pro like Vad is going to do?

Tom

Jonathan,

I have been a little leery of oil for some time. I have some BJS in both my personal and SLOport which I have cut back quite a bit. In my personal portfolio I also had some XOM which I sold off a week ago.

Long term I don't think oil will go back to the way it was. I can remember filling up my 67 Ford V8 for less that 5.00...Now it can be over 50.00 to fill up a 4 cylindar Camry.

My strategy has been to buy various oil/gas stocks such as XOM, APA, COP, DVN, SU, OIS when I think they are on the low side, then sell covered calls after they have gone up a certain amount. I think the basic trend is up but I would be more interested in trying to cash in on the volatility than riding them all the way to the top.

People who rent (of which there may be more than there used to be) would look at the drive to work if and when they changed apartments. Also, as people sell and buy cars they should start to weigh has mileage more than style. Over a peiod of time that adds up.

Tom

Welcome back. I have read both of Taleb's books, and tried to incorporate the black swan idea into my blog on the Bear Stearns implosion because I felt it was an instance.

His ideas challenge a lot of assumptions, very heavy for beach reading, but food for thought.

The past week or so I have been thinking about one of his pet peeves - that we regard too many phenomena, stock prices among them, as being (log)normally distributed. I found a pair of stocks where the price seems to be distributed more along the lines of 1, 1/2, 1/4, 1/8, 1/16...needless to say, I lost some money.

Tom

Good Post. You have obviously done your homework...

Tom

Kai,

I was also of the opinion that YHOO was overvalued. I think YHOO is worth more to MSFT than anyone else, and they should have taken the money and run.

As you note, why are they selling and then don't let the shareholders unload at a very favorable price?

Tom

I vote for another set of limit orders.

I have been trying some sell high buy low in my personal portfolio with half decent results, maybe I'm better at picking mediocre stocks...

Tom

I think you are being too pessimistic. It has been possible on and off to buy homebuilders at less than book value. The stronger balance sheet cases will be able to hang on the their assets and when the housing market recovers their operations will become profitable.

I have 15 to 30% profit on my homebuilders positions established in August last year and plan to sell on the rallies and buy on the dips.

Patient value investors who are willing to do the work on for example regional banks will be able to pick some nice winners. I have been using a mutual fund, not a strategy for SLO but it saves the work of going through them and gets you diversified. That would be John Hancock Bank & Thrift Opportunity, BTO. I am building a small position on the dips.

SOme of the cases like WM, C, and NCC that have serious problems would be a little too risky for me too.

Tom

Jeff,

You posted this several times, it clogs up the website so other people's entires aren't visible. Please delete the extra entries.

When you save your post, only hit save once, it takes a while.

Tom

Thanks for explaining how you did it - I was looking at your portfolio the other day and guessed that your strategy was small engergy companies.

Tom

Russ,

Good call, I owned Motorala when Icahn got involved, he made all kinds of noise and the stock went up some. His tactics didn't do anything to create value, Motorola blew it on the cellphone business, and I got out with a small loss.

I once shorted CNET, which does some sort of internet content thing, for quite a while, with fundamentals equally as mediocre as YHOO. The stock stayed up there for maybe half a year, there was always some rumor of a takeover, but eventually it plummeted and I made pretty good money.

Yahoo is probably worth more to Microsoft than it is to anyone else, so the 33 would seem to be the maximum if its still there. The share price could be propped up indefinitely based on rumors and speculation about takeovers, so I would be hesitant to short it.

Tom

Target seems a little more upscale than Walmart, from what I've heard - I have never been in a Target so I don't have any personal observations to rely on.

But in today's economy price which is Walmart's strong point could be more important than some ill defined upscale atmosphere.

Tom

Becky,

I susptect tht inflation is higher than reported, the bit about excluding food and fuel only goes so far. Things seem more expensive.

ADP, working off actual records of paychecks, just can't seem to make their employment figures agree with what the government puts out.

The spector of inflation does pose a challenge for investing. I will never be a gold bug but I do agree we as investors need to develop strategies to deal with inflation.

Doc,

I read in the WSJ today that Oil Futures have become disconnected from Spot Prices...how can that be?

It is horrible the loneliness that men of genius must endure when they get too far ahead of the crowd - I hope you survive it...I'm pretty sure you will make money on it.

Tom

Raju,

Good post, I don't think oil will go below a price that makes it profitable to mine the Alberta Oil sands, that is above 70 per barrel.

More likely it will be volatile but eventually rise to where solar and wind will be profitable with little or no government subsidies.

I didn't realize there were solar companies out there with a P/E less than 40, I guess I just jumped to the conclusion it was a bubble and prices were way out there.

Tom

I was with you until the last paragraph,then you lost me. You could submit your astrological evidence to the Saudis - it might work better than Bush lecturing them on women's rights.

I think oil is a little high due to speculation and you might make some money eventually. too bad you started scaling at 5 instead of 2.

I started scaling down on MBI at 31, it's at 7.50 today. This feeling for the bottom is no fun - you accumulate too many losses on the way down.

Tom

Kai, I'm a little puzzled how a stock trading at a low price/cash flow can also work out to less than zero on DCF?

Tom

Russ, good post. As we go along I am starting to realize that some companies provide a lot of material that can benefit those who take the trouble to look it over and do some thinking.

Tom

Russ,

I vote for hold, even adding to the position: unless/until you see the dreaded capital raise coming there is no reason to hop off the stage coach while it's rolling downhill in dangerous territory.

Tom

Duff, I was watching Bloomberg and saw the "D" word running in red across the bottom of the screen, June was the worst since the Depression. Not to mention seeing the "GD" phrase twice in one day in the WSJ, day before yesterday, "Great Depression" used twice in two different articles. The tone of commentary is getting a little pessimistic here, maybe that drove the market down.

One gentleman expressed the opinion that the commodities and oil boom may be driven by the Chinese pulling in materials before the 2 month Olympic moratorium on pollution (and refining and manufacturing) around Beijing.

I panned DRYS when it came up as QOTW, since then it has had a favorable article in Barron's, and I have been thinking I may have been wrong, also the article by Harry Domash has me thinking, "Magic Niner" was the authority but that was SLO1.

Tom

Noting that most of the 19 protected stocks rallied on news that naked short selling (illegal) would not be permitted, the result speaks for itself - the SEC has not been enforcing laws against manipulation. So, manipulation proceeds unencumbered.

I have nothing against short selling per se, I have been doing it myself for several years on and off.

But it is fairly clear that the present administration has done everything in its power to minimize regulatory oversight. The result has been egregious abuses which have endangered the entire financial system.

In times of crisis, real or imagined, power grabs are the norm. WIth the election coming up, it is not surprising that the same folks who turned a blind eye to various abuses which could have been prevented within the existing regulatory framework if the laws were simply enforced are now howling for more regulation, while manuvering for position to grab some power in the process.

Tom

Russ,

I have had some gains lately on Electronic Manufacturing Services, JBL and CTS.

I don't like the sector that much but JBL was dirt cheap on a P/S basis. The outlook on their last conference call was very enthusiastic.

CTS in addition to Electronic Mfg Svc does approximately half their business in automotive sensors, etc. They have some patents and they are pushing diesel sensors which help deisel run clean in Asia, that means China. Earnings are due Tuesday and it has been running up ahead of the report.

Reasons not to like the sector is mostly thin margins, but if you can increase net margin from 1% to 2% you doubled earnings. For what its worth, my brokerage (Schwab) recommends it. For CTS my interest is the diesel/China/Asia on the automotive sensors.

Congratulations on a solid performance in SLO/Marketocracy.

I should add I have been taking up starter postions in P&C insurance, the dip in financials Thursday and Friday seemed like a good time to get started.

Tom

tradingbr,

Maybe I didn't express myself clearly in my post - I don't own any FRE or FNM either in SLO or in my personal portfolio. The thinking would be, the whole situation becomes a game of political football, as well as a morality play, and shareholders of FNM and FRE could wind up on the short end of it. Also, I have enough exposure to this housing situation already without adding to it via these two situations. My interest is whether the firestorm around FRE and FNM was a bottom for the whole market.

My doubling down rampage is limited to ABK and MBI. Developments over the past month or so are supporting my thesis, that these two are seriously, seriously undervalued by the market, in view of the present value of future premiums which are already booked and the expected reversion of mark to market losses which are not real. For MBI, it goes: book value, 8.70, adjusted book value (includes present value of future premiums) 26.67, analytical adjusted book value (which excludes mark to market losses) 42.15. For ABK, it goes: book value 4.52, adjusted book value 15.83, analytical adjusted book value 35.60. I will give you a 10% chance of zero, but would suggest you consider the 10% chance these will wind up trading at 42 and 35 respectively within two years. The most likely two year price targets would the the adjusted book value, 15.83 and 26.67 respectively. Shorting either of these at 2 or 5 is crazy.

I have carefully reviewed the Servicer reports as of 7/25 for ABK's problem HELOC and CES exposures, and note that losses are leveling off and the most recent month features lower losses than the three month average in 4 out of 5 cases. I note that median prices of existing home sales have risen for 5 months in a row. I note new homes continue to sell steadily at a voljume roughly 30-35 % less than last year. The ABX is starting back up. The "rescue" of FNM and FRE should be complete next week, which prevents the catastrophic downward spiral you appear to expect.

A while ago you were kind enough to suggest some protective puts on MBI which would have saved me a lot of money. Now I am pleased to reciprocate and suggest you buy some protective calls (if you must continue to short these two.)
I recently bought a very large number of the January 2010 2.50 calls for ABK at prices averaging .59. I am watching for a similar opportunity to develop on MBI. The plan is, after holding the positions long enough to get past the wash sale rule, I then sell some of my shares, which under FIFO accounting will enable me to book a large loss for tax purposes. Then, as the share prices recover, I will realize a generous profit on the remaining shares and the calls.

Russ,

Checking Morningstar, their analyst says a majority of CBI's contracts in backlog are fixed cost - they bear the risk of overruns.

About 5 years ago I invested in Shaw Group (SGR), and they had a series of overruns, followed by a capital raise, which went better than I would have expected. They have since gone over to cost plus contracts and the stock has done well. I lost a little money going long and made it back going short.

If CBI got to where they needed a capital raise,such as if they can't get waivers or revised covenants, the capital raise would attract short-sellers. Up until recently, banks seemed fairly lenient in granting waivers, but recently I have several cases I invest in where negotiations seem to be dragging on.

I missed the E&C boom so it would be tempting to try to find an entry point, but my past experience with fixed cost overruns was not good.

Tom

I'm glad to see someone talking about options. I use them in my personal portfolio but while the SLO was in progress I tried not to talk about them because you can't use them in the contest.

But with contest over I think it's a good subject, sometimes options work better than owning stock.

Tom

GM was blindsided by a paradigm shift which Toyota and Honda easily saw coming and planned accordingly.

GM management and union leadership were in it together for 30 years while they negotiated retiremet and health benefit plans they both knew could not be sustained.

I agree, I wouldn't attempt to play GM or Ford, but for the past week or so I have been wondering if the stronger parts and supplies firms such as JCI, MGA and maybe AXL would hit buy points while this plays out.

Tom

Russ,

Good post, you didn't say whether the decline in oil and oil services represents a buying opportunity yet - I guess you like oil services and/or equipment.

I sold the last of my BJS a while ago, then they reported decent earnings and raised guidance. The stock is down quite a bit, because it is natural gas related, but the fundamentals are looking better than before. Maybe the market is tuned in to the day to day fluctuations and not the long term.

Tom

You definitely picked up on the softest spot in their financials/presentation. Then they declined to say what their expected losses were, totally clueless, an insurance company has to estimate their losses.

I wound up taking a small position, based on valuation and the other lines of business - the thinking being that if it goes lower the discount to book would justify the risk.

Tom

Russ,

I didn't make a new portfolio either, prefer to play it from where it lies. As you know, I got trashed in SLO1 and 2, but starting 8/1 I am up 25% on the heavy financial concentration.

You make a good point, that sector rotation has to be considered. Some say the market provides 1/3, the sector 1/3, and the stock 1/3. The other night Jim Cramer was saying the sector provides 1/2 of the return.

Vad,

Congratulations on winning strategy lab, that makes a year of excellent performance for you, winning SLO1 was not a fluke.

I think value is going to outperform, it started at the July bottom.

Jonathan's comparison to tech is food for thought. Tech never made it all the way back because P/Es never went crazy again. Financials weren't at high P/Es, but many of them were earning at unsustainable rates due to excessive leverage, which will not be permitted going forward.

But where value investors have been is financials and many of them are hammered down to unreasonable levels.

Tom

Good post, the title is well chosen

Good post, I congratulate you on being willing to change strategies so quickly while in the limelight...

Lately there are a lot of negative momentum players out there, they have not done the in depth research necessary to make a good short case on individual stocks.

Good topic, good post, very clearly expressed.

I tried real hard to come up with something snappy but drew a blank.

I wouldn't sell FNM with a pack of short-sellers in attack mode - I would hang on and hope for it to blow over.

But I would not tap a 401K to send good money after bad.

Russ, I sense some cautious optimism here.

I have been watching a lot of TV lately, Bloomberg and CNBC, for the last couple of days the anchors have been acting surprised, almost like a sudden revelation, it may not be that bad.

No, there is a tower in Paris, France, made of iron, the government is trying to sell it. You can buy it for less than the value of the iron as scrap.

That would be a better use of your money.

WHich ear?

Thursday last week the headline in the WSJ was "Oil-Supply Data Probed for Manipulation." Increasing over the past year I get this sensation that there is just to much manipulation going on, Oil futures is part of it.

Last year I went on and on about Credit Default Swaps - they are a form of insurance on credit risks, but there is no requirement of insurable interest. So Ackman for example could buy CDS on MBI and then do his damndest to slime them into a default. He never held any debt that he had any interest in insuring. It was like taking out insurance on some property you don't own and then burning it down in order to collect.

There would be a benefit in requiring proof of an economic stake in the commodity for futures trades. Speculators trashed the oil futures markets and probably some industry participants were burned when their hedges went bad.

Options I think are OK. It's about a right or an obligation to buy or sell a stock at a certain price. But it is about ownership in some way. For a small investor, it's a nice way to juice returns if you're right. Or to lose a bundle if you're wrong.

But the people who buy options based on insider information, it goes on and on,the first sign some news is coming is that puts or calls suddenly develop a large volume.

I think the lack of government enforcement of existing securities laws adds to the climate of fear in the market. Probably a firm crackdown on manipulation would do more than bailing out FRE or FNM to restore confidence. Who wants to bet on a rigged game?

I got in the path of some of that stuff when I bought MBI and ABK last year. Writing to the SEC, the Insurance Commissioners of NY and Wisconsin, the Atty General of the State of NY, the Federal Reserve, my congressman, etc. didn't get the courtesy of a reply.

I spent much time and effort trading around the situation until it started to square itself away, it took 6 months to get back to break even.

Back on the subject of credit default swaps: the entire cedit market is so confused and hamstrung by the amount of gambling on the debt of others that it's no wonder it doesn't function.

I got restless yesterday and decided to buy some lottery tickets, tried to get a dollar per share but paid an average 1.07 in my personal account.

The positions are small, there are too many variables to come up with a meaningful guess.

My thinking, such as it was - the stocks at approximately 5 on Friday had the dilution priced in, so for 1 (or less) you own something that can't go BK and might be worth 5. Uncle Sam will just keep adding capital until they start to make money.

In the back of my mind I remembered the BSC takeover, it went from 2 to 8 or was it 10.

I tried FNM for a few days, I wanted to make enough to have a few 100 shares free and clear, but I broke even and gave it up.

The preferred doesn't get diluted per se, it just comes in below the Fed in terms of the capital structure.

The political angle is interesting, maybe something can be done, those poor banks and retirees.

I wasn't sure I believed it myself. I was not going to get involved with MER even at my 11.25 1/2 off the smart money.

Maybe BAC needs to be shorted to zero...

If AIG is unable to repay the 85 billion, unless I misplaced a zero somewhere, your shares cost you 31.46. I bought mine for an average 4.27...and I am going to scream unfair dilution if the government exercises the warratns.

You're missing the point Jim.

The classis old-time short-seller read the documents you mention, sold the stock short, and kept a low profile.

The new breed, aided and abetted by the fallacy of mark-to-market accounting, uses it as a convenient source of pseudo facts to distort, creating a drumbeat of negative pronouncements, meanwhile bidding up CDS spreads and selling short whether he has located shares to borrow or not.

A victim such as AIG suddenly finds itself facing multiple collateral calls based on distorted mark to market losses and without any access to capital markets.

With heros like that you don't need villains. And there has been no enforcement of any kind until the village is half burnt down. Pleasse read my essay on Moral Hazard.

If the SEC had done an adequate job of enforcing existing regulations we would not be where we are today. McCain made a start, calling for Cox to be fired.

Timely and proactive regulation would have prevented the need for hasty,poorly thought out and expensive market interventions.

Also thanks again for the support on the moral hazard idea, I feel very strongly that the SEC needs to investigate and take action if they find any evidence of wrongdoing.

And I will never understand why they permit the use of CDS insurance without any requirment of insurable interest.

SEC Chairman Cox is now asking for authority to regulate CDS. His concern is that the purchase of "naked swaps" - those not supported by an insurable interest - is equivalent to a naked short sale of the underlying bond.

Your heros, the bear raiders, achieved their results by fraudulently manipulating the thinly traded CDS market. They already have slick lawyers claiming their actions should be outside of the SEC's authority even to regulate fraud.

The whole thing Ssucks (sick)

Good bottom call!

I'll bet a dollar we don't go below S&P 1,100. I hope to lose.

Good post

One thing I like is the emphasis on individual accountability. As you note the only way to achieve this is to go through the loans one by one. A lot of these transactions contain lies by one or more participants, the only way to resolve the issues fairly is on a case by case basis.

I have been ranting and raving against CDS, at least when not supported by an insurable interest, for at least six months.

The idea of refusing to pay those who did not own the underlying debt makes some sense: such contracts are for an illegal purpose (trashing the credit ratings of the vicimized company) and should be unenforceable as a matter of public policy.

Jim Cramer was on the subject tonight - maybe he will popularize it.

I think its good for the banks involved, it puts them in the position of having more than adequate capital at a time when many financials don't have enough.

There have been these articles listing the writedowns and the capital raises, it looks to me as if the 250 billion injection would bring capital raises more or less equal to writedowns for banks as a group.

Russ,

Adventurous fare by your standards but definitely interesting, based on the yield. I checked out the Barron's article, it's short and you have provided more informatin than they did.

Those who bought it before the 15% run-up made a quick and easy profit. This could be interesting if it went back down, you could hold it waiting for a bounce and collect the dividend.

Ah, the wonders of leverage when judiciously applied, the potential of the spread between short term and long term rates....

Tom

Mike,

My experience with selling puts has been mixed. For years I sold small amount of puts at times when the market was low and volatility high, earning decent returns with what I regarded as very little risk. This past year I have had some good size losses selling puts on a few financials which I thought were at the bottom of their range. You have the old saying, selling puts is like picking up nickels in front of a bulldozer or is it steamroller.

That having been said, selling the puts you list looks OK to me, because you are perfectly happy to own the shares at 30. That is the acid test, if you like the stock and are happy to own it at the net price resulting from an assignment then puts is a good way to handle it, especially with volatility as high as it is right now.

RIG is trading at a very low P/E and as I recall a lot of their work is under contract and so it could take a while for the oil slump to make it through to their bottom line. A lot of writers are suggesting that if oil exploration and productions slows while the economy slows, there will not be adequate supply when the economy recovers, resulting in a spike in oil prices. That would carry your RIG back up to where it was 6 months ago, so I don't see to much risk that selling the puts could do your finances any lasting harm.

Tom