I do own funds, but am looking to move at least some of the domestic equity exposure to individual stocks. I expect I'll always have funds in my portfolio to cover market areas where I don't have the experience, knowledge or resources to do it myself. Examples - emerging markets, where I've got Driehaus Emerging Markets (DREGX) - I hope your DRIDX has done as well as it's stable mate recently. Bonds - I could deal with treasuries, but putting together a diversified bond portfolio takes more money and more smarts than I've got. I've got Manager's Freemont Bond (MBDFX), which is advised by Bill Gross.

I thought I was doing good by cooking drunk Thanksgiving turkey on the charcoal smoker, but time with the family in Denver, 1884 beers to taste, Mrs. Duffbeer cons you into a chocolate and beer deal. You 'da man.

Cheers back at ya' Duff.

I'll look for the IBD note.

Seeking Alpha had a column this morning that talked a bit about T's future with land lines disappearing almost as fast as the cold beer in a can of Duff.
http://seekingalpha.com/article/57050-at-t-wake-me-up-at-65

In any event, the bigger T divvy should be good for a couple more Duffs each quarter.

Russ

Merry Christmas and Happy New Year to the DuffBeer family.

Your posts have been great. I don't have a beer in front of me at the moment, but just lifted a toast to you with a glass of merlot.

Hi Armin,
The biggest gainer in SLO for me was Graham Corporation (GHM)at a little over 38%. They're a small/micro cap manufacturer of heat exchangers and other hardware that's used in places like refineries.

Nice analysis, as usual.

Congrats on winning SLO-1 and good luck playing with the pros.

Welcome and good luck.

Hey T&B, Glad to see the writer's strike won't be stopping your blog :)

Hope you enjoyed your vacation from blogging.

Selling vs. buying?? Not sure if selling's more important, but I think it's more difficult. Maybe thats why I like divvy's - no need to ever sell the stock to make money with it.

Enjoy your super commercial bowl 'stock picking' opportunities. Hope they're all refreshing and profitable.

Hi John, Welcome to the contest. There are some blogging pointers at the Coach's Corner link on the "Strategy Lab Contestants" page.

The range of experience and styles in this contest seems to run from new investors using it to help learn to folks who publish investment newsletters and manage money professionally. If you're managing a portfolio and holding your own in the market, that qualifies you as a 'knowledgeable source' imho. Besides, this is kind of a community intelligence thing, everyone adds something to the borg collective.

As far as what makes a good blog post in my opinion - stay focused on the point you're trying to make whether it's a stock or sector analysis, trading or management strategy, or whatever - stay on point. On stock blogs, one of the points Ken made in earlier hints that really struck home was to explain why the market isn't valuing it correctly. A little humor never hurts if you can mix it in.

Great post.

I don't follow the muni market, but would be very cautious. In communities with declining home values, assessments will trend lower taking property tax revenues along for the ride. That could put enough of a squeeze on municipalities to lead to defaults. Doubt it would be substantial, but if the default rate exceeds what the insurers have in their models...

Excellent post. I think this is something we all struggle with. Most all my real life holdings are long term and I find it very difficult to make a sell decision, largely because I bought with no intention of selling.

In SLO, I've tried some trading with mixed success. In those cases, the sell decision is much easier because the buy was made with the intent of selling it after some near term event or move. 'course it also helps that there's no money on the line.

Many thanks for the comments.

On Sunday, SeekingAlpha had a somewhat bearish piece on RIG. Basically, the author was concerned about integrating the Global SantaFe merger.

I haven't seen an analysis on where oil prices need to be to sustain current day rates. If memory serves me correctly, oil would have to fall quite a bit from current levels before companies would start canceling rig contracts.

ntb - I share your concern on refiners. The crack spreads are tiny and even though pump prices seem to keep going up, they just aren't able to pass all the oil price increases along into refined products.

Tom - From your post it looks like DRYS' venture into drilling is more of an investment than an operational expansion. Either way, it's interesting that they think offshore drilling is a better use of capital than expanding their shipping ops. And congrats on being selected for the blogger spotlight.

Hi Armin,

Thanks for the post, 'tis an interesting little company. Looks like the stock price got a haircut because of a slight miss, but the company says they'll still meet rev. and growth targets for the year.

One has to suspect the "offers specialized financial and economic analyses and advice on challenges that arise from litigation, disputes, investigations, regulation, and financial distress to clients" part of the business should see plenty of demand :)

Take care, Russ

This has all the makings of a value trap. Low single digit PE, but - as noted in the question - disappointing guidance and cautious outlook. The PE may expand, but it's more likely to expand on falling earnings than higher share price. This doesn't seem like the kind of business that will do well in a slowing economy. If the budget gets tight, the Nutrisystem plan is pretty high on the list of expenses that get cut and pretty low on the list of new things to sign up for. There are just too many better choices than sinking money in NTRI.

Yep. M-tocracy isn't a particularly good short term trading simulator. Between compliance rules and "marketocracy: please wait" it's tough to catch fast zig zags.

Looks like you're up 2% or so with the S&P down slightly over the same time period. Nothing to sneer at.

Can you write a bit about how you choose what to trade and how you set your buy and sell points?

Woo hoo, comments.

d l, Great questions, but I haven't got many answers. I think they own their satellites, but they're financed - suspect that's much of the debt.

southrngent1 - the subscriber total is XMSR and SIRI combined, not just SIRI. But, the revenues don't cover costs. Big interest expense and they have to pay for all that programming. Like d l noted, harpo and drawoh have big $$$ contracts.

pwalesky - the blog is just my opinion of the stock, I'm not in a position to try and give investment advice, sorry.

Nice post John.

I held BUCY for a trade in SLO1 and should have held on for the ride up. It's had a pretty substantial run, but still looks like a good value. Be careful with quarter-to-quarter revenue comparisons, each sale is so big that a contract moving up or slipping across a quarter can make a big change in the comps.

For a similar story down stream from offshore drillers, look at National Oilwell Varco (NOV).

Peter Brimelow has a column at Marketwatch that supports your fishing down stream theme. It includes the following quote from a recent edition of the Cabot Market Letter.

"The kings of this new bull market are natural resources, commodities, and the companies that find them, move them and sell them. That means coal, oil, iron ore, steel, natural gas, gold, silver, copper and more."

EXCELLENT!!!

I hearby pass along the title of SLO Poet Laureate, graciously bestowed on me by Viking Warrior at the end of SLO1.

Recommend including Transocean (RIG) in your BHI HAL comparison.

I think narrow crack spreads are going to be with us for awhile. The big integrated oils are under a lot of political pressure over gasoline prices. With high crude prices, they're in a position to make good profits on the upstream side while holding very narrow margins downstream. That squeezes the pure refiners since it keeps the crack spread narrow.

That said, Tesoro does look cheap with fwd PE of 6, PEG of 0.5 and 1.5 times book. Can you expand on why you would pick Tesoro over Valero (VLO)?

If you've got a WSJ online subscription, check out their headline Fed Races to Rescue Bear Stearns story.

A significant quote from that piece:
"But the central bank has explicitly assumed the risk of the loan. If Bear fails and the collateral it posts is insufficient to cover the loan, the Fed will sustain a loss. Officials say there is no preset maximum amount of the loan, other than how much collateral Bear is able to provide to meet the Fed's requirements."

In other words, the Fed may have effectively purchased a whole bunch of illiquid paper. They can try to call it a loan, but if BSC can't raise the cash to repay, they might decide to just walk away and leave all that paper at the Fed.

Not sure the terms would allow it, but it could also provide a conduit for other firms to dump paper. They could sell or loan it to Bear, Bear passes it to the Fed through JPM, banks walk away and leave the Fed holding a bag full of ?????.

I'm not thrilled about the Fed/JPM credit extension to BSC, but don't know enough to comment on the merits. Clearly, one concern would have to have been the potential snowball effect if Bear lost accounts, then couldn't meet margin call, then BSC paper held by other firms falls... rinse, lather, repeat.

The weekend WSJ front page article on this states that the Fed won't hold JPM liable if Bear defaults and that the only limit to the amount Bear can borrow is what they can put up as collateral. That sets up the very real possibility that the Fed effectively purchased every bit of paper Bear had that met the pledge criteria.

Wow - just went to double check something and saw that JPM is buying BSC for $2 per share.

Thanks for sharing your portfolio management analysis. One of the great things about this contest is learning from what others have done well and not so well.

I hope the chronic fatigue is improving for you.

And, good luck with that 'Cubs winning the World Series' thing.

Good post. On the banks, I'd look to stronger companies than WM or IMB. I think companies like GS, JPM and WFC are best positioned to take advantage as the financial sector starts to turn up.

You do have more upside potential with WM and IMB, but also more risk that they'll be at the center of the next bad news cycle.

Nice entry. In addition to the regular business dynamics, I suspect political pressure on rising gas prices will really hurt refiners. With big profits on crude, the integrated firms can choose to avoid some of the political fire by operating their refineries on shoestring margins. Not so for TSO and VLO.

You could park cash in a short term bond ETF. Ticker BIL holds 1-3 month t-bills, but those rates are so low you'll have trouble making anything after commissions.

And, I agree with ahknaten's comment - get off the sidelines, the best way to learn is to jump in and play. you could always build in some hedges with ultra short funds if you want to protect against loss.

You've set the bar pretty high for those of us who feel compelled to write on this one. $55 billion in option ARMS - $10 billion market cap; doesn't sound promising.

I do like WFC, but FWIW, I'm inclined to lighten up after this week's run and then try to buy back lower. I also like your BTO idea, grab it at a discount, spread out your risk and let a pro sift through the trash for gems.

Here's a little old school BTO just for fun.

Welcome back! Thanks for the real estate run down, but we really want to know how you took your sloport from bottom of the barrel dregs to super-premium micro brew.

Agree with you on T, probably the best buy of any Dow component. High yield, no mortgages, hitting earnings targets, expect another dividend hike later this year ... Don't know why it isn't in the mid-40's now.

I've thought about hedging some of my oil-related SLO holdings with a little DUG, but don't have a good basis for coming up with where I think oil should trade. Crude has had a phenomenal price run this year and it's tough to imagine that continuing.

The economics are kind of interesting, if painful at fill-up time. The slowing US economy and worry over high fuel prices is slightly reducing US consumption. But, China and India seem to be more than taking up the slack - which explains why US refiners are getting squeezed so badly - world demand keeps crude prices high, slowing US demand doesn't let product prices rise as fast as crude.

I think oil services companies continue to do well even if oil drops quite a bit from current levels. Oil producers also do pretty well if oil falls a bit; I doubt most analysts' earnings models are based on $110 - $120 oil.

To end a long and rambling reply, I'm not smart enough to predict where oil should be priced. But if I had to pick between buying DUG or going long oil over the next few months, I'd pick DUG.

Nice review. I didn't even know Motley Fool had added a screener, looking forward to your writeup on it.

Interesting approach. It does make sense that the strongest consumer brands would be big advertisers on popular shows.

This line jumped out at me - "he [Buffett] always has extra capital"
It's nice to be all in when things are hot, but there have been several times during this contest when I've seen great opportunities and only had chump change.
Words of great wisdom - always have extra capital

Interesting that they think something like 90% of their mark-to-market losses are coming back. I'm sure the securities aren't directly comparable, but back when WAMU was QOTW, they were forecasting more writedowns over the next 3-4 years.

Raising capital and the dividend at the same time seems counter productive. Not sure the new investors, whoever they are, will appreciate the company turning around and passing their money right back out.

Enter 'em!!! Who knew keeping the bull running could be so simple. I've sometimes made long dormant stocks soar to new highs merely by selling them.

Apparently accountants have more hands than economists. On one hand, book value is X, on the other hand it's Y, over here it's Z and then there's adjusted estimated analytical.....

Good explanation.

Thanks for sharing your strategy. It's nice to see how the folks at the top of the board got there.

Your theory that the divergence between the curves is from exotic loans being in the CS index but not the OFHEO index makes sense. That would be consistent with a sharper uptick when lenders and borrowers were busy signing up on teaser rates and sharper drops when those things ran in to trouble.

If you predict a bottom (or top) every day, you're sure to nail it. Next will be the ads, 'our analyst called the exact bottom of the 2008 bear market.'
I got cynical before I got old :)

But, you did keep the market in pretty good shape.

Hope the CLF buy works out for you. Seems like an open limit order should adjust for a split. If you didn't want the buy, I suspect M-tocracy will cancel it for you.

Rated your post a '3' only because they don't have a 4. :)

The big finds off Brazil combined with PBR trying to lock-up the majority of the deepwater drill rigs should be very positive for NOV along with the offshore drillers. Bloomberg had a piece a few days ago about PBR planning to build something like 130 rigs of their own. Even if oil drops back quite a bit, NOV will still have a full order book and good pricing power.

It's good to see you posting again. Looking forward to the follow up.

And some picks from the Warrior to round it out!

Good post T&B. I think the risk of gov't 'help' is another really good reason to stay out of this stock.

The only flaw I see in the buyback approach is the price won't stay near the 2.50 low very long if they start a program to buy back 95+% of the float.

But, it would be really ugly for the shorts.

Based on just a quick look at CSE, that dividend is far from safe. Estimated 2009 earnings are 2.33 per share, annual dividend payout if they don't cut it is 2.40 per share. No company can pay out more than they earn for very long.

Can you share a little more on why you think energy stocks will drop this summer?

Don,

I think your longboat is on a course for pillage and profits with DRC. From a quick scan of the vitals, it looks good. Easy on the steering board (the origin of starboard) and keep 'er so.

I tried my hand at target prices for GHM after the 30 May earnings report. The top end of the 12 month target came out to low-90's and the bottom end was in the mid-60's. I've taken some profits in SLO and real, but hung on to enough to enjoy the ride. The earnings report bumped 'fully valued' up some, but mid-70's is is in the error band. It's a great company, but stock valuation is getting up there.

The beauty of companies like GHM and DRC is their products are needed no matter what happens in the energy world. Oil, oil sands, oil shale, coal-to-liquid, bio fuels - it doesn't matter, they all need compressors, pumps, condensers, heat exchangers, ejectors .... DRC and GHM keep getting orders no matter what.

I'll do a little more research on DRC and use that for my qotw rather than whatever Jamie throws at us this week.

Russ (charter member of the SBI)

A qotw inspired by the Viking Warrior! Should be excellent.

Alright! Another bank stock owner to commiserate with. Remember, never admit we're wrong - only early ;)

Nice. A little humor is most welcome after this week.

I'm not clear on how you use the "what the market is doing" step. It looks like you're tracking a lot of index moving averages, but how are you using that information?

It looks like your stock selection process is the same regardless of what the overall market is doing. What am I missing?

Good post.

The conference call transcript mentioned some customers coming back after trying lower priced, lower quality competitor's equipment. Wonder if that was the same 'Chinese manufacturers of pumping units' mentioned in the '07 10K.

I think equipment orders still hold up well around $100. When most of these equipment orders were placed and earnings forecasts were made, oil probably wasn't much over $100.

I don't think the vote bar is working. I've tried rating several blogs recently and none of the ratings stick.

Nice post. The ratings thing doesn't seem to be working, so thought you might like to know someone read your entry.

Useless alt energy trivia - the largest geothermal power plant in the world is owned by an oil company (Chevron).

Good run down. I'm also planning on continuing my SLOport in M*. It's good practice and provides a nice outlet for the 'I've got to do somethings' when the market goes crazy. Better to keep the panic responses limited to play money.

If you're looking for a pharma replacement for SNY, NVS held up pretty well in last week's disaster of a market.

Glad you got in on the ride with Graham. I don't think it's over, but it is due for a breather. Addition to the Russell 2000 has probably been giving it a bit of a tailwind recently.

Rating bar still doesn't seem to be working. '3'

What makes you conclude the companies in the those three country ETF's aren't profitable?

Nice post, as usual.
One concern I haven't seen addressed is the ability to raise capital. Whether it's a bond issue or a share offering, at some point the new capital well has to start running dry. Or at least the folks with deep pockets will start getting very skittish after seeing so many other financials keep falling after raising capital.

The 80% don't beat the market stat refers to mutual funds, which aren't the same thing as hedge funds.

Congrats on a well played game.

Nice wrap up entry. And the vote bar appears to have worked for a change.

Like you, I had tried rating most of the posts but gave that up a while back when the ratings wouldn't stick.

Congratulations on a well played contest.

Good post.

Insurance has certainly been overshadowed by banks, FRE and FNM lately.

FWIW, I ran a quick chart from 15 July comparing your picks to the XLF to see if they had participated in the financial run up. AIG was up more than the XLF, CINF underperformed it by about 5% and the others were up, but much less than the XLF.

Looking forward to the follow-ups.

Just checked barchart. Sell signals dominate for both the ultra long and ultra short etf. Not sure how to read that, but suspect it either means 'stay on the sidelines' or that market sentiment is shifting.

I think you're better off trying to sort the good from the bad and buy individual banks rather than buying the ETFs. Even tho' you can't make a lot of sense out of balance sheets, you can get some valid relative information from their reports. For example, we know Wachovia has a lot of 'pick-a-payment' loans that came with their Golden West acquisition; we know WaMu's balance sheet is predominately mortgages since they're an S&L; we know who's had to raise capital and who's been able to make acquisitions... That's all information that can be used to make a judgment call between the companies.

Hi Tom,

What's your take on how Merrill's fire sale of various MBS might impact other firms? Does that force companies that had been using mark-to-model to shift to mark-to-market now that there's a fresh sale data point?

I was hoping you'd tackle this one.

The possibility they'll need more capital is worrisome.

Outstanding!

Shortly after SLO2 ended, Jamie sent out a note stating there were currently no plans for another Strategy Lab Open round. They may do another one some time in the future.

Congratulations on following your convictions and recovering with the M* portfolio.

I've got to believe part of the problem with your original strategy was, in hindsight, there was no way to get to a "high conviction" since not even the companies knew what they were facing.

Tom,

Thanks for the comment.

I think the talking heads are missing a key factor that will drive business. They all seem focused on a turnaround in home building.

They're missing stabilizing existing sales and that a large portion of the existing sales are foreclosures. I think that helps drive same store sales for LOW and HD to beat easy comparisons within the next quarter or two.

Hi Tom,

Thanks for post, particularly pointing out that there is some legislation controlling the process. I like the idea of the rights offering. Taxpayer money will come with heavy gov't oversight and I have little confidence they'll do much better than the folks running things now - the only real change would be an unlimited source of funds to work with.

The WSJ has been updating their articles on this frequently. They're now saying the gov't might not be injecting money, but FNM and FRE will be placed in conservatorship. Details are supposed to be out Sun afternoon.

They're also reporting that the dividend on the common will be eliminated and preferred dividends are probably going to be suspended.

I hope they'll release some information on what default, failed capital raising or ??? triggered this. The legislation you pasted gives Paulson broad authority, but he can't just jump in without some imminent indication of failure. We're all well aware of the risks facing FNM and FRE, but as far as I know they're still paying the bills and have still been able to raise debt, although at higher spreads.

Here's a suggestion for the first place new capital should come from. Every contribution FNM and FRE has ever made to a politician, political party, or political event should be returned. I know that'll never happen and that it's just a drop in the bucket. But, I can dream.

I may rant later. And I'll probably put in a buy order for FNM on M* Mon morning to play the lottery. Might even make a small, real life bet.

Take care, Russ

The plan is out, most news agencies are covering it. Treasury has released quite a bit of information at
http://www.ustreas.gov/news/index1.html

Vic - The common and preferred stock of both companies will still be traded, but it will be junior to a new class of senior preferred that will be purchased by the gov't. As part of that deal, the gov't gets warrants for common stock equal to just under 80% of the companies. I didn't see any information on the pricing or terms of the warrants. Dividends have been eliminated on the common and preferred.

What that means is at some point in the future, if things go well, current shareholders will have a stake that's one-fifth what they have now. It is possible there could be more shareholder dilution in the future.

The stock prices will be set in the market just like they were before, only now the gov't involvement is a little clearer. Much of this risk was known and should have been priced in, so no way to know for sure how the market will price the shares tomorrow morning.

I think the shareholders are in better shape with this than the worst case scenarios that would have been considered when the news was released Fri afternoon. So, there's a fair chance they trade above the last after-market pricing when they open on Monday. FNM last trade in ah 5.45, just checked my brokerage and they're showing bid 5.50, ask 5.55. I'm sure that will change as more information gets released and new assumptions crunch through models.

The treasury release also outlines credit facilities and gov't purchase of securities, but no clear picture of the dollar amounts expected to be used.

I thought it over this morning and put it a small, lowball limit order. Why should the pros have all the fun?

Thanks for pointing out the preferreds.

The deal details are here without all the journalist's analysis. The plan doesn't dilute the preferred, just suspends the dividends indefinitely.

I don't think there's any plan to list the new gov't super senior anywhere since there's no reason it would trade. They haven't stated any plans for it, but my guess is it'll get bought back by the companies if they make it and it won't really matter if they don't.

doooh I'm the one who made the math error.

AIG had 2.6 B shares outstanding as of the 30 June 10Q. It would take 10.4 billion warrants to own 80% of the company. 10.4 b/300 m = 34.7 warrants per person. Unless I messed it up a second time.

Spreadsheets only work when you click the right cell.

"If there has been fraud, misrepresentation, or breach of warranty, let the perpetrators bear the consequences of their own actions."

Just thought that was worth repeating.

Jim,

Good post.

Out of curiosity, how did your index fund portfolio compare to your stock portfolio picked using the same BarChart.com criteria?

Good luck over the rest of Strat Lab.

Hi Tom,

Thanks for the comment. I was beginning to wonder if anyone was still visiting these blogs.

I got a comment over at Motley Fool with a risk I missed. Counter parties on the interest rate swaps. They've got the swaps spread out among a number of financials, most are pretty strong. However, the conference call transcript did indicate some possible losses wrt to Lehman.

The dividend is very tempting and they seem to have the risk bases pretty well covered. The last Fed cut was after their 10-Q report, so if anything their spread should have increased this quarter.