As all major indices dropping straight down today, I felt like the episode of August 2007 had returned. That was when the two Bear Stearns mortgage funds were shuttng down, and most quant equity strategies were losing money big time. It was the harbinger of what was to come in 2008.
Could today's event be something similar? Or the market just got short-circuited due to the fear of European contagion?
The selling was across the board. Everything, including stocks that are unrelated to international trade or finance, went down rapidly, before recovering some.
Dow at one point was down nearly 1000 point. Some of the stocks I was watching were down more than 20%. Truely amazing.
I have been reading up on European Union and Euro. I'm inclined to think that the sovereign debt problem is nowhere near the mortgage debt problem we've had. Greece will be dealt with or will linger on and shrink. Portugal and Spain will be dealt with or will linger on and shrink. Euro may continue to drop or even collapse. It will be a source of great volatility. But then so what? It was just a monetary experiment, an idea or a strategy to counter the dominance of the U.S. and the rise of Asia. ECB is not an effective central bank. If the problems it now face will bring it down, so be it. The nations in EU would then have the freedom to choose their own destinies.
The real economies will continue. Businesses that can take advantage of the weak Euro are going to thrive.
So why the panic given the small size of all PIIGS economies? They're neither a critical source of energy or raw material nor a major consumer market. They're not going to derail the global economic recovery led by US and China.
I actually bought some shares during the few minutes of big drop.
Gold price, reflecting the great uncertainty over Euro, has gone over $1200/oz. This is precisely the reason to hold gold. Yet, some of the precious metal funds have been disappointing. For example, Vanguard's VGPMX has not only under-performed some of its peer funds, but have under-performed both GLD and GDX. Now we know for the hedge using gold to play well, we should get the real gold, or gold futures.
We've been right about raising cash, limiting exposure to banks and increasing short. But, rotating more into industrial, material and energy now appears a bit pre-mature.
Showing posts with label Trading. Show all posts
Showing posts with label Trading. Show all posts
Thursday, May 6, 2010
Sunday, April 18, 2010
Focusing on earnings
The first week of the earnings season turned to be rather eventful.
Intel and JP Morgan reported fantastic results that pushed the market higher. Google's somewhat disappointed.
March housing starts was a positive surprise, even though it's still way below average.
Friday was a bomb. SEC's charge against Goldman, combined with weak reading on consumer sentiment sent the market sharply down, erasing the gain for the week. Goldman story will linger on for months, as it's a poster child for Wall Street's greed and power. Everybody will be jumping up and down on this unfolding saga, and people are expecting more and more followup scandals and discoveries... the political risk of owning bank shares is getting even higher.
For bank stocks, two things to focus on. (1) We can avoid these Wall Street concepts. I've sold off JPM and BAC for that reason. I've stayed with my long-term holding WFC, for it has a very small I-banking business inherited from Wachovia Securities, and the rest is doing very well. I still think it could become the largest bank stock in market cap. (2) Pick up some of the bank stocks such as GS if they are excessively over-sold, so that the political risk is well-compensated. One of the Barron's articles argues that GS already looks under-valued after Friday's selloff. I agree somewhat, but the article may have underestimated the political fervor. Similarly, JP Morgan also looks expensive. Jaime Dimon's approach to dealing with Washington may not help. These Wall Street firms don't seem to get it: Washington will not leave them alone to do business as usual, doesn't matter what they say or do.
Last week, Sandra Ward had an article on Barron's about how retail investors are finally following the lead of institutional investors in getting into equity funds. It's well worth a read. I think there is more to come, which can turn out to be a powerful factor for the stock market.
James Paulsen's thesis on the recovery appears to be intact. This week, he re-confirmed the view by observing that "Despite persistent, widespread economic anxiety, the contemporary recovery appears remarkably normal." That is, there is no "new normal."
According to Tax-Refund Monitor,
Investors with a long term view informed by economic data will be in an advantageous position to play this market. Stay in the market, raise some cash when your winners become too large, and pick up good stocks when they're wacked by short-term forces. This is a sound strategy that I've played with with good results.
On Monday my favorite builder SPF will report Q1 earnings at market open. I'm somewhat optimistic. Citigroup, Goldman Sachs and Wells Fargo will report too. During the week there will be existing home sales and new home sales reports. It'll be very interesting.
Intel and JP Morgan reported fantastic results that pushed the market higher. Google's somewhat disappointed.
March housing starts was a positive surprise, even though it's still way below average.
Friday was a bomb. SEC's charge against Goldman, combined with weak reading on consumer sentiment sent the market sharply down, erasing the gain for the week. Goldman story will linger on for months, as it's a poster child for Wall Street's greed and power. Everybody will be jumping up and down on this unfolding saga, and people are expecting more and more followup scandals and discoveries... the political risk of owning bank shares is getting even higher.
For bank stocks, two things to focus on. (1) We can avoid these Wall Street concepts. I've sold off JPM and BAC for that reason. I've stayed with my long-term holding WFC, for it has a very small I-banking business inherited from Wachovia Securities, and the rest is doing very well. I still think it could become the largest bank stock in market cap. (2) Pick up some of the bank stocks such as GS if they are excessively over-sold, so that the political risk is well-compensated. One of the Barron's articles argues that GS already looks under-valued after Friday's selloff. I agree somewhat, but the article may have underestimated the political fervor. Similarly, JP Morgan also looks expensive. Jaime Dimon's approach to dealing with Washington may not help. These Wall Street firms don't seem to get it: Washington will not leave them alone to do business as usual, doesn't matter what they say or do.
Last week, Sandra Ward had an article on Barron's about how retail investors are finally following the lead of institutional investors in getting into equity funds. It's well worth a read. I think there is more to come, which can turn out to be a powerful factor for the stock market.
James Paulsen's thesis on the recovery appears to be intact. This week, he re-confirmed the view by observing that "Despite persistent, widespread economic anxiety, the contemporary recovery appears remarkably normal." That is, there is no "new normal."
According to Tax-Refund Monitor,
... taxes withheld in March showed a very large increase over February. There were no changes in law or withholding schedules ... it often indicateds activity has accelerated, but is not yet being captured in the labor-market data. ...Last Friday's WSJ, however, did have an article on "Tech Leads Jobs Recovery" that shows that Silicon Valley is ramping up hiring on tech talents.
Investors with a long term view informed by economic data will be in an advantageous position to play this market. Stay in the market, raise some cash when your winners become too large, and pick up good stocks when they're wacked by short-term forces. This is a sound strategy that I've played with with good results.
On Monday my favorite builder SPF will report Q1 earnings at market open. I'm somewhat optimistic. Citigroup, Goldman Sachs and Wells Fargo will report too. During the week there will be existing home sales and new home sales reports. It'll be very interesting.
Tuesday, April 13, 2010
Will Standard Pacific Pacify?
Investors have bid up Standard Pacific Homes (SPF) ahead of its Q1 earnings release next Monday (4/19). Since the company has a very large exposure in California, this is likely due to the March sales data just reported by MDA DataQuick. SoCal's sales volume has gone up 5% over the same period last year, and the median price has been up by 14%.
According to the same source, similar trend but smaller magnitude has been observed for January and February Southland home sales.
For Q1, analysts are expecting a $0.06/share loss, which is about -$6 M in net income, on revenue of $184 M.
The revenue estimate is very likely an underestimate.
In the March quarter of 2009, Standard recorded $209 M in revenue. Given the increases in both sales and prices year-over-year in one of the major markets where Standard operates, and the fact that the company has been ramping up in California, we think it's likely that the revenue will increase, rather than decrease substantially.
Newer communities, which may account for more than 10% of the company's total sales, should contribute higher margins. Compensation cost is expected to come down a bit. It is likely that the company will report a small profit excluding tax benefit this quarter.
While increased sales is certainly a big welcome, investors should look for increases in community counts and backlogs as the company heads for the Spring selling season. We will also be looking at the company's use of capital in new land acquisition, and the geographic distribution of its communities. How it positions itself to benefit from a rocky recovery is at least as important as how the last quarter turns out.
This is a very volatile stock. The share price can go up or down 20% easily around earnings release. Should the stock price continue to rise in the next few days, the stage may be set for a big selloff after earnings. If that doesn't happen, we may see a more pacific trading next week.
According to the same source, similar trend but smaller magnitude has been observed for January and February Southland home sales.
For Q1, analysts are expecting a $0.06/share loss, which is about -$6 M in net income, on revenue of $184 M.
The revenue estimate is very likely an underestimate.
In the March quarter of 2009, Standard recorded $209 M in revenue. Given the increases in both sales and prices year-over-year in one of the major markets where Standard operates, and the fact that the company has been ramping up in California, we think it's likely that the revenue will increase, rather than decrease substantially.
Newer communities, which may account for more than 10% of the company's total sales, should contribute higher margins. Compensation cost is expected to come down a bit. It is likely that the company will report a small profit excluding tax benefit this quarter.
While increased sales is certainly a big welcome, investors should look for increases in community counts and backlogs as the company heads for the Spring selling season. We will also be looking at the company's use of capital in new land acquisition, and the geographic distribution of its communities. How it positions itself to benefit from a rocky recovery is at least as important as how the last quarter turns out.
This is a very volatile stock. The share price can go up or down 20% easily around earnings release. Should the stock price continue to rise in the next few days, the stage may be set for a big selloff after earnings. If that doesn't happen, we may see a more pacific trading next week.
Thursday, April 8, 2010
It's time to take some profit
Stock market looks very resilient, able to overcome many bad news. Optimism is returning.
Retail sale has been up on consumer strength. Mortgage rate is up too. Gold has been up to highest level for this year.
Some of our holdings are breaking new highs. It has been none-stop since early February.
There is no big concern, but it's important to raise cash at this point. The retail strength noted above could very well be short-lived. So we sold quite a bit of winners, and even started a short position. This sets us up nicely to rotate into the next promising areas.
We hope the upcoming earnings season is going gangbuster. We just don't want to depend on that outcome. If market rises from earnings, we'll benefit; but if vol picks up, or credit risk turns up, or the Fed moves earlier than expected (unlikely) we'll be ready for it.
Retail sale has been up on consumer strength. Mortgage rate is up too. Gold has been up to highest level for this year.
Some of our holdings are breaking new highs. It has been none-stop since early February.
There is no big concern, but it's important to raise cash at this point. The retail strength noted above could very well be short-lived. So we sold quite a bit of winners, and even started a short position. This sets us up nicely to rotate into the next promising areas.
We hope the upcoming earnings season is going gangbuster. We just don't want to depend on that outcome. If market rises from earnings, we'll benefit; but if vol picks up, or credit risk turns up, or the Fed moves earlier than expected (unlikely) we'll be ready for it.
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