Rumblings out of Washington and the FCC indicate that a decision on the merger is imminent. The stock was up nicely on Thursday, but more impressive was the 8% move higher during after hours trade. If approved, I expect SIRI to move higher, but I would not be surprised if the move is a dud. I'm more concerned about the long term and there I could not be happier. This is a huge deal for SIRI. No more cut-throat competition for talent, subscribers, and auto installation deals. Now if we can just get this economy on stable footing, we would be in good shape. For the long haul, SIRI combined with XM is poised for success. Enjoy the ride.
Goldman Sachs (GS)
Good timing for my stock of the week, Goldman Sachs (GS). On Friday Standard & Poor's cut the outlook for GS to negative. Citing market volatility the rating agency believes revenue and profit at the venerable investment bank could be lower than expected. The collapse of Bear Stearns, especially the rapidity thereof, has certainly spooked the market. The irony for me is that typically volatility leads to increases in trading revenues for investment banks. Obviously we are living through a very bizarre time in capital markets. I'll leave my opinion for this week's Bull/Bear article.
Microsoft (MSFT)
With the turmoil in the financial markets and a recessionary backdrop, Microsoft (MSFT) and its bid for Yahoo (YHOO) has been relegated to second fiddle status. Since YHOO rejected MSFT's $31 bid, there has been little talk about a counter offer. MSFT is taking the right approach with this deal. They have been quite patient while YHOO exhausts alternatives. In some ways it appears YHOO is wishing this deal would just go away. Keep dreaming. MSFT will ultimately prevail and the only question left is at what price. I'm pleased that MSFT hasn't been forced to raise their bid. My guess is that eventually a deal will be forged. I still think the deal gets done in the mid-$30's. The only question is when. Stay tuned.
Bear Stearns (BS)
The shock of the Bear Stearns (BS) collapse remains fresh for shareholders even though the stock managed some life late in the week. Whether or not this makes any sense is irrelevant. It appears that speculators may feel as if there is hope for a higher price. For certain, the stock, now tied to JP Morgan's (JPM) value, may explain why shares are trading well above that $2 headline. Whatever the explanation, there is no reason to stay here in my opinion. If you are long, take your medicine and move on. You may have recourse in a class action shareholder suit, but I just don't see how holding on makes any sense. Consider the extra $4 a bonus.
Notes
As a big fan of politics and history I am watching this year's presidential election with keen interest. In addition to reading as much as I can about all the candidates and issues, I particularly enjoy watching the Sunday morning political news shows.
Today on Meet the Press, I was surprised to see first segment of the show dedicated to the economy and markets. Even more strange was seeing two CNBC commentators as guests.
While I can appreciate the interest in cross promotion, the choice of these two as guests left me somewhat stunned. I mean, they are journalists and all, but we are on the cusp of recession with capital markets in complete disarray.
Do we not deserve a bit better here? I mean I would have liked to have heard from experienced bankers, academics, or current/former Federal Reserve Governors. Instead we get the equivalent of People magazine.
Listening to these two dolts tell me to stay calm with my portfolio doesn't quite work. I need a bit more please.
I can appreciate the idea of not panicking, but there is something very unique transpiring and the fact that we get two CNBC talking heads is a fairly juvenile and cavalier approach to dealing with the situation.
Anyway, I found it a bit odd. We are experiencing extraordinary circumstances in the economy that deserve a bit more.
Jamie Dlugosch
The Rational Investor
Friday's bailout of Bear Stearns (BSC) may very well begin the domino action that many have feared and the central bank is determined to avoid. We should all be concerned and frankly a bit mad.
I get the concept of why BSC is too big to fail if you will, but I'm not sure the benefits of rescue outweigh the negatives. Are we not simply rewarding poor and reckless behavior?
Nobody complained of course when profits at BSC were sky high during the housing boom. The lending binge generated fees of ungodly proportion and shareholders enjoyed a bull market that was propelled by the entire financial sector.
And yet when the music stops here we are left holding the bag. By we I mean American citizens that once enjoyed the fruits of a transparent and inherently fair economic system. Now, our reputation has and is being damaged by trying to fix something that ought not be fixed.
What is scary to me is that the central bank knows that the damage caused by its actions may take years to repair and yet they continue to act in this way. What does that say about their perception of the alternative?
If BSC were allowed to fail the outcome then must be worse than what we now face as a result of intervention. I guess the loss of credibility outside our borders and runaway inflation are acceptable consequences.
What in the world then are we to do as investors in this environment? Should we get out while the getting is good or at least while there is still something to get.
As an optimist it is very hard to not view this turmoil as an opportunity, but this time things may be very different. Stocks are still very expensive relative to historical levels. Keep in mind there was a time when single digit P/E ratios and 7% returns were the norm.
We still have a long way down if that is the case and leading the way will be the financial sector.
Recently we featured a bull/bear report on Citigroup (C). What should investors do now?
Well the conclusion I took from our analysis of C was to proceed cautiously. At best the stock was a buy on a dollar cost averaging basis. That would seem to still make sense in the current mess if you insist on buying at these levels.
If the CEO of BSC had no idea how bad things could get, how are we to know what lies ahead for C?
The decision to buy C is fairly simple. If you are right there could be huge gains. If you are wrong there could be large losses. There is no real way to know for certain which way it will go.
That means we are looking at a casino situation with C. Rational investors know to stay away from gambling so I would say stay away from C until this drama plays itself out.
My guess is that there will be plenty of time to get in on C if indeed the company survives. I'd rather wait until I have more information and I think you all should do the same.
As for BSC, I can't even comment and I won't. It truly is a mess.
Jamie Dlugosch
The Rational Investor
Surely I must be crazy to think such thoughts but am I really nuts? No, I'm quite sane really and with a fairly simple road map I'll show you why I think SIRI is a bargain that over time will mature to be a very fine wine.
For those that have followed my work over the last five years, you know the basics. SIRI dominates the industry with a lock on premium content that it can sell to a very, very large audience without worrying about competition due to barriers to entry.
That last statement on barriers to entry by the way is the reason the proposed merger with XM Satellite Radio (XMSR) is taking so long for approval, but I digress.
With more than 8 million subscribers SIRI is barely tapping into a market that I estimate will reach in excess of 50 million. How do I get that number?
Very easily if you consider the number of vehicles in this country and the fact the majority of those have a radio inside. My research suggests a number that totals at least 250 million with approximately 16 million vehicles new sales added each year.
Given that pay radio's product is far superior to free radio, I am quite certain that over time the industry will meet and exceed my expectations for growth. The only real question is when?
Let's take SIRI independent of any merger. At 8 million subs, I assume growth slows to about 30% this year due to absolutely horrendous economic conditions. From there on I assume growth rebounds to 50%.
That means SIRI alone will reach 52 million subs by the end of 2012. Take those numbers assume a $12 sub rate, 20% profit margin, some sponsorship type ad revenues, and a price/earnings multiple of 15 and I get a valuation of $20 per share in 2012 (based on current number of shares outstanding).
I know that many believe that consumers won't pay for something they already get for free, but please are we not beyond that argument already? For crying out loud, SIRI alone is at 8 million subscribers and they were growing in excess of 100% before last year when growth slowed to 70%.
What about the absurd losses and the fact that SIRI has never made a dime? All true. The losses are absurd, but not for an emerging growth company with a market potential this large.
According to management SIRI has the capital to absorb continued losses until they reach profitability. Yes, it is taking a bit longer than expected, but the potential reward should take the sting off the wait.
I can appreciate the concerns over valuation and capitalization. What I don't accept is the premise that SIRI has a failed business model. It does not.
The problems facing the company today have much to do with the economy and the weakness thereof. Honestly if there was even an ounce of stability, SIRI would be doing much better from a growth perspective.
And it needs that growth to reach profitability. When it gets there, the market will eventually catch on.
The point I am trying to make is that there is more than enough evidence to convince me of the potential reward that taking the risk at these levels, valuation levels not price levels, makes Rational sense.
Now let's factor in the merger with XMSR. Do you have any idea how huge this will be for the company if approved?
Let's imagine for a bit what that world would be like. No more competition for talent and no more competition for subscribers. SIRI would be free to do what it does essentially unencumbered.
That fact alone is why the deal is taking so long to be approved. The beauty is that SIRI does have plenty of other competition to justify Justice eventually approving the deal. There is free radio for one and then other devices like I-pods that make this so.
Even if SIRI needs to further concede on some pricing issues, they should do whatever is necessary in order to gain approval. Once they have it, costs will drop significantly making it more likely that the combined entity will indeed reach profitability without further capital needs.
At the end of the day, I am still extremely bullish on SIRI. The fact that I have such a contrarian view of the story provides much comfort. $20 may take patience and time, but investors should be willing to wait.
Heck, if I am wrong and SIRI only hits $10, investors will still have a triple from these levels.
Now for some really good news. In addition to my role with www.investorplace.com and www.investorplaceblogs.com I am re-launching my highly rated newsletter The Rational Investor as a premium, on-line only service.
The site is currently under construction and should be ready to go shortly. If you would like to sign-up early, I'm offering a huge discount of 60% off the listed price of $250 per quarter.
Drop me a line at jdlugosch@hotmail.com to learn more.
Jamie Dlugosch
The Rational Investor
One or two more shoes appear ready to fall with respect to the market and our economy. While we have enjoyed a nice rally off the mid-January lows, the rally will be fleeting.
Friday's action whereby the major indexes all dropped by more than 2% may be just the beginning. Frankly it is hard to see the market doing anything but retesting the lows.
The headwinds for such a decline continue to persist with no sign of receding. Inflation, or at least prices for things that matter, are going up, job growth has slowed and unemployment is rising, and the credit crunch has indeed bled beyond the sub-prime mortgage market.
In early February, I was advocating a buy into the market steadily over time while keeping a small portion of the portfolio short world markets. Given where we are at today, I am not so sure that makes Rational sense.
There are many reasons for feeling this way, but I think the biggest concern I have is in the financial sector. With huge numbers of variable rate mortgages resetting in May and June, the odds are pretty good that the banks will be seeing more losses and asset write-downs.
There is no way for the market to truly rally without the participation from the financial sector. Until this mess is fixed, the market is at risk for more corrections that may finally result in a true bear market.
I'm not trying to be pessimistic here, but these issues are not simply solved over night. Thus far the pain in portfolios has failed to match the depth of the problems. Admirably the market has hung in there quite well, but get ready for round 2 to the downside.
As for my Marketocracy portfolio, I will put my monthly buying on hold and instead increase my exposure to the short side by doubling my existing short positions. I'll keep the existing long positions as a hedge to a more protracted correction.
I'm on the record as stating that the next best buying opportunity in the market will be in the fall of this year. There is no harm in nibbling as I laid out to do, but when the direction is as obvious as it appears to me now I prefer to just wait.
Jamie Dlugosch
The Rational Investor
What an interesting week.
The rejection of the bid set off a chain reaction of events including new dancing partners (Rupert Murdoch and Newscorp - NWS) and board members running for cover.
It is not a good sign when board members hire lawyers to validate that they are indeed acting in the best interest of shareholders. I can't say that is unprecedented, but holy schmoly batman.
Somebody is worried. And what is Mr. Softy (MSFT) doing?
Oh, let's just say they are not sitting idly by. Thankfully there was no rush to pay a higher price. Instead, how about waging a little proxy battle?
No wonder board members are scrambling. This could get ugly.
What about Mr. Yang? His speed dial to Google was in overdrive this week. What are the odds of striking a deal?
Not good in my opinion.
Yang's options appear limited. He is in a box and he knows it. MSFT knows it too explaining why there was no immediate increase of its offer.
On this day of the Daytona 500, MSFT appears to be in the driver's seat. They have the resources, the desire, and the need to get this deal done.
The latter, need, tells me the deal gets done at a higher price. Many speculate that $40 or more is what YHOO needs. Well, as I said, MSFT holds the cards so the high end may be less likely
At the end of the day, I suspect YHOO goes to MSFT for $35-38 per share. MSFT cannot afford to lose here and winning at $31 may cause trouble with respect to integration.
Paying that higher price should push shares of MSFT lower in the short run, but they will recover. I like all aspects of this deal for both parties. Those that don't own MSFT are wise to wait until the dust settles.
Hopefully, we get the answer this week.
Jamie Dlugosch
The Rational Investor
According to Reuter's, inside sources are claiming that Microsoft's offer is an attempt to steal the company. Well that's a good one not heard before, right? I think the title to my first article on the topic was, "Microsoft Steals Yahoo?"
Anyway, as a fan of Yahoo before the offer the $31 price, while representing a big premium, did not represent the true intangible value of the company. I was honest by saying that I was upset at the offer.
It now appears that the board agrees with me. They will not capitulate without getting full price for the company and with the levers they can pull, including entertaining overtures from Google, I suspect they will get a much higher price than the $31 offer.
That's the good news. The bad news is that I will have to be a bit upset on the other side as Microsoft's share price might suffer in the short term. In my Bull/Bear article InvestorPlaceBlogs, our bull contributor suggested buying Microsoft after all of this shakes out.
That advice will look pretty good on Monday. The action by Yahoo's board will surely put pressure on Microsoft to offer a higher price and the reaction by the market can be expected to be negative for Microsoft.
Will it be a 3, 5, 10 percent haircut? Only time will tell, but 5% or a bit more on the down side seems reasonable. If you own Microsoft there is not much to do but hold for the long term. If you are waiting patiently for the final chapter in the story, you may be able to buy Microsoft at a lower price.
Unless Yahoo's board overplayed its hand, Yahoo looks almost certain to rise from here. That will be an appreciated outcome for those Strategy Lab Open participants that bought Yahoo even after the announced deal at $31.
Cleary this audience knows what it is doing. Congrats and keep up the great work.
Jamie Dlugosch
The Rational Investor
In Gladiators, contestants utilize their strength, agility and speed to avoid behemoth gladiators who are attempting to prevent them from finishing a variety of challenging tasks.
It's tough enough to scale a wall, but try doing it with a gladiator tugging at your heels.
Sometimes the market acts like it has its own army of gladiators attempting to prevent us from our goals. I'm sure I'm not the only one that physically feels the punishment that market gladiators can hand out in attempting to prevent us from our goal of market beating returns.
For example, let's take a look at gladiator - Volatility. Wide swings in the market can throw even the most prudent pro off his game like those contestants on the show.
Last week in my inaugural post I laid out a well executed plan that was premised on a portfolio long certain sectors, including homebuilding, and short world markets. Well, not one week later and housing stocks are roaring.
Arghhhhhhhh! What to do now?
Oh well, I will not let the Volatility gladiator throw me off my game. While it would be tempting to wait for a correction, I'll just have to ignore the short term action and stick with my strategy of establishing long positions in sectors that I believe to be undervalued.
I'll do that buying over time using exchange traded funds. The sectors that I will focus on are the homebuilding, consumer retail, technology, and banking industries.
For homebuilding I will use I Shares Dow Jones Home Construction Fund (ITB). The I Shares Dow Jones U.S. Consumer Services Fund (IYK) will provide exposure to consumer retail. The I Shares S&P Technology Index Fund (IGM) will suffice for technology sector.
In banking and finance I will use 3 different I Shares funds: broker/dearlers (IAI), regional banks (IAT), and Financial Services (IYG).
I will allocate $150,000 to each of these 4 sectors beginning with $25,000 positions or 1/6th of the expected total investment. For the banking sector the total investment will be $50,000 in each of the three funds.
What is important at the end of the day is sticking to my strategy. The most Rational approach is to adjust our allocations from time to time, but don't get distracted by the day to day gyrations of the volatility gladiator.
Note: I was unable to place a trade in the Rydex Strengthening Dollar Fund. I will search for a replacement and announce that trade in my next entry.
Jamie Dlugosch
The Rational Investor
I'm not so sure anymore.
The emergency action of the Federal Reserve is welcome relief from the carnage of a collapsing economy, but its timing shakes my confidence in this venerable institution.
I've been a Federal Reserve fan for a long time. Despite what you may hear from other pundits criticizing its actions, I feel quite strongly that the central bank has done a fabulous job of stewardship over the last 30 years or more.
Those blaming Greenspan for the housing bubble and ATM aspects of easy credit fail to properly assign blame to Wall Street, banks and borrowers. In addition, lower rates in the early part of the millennium staved off a deflation that would have lasted for many years.
We will never be able to prove such a belief because doing so would require us to change history, but I am quite certain bold action then prevented something far more scurrilous than a wee bit of inflation.
Flash forward to today and the new leadership of the central bank has me worried. Chairman Bernanke and his wish for transparency and consensus may be the wrong mix for the current situation we find ourselves in.
The recent cut in rates may have been the right move, but one has to wonder how they missed the boat in December when its actions were more timid and its statement continued to show much worry over inflation.
It is all a bit too wishy-washy for me at a time when bold leadership was needed to guide us through this morass. Did the Federal Reserve simply act to appease Wall Street preventing a correction that may indeed be quite necessary?
I think so and as a result the central bank thus loses one of its key tools, confidence, in its mission to achieve stable prices. So far the results have been favorable, but I do think caution should be used in our approach to the market.
No matter what the Federal Reserve does or does not do, I am a believer in the U.S. economy. That includes a strong belief in the value of the U.S. dollar and a suspicion over the supposed booming world economy.
To me the world is still heavily tied and levered to the U.S. If you figure the world is about six months behind the U.S. then world markets should lag the U.S.
In my Marketocracy portfolio I will act accordingly. That means building primarily long positions in domestic equities, done slowly over time, and selling global markets.
I'll start with a purchase of the ProShares Ultrashort China (FXP), Ultrashort Emerging Markets (EEV) and Short EAFE (EFZ) funds. I want to sell basic materials with a purchase of Ultrashort Basic Materials (SMN). I'll take $25,000 positions in each.
I also want to be long the dollar here and I will do so with the Rydex Strengthening Dollar x2 (RYSBX). I'll take a $100,000 position.
As for stocks I will start with a purchase of I-Shares Russell 2000 ETF (IWM). I'll take a $100,000 position here. Small cap stocks have been pummeled of late and to the extent the U.S. rallies, small caps should outperform.
Next week I'll start using the rest of my cash to take positions in long stories that I believe are undervalued. I'll be dollar cost averaging with monthly purchases over the next 6 months.
Jamie Dlugosch
The Rational Investor
Such a scenario is not a funny matter, but what the heck else are you going to do. I figured if I was going down, I'd go down cool.
Well fortunately we don't really need to worry about nuclear Armageddon today, but what about financial Armageddon?
What started out as a contained correction could turn out to be something much worse. Led by sub-prime fissure material, we are now truly facing what could be a global financial meltdown of epic proportions.
What is a Rational Investor to do?
For me, I'll take the same laissez faire approach mentioned above. No sense getting emotional over something that has been fairly easy to predict. In fact, I think I want to pop open a bottle of champagne.
The bargains that are being created in the wake of across the board selling are too good to be true. So many good companies are being sold in reaction to what is becoming mostly emotional selling.
Some of the most reviled sectors of today can be expected to be the biggest winners in a portfolio going forward. That means dabbling in the homebuilding, banking, mortgage insurance, and consumer retail industries.
My game plan will be quite simple. I want to own value and I want to sell excess.
I will scour the carnage and begin building a portfolio of undervalued companies that will survive and thrive no matter what happens to the economy in the short-term.
I'm very interested in the homebuilding sector where many companies now trade for very large discounts to book value.
Yes, I am well aware that book value is likely to be reduced as land values decline, but some of these companies are trading for 10% of book value. Even a 50% whack to book still makes these stocks historically cheap.
Following that line of thinking leads me to, you guessed it, financials. Banks are cheap no matter how poor the lending. In my opinion, much of the damage has already been priced into these stocks. The big money center banks in particular should be able to ride out this storm.
One of the most beaten down assets of late is the greenback. Frankly, I just don't get the selling in the dollar. Well, actually I do, but the logic of where we are trading today makes little sense. I want to own the dollar aggressively in any portfolio here.
That also means I want to be selling gold. The fear mongers shilling for gold will be reminded shortly when the rest of the world clamors to own dollars. A slumping world economy will be the trigger for this action.
On the short side of the market I want sell the excess of foreign stock gains. If the United States sneezes the rest of the world will indeed catch a cold. The concept of decoupling is far from reality.
The United States is the engine that turns the world economy. We have struggled of late and much of those struggles are priced into the market. My thesis going forward is that we are at or near a bottom with an upswing all but certain.
It is an excellent time to be buying all things American. The rest of the world has not yet corrected like we have. Put simply, I want to build my portfolio accordingly.
Timing is not important. Whether we go all in today or build our portfolio over time matters little. What is important is finding a bargain, making a commitment and sticking to it.
Keep cool. It may get a bit dicey as that mushroom cloud appears in the financial markets, but just remember there is little action today that can prevent the inevitable.
Wear those shades, pop open some champagne and get ready to buy some fabulously cheap stocks.
I'll have more specifics in my next entry.
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