Uncle John's Cabin

Question of the Week - Get Sirius Dude

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Wow, you really seem to like this stock. In concept, I liked the business model when I first saw it. It seems to bring up comparisons to cable TV vs. OTA broadcasts which certainly worked out well for the cable businesses. When my wife bought a new car, we got a trial subscription for 3 months and enjoyed playing with it. Am I correct in remembering that it is completely commercial free? I have to say we enjoyed the variety of all the available channels to listen to. But in the end, we did not pay to continue the subscription.

I'm trying to understand the basic business model here. While it seems like cable, in many ways it acts nothing like cable TV.

Pros and Cons on sat radio in general.

Pros -
1) The variety seems endless, there is something for everyone.
2) Commercial free radio is pleasant
3) It is not location specific, no matter where you drive, you get the same stations
4) It even has portable adapters to take it out of your car and carry around.
5) Many new cars feature it as a built in feature and each new car purchased must bring in some revenue

Cons -
1) I found the number of channels distracting while driving. Much like cable TV, "1000 channels and nothing on."
2) Driving and surfing the radio are not a good mix. Surfing on your couch with the TV is.
3) It costs money to listen to what amounts to background music or talk (limited market) when you can get similar noise for free
4) Cable TV still had commercials to pay for part of the costs and profits, satellite radio does not seem to have this. (It's one of the biggest draws yet biggest differences between cable and radio.) Am I wrong here?
5) OTA or terrestrial radio stations have a huge lobby and are paying congress to prevent the merger between Sirius and XM as a form of protection. Congress has held 4 hearings on this already for some "unknown" reason. Even ExxonMobile did not have this much trouble merging. I believe today marks the 375th day on deliberations since the merger was proposed. This is the longest ever in history without a verdict.
6) Sirius does not really compete with only radio. It is competing with tapes, CDs, and now, it's biggest threat, MP3 players. (I refuse to call an MP3 player an iPod! An iPod is a brand, not a device.)
7) It would seem costly to add Sirius radios to older cars that did not have it built in.
8) Cable TV companies were granted exclusive rights to certain areas. Sat radio does not have this advantage.
9) I would venture to guess very soon there will be cell phone hook ups to cars (like "Sync") but with internet connections as well. This is a real killer. If you already pay for a cell phone with internet, you should soon be able to stream internet radio though it. Most people that would be possible targets for this market already own cell phones so why pay for radio twice?
10) Cars are now being built with hard drives to make radio listening like a TiVo experience where you can actually rewind to catch a tune or spot you missed. This would work really well with an internet cell phone.
11) MP3 players, not radios seem to be the portable music device of choice these days.
12) Someday soon, cars will probably contain complete computers in the cars as well with cell capabilities.

Based on this list off the top of my head, knowing that the Sirius XM merger is being strangled in congress and the high cost of entry, when a similar device that everyone is paying for (cell) "could" provide the same thing, I really wouldn't even bother with looking at the companies financials etc. Quite honestly, it will be an obsolete business before it become profitable. With portable electronic device convergence, why pay for yet another device when your cell phone can and will do it all?

No offense to any fans of this service here but I don't see a profitable business model ever. The high cost of entry and the speed of competing device convergence leaves no room for another subscription device whether the merger could get through congress or not. Radio as we know it probably only has 10 more years left as a profitable business model as well.

Could you make money on trades here? Sure if the merger goes through (or from pure speculation) but why bother hoping on a government that won't act and a business model that is doomed to failure in a few short years?

Given all of this, I can see many better opportunities in the stock market than Sirius. There is no crime to walk away from this one and go make money in a better stock. It took too long to make money in this business. Grieve and move on!.

Sorry dude. Get serious and sell this stock while you are up.

Best of luck,
Uncle John

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What a Bunch of Yahoos!

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I just read that Yahoo! is once again taunting Microsoft by extending the deadline to nominate board directors in hopes of a white knight to save them from a horribly "undervalued" takeover bid. Who might this white knight be? Time Warner/AOL? I certainly doubt it. Google? Umm, can we spell anti-trust? What I want to know is what Jerry Yang is smoking.

When Microsoft made it's $31 per share or 41.7 billion dollar buyout bid, Yahoo! was trading at about 17 and change. After the announced bid, the shares jumped to the expected $29 range. Yang and company quickly looked for other buyers and found none were to be had. After that, they turned down the offer stating that Microsoft's bid "severely underestimated the value of the company." By what standards are we measuring here? The stock's 52 week high is $34 in Oct when everything was over valued. Since Jerry's return, he has done very little to help this company, it's employees or it's shareholders.

Let's consider some scenarios on the surface here.

1) Yahoo accepts MS's bid for a 60%+ premium on it's shares. Everyone walks away happy except Jerry Yang who has now guaranteed that he will not be retained by MS to run it's internet division. In the mean time, the shares holders get some much needed relief in unlocking share holder value and a fighting chance against the behemoth named Google. Microsoft can finally recoup the $4 loss that the stock has suffered since the refusal of the takeover "bear hug" bid.

2) Microsoft walks away. Yahoo falls back to $17 (or lower considering how Google is doing at the moment) and is left to its own devices of learning new ways to lose market share and money. Microsoft gets its $4 pop back and has to keep building up its MSN/Windows Live internet brands and can hope to continue to chip away at Google's dominance by scavenging Yahoo's market share.

3) Yahoo! and MS stay in a protracted battle for company ownership. Yahoo! doesn't win as employees start to jump ship afraid for their jobs as they look for ways to cut costs. The biggest asset other than the company name is the talent at the company. Yahoo! will continue along like a wounded bird until it becomes so cheap and worth much less that virtually anyone could pick them up for a pocketful of change. MS, on the other hand, will do fine as a company, but it's stock will stay in the doldrums until a clear decision is made. They have the money to fight and survive without hurting their business. Yahoo! does not. Consider the recent record judgment against MS from the EU for 1.3 billion. That is 2 weeks operating cash flow for this company.

Don't think MS can't walk away from this deal and live with it. MS has a history of being tenacious to a fault! When Novell dominated the networking space, MS came in and destroyed them with Windows Server (and NT before that.) It took years, many dollars and more than a few iterations of Windows to do this but they did. When Access was a joke to rival dBase, MS kept pushing and improving until dBase became a trivia question on game shows. (How many people actually remembered this product until I mentioned it?) When Turbo Pascal and Turbo C were the top in their class as development tools, MS introduced a series of it's own competing tools starting with Quick C and evolving into Visual Studio, again, leaving Borland in the dust. Remember Lotus 1-2-3? WordPerfect? All victims to Microsoft's ability to beat people at their own games even against unbelievably daunting odds. They key is cash, smarts and the ability to improve year over year until they finally come up with a better product.

I personally know folks at MS and have on occasion considered working there (when I was younger and could stand the hours) and almost sold a product to them to be included into Windows. (IBM now owns it.) Their corporate culture is amazing. These people talk in terms of "bandwidth" when referring someone's ability to absorb new ideas. They regularly vote out the lowest performing 5% of their peers in the company to keep it strong and replace them with new grads at the tops of their class. For leadership, they buy best of breed when they can and retain the old leadership to run their new divisions. They also scavenge top talents from competitors on a regular basis.

OK, if Microsoft is so good, why is their stock waffling? A number of factors are involved here. The company is just too big and in too many areas to have anymore double digit growth overall as a company. Their desktop business, while still dominate is suffering from one of the biggest challenges yet; a move away from desktop software to internet subscription based software. Do they see this as a problem? Yes! One of many reasons Bill Gates walked away from the CEO job and then as chief architect is that he understands he is too attached to his original money makers, Basic and Windows. The new breed at MS understand the internet much better and you can see it in their latest offerings for Office subscriptions on the internet instead of their bread and butter, the Office Desktop Suite. Over the last 2 years, there has been a huge internal fight as the new "internet breed" has convinced the old guard that they need to change and has won. Basically, it takes time to move a monster this big but MS is more nimble than most companies its size. Is it possible, MS goes the way of the old IBM when they were dominate through the 80s? Sure. I have suspected at one time this will happen but like IBM, they could very well reinvent themselves. Every tech company of this size has those challenges.

In the end, I don't see Yahoo! accepting this offer as a defeat for them. It would be a victory for the stockholders, employee's and both companies. The only loser will be Jerry Yang (albeit a very rich loser.) If this battle continues, it will hurt Yahoo! as a company, it's employees and it's shareholders.

Jerry Yang reminds me of all the home owners trying to sell their houses at peak 2005-2006 prices and is unwilling to accept that prices have come down. Stop being a Yahoo Jerry and take the deal!

Uncle John

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Is The Taco Play (Ag) Over?

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As Jon Markman writes so well in his MSN Money article "Could we really run out of food?" I have agreed with his opinion for the last month with a good portion of my portfolio in ag stocks as I stated in a previous post I called "Stagflation or Agflation?".

I honestly don't believe the high ag prices are purely from speculation, nor from the declining dollar although some speculation and a lower dollar is providing a lot of volatility. The famine angle is so acute I have heard that certain charity organizations have much less food to give out due to cost and are trying to find ways to cope. There are a few basic tenants to my thesis:

The corn inflation itself has downstream affects to half the products in a taco for example. It takes corn to feed livestock to make beef (or any meat), cheese and sour cream, let alone corn and flour tortillas.

The more corn and soy we burn for fuels, leaves less land for growing wheat and other much needed crops. In the US, we burn 35% of our corn crops for ethanol.

The growing middle classes in the emerging markets are eating better now and will not go back to a meatless diet until they can no longer afford it.

Failed crops, unpredictable weather patterns are all contributing to world hunger.

See my previously referenced post to see what picks I'm holding to make this play.

Here's the burn now. The story is out. (OK, yes the "ag story" has been out a while but the new twist of actually stating a good case is different then the tradition momentum jargon.) Analysts are typically late to the party and with a well written article that, I'm sure, will be expounded on my many other writers, I'm starting to wonder if the story is over for me. Sure, I will get a nice bump in the next week or two, maybe through the month, but I am already thinking about rotating out of the ag sector on pops over the next few weeks. It's not a done deal in my mind yet but I get nervous when others start writing about what I am already doing. (It's that contrarian in me.)

I guess I'll have to see if my favorite taco stand can raise prices to cover rising costs.

Good luck and good eating,
Uncle John

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Fishing Downstream for BUCY

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Other than my Taco plays (ag), in this economy, like many others in this game, hard assets seem to be where the money is. What I have been looking for is a road less traveled to profits in this area. The upstream stocks are so expensive it seems hard to find the right trigger points.

Here's a list of what I keep hearing about. Oil is up, oil research and exploration spending is up, the oil services companies are touted daily, mining is up, steel is up, ore is up and of course precious metals and coal. While thinking about this, I heard of a seemingly under looked company that can benefit from all of these plays. Every one of these industries are selling at a pretty high PE ratio although, probably well deserved to a degree but I am looking for somethign cheaper.

Consider the oil situation and follow it downstream with me. To get more oil, you need to drill so the oil services companies, (SLB), (HAL) get involved. To run their businesses they need large amounts of steel for rigs, pipes, drills and other equipment. Companies making steel like US Steel (X) and Nucor (NUE) and the rest need iron ore and coal to make steel. That leads me to the miners of both coal and ore. Arch Coal (ACI), (RIO) etc. What do all of these companies need? Heavy mining equipment. Right now, I know of only two major heavy mining players in the market. The much touted Joy Global and lesser known company controlling basically a duopoly. Add this list to the obvious and direct mining benefits and we have a winner.

Current disclosure, I already own ConocoPhillips (COP), Schlumberger (SLB), US Steel (X) and Arch Coal (ACI). (I get a two-fer in the steel as I like the infrastructure play and a three-fer in coal as energy costs rise and the shortage of coal as well as the steel infrastructure play.) I have yet to take a stake in the miners but am looking.

That brings me back to the bottom (or top?) of the food chain. The heavy mining equipment manufacturers. Joy Global and... wait for it..., Bucyrus Inc. (BUCY). OK, I got this name from CNBC but after looking into it, this fits what I have been trying to do all along, go to the source and look for the suppliers for the hot markets that can play well with various themes.

While Joy Global has gotten most of the news attention, Bucyrus has been firing on all cylinders only posting a disappointing quarter once in the last five years. Joy on the other hand is trying to raise capital by issuing more shares and just lost their CFO this week. Small insider positions are being bought at Bucyrus as of yesterday and Joy has had some insider selling as well as institutional selling in recent months. Bucyrus has less coverage by analysts so is a little more off the radar of Wall Street which is always something I like but still gets better ratings. Revenue and income growth last year was 118% and 252% respectively for Bucyrus while Joy's numbers are 6% and -18%. I have to assume Joy's income growth was due to some one time charge but either way, Bucyrus seems to be blowing it out of the water. It is a smaller company with about 1.6B in sales compared to 2.5B for Joy but it is clearly not half as small and is in the same league but seems to give it room for more growth. Forward PE ratios for both companies are about 20 +/- .5. On the other side, Joy beats with a slightly better net profit margin and a lower debt to equity ratio but I believe the growth in Bucyrus is worth that.

I like buying best of breed with limited competition and Bucyrus seems to fit the bill for me. It seems to work well with a number of different themes I am playing as well as being the under looked company on Wall Street. I'll be looking for a good entry point starting today.

Happy fishing and don't forget to look down steam.
Uncle John

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'Twas the Month Before Earnings

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'Twas the month before earnings, and all through the street
Not a trader was sleeping, just wanting a beat.
The balance sheets were waiting, primped up with much care
The stocks are all cheap, the market's a bear.

The CEOs were nestled, all snug in their beds
While visions of bonuses danced in their head.
Pay for performance, or vote say for pay
Was not on the agenda, not even a day.

When up from the financials, there arose such a clatter
I looked up at Ambac, to see what's the matter.
Away to my broker, I flew with a flash
With sell orders in hand, hoping for cash.

Bernanke is talking, like a fear frozen doe
He's not sure what's in, that darn CDO.
He pushed on a string, with little effect
To get lending in order, I truly suspect.

With my little old ticker, so old but so quick
I watched my stocks plunge, it was making me sick.
More rapid then eagles, the stocks fell from air
Taunting me to buy them, buy if you dare!

Now Amazon! now Apple!
Now Fargo and Goldman!
On Google! On RIMM!
On, Citi and Morgan!
From the top of the charts
To an unfettered fall,
Profits dash away! Dash away!
Dash away all!

As dry leaves that before the wild hurricane fly
The ag futures and metals, flew up through the sky.
So up to the stock pages, in browsers I flew
Looking for bargains in mining and doo-doo.

And then in the news, I heard such a gloom
China is slowing, it's on-coming doom.
Russia, Brazil, their growth rate is falling
It's India too, while Europe is stalling.

The dollar is "worth less", said old wise man Buffett
As he bought the REAL, and in stockings he stuffed it.
The Yen and the Euro, have reached all time highs
Food is expensive, and my gas tank is dry.

And then in a twinkling, I lost my whole roof
My house price had fallen, the numbers are proof.
As I looked through my mail I gasped with astound
As I found the foreclosure, note nicely bound.

I packed up my things, and proceeded to rent
But with oil so high, it made hardly a dent.
My credit was trashed, my net worth was too
I went to my broker, asking what do I do?

He was chubby and plump, a right bloated old troll
He smiled when he saw me with eyes black as coal.
He looked at me slyly, with a malicious grin
Buy these stocks for earnings, I'm sure you will win.

He turned as he stuffed, his commissions in sacks
They were overflowing with euros, not even greenbacks!
He packed up his fees and started to run
But I stopped him cold, with my .45 gun.

I don't promote violence, not even for crooks
Even when they fudge and manipulate books.
Just send them to jail, with hardly a care
Where a prisoner will comfort, with steely eyed stare.

Now I invest for myself, with a client that's a foole
This new online trading, it's such a nice tool.
I pick my own stocks, and ignore all the chatter
I make trades at night, like nothing's the matter.

I'm back where I started, and now I'm in charge
Gritting my teeth, I take positions not large.
I take pills by the handful, to prevent heart attacks
While looking for winners, some stocks in the black.

Too beat the old NASDAQ, and S&P too
Beat the Dow firmly, that's my new to do.
I'm estimating risks, calculations in head
While I wait for the earnings and the write-downs ahead.

I got me a blog, and went on a tear
Scathing reports, like a long time old bear.
I post when I'm happy or when I get mad,
I just hope my posts, are not all that bad.

Investing is tricky, I write in my blog
This market has pitfalls, like a marshy old bog.
But if you're patient, you won't have to stop it

"Happy earnings to all, and to all a good profit!"

Uncle John
Adapted from Clement Clark Moore's famous poem "'Twas the Night Before Christmas"

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A Day in the Life of a Market

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I don't know if there are any old aged truths that have already been discovered or are even well known to most regarding this topic. It's possible I am writing about a truth that is well known to all of you investors out there. Maybe what I've seen in the last few years is an abnormality but I do not think so. What I see is a pretty clear pattern in the path of least resistance in the markets. (Actually I'm willing to bet that someone has discussed this topic in great detail, somewhere.) I am not talking about technical resistance or support levels here but using the term in a much more general way, more like friction.

By my observations, every market day has similar traits that I try to take advantage of or avoid as necessary. While I see a pattern, I have to at least come up with a working thesis as to why this might be true or I would think this is just nothing more than watching a short term trend. My thesis is based on a view of the world that comes mainly from a math and physics background. It is a well known fact that many events occurs due at part to the path of least resistance. Electronics and fluid dynamics are just a few of these sciences that reply on this principle.

So how does this path of least resistance affect the market? From the 9:30 am opening bell to the 4 pm closing bell I see this in action almost every day. This also explains much about after market trading.

Before the opening bell, I see pent up demand to buy or sell stocks. The resistance here is that the market in general is not open yet so the resistance builds. Much of this pent up demand is based on news released during the closed markets from the day before as new information is fit into the puzzle. In the physical world, imagine a river that has been dammed up. When the bell sounds, the resistance is cleared and this pent up demand to take action (in either direction) shows in high spikes at the open and very quick reversals. So many people want to establish or remove a stock position that they are literally climbing the backs of others to get their orders in. Imagine a dam blocking a river suddenly bursting open. I wouldn't want to be in that path of that water and in the same way I try to avoid this time in the market. If I do try to get an order in, I make sure it is a limit order. (I learned this lesson in a very expensive way by placing a market order for naked puts on Microsoft in Dec of 1999 after bad news form the night before.) Then I can try to play the quick and sharp reversals usually seen about 5-15 minutes into the trading day but only if I have a strong conviction on what I think will happen.

After the froth of the opening, the market looks for a direction just like the waters of a dam start looking for a way to travel down the path of least resistance. The huge initial resistance is gone (the market is now open) and the waters that just spewed about have started to channel into a direction. This seems to occur daily between about 10:30 to 11:30 am each morning. The news is getting digested. Maybe more news is coming in or maybe it's just lunch time. The effects of the news are being analyzed, log jams are broken and new paths start forming. Frequently this is a short lived peak or bottom and a V shaped reversal. These are times I can consider making some money. If it is a short lived top, I might sell into this or if I think this was a downtrend that will not last, it could be a good time to enter a position.

During the middle of the trading day, the least amount of resistance is evident as stocks start moving in a more consistent direction and there is no longer an urgency to change a position. News and sentiment generally drives this time of the day and there is plenty of time to make a move. Relative to the raging waters once the dam burst, this is generally a relatively smooth path where the channels have been carved out and the logjams broken up (without dramatic news that can alter the course of the water or market.) Trends are becoming evident for the day. If I have conviction in this trend as being a longer term trend, I might consider using this part of the day to change a position but usually I sit this out looking for clues into tomorrow and doing research or looking for news that will turn the course of this river.

The last part of the day again, has much more resistance as it builds up to the close. The 2:30 to 4 trading hours can once again, move the markets quickly as resistance builds up again. The waters have traveled downstream and as now finding all the niches to store water have been filled and uphill gravity becomes a factor and log jams start building up again. The traders, knowing the market will close soon are getting positions ready for the following days or taking profits and cutting losses during this time period and many rallies are broken here as well as many decline reversals are seen during this time period. The closer we get to the resistance of the market close, the more activity we generally see. When I am taking profits, I might wait until close to the 4 o'clock close to maximize my profits where the most resistance is. When I am trying to establish a new position, I am much more likely to try to buy in around 2 before the market resistance starts creeping up and inflating prices.

After hours trading gets a short note here. With very few relative buyers and sellers, the resistance is extremely high and this the spreads between the ask and bid prices can be outrageous. In effect, there is nowhere for the water to slow so it just splashes around a bit. I typically will not tread in this area but if I do, I will have very tight limits on my transactions.

Note that this seems to be true during a rally or decline (excluding important news, which I admit can be frequent and negate this pattern for the day.) The direction is not really important here. It is the resistance patterns and reversals or directions that I am referring to.

In my opinion following the path of least resistance patterns can help you find the right times to get into and out of positions on short term trades or find better pricing on longer term investments.

Happy trading,
Uncle John

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Profiting from Human(a) Disasters

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Today I established a position in Humana after it took less than 24 hours to go from $62.80 to around $34. I know the story. Healthcare is immune to recession (but not to congress.) But, after a somewhat large management mistake in pricing, they reported they will have to reduce earnings for 2008. This comes less than a month after reporting good earnings and giving good forward guidance.

Long term (2-3 years) this may be a buy and hold but I am suspicious of management that can make these types of mistakes and wipe out about 40% of the market cap in 2 days. I also have to account in the fact that this pricing error can be corrected next year and this is a good business to be in unless congress does something to undermine it. That won't happen for at least a few years as a new president will not likely get a Medicare reform bill passed in the few year or two of his or her (Wow! Never had to say that before) presidency, thus the 2-3 year time frame.

But, markets love to overreact in both a positive and negative direction. I bought in today for a short term trade knowing it should get slight bounce today and will probably try to eek out a 5% gain before selling, maybe even as soon as today.

Today's Fast Money Trade,
Uncle John

EDIT: Got in at 42.50 and out at 45 in about an hour for about 6%. Just a quicky.

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I'd Rather be Playing Poker

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Right now, I am sitting here as I watch my streaming quotes gyrate like a drunken hula dancer. Is Bear Stearns going to be the first truly large domino? Is everything of value going to crash just because everyone is struggling to cover calls? Is thing going to continue like it did in the 70s or in Japan in the 90s?

Right now, I really can't answer any of those questions. I'm even afraid to make a guess. I have heard that when there is blood in the streets like this, it usually signals a buying opportunity of a life time. There's the catch, "usually." Everything thing in the market seems like a complete gamble now. The financials could tumble over like dominoes. Most stocks of good value are in the tanks due to merciless selling to cover margin calls. The "defensive stocks" have not been very defensive as if MO, JJ, KO were not going to make money next year. This is like playing at the roulette wheel. There is no skill involved, just place your chips on the table and watch the little white ball go around the wheel. Where will it land? Nobody knows. The one thing I do know is that the best bet on that table is the house for collect 2/37ths of virtually every bet (even more on some.)

I have an idea. I've been playing house game poker since a wee lad though high school and college and many years after that. Then after the poker boom in 2003, I started playing No Limit Hold'em very seriously. I got good enough to play with real money online and learned I can carry my own. I have personally played against at least 1 World Series of Poker Main Event winner and many other famous money players.

The thing I love about poker is, if you know what you are doing, it's not really gambling. Yes, the house gets a cut of the pot. But you are not playing against the house, you are playing against the other people at your table. (I will withhold the argument that online poker should be legal and based in the US to collect taxes and to be monitored and regulated for today.) Poker is a skill game. It's about calculating pot odds, knowing your outs and reading the other players. When a player panics at the table, they will lose money going "on tilt." If they keep cool and make the right decisions every chance they can, they will come out ahead even if a decision loses you money in one hand.

Can I actually play? I think yes. I've sat with some of the best in the world and held my own. I've come as close as 23 people away from making a TV table out of a field of over 20,000. I have not been to the WSOP yet but I suspect I will play in that tournament some day. This is what makes me think I would honestly be better off going to Vegas with my portfolio today then staying invested in the stock market. If I played very tight, took my time and made good decisions all day long I could grind out a better percentage then even the short ETFs.

Why don't I do it? Stress has always prevented me from even considering this. If my nerves shattered, I would probably lose it all. But watching this market is worse then holding pocket aces on an all in against a solid flush draw with a lower pair with 2 cards to come.

Today, I don't know which stress would be worse. At least I know the rules won't change mid-game like they are in finance and the market in general recently. Would I like to be sitting across the felt from Chris "Jesus" Ferguson again with my entire portfolio this time (instead of a few hundred bucks?) Would I like to take my chances against Doyle or Phil or Johnny or Daniel?

As odd as that seems, today, that prospect seems more comforting and less stressful that watching the market play out today. I feel like I'm holding pocket aces and suddenly, the dealer declared that aces are low in this hand.

Good luck to all,
Uncle John

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Beware the Quadruple Witching Hour

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It's going to be a strange one today. Stock options, stock index options, futures and index futures are all expiring today which typically means some weird patterns and rotations out to the next month. I messed up good and forgot that the markets were closed tomorrow for Good Friday so my positions were not really ready for today. I guess I'll just have to eat the loss and try pick up some cheap stuff later today and try to recoup next week.

At least that means I have more time to watch the NCAA!!! ;-) Go Illini! Umm, opps, they didn't make it. Who did I pick to win it all??? Let me check my sheet. UCLA! Go Bruins! You heard it here first.

19 days and counting until the Cubs start their trek to winning the World Series. This is the year! (Just because you are delusional doesn't mean your projections won't happen. /grin)

Happy Easter, Passover, or whatever you may celebrate,
Uncle John

P.S. Friends don't let friends trade stocks during March Madness! (I know I'm gonna suffer for it this week.)

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QOTW - Dancing on the Edge of a Knife with (GS)

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In response to the question of the week about Goldman Sachs:

I will agree (GS) looks to be the best of breed in the financial sector, certainly at least in the investment banking side. It was genius to short the sub-prime mess while selling the same product to others or is that called sleazy? Either way though, it didn't seem to be illegal. Their numbers were better than expected but hardly good. The bar had been lowered so much by reducing expectations, that it would really have been a disaster to have missed earnings. So far, their name has been untarnished, their trading desk seems to be doing well in this market and they have held their price better than most of their competitors. These all seem like good signs to me. But I don't think it is that simple.

Usually when one or more companies get dragged down, their entire sector goes down and trying to fight that trend is futile. This has been the case for GS to date. There are other good names here too like JPMorgan that just got a steal that could pay off in spades for year to come with the purchase of Bear Stearns (assuming there are no more legal complications from Bear Stearns shareholders that seemed determined not to take the offer.) GS should also pick up some business with the imminent closing of (BSC).

In a time when a rumor can cause a run on a bank or take them out, anyone invested in these companies are playing with fire. But, risk is where the profits are and if you can stomach it, these financials have been beaten down so badly that when the worm turns, they are due for a big run. To me, the questions are who and when? Who do we pick to invest in and when do we choose to do so?

There is an interesting fact to mention here. The investment banks and the commercial banks use two different accounting methods. The investment banks use a "market to market" approach that means they have to markdown (or up) their assets when similar assets are traded. This means the investment banks have to take the big write-downs faster than the commercial banks which use an accrual accounting method. The hidden writing on the wall here is that the commercial banks may not have shown the public how bad it is yet as their losses may still be hidden in accruals. The flip side of this argument is that the markdowns are too extreme and when the liquidity comes back and these assets can be priced better, there should be significant write ups. This would also mean the commercial banks accruals get reversed and the paper losses that he investment banks suffered may never happen to the same degree at all for them.

We are dancing on the edge of a knife here. If the commercial banks take a big hit as the accruals pile up, the investment banks like GS can still take a big hit as the entire sector goes down. It also seems that no bank is truly safe at this point in time. As Bugs Bunny used to say "Hare today, goon tomorrow." The Fed has proven it's willingness to preserve the banking system at virtually all costs (as I believe it is mandated to do) but that does not mean it will take pity on any bank that stands in the way of stability. Witness Bear Stearns and the Fed's participation to virtually take the bank down to prop up the system as a whole. Was BSC really only worth $2? I think most people know the answer is no. They were obviously worth more than that. (A moment of silence please to morn the non-executive employees of BSC and their retirement portfolios and careers.) But that was the number that was needed to make things happen so it became the target number. Technically, its not a $2 per share offer, it is a stock swap for JPMorgan shares and as JPMorgan goes up in value so does the offer but not by much considering it's low starting point. I also have to love the observation that Dylan Rattigan made that JPMorgan paid less for Bear Stearns then the Yankees paid for A-Rod! /grin

To wait until this clears up may mean missing a huge part of the recovery and run up. To jump in now may mean taking a big bundle of risk with a possible hefty return or loss. The general consensus on the street seems to be that it will take the financials to lead the way to a market recovery. Without them, the market will clearly either stagnate or continue it downward trends.

My personal risk tolerance does not lean me towards buying GS as these prices or at this point in time. Once the commercial banks report in the next few weeks and the rate cuts and Fed actions have been digested by the market, we could very well see a quick leg down for the financials again, especially if someone else gets into trouble. (Lehman Brothers?) Both Lehman and GS got a negative outlook and possible downgrade from S&P today. GS has also jumped almost 40 points in the last week and that probably was an over shoot.

If I were to buy into GS, it would be at a lower price point as it could very easily retest its 52 week low of $140. A price point of closer to $150-$155 and a few weeks of more earnings, especially the commercial banks with no more bad news (failures, runs, huge unexpected write downs etc...) would make it interesting but still, very risky with only the possibility of a high reward. My prediction is we will see Goldman Sachs back at the $150 range and some point next month and only then, based on the news could it be worth dipping a small toe into the water with maybe a quarter position and look for opportunities to buy dips over the next 3-6 months. Until then, the knife is way to sharp for me.

OK, time to get back to basketball and a weekend of beer, pizza and poker. (Hmmm, maybe I should by BUD instead.)

Good luck to all,
Uncle John

Disclaimer: I just bought a large short position with SKF at this time in the game. This is a big risk and I could get hammered on it. I bought in recently after the financial run up due to earnings from GS and others this week as well as the Fed and GSE actions and the short squeeze due to the options and futures expirations. The reason I believe the downside risk is still there is the very quick run up of the US banks, as well as the European bank situation. While I do not believe they are represented in the SKF, I do believe bad news from Europe will take the sector lower and I don't believe the European banks have been as aggressive taking write-downs and we will likely see some bad news from them within the next month.

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