Another devil in the financial crisis

From Jubak’s 9/23 article:

The global market for derivatives has a notional value of $455 trillion. The market for a single kind of derivative called credit default swaps (CDS) comes to $62 trillion. A single company, the recently rescued AIG, was counterparty to $422 billion in derivatives. That’s just a tad below the low-end estimate for the government buy-up plan as a whole. For a single company.

But the reasons that it will be harder to fix the derivatives market than the mortgage market don’t stop with size. There are three other very significant obstacles to a fix:

  • There’s no political lobby to throw its might behind fixing the derivatives market. In the mortgage mess, the banks want it fixed, homeowners who are under water want it fixed, and elected officials who want to get re-elected want it fixed. The only dissenting voice comes from the taxpayers who will pay the tab, and we’ll get rolled as usual. On the derivatives side, the financial industry has successfully fought against regulating the derivatives market. In 2000, then-Sen. Phil “Americans Are Whiners” Gramm succeeded in getting the derivatives market declared off-limits to regulatory agencies in the Commodity Futures Modernization Act. When Gramm left the Senate in 2003, he went to work for Swiss bank UBS (UBS, news, msgs). With that kind of cozy history, I don’t expect to see the financial industry take up the call for more regulation of the market.
  • Derivatives are hard to understand. The reforms needed to fix the market are even tougher to grasp. One big problem, for example, is that most derivative contacts aren’t traded on any exchange. They are unique, one-off contracts between an individual buyer and seller. Without a market to act as a clearinghouse, there’s no way to know how many contracts any individual seller has written. Which, of course, turns out to be crucial to figuring out which sellers can stand behind which deals. And without a market, there’s really no way to price these contracts. So when a company such as AIG or Lehman faces a need for capital, there’s really no way to figure out what any nonmarket contracts are worth. Fixing this problem would require negotiating some degree of standardization into derivative contracts so that more of them could be tracked on existing over-the-counter exchanges. That would require tough negotiation by a politician with the smarts to understand the industry and the determination to see it through, although the political reward would likely be slight. You know anybody who fits that bill?
  • And finally, it’s much easier to demonize the derivatives market than to fix it. Derivatives do allow traders to speculate on the direction of just about any price, and the high-profile presence of speculators in the derivatives market is enough to turn general opinion against the market as a whole. Who wants to reform the place when it’s easier to preach against it?

MIDD update: He is increasing his target for Middleby to $75 a share by October 2009 (I am long MIDD)

More on this topic (What's this?)
State Regulation of Credit Derivatives
Credit Derivatives Market Shrinks 12% as Dealers Reduce Trades
Coming Soon: The 600 Trillion Derivatives Emergency Meeting
Read more on 2008 Financial Crisis, Derivatives at Wikinvest

Jubak: Botched rescues are killing markets

In Jubak’s latest article, he summarizes recent news at CHK and to be honest, has gotten me even more excited about the stocks potential. At current prices I would rate it a strong buy (I am long CHK):

The plunge in the stock prices of natural-gas producers has been so mesmerizing that it’s been hard to pay any attention to positive fundamental stories from companies in the industry. For example, good news — and I mean really good news — from Chesapeake Energy (CHK, news, msgs) has been completely overshadowed by the stock’s 43% plummet from July 2 through Sept. 17.

The big news most investors didn’t hear was the company’s extremely bullish take on newly discovered natural gas in the Haynesville shale formations of Louisiana. Chesapeake Energy CEO Aubrey McClendon told the Lehman Bros. CEO Energy Conference on Sept. 2 that Haynesville will eventually become the largest gas field in the United States and the fourth-largest in the world.

The field, McClendon said, contains about 800 trillion cubic feet of natural gas, with about 30% to 35% of that recoverable. By comparison, Chesapeake’s total proven natural-gas reserves totaled just 11.5 trillion cubic feet as of March. The company holds leases on about 500,000 acres in the Haynesville formation.

I certainly can’t call the bottom in the price of any natural-gas stock, but on any fundamental basis I’d call Chesapeake Energy a buy.

The company is well-protected from falling prices for natural gas. As of the end of the second quarter, the company reported it had hedged all of its 2008 production and as of September had hedged 75% of 2009 production at $9.75 per million cubic feet and 45% of 2010 production at $9.50 per million cubic feet. With natural gas at $8.20 on Sept. 17 and supply set to rise, Chesapeake’s hedges look like good insurance.

The company has also found an innovative way around the current credit crunch by setting up joint ventures that have raised $2.5 billion to develop the Haynesville and Fayetteville natural-gas fields.

As of Sept. 19, I’m leaving my target price for Chesapeake Energy at $62 a share but stretching out my timeline to December 2009 from December 2008.

More on this topic (What's this?) Read more on Chesapeake Energy at Wikinvest

Jubak: Feds bailed out China, not the US

Jubak’s 9/12 article:

“The Fannie-Freddie rescue will work out great for emerging markets abroad, but it’s going to kill us here at home. You might find some relief by investing in a handful of recommended foreign stocks…..

What should you buy once you think you’ve heard the all-clear? I’d break down my potential purchases this way:

  • Stocks of domestic Chinese companies that should see the direct effects of any government efforts to stimulate growth. Two that I’m going to add to my watch list (on the left side of this page) are China Medical Technologies (CMED, news, msgs) and SunTech Power (STP, news, msgs).
  • Stocks of domestic Brazilian companies in order to reap the benefits of accelerating growth in that country and continued improvement in Brazil’s creditworthiness. (Brazil’s credit rating going up as the credit rating of the U.S. is under pressure? Who would have thunk it?) Two that I’m going to add to my watch list are Jubak’s Picks Petrobras (PBR, news, msgs) and Banco Itaú Holding Financeira (ITU, news, msgs).
  • Stocks of suppliers to developing markets. For example, any recovery in the Chinese steel industry will be a huge shot in the arm for Australian iron mining companies such as current Jubak’s Pick Fortescue Metals Group (FSUMF, news, msgs).

As of Sept. 12, I’m cutting my target price for Fortescue to $9 a share by July 2009 from my prior target of $15 by October 2008.

As of Sept. 12, I’m keeping my target price at $29 a share [Thompson Creek Metals] but stretching out my schedule to September 2009 from December 2008.”

Disclosure: I am long FSUMF

Markman: A desperate but necessary bailout

Jon Markman’s recent article summarizes the Fannie Mae/Freddie Mac bailout as ‘it’s an expensive ploy to keep the sovereign wealth funds and central banks of China, Kuwait and Singapore from foreclosing on their Fannie Mae and Freddie Mac debt and plunging the U.S. economy into chaos.

Now that Paulson has made his play, Americans are exposed to incredible danger. If that sounds like hyperbole, do the math:

Of the $4.7 trillion in U.S. debt already in private hands through last week, $2.4 trillion, more than half, was held by foreign investors. The Paulson plan to take over Fannie and Freddie adds an additional $5.4 trillion to U.S. debt, of which $1.4 trillion is owned by foreigners. Thus Paulson has committed to doubling U.S. debt and increased foreign exposure by around 50%.

This is plainly a troublesome matter on its face and may affect the country’s overall sovereign credit rating. Now add to this exposure the likelihood of a sharp rise in demand for funds from the Federal Deposit Insurance Corp. and increased demands from the Federal Home Loan Bank system — and consider that the U.S. faces slowing tax revenues from falling incomes amid swelling joblessness and recession — and you begin to understand the size of the risk Paulson is taking in our behalf.’

Jubak: How to share in the dollar’s surge

Jim Jubak’s latest article summarized:

  • If you’re a short-term trader willing and able to time and profit from trends that last for three to six months or so, jump on the dollar rally. I think good times for the U.S. dollar could last three to four more months. The dollar could well climb an additional 10% during that period.
  • If you’re a longer-term investor, I think you use this rally in the dollar as a buying opportunity in overseas equities and commodity-related stocks. From this perspective, the recent rally doesn’t change the long-term downward trajectory for the U.S. currency. The dollar is still in a trading range against the world’s currencies marked by lower lows at the bottom and lower highs at the top. And from this perspective, oil and other commodities are still in a long-term trend that points toward higher prices.

The dollar right now is benefiting from one real trend and one widespread Wall Street belief.

  • The real trend is a perfect storm of bad news from the rest of the world.
  • The widespread belief on Wall Street is that the U.S. economy, having entered its downturn before the rest of the world, is set to rebound first.
  • A rising dollar also puts a virtuous cycle into motion. A stronger dollar makes oil and other commodities cheaper for U.S. consumers and companies to buy.
  • A stronger dollar, however, makes U.S. exports more expensive and will take back part of the gains that resulted from a weaker dollar.
  • Larger developed countries like China and India are signaling attempts at higher growth.
  • A stronger dollar will gradually create bargains in the rest of the world as the outflow from foreign countries to the US gradually reverses course as those international markets begin to look cheap

What do you do as an individual investor? Three things:

  • First, you don’t pile on risk at this point. Holding cash is still smart, and buying stocks with hefty dividends still makes sense.
  • Second, you start looking for bargains in the depressed overseas markets and sectors that have been beaten up as the dollar has climbed.
  • And third, you look for individual companies that have stable and substantial cash flows that they can reinvest in their own businesses at mouthwatering rates of return.

September Portfolio

September Portfolios (9/2 open -9/30 close)

Benchmarks:

SPY 130.03/115.99= -10.80%
QQQQ 46.86/38.92= -16.94%
DIA 116.96/108.36= -7.35%
IWM 75.01/68= -9.35%
MSN Stockscouter: LLTC (33.23/30.66/-7.73%), PNR (37.19/34.57/-7.04%), SY (34.69/30.62/-11.73%), TE (18.03/15.73/-12.76%), DNA (97.98/88.68/-9.49%), CAI (51.45/50.1/-2.62%), EMR (47.48/40.79/-14.09%), GE (28.54/25.5/-10.65%), IPCR (31.81/30.21/-5.03%), AZN (49.41/43.88/-11.19%)= -9.23% return for September

Low Priced Momentum

WEL 3.09 / 1.93= -37.54%
NPSP 8.21 / 7.14= -13.03%
SMMX 11.20 / 9.91= -11.52%
HDIX 10.41 / 9.68= -7.01%
SEAC 8.76 / 9.66= 10.27%
ESIC 3.77 / 3.29= -12.73%
DEPO 4.4 / 3.65= -17.05%
XIDE 12.58 / 7.38= -41.34%
SMCI 10.40 / 9.01= -13.37%
DLM 8.63 / 7.8= -9.62%
TCAP 12.94 / 11.94= -7.73%
AIQ 11.75 / 10.27= -12.60%
return: -14.44%

S&P 500 SELECT

GE 28.54 /
MSFT 27.665 /
AAPL 172.4 /
CSCO 24.35 /
INTC 23.27 /
HPQ 47.18 /
QCOM 53.31 /
AMGN 63.46 /
DELL 21.91 /
DVN 98.88 /
—-
EMR 47.48 /
NKE 61.56 /
ADBE 43.83 /
SYMC 22.56 /
TEL 32.85 /
PSA 90.9 /
EP 16.45 /
FRX 35.95 /
NBR 34.45 /

ELITE STOCKS

DNA 97.98 / 88.68= -9.49%
MSM 52.12 / 46.07= -11.6%
WAB 59.36 / 51.23= -13.7%
return: -11.60%

Scott’s O’Shaughnessy Growth Portfolio

SOHU 76.85 / 55.75
SMMX 11.20 / 9.91
BUCY 67.22 / 44.68
OSIP 50.42 / 49.29
RENT 15.01 / 13.83
SSRX 9.81 / 6.43
SWN 36.93 / 30.54
SMCI 10.40 / 9.01
TTES 55.97 / 37.12
SII 68.36 / 58.64

O’Shaughnessy Growth Portfolio

LDK
NR
DXPE
SOL
SMMX
SOHU
FUQI
CLR
LL
CSIQ

Low Priced O’Shaughnessy Growth Portfolio (trading under $15/share)

NR 8.41 /
SMMX 11.20 /
FUQI 10.92 /
LL 13.40 /
RENT 15.01 /
VDSI 13.96 /
ADPI 12.59 /
VIT 9.24 /
DBTK 13.20 /
SOLF 15.46 /

O’Shaughnessy SAPI SLUGS

NS
ETP
BWP
SXL
PFE
RAI
EDE
DUK
TNP
TEG
PKG
LEG
POM
LLY
LNT
ETH
FL
IP
BCE
WSO

Top Magic Formula 100 Stocks (for more information visit Magic Formula. I am picking the best of the best from the list)

Tier 1
*AYI 44.13 / 41.76
CSGS 19.21 / 17.53
*DEPO 4.4 / 3.65
EGN 56.28 / 45.28
*FRX 35.95 / 28.28
LNCR 33.33 / 30.09
MSFT 27.665 / 26.69
*QCOR 5.46 / 7.35
*SWIR 12.81 / 9.97
LOV 4.23 / 3.9
WDC 27.52 / 21.32
———
2nd Tier

ACN 41.78 / 38
*BBSI 14.55 / 12.85
*BVF 10.81 / 9.77
BA 67 / 57.35
GIB 10.56 / 8.84
*CALM 39.8 / 27.44
FIX 15.16 / 13.36
*DTLK 5.9 / 4.37
*HSII 30.42 / 30.15
*KFY 17.98 / 17.82
*MRX 20.88 / 14.91
UEPS 26.83 / 22.33
*PACR 21.43 / 16.47
RSH 19.27 / 17.28
VGR 18.50 / 17.66
*VPHM 14.533 / 13.12

*also listed in Magic Formula Top 50 stocks

August Portfolio Review

I was a little late to the ball in August making some revisions to my test portfolios, so my test range is August 5th close-August 29th close. Portfolios are below:

Benchmarks:
SPY 128.36 / 128.79 = .33%
QQQQ 45.93 / 46.12 = .41%
DIA 116.01 / 115.45 = -.48% (-ex $.247 div on 8/15)
MSN August StockScouter Top 10: 5.7% — MMSI 20.02/19.36 (-3.3%), CSGP 51.73/52.81 (2.1%), IRIS 16.68/18.52 (11%), VLCCF 29.66/28.98 (-2.3%), RNT 27.86/28.56 (2.5%), CAP 18.39/14.8 (-19.5%), AKO.B 18.17/18.23 (.3%), DBRN 16.39/16.26 (-.8%), NCS 37.46/38.28 (2.2%), CVTX 10.12/11.49 (13.5%)

Low Price Momentum
OPEN/CLOSE
NNBR 14.8 / 16.42 = 10.95%
PCTI 10.39 / 10.11 = -2.69%
SMMX 10.3 / 11.05 = 7.28%
VPHM 12.73 / 14.65 = 15.08%
DTLK 6.04 / 5.94 = -1.66%
GSIT 3.78 / 3.81 = .79%
TTMI 11.71 / 11.98 = 2.31%
TWLL 11.59 / 11.08 = -4.40%
DINE 5.15 / 5.05 = -1.94%
CMZ 9.16 / 8.47 = -7.53%
GMK 11.38 / 11.41 = .26%
ENZN 8.29 / 9.05 = 9.17%
DLM 8.76 / 8.52 = -2.74%
CYPB 7.83 / 6.86 = -12.39%
AXAS 3.33 / 3.60 = 8.11%
——————————–
20.6/15
TOTAL RETURN: 1.37%
TOTAL RETURN OF TOP 10: 1.82%
———————————

S&P 500 SELECT STOCKS

GE 29.25 / 28.10 = -3.93%
MSFT 26.21 / 27.29 (ex $.11 div on 8/19) = 4.12%
CVX 82.49 / 86.32 ($.65 on 8/15) = 4.64%
INTC 23.02 / 22.87 = -.65%
ORCL 22.21 / 21.93 = -1.26
QCOM 55.56 / 52.65 = -5.24%
AMGN 63.69 / 62.85 = -1.32%
OXY 75.61 / 79.36 = 4.96%
DELL 25.11 / 21.73 = -13.46%
DVN 88.9 / 102.05 = 14.79%

SYK 65.76 / 67.19 = 2.17%
CHK 44.92 / 48.4 = 7.75%
ITW 47.80 / 49.61 = 3.79%
ADBE 43.34 / 42.83 = -1.12%
WWY 79.1 / 79.48= .48%
SYMC 22.13 / 22.31 = .81%
STJ 47.5 / 45.83 = -3.52%
TEL 33.15 / 32.91 = -.72%
JNPR 25.99 / 25.70 = -1.12%
EP 16.69 / 16.76 = .42%
TXT 41.84 / 41.1 = -1.77%
AES 15.92 / 15.26 = -4.15%
5.67/22
—————————-
TOP TEN RETURN: .27%
TOTAL RETURN: .26%
—————————–

ELITE STOCKS

DR 30.76 / 31.63= 2.83%
MATK 36.57 / 33.41= -8.64%
PXD 55.40 / 63.17= 14.03%
PXP 51.83 / 53.90= 3.99%
QCOM 55.73 / 52.65 (ex $.16 div on 8/27)= -5.53%
SY 34.05 / 34.41= 1.06%
TE 17.11 / 17.84 (ex $.20 div on 8/13)= 4.27%
WAB 54.24 / 59.07 (ex $.01 div on 8/13)= 8.9%
20.91/8
——————————-
TOTAL RETURN: 2.61%
——————————-

O’Shaughnessy Growth Portfolio

NNBR 14.8 / 16.42= 10.95%
PCTI 10.39 / 10.11 = -2.69%
SMMX 10.3 / 11.05= 7.28%
HCKT 6.1 / 6.4= 4.92%
OSIP 50.93 / 50.50= -.84%
BUCY 58.3 / 69.85= 19.81%
SII 70.71 / 69.7= -1.43%
SLB 95.91 / 94.22= -1.76%
DTV 27.45 / 28.21= 2.77%
BTU 59.47 / 62.95= 5.85%
44.86/10
————————–
TOTAL RETURN: 4.49%
—————————

O’Shaughnessy SAPI SLUGS

VLCCF
YPF
ETP
BWP
OKS
MMP
NZT
RAI
CALM
TSM
NSANY
LEG
LNT
ALE
WGL
WOR
LLY
BCE
WSO
PPG
———————————————

July Low Priced Momentum 2-Month Return July 1st – August 29th

Benchmarks:

SPY 128.38/128.79= .32%

QQQQ 45.81/46.12= .68%

IYY 62.62/63.58= 1.53%

Portfolio:

TMR 2.98/2.71= -9.06

DBRN 13.37/16.26= 21.62

PCTI 9.5/10.11= 6.42

GMET 9.48/6.98= -26.37

NTE 12.93/9.61= -25.68

WIBC 8.51/13.57= 59.46

KEI 9.54/9.51= -.31

NNBR 14/16.42= 17.29

GW 9.04/8.71= -3.65

AXAS 5.4/3.61= -33.15

WEL 2.41/3.05= 26.56

PSEC 13.07/14= 7.12

40.25/12, TOTAL RETURN: 3.35%