Sunday, July 31, 2005

India - The next big player

Interesting thoughts from John Mauldin - he is the dude who wrote the classic Bull's Eye Investing.

Short, but the observations are nice.
India - The Next Big Player

The Appeal of a Resilient Market

Interview with S & P's Steve Biggar. I personally am not currently bullish on the market and am expecting a 5% pullback - if not something sharper. Something's to note in his notes are "Market's ability to handle $60 oil". I know I don't know as much as these guys do - but there is a huge disconnect in what he says and what I expect.
The Appeal of a Resilient Market

Friday, July 29, 2005

More on the Chinese Yuan revaluation debate...

"The balance of convenience"...

Awesome article by Andy, the piece on Reserve Bank's attempt to copy Greenspan's way with words was hilarious. The article puts into perspective that both Chinese and Indian officials have a ways to go to begin playing with the big boys and start gaining some respect in the fin community. Their current statements don't help this goal in the least bit.

Bloomberg.com: Bloomberg Columnists

More on VIX...

... from my subscribed newsletter.


Index option volatilities have followed actual volatility lower.
While there is much conjecture on what has caused this low
volatility period we’re in, historians suggest that low interest
rate environments are accompanied by low volatility in the stock
market. That might not explain why volatility is so low, but at
least it is better than nothing.
Don Fishback (http://www.donfishback.com) recently
conducted a study which had some interesting results. Noting that
the current actual (historical) volatility of $SPX was at its lowest
point in 20 years, he was curious to see just how low it was,
compared with longer-term histories – going back 50 years or so
on the S&P 500. The results were rather startling. Even though
we think volatility is boringly low right now, it was actually lower
than this for much of the time in the 1950's and 1960's. In fact, it
was almost always lower than the current volatility. After 1972,
however, volatility was higher (except for the 1993-1996 period).
But the other fact – that low volatility is common in low
interest rate environments – was provided by technician Alan
Shaw. While this may be known in some circles, it certainly isn’t
common knowledge, or else there wouldn’t be so much discussion
as to why $VIX is so low. By the way, the reason $VIX is low is
that actual volatility is low, and the two are highly correlated,
despite the media’s attempts to characterize $VIX completely as
a “fear gauge.” As we’ve pointed out many times, $VIX is only
a sentiment indicator at extremes – usually at market bottoms
more than tops – and most of the rest of the time is merely
reflective of the actual volatility of the $SPX Index.
I realize that doesn’t offer much hope of $VIX increasing
anytime soon, unless the Fed increases interest rates more than it
has. There obviously isn’t a direct correlation, though, because
$VIX has been moving lower this year while the Fed has been
raising rates. But perhaps the correlation is stronger with longerterm
rates, which haven’t moved higher yet (the “conundrum”).

Thursday, July 28, 2005

POSCO

Hey guys this has been in the validea hot list for ever. I recommended it some time ago and recently I noticed it has been going up. It has really attractive valuations. I still feel this will be really good for our portfolio.

You can read more in validea. Here is from the recent newsletter:

POSCO (ADR)

Strategy: Value Investor
Based on: Benjamin Graham

POSCO manufactures and sells a line of steel products, including hot rolled and cold rolled products, plates, wire rods, silicon steel sheets and stainless steel products. The Company produces over 28.9 million tons of crude steel. In Korea, POSCO produces all of its steel at Pohang Works that has 12.87 million tons of annual crude steel and stainless steel production capacity, and Gwangyang Works that has an annual crude steel production capacity of 15.83 million tons. The Company sells primarily to the Korean market, with Korean sales accounting for 68.9% of its total sales volume of steel products during the year ended December 31, 2003. POSCO's exports in 2003 accounted for 31.1% of its total sales volume of steel products. The Company's major export market is Asia, with China accounting for 36.8%, Japan 18% and the rest of Asia 23.7% of its total export volumes in 2003. Other products include lower value-added, semi-finished products, such as pig iron, billets, blooms and slabs.

Guru Score: 100%



SECTOR: [PASS]

PKX is neither a technology nor financial Company, and therefore this methodology is applicable.


SALES: [PASS]

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. PKX's sales of $55,187.1 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: [PASS]

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. PKX's current ratio of 2.10 passes the test.


LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS]

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for PKX is $1,988.2 million, while the net current assets are $5,325.1 million. PKX passes this test.


LONG-TERM EPS GROWTH: [PASS]

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. PKX's EPS growth over that period of 267.1% passes the EPS growth test.


P/E RATIO: [PASS]

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. PKX's P/E of 4.23 (using the current PE) passes this test.


PRICE/BOOK RATIO: [PASS]

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. PKX's Price/Book ratio is 1.00, while the P/E is 4.23. PKX passes the Price/Book test.


Time to consider options?

U.S. Stocks Face Multiple Threats

At major bottoms in stocks, we often see the volatility indexes at extreme highs; conversely, when the stock market is at or near a peak, we usually see volatility at very low levels.

The VIX, or the volatility index, is a measurement of options premium volatility as it relates to the most important benchmark for institutional activity, the S&P 500. This is also the index and option set that I use when it comes time to take a short position on the overall stock market.

The picture this current view portrays is really quite shocking. Despite all the aforementioned risks that are obvious to anyone willing to take off their rose-colored glasses, volatility is at an all-time low. I assure you, this is not a sign of health but of impending disaster for stocks.

Since there is such a diminished view of risk, and since this affects option premium prices, when it comes time for us to take on put options once we achieve critical mass readings in the model, these premiums will be relatively very low.

Consequently, it is entirely possible that we may be able to achieve relatively more leverage than ever as we take on deep-out-of-the-money positions. This is a real bonus that one could not always expect to see just before a market meltdown!



I remember from the options newsletter where it was recommending trading volatility instead of stocks. If I understood that correctly then this is the right time for buying options. If the current volatility is low as the article claims we should straddle major indices such as S&P500 based on the assumption that whenever the market gets back to its average volataility we can make money irrespective of how the market goes.

Wednesday, July 27, 2005

Are you CEO Material?

This is a quiz more of the history of capitalism rather than an aptitute test. Its amusing nevertheless.

http://encarta.msn.com/encnet/departments/elearning/?page=ceoquiz&Quizid=98&GT1=6672

Sunday, July 24, 2005

China's Revaluation

A small move, a 2.1% rise against the dollar. But this is bound to put upward pressure on long-term interest rates. Here is a nice discussion in WSJ on the implications of this move. Couple of interesting ones on the same topic:
An Awesome Move By China
China lets the yuan rise—but how far?

India and America

Together at last . Also on the same topic India As A Global Power . Its a long one and haven't read it all but looks quite interesting.

Monday, July 18, 2005

Time to raise the equity risk premium

"The Importance of London Attacks"

We believe that the financial markets may not be prepared to weather such a scenario. We are not predicting this scenario, mind you.

Rather, we are arguing the case that the financial markets do not appear ready for the type of unpredictable, debilitating, long-term warfare that has been a fixture in the Middle East, but has been, up until now, far removed from the major metropolitan areas of Europe and the United States.

This geographic dynamic may have changed in London last week, a point lost on many investors. The investment implications: perhaps it's time to raise the equity-risk premium. Also, stay long in stocks that directly or indirectly address homeland security.


Do you guys have any good security related stocks in mind?
The Forbes article posted by Pankaj had recommended SBL which is trading at its 52 week low maybe a good one. I don't like the valuation but growth potential is there.

Friday, July 15, 2005

CNOOC, CVX, UCL and the Congress

Everyone has obviously been hearing this story a lot in the news lately. It's got me thinking (not something I do on a regular basis). MNA activity almost always presents "arbitrage" opportunities. For investment banks and other insiders privy to such deals, the arbitrage opportunities are actually practical or even profitable. But the high profile, and public nature of this transaction, the money involved, and the political factors all combined, this, in my opinion, is a very opportune climate for some intense but clever speculation. The hedger in me just cannot resist at least hypothesizing some basic outcome scenarios. So here we go.

There are really only two scenarios on the surface of the deal (simplified).
  1. Congress decides not to meddle and let the market sort it out, in which case CNOOC's bid, which is at a significant premium over CVX's offer, will almost definitely win. After all UCL's shareholders are most likely to care how much they get for their stock today as opposed to the hopes/expectations that an acquirer might improve the management and deliver better dollar/share int he future (regardless of who the acquirer is). Thus CVX is to loose and UCL is to win because they are getting a lot more for their shares than the market is paying.
  2. Congress decides to step in and stop the acquisition attempt on political grounds. This would mean the CVX wins the bid (since the two parties had already agreed and some time had already passed). In this case, CVX stands to gain at least in part due to the perception that they got a good deal on UCL - only because there was a higher bidder who lost out. The primary gain though for CVX is the oil resources of UCL.

There are a couple more fringe possibilities too. This, in my opinion, is more likely closer to reality.

  1. Congress dilly-dally's (as usual) giving mixed signals, expressing concerns over national security, and then expressing faith in capitalism and markets, then expressing communistic intentions of China, then again stepping back because of corporate lobbying and/or because of local job situations. This may go on until long enough that the deadline passes by, CVX does not counter bid and CNOOC wins the deal. The stakes will be too high to block the acquisition after that. UCL wins in this case because it got the higher bidder to pay its shareholders.
  2. CVX figures out that Congress is just playing politics, lobbying is not worth it, and raises its bid to match or beat CNOOC's bid. In this event, we enter a bidding war. The argument that CVX will not raise its bid can be countered by the possibility that CVX may bid just to push CNOOC to bid even higher and force them to overpay (this happens in auctions and bidding often, when one party knows it cant win, it engages in a proxy bidding war just to inflate the price for the eventual winner and thus hurting the winner). In case of a bidding war, it is likely CNOOC decides that it does not want to raise its bid beyond a limit and backs off, CVX ends up with the spoils at a higher price than they would have wanted to pay. In any case UCL wins. CVX may loose or the effect of bidding war on CVX can be neutral (in the more likely case that CNOOC wins).
  3. CNOOC may up its offer even more (without any incitement from CVX or Congress) just to sweeten the offer and make it irresistible. Don't laugh, the Chinese have been known to do such things. An offer you cannot resist? Possible.
  4. A third or fourth or fifth party emerges and joins the fray to takeover UCL. This is like certain mammals mating rituals. Exxon-mobil, Shell etc could make offers.

So the question to ask is, what is a good mean to base some hypothetical and speculative bets on this story? Lets look at the numbers first.

  1. CNOOC's current bid stands at roughly $67 per share of UCL.
  2. CVX's current bid stands at roughly $60.65 per share of UCL.
  3. UCL shares are trading at $65.32 - thus some of the euphoria of CNOOC winning may be priced in, part of the euphoria is speculation that either CNOOC or CVX may bid higher. Wall Street is betting on a higher bid from CNOOC or Chevron.
  4. CVX shares are trading at $56.41.
  5. CNOOC's US listed shares are trading at $60.88.
  6. UCL shareholders will vote on CVX proposal on Aug 10.
  7. UCL is saying it will take as much time as necessary to consider CNOOC's bid.
  8. Unocal is the No. 9 U.S. oil company. Chevron is No. 2, after Exxon.

So what are the public arbitrage opportunities present here? Are there any at all? Here's my opinion and I welcome your comments, opinions arguments for and against my speculation. I am going to make a speculation based on certain axioms I beleive are true:

  1. Nobody settles for a lower bidder if a higher bidder exists. So UCL saying that its taking its time in considering CNOOC's bid only means that they are waiting to see if CVX or CNOOC itself bids higher or if any other companies add to the bidding. The other thing they are trying to assess is what Congress will do.
  2. So far Congress has passed only rhetoric (in other words a lot of bloated gas from those fat old farts). But, I am not sure which way to go on this one, so I am going to punt and hedge my bets on this variable.
  3. When a bidder knows he is not going to win, he may most certainly raise his bid in order to hurt the next winning bidder. This avoids from making him look like a loser (having quietly let someone else win) and also hurt the winner. Who wins? - the one who is being paid on the bid.

Based on these three assertions I recommend the following:

  1. CVX is already beaten up, it may be beaten some more if they re-bid, but they will likely let UCL pass them by in that case. Their shares are bound to rebound should they loose the bid. There is a slight down side risk if they win the risk (but I beleive most of that risk is priced in). I say, buy some August/Sep Calls for CVX at strike $54.
  2. CNOOC's listed shares dont have any options - so I am not going to make any trades on CNOOC.
  3. UCL is set to win if CNOOC wins the bid (UCL share price has this priced in). If CVX wins or congress steps in, UCL share price will drop on knowledge/speculation CNOOC may not win the bid. But downside is potential is limited to around $60. I recommend hedge your bets and straddle here - Buy Aug 64 Calls and Buy Aug 69 puts.

Would love to hear your comments. Thanks for listening.

Speculatively yours,

chompi.

Thursday, July 14, 2005

Structured Products

Has anyone heard about this? I learnt about it through my options subscriptions. Merill Lynch offers Structured Products called MITTS and there was a positive recommentation on BBH or BHM (biotech holders) structured products both from Merill.

Structured Products

Wednesday, July 13, 2005

HCA lowers guidance

HCA Expects Soft Admissions
To Hurt Second-Quarter Earnings


"People have made a lot of money [on the stock increase] and don't want to stick around and figure out what's going on once they get a negative data point," said Frank G. Morgan, a health-care analyst at Jeffries & Co. in Nashville. Mr. Morgan said he wasn't willing to "throw in the towel" on the industry yet. He rates HCA a "buy," and doesn't own the stock.


S&P Downgrades HCA to Hold
We got in on this one at the right time...do you guys guys think its time for us to close our position and then look for an opportunity later on to get back in. I feel we should either put a stop limit it or buy some protective puts to lock our gains.

Tuesday, July 12, 2005

Weekly Strategy Discussion

Searching for a Home In Atherton, Calif.? Look Out for Googlers

Monday, July 11, 2005

Screw Osama, I'm Buying Stocks - Forbes.com

Wednesday, July 06, 2005

Market Statistics 07/06/2005

CBOE Market Summary for 07/06/2005


Total Put/Call Ratio : 1.12
Index Put/Call Ratio : 2.50
Equity Put/Call Ratio: 0.52

BXM : 685.13

VIX OPENING VALUE: 11.67
VIX HIGH VALUE : 12.33
VIX LOW VALUE : 11.54
VIX CLOSING VALUE: 12.27

Weekly Strategy Discussion

The weekly strategy discussion...
LEAPS® Covered Write

Tuesday, July 05, 2005

Salt lake real estate - interview with the County Assessor

July 5, 2005, 10:07 am on KCPW 88.3 FM - Bubbles
Salt Lake is part of the nationwide real estate bubble that has investors turning from the stock market to the home front, literally. Does that mean a windfall in property taxes? How about entry-level home prices -- are they rising? Is buying a home still an affordable option for the average Utah family? Midday Metro gets the skinny from Salt Lake County Assessor Lee Gardner and Jaren Davis, president of the Utah Association of Realtors Board of Directors.

Listen live or archived at http://www.kcpw.org/

Saturday, July 02, 2005

PIMCO Bonds - IO July 2005

Unbelievably Impressive!!
Bill Gross - July 2005

Friday, July 01, 2005

More Power to your Portfolio

Powershares in American Express

The Optionetics Trading Approach - Articles

EBay bidder to pay $351,100 for Buffett lunch

Follow up to the auction posted on EBAY. The proceeds go to a chartity. Still, I think 351,000 is a LOT!
EBay bidder to pay $351,100 for Buffett lunch