Crisis of Competence
September 20, 2010
Good morning. Firstly, I extend an invitation to all of you: If you are interested in learning more about my managed money program, the Protected Index Program (PIP), PTI Securities & Futures is hosting a no obligation, no-pressure, complimentary In-Office Protected Index Program Seminar on Saturday, October 2nd, 2010, in a classroom overlooking the CBOE at PTI’s Chicago Loop Office from 9:00am to noon. A continental breakfast, coffee bar and classroom materials will be provided. Topics covered include: review of option basics, investment program objectives, diversification solutions, SPY basics, index portfolio examples, option time decay and PIP portfolio example, strategy expectations and objectives and longer-term fixed income products. Space is limited and all attendees must register at www.PTISecurities.com/Education.htm – Come out, have a cup of coffee with me, and meet some of PTI Securities’ experts.
It was another positive week for the overall market last week, as the SPY finished up 1.01 points to finish at 112.49 (1.1%). This level, roughly 112.50 to 113, was reached both in late June and early August, only to fall back. Will the third time be the charm for the bulls? The VIX was essentially flat on the week, hovering right around 22, and interest rates inched up a very small amount (TYX up .04%). So, by and large, the week was an inside week and a week won by those short premium. Even though it was tempting to go long some premium in the SPY, given the narrowing range and seasonal surprises September can bring, I am glad I did not. It would be tempting, given some of the seasonal studies of market rallies into mid-term elections, and the length of time we seem to have been in this range (feels like forever), to lean into the upside with some of this relatively cheap premium. On the other hand, the last few years have shown, so far, that we do not seem to be bound by any of the old trends or seasonal tendencies.
One area we will be doing some research on this week is in some of these mid-level technology companies that seem to be being bid up by a lot of the cash rich large technology companies. It seems like anyone with a niche tech business that compliments HPQ and ORCL is being looked at, and the premiums being paid so far seem excessive (but just right if we happened to own some). I think a lot of these companies have been driven too high already by this fever, but we intend to spend some time on it. There are actually some interesting phenomena in some of these stocks that bear watching. For instance, take a look at what is happening to RIMM. Conventional wisdom has AAPL killing them going forward on phones, and the amount of free press AAPL gets in relation to RIMM is newsworthy in itself, but the company has some serious products and is nosing under nine p/e. I am not sure it is a flat out buy, but it sure seems like they have some growth potential and they make money. One of the hardest things about trading, and valuing stocks (especially since the advent of the dot com era) is the amazing premium or discount to traditional fundamental values of companies based of what I would call reputation or (almost) PR. It seems like this generation of investors is really willing and able to maintain huge fundamental premiums or discounts to stocks that they like or dislike. Companies like Ebay and INTC carried huge premiums vs. price/earnings or price/revenue for years, and any attempt to fight it was a disaster for your account.
Right now I have RIMM trading around nine times earnings, and revenue per share over $30 on a $46 stock. AAPL is trading over 21 times earnings and has revenue of $69 per share on stock trading over $275; with people drooling on themselves for soon to be prices of $300 to $350 per share. They may well be right, and to be truthful have been right about AAPL so far, but you are really paying up on fundamental terms chasing that opinion. What does it say about investments going forward, when you start to compare peoples’ willingness to invest in various industries? Look at the infrastructure area (remember when the administration was taking about huge projects and talking heads were telling you to buy those stocks?). I have Foster Wheeler (FWLT) trading at a 9 P/E, and FLR at 12.6 ($2.30 revenue per share). Does that mean forget about infrastructure and just concentrate on overseas phone and tablet sales? Maybe it does, but it does not make it easy. There is no question, it seems, that certain stocks are in favor, and that some of those stocks in favor do not compare fundamentally well with other stocks, even in the same industry. So far, trying to trade against that valuation has been expensive.
Where does the current political climate fit into the current investment climate? Clearly one of the biggest questions is what might affect interest rates and the seemingly huge bubble in longer-term bond pricing. How long will the demand for funds remain low and how long will the Fed maintain almost zero costs to Banks? How long will the current administration watch health care costs rapidly advance and still let combinations in the industry continue, while the blame is put on the new Health Care system, which has not really started yet? I have never seen an administration talk as much in one direction; yet let things happen that totally undermines their (published) position. If you talk ad nauseum about jobs, you do not cheer every merger among competitors that will do nothing but cost jobs.
I really do believe that we continue to have a crisis in competence in governance at every level in this country, maybe brought on by a crisis in competence of voters. It has seemed clear to me for a while now that the most qualified and accomplished do not run for office anymore. Maybe it is the limelight, maybe it is the fact that if you have had success over time in various aspects of life there may have been a failure or mis-step as well, or a divorce with unkind words. Whatever it is, we seem to be getting people that have really accomplished nothing before getting a position of huge responsibility. Take the last three winners for President, getting younger and less accomplished all the time, even though all (Clinton, Bush, and Obama) I believe to be bright and decent people. Maybe they just got the job too young, or maybe they were, and are, all face people for those who are really in charge, or something. Take a look at those the supposed Tea Party people are touting, some of them (take the reformed “no sex” lady in Delaware) really incredible in their lack of knowledge and expertise for the job they are seeking. Why does the electorate think lesser talent is the answer, I think maybe we elect someone competent and maybe not worry about some skeleton from 40 years ago if he or she has one. If Obama was so good and really ready for the office, and I voted for him, the Tribune would not have had to slimily discredit his original Senatorial opponent with some crazy divorce tabloid like exposure. I will say this; if the people of Delaware elect that lady I will be thinking of investing in a second home somewhere overseas. Or maybe she will win and resign after two years and join the rubber chicken crowd for cash with Sarah, or supposedly write a book? Can’t wait for that literary classic.
As for the market, I think we have a chance of the market breaking out a little to the upside this time. For whatever reason people are declaring the problems in Europe over, all of a sudden the decision to let European Banks have many years to meet reasonable capital requirements is being spun as a positive. This morning Goldman Sachs is even recommending that people buy Greek debt. If you believe that the Greek economy has turned the corner due to the austerity programs forced on them, then you really would have to question economic policy here, as our program is anything but one of austerity. Trading remains slow, and it is, right now, a faders market. By that I mean that if the market rallies, you sell calls into it, or if it drops, you sell puts into it, and at the end of the day both the calls and puts are down. That is a real hard market for retail investors to trade. We can get to the same place by doing some time spreads in the weeklies, but we have to make sure we get some edge in volatility to give us a good chance at some winners. Last week there was not much edge so we stayed away, maybe there will be something this week that stands out. There are a lot of economic numbers out later this week, so trading should pick up as the week progresses.