Friday, May 21, 2010

If You Are Attracted To Brazil, Buy EWZ

I happen to like Brazil and find many similiarities to an earlier time in the USA. Immense natural resources, export and internal consumption opportunities, population growth, and an expanding middle class. The government is stable, debt manageable, and the future bright. President Lula doesn't appear to be a total socialist.

EWZ is an ETF that tracks the Brazilian stock market. It had an amazing 2009. It has fallen like a rock the past several weeks as speculators have fled riskier assets, i.e. commodities and emerging markets.

If one's investment time horizon is longer than a couple of days, EWZ has merit. At present pricing, it has a distribution yield of about 4%. It is an income play as well as an emerging market bet. The 4ish percent distribution evolves from the portfolio composition. About 60% of the portfolio is invested in preferred stocks. These yielders not only throw off dividends, but are higher up the priority ladder should Brazilian companies start to falter.

The stock price may decrease further from here, but you get 4 percent to wait for Brazil to prosper. And prosper it will. There's too much oil, agriculture, steel, and consuming citizens to avoid growth. Yesterday was the best day in quite awhile to buy Brazil, today wouldn't be bad either. Expect it to go down, be happy if it doesn't, enjoy the distribution, and reap the benefits down the road. In the mean time sit back and enjoy the precision flag twirling half-time show on Brazilian soccer.

Saturday, May 15, 2010

Book Rooms For The IMF In Sacramento this June

What do you do when you have time on your hands and don't get your way? Ask the Greeks. Ask our illegal alien population. Soon you will be able to ask those with their hands out in Portugal and Spain. Why riot of course. Tell the news media the world will end and children will be harmed. Threaten not to vote for anyone that cuts your entitlements. Why would you vote for the SOBs that cut your six weeks of vacation? Riots, riots, riots and we're going to see more. Right here in the good old USA.

California is supposed to have their budget approved in mid June for the 2010-2011 fiscal year. The Governor and the legislature are miles apart. Arnold says all the low hanging fruit has been picked as well as the medium hangers and the high hanging fruit as well. All the easy cuts are history. Republicans refuse to enact tax increases or new levies/fees. Cutting programs that have loud constituencies is all that remains. What do loud constituencies do? Complain to the media and riot.

June ought to be a difficult month for the markets. California's problems aren't new or surprising, neither were those of the PIIGS. But no one worried until they were upon us, then panic set in. First with traders, then politicians. Expect the same to occur this coming month as California deals with its budget and angry recipients and taxpayers. Arnold & Co will hit close to home. It's not some foreign land, it's part of us and it will remind us of all of our own unsolved problems.

If markets don't like uncertainty, then we ought to see some significant downward pressure on stocks as the drama unfolds. Here's the sequence of events: talk of program cuts, recognition of huge deficits and debt, riots, pleading to Washington for help, panic and stock plunge, buckets of money from DC, promises to cut and tax enough to get California's house in order, equities rebound significantly. Bet I'm right.

So, even though they will go down in value also, I'll stick with my income stocks and MLPs, gold and silver positions, long-term hold speculations, and short positions. On the first big bounce back day from last weeks decline, I am going to pitch my index funds and buy a few more puts. I should do more, but I'm often wrong, especially with timing so I always have to hedge my bets. But the future sure looks clear and the picture isn't pretty short, nor long term. Too much debt everywhere and an investor class that has started to recognize that fact and is becoming more fearful daily.

Invest in Sacramento hotel rooms as they will have high occupancy as the media and Obama's henchmen come to town.

Sunday, May 9, 2010

The Circus Starts Anew Monday

The circus comes to town again tomorrow morning. Possibly this evening if the Asian markets get flustered. Later the Europeans will be celebrating a Greek bailout or stewing over the next candidate and the taxpayer footing the bill for the shiftless. The day's stage may be set by the time the U.S. markets open.

What will we fear or celebrate on Monday?
Greek stalemate? A strong Eurozone plan? Contagion? Volcanic ash clouds disrupting air travel? A gigantic oil slick that can't be contained? American bank exposure to Europe? Goldman Sachs? A slowing Chinese economy? IMF funding of the Euro plan with 40% contribution from the USA? Riots in Greece? Riots in Arizona? The latest, mind numbing statistic?

Will I be happier with my Brunswick short or my new Neutral Tandem position? We'll find out shortly as volatility has returned and markets are being swayed by the concern of the day. It isn't investing, it's speculation and fear that are driving the day to day pricing of the stock market. The actual value of the underlying companies cannot gyrate to the extent their stock prices do. But the prices do gyrate. So wait for a return of sanity, sell into declines, or a little of both.

Who will have control of the bigtop in the morning?

Saturday, May 8, 2010

I Need My Head Examined

Be cautious, look over your shoulder, lighten up on rallies, all make sense and generally describe my investment behavior. But it gets boring staying with the same long term holds, dividend plays, and anti-inflation stocks. So, in the midst of the recent melt down, I opened a new position that will either do extremely well, as everyone seems to hate the company, or limp on as another Level3. In fact, it is a Level3 competitor. I invested long in the telecom field. I need my head examined.

The latest proof of my increasing dementia is my purchase of Neutral Tandem, TNDM. This is a relatively young company that went public in the Fall of 2007 and has grown rapidly in sales and profits. 2010 revenue is projected to be $180M and analysts predict earnings per share of $1.11. TNDM currently sells for $13; a PE of 11. It went public at about $17 and was in the mid 30's as recently as 6 months ago. It's gone the opposite way of the market.

The company is performing wonderfully. May 5th TNDM announced 1st quarter results and revenue grew 17% due to a 26% increased in minutes billed. EPS was flat for the quarter. They have $171M of cash and no debt- a rock solid balance sheet.

So why doesn't anyone like the company and why has the stock price been cut by nearly 2/3rds? I wish I knew for sure. The concerns that have been discussed are a patent battle with competitor Peerless [ since they already compete, and the company has other competitors, the worst outcome is high attorney fees], recent competition from both Peerless and Level3 [ revenue growth shows the company is holding its own, but flat earnings on a 26% increase in billable minutes the indicates pricing pressure of competition], and finally more direct traffic between carriers that doesn't require tandem switching.

Neutral Tandem's business is the switching of calls between new carriers [Sprint, cable, etc] and telecoms majors. TNDM doesn't compete with their customers like other carriers do and their tandem system is state of the art. They are the big player in this subset of telecom. Competitive pressure and the future of IP switching will not decimate revenue and earnings overnight. They are also expanding into ethernet switching which should add new revenue streams.

The stock price trend is down and it sure could continue, especially if the market continues to hemorrhage, but I think $13 is a good entry point. At an EV/EBITDA ratio of 3, you usually do well with a position, especially if the balance sheet is sound.

I've pulled the trigger so lets see how it turns out.

Thursday, May 6, 2010

Yessiree, Crowded Exits Are Painful

It might have been caused by a trading error at Citibank, executed by a computer, and compounded by mechanized sell programs, but it was still illustrative of fear. Investors have been staying far too invested, even when they knew they were in the danger zone, because prices keep climbing and they had a false confidence in their ability to exit before trouble was recognized. Today's market action proved them wrong. Everyone wanted out at the same time. Fear was in charge.

While the market was crashing today, I was at a memorial service for a friend that had passed away. It was a beautiful service and the family was comforted. I was enjoying the ride home until the phone rang and a distraught friend told me the Dow was down 1000 points. Now I was sad again. I was short a few positions and owned gold ETFs, but my long portfolio would suffer more than the negative bets would help. Intellectually, buying stock then would have been scary, but proper. I was a long way from a computer, so I went to lunch. By the time I got home the Dow had gained back 600 points and ended as just a crummy day, not a disaster. Tomorrow is not a day to pick up bargains. If the market does rebound, enjoy it and consider lightening up some positions. Fear has raised its ugly head and she isn't pretty. The exit is also real small. Getting through is difficult.

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