Growth at a reasonable price in healthcare – Mylan on the comeback trail
By Allen Phatimer
Thinking about ideas that are somewhat countercyclical in nature but also have a good chance of support from industry specific trends and/or company specific dynamics which can yield cash flow and earnings acceleration lead to me like Mylan (MYL). I view this as an out of favor name in an out of favor sector; a contrarian idea which would effectively surprise positively if they simply met guidance or a consensus) of non-belief) below management's guidance. Expectations are very low in my opinion, and its understandable given the history; but Mylan suddenly appears positioned to beat expectations and gets no credit for that prospect. Management sounds very confident regarding their financial prospects yet the street says single digit forward multiple until Mylan shows us the money.
The history for those of you that don't know is that a couple of years ago the company had improving new product momentum, was valued cheaply and primed to fly as they blew out estimates for the first time in a while. Instead of leaving well enough alone, they did a pharmaceutical ingredient co. acquisition which made sense strategically and was bought at an arguably fair price but then quickly got into a bidding war for Merck KG's generic drug business. Merck KG was more than twice their size and also made sense from a longer run strategic perspective as it gave MYL access to new faster growing markets in Europe and Asia and effectively would make them a global player which would leverage the new ingredients, lower cost manufacturing capacity and distribution.
It could have been brilliant; if only Mylan didn't over pay. As it turned out Mylan got into a biding war with all the big global generic guys AND about 4 private equity investors. The bidding got too rich for the publicly traded companies involved and private equity investors gave up shortly thereafter. MYL won and went from a company trading at 9 times earnings with sales momentum and operating leverage positioned to beat estimates for the first time in years, to one paying a big premium and diluting the hell out of its shareholders as they financed the deal (with stock and debt) after they stock went down significantly.
The company has since put up weak results and guided down a couple of times but now guides to significant improvement which no one seems to believe. That now appears poised to change. Earnings out a couple of weeks ago look much better than expected and MYL reaffirmed guidance for both 2009 and 2010. Sales, margins and net income were substantially better than expected and synergy potential still lies ahead of them. Management said they've realized $100M of the $300M in synergies they plan and expressed confidence that they achieve their target of $300M by year end 2010.
Furthermore, the co. detailed the pipeline; which includes 93 ANDAs related to about $65B in branded sales of which 22 are potential first to file opportunities related to roughly $12B in branded sales. First to file opportunities are a boon to generics, where companies have 180 day exclusivity and not only price much higher than competitors that join the fray on day 181; but also work to cement sales relationships in these new products before competition arrives.
The pipeline is key because new product momentum is what will offset pricing pressure which is a fact of life for generics. In the quarter recently reported Mylan posted better sales and margins, mainly due to a improved mix of higher margin U.S. sales which more than offset pricing pressure in Europe and to a lesser extent Asia. Mylan is very well positioned on this front; and the share price gets no credit for this in my opinion
Another key part of the investment case is that utilization increases at the same time that a lot more drugs go off patent in the next 3 years. In 2009, 2010 and 2011, more branded drugs will lose patent protection than ever before. And as more people across the globe have access to cheaper medicines and payers and governments push moves to generic alternatives to cut costs, utilization can also grow. So this is really a long term investment call.
The idea is to be there in front of the potentially big earnings momentum in 2010 and 2011, when Mylan is launching new blockbuster generics and fully leveraging its leaner cost structure. If spending is kept in check, free cash flow should grow nicely over that time and can really explode in 2011. The few bulls in the name talk about opportunities in biologics although that can be another significant growth driver post the patent expiration bolus in 2011; that's too far out and too uncertain to hang your hat on in my opinion.
The company is looking for mid to high single digit revenue growth for both 2009 and 2010 and if you conservatively extrapolate what the co. expects in terms of R&D investment and SG&A, you get to roughly 200 basis points of operating margin expansion in 09' vs. 08' and another 100 basis points in 2010. That translates into huge operating leverage as pre-tax earnings grow 40-50% in 09' and another 20% in 2010. If you assume a constant 34% tax rate, you can get to $1 in 2009 and $1.40 to $1.50 in 2010.
It's worth noting that management guides to a range of $0.90-$1.10 in 2009 and $1.50-$1.70 in 2010. So, good execution and a modicum of pipeline success can easily make EPS $1.50-$1.60 or more in 2010. If Mylan can do $1.50, I think its reasonable to expect a market multiple by year end 2010 (let's assume a conservative 12X's) and that gets you to $18. That's a double ladies and gents.
On the flip side, there's little reason to expect any less than 10 times on a $1.40 number if execution is solid, so the margin of safety is substantial. If on the other hand, estimates are topped and the number is closer to $1.60, investors are apt to get really excited and bid the multiple to 13 or 14, which would get you north of $20/share.
On a shorter term basis, I think a couple of marginal earnings beats can get this name 11 times the $1 expected in 2009. That would amount to a 20%+ gain from here in the next 6 months and the street would likely look to roll that target multiple forward to a $1.40ish number for 2010 – which would get you north of $15 a year from now.
So the net-net here is that you have a decent company in an out of favor sector and industry that has stumbled and appears to be regaining traction at a time when secular trends are poised to improve and mitigate cyclical pressures in the years ahead. Sentiment is bearish, management has a credibility issue and valuation at 9 times 2009 EPS reflects. Several things can go right in the next 2 years and MYL can standout as a margin and earnings growth story in a world where few exist. Estimates appear to have stabilized, expectations are positioned to bottom and valuation multiple have minimal risk in my view, IF Mylan can simply hit its targets.
Meanwhile, huge amounts of patent expirations in the industry, a record number of first to file opportunities and yet to be realized merger synergies are reasons to be optimistic that Mylan can deliver better results. Some might question its balance sheet as the company put a lot of debt on to pay for the Merck KG assets. Fair concern but the cash flow is relatively visible and stable and the interest expenses well covered in even a very bearish scenario for profitability in 2009 and 2010. Thus I think the debt service burden very manageable and if the balance sheet is delivered faster than expected, which is quite possible; it would add additional support to EPS growth in 2010.
The shares are well off their recent lows and thus apt to give a little back in the days ahead. So you have time to build a position by buying a little here and adding on any meaningful pullback. The recent trading action and very short run chart pattern seems to indicate that the shares are under accumulation so I doubt a big pullback is coming. I'd expect pullback to find support in the $8.40 to $8.50 area and better support near $8. If your approach requires one, I'd suggest using stop at $7.80. If you can take a longer term view, I would look to buy a third here and third at $8 if it ever gets there and another third at $7 if that happened, all else was equal. At an average cost of $8, I think you'd be getting well compensated for the risk and would stand to do very well if anything went right.
Wednesday, November 26, 2008
Tuesday, November 18, 2008
Hologic (HOLX) A Top Healthcare Pick for 2009
Hologic (HOLX): A top pick in Healthcare for 2009?
A quest for value and alpha in well financed, well managed defensive names with solid visibility, reasonable growth prospects and discount valuation leads me to digital mammography and Pap test leader Hologic. The shares are off to historical trough multiples at significant discounts to what appear to be lesser peers. But with a solid quarter, reset and achievable expectation and a call that detailed how upside to 09’ expectations is probable; I cant help but think about what can go right at this juncture.
The shares have been in a slide for the better part of a year in reaction to a major acquisition (Cytec) which looked suboptimal and expensive initially and proved naysayer right when the sales growth of the acquired product portfolio slowed profitability suffered and investors began to aggressively discount the expected sales and margin benefits the co. did the Cytec deal for in the first place. And then came the currency headwind. And then a sales miss. And did I mention the push out of a new sales and margin driving product?
Needless to say, the bears were vindicated and burden of proof shifted directly to management’s ability to execute on improving acquired sales growth and new product commercialization which looked increasingly difficult in the face of mounting macro and industry specific headwinds. Understandably, long time longs threw in the towel, shorts pressed their positions and the share price has gotten pummeled.
What’s the point you ask? To make a short story long, I think HOLX shares might now represent the kind of relative value associated with a stock with reasonable growth prospects and margin expansion opportunity in a world where few can grow or hold margins.
Sales were better than expected on strong organic unit sales growth. The company’s breast health sales were solid, orders were strong and management was somewhat optimistic about a rebound in acquired product sales. Gross Margin dollars were higher and operating expenses lower so operating income topped expectations. EPS was in-line.
Breast Health of sales of $221M were up 25%; guidance is for 5% in FY09’, Diagnostics revenue of $133.7M was up 11% y/y; guidance is for 15-16% growth in FY09’, and GYN/Surgical (which is essentially NovaSure) sales of $59.7M were up 2%; but that’s an improvement from the last couple of quarters and management is looking for 17-18% growth in FY09’ in that division. Management's new FY09 guidance is for 9-10% sales growth to $1.82-1.85B and non-GAAP EPS of $1.22-1.44.
All in all a solid quarter with excellent unit growth in profit driving digital mammo, steady Pap test sales and a rebound in Novasure (key products acquired from Cytec). And management lowered guidance to account for recession worsening, credit tightness, currency pressure, and slightly negative mix. Management removed any considerations for new product sales. And that only lowered numbers slightly – much less I think, than was feared. Exactly what you needed to see, in my opinion, in order to begin to exit the show me stock status Hologic earned.
It appears that the share price (at roughly 11 times forward earnings) discounts a substantially worse unit growth and pricing pressure in key cash flow drivers than management or most analysts do with no help from new products – i.e. what amounts to a worst case scenario. So risk (in the company specific sense) with respect to earnings and multiple appears relatively low if can make it’s numbers because the unusually low multiple should hold provided the market doesn’t continue to slide hard.
One might also think that risk (in a margin of safety sense) is relatively low if valuation on cash flow, margin potential and returns of such franchises as Hologic’s is low – as I believe it is. One might also conclude that a company that considers pressure on unit sales growth and margins that they are yet to realize, and omits likely incrementals in its guidance is being very conservative and thus risk to their estimates is low so that sort of risk appears to be relatively low.
Management considers the macro pressure (which they still say they haven’t seen) and no new product contribution in the $1.22 guidance, when there is a high likelihood of additional revenue streams ramping by year end 2009, and 9% revenue growth that is fairly visible (strong order growth, and substantial backlog) and stable margins that can expand as sales growth accelerates.
Management seems confident that digital mammography unit sales would be up in 09’ vs. 08’. They admitted average selling prices might be under slight pressure but suggested that the guidance took that into consideration. I can’t help but wonder is management is more bullish than they let on about unit sales.
Another interesting thing about this situation is that cash flow appears to be resilient in the face some level of the aforementioned macro headwinds, while the company has a few significant growth drivers and cost save opportunities (like the new products and ramping utilization in a new low cost facility or synergy from integrating Cytec). Thus you might think that adds more flexibility to meet numbers.
So as the market grows (however slowly) and penetration increases, revenue growth can accelerate and margins can increase a couple of hundred basis points by year end 2010. The 1.22 can turn into 1.30 which might get a 12 multiple (~$17), and 15% growth rate in 2010 can get you to 1.50 for 2010 and could be as high as 1.60-1.70 on such faster, higher margin sales growth and a little operating leverage. And that 1.65 might garner a 14-15 time multiple (when the co. is beating estimates and raising guidance) and that might get you to $23-$25 12-18 months out. If anyone knows how wrong I am, please do tell.
A quest for value and alpha in well financed, well managed defensive names with solid visibility, reasonable growth prospects and discount valuation leads me to digital mammography and Pap test leader Hologic. The shares are off to historical trough multiples at significant discounts to what appear to be lesser peers. But with a solid quarter, reset and achievable expectation and a call that detailed how upside to 09’ expectations is probable; I cant help but think about what can go right at this juncture.
The shares have been in a slide for the better part of a year in reaction to a major acquisition (Cytec) which looked suboptimal and expensive initially and proved naysayer right when the sales growth of the acquired product portfolio slowed profitability suffered and investors began to aggressively discount the expected sales and margin benefits the co. did the Cytec deal for in the first place. And then came the currency headwind. And then a sales miss. And did I mention the push out of a new sales and margin driving product?
Needless to say, the bears were vindicated and burden of proof shifted directly to management’s ability to execute on improving acquired sales growth and new product commercialization which looked increasingly difficult in the face of mounting macro and industry specific headwinds. Understandably, long time longs threw in the towel, shorts pressed their positions and the share price has gotten pummeled.
What’s the point you ask? To make a short story long, I think HOLX shares might now represent the kind of relative value associated with a stock with reasonable growth prospects and margin expansion opportunity in a world where few can grow or hold margins.
Sales were better than expected on strong organic unit sales growth. The company’s breast health sales were solid, orders were strong and management was somewhat optimistic about a rebound in acquired product sales. Gross Margin dollars were higher and operating expenses lower so operating income topped expectations. EPS was in-line.
Breast Health of sales of $221M were up 25%; guidance is for 5% in FY09’, Diagnostics revenue of $133.7M was up 11% y/y; guidance is for 15-16% growth in FY09’, and GYN/Surgical (which is essentially NovaSure) sales of $59.7M were up 2%; but that’s an improvement from the last couple of quarters and management is looking for 17-18% growth in FY09’ in that division. Management's new FY09 guidance is for 9-10% sales growth to $1.82-1.85B and non-GAAP EPS of $1.22-1.44.
All in all a solid quarter with excellent unit growth in profit driving digital mammo, steady Pap test sales and a rebound in Novasure (key products acquired from Cytec). And management lowered guidance to account for recession worsening, credit tightness, currency pressure, and slightly negative mix. Management removed any considerations for new product sales. And that only lowered numbers slightly – much less I think, than was feared. Exactly what you needed to see, in my opinion, in order to begin to exit the show me stock status Hologic earned.
It appears that the share price (at roughly 11 times forward earnings) discounts a substantially worse unit growth and pricing pressure in key cash flow drivers than management or most analysts do with no help from new products – i.e. what amounts to a worst case scenario. So risk (in the company specific sense) with respect to earnings and multiple appears relatively low if can make it’s numbers because the unusually low multiple should hold provided the market doesn’t continue to slide hard.
One might also think that risk (in a margin of safety sense) is relatively low if valuation on cash flow, margin potential and returns of such franchises as Hologic’s is low – as I believe it is. One might also conclude that a company that considers pressure on unit sales growth and margins that they are yet to realize, and omits likely incrementals in its guidance is being very conservative and thus risk to their estimates is low so that sort of risk appears to be relatively low.
Management considers the macro pressure (which they still say they haven’t seen) and no new product contribution in the $1.22 guidance, when there is a high likelihood of additional revenue streams ramping by year end 2009, and 9% revenue growth that is fairly visible (strong order growth, and substantial backlog) and stable margins that can expand as sales growth accelerates.
Management seems confident that digital mammography unit sales would be up in 09’ vs. 08’. They admitted average selling prices might be under slight pressure but suggested that the guidance took that into consideration. I can’t help but wonder is management is more bullish than they let on about unit sales.
Another interesting thing about this situation is that cash flow appears to be resilient in the face some level of the aforementioned macro headwinds, while the company has a few significant growth drivers and cost save opportunities (like the new products and ramping utilization in a new low cost facility or synergy from integrating Cytec). Thus you might think that adds more flexibility to meet numbers.
So as the market grows (however slowly) and penetration increases, revenue growth can accelerate and margins can increase a couple of hundred basis points by year end 2010. The 1.22 can turn into 1.30 which might get a 12 multiple (~$17), and 15% growth rate in 2010 can get you to 1.50 for 2010 and could be as high as 1.60-1.70 on such faster, higher margin sales growth and a little operating leverage. And that 1.65 might garner a 14-15 time multiple (when the co. is beating estimates and raising guidance) and that might get you to $23-$25 12-18 months out. If anyone knows how wrong I am, please do tell.
Saturday, November 15, 2008
Don't call it a comeback
After writing my first few blog posts a good friend of mine suggested I turn it into something bigger and better than a blog full of market rambling. He suggested that incorporating technical and market timing insights and ideas to my fundamental value approach was a good idea and I agreed. Though my specialty is So I took a hiatus and started building a larger website and an almost done with the finishing touches. We hope to launch by December 1. We hope to see you back then. We'll be discussing equity, futures, options and system trades and investments. I'll be back to give you the new url soon. Thanks for you patience; it'll be worth the wait!
Monday, February 11, 2008
Know When To Hold em' Know When to Fold em'
A reader says/asks "Steel stocks look awfully cheap and commodities are running higher again, what do you think about getting long some steel here?" Thanks for the layup comment/question; here's the long and short of what I think.
My short answer is: in my opinion, if you are talking about a short term trade, you may be right to want to be long and steel take one more run higher before a substantial decline; however, if you're talking about a longer run commitment on the long side for an extended bull run then I'd have to disagree. Why? Simply because we are of the opinion that we are more likely than not in the late innings of the bull market in steel. We also think the industry's cyclicality is being underrated. Its quite possible that peak earnings are in the books and few want to admit that.
Now for the long answer:
The longer term technical trends are still favorable. Valuation (on Earnings, Cash Flow and Free Cash Flow) is still on the cheap side when you consider either trailing, current or forward earnings. The group and most of its members are still performing well on a relative basis. Most of the major steel companies have posted disappointing earnings for 2-3 quarters now. However, disappointing results were not very surprising and bottom lines have held up much better than bears would have guessed.
Expectations have been guided conservatively so bullish sentiment appears to be moderating. Nevertheless, I sense that sentiment is still tilted toward the bullish camp as most commodity prognosticators and market pundits seem to be either raging bulls or cautiously optimistic. So with technicals and fundamentals more supportive of the bull case, we think it makes most sense to either be on board the prevailing trend if you are a trader or stay long if you are an underweighted investor. If you are overweight metals and commodities as a longer term investor at this point, then I'd consider starting to scale out of some of that exposure; especially in steel.
Why be negative in the intermediate or longer term? Because we doubt that the next big move is up. Why? Because fundmentals have clearly deteriorated and may very well get worse sooner than most think. And because the sheer cyclicality of the steel industry seems to be underappreciated. Most seem to believe that steel companies are immune to the recent changes in U.S. and global macroeconomic conditions. We beg to differ.
Some of that has to do with demand being more resilient than expected, some of that has to do with the weak dollar, and some may have to do with the successful global capacity consolidation we've seen at the hands of the Mittals of the world. Some may have to do with cost inflation and higher shipping costs keeping prices more elevate than would otherwise be the case. All of which is understandable. Nevertheless, we still think the cyclical influences will have their say - it's just a matter of time.
If growth slows globally (as I expect), then it's only a matter of time until demand softens, inventories build, and shipments slow. Meanwhile, the cost side of the equation would likely lag on the downside. Since this is happening slowly, I would think that capacity and overproduction would also become an issue. If/when revenues slowed and costs could not be cut fast enough negative operating leverage would become an even bigger issue and profits would be under serious pressure. When estimates are reduced further, shares wouldnt look so cheap. Steel stocks would sell off and the trend and momentum would go the other way; and so would a trader's reasons to be getting long.
Good Night and Good Luck.
My short answer is: in my opinion, if you are talking about a short term trade, you may be right to want to be long and steel take one more run higher before a substantial decline; however, if you're talking about a longer run commitment on the long side for an extended bull run then I'd have to disagree. Why? Simply because we are of the opinion that we are more likely than not in the late innings of the bull market in steel. We also think the industry's cyclicality is being underrated. Its quite possible that peak earnings are in the books and few want to admit that.
Now for the long answer:
The longer term technical trends are still favorable. Valuation (on Earnings, Cash Flow and Free Cash Flow) is still on the cheap side when you consider either trailing, current or forward earnings. The group and most of its members are still performing well on a relative basis. Most of the major steel companies have posted disappointing earnings for 2-3 quarters now. However, disappointing results were not very surprising and bottom lines have held up much better than bears would have guessed.
Expectations have been guided conservatively so bullish sentiment appears to be moderating. Nevertheless, I sense that sentiment is still tilted toward the bullish camp as most commodity prognosticators and market pundits seem to be either raging bulls or cautiously optimistic. So with technicals and fundamentals more supportive of the bull case, we think it makes most sense to either be on board the prevailing trend if you are a trader or stay long if you are an underweighted investor. If you are overweight metals and commodities as a longer term investor at this point, then I'd consider starting to scale out of some of that exposure; especially in steel.
Why be negative in the intermediate or longer term? Because we doubt that the next big move is up. Why? Because fundmentals have clearly deteriorated and may very well get worse sooner than most think. And because the sheer cyclicality of the steel industry seems to be underappreciated. Most seem to believe that steel companies are immune to the recent changes in U.S. and global macroeconomic conditions. We beg to differ.
Some of that has to do with demand being more resilient than expected, some of that has to do with the weak dollar, and some may have to do with the successful global capacity consolidation we've seen at the hands of the Mittals of the world. Some may have to do with cost inflation and higher shipping costs keeping prices more elevate than would otherwise be the case. All of which is understandable. Nevertheless, we still think the cyclical influences will have their say - it's just a matter of time.
If growth slows globally (as I expect), then it's only a matter of time until demand softens, inventories build, and shipments slow. Meanwhile, the cost side of the equation would likely lag on the downside. Since this is happening slowly, I would think that capacity and overproduction would also become an issue. If/when revenues slowed and costs could not be cut fast enough negative operating leverage would become an even bigger issue and profits would be under serious pressure. When estimates are reduced further, shares wouldnt look so cheap. Steel stocks would sell off and the trend and momentum would go the other way; and so would a trader's reasons to be getting long.
Good Night and Good Luck.
Wednesday, February 6, 2008
Chasing Powerful Profits & Timing Alpha Well (Hopefully)
Alphatiming is everything! Because of the inherent volatility and mean reversion, we are of the opinion that you are more often than not better off buying pullbacks when trying to get long and selling rallies when trying to get short. Buying break outs and selling breakdowns is fine when your directional bet is correct immediately; however, timing itself is generally a low win rate endeavor.
Thus the odds of being precisely correct are relatively low so you should try not to combine entry decisions with buying/selling overbought/oversold or chasing something unless the magnitude of your expected win can justify that risk. If you resisted the temptation to chase the market or your favorite stock in the last week, you're probably better off for it. If I had a nickel for every time I heard someone say "this volatility is good for traders", I'd have a small fortune. Volatiltity may be good for daytraders and market makers, but its probably overrated for swing traders and investors who either get shaken out of positions or influenced to act incorrectly.
That said I'd like to share a few thoughts about a company that has quietly been blocking and tackling against very formidable cost inflation which it finally appears poised to overcome. The name of the company is Exide (XIDE: $8.37 as of 2-6-2008 close). XIDE makes a range of batteries for a range of end markets including autos, trucks, telecom. Risks are plenty; ie. macro, automotive sector softness, telco spending moderation, incremental surges in lead or other raw materials; nevertheless, this is a company that was generating a ton of unprofitable revenue as a result of cost of it's key raw material skyrocketing. Now that revenue growth is stronger AND finally becoming substantially more profitable.
Sentiment is terrible. No one covers it, people that know it hate it – busted IPO that’s been a disaster for virtually every long since its IPO. Many are playing it short on lead price derivative (big short interest). But end markets seems solid on the demand side and not pushing back on price increases (unit growth solid mid single digit, in spite of weak auto sales). XIDE appears to be taking a little share, raising prices and cycling past bad contracts that didn’t reset fast enough to offset surging lead costs. XIDE hasn’t had a problem raising prices – both XIDE and competitor ENS have raised prices and haven’t lost customers. Most remaining bad contracts (whose pricing couldnt keep up with lead cost inflation) should be reset by next quarter, so profitability should continue to improve.
Additionally, Margins – both Gross and Operating Margins are improving. Manufacturing costs are declining and probably not done declining; doing a good job managing expenses. So productivity is improving. And Operating results, profitability and financials improving. Balance sheet somewhat levered but manageable because cash generation increasing. DSOs are also improving. XIDE recently did a $91M rights offering. Have sufficient Cash, Equivalents, and revolver, etc.
Earnings results indicate that XIDE's financial performance is quickly catching up with its market fundamentals. If lead prices could come in a bit more and not go higher and global economy does not slide into bad recession, EXIDE may generate significantly improving cash flow and earnings in the coming quarters. The operating leverage here is potentially huge - we love that. Tomorrow's action is sure to be interesting as the shares are trading at key technical levels and the market is under significant pressure of late. Alphatiming will tell; we should know know more by 11AM when the earnings call ends.
As always, this is not a recommendation to buy or sell. This post is for informational purposes only. The writer has no position in XIDE. The information, thoughts and ideas shared herein should not be construed as a recommendation or solicitation to buy or sell securities. Furthermore, the information, thoughts and ideas should not be interpreted as investment advice. The author of this blog is not a registered investment advisor. The ideas speculated upon and discussed herein may not be suitable for you. We recommend that you consult a financial advisor or registered stock broker before making any investment decisions. We in no way warrant the accuracy, veracity or completeness of any of the information posted on this blog.
Thus the odds of being precisely correct are relatively low so you should try not to combine entry decisions with buying/selling overbought/oversold or chasing something unless the magnitude of your expected win can justify that risk. If you resisted the temptation to chase the market or your favorite stock in the last week, you're probably better off for it. If I had a nickel for every time I heard someone say "this volatility is good for traders", I'd have a small fortune. Volatiltity may be good for daytraders and market makers, but its probably overrated for swing traders and investors who either get shaken out of positions or influenced to act incorrectly.
That said I'd like to share a few thoughts about a company that has quietly been blocking and tackling against very formidable cost inflation which it finally appears poised to overcome. The name of the company is Exide (XIDE: $8.37 as of 2-6-2008 close). XIDE makes a range of batteries for a range of end markets including autos, trucks, telecom. Risks are plenty; ie. macro, automotive sector softness, telco spending moderation, incremental surges in lead or other raw materials; nevertheless, this is a company that was generating a ton of unprofitable revenue as a result of cost of it's key raw material skyrocketing. Now that revenue growth is stronger AND finally becoming substantially more profitable.
Sentiment is terrible. No one covers it, people that know it hate it – busted IPO that’s been a disaster for virtually every long since its IPO. Many are playing it short on lead price derivative (big short interest). But end markets seems solid on the demand side and not pushing back on price increases (unit growth solid mid single digit, in spite of weak auto sales). XIDE appears to be taking a little share, raising prices and cycling past bad contracts that didn’t reset fast enough to offset surging lead costs. XIDE hasn’t had a problem raising prices – both XIDE and competitor ENS have raised prices and haven’t lost customers. Most remaining bad contracts (whose pricing couldnt keep up with lead cost inflation) should be reset by next quarter, so profitability should continue to improve.
Additionally, Margins – both Gross and Operating Margins are improving. Manufacturing costs are declining and probably not done declining; doing a good job managing expenses. So productivity is improving. And Operating results, profitability and financials improving. Balance sheet somewhat levered but manageable because cash generation increasing. DSOs are also improving. XIDE recently did a $91M rights offering. Have sufficient Cash, Equivalents, and revolver, etc.
Earnings results indicate that XIDE's financial performance is quickly catching up with its market fundamentals. If lead prices could come in a bit more and not go higher and global economy does not slide into bad recession, EXIDE may generate significantly improving cash flow and earnings in the coming quarters. The operating leverage here is potentially huge - we love that. Tomorrow's action is sure to be interesting as the shares are trading at key technical levels and the market is under significant pressure of late. Alphatiming will tell; we should know know more by 11AM when the earnings call ends.
As always, this is not a recommendation to buy or sell. This post is for informational purposes only. The writer has no position in XIDE. The information, thoughts and ideas shared herein should not be construed as a recommendation or solicitation to buy or sell securities. Furthermore, the information, thoughts and ideas should not be interpreted as investment advice. The author of this blog is not a registered investment advisor. The ideas speculated upon and discussed herein may not be suitable for you. We recommend that you consult a financial advisor or registered stock broker before making any investment decisions. We in no way warrant the accuracy, veracity or completeness of any of the information posted on this blog.
Monday, February 4, 2008
Trying to Trade Signals in a Timely Fashion and Tune Out the Noise
A substantial move down, a substantial move up and now a game of hurry up and wait to see if we just witnessed a major low in several choice longer term buy candidates. Some think the bottom is in, others think the oversold rally has run its course and has already given way to a resumption of the bear trend.
As we discussed last week, its our view that major very tradable and investable lows are in for several names and groups so we will act accordingly and attempt to time entries and accumulation strategies. We continue to think that there are many compelling buy candidates available and think the next big move is not down in the case of several quality stocks we want to own as the pullback with the market in the coming days.
In the coming days, we'll be looking for confirmation that our view is likely to prove true in a few specific names. For increased confidence, we'll look to clues in volatility, relative strength, shorter term trading patterns and changes in volume - signals in the noise which 50 different pundits will try to explain 50 different ways.
In terms of industries, we are looking most closely at oil services, financials, chemicals, hotels and even semiconductors. We have several solid oil service, financial, hotel and chemical names in mind and are doing some work on a couple of semiconductor names we'd like to discuss soon. Interestingly, none of these industries can be bought wholesale as they are frought with risk and filled with companies more likely to disappoint than not. That's where the opportunity comes in: these groups have discounted a fairly dire scenario almost across the board - in some cases we think the discounting is overdone.
For now however, we'll tune out the noise and spend our time kicking more trade/investment candidate tires, and monitoring how our favorite charts and indicators are developing. We are waiting for more opportune entries to present themselves instead of getting are asses whooped my market makers, specialists and Mr. Market. Not to worry, we plan on having something good tomorrow. Tune in tomorrow for a couple of equity and option ideas we think are particularly interesting.
Alpha Timer
As we discussed last week, its our view that major very tradable and investable lows are in for several names and groups so we will act accordingly and attempt to time entries and accumulation strategies. We continue to think that there are many compelling buy candidates available and think the next big move is not down in the case of several quality stocks we want to own as the pullback with the market in the coming days.
In the coming days, we'll be looking for confirmation that our view is likely to prove true in a few specific names. For increased confidence, we'll look to clues in volatility, relative strength, shorter term trading patterns and changes in volume - signals in the noise which 50 different pundits will try to explain 50 different ways.
In terms of industries, we are looking most closely at oil services, financials, chemicals, hotels and even semiconductors. We have several solid oil service, financial, hotel and chemical names in mind and are doing some work on a couple of semiconductor names we'd like to discuss soon. Interestingly, none of these industries can be bought wholesale as they are frought with risk and filled with companies more likely to disappoint than not. That's where the opportunity comes in: these groups have discounted a fairly dire scenario almost across the board - in some cases we think the discounting is overdone.
For now however, we'll tune out the noise and spend our time kicking more trade/investment candidate tires, and monitoring how our favorite charts and indicators are developing. We are waiting for more opportune entries to present themselves instead of getting are asses whooped my market makers, specialists and Mr. Market. Not to worry, we plan on having something good tomorrow. Tune in tomorrow for a couple of equity and option ideas we think are particularly interesting.
Alpha Timer
Thursday, January 31, 2008
A Commentary on Technical Developments and Rate Sensitive Financials
This week's trading action in most Financials, Retailers, Homebuilders and Industrials we follow has now traced out what appear to be bottoms that are typical of major lows. Whether these are major lows or not we won't know right away. Tough call as the critical element of time is an issue. Nevertheless, we've had heavy volume selloffs, followed by heavy volume upthrusts. The pullbacks have been minimal in magnitude and met with accumulation. Some will argue that since those are admittedly the industries with the most fundamental problems and have a relatively high sensitivity to macro developments which are not likely to be conclusively resolved, that selling pressure has simply been momentarily suspended. We respectfully disagree.
Of course its the case that some shorts cashed in profits and other late to the game shorts that dove in near lows cried uncle. But is it the case that one should conclude that the recent rally off lows is nothing more than a very oversold rally in a young bear market that should be shorted? We doubt it should be so easily dismissed because it appears to me that there has not only been a sharp retracement of the last move lower; but selling also seems to have dried up. Thats how stocks bottom - not because crazy numbers of buyers come out of the woodwork; rather its because sellers have sold all they wanted to sell and the weakest longs throw in the towel. The price-volume correlation also shifts noticeably.
Today wasnt a particularly huge volume day in the markets; but it was a particularly heavy volume day in some important stocks; namely C, BAC, WB, GE, AEO, JCP, DHI, KBH. All are breaking short-term downtrends and doing so on heavy volume. If that wasnt enough, this is happening in the context of generally poor news, earnings and economic data. Short term trends must become constructive before intermediate trends do so and so on with intermediate and long term. The action has played out very much as we expected and charts are starting to support the idea that the worst is likely to be over for financials shares.
We continue to think when its all said and done, we are likely to be talking about an otherwise greater economic and equity market disaster being averted as a result of aggressive coordinated policy responses. I also think that the huge rate cuts instituted by the Fed are sure to help most banks and brokers, many on the brink of disastrous option ARM resets and also grease the wheels of the credit markets and allow libor rates to gravitate toward U.S. rates and thus help even more.
We think that the banks with extensive branch networks and deposits are helped most, while those with substantial credit card operations like B of A get an added boost and guys like C and JPM that have all that and then a good deal of mortgage exposure may be helped most. Relative to what would have otherwise been the case that is. We don't mean to imply that everything has been fixed in one fell swoop.
Banks with Liability sensitive balance sheets should be helped most. Funding costs/costs of funds have declined significantly (almost overnight). Banks with hefty amounts of spread income are sooner likely to see improved net interest margins and net interest income. The boost to 2H08' profitability will go a long way toward improving industry capital ratios and putting banks and borrowers on the margin in position to refinance and restructure loans is big. Rate sensitive equities are getting a lot of help and reflecting it.
The next few trading days will be telling. Several Banks, Retailers and Homebuilders are now 40-45% off their lows; impressive! Furthermore, many of the leading banks, builders and retailers are approaching difficult technical levels. From a technical perspective, a rest is in order as bears put more shorts on and anyone fortunate enough to capture a good part of the recent move cashes some in. Thus, I'm expecting a pullback in the next few trading days. We'll be looking to get long some quality as this happens.
Of course its the case that some shorts cashed in profits and other late to the game shorts that dove in near lows cried uncle. But is it the case that one should conclude that the recent rally off lows is nothing more than a very oversold rally in a young bear market that should be shorted? We doubt it should be so easily dismissed because it appears to me that there has not only been a sharp retracement of the last move lower; but selling also seems to have dried up. Thats how stocks bottom - not because crazy numbers of buyers come out of the woodwork; rather its because sellers have sold all they wanted to sell and the weakest longs throw in the towel. The price-volume correlation also shifts noticeably.
Today wasnt a particularly huge volume day in the markets; but it was a particularly heavy volume day in some important stocks; namely C, BAC, WB, GE, AEO, JCP, DHI, KBH. All are breaking short-term downtrends and doing so on heavy volume. If that wasnt enough, this is happening in the context of generally poor news, earnings and economic data. Short term trends must become constructive before intermediate trends do so and so on with intermediate and long term. The action has played out very much as we expected and charts are starting to support the idea that the worst is likely to be over for financials shares.
We continue to think when its all said and done, we are likely to be talking about an otherwise greater economic and equity market disaster being averted as a result of aggressive coordinated policy responses. I also think that the huge rate cuts instituted by the Fed are sure to help most banks and brokers, many on the brink of disastrous option ARM resets and also grease the wheels of the credit markets and allow libor rates to gravitate toward U.S. rates and thus help even more.
We think that the banks with extensive branch networks and deposits are helped most, while those with substantial credit card operations like B of A get an added boost and guys like C and JPM that have all that and then a good deal of mortgage exposure may be helped most. Relative to what would have otherwise been the case that is. We don't mean to imply that everything has been fixed in one fell swoop.
Banks with Liability sensitive balance sheets should be helped most. Funding costs/costs of funds have declined significantly (almost overnight). Banks with hefty amounts of spread income are sooner likely to see improved net interest margins and net interest income. The boost to 2H08' profitability will go a long way toward improving industry capital ratios and putting banks and borrowers on the margin in position to refinance and restructure loans is big. Rate sensitive equities are getting a lot of help and reflecting it.
The next few trading days will be telling. Several Banks, Retailers and Homebuilders are now 40-45% off their lows; impressive! Furthermore, many of the leading banks, builders and retailers are approaching difficult technical levels. From a technical perspective, a rest is in order as bears put more shorts on and anyone fortunate enough to capture a good part of the recent move cashes some in. Thus, I'm expecting a pullback in the next few trading days. We'll be looking to get long some quality as this happens.
Tuesday, January 29, 2008
Fed Schmed - Don't bring a knife to a gunfight with The Fed
Investors can't help but speculate on the various if-thens associated with what the Fed does and says and what an investor or trader should or shouldn't do in response or anticipation. The conventional wisdom goes like this: Since the bond market is discounting nearly a 100% chance of a 50 bps cut in the Fed Funds target rate, anything less would be disappointing and lead to a market sell-off in both treasuries and equities.
So most probably expect that 50 bps would be good for stocks and bonds, 25 bps bad and no cut a disaster. That may very well be the conventional wisdom; but it doesn't mean its true or you should trade or invest accordingly. So what should you expect a do or not do? The short answer is (whether you are bearishly or bullishly inclined) don't bet on instant gratification.
Alphatimer is of the opinion that this is not a good market for momentum trading either on the long or short side. No good for long momo because the major market trend is anything but up and not great for the short side because the rush to coordinated policy actions that we seen in the last two weeks is tantamount to market manipulation (in support of the long side) of the highest order. Instead of allowing an enormous amount of bad trades meet the rightful comeuppance, the Fed, Congress, and the White House are pulling out all the stops to bail out banks, brokers, tapped out consumers, over-extended homeowners, and credit insurers.
We think such concerted policy actions, whether you agree with them or not, are powerful forces which shouldn't be underestimated. It looks like we are on the cusp of the mother of all bailouts and we do not want to be on the other side of that trade. That's not to say that all is well again and the problems in the real estate market, credit market, derivative market or most importantly job market are all solved overnight.
There's little doubt that economic activity is contracting and that has reflexive implications that can only be reversed in time. And there's little doubt that the next 3-6 months of economic data are likely to be negative. However, we do think that enough is being done in terms of reducing market rates to help banks earn much better spreads and thus be better positioned to grow balance sheets sooner rather than later instead of shrinking balance sheets and lending less. Market rates would also soon decline sufficiently to allow homeowners to refinance and thus pre-empt a significant amount of foreclosures and billions more in credit derivative losses. If the Fed can only figure out how to bailout credit insurers, most economic fires will have been put out.
To the extent that it matters, we think it a safe bet to assume that the Fed knows that it must inspire confidence. That being so, we think that whether we get 25 or 50 bps; we are very likely to get re-assurance that the Fed is willing and able to cut more if/when necessary (which wouldn't be as bad as some think). Pundits might very well rush to criticize Bernanke and the Fed again, and highlight the economic problems. Keep in mind, however, that the market will not track coincidental to economic data; instead the market will look ahead.
In that context, this market quickly becomes a stock pickers market for shorts and longs. We expect no big move up or down in the indexes from here. We expect the negative market effect to lose its influence sooner rather than later. Therefore, we expect the short side loses the wind at its back. At the same time we also expect earnings disappointments to put a lid on potential upside. Its also quite possible that earnings disappointments may be shrugged off as the market looks forward. Either way, we think the next few weeks and months will be tough on bears and bulls alike.
If we are correct about the odds favoring either successful retests of recent lows or a basing process ensues, then this market will frustrate most. This looks like an environment where value investing thrives. We continue to think there is a good deal of value in the market. Long term value investors should look for opportunities to buy pullbacks in out of favor, absolute values with solid operating and financial performance. companies generating solid returns or well positioned to improve returns and free cash flow generation.
So most probably expect that 50 bps would be good for stocks and bonds, 25 bps bad and no cut a disaster. That may very well be the conventional wisdom; but it doesn't mean its true or you should trade or invest accordingly. So what should you expect a do or not do? The short answer is (whether you are bearishly or bullishly inclined) don't bet on instant gratification.
Alphatimer is of the opinion that this is not a good market for momentum trading either on the long or short side. No good for long momo because the major market trend is anything but up and not great for the short side because the rush to coordinated policy actions that we seen in the last two weeks is tantamount to market manipulation (in support of the long side) of the highest order. Instead of allowing an enormous amount of bad trades meet the rightful comeuppance, the Fed, Congress, and the White House are pulling out all the stops to bail out banks, brokers, tapped out consumers, over-extended homeowners, and credit insurers.
We think such concerted policy actions, whether you agree with them or not, are powerful forces which shouldn't be underestimated. It looks like we are on the cusp of the mother of all bailouts and we do not want to be on the other side of that trade. That's not to say that all is well again and the problems in the real estate market, credit market, derivative market or most importantly job market are all solved overnight.
There's little doubt that economic activity is contracting and that has reflexive implications that can only be reversed in time. And there's little doubt that the next 3-6 months of economic data are likely to be negative. However, we do think that enough is being done in terms of reducing market rates to help banks earn much better spreads and thus be better positioned to grow balance sheets sooner rather than later instead of shrinking balance sheets and lending less. Market rates would also soon decline sufficiently to allow homeowners to refinance and thus pre-empt a significant amount of foreclosures and billions more in credit derivative losses. If the Fed can only figure out how to bailout credit insurers, most economic fires will have been put out.
To the extent that it matters, we think it a safe bet to assume that the Fed knows that it must inspire confidence. That being so, we think that whether we get 25 or 50 bps; we are very likely to get re-assurance that the Fed is willing and able to cut more if/when necessary (which wouldn't be as bad as some think). Pundits might very well rush to criticize Bernanke and the Fed again, and highlight the economic problems. Keep in mind, however, that the market will not track coincidental to economic data; instead the market will look ahead.
In that context, this market quickly becomes a stock pickers market for shorts and longs. We expect no big move up or down in the indexes from here. We expect the negative market effect to lose its influence sooner rather than later. Therefore, we expect the short side loses the wind at its back. At the same time we also expect earnings disappointments to put a lid on potential upside. Its also quite possible that earnings disappointments may be shrugged off as the market looks forward. Either way, we think the next few weeks and months will be tough on bears and bulls alike.
If we are correct about the odds favoring either successful retests of recent lows or a basing process ensues, then this market will frustrate most. This looks like an environment where value investing thrives. We continue to think there is a good deal of value in the market. Long term value investors should look for opportunities to buy pullbacks in out of favor, absolute values with solid operating and financial performance. companies generating solid returns or well positioned to improve returns and free cash flow generation.
Sunday, January 27, 2008
Another Card from the Dealer
Put your helmet on as we watch the next few cards the dealer deals.
With Asian markets falling hard post the U.S. market slide Friday, it's reasonable to expect a rough open for the U.S. markets whether or not Asian markets close well. An impressive intraday rebound in Asia would certainly be constructive; nevertheless, 4% plus slides in developed market indexes are also certain to inject doubt that any type of bottom may be imminent.
After the bounce we saw on Wednesday, Thursday and Friday morning, one should expect some retracement. How substantial and vigorous that might be may or may not have the implications market pundits are likely to posit. Given the substantial fear in the market, bearish technicals and negative headlines; it makes sense in my opinion to expect action more typical of a bearish continuation pattern (ie. heavy volume, seller dictated action) which puts the recent lows in jeopardy.
With the U.S., Japan, and Europe seemingly on the fast track to recession, markets are apt to begin questioning how China and a few others could buck the trend. Although no key market questions are likely to be resolved anytime soon, we do get a lot of economic data this week. New home sales, Durable Good Orders, Advance GDP, FOMC's Policy Statement, Chicago PMI, ISM and Payroll data all get released this week. Volatility is sure to remain elevated through Friday.
For better or worse, the big question then becomes whether or not recent lows hold. For clues on that score, I suggest we watch the action in individual names rather than the Dow, Nasdaq or the S&P500 as I'd expect a rather bifurcated market - one in which the financials, and techs pullback hard initially, and eventually hold recent lows, while cyclicals and those viewed as most levered to global growth take it on the chin.
This is not going to be an easy week to trade whether you are bullish or bearish. While all the madness ensues, I'll be observing how the market plays the economic hand its dealt and double checking my shopping list as I prepare to go all in. If you're holding bad cards, I again suggest you fold quickly and look to play better cards.
With Asian markets falling hard post the U.S. market slide Friday, it's reasonable to expect a rough open for the U.S. markets whether or not Asian markets close well. An impressive intraday rebound in Asia would certainly be constructive; nevertheless, 4% plus slides in developed market indexes are also certain to inject doubt that any type of bottom may be imminent.
After the bounce we saw on Wednesday, Thursday and Friday morning, one should expect some retracement. How substantial and vigorous that might be may or may not have the implications market pundits are likely to posit. Given the substantial fear in the market, bearish technicals and negative headlines; it makes sense in my opinion to expect action more typical of a bearish continuation pattern (ie. heavy volume, seller dictated action) which puts the recent lows in jeopardy.
With the U.S., Japan, and Europe seemingly on the fast track to recession, markets are apt to begin questioning how China and a few others could buck the trend. Although no key market questions are likely to be resolved anytime soon, we do get a lot of economic data this week. New home sales, Durable Good Orders, Advance GDP, FOMC's Policy Statement, Chicago PMI, ISM and Payroll data all get released this week. Volatility is sure to remain elevated through Friday.
For better or worse, the big question then becomes whether or not recent lows hold. For clues on that score, I suggest we watch the action in individual names rather than the Dow, Nasdaq or the S&P500 as I'd expect a rather bifurcated market - one in which the financials, and techs pullback hard initially, and eventually hold recent lows, while cyclicals and those viewed as most levered to global growth take it on the chin.
This is not going to be an easy week to trade whether you are bullish or bearish. While all the madness ensues, I'll be observing how the market plays the economic hand its dealt and double checking my shopping list as I prepare to go all in. If you're holding bad cards, I again suggest you fold quickly and look to play better cards.
Wednesday, January 23, 2008
Bernpaulpresput? Bottom or not: what to do now!
The obvious questions that all market watchers almost instinctively ask after action like today is: Is this "the" bottom and what should I do now? Whether or not this is "the" big one is less important than what to do now. Noone can know for sure that this was an 87' type major low, the new volatility paradigm or simply the mother or all oversold bounces?
Whatever the case, I think it makes sense to acknowledge that it was a significant day. As news of a serious discussion on how to bailout the mortgage and municipal bond insurers spread, the market got the sense that all the king's horses and all the king's men were on the economic and market case. This follows a day when Bernanke effectively rolled over and cut rates to support equities in spite of significant inflation and inflationary pressure. Bernanke caved. Price stability no longer shares top billing with growth and inflation, but thats another show. Whether that comes home to roost is another story.
Its no secret that the economy is slowing and the slowdown accelerating BUT I dont think growth has slowed so much that the Fed had to cut as much as it did a couple weeks ahead of a meeting, and in the face of seemingly insipient pipeline inflation. Financial markets had become dysfunctional to the point where odds of a serious stagflationary recession where increasing by the day. If an MTG, MBI, ABK (or PMI or RDN for that matter) became insolvent, the ripple effects would be severe as the market could not help panic about who would be next or how bad the banks might get as they would be forced to take another round of asset write downs (for CDOs and CDSs gone bad).
U.S. financial conditions are clearly exacerbating and magnifying an economic slowdown which is young but snowballing. Just as the marginal consumer has neither the will nor resources to spend beyond their means these days, sharply widened credit spreads, heightened risk aversion and weakened capital positions have caused kept marginal market rates stubbornly high and lending appetite and/or werewithal limited.
The Fed is now acting aggressively (with monetary policy) to ease tight credit conditions and get rates down so and the administration, congress and regulators are scurrying to inject fiscal stimulus. The net of all that is we now have coordinated policy responses to all the economy's major problems. That's historically marked major lows. If the present rhymes with past policy responses then the market may bottom well ahead any light at the end of the tunnel. Does that mean that all is now well? No. The major economic problems we face - ie. subprime, derivatives, weakened financial intermediaries are not likely to be healed immediately. Nevertheless, we seem to now have the pre-requisites for the healing process.
Technically speaking, the fact that the move down was substantial and came on high volume after an equally impressive high volume intraday reversal suggests that this is at least a short or intermediate bottom. Financials, Techs and Industrials have been especially weak and have declined hard and fast without a substantial retracement for quite a while now. Financials, Techs, and Industrials among others are very oversold on all timeframes and primed for a bounce. Its my strong opinion that nothing short of a heavy volume follow through day would have been enough to stop the markets slide. The market decline had become very reflexive. Its often the case that motion motivates.
Fundamentally, there appear to be many a compelling buy out there these days. A lot more cheap names with decent sales, cashflow and earnings growth than you had a few short months ago. A lot of high quality, low p/e, low EV/EBITDA, high FCF yield names to choose from.
Net net net - play for a sizeable rally in the short run. We'll cross other bridges when we get there as they say. For now, my best guess is that one would do well to sell what you don't want to own for the next 3 years for better or worse. I say that because I think the market is apt to focus on quality w/o near term problems for the time being. Don't hold something simply because its down. You don't have to make your money back in the same stocks that you lost in. Identify your weakest holdings and swap them for better positioned names. This is an alphatimer's market, take advantage of it. For various reasons, my favorite names for new money today are NE, CE, IACI, GM, WB and CPKI (though I'd buy WB and CPKI slowly and only if I could add on a pullback since the move yesterday was huge)
Whatever the case, I think it makes sense to acknowledge that it was a significant day. As news of a serious discussion on how to bailout the mortgage and municipal bond insurers spread, the market got the sense that all the king's horses and all the king's men were on the economic and market case. This follows a day when Bernanke effectively rolled over and cut rates to support equities in spite of significant inflation and inflationary pressure. Bernanke caved. Price stability no longer shares top billing with growth and inflation, but thats another show. Whether that comes home to roost is another story.
Its no secret that the economy is slowing and the slowdown accelerating BUT I dont think growth has slowed so much that the Fed had to cut as much as it did a couple weeks ahead of a meeting, and in the face of seemingly insipient pipeline inflation. Financial markets had become dysfunctional to the point where odds of a serious stagflationary recession where increasing by the day. If an MTG, MBI, ABK (or PMI or RDN for that matter) became insolvent, the ripple effects would be severe as the market could not help panic about who would be next or how bad the banks might get as they would be forced to take another round of asset write downs (for CDOs and CDSs gone bad).
U.S. financial conditions are clearly exacerbating and magnifying an economic slowdown which is young but snowballing. Just as the marginal consumer has neither the will nor resources to spend beyond their means these days, sharply widened credit spreads, heightened risk aversion and weakened capital positions have caused kept marginal market rates stubbornly high and lending appetite and/or werewithal limited.
The Fed is now acting aggressively (with monetary policy) to ease tight credit conditions and get rates down so and the administration, congress and regulators are scurrying to inject fiscal stimulus. The net of all that is we now have coordinated policy responses to all the economy's major problems. That's historically marked major lows. If the present rhymes with past policy responses then the market may bottom well ahead any light at the end of the tunnel. Does that mean that all is now well? No. The major economic problems we face - ie. subprime, derivatives, weakened financial intermediaries are not likely to be healed immediately. Nevertheless, we seem to now have the pre-requisites for the healing process.
Technically speaking, the fact that the move down was substantial and came on high volume after an equally impressive high volume intraday reversal suggests that this is at least a short or intermediate bottom. Financials, Techs and Industrials have been especially weak and have declined hard and fast without a substantial retracement for quite a while now. Financials, Techs, and Industrials among others are very oversold on all timeframes and primed for a bounce. Its my strong opinion that nothing short of a heavy volume follow through day would have been enough to stop the markets slide. The market decline had become very reflexive. Its often the case that motion motivates.
Fundamentally, there appear to be many a compelling buy out there these days. A lot more cheap names with decent sales, cashflow and earnings growth than you had a few short months ago. A lot of high quality, low p/e, low EV/EBITDA, high FCF yield names to choose from.
Net net net - play for a sizeable rally in the short run. We'll cross other bridges when we get there as they say. For now, my best guess is that one would do well to sell what you don't want to own for the next 3 years for better or worse. I say that because I think the market is apt to focus on quality w/o near term problems for the time being. Don't hold something simply because its down. You don't have to make your money back in the same stocks that you lost in. Identify your weakest holdings and swap them for better positioned names. This is an alphatimer's market, take advantage of it. For various reasons, my favorite names for new money today are NE, CE, IACI, GM, WB and CPKI (though I'd buy WB and CPKI slowly and only if I could add on a pullback since the move yesterday was huge)
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