This past week was quite quiet, not to say plain boring. There was no rally, no deep dive of any of the indexes, nothing to keep us from doozing off while watching the ticker tape. If it wasn’t for Madoff, with his Ponzi scheme, there would be nothing to remember.
Speaking of Madoff, here is what Clarence W. Barron, the founder of Barron’s newspaper, said in 1920, when he denounced the original Ponzi scheme: “This neglect in our educational system leaves the people’s financial education to the sensational press, to socialistic propaganda and to designing politicians. It permits schemers to defraud the small earner and small investor through making him believe that capital accumulations and great fortunes are matters of speculation or public robbery.” Barron’s – the newspaper – wrote a skeptical note on Madoff back in 2001, questioning his secretive tactics.
So let’s take a yawn – sorry, look – at the major indices and how they fare this past week. The DJIA closed at 8579.11, down 0.59%, Nasdaq closed at 1564.32, up 1.53% and S&P500 closed at 887.88, up 0.93%. That’s it! So, with nothing to talk about last week, everybody turned to predict the outlook in 2009. And the opinions abound. After a 2008 which had investors on their toes, ready to throw in the towel, or the shoe, everybody is hoping for a much calmer 2009. It must be the exhaustion talking, because I read somewhere that 1929 looked just like 2008. Brrrr!!
Because optimism is the most important of the humanly traits, let’s cross our fingers and take peek into what’s expected from 2009. Tall order, no less! The economists expect a deeper economic slide, and traders are waiting for companies to report their messy fourth-quarter earnings starting in February. There are three powerful forces that will keep investors guessing and markets volatile: the ongoing and unpredictable government intervention, the process of deleveraging, and the impact of the economic contraction on corporate profits. As the volatility will come down from its peak, so is the correlation between stocks, which will allow for a clear differentiation between winners and losers. Some dubbed 2009 “the stock picker’s paradise”. As the expectancy for growth increases, the first beneficiaries could be the technology and small stocks – Nasdaq rallied 13% in four weeks.
The Cash Bubble and the January Effect
We are probably in a cash bubble, as investors paid the government to keep their money safe. The “cash is king” mentality is all the rage now, and it may soon join the list of bubbles that burst over Wall Street, including stocks, oil, agricultural commodities and subprime mortgages. A lot of traders are buying – or debating doing so – bullish calls on stocks and sectors. The more battered the security the better. They see options as a cost-effective way to balance the risk that the market could worsen in 2009, rather than improve, while ensuring they do not miss any rallies. They are selling richly priced calls, and using the proceeds to lower the costs of buying stocks. One Credit Suisse derivatives strategist, is advising clients to sell calls against Exxon Mobil (XOM), which he says is the “T-bill of equities”. Exxon has a free cash flow of $37 billion, the highest in the S&P 500. Many investors, in their flight to safety, have bought Exxon recently, and it appears to be overbought. Selling January 85 call against the stock may be a good way to cash in the exuberance. The economy gives us good reasons not to part with cash. Conditions will worsen if the consumers don’t start consuming again. Rising unemployment is also a major risk factor. However, it is difficult to find another point in the modern time when investor sentiment was more negative than today. Three-month realized volatility of the S&P500 Index was recently 71.86% surpassing the high of 68% set during the Great Crash of 1929. A short term swing on the optimist side will see a great deal of cash reinvested. Jon Najarian, co-founder of optionmonster.com, said cash is so high on the sides that it could stress the financial system when reinvested, saying that “it could be the biggest January effect ever”. Now that’s a good way to start 2009.
Still in the Bear Territory
The bear market doesn’t go away that fast. So while a retracement may be in the cards, looks for the exit points while the rally lasts.In this information age we are all inundated by data, forecasts and opinions. Some based their forecasts on life experiences, statistical analysis, historical references, or even just opinion. In the end some will be correct, and most will be incorrect. To pick and choose among the various resources is a matter of personal preference. Yet, to pick and choose too many resources will result in information overload. We can all agree, economically these are treacherous times. Banks are dysfunctional, credit lines are tight, businesses that relied on ever expanding credit are failing, unemployment is rising, and deflationary pressures are everywhere. We can all also agree that this is a cyclical economic downturn and not just an equity bear market. In the past century all cyclical bear markets have displayed similar characteristics. First, the equity market loses 50% of its value. Second, there is a 50% retracement of the entire bear market. Third, the final downleg. We label these three events are Primary waves A, B and C. The 1937-1942 cyclical bear market: lost 50% in a year, retraced 50% in a few months, and then took three years to retest the lows. The 1929-1932 bear market: crashed 50% in a matter of months, retraced 50% within a few months, and then continued to decline for the next two years until the market lost about 90% of its value. Technically, the main difference between the two cyclical bear markets is the 1929-1932 bear market continued to make new lows for the next two years after the initial 50% decline. While the 1937-1942 bear market went sideways for a few years, and only made new lows at the end. Our current cyclical bear market has already declined 50%, but has yet to retrace 50% of that decline. The retracement may be underway now, as the market has already rallied 24% off its recent lows. When the retracement does complete, Primary waves A and B will have completed, and then Primary C will be underway. Only then can we estimate the potential total damage to the equity market. Prior to these two events occurring, many forecasters are just making educated guesses. Should the bear market stall we'll enter a 1937-1942 scenario. Should the bear market start making lower lows, 1929-1932. The 1929-1932 bear market displayed some characteristics of its own. More on this should the need arise. When this bear market does complete its 50% retracement, to remain in equities would be a high risk venture.
Tuesday, December 23, 2008
Monday, December 8, 2008
Company of the Week - Masimo Corp
Masimo.com
Ticker: MASI
Share price: $25.53
12-month sales: $293 million
5-year profit growth rate: 49%
The company’s new product, called SpHb, does real time blood test, without the blood. It tracks hemoglobin levels in blood without drawing any. The results don’t reach the levels of a lab test, but they provide many crucial uses, such as telling right away if the patient who just had surgery is suffering any internal bleeding, or telling a doctor when to administer a blood transfusion and how much to transfuse. It also detects anemia. The real advantage of SpHb for doctors is the real time aspect, as opposed to drawing blood, send it to the lab, and wait for the results few hours later. The SpHb is still in beta phase with a full launch expected early next year. The potential market for the product is around $1B, quite a bump for Masimo, which sales last year were $293 million.
Masimo’s original, and still dominant, product line is a pulse oximeter, which measures oxygen levels in the blood. They are the pinching plastic clothespin the doctors put on your fingers when you’re in the hospital. The competition is much larger Covidien (Ticker: COV), but Masimo is steadily taking market share from it, and currently sits at 27%, vs. Covidien’s 60%. In the third quarter, oximetry sales grew faster than some analysts predicted, and since the market is mature, it was almost entirely due to market-share gains.
The major differentiating factor is the algorithm inside of Masimo’s unit, which allows for higher sensitivity toward patient movement, and results in lower number of false readings.
The analysts have arrived at the $1 billion figure by counting the potential U.S. hospitals market. More than 400 million hemoglobin tests are done annually, and more than half of those are outside hospitals.
The firm’s business model is the “razor-blade” model: give away the razor, sell them the blades. Masimo gives away or loans its monitors n exchange for a five-year contract to supply its disposable sensors, which only fit Masimo’s devices. This has given the firm an installed base of more than half a million, plus a steady revenue stream. The company has more add-ons in the works. Late next year, it plans to launch Acoustic Respiration Monitoring, a device which can alert hospital staff to slowdowns or seizures in a patient’s breathing. In the third quarter, profit beat analysts’ view by rising 22% over the prior year to 22 cents a share. Sales increased 21% to $78.1 million. In the fourth quarter, analysts expect profit to decrease somewhat, due to lower royalties, higher research and development costs. In 2009, though, they expect 15% profit growth to 82 cents a share, accelerating to 35% the year after that.
Ticker: MASI
Share price: $25.53
12-month sales: $293 million
5-year profit growth rate: 49%
The company’s new product, called SpHb, does real time blood test, without the blood. It tracks hemoglobin levels in blood without drawing any. The results don’t reach the levels of a lab test, but they provide many crucial uses, such as telling right away if the patient who just had surgery is suffering any internal bleeding, or telling a doctor when to administer a blood transfusion and how much to transfuse. It also detects anemia. The real advantage of SpHb for doctors is the real time aspect, as opposed to drawing blood, send it to the lab, and wait for the results few hours later. The SpHb is still in beta phase with a full launch expected early next year. The potential market for the product is around $1B, quite a bump for Masimo, which sales last year were $293 million.
Masimo’s original, and still dominant, product line is a pulse oximeter, which measures oxygen levels in the blood. They are the pinching plastic clothespin the doctors put on your fingers when you’re in the hospital. The competition is much larger Covidien (Ticker: COV), but Masimo is steadily taking market share from it, and currently sits at 27%, vs. Covidien’s 60%. In the third quarter, oximetry sales grew faster than some analysts predicted, and since the market is mature, it was almost entirely due to market-share gains.
The major differentiating factor is the algorithm inside of Masimo’s unit, which allows for higher sensitivity toward patient movement, and results in lower number of false readings.
The analysts have arrived at the $1 billion figure by counting the potential U.S. hospitals market. More than 400 million hemoglobin tests are done annually, and more than half of those are outside hospitals.
The firm’s business model is the “razor-blade” model: give away the razor, sell them the blades. Masimo gives away or loans its monitors n exchange for a five-year contract to supply its disposable sensors, which only fit Masimo’s devices. This has given the firm an installed base of more than half a million, plus a steady revenue stream. The company has more add-ons in the works. Late next year, it plans to launch Acoustic Respiration Monitoring, a device which can alert hospital staff to slowdowns or seizures in a patient’s breathing. In the third quarter, profit beat analysts’ view by rising 22% over the prior year to 22 cents a share. Sales increased 21% to $78.1 million. In the fourth quarter, analysts expect profit to decrease somewhat, due to lower royalties, higher research and development costs. In 2009, though, they expect 15% profit growth to 82 cents a share, accelerating to 35% the year after that.
Weekly Recap - December 8, 2008
The recession of 2008 became official last week. According to the announcement Monday by the Business Cycle Dating Committee of the National Bureau of Economic Research, the recession began last December, which means it has already lasted 12 months. The average recession in the U.S. lasts about 10 months, so the good news is that this current recession has gone on longer than the past two recessions – in 2001 and in 1990-1991 – each eight months long. The news last week came both good and bad. We took solace at the news of recession declared, as we hope that the call often comes after a recession has peaked. In the ‘good news’ category was the fact that the U.S. government may force rates on new mortgages down to 4.5% to revive the housing market, and Europe has slashed interest rates to 2.5% from 3.25%. In the ‘bad news’, there are plenty. Manufacturing contracted in November by the fastest pace in 26 years, and 533,000 people were laid off – bringing jobs cut in the past three months to more than 1.25 million.
The Dow ended the week off 194, or 2.2% to 8635. The S&P500 gave up 20, or 2.3% to 876; it is 16% above an 11 ½ -year low reached on Nov. 20 and 44% below its 2007 peak. The Nasdaq Composite Index fell 26, or 1.7%, to 1509, while the Russell 2000 lost 12, or 2.6%, to 461. The economy may still go worse before it will improve, especially if the Americans continue to lose jobs and the government fails to repair consumer confidence, both likely events.
Inflation Rebound
Rather than betting on rebound in growth, a smarter bet would be on rebound in inflation, according to Don Rissmiller, economist at Strategas Research Partners. The government is fighting deflation by flooding the markets with cheap money, increasing the odds for inflation. When inflation returns, energy and basic-material stocks could lead the market once again, and resource-rich countries like Canada, Australia and Brazil could prosper. Shorting Treasuries and buying TIPS, or Treasury inflation-protected securities, might be the purest way to hedge against eventual inflation.
Option Strategies: Buy-Write
Options traders try to convert volatility into money. “Buy-writing” is a classic strategy that refers to buying a stock and selling, or writing, an out-of-money call on it, and it helps traders to harness volatility. The “buy-write” lowers the cost of buying the stock by the amount received for selling the call, and it also serves like a modest hedge. The strategy’s benchmark is the Chicago Board Options Exchange’s S&P500 BuyWrite Index, or BXM. In October, it had its largest monthly gain in 20 years – 8.1% - well above its two-decade average of 1.7%.To successfully implement this strategy one needs discipline.
Here are the rules, according to Michael Schwartz, Oppenheimer & Co.’s chief options strategist:
• Stock selection is primary, getting a premium is secondary. Pick stocks that you want to own, not calls that you want to sell.
• Never invest more than 10% of your capital in a buy-write. Leverage cuts two ways.• Sell slightly out-of-the-money calls to leave room for upside profit potential.
• Let time work for you. You can sell three- to six- month calls for higher premiums.
• Don’t annualize returns. Focus on the potential return for the trade’s actual duration; annualized returns are rarely earned.
• Ignore theoretical values. Expensive options stay expensive longer than expected, and vice versa. The current correction has shown that volatility, which always reverts to its mean, may not do so when expected.
• Don’t sell the call and try to buy the stock at a better price. This leaves you with a “naked call” and unlimited market risk. Enter buy-writes simultaneously. A net debit order is entered for any combination of prices to buy a stock and sell a call that equals your desired debit ($30 stock price less $3 option price equals $27 net debit).
• If stock fundamentals change, sell the stock and buy back the call.
• If you can earn a high percentage of the maximum profit before expiration, do it. Waiting for the last 10% to 15% of premium often means risking everything for no more than an incremental gain.
This strategy of “buy-write” gives investors a way to handle panic and use the market fear to their advantage.
Other news of the week:
• U.S. Shed 533,000 Jobs in November – on a percentage basis, that was the worst decline in 28 years and far worse than expected. Also, Sept. and Oct. job losses were revised sharply higher, lifting ’08 job cuts to 1.91 mil. The jobless rate hit a 15-year high of 6.7%. It would have climbed more, but many people simply stopped looking for work.
• Mortgage Delinquencies Jump – The share of home loans behind on payments rose to 6.99% in Q3 vs. Q2’s 6.42%. 20% of subprime loans are delinquent, but prime mortgage woes are rising as the recession affects more people. New foreclosure activity dipped as governments and lenders try to keep people in homes.
• Crude Oil Dives 7% to 4-year Low – The January crude contract is at $40.81 a barrel – 72% off the July peak – as the jobs report boded ill for energy demand. The Int’l Energy Agency also cut global oil-demand forecasts again. Natural gas tumbled 5% to $5.74 per mil Btu. Retail gas prices should fall to $1.60 a gallon, given the current gasoline futures.
• Fed Begins Buying Agency Debt – It bought $5 bil of Fannie Mae, Freddie Mac and Federal Home Loan Banks debt as part of a new $600 bil program to support mortgages and housing. Since the plan was announced Nov. 25, mortgage rates have plunged, triggering a refinancing boomlet. Also, the Treasury is legally bound to inject capital into Fannie and Freddie if needed, the Justice Dept. ruled.
• Consumer Borrowing Fell in Oct – Consumer credit outstanding declined $3.5 bil to $2.578 bil, the Fed said, the latest evidence of reined-in spending amid accelerating job losses and economic gloom. Borrowing rose a revised $6.7 bil in Sept and fell $6.4 bil in August. In Oct., credit card and other revolving debt fell $181.6 mil. Auto and other nonrevolving debt fell $3.4 bil
The Dow ended the week off 194, or 2.2% to 8635. The S&P500 gave up 20, or 2.3% to 876; it is 16% above an 11 ½ -year low reached on Nov. 20 and 44% below its 2007 peak. The Nasdaq Composite Index fell 26, or 1.7%, to 1509, while the Russell 2000 lost 12, or 2.6%, to 461. The economy may still go worse before it will improve, especially if the Americans continue to lose jobs and the government fails to repair consumer confidence, both likely events.
Inflation Rebound
Rather than betting on rebound in growth, a smarter bet would be on rebound in inflation, according to Don Rissmiller, economist at Strategas Research Partners. The government is fighting deflation by flooding the markets with cheap money, increasing the odds for inflation. When inflation returns, energy and basic-material stocks could lead the market once again, and resource-rich countries like Canada, Australia and Brazil could prosper. Shorting Treasuries and buying TIPS, or Treasury inflation-protected securities, might be the purest way to hedge against eventual inflation.
Option Strategies: Buy-Write
Options traders try to convert volatility into money. “Buy-writing” is a classic strategy that refers to buying a stock and selling, or writing, an out-of-money call on it, and it helps traders to harness volatility. The “buy-write” lowers the cost of buying the stock by the amount received for selling the call, and it also serves like a modest hedge. The strategy’s benchmark is the Chicago Board Options Exchange’s S&P500 BuyWrite Index, or BXM. In October, it had its largest monthly gain in 20 years – 8.1% - well above its two-decade average of 1.7%.To successfully implement this strategy one needs discipline.
Here are the rules, according to Michael Schwartz, Oppenheimer & Co.’s chief options strategist:
• Stock selection is primary, getting a premium is secondary. Pick stocks that you want to own, not calls that you want to sell.
• Never invest more than 10% of your capital in a buy-write. Leverage cuts two ways.• Sell slightly out-of-the-money calls to leave room for upside profit potential.
• Let time work for you. You can sell three- to six- month calls for higher premiums.
• Don’t annualize returns. Focus on the potential return for the trade’s actual duration; annualized returns are rarely earned.
• Ignore theoretical values. Expensive options stay expensive longer than expected, and vice versa. The current correction has shown that volatility, which always reverts to its mean, may not do so when expected.
• Don’t sell the call and try to buy the stock at a better price. This leaves you with a “naked call” and unlimited market risk. Enter buy-writes simultaneously. A net debit order is entered for any combination of prices to buy a stock and sell a call that equals your desired debit ($30 stock price less $3 option price equals $27 net debit).
• If stock fundamentals change, sell the stock and buy back the call.
• If you can earn a high percentage of the maximum profit before expiration, do it. Waiting for the last 10% to 15% of premium often means risking everything for no more than an incremental gain.
This strategy of “buy-write” gives investors a way to handle panic and use the market fear to their advantage.
Other news of the week:
• U.S. Shed 533,000 Jobs in November – on a percentage basis, that was the worst decline in 28 years and far worse than expected. Also, Sept. and Oct. job losses were revised sharply higher, lifting ’08 job cuts to 1.91 mil. The jobless rate hit a 15-year high of 6.7%. It would have climbed more, but many people simply stopped looking for work.
• Mortgage Delinquencies Jump – The share of home loans behind on payments rose to 6.99% in Q3 vs. Q2’s 6.42%. 20% of subprime loans are delinquent, but prime mortgage woes are rising as the recession affects more people. New foreclosure activity dipped as governments and lenders try to keep people in homes.
• Crude Oil Dives 7% to 4-year Low – The January crude contract is at $40.81 a barrel – 72% off the July peak – as the jobs report boded ill for energy demand. The Int’l Energy Agency also cut global oil-demand forecasts again. Natural gas tumbled 5% to $5.74 per mil Btu. Retail gas prices should fall to $1.60 a gallon, given the current gasoline futures.
• Fed Begins Buying Agency Debt – It bought $5 bil of Fannie Mae, Freddie Mac and Federal Home Loan Banks debt as part of a new $600 bil program to support mortgages and housing. Since the plan was announced Nov. 25, mortgage rates have plunged, triggering a refinancing boomlet. Also, the Treasury is legally bound to inject capital into Fannie and Freddie if needed, the Justice Dept. ruled.
• Consumer Borrowing Fell in Oct – Consumer credit outstanding declined $3.5 bil to $2.578 bil, the Fed said, the latest evidence of reined-in spending amid accelerating job losses and economic gloom. Borrowing rose a revised $6.7 bil in Sept and fell $6.4 bil in August. In Oct., credit card and other revolving debt fell $181.6 mil. Auto and other nonrevolving debt fell $3.4 bil
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