understanding the psychology of behavior

The market certainly was and is a scary place.  But some positives are emerging.  LIBOR came down significantly, and the VIX is showing a sign of collapse with its break from the 20SMA. 

This could mean the market rallies.  The extent of the rally, I do not know.  There is resistance all over the place, and if the market does rally it will be a choppy rally. Around 980-1010 there is resistance, along with the SMA resistance.  On top of that, the market will be approaching these points with a short-term really overbought position.

As far as action, I do think we rally toward the end of the year, or at least for November.  I kepted most of my exposure to the upside with MA calls, sold put and GE position.  But my PG and JPM I sold Jan calls against to capture profits.  (I will also be active in trading around those protected positions via calls/puts.)

A word of caution on playing puts.  The VIX is looking to ease, which means volatility will ease, hence the premiums, primarily in the Puts, will ease, which means the value of the Puts will decrease.  If you want to get into names like PG or JPM or MA or whatever, may want to look to sell just out of the money Nov. Puts (or at a strike you would not mind owning the stock).  Basically the trade is a reduction in option premium, but if the stock does decline below the strike be prepared to own it… so choose a strike price you are willing to buy the stock at. 

B-U-L-L-S-H-I-T.

The sell off was almost the same perfectly timed sell off we had the other day.  It was forced selling.

With respect to NVDA… a move from mid 6 to mid 8 is a move of 30% in less then 3 days.  I know the industry wind is on its back, but it is approaching my conservative estimate target price.

If your a long-term holder (+1yr), keep holding, maybe sell some Jan Out of money ($10) calls.

Not touching PG, GE, JPM or MA yet.  Will look to unload some PG at 66, and sell calls on the remainder when mid 60s is achieved. Looking to sell calls on GE when 22-23 is reached. Will sell calls on JPM when 40 is achieved as well.

Also, will start to short the market again when the SP500 approaches 1000. 

This market is no fun. There is no stability. Chaos rules. Its a great long-term story, but even then, ur will gets tested as rational gets thrown out the window. (And I am too scared to short here, as the fundamentalist in me prevents me from doing such things due to valuations.)

Anyway, just an FYI, I purchased more PG (common) today ahead of the earnings report tomorrow morning.  As every company that already reported, PG probably did well this quarter, but will say they do not see clear visability due to the weak economy.

But how great would it be if they stated that they expect a solid next quarter due to the decline in commodity prices and increased margins. Then we might get some leadership in this market, and some fun might return… oh… i have to calm down… getting a bit a head of myself. Too much optimism for such ’long and deep’ recession feared market.

This sucks.  Markets are no fun anymore.  We just keep getting hit by forced selling.  The last 10 minutes of trading was such an obvious display.

There is really nothing we can do about it.  The market was holding its own for the better part of the day, but as usual, gains do not last longer than a few hours.

But the end of day, especially the last 10minutes is just something to awe.  Something triggered a massive, high volume, selling.

I do not know what to make of this, and I am not going to try to sound smart and explain it. 

(If anyone thinks this type of selling is due to ‘Recession Fears’, I will openly call them a moron. The market is not going down because we fear a recession… we are ALREADY in a nasty recession. period.)

IMO, too many people are expecting a capitulation bottom.  There are too many ‘talking heads’, too many people who think they know what they are talkiing about… myself included .

My entire premiss of purchasing stocks at this point is all due to severe dislocations in stock price verse very conservative values.

I am not waiting on some techincal indicator to dictate bottom. (Anyone who is should not be listened to… all technical indicators were blown out the window weeks ago.)

I think everyone who tried to pick a market bottom has been made a fool of in the past few weeks. Althought, to be fair, the market has not broken the 839 SP500 low yet. (For the record, I do not think it will, and no I will not wear a jester’s hat )

Much talk was given to the unwinding of the currency carry trade. So I plotted the FXY (Yen-to-Dollar) against the SP500 to try to observe a pattern. But there is none, with the exception of the past 2 months.

(Plotting the UUP over the past 3 months produces the same chart.)

What I find most intersting about this chart is that it indicates an inflection point. The divergence has become too severe, further supporting a market bottom. I say this because, this is not the first time we heard of the ‘carry trade’ unwinding. The unwinding has gotten some exposure last year. I guess what I am trying to say is that the carry trade has been unwinding well before this current attention, and should come to an end sooner rather than later.

If I were an ‘insider’ I would have some knowledge of the total number of unwinding that needs to take place, but because I am not I do not have a fundamental basis to say whether or not the thesis above is accurate. But I (and all of us) do have a fundamental basis to say whether or not equities at current levels justify purchase.

On the individial stock level, I am interested in GE, PG, BNI, NVDA, MA, PWR, JPM and PBR. All of these are established well run companies, and leaders in their field. I conducted a model analysis putting in reduced estimates (from already reduced analyst estimates) via the Diamond-Hill finacial model ‘valuator’, along with a common sense approach via assets. Below is the analysis. The numbers presented will be in order of… current EPS est., assumed 5yr growth rate, requested return, and terminal PE:

GE: 1.75, 6.8, 8.5, and 10.0 produces a target price of 25-26. Right from the get go we know GE will make more then 1.75 this year. In 5 yrs will it produce more than a 7% growth rate? And it historically holds a PE of 13-15. I drastically under cut estimates, yet GE is trading around 17-18. It is at the forefront of the Clean Tech/infrastructure spending.

PG: 4.20, 6.5, 8.0, and 13.6 produces a target price of 66. Commodity prices are down, directly and immediately benefiting their bottomline. Not to mention their products will be purchased whether or not there is a severe recession. Historically it trades at a much higher trailing PE, around 18-21. Even with really conservative estimates, and a pathetic growth rate, PG is trading around 58 below the conservative target price.

NVDA: 0.80, 5.0, 10.5 and 7.2 produces a traget price of 9-10. The PC indurstry is shifting to use more and more graphic chips, and NVDA is perfectly positioned. It has $3/share in cash, with asset price of about $5/share. Basically you are paying for the assets of NVDA at the moment, and zero… ZERO… earnings power.

MA: 8.18, 10.6, 8.5 and 14.6 produces a target price of 176. Cash to electronic payments is happening whether we like it or not, recession or no recession. MA is currently trading at a PE of around 15, but better understanding of the processing biz will take place next week w/ Visa reporting.

BNI: 5.64, 10.5, 9.5 and 13.1 produces a target price of 124. I know it is a transport and during a severe recession transports really feel it. However, current 2009 EPS estimates 6.97, and I accounted for 5.64 (a 20% reduction, while we are in the recession and after they beat estimate on thursday). The chart indicates around 75 may be seen again… but ‘who knows’?

PWR: 0.88, 10.6, 10.5 and 14.0 produces a target price of 17-18. During the last CC, management confirmed they can grow EPS at a 20% clip. A 20% growth would produce a target price of 25-26. With PWR, a conservative entry point, with conservative estimates, merits around a $14 entry.

JPM: 2.50, 5.0, 7.5 and 8.2 produces a target price of 42. With WaMu in their fold, JPM should produce greater EPS, probably north of $3/share next year. However, for the moment, JPM and other banks are held hostage to continued write-downs via defaults. Low 30s is not a bad entry, not at all.

PBR: 1.90, 5.8, 9.0 and 7.6 produces a target price of 25-26. Ignoring the fact that they control one of the largest reserves in the world, PBR is held hostage to oil prices. A good entry would be to wait for oil to hit 50 or so, however PBR’s chart indicates support at around 18.

We should be seeing market declines Monday morning (as usual ), but on these decline I will be a buyer. (I already purchased PG on Friday, own GE and am exposed to MA.) By the end of this week, probably Monday or Tuesday, I be entirely in stocks. I will pick up NVDA, JPM, and some BNI.

All these stocks are trading well below very conservative estimates, and I do not mind holding on to these stocks at current prices.

Remember, if this is armageddon… eventually, any asset will be worth nothing, even cash, but if it is not, better off investing in assets with a relatively higher rate of return.

Because I have no bearing as to what price to enter, and no real guage as to when there is a psychological low point (all indicators are thrown out the window after today), I am just waiting.

Obviously I am not selling anything.

Stocks still have value, and now is a great time to enter names. The macro economy will lead to hick up for a quarters or so, but quality companies will keep making money.

I have enough GE, from shares to Puts I sold… I’m done entering in GE… PS it is yielding around 7%.

MA… just waiting on it, i’m exposed enough to it.

PBR… wait for oil to hit 50… could see 18, although it is disturbingly cheap in the low 20s.

BNI… That $75 level is appealing.

PG… Falling commodity prices, reduces their costs and will benefit from it. Will be affected by the currency rise, but imo, not as much as the commodity price fall.

JPM… The bank that benefited to most from all this.

So… i guess stocks (as a piece of paper reflecting ownership in a viable cash producing company) has absolutely no value.

I am truly sick of this relentless selling.

To the sellers out there… please… please… just sell everything you plan on selling now. I mean NOW. I am tired of watching quality stocks of solid companies being traded like dog shit.

Please… just sell everything and get it over with. Dump it all. PLEASE.  Make the markets crash, again. PLEASE!

GE is at a 6.8% yield.  By the time the hegdies and pussy whipped mutual funds are done with it, GE will be trading at 10%.  For the record, GE at 1.75 eps (forward looking) with only 6% growth (for 5yrs) and an assumed PE of around 10, is worth about $25-26 a share… but its okay as many investors are willing to unload it at 18-19.

At the moment I am predominately cash heavy, but the MA options are really giving it to me where the sun don’t shine.

MA is trading at a heft discount.  Obvious reasons include…

1. slow down with the consumer

2. dollar appreciation against most currencies

Both are valid reasons to be negative, and expect multiple compression on MA, as I was anticipating.  However, at what point of multiple compression is enough?

The slow down with the consumer is obvious, we saw it in their last report where the US consumer was slowing, yet the processing rate showed 6% growth.  This, to me, was a clear sign of cash-to-plastic conversion.  When AmEx reported, they reported consistent growth figures. US spending became negative, while international still grew at a healthy pace.

No one is denying a recession scenario, nor is anyone NOT anticipating a global recession.  The cat is out of the bag… things suck out there, but is the negative economy preventing the cash-to-plastic trend?  Current 2008 estimates have MA earning 8.75 (reduced from 8.81).  With MA currently trading around 135, does the economic situation merit a PE of approx. 15?

The current 2008 estimates may be too high thanks to the dollar’s strength.  Since August, the dollar (in aggregate via the UUP from 23.2 to 26) has strengthened approximately 13%. About half of MA’s earnings come from abroad.  If we assume analysts are not factoring in the currency conversion, we must establish a half of the 13% discount to 2008 estimates. So… from 8.75 we get (8.75*0.13= 1.1375/2= 0.56875), to which the 2008 estimates become 8.75-0.56875= 8.18.  Leaving MA (at 136) with an estimated PE of 16.6.

Is that too expensive for a company taking advantage of one of the greatest society changes (paper cash-to-plastic) ever witnessed?