understanding the psychology of behavior

I know its an advertisement company and all, but please due a discounted cash flow valuation on GOOG.

I found, with an EPS of 16, 5yr growth of 10%, and a ending PE of 13… the stock is conservatively worth around 350. Yet it is about to enter the 200s.  Seriously? (I know… I know… valuations do not matter in this market… blah blah blah. But for companies like GOOG, valuation soooo does matter.)

Google has already proven its flexability with respect to earnings. It can cut costs and raise earnings, as it showed during the last quarter report. So a major EPS cut (despite the flexability), with a major eps growth cut still has GOOG conservatively priced around 350.

Take note value boys/girls.

(I will look to play the 300 Jan GOOG Calls for the oversold pop, as the value player will start eating it up.)

Anyone who thinks GE’s infrastructure biz will see a major hit over the next year, imo are mistaken.  Stimulus packages focusing on infrastructure projects will take hold in a major way, and China is the first announce it. (article)

This should faciliate the infrastructure side of GE’s biz, but the materials etf XLB (which pretty much entails everything required for infrastructure) would be the best direct play.

The market started to break from its first set of SMA resistances, the 14sma. The 32SMA is proving to be the next.

Although the SMAs are resistance points, the market valuation is more important at the moment, which incorporates the channel trading that is currently taking place. The economic data is simply too weak to support a reasonable rally at the moment. So everytime it rallies we get some serious selling, probably from hedgies. But what I find more interesting is that there is some serious buyers at the 900 and below level. Individual valuations simply can not be ignored… I do not care what the pundits say.

Support of a bottom is the VIX. Further weakness is being seen within the chart.

The 20SMA did act as resistance, and now the chart looks to want to continue its break down. The 50SMA will most likely be taken out over the next two months.

Some stocks with interesting charts in relation to the current market weakness…

MA - Its been consolidating for some time, and while the market has been punished so has MA. The SMA resistance has been breached in the daily and weekly. Hence my belief it will not breach 130 again, also beecause at 140 valuation becomes a no brainer.

GE - Should continue its channeling with the market, although a more clearly defined channel has been established. Mid 21 is the resistance to breach.

PWR - Currently at a long term support level due to a weaker than expected earnings report.

From the recent report, with its current line up of products, if the computer biz was in an up cycle, NVDA would be a $50 stock… easily. Imagine all the computers its products would be in, and the profits it would reap in an up cycle from the growth of the sector.  Truly is a tragedy.

But the computer industry is in a really weak cycle, with a market of reduced multiples and NVDA is making due with what it can. It was a really nice report. But since we are in a weak cycle, wait for a pull back if wanting to get into the stock.

Dimon is probably the most honest CEO out there.  No bullshit, no sugarcoating he just tells the world to be very scared, and if your not, get scared.

I think this is why the street treats the stock so well.  Its a well run company with a CEO that is (and has been) preparing for the worst, and they are now taking advantage.

I closed out my protective puts in JPM, still have the sold calls against my common, but will enter 37.5 Jan Calls when JPM hits 38.  It is currently consolidating, as all banks got hit yesterday due to the Queen of Doom’s negative banking note.

Also, I am looking to get long the market again… the SP500 may test 900, but I will post a more detailed analysis later in the day.

Increased my market protection via 100 Jan SPY Puts.  Purchased puts on PG, and am waiting for JPM puts to go into place via my limit order. (The Vix is really oversold, and sitting on the 50SMA support. I am expecting a pop from current levels.)

The market is very overextended in the short-term, and expect a pull back for the very short-term, at least for a consolidation.

I still like the market for a Nov. or end of year rally, and I am just playing the consolidation here… not a major market break down.

(I stated early I expect the rally to be choppy. While volatility is going down, as I expect, a Vix in the 40s is still pretty high.) 

For the first three quarters of their current year they produced 7.59 eps in diluted share.  The current estimate for the 4rth q is 1.80.  MA has proven to beat every quarter since becoming a public company, that trend should continue.  If they only meet the 1.80 4rth q estimate, they will have a 2008 eps of 9.39, which means at a stock price of 145 it will have a PE of 15.

A PE of 15!!!!!!!… for a company that has just beat estimates by 22cents… (10%), and every public quarter.

That spells VALUE!

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.

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.