Collecting Wealth

A few things

2007-06-01T01:18:00.000-04:00

I have a feeling that my PFE position that I have established earlier this year is going to end up like my BMY position, 5% yield for a year, another 5% capital gain for the same period, and exit without too much excitement.

Got out of LTD. The company is transition. I don't know if I like restructuring story. I thought they had a handle on bring the Express stores back to profitability. I was wrong. Nevertheless, a ride from $20 to $27 isn't that bad. At least it met my goal of 15% capital appreciation.

Also chopped was BER. Nothing against BER, I just have a little too much exposure in the hazard business. One of them insurers must go. This year is looking like a bad year with hurricanes, time to trim back a little

Screaming can kill

2007-01-24T10:39:00.000-05:00

I thought this was funny. From Reuters:

BEIJING, Jan 24 (Reuters Life!) - Hundreds of chickens have been found dead in east China -- and a court has ruled that the cause of death was the screaming of a four-year-old boy who in turn had been scared by a barking dog, state media reported on Wednesday.

The bizarre sequence events began when the boy arrived at a village home in the eastern province of Jiangsu in the summer with his father who was delivering bottles of gas, the Nanjing Morning Post reported.

A villager was quoted as saying the little boy bent over the henhouse window, screaming for a long time, after being scared by the dog.

"One neighbor told police that he had heard the boy's crying that afternoon and another villager confirmed the boy screaming by the henhouse window," the newspaper said.

A court ruled the boy's screaming was "the only unexpected abnormal sound" and that 443 chickens trampled each other to death in fear.

The boy's father was ordered to pay 1,800 yuan ($230) in compensation to the owner of the chickens.

Recent transactions, part 2

2007-01-18T11:50:00.000-05:00

On top of the position I established and unloaded, I also made some arbitrage trades:

BRCD buying McData. MCDT holder will receive 0.75 share of BRCD that they hold in MCDT. The time that I made the pair trade, the spread was about $1, was about 18%. With the deal set to close end of Jan, that's more than 100% annualized return. There are some risks involved
1. BRCD investors may not approve the deal (McData already voted yes). This is unlikely, as there is no objections form the BRCD investor community at this point
2. FTC has some concern on BRCD having too much of market share after the merger. This is also not a very serious risk, but worth keeping an eye on
At the present time, the spread has shrunk to less than $0.5. Indicating the perceived risk is lowered..

I purchased 1000 share of EBHI @ $9.10. Eddie Bauer is in the process of being acquired by a private equity firm for $9.25/shr. There is virtually no risk involved in this deal and is set to close end of January. The annualized return for this trade is 20%.

I have established other positions as well. I am running out of time, and those position will be covered in the 3rd part of this series.

Recent transactions

2007-01-18T11:17:00.000-05:00

I haven't been very good with keeping notes lately. Here's a little catch-up:

Before end of the year, I unloaded FDC. Reason:

Western Union is spinned off. WU was the main reason I bought into FDC in the first place. While FDC's other business are still excellent, my focus is shift.
Use the drop in price to off set the huge cap gain I got in 2006. Over all, the return from FDC with the spin off of WU was a moderate 10% annually.

Also before the end of the year, I added PFE. Reason:

Market still undervalue drug companies. I sold off BMY earlier this year after I realized the company is not very well managed. PFE offers better drug pipelines, and better management
PFE recently hiked it's dividend. At my point of entry, my annual yield was about 4%, slightly lower than the 4.5% yield that I got from MRK when I bought it for $30/shr. At this rate, with the potential (very likely) dividend hike in the future, PFE and MRK are my long term safe investment. It's thrilling to receive thousands of dollars in dividend. On top of that, pay less tax than bank interest (CD fans take note).

On 12/20/06 I bought into SBH. Reason:

Special situation. SBH is a spin off. The best explanation can be found in Fat Pitch Financial's blog: Sally is a Beauty of a Spinoff. Although the situation deteriated a little.

After the new year, I unloaded FII. Reason:

FII has been an under-performer in my portfolio.
The reason for purchasing shares was murky. Best I can remember was that it was a safe bet (FII has been profitable), and Investment companies were hammer at the time (2003)

Over all, FII was only game me a 5% annual return for my investment. Not terrible, not great either.

I also sold off my AVP position. Similar reasoning to FII. The turn-around is slower than I expected. Sold off for a small profit. Although I recently check the price and found Avon has advanced quite a bit after I sold it. I suppose the Peter' law, or the Lynch Principal is at work.

One exciting addition I made after the new year is Sears Holding (SHLD). I watched the stock with infinite interest since it was in the mid-$90 and never bought. It's a masochism that I love the stock and yet kick myself not buying it. Lampert is a son-of-a-gun that can perform magic. I was scratching my head 5-6 years ago as how k-mart can ever survive let alone compete. After Eddie took over, with addition of Sears, the ship is finally chartered by a competent captain. I kept waiting and waiting for an entry point (I suppose that's how Warren was waiting for an entry point for Wal-mart). Finally after the new year, SHLD had another mini drop, and I got myself some share at $167.

sold off BBW

2007-01-18T11:11:00.000-05:00

I sold off my position in BBW this morning. The reasons:

The fad issue caught up to me.
I believe weaker economy is ahead of us
BBW usually has post-Christmas slide, usually after weak spring sales.
Margin of safety shrunk
There are other excellent investment opportunities around

I will get back into BBW, however, if it hits low 20's again.

Bad day, worse for insurance

2006-10-27T19:08:00.000-04:00

I guess as a part time investor, I get to hear the news last in the wall street food chain. The news is out why HIG took a hit. Turned out HIG's CEO said that the industry's profit level might have peaked this year for at least the short term. A quick check, I found that the insurance companies in my portfolio also suffered: PGR down 1.84%, BER down 3.6%, FAF is down 1.2% (although title insurance is very different from casualty insurance). ZNT, which is on my watch list, suffers the least, down 0.5%. I am waiting for this baby to come down so I can swap it with PGR. In any case, the basis of this speculation is the underwriting margin is shrinking. With re-insurance rate going higher and premium not improving much, the money isn't much if you are looking to make a dime from underwrite policies. This is the time to test the specific company's ability to resist the temptation of a price war. Insurance is a commodity business, those can tough it out with financial strength will eventually emerge as the victor, and will be able to buy up competitors at the end of the tunnel at 50 cents on the dollar worth of business. With strong balance sheet, prudent management team, I expect HIG, BER, and PGR will come out ahead in a few year. This is good news indeed. (Probably good news for consumers in the short term, bad news in the long run)

Adjusted portofolio

2006-10-27T10:51:00.000-04:00

I haven't posted for a while. I need to get better at it since this is one place I keep my thought records. Since August, I have reduced my position in 3M(MMM) by half, and double on TD Ameritrade(AMTD). I haven't changed my view on both, just recent price movement made sense to reallocate capital. I am staying put with my two oil plays, SinoPEC(SNP) and TNP.

scratching my head

2006-10-27T10:41:00.000-04:00

Now, this is what I don't understand how Wall Street dynamics works, and reason why I am NOT a momentum investor. HIG which last night reported 40% jump in profit increase, beat the estimates, has a very consistent earning record, and by my account a very undervalued stock... Guess what happened, the street pushed it down 4% this morning. Another case, FII, an asset management company, reported a DROP in profit, fell BELOW estimate. The street pushed it up 4% higher. Granted I also view FII as an undervalue long term value play and I am happy that I got an unexplained pop for it, it's not quite the same when you don't know exactly what these traders are thinking. The only thing I can think of is short covering from those who EXPECTED WORSE.

Today's market

2006-08-08T15:49:00.000-04:00

The bottom fell off for retail today. The biggest losers in my portfolio are all retail stocks. TNP, however, continue its surge since the positive earning surprise. The current world wide oil production is favors TNP's near and mid-term future. Long term wise, as long as India and China don't hit a hard landing, the down side risk is still low.

I am starting to look into adding to my URBN position. I had a tiny position established a few months ago after its initial drop. It has been down 25% since, netting me a small paper loss. Longer term wise, this is a very well manage company. Current woe is a good opportunity to get in and establish a sizeable investment. (chuckle.. don't really mind telling people what I am going to do because (1) nobody reads my blog, and that's a fact (2) I am such a small potato, there is no harm in showing my hand... I always laugh when I read other investment blog that the author always say "I am adding/unloading a position, will let you know when I am done..." come on, are you kidding me? everyone thinks they are Warren Buffett or Eddie Lampert... it's funny)

Good companies, different results

2006-07-28T21:39:00.000-04:00

I just scanned my portfolio quickly, and observed that Merck is as right now the biggest position in my portfolio. Since I bought it a little over a year ago, it has appreciated almost 40% and making it 9% of my total investment. I also bought 3M almost the same period, with a -2% return so far. I have to admit that I wasn't being patient at the time. I had cash and wanted to invest it. 3M wasn't cheap but wasn't overvalued either. Being a good company it was a safe buy. It did just that, a safe buy. I wish I'd stuck to what Warren Buffett preached "consider the cost of opportunities." the 3M buy had cost me other opportunities, like those other stocks when they were beaten down, or when 3M was beaten down. 3M is serverely beaten down right now. With earning increased over 17% over last year and remain the same price I bought it? What was a safe buy then has become an attractive buy.

Perfect 10

2006-07-27T12:34:00.000-04:00

John Dorfman, a columnist from Bloomberg has the piece Perfect 10 Portfolio Wasn't Beautiful This Time. In the 2006 edition of his annual 10 picks (which had an average 17% return since inception), one of his picks is Hartford Financial Services Inc. (HIG). He listed his reason why he likes the stock, which is the same reason I like it. I bought it a little less than a year ago, and it's currently sitting at a 13% paper gain. Adding the 2% yield, it meets my objective of a 15% annual gain. It's nice to have someone else to agree with you. It doesn't mean whether you are right or wrong. But as human we seek comfort in numbers.

Money that I didn't make

2006-07-27T09:48:00.000-04:00

I am starting to regret I didn't take advantage of the drop in the past month. With Build-A-Bear and TD Ameritrade coming back to life the chance of short term gain has slipped away. The problem with me wasn't that these companies weren't attractive buys. The problem was my portfolio was already fully allocated. Any further juggling will require me to unload other positions as I refuse to increase my exposure at this point. Yes, fundamental is important, but fighting the tape isn't very smart either.

It seems like I am going to make it 4 years in a row since I am converted to a "investor" from a "speculator" that I will make the goal of beating the S&P500 by 5 percentage points.

Buh bye, Sara Lee. I will miss you honey!

2006-07-27T01:31:00.000-04:00

Not really. I have quite a few turn-around stories in my portfolio, SLE is probably the only one that did turn out okay. What scared me was the further deteriorating of its fundamentals and the slow-foot pace of its restructuring. I also figure if it's going to spin off brands like Champion, etc, I could just buy them over the open market. What also bother me was the 130% dividend pay-out ratio. We should know that 5% yield is not going to last if fundamentals don't hold. When they cut dividend, the price will sink further. I took the 7% loss and moved on.

I also exercised my rights granted by USG corp, doubled my position in USG. At this point, I am just a few thousand below my 52-week high. My confidence is slowly coming back but still remain cautious.

Reponse to "Should You Prepay Your Mortgage?"

2006-07-12T18:16:00.000-04:00

http://www.freemoneyfinance.com/2006/07/should_you_prep.html

I had to respond to freemoneyfinance about his post. Since his site is down (unable to post comments) I am putting my comments here, and will copy-paste to his site late:

I dispute your points

1) You really have to look at it from the right perspective. The money you put into mortgage should be considered a 30-year investment. If your horizon is 30 years, pull up the equity market chart, no 30-year S&P500 period under perform the meager 5.5% percent. Statisically, it's ALMOST guaranteed it would outperform the 5.5% return.

2) Under normal circumstances, the usual mortgage terms people go for are fixed 30-year loan

3) You gotta give credit for people having more discipline than you expect. In other words, if people are already reading your blog, they at least have the motivations and the will to succeed financially. Perhaps you should re-read freakonomics.

4) That's subjective, not objective. Leverage, is often a tool to maximize return. I often think of my mortgage as a fix-asset-backed margin for my equity account. that 5.7% APR sure beats the 9% the brokerage house charges on margin rate. That why I am long only.

5) Finally, John, I think you should know this since you have a very strong finance background. Investment risk DECREASES for equity as the investment horizon extends, and INCREASES for fix-income when investment horizon extends. The risk of having your money tied-up at 5.5% over 30 years is so huge, I can't even begin to describe the horror. What if inflation increases? a 5% inflation rate will render your real return to almost zero. Worse, when inflation goes up, the fed will fight inflation with interest rate. I still remember the late 80's when your daily saving account can enjoy a 6% return, not to mention the CDs gave you over 10%. Your 5.5% will terribly under-perform even the safest investment instruments. There are not guarantee of success, only chances.

Small Investor Blues

2006-07-11T12:34:00.000-04:00

Small investors' mood I believe is probably reaching the low, or close to the low. What I just stated isn't anything scientific. It's based on the fact that I am a small investor, and I woked up extremely annoyed by the market. For the third straight year, June-July-August period gives me the blues. I also noticed quite a few blogs that I read regularly, the authors being small investors themselves, have no new material. When people are depressed, they usually go silent. (The opposite is true, when they are excited, they tend to talk a lot).

I am annoyed. But I shouldn't be. My account is still above water, off 6% from the height. That compared to the accounts that I have w/ two professional private money managers, both down more than 10% from the height (one still above water). I should feel pretty good. Except, comparing bad to worse is not a good way to make you feel great. This morning I almost felt like I need to unload half of my positions. Then I realized "holy shit, what am I doing..." It's probably a good time to double down (I am currently 80% invested, long only). Except... the little Hamlet is doing his work inside of me.. decisions, decisions, decisions....

Every time I see a position imploded, I get angrier. First, Ameritrade, then Urban Outfitter, Build-A-Bear, and the latest, 3M. "F---ing Mother F---er" I said. The emotional me tells me "The hell with these f---ers, let's sell them." The logical me then remind me that, I didn't double down on Digital River when it was hammered last summer, big mistake. I didn't double down when Sherwin Williams was hammered last winter, big mistake. I didn't double down McGraw-Hill this spring when it was hammered, big mistake. Ouch ouch ouch! Damn this greed and fear bullshit. What to do! What to do!

Oh and look at that 6% yield on FNT! I think I buy that one. Valueation-wise a lot of stuff look very attractive. It just when things look cheap, usually that's when your account isn't exactly healthy.

That has me thinking, maybe I should be a little more fearful next time when I got greedy, so I can be greedy when everyone's fearful. Hind sight is ALWAYS 20-20.

A well thought-out comment on outsourcing from slashdot

2006-06-12T18:13:00.000-04:00

See the actual post for the debates

I would argue that the companies doing the outsourcing aren't bearing the full economic costs of the transition, and that there are other costs that need to be factored in.

First, there is the cost to the employees of finding a new job, which is never fully reflected in severance pay. Severance pay probably only covers the amount of time the employee will be idle. Other costs include retraining the employee to fit the new job (paid by his new employer), the psychological effects of having his job terminated (paid by him, his family, and society at large), the costs of moving if the new job requires it, and the loss of community if he does have to move. This last item is important: while a loss of community has all sorts of ill effects, the expectation of losing it several more times over the course of your work history is even worse. Ask anyone raised by parents who got moved around a lot by the military.

People who expect to move away end up less trusting, less willing to invest in new relationships, less willing to participate in community functions or worry about local issues. There was a time when the rich still had some sort of shared community life with their workers, and it was a time when employers had loyalty to their employees. But now those who own the wealth--and decide how it will be used--are more distanced from the rest of us, and have no stake in that shared community life. So they'll happily move jobs to Outer Ohfuckitstan to earn an extra 1% return on their investment, without regard for the problems these moves cause the wider society.

The country that benefits from the new jobs also receives increased inequality between the well-off and the poor. India's rise has been accompanied by increased tension between wealthy urban areas and poor rural areas. Back when everyone was poor, the rural areas weren't likely to complain about not having electricity, because few did have it, and it's hard to want things you don't see anyone else enjoying. While an increase in the standard of living is wonderful, it is poisonous to a society when extreme inequalities in wealth exist. Of course, by this metric, our own society is very, very unhealthy.

There is another cost that employers do pay, but rarely fully account for when planning an offshoring: the loss of expertise. No matter how well the departing employees train their replacements (and what's their motivation to do a good job?) it will be years before the replacements can match the original expertise. Some of the knowledge lost in transition may never be rediscovered, leading to permanent inefficiencies.

No, I'm not a socialist. But I'm coming to the belief that collective ownership of wealth is a good thing. If Bank of America was owned by its employees, then their salaries would show up on the "income" side of the accounting ledger rather than the "expenses" side, and much of the motivation to outsource would evaporate. Otherwise, there is an inherent conflict of interest between management and labor: management wants to keep costs low, and labor is simply another expense to be minimized.

Additionally, a worker-owned setup is necessarily more efficient. Workers have the greatest incentive to make the company run as efficiently as possible, so management doesn't have to spend its time figuring out how to best motivate the employees. The workers would just tell them. Worker-owned companies are also more concerned with long-term stability, because there is no golden parachute waiting if they can just keep the stock prices from tanking in the next three quarters. There is only the promise of continued employment. Finally, when a few investors own a company, the goal is to maximize their profit. When workers own a company, they still want to maximize their returns, but they can accept a wider variety of payment: a cleaner environment, more free time to spend with their families, improvements in the social fabric of their communities, less stressful working conditions.

In short, collective ownership allows the wealth of a company to serve the many, not the few. So bring it on, free market boy.

Existing-home sales fall 2% to 6.76 mln in April

2006-05-25T11:55:00.000-04:00

Marketwatch.com reported that existing-home sales fall 2% to 6.76 mln in April. Now, in another blog message that I mentioned that new home sale hit higher, and inventory of existing home is hitting record high. The snow ball effect has just started. Next month, we are going to see even higher new home sale number while inventory pushing higher. This real estate market has finally turning back into buyers' market. Sooner or later, speculators will want to bail out. Price will go the way of a downward spiral.

New-home sales jump, but inventory of unsold homes rises to record

2006-05-24T11:57:00.000-04:00

According to this USAToday article, New-home sales jump, but inventory of unsold homes rises to record. To some people this may seems like an interesting contradiction. But to me, it's a clear sign of the housing bubbles making more popping sound.

It makes perfect sense, folks. Speculators (dumb money) rushed in middle of last year buying up spec homes from builder, hoping to turn around to sell them at a much higher price when the houses are built. Houses take average 10-14 months to complete, and we are now sees those transactions being completed. Hence a jump in new home sales. When ownership of these houses are transferred to the speculators, they immediately turned around and try to unload it, adding their share to the overall housing inventory. That's how we got this pill up in inventory. Watch, the more new home sale there is, the higher the inventory is going to go up. Meanwhile, there is just not enough demand to soak up all the supply out there. You know what's next? Most of these properties are highly leveraged, and most of the loans/mortgages are interest only. With the interest rate keep going up (see my other blog), and little prospect in finding a buyer, how long can the speculators take the bleeding? Sooner or later, someone will start slashing price in a fire-sale to trigger a massive price downward pressure.

Dear oh dear...

Hunker down, the tidal wave of inflation is coming

2006-05-23T15:18:00.000-04:00

A Reuters's article about Kodak's price power shows even a old and tire company, like Eastman Kodak is able to raise price, and pass on the energy cost to customers. Are we seeing the triggle down effect yet? Ladies and gentlmen, the Federal Reserve is not done with rate increase yet. We can officially declare the rest of year is going to be ugly.

Is Intel a value play?

2006-05-23T12:00:00.000-04:00

I quickly scanned the list of stocks that I used to own and still interested in, one that popped up was Intel. What caught my eye was the price tag, $18/share. Last time I checked the price it was at around $30. I checked the company's info on Yahoo, and here is what I found:

The stock is down 32% YTD
Revenue is not going anywhere w/ a -5% YOY growth rate
Earning is down

Now on the positive side:

Gross margin and operating margin is still at mid to high 20's
ROE, the indicator of the company's economic health, is at 21.77%
Excellent balance sheet, the company is net cash at 8.5 billion
Operating cash flow is at 13 billion, making the Enterprise Value / Operating Cash Flow ratio at at ridiculous 7.3%
The dividend yield is at 2% at current depressed price level, and the pay out ratio is only at 34%

In summary, we are looking at a hugely profitable money making machine selling at a fire-sale price. The extreme pessimism by investors seems come from the uncertainty of the future revenue growth. Can Intel fight back AMD? Can Intel morph itself again and grow into another product category? I am willing to bet it can. But first, more reading ahead

Exotic China island gears up for British package tours

2006-05-17T10:13:00.000-04:00

Exotic China island gears up for British package tours

I had the chance to visit the island and its beaches in 98 before the modern development. To call it an island while technically true, is kinda misleading. With the size about New Jersey, you are talking about tons and tons of beach front. I would go back to visit some time. When I visited, the beach was absolutely beautiful, with nobody arround, it was the kind of perfect setting for some peace and quiet.

HPQ order filled

2006-05-17T09:40:00.000-04:00

Yesterday right after lunch I got a notice that my HPQ order filled at $30.50 a share. I was rather surprised. That is a very good price, and last time I checked, HPQ was at $32. Apperently, someone paniced before the earning call after the market close, and dumped their shares. They probably looked at Dell, after Dell pre-anounced they will disappoint with their earning, people started to think the same thing will happen with Hewitt Parckard. After market close, Hewitt Parckard reported 51% dump in profit compared to last year. I can officially say I am lucky. Or not. Ever since the new CEO got on board, HPQ has been on the right track, focusing on profitable innovations, less glitz, more guts. Its free cash flow to enterprise value ratio is a ridiculous 10%, far far better than a lot of value plays, and we are talking about a growth company. HPQ has years to come which they can get much better. More innovative products will be one. Another could be trimming more fat from the corporate structure, making it leaner, and meaner.

Farewell, Pier One

2006-05-16T18:22:00.000-04:00

I was getting bearing on retails as of late. So when I started to whack positions off my portfolio a month ago, I unloaded Pier One Imports. Some might wonder why I chose this time to unload it instead of say, a year ago. The difference is fundamental, no pun intended. The fundamentals of this company has changed. It went from a solidly managed company with excellent balance sheet. When I bought this company two years ago, it looked cheap. It had a healthy cash flow and no debt, selling at a very low earnings multiple. I believed the problem was short term, something to do with product mix that didn't catch customers' fancy. Today, the cash flow is down to just a triggle, and there is no end in sight that the company is going to come out better with out a management change. If I have another 4 or 5 billion, I would buy the whole thing and try to turn it around. But I don't have that much money. The only logical thing to do is to leave and let them figure it out first.

Meanwhile, I was lucky with timing. I unloaded at $12 and change. Today it stands at $8. It doesen't matter at what price I sold it though. PIR was less than 0.5% of my portfolio, and any loss stings a lot for me.

more pruning

2006-04-27T11:22:00.000-04:00

Just unload my position in BMY. I entered into both MRK and BMY at the same time last year as I was being bearish on the market. Both stock looked cheap to me. The 5~6% yield on both are excellent hedge again a down market. I believed the market was over reacting to the expiration of drug companies' patents. Observe that people are still buying Tynenol, even though every pharmacy store and big grocery chains has their generic version Acetaminaphen. At the time, the three big drug companies, MRK, BMY, PFE all looked cheap. I ultimately went with MRK, which I still hold, and BMY. MRK was clearly oversold, and I got in the bottom. As for BMY, I am starting to have doubts about its management's capability. The move is more influenced by my thoughts after reading the book Good To Great. I simply can not envision BMY can be a Great company at this point. Ironically, I thought PFE had the biggest risk at the time, but it has out-performed BMY by a wide margin so far. I unload BMY also because after I examined my portfolio, I came away with the conclusion that I have a little more exposure in pharmaceutical area than I would like. It was the same reason why I sold my NUTR shares yesterday.

BMY was 4% of my portfolio.

clipping branches

2006-04-26T21:12:00.000-04:00

Today I finally got down and started unloading some positions. Some of the trades I put in got executed, some didn't. The ones didn't get executed are limited orders I put in this morning at today's high. The prices never came back. The positions I am unloading are small, either irrelevant to my current investment philosophy, or the underlying economics has changed.

The stocks sold today were

Oracle (ORCL), I bought this stock many years ago before I have better educated myself about investing. I sold it for a substantial loss (percentage wise). By my calculation, the current price is probably at fair value. For me to unload Oracle doesn't mean I am bearish on Oracle. Simply means I can find better opportunities elsewhere for my money.
Nutraceutical International Corporation (NUTR). Sold this position as a small loss. Again, NUTR is not a bad company. I bought it at full price, and it hasn't done anything for me in the last couple of years.

In the end I am more concern about potential growth in sales of both companies. NUTR was 1% of my portfolio, and ORCL was 0.5%. As I unload more small postions from my portfolio, I will record them on this log.