H J Mann

Last week, AIG became the lastest example of the skittishness and fear that defines why the market is so volatile. First there was a disclosure in an SEC filing that outside accountants found “material weakness” in AIG’s accounting systems. And then, to cover potential losses in collateralized debt obligations (CDOs), there was also bigger “mark to market” writedowns in Q3 2007, and will be bigger writedowns for Q4, and for Q1 of this year. Analysts moved quickly to revise 2008 earnings lower, and the stock took a 12% haircut off of what is already a pretty depressed price.

The situation reminds me of a trade I had in Capital One stock in July, 2002. It was within a year of 9/11. The market was finally showing signs of life, but still was very skittish. The slightest bit of bad news was met with a ’sell first, ask questions later’ mentality. Kind of like now.  

That July, the stock was already down considerably from recent highs in the mid 60s when the company announced a Memorandum of Understanding (MOU) that reclassified a healthy portion of their credit card accounts as subprime, and required that they hold a much larger loss reserve. No money went out the door. No actual damage was done. It just reclassified the risk. Yet the stock sold off from around $50 into the high $20s literally in hours.

Yes, it was not the best news, but it was not the end of the world either. Once you took a breath and thought about it, it was easy to realize that suddenly the Capital One card portfolio was in even better shape and far less risky than it was before the announcement. The odds of a downside surprise were significantly reduced. I took the opportunity to double down, and the shares rewarded me by more than doubling in the next two years.

AIG’s current situation reminds me a lot of this. Yes, again, not the best news, but these write downs are for potential losses, and there is a good chance that the vast majority of the write downs AIG is incurring will reverse back into earnings. AIG will only pay out in the event of an actual default, and AIG collects income in the form of premiums for insuring these CDOs. 

The stock is at its lowest levels in years. I would await the rest of the write downs to get a full view of what the potential risk is. After that… I won’t say it will double like Capital One did, but the shares are worth considering.

Disclosure: As of publication I have no positions in the stocks mentioned here. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

Tags: Business And Life by HJ
3 Comments »

Last year hedge fund giant Blackstone (BX) went public in the low $30s. After a brief run-up to the high $30s, the stock waned into the $20 range. In January, with the stock languishing at around the $20 mark, Blackstone announced a buy back. Since then, the stock has fallen another 20%, and has made a new all-time low multiple times in recent days.

It seems to me that Blackstone has been dragged down in the carnage afflicting financials, and that this is very overdone. The bear case is that financing has dried up and there will be no big deals this year that will help drive Blackstone earnings. I am in the camp that the worst is over, and that the rest the year, particularly the second half, will be very strong for the market in general, for financials in particular, and very specifically for those stocks such as Blackstone that should have never been pounded this much in the first place. In fact, I would go one step further and say that the return of M&A will be one of the major catalysts jumpstarting the market later this year.

Last week, Barron’s magazine penned an article laying out scenarios that if realized they said would drive Blackstone to $15. If you wanted a measure of downside risk, you could use the $15 mark as a floor. This leaves Blackstone with a manageable downside and a whole lot of upside. These are really the smartest guys on Wall Street. Betting with them at these levels is very tempting.

Disclosure: As of publication I have no positions in the stocks mentioned here. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

Tags: Business And Life by HJ
No Comments »

With Merrill’s down day today, it is getting very close to setting up a nice short-term trade. When Merrill took in overseas investment in December, the overseas investors received the right to purchase Merrill stock at $48. In the market carnage that was early January, The stock got as low as $47.50 intra-day, and then immediately bounced higher into the mid $50’s.

Take this in contrast to BofA’s right to buy Countrywide at $18, and how Countrywide absolutely plummeted through that floor. If you owned Countrywide above $18, this was an obvious signal to sell and wait for another opportunity. Likewise, an investor in Merrill can use the $47 range as a bottom, and any meaningful move below this level as a sign to sell and reset.

I previously wrote about this trade on my blog on January 9th. On that day, Merrill hit the aforementioned intraday low of $47.50. Within a week, the stock was at $55. It immediately dipped again to the high $40s, and again within days was at $58. It has yet to get above the $59+ it was trading at the day Thain accepted the CEO position. In short, this range has been strangely predictable.

Also, for a longer term investment: even at the current price, you can clearly see the limited downside of a few dollars, and there is wide agreement that the future upside is huge. A Citi analyst issued comments this week saying that shares could double in a year or so. Either play could be a good one. 

Disclosure: As of publication, I am long MER, though positions are subject to change at any moment. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

Tags: Business And Life by HJ
No Comments »

Over the weekend Exxon Mobil succeeded in getting a British Court to freeze assets that were seized last year by Venezuela’s state-run oil company. This morning, Venezuelan “President” Hugo Chavez vowed to cut off oil supply to the US if the British Court injunction of $12 billion in assets holds up.

Oil prices spiked more than 4% on the news. So what does this mean? What will happen? How do you play it, if at all?

First, is Chavez for real? Will he cut off oil to the US? Ah, that would be a no, he won’t. It’s simple really. Dictators need stability in order to remain in power. For Chavez, this is especially true. In last year’s elections, he was soundly rejected in an attempt to get himself elected ”president for life.” The income derived from oil and other natural resources is paramount to Chavez maintaining control.   This guy is nothing but a podium-pounding blowhard, and he is less than nothing without our money for his oil.

So why did oil go up? Why does oil always go up? Because there is no shortage of speculative dollars waiting to pounce on situations like this one. But there is no imminent return to oil over $100. So I would just leave it alone.

And what if the worst happened, and Chavez did cut off oil to the US? There would certainly be a very short term shock– maybe at most a month of oil being 20% higher– then a quick return to normalcy. Does Chavez really think the rest of the world would not step in and increase production to fill the gap? Of course they would. Within hours. And speculators might move in and make some quick money, but not likely the average investor.

Exxon is another story. For nearly a year it has been trading in a channel between the high $70s and $95. It hits the $95 mark and immediately falls off. But it never goes lower than the high $70s, and most of the time, no lower than the low $80s. As the price stands today, there is about $14 of upside in the channel, and should it drop below $79 and stay (a sell signal), a downside of about $3. This in a company that is incredibly profitable (XOM just reported the single most profitable quarter in the history of the stock market) and a company that is buying back literally billions of dollars in shares every quarter. For the short term and the long term Exxon looks like a good play.

Disclosure: As of publication I have no positions in the stocks mentioned here. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

Tags: Business And Life by HJ
1 Comment »