UV Market Blogs

Friday, March 16, 2007

Subprime yada yada

Subprime yada yada

Look, this whole sub-prime loan crisis is just a bunch of junk.  Lenders were dumb enough to give money to people who statistically don’t plan to pay it back, sure these are moral individuals but their history speaks volumes for the financial past. 

Here’s my take on the mess:

Sub-prime borrowers are less than the top quality of borrowers known as prime borrowers.  Usually a sub-prime borrower has many credit blemishes such as bankruptcy, late payments or previous defaults on mortgages.  The banks who take these loans assign incredibly high interest in order to cover any potential risk generated from accepting the loan.  First mistake, issuing a high rate to someone who has problems paying.

The financial industry is backwards.  See, a person who makes $100,000 a year with a prime credit score could get a home loan with a 5.77% rate.  Someone who makes $30,000 a year with a bad score could get a home loan but would expect to pay 8.5% plus.  This represents a difference of nearly $300 per month on a loan of $150,000.  Granted, income does not affect your credit score but typically those who make less have a lower credit score due to lack of money to make payments.  Loans to sub-prime lenders have much higher default rates as well.

See how the sub-prime market is destined to collapse?  The worse some one’s ability to pay, the higher the monthly payment.  That makes no sense mathematically, of course their will be a higher default rate, especially when interest rates are that high. I think this sub-prime mess was long overdue.  It simply cannot sustain itself when those who can’t pay, pay the most. 

The thinking was that if home prices continue to rise, people with bad credit would be able to refinance and get a better rate after making payments on time, or sell the home for a profit.  These lenders weren’t investing in future homeowners!  More or less they were making a direct play on the future of home prices! 

This sub-prime stuff is just out there to make investors jump.  Its just an excuse for the hedge funds to dump shares, really.  There was no reason that the dow should have dropped 500 points other than profit taking.  Lets not try to cover up what really happened, we just wanted to cash in our earnings.

I don’t want to get far from the point that the sub-prime investment arena is junk.  Trust me, its junk and you don’t want any exposure to it, but it wasn’t the reason for the drop.  Don’t invest in any sub-prime lenders, just stick to what you know.  Value plays in a cheap market.

Wednesday, March 14, 2007

First big one for Google

After its acquisition, Google was expecting to receive some sort of criticism for the content provided on YouTube’s webpage.  The site is notorious for offering all kinds of videos ranging from copyrighted TV shows to full movies for free to visitors.  The company was negligent of copyright and allows anything under the sun to be uploaded to its servers without checking the ownership.

Viacom, owner of VH1, MTV and Comedy Central has filed a $1 Billion dollar lawsuit against YouTube for publishing copyrighted materials and distributing them freely to their millions of daily visitors.  This marks the biggest “fight” between the two media outlets regarding content.  Prior to the lawsuit, Viacom requested that 100,000 videos be removed due to copyright infringements and since that request was sent last month, Viacom has reportedly found 50,000 more videos it wishes to be removed. 

The lawsuit says that YouTube is ignorant of copyright and allows too many videos to be added without first checking the ownership.  The duty to check copyright should be in the hands of Youtube, Viacom argues, but since YouTube has done a poor job to weed through the videos, the responsibility has been placed into the media publisher’s hands.  YouTube argues it is protected under the 1998 Digital Millennium Copyright Act the act takes responsibility from online publishers as long as content is deleted as asked by the copyright holders.  YouTube has so far been slow in deleting the 150,000 videos requested from Viacom. 

Google purchased YouTube for $1.76 Billion back in November.  I just wonder now if Google might have just purchased another liability.  When the transaction was made, $220 Million was set aside to cover future lawsuits regarding the content published on YouTube.  It seems evident that YouTube might become another Lawsuit Magnet.

Viacom is now the first, and certainly not the last company that will attack YouTube’s policy.  Pending the result of this lawsuit, we may see every cable company or content producer coming on to attack YouTube.  These companies have a right, and a duty to protect their content, and really, their futures. 

YouTube, prior to the Google acquisition was virtually worthless.  The company had very little cash, and that it had was from its venture capital funding.  The websites visitor stats certainly are impressive, although the traffic generated is certainly less than quality.  YouTube suffers from high bandwith costs due to servicing large files to visitors.  Each few can realistically cost YouTube pennies and yeild tenths of pennies in income.  The viewers want to watch their movies, they don’t want to view advertisements.

I think the result of this lawsuit will be that YouTube has within X timeframe to remove the material in question or face a heavy penalty.  In my opinion, both companies will win.  Viacom will protect its media and YouTube will avoid heavy copyright infringement penalties.  As far as I am concerned, Google’s purchase of YouTube was just them throwing money away.  Google has a lot of cash on hand, but I think there are better investments than company’s that lose money. 

Yahoo for the win! 

Tuesday, March 13, 2007

The other Oilers

Couldn’t forget about the other three big name oil companies you should take an investment.  With oil at $60 per barrel its time to get cracking before its too late.  Summer is right around the corner.

Let’s start things off with Rowan ticker RDC.
Allow me to first start this off with a “ARE YOU SERIOUS” 6.7 PE ratio.  If this isn’t a beacon for private equity I don’t know what is.  Current PEG ratio is .23.  I mean seriously, you aren’t going to beat an investment like this.  Consider this, oil stocks trade for an average of a PE of 9.  Even a “catch up” to the other oil stocks represents a 40% gain in stock price.  To conform to a typical PEG, this stock would have to triple, and that’s for oil stocks.  This is a great stock fundamentally.

This stock was also over saturating the Gulf of Mexico region.  To be frank, the gulf of Mexico is overloaded with rigs and prices are sometimes one fourth of that of the Middle east or Africa.  Rowan, like Nobel is moving many of its rigs from the competitive Gulf to the Middle East to capitalize on bigger daily rates, with no risk of natural disaster.  The company has two rigs headed to Saudi Arabia very soon that will be drilling for a $190,000 day rate, much better than it was receiving in the Gulf.  And along with moving the rigs comes a great earnings boost, some analysts say 66% revenue boost.  Say what?  66%!!!

Three new rigs will be coming on the lines before 2009.  Not to mention the 24 land based rigs that are doing just fine as it is.  Oh, and another thing, the company owns a relatively small rig construction business.  This is the play to cover the overall rig-building, operating, land and sea.  I’m a buyer here, I don’t foresee any resistance until $40, and even then I think its going to retest its highs around $50.  A move to $40 represents a 33% gain, $50 would be a 66% gain.  I’ll provide a chart to show the underlying trend.

Diamond Offshrore ticker symbol DO

This company is another play in the oil drilling industry I really like.  See, because of high oil prices, companies are looking to go to deeper and deeper depths in search of the valuable black stuff.  This company specializes in deep sea rigs.  Two thirds of their operations are semi submersible which allows oil companies an advantage, an ability to seek deeper oil.  Because oil prices are so high, it is now economical to look deeper for oil, and oil companies will.  Diamond Offshore is the major player in deep oil.

While this company flourishes with high oil prices, it is not limited to making money only with high oil prices.  This company locks in its rates, but even then, it should prove profitable even with oil in the low $40s, and I don’t see $40 oil ever again.  I would invest in this company heavily due to the sheer fact that as oil prices rise, it will be in greater demand than other drillers. 

The balance sheet for Diamond is rather impressive in itself, it has $800M in cash and just $900M in debt.  The company should have some price protection as 95% of the outstanding shares are held by institutional investors, that says a lot for its quality. 

I’m a buyer here, and everywhere.  I think Diamond will always be a great prospective company provided oil stays at current levels.  If oil plows forward to $100 per barrel, this company could be the new oil king with great exposure to the deep sea drilling.  You need this one.

Monday, March 12, 2007

Confidence

In todays world there must be something that makes sure people keep negative attitudes about life.  Sure, the US and Global economies might not be at their best, but the last Dow crash and prior drops must have really causes some problems in the minds of investors.

On Yahoo Finance a poll is under way.  The current poll question is: The U.S. unemployment rate fell to 4.5% in February. Where will it be at year-end?

Higher
Lower
Where it is now

Now, Yahoo Finance, in my opinion doesnt represent investing/economic professionals like a site such as Bloomberg or Economist.com would.  Both of those sites are niche, dedicated only to finance (bloomberg) and world events (economist).

The 25948 people who have responded already to this poll have stated:

Higher 52%
Lower 24%
Where it is now 25%

I think this is the perfect example of what the media can do to the thought process of the general public.  People who read Yahoo Finance are probably ordinary people just reading about the business news, and not Hedge Fund managers with $500 Million dollars under their belt.

I think this poll best shows what we have been conditioned to think after the market instability ranging from year 2000 to today.  The last 7 years have given a return of just 7% on the dow.  Mind you this isn’t 7% per year, its just 7%.  In a money market fund, you probably would’ve earned around 20% total. 

These last 7 years have been terrible, and have killed our spirits about everything.  Think positive, and try to look for short term profits.  Unfortunately, one person cannot control the markets so other people’s opinions do matter.  Don’t pick stocks that move with the general markets, you dont want other people’s business to trouble yours.

Friday, March 09, 2007

Oil is hot

Its spring 2007 and we’re just starting the 2007 driving season.  Are you excited for $3 gas, shortages, and a US slowdown? No?  Then you must be a driver.

2006 was a doozy for oil prices.  Oil hit all time highs even after little activity in the hurricane arena.  $82 a barrel anyone?

Today, oil sits at just $62 per barrel.  Don’t get excited just yet though, but I think oil could easily top our 2006 highs of $80+.  This year we could see $90 in my opinion.

$90?  That ridiculous, the federal government won’t allow that.  Let’s get past this federal regulation mumbo jumbo because thats just what it is.  No matter what your government says, they can’t put that much pressure on a worldwide market.  Look at the drug market, the war on drugs isn’t exactly working

That’s a totally unrelated market, but the dynamics can be applied here.  Quite simply, if the US doesn’t consume the oil, China will or India, or Mars.  Point is, oil isn’t going to be destroyed like it was in the 90s.

If you’re one of the few, the hardcore, the proud, investors who possess a futures account, I want you to long oil right now.  Right now, and don’t think anything about it for another year.  Or atleast until fall, when you can cash out and reverse your trade.

If you do not have access to a futures account, perhaps I can interest you in some of the following Oil stocks, destined to rise in price as oil does.  These stock are already off their highs but continue to post significant earnings numbers and boast PEs as low as 7.  Can’t be that anywhere!

Its not the refining companies I want you in.  You need to be invested in the drillers, these companies are receiving hundreds of thousands per day just for locating their offshore drillers in the seas.  Companies such as Exxon Mobil or BP have had to pay three times as much as they were previously.  The best part about these drillers is that their contracts are slowly expiring and the drillers are reaping the rewards.  Some drillers are getting $300k a day payraises, a 300% increase over the last contract signing.

When these drillers sign to a contract they are GUARANTEED that amount.  Imagine, locking in now for $80 a barrel even if oil drops to $2.  These drillers will not loose money.  Catastrophe in the Gulf is the only way we could see these drillers go under, but as many drillers leave the Gulf of Mexico to sights such as African coasts or the Persian Gulf these drillers are leaving risk behind. 

Now to the companies:

Noble (NE)
This company was over exposed to the Gulf just a few years ago with 18 out of 49 of its drillers in the Gulf of Mexico.  Now it has only 9 of its 60 vessels parked in the Gulf of Mexico.  Many have attributed the recent success of the company to moving its drillers out of the Gulf of Mexico and into better, higher paying, areas of the world.  Many of the contracts are expiring this year, which many investors have feared.  Although these contracts are expiring, nearly all of the new contracts will pay more than the old.  One of the companies rigs currently receives a rate of $128,000 per day to be drilling off the coast of Africa for Exxon Mobil.  On January 1, 2008 this rig will be part of a new $433,000 a day contract to drill for Anadarko.  This company is set to make large amounts of cash as these contracts expire.

The company is expected to earn $1.2Billion dollars in 2007.  This amounts to $8.98 a share up from $5.35 per share it earned last year.  This huge growth in earnings is the sole reason I think you should be in this company for the long term.  Noble is also unleashing a healthy stock buyback plan, set on buying 11% of the outstanding shares.  This should give even better returns to an already well priced stock.  The current price to earnings for this stock is 8, with a PEG of .2.  Analysts typically recommend stocks with a PEG of 1, this means Noble could rise in value fivefold before it would even be a recommended purchase.  This is a stock for the future, get in while its cheap.

Wednesday, March 07, 2007

Google?  Google!

Do you google?  A lot of us Google, an estimated 80% do at least.  Some estimates rank Google as high as 90%; foolproof, 100% numbers are impossible to obtain because such competitiveness between the big three search engines, MSN, Yahoo and Google.  Back to Google.  You wouldn’t believe what a trendsetter this company happens to be, just check out the stock chart.

Google, besides it 500% return since its IPO has been a rather boring company, seriously.  This stock has touched the same two trend lines twelve times between the two and has remained a fairly constant mover amongst a sea of undecided stocks.  Google has always marched to the beat of its own drummer, and I would expect nothing more from it.

Quite frankly, fundamentally, this stock is the worst on the market.  Growth rates, brand strength, blah blah blah.  Yahoo and MSN have entered online text advertising, a market once held nearly 100% by Google.  At this point, Yahoo and MSN should have the same valuations as Google.  Yahoo isn’t even close and MSN is a part of Microsoft.  Simply, buy Yahoo for the fundamentals. 

But for you techies out there :D we like seeing those boring stocks that move back and forth between a set or prices.  Google is one of those that does, and has moved between two trend lines nearly perfectly for the last two plus years, since its inception.  There are a few theories I have proposed as to why this trendline, the bottom one, is so strong. 

First, institutional buyers.  Institutional buyers generally trade long term technical plays like that of Google.  Its all about generating cash flow for their investors and while providing a liquid portfolio.  The private equity sector is a large buyer of Google, as I would expect.  Stanford university, among others, is another very large holder of Google.  The venture capital company which brought Google to the masses is still holding to its large chunk of the online advertising mogul.  From the institutional side, ie the people who actually move the markets, no one is selling nor would I expect them to do so.

Second, this is a very old line.  Its not some intraday trend drawn up by a day trader on the one minute charts.  Since this line started at the beginning of the company, investors believe the line to be more credible.  And they should, this is all the stockholder of Google has ever seen.  You don’t know something until you’ve seen it, and at this point it seems as though this stock will trade up forever. 

Third, this is an extremely measured pace.  Using some slope algorithms I learned in the fourth grade I have concluded that this stock has moved up $16.67 every month on average, according to the bottom trend.  That’s a nice ROI in my book. 

Ta da!  A nice pretty chart with lines.  A picture really is worth a thousand words, or at least one thousand dollars. 

Play the trends my friends.  The trend is your friend, and when it bends, CASH it IN!  Take the trend and run with it.  This isn’t going to end soon, as you can see google has already made a bounce off the bottom line and is headed back for $500.  Don’t miss the boat, but for the long term, Yahoo is the internet play!

Thursday, March 01, 2007

DOWN Jones Industrials

DOWN Jones Industrials

Today brought another large sell off in the history of the US markets.  The Dow shed 416 points, the S&P500 had only two stocks that advanced, and experts suggest some hedge funds may have gone belly up in the onslaught that occured on February 27.  This wasn’t good news to the ears of relatively new investors who haven’t yet seen some of the impressive returns of 2002 or more recently the Fall of 2006. 

This dropped seemed out of the blue to some.  People thought he market to be in a perfect equilibrium of balanced interest rates and investor confidence.  While I don’t think much confidence was lost due to the drop I do think that there was some loss in investor confidence.

It has yet to be determined the reason for the drop but its evident to me that this was just an example of what happens when anyone can trade the markets via online brokers.  Liquidity is at an all time high but so is margin.  The ability to buy shares of stock with other people’s money causes a more volitile market.  After a consistant slide downward yesterday it seemed like thousands of stop losses and sell orders were made all at one time.  This may have been the repercussions of a hedge fund protecting its worth or a large institution selling out of a bad trade.  The source has yet to be decided but it is sure that a surge of orders was created, backing up the system.

The slide of 200 points was made greater by thousands of sell orders hitting at the same time.  No one was buying so no ask prices could be set.  The slip went from a gradual trend to a 300 point wild ride.

I think technicals may have had their foot in the door of this fall.  The below chart may explain some of the losses yesterday.

In the end, this isnt the end.  The markets aren’t doomed, and you will be able to eat.  Don’t panic, this was only a long overdue correction.