Interlude: Good Bye Summer

It’s cold outside…. frost is on my windows before I drive to work…. time to say g’bye

Stock Series: BEAV

Do your own research prior to making any investment decisions. Always assume that ISYN is biased with its analysis by way of direct or indirect ownership.

Current ISYN Watch List

This is still lacking an industry comparison but based on the firm-specific information alone this firm is looking poised for some serious price appreciation.

REASONING
BE Aerospace Inc. presents an extremely attractive valuation at the current price level. The company is trading at 75% of its book value with increasing revenue, operating margins, and profitability in a contracting economy. These facts are more compelling when one considers that their primary business is focused on servicing/manufacturing products for the airline industry. BEAV boasts excellent debt coverage with a quick ratio of ~1.0 and enjoys a geographically-diversified revenue stream which helps mitigate the negative impact of currency fluctuations and economic slowdowns. BEAV also just received their largest contract ever from Airbus totaling $1b USD. With fuel costs decreasing drastically and the current fleet of airlines aging this is the firm to own as the world climbs out of the economic doldrums and begins to once again expand.

Company Information & Fundamentals

Stock Series: BTIM

Do your own research prior to making any investment decisions. These are names that ISYN finds compelling for a long or short entry point. The date of the inclusion on the watch list, ISYN will use the closing prices as entry points. ALWAYS ASSUME THESE ARE BIASED IDEAS AND ISYN OWNS OR KNOWS SOMEONE WHO OWNS THESE NAMES.

Watch List

Great short story in my opinion. Firm needs financing and will be out of money (by their own calculations) by the end of 2008 unless they’re able to raise capital. There’s been some positive press releases recently so the stock has enjoyed a nice bump and is approaching its six month highs. There is significant resistance up here. ISYN believes this to be a solid short entry point so we will add BTIM as a short to the watch list today, 10/29/08.

Here’s an example of a recent press release: HERE

As of 06/30/08, according to page 2 of the 10Q HERE the company has ~600k in total assets with ~2.8mm in current liabilities… spells disaster, no? The only way this firm survives is through an acquisition, merger, or capital injection/financing of some sort. The odds of BTIM receiving this are minimal due, in ISYN’s opinion, to extreme weakness in their product pipeline.

BTIM

-ISYN

Interlude: Damn It Feels Good

Basing & Breakout Time!

Current Watch List

AAPL

MPEL

CIEN

We’ve enjoyed some sideways stability for a few days now as many names begin to form some bases and/or break out of previous downtrends. This is further evidence of bullish momentum and the above names are interesting to look at.

-ISYN

Bulls Are A’ Comin’

Assuming the website I used is correct (click HERE to see) this is a very interesting piece of information. If one were to buy the S&P 500 index beginning in November 1929 and hold through February 1930 you would have earned a 57% annualized return, or very approximately 15% total.

This happened as you know directly after the crash. We did not have, as a nation or world, the ability to produce a concerted effort to buoy the markets and provide stability. Now if we consider the trillions of dollars that have been pumped into the global economy by several nations to keep things afloat we may consider the 20%+ month of October to be a significant decline – even with the severity of the current issues. As this market has continued to hold a low of 850 over the past few days and without experiencing any vicious declines, I’m more confident than ever in a year-end rally. Factors that continue to provide confidence:

• Most people don’t know whether to stuff money in their mattress or start accumulating shares in a hog wild fashion – so they’re selling, or shorting, or doing nothing
• Trillions have been pumped into the global economy – this will have a positive impact
• We didn’t crash when the futures were limit-down premarket last Friday (huge confidence builder)
• We’re holding the 850 low thus far
• October has already seen a hideous decline (approximately 27% MTD as of yesterday) and a rally is overdue
• Fear is still at ridiculous levels as per the VIX (see below)
• Every news station and regular Joe is discussing the stock market and the economy – this is ALWAYS a good sign that we’re close to a bottom/rally time-wise (not necessarily %-wise)
• Nobody has a consensus and confusion is at an all-time high (in my lifetime anyway) which means that once this market turns and others believe in the rally – they’re going to be LUSTING after this thing with everything they’ve got….check out this article for a bit more depth.

VIX

S&P 500

S&P 500

Interlude: Rocky

Current Watch List

Current Watch List

Long Ideas cont…

CURRENT WATCH LIST (entry)
YHOO ($12.99)
GU ($3.25)
CIEN (today)
MPEL (today)
QLD (today)
AAPL (today)
GOOG (today)

NEW ADDITIONS
_________________________________________

CIEN

CIEN

Reasoning: These monsters have tons of cash and great debt coverage with a high level of valuation appeal.

Cash, equivalents, and ST investments = ~$1.0b as of 07/31/08
Market Cap currently = ~$825mm as of 10/27/08

All this with positive net income… given sales are declining – the name is discounted for a reason. However this looks to ISYN like a solid acquisition candidate and at the very least you won’t have to worry about it going bankrupt for a while.

MPEL

MPEL

Reasoning: Macau casino owner. Caters to highest net worth individuals so all the “Visa travel issues”
plaguing other companies won’t have an immediate material impact on these guys. Also owners (Ho family)
are extremely well-connected to politics and the whole government process. Very attractive valuation.

QLD

QLD - Nasdaq Ultralong ETF

Reasoning: I believe we’re in for what Fly would call a Zeus Rally due to my reasoning set forth in the ISYN articles from last week. The domestic equity markets require a rebound of some sort. Everyone is looking for a reason good enough to justify a full-fledged long-entry assault or to bail completely and wait until 2009 to resume operations. There is so much cash on the sidelines right now that the past few days of relative stability will nudge some of this cash back into the water…. albeit maybe on a toe-by-toe basis to see how cold it is.

GOOG

GOOG

AAPL

AAPL

For information on GOOG/AAPL trades check out THIS POST from RaginCajun.

Do your own research prior to making any investment decisions. These are names that ISYN finds intriguing for a long entry point as noted in the prior post HERE. Today’s closing prices will be taken as entry points. ALWAYS ASSUME THESE ARE BIASED IDEAS.

AAPL / GOOG

Two names that have been beaten down significantly but continue to have extremely solid prospects. Looks like a solid entry on the long side. The idea for the trade came from THIS ARTICLE.

AAPL

GOOG

ISYN will be using today’s closing price for tracking purposes. This is a trade based solely on quality of the companies involved and the severe price depreciation in the stocks.

Entry Price: (receive at close)

Names To Watch

These tickers present some very strong risk/reward profiles in ISYN’s opinion -> 6-9 month time frame for the individual companies and 1-3 month time frame for the ETFs.

Individual Companies
CIEN, MPEL, YHOO
ETFs
QLD, SSO, UUP

GU Update

Until the fraud allegations are cleared up ISYN is going to stop tracking GU. Today’s closing price will be the price used to calculate the loss.

Can someone who reads Chinese please translate the gist of this article or tell me of a place to do the translation…. apparently it details GU’s accounting fraud.

http://finance.sina.com.cn/g/20080924/03002438842.shtml

Oh Yes…. HERE WE GO

Get jacked for Monday…

Welcome to the Rally baby…. if this market held up as well as it did today then we are locked, cocked, and ready to go higher. S&P 500 chart below.

VIX

Trifecta Interlude

Taleb & Doomsday
Courtesy of the following post by ‘Green Writer‘ here is an interview with Nassim Taleb, author of The Black Swan.

http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21102008&seg=5

It’s a fairly doomsday projection – I figured I should show the other side.

Boondock Saints: How Righteous This Rally Shall Be

A Message To The Bears

-ISYN

Bullish Confirmation

My original bullish postings can be found HERE and HERE. I’ve been officially bearish since Fall of 2007 and only this week have I changed to the bull camp.

This is a chart of the VIX in previous market bottoming processes. We’ve peaked above all peaks since 1991. Read the chart and it essentially explains itself – this is a great time to buy.

VIX

-ISYN

Updates (ELN, YHOO, GU)

ELN UPDATE: Market apparently does not like outlook for the company. I’m sticking with it – long idea still valid as spec play.

ELN
ELN earnings came out and the market seems to like what they saw. Current bid @ 8:20am is showing 8.18 per share or $0.36 above yesterday’s close of $7.82. This of course is WAY below the price of $9.08 ISYN decided to watch at for the earnings play. Fair enough. With the growth in Tysabri sales to $237mm in in-market sales globally ISYN still believes there is some value in a longer term holding (albeit as a minor position and a purely speculative drug play).
YHOO
ISYN still likes this and believes you won’t be punished for holding this six months out. Could be wrong but we think we’re right. If YHOO received a new offer that was lowered from $33 to half that ($16 or so) – you’re still making bank.

GU
No legitimate updates except a new variable has been thrown into the mix. I have yet to be able to confirm or deny this rumor but there’s discussion of fraudulent accounting practices with GU – mainly in terms of their input cost of vegetable oil. Apparently (and again, I haven’t seen the article yet) a reporter in China wrote up an article stating that the company has been lying. I’ll let you know when I know.

Looks like another tough start for the market today. ISYN stands behind the article it wrote yesterday about exposing yourself to the market here and now. We may be early but with an S&P that is now discounted ~40% from it’s peak (it was around 34-35% when ISYN published the article) we believe now is the time to start accumulating solid companies with strong cash positions and operating cash flow. You have to be selective.

-ISYN

Interlude: Sky’s The Limit (+ Triple Bottom Bonus)

After enjoying the uplifting video above, recognize and take heart in the following chart. It’s the S&P 500 for the past decade on a monthly candlestick basis. If the month were to close right now we would have lost a little in excess of 20% in a single month. This has happened very few times in the past.

The following data is from AllFinancialMatters.com
The worst month ever was a 29% drop in September of 1931. The worst October decline was 21.5% in 1987 when the stock market crashed.

Considering this information I believe we can be confident we will not be setting a new worst record. The U.S. was much worse off in 1931 and throughout the Great Depression than it is now. Unemployment has remained relatively low and GDP growth (although these statistics are always tainted and inaccurate in my opinion) has not registered a severe decline just yet – although the market seems to be pricing one in. As I type the S&P 500 has just broke through 900 to the downside. Chin up – while the market may suffer a bit more I expect we rally into the end of October. Click HERE to read ISYN’s reasoning behind this belief.

-ISYN

UPDATE

Triple bottom in place on S&P 500 – If it holds the line tomorrow….. RIDE THAT RALLY BABY!!!

Expose Yourself

For the time being it may be prudent to expose yourself to the long side of the market. The incredible correction and volatility the market has enjoyed these past few weeks has been nothing short of mind-numbing, heart attack-causing, hair-loss catalyst action. Just look at the following chart of the S&P 500 while bearing in mind the VIX closed at 53 and change from a peak of 80 or so.

Mean Reversion
An investor who bought an S&P 500 index fund in 1998 would barely have seen a return over the past decade…. we’re talking less than 1% per annum on average – you would’ve been better off investing in CDs!!!

S&P 500: Decade of Nothingness

Now I’m a fan of the concept of mean reversion. I even developed an intraday indicator based on the concept. Over the last thirty years or so the approximate average compound annual return of investing in an index was 12%. Thus one could conclude that earning a return of next to nothing for the past decade or so is a sign of one of two things: either we enter a long, drawn out bear market which brings us to a 5,000 Dow Jones Industrial Average or we revert back to the mean and see significant price appreciation in the equity markets. I’m a believer of the latter viewpoint.

Understand The Risk
ISYN expects a rally but respects the potential for a crash. The current financial crisis was not a Black Swan because it was predicted and expected. If there was ever a time for a Black Swan event it’s now to within six months. Life’s irony dictates that things happen when you least expect them and as this market learns how to walk again don’t be surprised if it gets knocked down a couple times. This is fine – capitalism is not over and the equity markets will continue to march higher. Every generation has the doom sayers who prance around screaming that the world is ending because of an oil shock, or a world war, or a food shortage, etc. If you want an asset class with high potential for growth over the next ten years – look no further than equities.

Put Me In Coach!
There is currently an enormous quantity of money on the sidelines that will soon be yelling “Put me in Coach! I’m ready to play!” Read HERE and HERE for figures – but we’re talking in the hundreds of billions of dollars. This is what happens at market bottoms…. everyone becomes terrified and pulls their investments into cash positions. Then they chase the market back up.

Overview of ISYN’s Argument

• VIX peaked at 80 or so (may go higher but at the moment I don’t expect it to)
• Money on the sidelines in cash was pulled out of the financial markets and will go back in at some point
• Respectable double-bottom in place
• Mean reversion dictates that for the thirty years prior to 1998 the market yielded 12% or so per annum. In the last ten we have been yielding just about nothing. This leads me to believe we’re going to see a period of drastic outperformance for a period of five to ten years.
• RISKS: There is the risk of a Q4 selloff in hedge funds as they close down their shops and reopen in 2009 (it’s much easier to start from zero than have to make up your losses prior to getting paid). Also while you’re not supposed to bet on a crash since the odds are so minute it is a very real possibility.

Either way the equity markets should be around in twenty years and should be much higher than today. I’d find some companies with mega quantities of cash relative to debt in semi-strong forward-looking industries and snap them up. If you read my prior posts I’ve highlighted a couple such as YHOO and GU. Check back shortly for some more ideas.

-ISYN

Stock Series: Elan Plc (ELN)

This is the third in a series of posts which will be focused on stock picks on a long/short basis which ISYN will track the performance of. This will not be actively managed and each idea will be independent of the others – no portfolio construction, etc. I will use the closing price of the day a pick is recommended.

Do your own research prior to investing in any stocks mentioned here. Always assume ISYN is biased via direct or indirect ownership in the companies mentioned.

Click HERE for a webcast of an ELN presentation at Natixis’ Hidden Gems Conference. Following are some of the key parts of the webcast as provided by the CEO (so it’s obviously biased).

Debt Coverage

• Creditors confident in cash flow and debt coverage ability
• 1st debt maturity 2011, 2nd is 2013 (2 fixed and 2 floaters)
• LIBOR rates (if remaining high) could have negative impact

Tysabri

• every 10,000 patients is roughly $100mm in EBITDA
• In the 1st six months of 2008, Tysabri enjoyed a patient increase of ~10,000
• Q308 earnings announcement on Thursday, October 23 – expected to announce patient and doctor increases in Tysabri
• Goal: 100,000 patients on Tysabri by 2010
• large debate on the safety of drugs (see HERE and HERE)

MS Market

• 4 main therapies other than Tysabri
• Relapse reduction rate in mid-20s to low-30s, Tysabri in high 60s
• New drug pressure coming on from competitors

Very risky but it may be worth the earnings play on the long side. It would seem to me that expectations are fairly low for this firm going forward. After a decline from $36 to $10 any sort of positive news or insight should provide a ST boost. This is a ST trade and extremely risky so tread lightly. While listening to the call it sounded like the CEO was frustrated with the investment community (who happens to be frustrated with him as well). This could be a positive sign – as in the “I know the results are legit why don’t you get this?!?!” type of way. The other argument could be that ELN is toast. Again, very spec play and probably not the play to throw up a hail mary on.

Entry Price: (today’s close) $9.06

Excellent Interview

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vJRGEwtqBFQM.asf

Headed Into The Weekend….

Stock Series: Gushan Environmental (GU)

This is the second in a series of posts which will be focused on stock picks on a long/short basis which ISYN will track the performance of. This will not be actively managed and each idea will be independent of the others – no portfolio construction, etc. I will use the closing price of the day a pick is recommended.

Do your own research prior to investing in any stocks mentioned here. Always assume ISYN is biased via direct or indirect ownership in the companies mentioned.

***NOTE THIS HAS BEEN WITHDRAWN FROM THE WATCH LIST DUE TO UNCERTAINTY REGARDING ACCOUNTING PRACTICES***

Gushan Environmental Energy Limited (GU)

Current capacity of 290,000 tons is expected to increase to 400,000 tons in Q408 through the construction of two additional production facilities and a ramp up in production capacity at a pre-existing facility. In addition GU has expectations of adding an additional 200,000 tons of capacity throughout 2009. Using what I expect to be an extremely conservative estimate for the price per ton of biodiesel ($435pt or ~50% of Q208 price) I derive FY09 revenue of $172mm with operating income of $57mm. GU is currently trading at less than 6x forward estimated operating income. In addition their debt coverage is exceptional and their margins are strong. I suspect with China’s pollution issues we should see more of a transition to biofuels such as GU produces.

Description

Gushan Environmental Energy Limited produces biodiesel and by-products of biodiesel.

Q208 Highlights

• Revenues increased 52% YOY and 20% QOQ to $58.3mm
• Gross Profit increased 43.8% YOY and 18.5% QOQ to $24.1mm
• Income from Operations increased 29.4% YOY and 8.3% QOQ to $19.3mm
• Biodiesel sales volume rose 21.8% YOY and 15.8% QOQ to 59,921 tons
• Selling price of biodiesel increased by 33.5% YOY and 7.6% QOQ to $865/ton

Fundamentals

LF = latest filing LY = EOY 2007

Liquidity
LF Quick Ratio 7.8
LF Cash Ratio 7.6

Profitability
LF Gross Margin 41.3%
LY Gross Margin 43.8%
LF Operating Margin 33.2%
LY Operating Margin 39.1%

Gushan Environmental

Entry Price: (receive at close) $3.25

-ISYN

Two Positive Catalysts

First – hell yes Red Sox…. from a 7-run deficit to a victory within just a few innings. Talk about a change in momentum! This is very good news for the market… why you ask? Because it is.

Also, Warren Buffett just penned an op-ed in the NY Times discussing his decision to throw his full weight into the United States equity markets (read it HERE). Below is a brief overview of his points.

• He’s acquiring domestic stocks in his personal account (not Berkshire Hathaway) in which he’s mainly held US gov’t debt securities.
• Be fearful when others are greedy, greedy when others are fearful
• Expects US firms to set earnings records over a 5, 10, 20 yr horizon
• Bad news is your friend – allows you to buy American companies at a discount
• Dow rose from 66 to 11,497 in the 20th century despite our country experiencing two world wars, multiple expensive & traumatic military conflicts, the Depression, a dozen or so recessions and panics, oil shocks, and a flu epidemic.
• Makes special point to mention that he’s not trying to time the market in the short term but that US equities are currently discounted.

-ISYN

Stock Series: Yahoo! (YHOO)

This is the first in a series of posts which will be focused on stock picks on a long/short basis which ISYN will track the performance of. This will not be actively managed and each idea will be independent of the others – no portfolio construction, etc. I will use the closing price of the day a pick is recommended.

Do your own research prior to investing in any stocks mentioned here. Always assume ISYN is biased via direct or indirect ownership in the companies mentioned.

YHOO
Whether or not the statement made today by Microsoft CEO Ballmer holds any weight Yahoo! (YHOO) is looking very attractive at these levels. A few things to consider.

General Reasons
Oversold market; fair earnings power with excellent debt coverage; acquisition target within previous six months at price > 50% today’s price; huge online significance

Points of Interest
*Trading at ~6x cash & ST debt securities
~18b USD market cap
~3b USD in cash & ST debt securities
*Carl Icahn sits on the Yahoo! board now and was a proponent of the initial buyout offer
*I believe that an economic slowdown will have a relatively muted impact on virtual businesses compared to physical ones
*As recent as June MSFT offered $33 per share… discount YHOO back to $18-20 (where it traded just prior to the offer) from $30 , then discount in an economic slowdown (choose your rate) and we’re still looking at $13 being a steal
*It’s doubtful anyone would disagree with the macro assumption that online/virtual businesses or extensions of businesses are the future. Name recognition is essential (think of it like ‘location location location’) and Yahoo! is one of the best recognized names on the internet.
*I know GOOG is trading at a better P/E but fundamental comparisons at this juncture in time are essentially worthless with the massive and reckless selling occurring in many tech names.

YHOO

Entry Price: $12.99

ReRun: Seeking Alpha w/S&P Short ETF

This article was originally published HERE on January 04, 2008.

“Ad augusta per angusta” [to high places by narrow roads]… it seems as though our Latin predecessors were seeking alpha as well!

2008 is shaping up to be a difficult market to navigate for individuals as well as professionals. The croupier is about to spin the roulette wheel and wealth managers are placing their bets. Will the ball land on red (recession) or black (progression)? Let’s examine a core-strategy for red. This is intended to make suggestions on a few key areas which should not be ignored, not as a design for an entire portfolio.

As a certain Wesley Snipes explained to us in the movie Passenger 57, we should “always bet on black”. Unfortunately for investors, employees and business owners across this nation Mr. Snipes is incorrect in this regard. The economy is incapable of consistently remaining in the black. There are always recessionary periods that lie in wait for the country to overextend itself by developing a bubble (see definition below). So how would one prepare their portfolios for a potential recession? Below are a few plays you can make to protect or grow your portfolio in 2008, assuming the economy declines further.

Pick up the UltraShort S&P500 ProShares ETF (SDS). The companies that the S&P 500 consists of are the pulse of the United States of America’s economy. While this ETF does not short the economy, it does bet on a decline in the stock prices of those companies that make up a strong portion of the economy. In my opinion, the market players have yet to factor the negatives of our current economic state into the S&P 500. If we enter a recession it’s a fairly safe bet that this ETF will outperform many of your other positions.

Pick up high-quality, high-potential healthcare stocks. Seek out stocks whose companies have a good balance between a current product base and a strong product impact potential [PIP]. An example would be Company X having $500 million in annual sales from 2 existing products and another product in Phase III testing which has sales potential of $50 million per annum (10% of sales). Here the company is already on solid footing (patents, etc. assumed valid for years to come) but can achieve a significantly higher stock valuation if Phase III completes successfully. If a healthcare company provides something people require and don’t simply need, they’re a pretty safe bet during an economic downturn. You’ll have to do your own research on this one.

Finally stay away from retail and consumer discretionary. The American consumer will probably not be able to sustain its current strength following the one-two punch of a depressed housing market and inflation’s rise (commodity prices are soaring from already-elevated levels).

DEFINITION: A Bubble, in economic terms, occurs in two phases. Phase one, the seed of a bubble, is when demand outstrips supply and causes prices to rise. Phase two, the actual bubble formation, is when supply proceeds to surpass demand yet prices continue to rise. Phase two can continue for months or years. It creates an illogical economic environment which in time will correct itself through mild or severe contraction.

Market Fluctuations

Financial Website Link List

Following yesterday’s action I don’t plan on posting much today, if at all so I figured I would contribute a little value and let you know some solid places on the internets (haha classic) to find information.

Best Blogs
IBankCoin.com (specific stock ideas & insight)
DealBreaker.com (up-to-date market news, sometimes beforehand)
WallStreetFighter.com (good for links to other blogs, more interesting than useful)

Best Virtual Investment Sites
UpDown.com (25% allocation, long/short, customized competitions)
WallStreetSurvivor.com (25% allocation, long/short, standardized competitions)
Yalicoo.com (pay-for-play competitions with decent cash prizes, more for intraday traders)

Best News Outlets
DrudgeReport.com (more political than finance-focused)
DealBreaker.com (same as above)

Enjoy!

-ISYN

P.S. Put on your rally caps!!!

Need a rally here!

Speech Interlude: Scent of a Woman

Stock Talk: Initiation

ISYN

Anyone who has enjoyed the absolute PLEASURE of watching the fluctuations of the stock market over the past few weeks already understands what can go right and wrong when you’re on this playground. This trading/investing gig can get pretty dicey sometimes – especially when you’re caught with your pants down (betting in the wrong direction). These are the times that cause men to go bald, earn ulcers, and put on more weight than Jenny Craig relapses. Do you really want to see people like me (young twenty-somethings) balding, clutching my stomach in agony, and gorging on pies and brownies?!?! If you answered yes – go take a long walk off a short pier.

Since you’re going to participate in the stock market on a professional or individual level you should understand a few things prior to doing so. Understanding these important tenets of investment/trading philosophy and knowledge should help prepare you for the turbulent times.

• The Bible verse “he who exalts himself shall be humbled” is the single most important saying to remember and live by. Never start thinking that you are better, bigger, faster, or more intelligent than the market. At some point that ego will be your downfall.
• The equity market IS NOT AN EFFICIENT MARKET. If it were every fund, bank, individual, and other participant would need to be using the exact same analysis tools. Therefore opportunities exist to exploit market mispricings.
• People can outperform the market over a long period of time. People will present professional statistics that claim it’s impossible but it’s not – it’s merely improbable.
• Information is king – period. The more information you have and the better the insight you possess, the more excess return you’ll be able to extract. Therefore keep educating yourself and pay attention to what’s happening in the global political and economic environment.
• Rising tides and falling tides can both yield energy. As such, a rising market and a falling market can both provide excess return. You should be able to exploit excess return on both sides of the market.
• Choose who you listen to carefully.

-ISYN

Playing The Earnings Season v.Q308

The recent rally was a knee jerk reaction I alluded to in a previously posting HERE and will be short-lived. I believe this because earnings estimates are almost surely elevated to unrealistic levels. So here’s how I recommend one plays this round of Earnings Season v.Q308.

1. Develop a list of names by running an equity screen for certain fundamental characteristics you deem important. Right now cash is king so a well-capitalized firm with solid debt coverage ratios and low valuations should do you good.
2. Determine if you like the industries the companies are in or if you feel the current valuations are discounted enough to provide for any decline in sales/profitability due to a declining economic environment.
3. Find out when the companies mentioned have their conference calls to discuss quarterly results and listen to the call (NOTE: the Q&A session will typically provide the most insight).
4. If everything checks out and earnings surprises are negative as I anticipate you should be able to acquire shares on the cheap in the names you believe will lead the charge out of the depths (or at least survive/hold up in the chaotic environment).

Now some notes of interest to bring us all up to speed. Typically small cap stocks are the front-runners of an economic recovery. Therefore we’ll be paying close attention to this market capitalization (with some discretion). I’ve run a screen on a list of names that may provide some solid entry opportunities once we see how they’ve performed this past quarter as well as hear their outlook for the rest of the year and into 2009.

My example of a screen was to find small cap stocks which have strong debt coverage and positive cash flow from operations. By nature small cap stocks are more risky than others. Keep in mind there’s a reason all of these names are so discounted – odds are it has to do with the ongoing outlook for the firms. Tread lightly as you seek out your own list of names.

1. $300mm <   Market Cap <  $5b
2. Cash Ratio (latest filing) > 2.0
3. Quick Ratio (latest filing) > 2.5
4. Free Cash Flow (TTM) > $50mm
5. P/E < 10.0
6. Market Cap/FCF (TTM) < 10.0

Results: ISIL, ELX, ARLP, MRX, CIEN, CRDN, ADCT, KG, TRA, ELNK

These are stocks that I will be watching during earnings season and depending on how the conference calls go and the market’s reaction will determine which, if any, are worth acquiring shares in. I will be revisiting this post/topic to follow through with an update on my opinions of these names.

Analyst Estimates

This Bloomberg article details the fact that the earnings consensus for Q308 among analysts remains at an all-time high despite all of the economic hindrances. The current estimate for aggregate earnings of S&P 500 companies is $241 billion, the most ever. According to estimates compiled by Bloomberg these companies will show an increase in operating profit of 28% following a decline of 7.5% in Q208. This would exceed the record amount attained in Q207, prior to when the subprime crisis erupted – sounds a bit unrealistic, no?

It has been and continues to be my opinion that the next shoe to drop will be the actual corporate earning power which has yet to be a focus for analysts. The banking crisis has maintained the spotlight for the past twelve months and now, as we pump money into the system to unfreeze it, we can return our sights to the standard concern.

Expect earnings to drastically underperform relative to expectations. The one bright side is that equities remain undervalued as it currently stands. The question you should ask yourself is whether or not you believe the current undervaluations experienced throughout the stock market are discounted enough to factor in any negative earnings surprises. If your answer is no, as mine is (especially after today’s rally), then prepare to raise cash and/or put on some short positions.

Here is today’s action. We’ve been overdue for a bounce and this is going to be one heck of a short term rally, as witnessed today. Expect a strong sell off to arrive within 5-10 days. This sort of straight up move is unsustainable, especially if you’re of a similar earnings thought process as I am.

3-month view of the S&P 500

-ISYN

Musical Interlude: Dead Presidents

Eye of the ‘Cane

This rally is a reaction to a state-of-market (oversold) and not to any fundamental change in the environment. Folks – putting a 5 foot wall up on the shore is not going to prevent a tsunami from flooding your house. It will only delay the inevitable. The sheer size of the issues at hand require more respect than is being given. These are extremely slow-moving areas of trouble and they take months to permeate the economic system, especially now that the system is a truly global one. We are in the eye of the hurricane – make no mistake. The second wind of it may cause less damage but it will be severe nonetheless.

Retail sales will be horrendous, I repeat, horrendous, this Christmas season. Home heating bills are going to cause immense sticker shock and Santa’s bag will be light (stingy old bastard). Corporate earnings expectations have yet to take into account the following things:

1- Home heating costs
2- Massive economic loss of high-income jobs from finance
3- Continued inaccessibility and/or tightening of credit
4- Global economic slowdown

Prepare to view the following have their heads chopped off after this 5-10% unsustainable rally fails: Retail (Fall  – Winter 2008), Commercial RE (more so in 2009), and Tech.

The Black Swan – An Initial Review

Although I’m only fifty pages into Nassim Taleb’s book “The Black Swan” I thought I would write a quick initial review. The book is extremely well written and littered with superb anecdotes and details which are relatively easy to comprehend for anyone with any sort of financial/statistical/mathematic background. More importantly it is quite relevant to today’s economic and market condition. Mr Taleb explains and provides support for his viewpoint of how the majority of people neglect to appreciate and recognize the significance of Black Swans on the trajectory of our economic and social environment. Pick this book up – it is an absolute must-read if you work in finance or any related field (or simply have a curiosity as to how our entire global human system function and is changed throughout time).

(SFI) High Risk – Huge Reward

SFI (iStar Financial) has stated that they while they will not be paying their Q308 dividend they will be paying out 90% of their annual taxable income to shareholders in the form of a Q408 dividend. This could be well worth the risk of owning this company as their share price is sub-$1.30. Any dividend of even nominal size will provide an excellent yield.

This is a short-term trade and the long-term viability of this company, as per this analysis, remains unknown and irrelevant. Going long SFI for the dividend and then selling may prove a prudent move. There is a risk of bankruptcy.

-ISYN

Fade The Rally

We’ve been oversold to extreme levels as per the Vix and most other oversold indicators out there. However we’re oversold for extreme fundamental reasons so any large rally, such as today’s, should be faded or used as an opportunity to put on more short positions.

-ISYN