Archive for October, 2009

Trick or treat!

Friday, October 30th, 2009

Recent market behavior has been more macabre than a nightmare on Elm Street.  I did warn you to take cover on Monday when the major indexes began breaking major support and the VIX took a jump.  But I’m not here to chastise you unbelievers in technical analysis but to relate two things.

First is that Professor Pat and I have been working on a white paper concerning the Sharpe Ratio and what it means in terms of fund performance, especially in regards to hedge funds.  The initial installment should be out sometime this weekend, so stay tuned.

The second is that I’d like to wish all my readers a scary Halloween, although not one nearly as frightening as recent market action. Unfortunately, I believe the market will be doling out more tricks than treats in the near-term. Boo!

halloween montage

2010 Investment Outlook–A woman’s perspective

Wednesday, October 28th, 2009

I spent a lovely Monday afternoon at the downtown offices of Latham & Watkins, the 800 pound gorilla in the Los Angeles attorney space. Befitting a firm of their stature, the tastefully understated decor oozed money and power, and just getting through their doors practically required a state-sealed letter from the governor.

The purpose of my sojourn was to attend the 100 Women in Hedge Funds (abbreviated 100WHF) panel which Latham & Watkins graciously agreed to host. The topic up for discussion was the investment outlook for 2010. Before I proceed any further, the flier for all 100WHF events states that the contents of their events is not for attribution in the interest of member privacy. I completely understand that policy but I don’t think that what I’m about to report will be anything that anyone could consider an invasion of privacy or even remotely controversial. But just to be on the safe side, I won’t attribute quotes to any one panelist in particular. I don’t think this will hurt my coverage as similar sentiments and points of view were echoed among others on the panel.

About a half-dozen questions were posed to a panel composed of high-level women in the areas of portfolio management, manager and investment selection, business relations, and financial law. Following is a summary of the answers to some the questions posed. In the interest of clarity and readability I’ve stripped out the financial jargon–terms like “dispersion,” “capital structure,” and “counter-party risk.” You’re welcome.

Q: In your opinion, is the market improving?
The general consensus is that trading is definitely picking up and fund managers are glad to now have something to do. They’re seeing an increase in liquidity and an overall improvement in the technicals, but they’re concerned about the fundamentals.

The feeling is that the market has gone from significantly undervalued to fair-valued and that from here on out the market will need catalysts such as earnings growth and/or an increase in liquidity to propel it higher. One manager said she is starting to raise cash (good move!) and is also tightening her selection criteria. Others emphasized the need for nimbleness in adjusting portfolios.

Overall, the panel’s approach to the market going into 2010 is one of cautious optimism.

Q: In what areas will you be looking to invest in 2010?
One concern is the threat of inflation, not only in the US but globally. Some hedges against inflation that were cited were the stereotypical inflation hedges–commodities and TIPS (inflation protected Treasuries). More interesting is the use of emerging markets as a hedge. Growth in emerging markets, fueled not only by commodity and infrastructure demand but also by a hugely increasing consumer demand created by an explosion in capital growth, is expected to easily outstrip that of the developed nations.

Not giving specifics, the panel also felt that what worked this year probably will not work next year. Diversification was mentioned as a priority especially away from “momentum factors.” (I’m not sure how to interpret this.)

Q: What are the challenges and risks for 2010?
We all know how the credit crisis crushed the portfolio returns of retail investors. The way hedge fund managers convey the same thing is by saying that they are looking forward to increasing alpha. One way that some aim to do this is by getting the betas right.* (The exact mechanism on how that could be accomplished wasn’t specified and I’m not sure how it could be done considering that beta is not a fixed number.)

Besides inflation being a potential problem, other risks are being examined. Included is political risk, both at home (think health care reform and securities regulation) and internationally (North Korea, Iran, Venezuela, etc.). Riffing off the H1N1 problem, one panelist mentioned that a health pandemic could also be factor into the risk equation.

Q: What’s your opinion of the proposed regulation of the financial industry?
Would you believe me if I said that all of the panelists were in favor of regulation? I didn’t think so. In fact, I think I heard the word “cancer” mentioned, but I’m not sure…

The prevailing thought is that no matter how hard one might try, fraud can never be completely eradicated and that government intervention is an over-reaction to the Madoff-type scandals. Some panelists said that they’ve voluntarily increased their own in-house due-diligence and feel those measures more than adequately address the issue of investor risk.

Q: Do you want to venture any forecasts for the US economy?
Although the crystal ball is cloudy, some on the panel feel that we may have to inflate our way out of our massive debt, a commonly held sentiment in the investment community. Others think that the greenback is losing stature in the international community and could well be replaced by a basket of global currencies.

Only time will tell.

I thoroughly enjoyed my experience at the panel discussion and it was thrilling to meet so many intelligent, experienced, and knowledgeable women involved in the Los Angeles financial community. I hope that this article will raise public as well as institutional awareness of the high-caliber women involved with 100 Women in Hedge Funds which has active chapters operating not only in the US but in Europe and the Far East.

For further information about this organization, their mentoring programs, member services, and extensive non-profit work, please refer to their website:

Disclosure: I’m on the board of the Los Angeles event planning committee of 100WHF, but maybe not for long after this article.

*Beta measures how much a stock moves in relation to a benchmark, typically the S&P 500.

Stinky market ahead–hold your nose!

Monday, October 26th, 2009

As I wrote in today’s Blue Plate Specials, the major market indexes have broken key support levels. The VIX, the market volatility index, leaped above its recent support level and the TRIN, the Arms Index, also made a dramatic climb. What this all means is that the grinch might indeed steal this year’s holiday rally from underneath the tree. Let’s take a quick look at the charts.

S&P 500
Here’s the 60 minute chart:

SPX Chart 10-26-09

The index broke its 1078 support level today. Next stop is around 1060 and below that is 1025.

Dow Transports
The Dow Transports, the DTX, is generally considered a leading market indicator. We saw it break support at 390 yesterday followed by the 378 level today. Not good. Next key level is 358.

DTX Chart 10-26-09

The volatility index, the VIX, generally moves opposite to the overall direction of the market. A falling VIX is a sign of growing investor confidence(although an extremely low VIX can signal complacency which can be dangerous). The VIX broke through major support at 40 following the market low in March and has been falling steadily since. It touched 20 last week, its lowest level in well over a year, and has been testing that level until today when it gapped up and through two minor resistance levels.

Support and resistance levels aren’t as meaningful for the VIX as for the other indexes; rather, it’s the overall direction of the VIX that we should be concerned with. A rising VIX signals a falling market. It’s really that simple.

VIX Chart 10-26-09

Market Actions
The market internals of the past two days suggest further movement to the downside. I would recommend lightening up on long positions and/or buying put options as protection. Those with more risk tolerance can start playing the market to the downside.

That’s it for today. I’m dashing off to a 100 Women in Hedge Funds panel discussion to find out what will be the investing themes for 2010. I’ll let you know what the panelists think. The event is in downtown Los Angeles. I’m giving myself 2 1/2 hours to get there (it’s all of 17 miles away) and am hoping that will be enough time. I probably don’t need to mention that traffic in LA is a nightmare…

The Retail Sector, Part II: Jewelers

Tuesday, October 20th, 2009

Last Tuesday I began a series on the retail sector starting with footwear. Now shoes may be a woman’s passion, but diamonds are definitely a girl’s best friend. In honor of Harry Winston’s stock breaking out yesterday, it’s only fitting that we break out our loupes and examine the bling space, especially considering that the holiday season is rapidly approaching.

Actually, there’s not much to write about since many of the major players–Cartier, Bulgari, and Van Cleef & Arpel–are either privately owned or are parts of large conglomerates. The priciest publicly traded companies are Harry Winston (HWD) and Tiffany’s (TIF) followed by the online diamond retailer Blue Nile (NILE). Rounding out the group are chain retailers Zale (ZLC) and Signet (SIG) (which owns Kay’s and Jared), Chinese jewelers Fuqi (FUQI) and LJ Int’l (JADE), and watch and accessory makers Fossil (FOSL) and Movado (MOV).

It’s not fair to compare Fossil with Harry Winston since it’s like comparing apples to skyscrapers, so I thought I’d compare the ones that I’ve paired above with each other.

Harry Winston (HWD), Tiffany (TIF), & Blue Nile (NILE):  These stocks suffered the brunt of the economic bad news and were grossly oversold. Although they’re trading well off their lows, they still have a lot of room to run, especially Harry Winston. Yesterday, this stock broke out of its month long base on heavy volume. There’s minor resistance at $15 and major resistance in the $23-$24 range.

As for Tiffany, the stock broke out October 6th on an analyst upgrade. It’s currently looking to push past its next resistance around $43 towards its all-time high of $57. Tiffany is the only company in this group that pays a quarterly dividend (D/Y = 1.7%), and it’s been raising it consistently since 2000 which is a cause to celebrate.

Blue Nile is the other luxury jeweler.  It doesn’t own any bricks and mortar stores; it’s presence is strictly online. The stock has been range bound for the past month channeling between $60 and $63. A break above the high point on decent volume would be the signal to take a long position. Next resistance at $73-$74.

Zale (ZLC) and Signet (SIG): It’s been a bumpy ride for Zale since recovering from a buck a share in March. It hit $8 briefly last month and if it can break through that again–as it’s threatening to do–I’d jump in.

It’s been smoother sailing for Signet but it’ll be rough seas for the stock if it can’t clear $30.  It’s $2 shy of that now.  I’d wait until it clears $30 or bounces off of $25 before buying.

LJ Int’l (JADE) & Fuqi (FUQI):  JADE put in an island reversal last week zooming up almost a dollar after an analyst upgrade.  The company recently raised third quarter revenue guidance which prompted the upgrade along with a price target of $6.75. In a detailed letter to shareholders, the CEO outlined the company’s expansion plans further into the Chinese market. This type of personal attention to shareholders is something that Warren Buffett is famous for and I’m glad to see it being emulated elsewhere, but for the stock to make it to the analyst’s price target, it’s going to have to clear the $4 mark which in the past has been a level of heavy resistance/support.

Fuqi is in the habit of blowing out earnings estimates. Of course, it’s only reported earnings four times but that’s still nothing to sneeze at. The company raised Q3 guidance to 44 cents per share, up from 31 cents the previous quarter as well as raising full-year guidance. Although the stock has fallen from its incredible run-up ($3 to $30), many feel it’s still undervalued, including Zack’s which recently added it to its buy list. An analyst quoted in a recent article in BusinessWeek also believes the stock is undervalued giving $52 as a 12 month price target citing a strong balance sheet, a dedicated management team, and a growing Chinese middle-class as the engines for growth.

Fossil (FOSL) & Movado (MOV):  Time has not been on the side of watchmakers. Both companies beat second quarter estimates but only Fossil raised full-year guidance.

An analyst upgraded Movado in September with a $16 price target saying that lower inventories could spur second half growth. On the other hand, others feel that lower inventories could also translate into lower sales unless the right products are stocked.

Not to be left alone, Fossil was also upgraded with a $32 price target. The analyst said that the company is branching out into licensing and other accessories that will spur growth.

Although both stocks are up three-fold since March, both are bumping up against major resistance–for Fossil it’s $30 and $15 for Movado. I’d wait for these levels to be broken before considering a long position.

Here’s a summary of the stocks mentioned in the article:

Jewelers 10-20-09

Click to enlarge

Quick MANDA Update

Thursday, October 15th, 2009

Two additions to MANDA, my M&A portfolio, were made this week. The first was yesterday’s purchase of Sinoenergy (SNEN) for $1.81. On Monday, private equity made a cash offer for the company amounting to $1.90 per share. No closing date was given.

Today I picked up Rubio’s Restaurants (RUBO) for $7.55 a share after a private equity group offered $8 in an unsolicited bid. The board is considering the offer and although this deal is by no means close to being locked in, I do think that Rubio’s stands a good chance to sell at the $8 price or possibly better.

To perform their fiduciary duty to the shareholders, the board must consider this proposal since it represents a 33% increase over the $6 recent share price. However, I think that if they agree to this offer, they’re going to be slapped with shareholder lawsuits since the price of the stock was trading over $8 before 2008. The board seems to be stuck between a rock and a hard place but this time I believe the shareholders will be the ones to come out ahead.

As an aside, I was tempted to purchase Starent Networks (STAR) but seeing that the closing date could be a good six months from now, I decided that the reward wasn’t worth it at these levels. If Starent stock falls under $33.60, then it will be worth my while. (Cisco (CSCO) bid $35/share for Starent on Tuesday.)

MANDA Portfolio 10-15-09

Investors marking up retailers, Part I: Shoe-Ins

Tuesday, October 13th, 2009

The tale on retail
Contrary to the continuing negative news that consumers are keeping their pocketbooks closed, the retail sector has recently come out of the closet, easily out-performing most other sectors including tech, energy, and basic materials. The XRT, one retail ETF (another is the RTH), has performed about as well as the XHB, the homebuilder ETF. Both have gained over 90% since the March lows and only the financials (XLF) and insurance (KIE) sectors have performed better.

So, is this a sign that the economy is indeed on the road to economic recovery or is it just a reaction to an extremely oversold situation?

Probably a little of both. In an article appearing earlier today in, October retail sales are inching upward with same store sales doing better than expected. According to the chief economist at the International Council of Shopping Centers who keeps track of these data:  “The trend improvement is providing evidence that the retail sector recovery is starting to unfold.” Other retail analysts agree with this sentiment as they’ve recently upgraded Pacific Sunwear (PSUN) and Macy’s (M).

Not being an economist but rather an interpreter of price patterns and technical indicators, it seems to me that no matter what the reasons are behind this turnaround it looks as if we can continue to count on gains in the retail sector–that is, provided that overall market sentiment continues to be bullish. I think that once earnings numbers start rolling in, we’ll have a better picture of where retail is headed. One particular “tell” will be forward earnings projections, especially for the holiday season.

With this caveat in mind, let’s see try on the retail sector and see what stocks could flatter our portfolios. Since retail comprises many distinct and diverse industries, I’m going to break up this space into several articles.  Today, we’ll begin our portfolio shopping in a girl’s second favorite place:  the shoe store.

Putting the best foot forward
Many footwear industry stocks have made a giant leap forward in recent months which is not surprising since the group as a whole was grossly oversold. In particular, Crocs (CROX) was down 90% from its all-time high.

My picks in this space: It’s been said that the woman’s credo is that one can’t be too rich, too thin, or own too many shoes. Unfortunately, when it comes to shoe companies there’s only a few names I’d consider adding to my retail portfolio:

Skechers (SKX):  The stock recently broke $19 resistance and is now trading over $20. Next level of major resistance is $25. It recently signed licensing agreements with companies in India and Mexico. It’s P/E is higher compared with the industry average but that may be meaningless considering the revenue growth potential. Upcoming earnings are estimated at $0.34, up 52 cents from the previous quarter, with the company scheduled to report sometime between October 23-November 2.

Steve Madden (SHOO):  The stock recently broke a couple of key resistances and is now lumbering on to test its all-time high of $45. Earnings growth has accelerated in recent years, and the current quarter is expected to beat last year’s earnings by two cents ($0.64 vs $0.62). The company will report earnings sometime at the beginning of November.

Crocs (CROX):  Sure their shoes are butt ugly but there are a couple of reasons to like the stock. First, it’s threatening to break out of a trading range which has hampered it for several months. Second, my favorite two contrarians, Jim Cramer and the Motley Fool, both hate it thinking it’s a one-trick pony. That, in and of itself, is something to love. In their defense, I, too, hate their iconic sandals.  But wait, there’s more!

This company is trying not to be a one-trick pony.  They now sport a catalog of men’s, women’s, and children’s footware. Some look to be as stylish as they are comfortable. I don’t think even Cramer would mind killing cockroaches on his kitchen linoleum in their Santa Cruz canvas houndstooth loafers.  (That’s probably not a great advertisement for the product.)  If Crocs can keep up the good work and throw some bucks towards decent advertising, I think they have a good chance at footware survival.  (They should toss in some low-priced handbags and socks into the equation, too.)  Company earnings have been rising although they’re still operating in the red. They’re expected to report earnings sometime in the second week of November.

Nike (NKE): Nike recently blew past major resistance at $60. It traded as high as $65 and has since retreated half a shoe size. What I like about this company is its name recognition which it heavily promoted at the Beijing Olympics. The company is intent on making further inroads into the Chinese youth market by working on reducing operating margins along with cross-promoting itself with other hot brands such as Apple.  Nike beat earnings by seven cents on September 29 causing the stock to jump over 8%; next earnings is scheduled for December 17th.  Watch this one!

Brown Shoe (BWS):  Brown Shoe not only incorporates its namesake children’s shoe, Buster Brown, but also adult styles such as Via Spiga, Naturalizer, Dr. Scholl’s, Life Stride, and specialty lines such as Vera Wang. The stock is in the process of breaking out of a several month consolidation pattern–anything over $10 on heavier than average volume is an entry point. Major resistance is at $12. The company will report earnings near the end of November and it has consistently paid a dividend.

Tomorrow we’ll take a look at apparel retailers.  Here’s the weekly chart on Crocs.

CROX Weekly Chart 10-13-09

MANDA Portfolio update

Wednesday, October 7th, 2009

New MANDA addition
In reviewing open M&A deals, I discovered that Life Sciences Research (LSR) was trading at a nice discount to its proposed purchase price of $8.50 in cash per share. I picked some up today for the MANDA portfolio for $8.00 per share. Assuming the deal is consummated (and there hasn’t been any indication that it won’t, at least so far), my transaction will yield a nice 6.25% profit. The company’s CEO announced on July 9th that he intended to take the company private. The deal is expected to close sometime in the fourth quarter and is subject to shareholder approval and certain closing conditions as set forth in the merger agreement.

Other MANDA non-news
As the old saying goes, “No news is good news” but sometimes no news isn’t good news as seems to be the case with Oracle’s (ORCL) bid for Sun Microsystems (JAVA). The merger finally cleared US anti-trust review and now sits under European inspection where regulators seem to not be in any sort of rush to clear it. Each day that passes is one more day the company loses market share to competitors.

And investors know it.  Witness  the steady decline in the price of JAVA stock. It closed today at $8.96, off 56 cents from its $9.50 take-over offer. I’m not too worried about the deal falling through–yet, but everyday it languishes in regulatory purgatory is one more strike against it. I’m setting a stop/loss around $8.50 which is roughly 7% below my purchase price of $9.10.

Here is the updated MANDA portfolio:

MANDA Portfolio 10-07-09

Litigation dogs recent M&A activity

Monday, October 5th, 2009

I’ve just returned from vacation and in the midst of catching up on recent merger activity, I’m finding that nearly every deal now comes packaged with at least one class action lawsuit. Is it me or does there seem to be a sudden rash of lawsuits in the M&A space?

In an attempt to answer this, I compiled the table shown at the end of the article. It shows that out of the 46 acquisitions proposed since June (that I was able to count–there may be more), 32 of them involve at least one class action lawsuit. That’s a whopping 70% of all deals! So, what gives?

Why all the lawsuits?
If you read the press accompanying the lawsuits, you’ll see that the overwhelming majority of them are founded on “fiduciary breach of duty” on the part of the board of directors of the company being acquired. The most popular “breaches of duty” include setting an unreasonably low price for the company as compared with recent stock highs (reached within the past couple of years) or structuring the deal so that no other company will want to make a competitive offer.

On the surface, it would seem as if these lawsuits have the best interest of the shareholders at heart, but don’t you find it just a bit suspicious that there are so many of these deals being pursued right now? Stranger things have happened, of course, but that doesn’t mean that everything is kosher in Denmark. (I can’t find the right metaphor but I think you know what I mean.)

What’s in it for the litigators?
Far be it from me to imply that lawyers are anything but honest and selfless, but I can’t help but think that this rash of cookie-cutter lawsuits is taking advantage of some newly-found grey area of securities law. It’s difficult to tell what the suing law firm has to gain because the results of recent lawsuits are either still pending or haven’t been published. The one case that was made public involved Laboratory Corp. of America’s (LH) take-over bid for Monogram Biosciences (MGRM). Two suits, one filed by Levi-Korsinsky (the “ambulance chaser” of this group), and the other by the law office of Howard G. Smith, were both settled out of court for undisclosed sums.

One might conjecture that these lawsuits are cheap to file and that any type of settlement might mean a quick and easy payday for the prosecuting attorneys. One big factor in their favor is the “pest” element. They know that shareholder approval is needed before any merger can commence and that it might behoove the attending companies to remove a potential thorn of shareholder discomfort before the terms of the merger are placed before them for their all-important vote.

So, what’s a shareholder to do if your company that is about to be acquired is hit with one of these lawsuits?

So far, the results have remained unchanged
If you’re in this position or are thinking of buying into the acquiring company, don’t fret. The three mergers that have so far been consummated (including that of Monogram Bio mentioned above) have gone through as originally planned. (The other two are Axsys Technologies (AXYS) and Cavalier Homes (CAV).) It seems as if the bark of these merger-chasing litigators is much more ferocious than their bite.

Preventative action
It might behoove the board of directors of target-acquisition companies to address the topic of “fiduciary responsibility” before a merger deal is struck. This will serve the dual purpose of reassuring their shareholders that the deal is in their best interests thereby avoiding grounds for potential lawsuits.

Obviously, there’s more to this subject than meets the eye. I wish I had the time to do the in-depth investigative research needed to answer some of the questions posed, but I don’t. For further information on the major litigators in the M&A space, I refer you to their websites:

Litigator Links:
1. Levi-Korinsky:
2. Brodsky & Smith:
3. Kendall Law:
4. Howard G. Smith:
5. Wolf Haldenstein:

M&A Litigation 10-02-09

*Companies that are in involved in merger deals since June, 2009 with no pending litigation: