The Once of Future King of Aerospace

Boeing, which has seen its stock go from a high of $107 to a low of $71 during the last year, the roller coaster ride is likely to continue, but the future is looking brighter. The company is the giant in aerospace industry, with a market cap of more than $57 billion with its hands in both the lucrative defense business as well as the cyclical commercial airplanes business. The combination of increased defense spending, and the game changing 787 has helped to double the company market cap since 2003. Yet it has seen several large setbacks in last year.

On the commercial airplane side, the blockbuster 787 which was introduced in 2004 had racked up a total of almost 900 orders before the plane ever took off the ground. The key to the success of the airplane lies in two large gambles that Boeing made. One, it decided that the commercial air travel market would move toward a point to point connection versus the more traditional hub and spoke system. Two, Boeing gambled on a design that had up to 50% composites that in combination with its GE or Rolls Royce engines would provide up to 20% fuel efficiency. These two decisions, along with the ever increasing cost of fuel and the shift in market sentiment regarding travel allowed Boeing to get back into the lucrative long haul market that it had ceded to Airbus when the latter introduced the A330 in 1992.

For the integrated defense business, Boeing’s business has been on the rise since Sept 11. It continues to supply older generation combat aircraft such as the F-18 E/F, transports like the C-17. It also continues to provide logistics and support services for even older aircraft such as KC-135 tankers as well as the venerable B-52s. In addition, there are also new businesses for up to 108 P-8 maritime patrol aircraft as well as satellite launch systems and other defense related items altogether providing the business unit with more than $30 billion in revenue a year.

However, Boeing has suffered a number of serious setbacks in both business units during the last nine months. On the defense side, based on the GAO (Government Accounting Office) ruling, the Air Force is taking another look at the award to Boeing for 141 CSAR-X (Combat Search And Rescue) helicopters. Boeing had also lost a lucrative $40 Billion contract to supply 179 KC-X mid-air refueling tankers to rival EADS in February. Then there are the numerous delays on the 787 that are likely to incur compensation costs for its airline customers and the failure of its 747-8 to move beyond its launch customer (Lufthansa) for passenger service. The delay in the 787 has opened the door for the Airbus A350XWB – the belatedly launched rival to the 787. A delay would enable Airbus to gain market by providing open production slots for airlines desperately looking for more fuel efficient planes. Collectively, these missteps has knocked Boeing shares to their 52 week low.

The delays on the Boeing 787 stems in part from Boeing’s move to more of a systems integrator format as it subcontracts out vital parts such as the wings and the fuselage. They ran into trouble due to delays in the subcontractors which in turn pushes the delays onto the integrator. Of particular concern is the need for Boeing to redesign the wing box (a major component on any airplane) for the 787, this implies that the engineering would not be available for other projects such as the larger version of the 787, a stretched version of the 777, or even the replacement for the single isle 737. The delays are highly reminiscent of Airbus’s delays with the A380 that in turned delayed their launch of the A350XWB.

On the defense front, the loss to EADS on the tanker business is particularly difficult to swallow given that Boeing has dominated this business ever since there was an aerial refueling tanker. This coupled with a possible loss of the CSAR-X project, and the likelihood of reduced defense spending if the Democrats win control of the White House could be a disaster for Boeing’s defense business.

However, for Boeing, there is definitely a glimmer of hope going forward. The 787 despite its delays is still a much needed aircraft due to skyrocketing fuel costs, and there is even good news in that the aircraft has reached its first critical milestone: the power on process. Although this will not keep Boeing from being hit with compensation costs, it is a step in the right direction where it is now more likely that Boeing can achieve its first delivery in Q3 of 2009. The other bit of good news is that GAO that gave Boeing so much trouble on the CSAR-X project has delivered its verdict on the refueling tanker protest that the company filed. While this doesn’t mean that the Air Force decision is being reversed, it does mean that Boeing now has a chance to compete again in the tanker business. With the election year looming, it would be difficult to bet against Boeing especially when politicians are faced with the option of off-shoring a critical defense project.

Where does this put Boeing stock? For the near future, it is likely that Boeing will remain in the 70s range where it has been languishing for a good part of the last three months. But if things continue to improve, for example the maiden flight of the 787 is not delayed, it is likely that Boeing stock will end at the mid 90s before year end.

Another week... changes are needed

The problem this week was that there was just a bit of action, all of it was poor. Pretty much everything I have is underwater. This basically means that it's a waiting game now. I have faith in most of the stocks that are in the portfolio, but the question is how long to wait. I guess I better learn patience here. One interesting thing though, I haven't been as active in my more regular analysis of business lately. This is something I'm much more interested in anyway. I think the next one will be going back to my favorite subject, aerospace and the airline industry.

Sector Review of the Portfolio

Friday was certainly interesting, oil prices shot through the roof and managed to take all of the stock market down with it. As it stands right now, the portfolio could do a lot better. Right now, 32% of the portfolio is invested in alternative energies, and as of Friday all of them look to be in sad shape. Why? This is because as oil goes up, these companies should be rising in parallel, however, given the decline, the worry is if oil comes down, there wouldn't be nearly as much urgency in the success of these stocks.

The only thing to do now is to wait for a bit, the most obvious target to divest are the solar stocks. Having had some success with these last year, it's looking more and more like these stocks have hit the top, and there isn't much more left to go before they tank. This leaves a potential wind play and a clean diesel company. Both of these are somewhat speculative. The wind play will move ahead if the US congress pushes through the PTC (Production Tax Credit) for renewable energy. The clean diesel is as much a China play as it is an alternative energy play, that's something worth keeping since energy needs will continue to be there for China no matter what happens in the US.

Moving on, the little stake in financials was probably not the best play, but it's only a small stake. The question is how much more does Citi have to drop, with the news out of Lehman Brothers, it certainly seem like there is more room to fall for the financials. This could also be divested when it gets above water, this would be especially true given that the US economy will likely still end up in a recession this year or early next year. Visa is still a good bet, but probably need to come down a little from present levels.

On the biotech side, DNA is fairly solid if not spectacular right now, Dendreon on the other hand is just a pure speculation play. The Provenge drug is its only shot for Dendreon, so if there is any positive news, this stock goes up. For now at least, the portfolio can stand a rather small percentage of biotechs.

The dry bulk shipping stocks is just a simple play on continued Asian expansion. A majority of that is with China. Given the recent earthquake and the need to rebuild, this is a safe play although one that's losing a lot of money right at the moment. The event that could derail this is if China's economy go into the drain, then the commodities are no longer the best play and the commodities transport sector would go down the tubes as well.

WWE for entertainment stock is a bit dangerous, certainly the US market will be a slow one for WWE. But there is an advantage in having a not so bad dividend. But this stock is probably not quite the keeper like an Apple. This one will probably see some profit taking once the ex-dividend date passes.

Finally, Intuitive Surgical is more of a medical devices stock than a technology stock. This is a real momentum stock, and one that has stalled a bit of late. The best chance is for Intuitive Surgical to expand its sales internationally, but the prospect of reduced costs on surgery will still have some appeal going forward
in a down economy.

May is finally over....

That's about the only good thing that has happened this month. For the week, I reinforced my position on Gushan and added to the solar portfolio with STP. The main problem right now is that I have too many stocks, and that needs to be changed up a bit. The key ones right now aren't doing well, these include Genetech, First Solar, and Intuitive Surgical, although they're quality stocks, these are not likely to last for long as they become supplanted by other high growth stocks. Currently, it seems that I have a lot more stocks in the alternative energy sector, STP, FSLR, GU, WGOV, and ENER, these make up close to 35% of the portfolio. So, may be there will be some consolidation along this sector shortly. Overall, May was a bit of a loser month. We'll have to see how June turns out, and that might set a better tone for the rest of the year.

Tough Week, nowhere to go but down from here

What a tough week. More lessons reiterated, the key one being always take profit when its there. I sold Apple and Gushan after watching those drop much of the week. Selling Apple was a mistake, the only hope is that sometime next week, the stock will resume its drop sufficiently to buy back in. With Gushan, the sale should've come at $17 or so instead of watching it go down to $15 before selling. This was one of those costly mistakes that one can only regret in hindsight. Selling Rio was probably a good move though considering how much it went down at the end of the week. There should also be an entry point there somewhere.

Although this week has been a bit of an eye opener as well. Bought into a few other beaten down stocks, Citigroup, WWE, Dendreon, and First Solar were all picked up. Although First Solar was bought on averaged down basis, added further to the position every time the stock went down. Given the continued rise on energy prices, FSLR is a continued good bet. Citigroup has also been beaten down over the last couple of weeks, started a small position there that may be added to as time goes on, generally the financials look like they've nearly bottomed, so, now might be a time to cautiously start picking some up. WWE is going to be another one that will have more of a position added onto it going forward, there is a nice little dividend that should happen in mid June, which has a prospect of boosting its prices in the next couple of weeks. Finally, Dendreon is the speculative play, having come down quite a bit lately, it was time to move back in a little and see if there is a quick pop and some fast money that can be made, but realistically, with Dendreon until Provenge (their cancer drug) gets approved, they will be stuck in the $5 range.

The week though has managed to help me solidify my thinking on strategy a bit more. The first is that my portfolio has to be split into three parts, core holdings where good long term companies like Apple will be held, secondary holdings that will trade in and out of speculative stocks like a Dendreon, and then just a small cash position to look for new possibilities. The problem though is that it'll take some time to get to this stage. Another interesting lesson is averaging, this is something already known, but had to be reinforced. Gushan was a good example of averaging while the stock is going up, and managed to get decent gains even if timing wasn't so great. Now, FSLR is going to be another test case, the stock dropped heavily this week, strange given the surge in oil. Having bought it on the way down, this is definitely still a stock that has legs, so I think it'll have some room to bounce back up, only time will tell if I'm right on this.

Overall, May has been an unkind month, but it isn't over yet. Hopefully, the foundation is being laid for some decent gains going forward.

Tough Day

No doubt about it, it was a tough day on the street, down nearly 200 points. Most of the portfolio held up well. But of course, Dryships was a disaster. Somehow that's not much of a surprise right now, given that this was one of those stocks that have been moving up in anticipation of earning, and now it decides to drop. No choice but to hold on to this for a little while and see how it plays out, since it's a small position, no big loss. Closed out the position on RIO though, although not at the most favorable price, this is also one that has had a bit of a run.

On the other hand, WGOV has been a disappointment just like DNA, and ENER looks like its stuck in a trading range just like AAPL, and ISRG. FSLR on the other hand had a not so bad day given the state of the market. Asia looks like it is dropping again for Wednesday, so it will likely mean a down day for stocks yet again. Given the continued currency weakness, it is likely that energy stocks will continue to surge. This should be the overriding theme of this year. Meaning, the portfolio might have to switch from its tech focus to more of an energy focus for the rest of the year.

Monday: May 19, 2008

Today was rather interesting. Pulled some money out of Gushan (GU) and then made a m0ve into a transport Dryships Inc (DRYS) and just a small position back into First Solar (FSLR) thanks to the big drop today. Tomorrow is likely to be a down day, Asia is showing some signs of weakness. This may be time to move out of a position like Apple (AAPL) at least for the short term since momentum seem to have stalled there for the moment.

The DRYS move this morning was likely a mistake, got caught trying to turn a quick buck even though the stock has been on a tear lately and has nearly doubled. FSLR may also be a mistake since there is a good chance this one goes back down to $280, but a small position at $292 won't hurt. Unless the demand for oil suddenly drops, the alternative energy play will continue to remain a good one for the long term. So, if there is a lot more weakness this week, it may be an opportunity to further add to the positions, especially if in companies like FSLR and GU.

It's Friday... and the market isn't too bad

All in all, it wasn't a bad market this week. Added a couple of new positions this week, removed one position, and noticed something interesting. First Solar (FSLR) position was closed on Wednesday, and then added Energy Conversion Devices (ENER) and Woodward Governor (WGOV) on Thursday. Both the later have been in the news lately, ENER having just announced a great quarter, and WGOV was mentioned as a great wind power play. But the theme is pretty obvious, alternative energy is all the rage, and Gushan (GU) bought last week apparently had a decent enough quarter that it continues to move up. All this thanks to the oil run up and Goldman's $200 per barrel oil prediction, it wouldn't be surprising if oil hit $130 a barrel next week.

This would call for a new trading strategy though for a good part of the portfolio. The theme is all going to be based on the fact that higher oil prices are inevitable. Therefore, the alternatives are all going to be in hypergrowth mode. The question is which are the right ones to pick to maximize returns. Part of the reason FSLR was sold was due to the recent runup. The runup is based on the premise that it's the only game (for thin film solar) in town, which is untrue. But FSLR is the largest name in play right now.

For the future, FSLR will likely track oil much more closely than before, and has a higher chance of pull back given the recent run up. So, FSLR would be a buy on a dip. Probably below $270 or so, but the major opportunity for growth will likely be found elsewhere.

Random Thoughts

What an interesting trading day that I can't take advantage of. One of the problem with having success is that you want to hold on to it. Now, the problem is more real if you only have one success to really hold on to. Apple is good right now, and the one part of me says to sell the darn thing. Another part looks at the last sell action on Apple and RIMM and thinks what a bloody mistake that was. Of course, I do wish I have some money now into the down stocks, my poor Intuitive Surgical and First Solar. Both are momentum stocks, hopefully, I can ride the upward momentum for a bit and make a bit of money that way.

One thing for sure, my trading strategy need to change a little bit. Wonder if the market will be good tomorrow.

How not to negotiate a deal

One of the most enjoyable class during the course of my MBA was negotiations. One of the first concept that you learn is BATNA (Best Alternative To a Negotiated Agreement), basically, BATNA is the only standard which can protect someone both from accepting terms that are too unfavorable and from rejecting terms it would be in your interest to accept. So, if the BATNA is better than the agreement you would reach, then you would not go for the agreement. How is this related to stocks and business?

The most obvious example is the now defunct Microsoft/Yahoo deal. For Yahoo, and more specifically, the chief Yahoo (defined in Dictionary.com as an uncultivated or boorish person; lout; philistine; yokel) Jerry Yang, there were really two simple options:

Negotiated agreement: That leads to Jerry walking away rich, and with his reputation intact while Microsoft is stuck with hopelessly trying to incorporate the mess that Yang and his predecessor Terry Semel left behind into its organizational structure.

BATNA: Keep Yahoo independent, and the face the litany of horrors that includes:

1. Angry shareholders in revolt, and if they succeed, Yang's legacy with Yahoo will be one of humiliation.
2. Even lower offers from future suitors if Yahoo can even find one.
3. An advertising system that is obviously not working well, why else would Yahoo outsource its search advertising to Google.
4. A continued decline in stock price if Yahoo income doesn’t show improvement next quarter.

So, when you look at the alternatives, it’s really simple. It’s understandable why Yang wanted to squeeze a few billion more from Microsoft, but that should never have been done at the cost of losing the deal. So, even if he took the deal as it was on February 1^st, he would’ve been better off than the BATNA.

As for why I think Yahoo is in a weak position, just look at Jerry’s statement on Monday. It’s like saying: “we’re sorry we're so stupid, please take us back.” Losing the deal was a mistake, but owning up to it is an open invitation for your already pissed off . So, in the end, may be Yang and the Yahoo board could’ve benefited a little more from some MBA classes. That’s why I think the definition of yahoo on Dictionary.com would greatly benefit from a picture of the Jerry Yang, the self professed Chief Yahoo, talk about an apt description.

Trading: May 6, 2008

The trading today was interesting. I knew what I wanted, but the execution was poor. I wanted to dump HRP, and it happened. I wanted to get more GU, that also happened. But in both instance, neither was optimum, the puny amount of GU I bought up was not worth the effort. The HRP move out was not bad, mainly because I didn't want to be around when they reported earnings on Thursday, we'll see if this is a good call or not. GU is something I've been meaning to move into a little more over time. The stock is coming off of its lows, so definitely worthy of some excess attention, still don't know when the earnings report come out.

As for the others, Apple, Intuitive, First Solar and Genetech are all riding on momentum for now.

Comparing against the past

I've done this BLOG for a little over a month now, and I've compared my end of March results to end of April results. And I was decidedly unhappy. Had I kept the exact same portfolio I had at the end of March until now, I would be actually about 10% better off overall. I guess that's the change in fortunes.

Looking at the current list of stocks, I wonder may be if the better idea is to hold onto the brand names. Apple is certainly worth it. And stupid me, by selling when I did, I missed essentially $20 of gain on 500 shares, yep, there goes $10K. But now that I've bought back in, I think I'll just hang on for the ride. Visa, another example of a badly timed sell, 400 shares went up another $20 from when I sold, there's another $8K. These were definitely bad choices. RIMM was another one. My pick since then, ISRG and FSLR have both flopped. HRP hasn't done any better... so far, not a good month.

I think this calls for a sit down and a re-evaluation of strategy going forward. Oh, trades of the day, I pulled in a little bit of Gushan Energy. I heard a little about this stock, decided to put up a small position in it, and see what happens. Let's see if this one is a flop or a not.

Still trying to relearn the same lessons

One of the earliest lesson I've learned in investing is when to walk away. Sadly, it's a lesson that I seem to have to keep relearning every few trades. Take HRP for example, I knew I should've sold it when I had a chance, when the dollar averaged result was still a gain, or at least, not that big of a loss. But I decided that I was going to be smarter, and hold out for a little longer. End result, the stupid stock took a $0.20 drop at the end of the day, and now instead of having a break even result, I'm stuck with a loss for the moment and have to sit on the stock.

Another idiotic thing that I did was I bought FSLR by accident when I didn't pay attention to the condition I was setting. I can't believe it. Definitely not a good day for stocks. Well, at least April is over, so far, I can say this isn't a good year for stocks. The old lessons that I keep relearning:

1. Always know when to walk away.
2. Pay attention, because even a small mistake might cost a fortune.

Trading: April 29, 2008

Today I added First Solar to my portfolio for the first time. I'm not sure I have a good feeling about this since earnings are tomorrow. But it's a very small position for the moment, so we'll see what happens. But I have a feeling I should be divesting out of some of my solar stocks now just in case things go downhill. After all, the solar stocks have had an incredible uphill run. So, it wouldn't be surprising if things started going down a bit for now. It's a gamble, but a small one. Let's see where this takes things.

What happened to last week????

Well, like it or not, a week has gone by, and my portfolio isn't better for it. Although I bought into Apple again last week, I would've been better off had I just stuck with it and not moved into Intuitive. It seems like all the major moves have gone bad recently. But I did do some reshuffling, moved back into STP, have to see if the earning reports from First Solar can get me higher up, or if STP is about at its limit. The big concern there is that FSLR reports poor earnings and then it drags everyone else down.

Well, this will be an interesting week again. I have a feeling that I will dump at least one of the stock in the current portfolio. As long as it makes some money. I guess it's better than nothing for the moment.

Monday again....

I hate Mondays, they're both opportunities for the future and reminds me of the mistakes in the past. ISRG rises a bit more, and HRP seems to be dropping again, and Apple is starting to move too. So, in the hopes of not missing any more of the bull run, I added slightly to the Apple position, and may do so again tomorrow depending on how things turn out. The fear is of course two folds, first, Apple will disappoint, and drop largely, the second is that Apple will report and guide optimistically, but the news will already be priced in. Either way, we'll see shortly.

On the HRP front, we'll see where the stock goes in a few days, because ex-dividend day is Wednesday, and depending on how that goes, I'll likely be moving out on the position there.

Friday: April 18, 2008

I have this feeling before, it's as if somehow things are out of whack. I sold half the losing position on ISRG, and bought in some additional position on HRP today. Both turned out to be not the best move. It remains to be seen how things play out. Apple has continued to rise much to my annoyance, as has Visa, and other stocks that I've traded in and out of. I wonder if I'm missing a bull run session.

I hate losing: April 17, 2008

Well, my gambles didn't pay off. I doubled down my bet on ISRG, and while those guys came in with good earnings, their guidance didn't exceed expectations. So, of course after hours, the stock is hammered. Gawd, this is reminding me of the Apple disaster all over again. I wonder how much this stock has to drop tomorrow. Well, think in this case, I'll sit tight. My other prediction on Google was wrong too, the stock shoot up, well, can't win them all. But at least my Sunpower prediction was there, good thing I sold off STP. Depending on how things look tomorrow I might reenter the solar space again.

On the whole, I had better days in the stock market.

Trading: April 16, 2008

The image here pretty much depicted how I felt today. Although it's not at all obvious to me which of the animals should be slaughtered. The market has reacted surprisingly well to earnings so far in spite of the GE miss.

But I feel like I'm gambling a lot. I sold off Suntech today, probably not in a smart way since I sold it below what it was sitting at for most of the day. It was a sensible decision, but not done in a sensible manner. Tomorrow Sunpower reports, if it's good, then I think Sunpower's good news is already priced in anyway thanks to record high oil. If it reports poor earnings I get to go back buy another stock, may be First Solar.

I'm still sitting on a little bit of ISRG that I collected. This could be dicey since the company reports earnings tomorrow. ISRG has so far not ever let me down on earnings season, hopefully this one will be no different. Now, the real disappointment is still Apple, that stock continues to rise. Depending on Google earning report tomorrow, Apple could drop to $130 somewhere so I can buy it. I'm really hesitant to buy before earnings is announced next week, but on the other hand, I can't help but wonder what if Jobs decides that he has a good quarter, announces 3G iPhone and give good guidance all at the same time, it could shoot up up quite a bit. This one is a wait and see, since I can't make up my mind on not touching Apple before earnings come out.

The World's Biggest Airline...

News that Delta and Northwest are getting hitched is likely to set off a chain reaction in the domestic airline industry. The merger would create the largest airline by traffic in the world, although the same can’t be said for profitability. The US airlines have been bleeding red ink thanks to higher fuel prices and steady competition from low cost competitors. Since my writing on this subject three weeks again, there has been a spate of bankruptcies. Almost everyone is blaming the high cost of jet fuel for the industry’s woes, and the airline industry is a poster child for underwhelming performance.

But the airline stocks might not be so bad for a number of reasons, in fact, there might be good reasons to start bottom fishing for some of the beaten down companies. Here are a few I can think of:

1. The airlines are all trimming back on capacity, meaning lower operations costs, and from the market standpoint, improved revenue and profits.

2. Fuel prices are at unnaturally high, and with the economy in recession, the price of oil is likely to fall and thus relieve of some of the operating costs from the airline industry

3. The increased number of international routes that are both profitable and generally under served. This is especially true for the Pacific routes.

4. Increased travel demands internationally means that competition is generally still small and there is significant room for expansion.

5. Airlines are raising prices to combat fuel costs, and might not be so willing to cut back costs if there are less competition due to mergers.

I think these factors will allow the domestic airlines to improve their profitability. Especially if there is more focus on the international travel and paring back domestic routes which are under pressure from low cost carriers. Mergers will force airlines to cut staff and reduce number of flights in order to reduce operational costs and improve efficiencies. The merger between Northwest and Delta will likely to enable further consolidation within the industry, barring the unlikely event of regulatory concerns on market share.

Based on the assumptions that we will see further consolidation, I think the best stock in the airline group with upside is Continental Airlines (CAL). They are likely to be targeted United, and the consolidation there would make sense. The international routing of a combined company would benefit significantly, for the Pacific routes, each would bring in unique capabilities: Continental with India, and Israel, and United with several Southeast Asia routes including Thailand, Singapore, Vietnam, as well as Taiwan, Australia, and Kuwait. Then both also serve China which would allow increased frequency on very profitable China US routing. For Europe, Continental would add significant number routes for a combined entity, bolstering United’s lackluster offering. The comparable reduction in domestic routes would also make a merger between to two companies extremely attractive. Based on this, and the current Continental pricing, I think it is probably more attractive domestic airline stock out there for short term gains.

Trading: April 15, 2008

Added to my position in ISRG today, but then the stock dropped after hours, how annoying. The earning season isn't too bad so far considering Intel's results today, not the big drop I've been expecting. But Ebay reports tomorrow and then Google, so, tech is still in danger. I think the ISRG buy is a gamble, but at 25% of portfolio, it's time to stop and see if the gamble can pay off. The rest of the portfolio was more or less flat. One thing for certain, I need to get out of Genetech the next time it gets above water.

Taking a Gamble: 4/14/08

I sold my position in Apple, and let me say it was not the best choice in the world, I took a nice 25% loss on it and it stings. But the alternative is to keep the money there and worry about it going down during earnings next week. I don't doubt that earnings will be pretty good, I think Apple will guide conservatively as it has done in the past. Given its exposure to the consumers, this makes sense. I'm going to gamble that Apple will have some more to drop during in the next two weeks, and that I can enter at a lower level. No doubt in the long term, Apple is a good bet, so I hope this gamble pays off.

One other gamble late today was buying into Intuitive Surgical, I bought a small position, but I'm going to gamble that they have good earnings and that guidance will also be decent. I'm banking on the fact that robotic surgery will be cheaper in terms of cost compared to normal surgery when examined in the totality of the cost. That and Intuitive's monopoly on the space should keep earnings up as well as forecast. I may reinforce the position a little tomorrow morning. I don't know how much upside, but I think it would be reasonable to revisit the $350s if Intuitive manage to beat earnings and give good guidance.

Gaming the Earnings Season

It’s that time of the year again… and the bear is already starting his feast. But if GE was the appetizer, the main courses are all coming up, on deck this week are some of the leading indicators for the rest of the industries. We have Merrill Lynch, Citigroup, Wells Fargo for the financials, Google, Ebay, IBM to name a few of the tech heavy weights, Caterpillar, Johnson & Johnson, Schlumberger, and a host of others that represent the first wave in this earnings season.

Everyone already knows that the US economy is in a housing induced recession, and the consumers are starting to feel the pinch. This coming week is likely to mirror last Friday’s monumental drop punctuated by bad economic forecasts and reports. So how to play this period of volatility, there are a few sectors that I’m particularly keen on, and I think will bear watching.

First, my favorite, the solar sector, Sunpower, one of the leading solar companies is set to report on Thursday. It will definitely set the tone for the rest of the solar companies, I’m going to guess that its report will be fairly good, but the stock will be slaved to the trends of Wall Street until Thursday. With its recent run up, I think the stock has a high hurdle to clear even with good earnings. So my strategy would look to buy stocks in the sector after earnings come from Sunpower on Thursday. If the earnings are good, the entire sector can go up for a few days, providing an opportunity for a quick flip. Alternatively, if the earnings are bad, it’s a great opportunity to buy in to a good company.

Then, there is Google, if I had the guts, I’d short this stock. My guess is with the consumer weakening at this point, its revenue for click based searches have been dropping. So, when it reports on Thursday, I’m guessing the stock is in for a good drop. Unless they have some other blockbuster news that can divert attention, growth is slowing for Google. This wouldn’t be an opportunity to buy into Google, but it will definitely affect other tech stocks, such as RIM, Amazon, Apple, and depending on the level of the drop, it might be a good idea to get in on those next week, after Apple’s report.

On the financial sector, I expect a slew of bad news on the earnings. I can’t imaging Citigroup, Wells Fargo or any of the others having good earnings. But I think the flip side is that the market may have already factored in the bad news, Citi for example is almost at its lowest point in a decade. So, unless there is another Bear Stearns in the mix, the financials might be a buy at this point on the theory that most of the bad news has been wrung out of that sector. Again, I think the best play is to buy these guys after earnings, Citi has had a nice run up recently, so better to play this one a little more cautiously.

Finally, there is a personal favorite here, Intuitive Surgical, reporting on April 17th. I am personally looking to get into the stock before any announcements. But I have to say, I’m scared. Intuitive is near its all time high, but it’s a great company, has locked in a nice monopoly for its robotic surgery system. The market is expanding, and it’s also got a nice revenue stream in the form of a razor blade model through the selling of disposable parts on its surgical system. What’s not to like here. But if there is a hint of slow growth, then it’s over. My strategy for this would be to hold out until the last day or so before earnings, if it goes down sufficiently, buy it at that point. Then a good earning report should give back some decent gains, even with the recent run up.

Microsoft, Yahoo, and You

Ever since the Microsoft announcement of its intent to takeover Yahoo in February, the drama has been ongoing. To date, others have gotten involved, including Google, Time Warner with AOL, and if you believe it, News Corp. The battle on the surface seem to be for a larger chunk of the search market, but one has to wonder what else there is beyond this takeover.

To start with, the offer is more than fair, on January 31^st (just prior to the announcement), Yahoo closed the day at $19.18, and the unsolicited Microsoft offer at $31 a share cash/stock offered a huge premium. The price is unlikely to be matched by anyone else, Google wouldn’t care since it already owns the search market (77.7%) compared to the Yahoo (12.06%) and Microsoft (3.25%), no one else realistically has the money. The only reason that Jerry Yang and the Yahoo board has held out is that they’re greedy.

In this case, Microsoft is the one taking the risk, $31 a share would suck up a sizeable portion of Microsoft’s existing cash pool, the integration is fraught with danger, and should the bid be successful, integrating operations and keeping the remaining talent at Yahoo will be a tricky proposition at the best. I don’t believe the Ballmer red herring of trying to compete with Google. That just doesn’t make sense. Why would the number two and number three player merge and hobble themselves in the process to try to compete with the dominant player?

But Yahoo does own some other attractive pieces of property, for example, Yahoo’s email service still holds the largest market share, Yahoo Sports is a fantastic site that is also a wonderful money generator for the company, then there is Yahoo’s stake in Alibaba and Yahoo Japan. There are also other nuggets which Yahoo has acquired through its operating history. May be Microsoft is trying to buy enough assets to spin them off in the future, or gain presence in the Asia market, whatever the strategy, search is likely not a part of that big picture Steve Ballmer has formed in his head.

It’s obvious that Ballmer has pegged the price he is willing to pay and is unlikely to up the bid. The Microsoft ultimatum to Yang and company on April 1^st is timed to coincide with the Yahoo earnings announcement on April 22^nd. Three weeks to the day when Microsoft believes that Yahoo will either have to come up with great earnings, or just plain give up before Microsoft carries out the threatened proxy fight or lower the bid (which would just put a good majority of Yahoo shareholders in open revolt).

So how does this play for Yahoo and Microsoft stocks? For Yahoo, holding on to its stock at this point is a losing proposition, if you bought the stock on January 31^st, it should be sold because it isn’t likely to go much higher. As for Microsoft, if it doesn’t buy Yahoo, the stock will definite go up, but if it does get Yahoo, then it will face a tough challenge integrating the parts. But it really isn’t worth the gamble. So, the best choice there is to sell the stock if you can take profits now, or hold on and hope the takeover doesn’t go through, because if it does, you’ll be in the stock for the long haul.

Trading: April 11, 2008

Yesterday was definitely a bad day for the market, GE went out and essentially killed everyone. So, I took the advantage and made this a buying opportunity. I bought up STP in the morning, and then it promptly went further down. This could be a mistake considering that Sunpower (SPWR), a major solar play will be announcing earnings next week, if it misses or guides down, it’s likely to take the entire solar sector down with it. So, STP could be a quick sell if it rallies a little enough for any type of profit.

I also doubled up on my HRP shares, this one at least has a dividend, and I may buy in a bit more if the market drops during next week. My biggest disappointment of the day though had to be Apple, down a lot, definitely a sell candidate if it drops any more. That means taking a large loss from when I bought it last year. But I’ll take the chance since I don’t want to just take the elevator ride down again. Overall, not a good week, but waiting on next week for some buying opportunities.

Is it the beginning?

Basically today was a bad day for the portfolio, but a good start for what I think is going to be a long down trend for the market as stocks go down. I look at the coming earning season, and I think for the most part it's going to be a wreck with people either having negative earning surprises (which will dominate) or poor earning guidance. The only thing that would help stock is if all the bad news are priced in. Somehow I don't think we're quite at that point yet.

Things will still hold up, if the bad news aren't as bad as expected. Case in point, Boeing was strong today, up $3.58 because it's bad news about 787 wasn't quite as bad as it sounds. Although I think Boeing is kidding themselves, the stock will stabilize, but I'm betting there is still more negative surprises to come, too much open items for Boeing, and a weakening economy means that airlines are not likely to buy as many airplanes.

The one point I'm kicking myself on is STP, I should've bought it back on the day I sold, solar stocks have crept back up thanks to higher oil prices. Again, it's very tough to tell, oil has gone
really far up, everyone says a pull back is inevitable. The only question is when, if oil goes down, so down the rest of the energy stocks, and so I'll play it safe for now and wait for the drop again. Tomorrow will likely be modest move up or down. But starting next week, I think we go into triple digit territory again. And I'm betting it won't be good news.

Trades: April 8, 2008

Sold RIM for slightly lower gain than I should have. How annoying, this is starting to become a pattern here, after I sell the darn thing it goes up. The same is true with RIO and Visa, it seems like I pick them just a little too late or too early and sell them a little too fast. So, of course, along those lines, my HRPT and Dendreon has been dropping, I may reinforce those positions later on, especially HRPT before the ex-divident date.

Beyond this, I added a little bit of VM ware to my portfolio today. Just a little bit, although I seem to have missed out on a nice $10 run in the last two weeks, this puppy still has some room to run, at least until earnings come out. We'll see how well this one does. Apple is just stalled out it seems, the last couple of days, it seem to be stuck around the mid 150s range. Hope it doesn't drop too much.

Both RIO and Visa are on the watch list, as are the solar stocks, I wonder when these will start up their drops.

Trades: April 7, 2008

Sold Suntech today under a standard trailing point order. Good thing too, solar stock seem to have dropped a bit today. This is probably because the entire sector has been going up like crazy in the last two weeks, so it stands to reason that there should be a bit of a correction. Will have to look for an entry point a little later on these stocks. RIM should have been sold off today too since all it has been doing since earnings is go down. It would be a good idea to possibly take some profits for tomorrow.

It seems that there is a lot of run up to stocks prior to earnings. This might indicate that the run for Apple, Google, and a lot of tech names would be good up until a day or two before their earnings. I think especially for companies like Google, there is a lot of downside to this stock.

Both risk plays from Friday have dropped, if they go further, there might be a new entry point somewhere down the road. The financials keep going up, and that's interesting, it makes me regret selling Visa a little bit, I will probably have to get back in to that one sooner or later. But I have a feeling that the market will likely see a few more ups and downs in the coming weeks as earnings start to go out. The market has been doing just a little too good lately.

Trades: April 4, 2008

I have to say, I don’t get this one, in an up market day, somehow RIM managed a loss. May be it’s because the recent gain has already factored in the excellent quarter and the good earnings guidance for the rest of the year. This one might have to be just sold, I doubt if I have enough gain to have a contingent sell put in that would be useful. STP on the other hand had a pretty good day, and for this one I did decide to put in a contingent sell though since I want to be sure to lock in the gains, and besides I am still nervous about that particular industry.

I did do two other trades, both are high risk speculative trades, HRPT Properties (REIT), and Dendreon (risky Biotech with Provenge). HRP with a low at $6.58, but the mitigation here is a nice dividend yield and of 12% thanks to their low stock price, and today announced $0.21 a share with a ex-dividend date of April 23. So, there is a potential to go up a bit more on this stock.

Dendreon is quite an interesting story, it’s a biotech with a one shot prostate cancer drug that is awaiting the results of FDA phase III studies. This stock had a wild ride last year, bolting up to $25 at one point before coming back down to earth. The stock has been as low as $4.15 in the last few weeks and is only just now climbing out of the hole. I think I probably bought a little too high here, but the news was that some anonymous investor bought 8 million shares at $5.92, so this is a risky but worthwhile shot.

There is no doubt both are risky, if they go lower, I may reinforce the positions.

Taking a bite out of someone else’s Apple

The man shown here is probably worth at least $40/share of the Apple stock price, probably more. Call it the Steve Jobs premium, but it is not undeserved for someone who has managed two large paradigm shift in just the last decade, first dominating the MP3 player market and changing the way music is sold on line, and then shifting the way the consumer cell phone market works. Oh, and lest anyone forgets, Apple still derives a of its revenue and profits from the Mac, which was essentially an industry wide joke a little more than a decade ago. All this for a 53 year old, it ain't bad.

In the case of the iPod and the iTunes online store, Jobs had taken a music industry to a different level, and you could say he has effectively obsoleted CDs. Apple has just been ranked the top music retailer and that’s just using a virtue store. The market for the iPod isn’t just about music either, with the iTouch and video capability, it is likely that online videos will also be a target for Apple down the road. It doesn’t hurt that that Macs also provide a great avenue for the video market.

Shortly after the iPod, Jobs launched another coup by changing the way the cell phone market works. Before he introduced the iPhone, everyone was selling phones like disposable razor blades, and the idea of paying equipment marker a part of the subscription fee for the consumer market was crazy. But along comes Jobs with the iPhone and everything is turned upside down. All the hype, and Apple hasn’t even really starting selling in Asian markets yet where the iPhone has already reached iconic status. Then there is the expected iPhone push into the enterprise market, RIM territory. The iPhone seems like it is on just the beginning of a very profitable growth trajectory.

Finally, there is the Mac, virtually declared dead about ten years ago, thanks to Wintel, Mac has clawed back its share of the PC market to more than 8%, this is coming back from a market share of under 5% and declining in the late 90s. With the introduction of the various Mac models, Apple is continuing to focus on the PC market, although it is likely that this push is aimed partly at the overall home electronics industry. With a phone, a portable music player, it is only logical that eventually Apple will try to merge the Macs in some way, shape, or form to TVs.

Apple has gotten rich by eating the lunch from everyone else’s plate. The music industry was a test, since one could say that the sales and distribution model was a dying form, once he had succeeded. Jobs moved on to cell phones where the competition is a lot stiffer. It’s anybody’s guess what Apple will do next.

The last decade for Apple is nothing short of stunning, and most of the credit can be attributed to Steve Jobs. His vision has managed to push Apple not only into the music business, but the cell phone business as well. Jobs is also a master at marketing, after all, how else can one attribute the frenzy around the iPhone. To such an extent that a shortage of iPhones in Apple store can be construed as a sign of Apple's imminent move to a 3G platform.

In terms of Apple stock, the earnings will be announced on April 23, I expect a very good quarter. The downside is that Jobs and company tend to be conservative on their guidance, this is something they did in January, and it tanked their stock by $20/share. With the high exposure to the consumers, Apple might guide conservatively again. Apple has bounced back from its sub $120 price after dropping nearly 40% from the high of $200 in the beginning of the year. The stock can probably go higher, but the guidance will be the killer in this mix. If you’re like me who bought too high, the only thing to do for now is to wait, and hope Apple guides sufficiently well to have stock price go up again. But if you have the cash, buying the stock now might not be such a bad idea.

Bad choices: April 3, 2008

Yesterday, I sold off my shares of Visa. It was a bad choice, because today, Visa shot up from the opening, and ended trading about $4/share higher than where I sold it yesterday. I could kick myself, actually, I'm sure my wife will do that for me. The trade I should have made was on Suntech Power. I think solar has gone about as far as it can for the moment, and while there might be a bit more upside, I think it'll drop soon, especially if oil goes.

On the other hand, I guessed right about RIM earnings and got lucky on the guidance. It is up nicely, I hope this means a few upgrades here and there, and with luck, the stock price can pop a lot more than where it ended trading today. Beyond this, there are a couple of risky biotechs and even a REIT with decent yield that may be worth buying. We'll see how it goes.

Trades: April 2, 2008

Today was interesting, I divested my Visa holdings. I should've probably done that a few days earlier, but didn't think it through. On the other hand, I added to my RIM position before market closed. This turned out to be not so bad a move since RIM came out after the bell with better than expected earnings and increased forward guidance.

The big question for tomorrow is what happens to RIM. After hours, RIM was up slightly, but not the big move that typically accompanies RIM every time the company announces good earnings. So my guess from a week or so ago was not too far off. Now, if I can make money with RIM, then it'll be a different story.

For the next few days, I will have to look at whether or not there are other Financial companies I want to take a stake in. But the thing that is really concerning is Apple's earnings on April 23. I expect that they will probably have a good quarter, but if Jobs decides to play conservative again, then Apple might lose some of th gains. Unfortunately, I have to hold on to Apple since I stupidly bought the thing near its high during end of December. Other interesting plays coming up in the near future will be Intuitive Surgical, and Google. One I'm interested in taking a position on, the other I'd short if I was truly rich.

Trades: April 1, 2008

Added to my RIM position today, although did it in a very stupid way. After hours is probably not a good way to buy in additional position if a stock is going up, I really should've bought early this morning or yesterday. But tomorrow will be earnings announcement, and we'll have to see just how well RIM does. I think it'll be the forward looking statement that could perhaps be the most dangerous area for RIM. So, I may end up selling half the position tomorrow if things move up sufficiently in the morning for some type of profit.

The downside is that Visa took a big drop today, definitely not a promising sign, may be I should sell it tomorrow before it goes down further. Given the day the stock market has had, I wouldn't be surprised if we moved down from here tomorrow.

Trades: March 28, 2008

Market was down again today. Made two quick trades, closed out some of my position on STP, and picked up a small position on RIMM. The RIMM position probably should have been done yesterday, but this is just a small gamble for next week's earnings.

This will test my theory on RIMM next week. I would guess that RIMM will stay around the $110 to $120 range until Wednesday. I may add more to the RIMM position if the prices drops below the purchase price today.

Still holding onto Visa and Apple, but keeping an eye on both. Especially Visa, since it seems to be stalled at the moment.

Surfing with Crackberries

If you owned Research in Motion (RIMM) over the last twelve months, you probably made a killing. The company has done incredibly well over the last 12 months, rising from split adjusted price of 45.89 to today’s closing price of $112.15, a gain of 244%.

But more money could’ve been had over the last twelve months, through the ups and downs of the stock. A trader could have done very well by selling after earnings, and then buying on dips such as what we had in the last three months. From November until today, there has been five successive dips in the stock price, and each followed by an a move up on the stock.

Overall, RIM is a great company. Sure, they’ve had their problem including service outage that was broadcasted nationwide, but the coverage is indicative of just how dependent businesses are on Blackberries. RIM gets its revenue from the devices they sell, as well as a flat subscriber fee for each customer it has through wireless providers such as Verizon and AT&T. So, the more corporate accounts and users RIM has, the more money they make.

They are so dominant in terms of the business of smart phones that the next closest player is Apple with the iPhone, and the iPhone is more oriented toward consumers right now. Although Steve Jobs may be trying to change this, he is a long way from being able to compete with RIM directly.

So, with RIM earnings coming out next Wednesday, I think the play should be to get into the stock before the report. Given RIM has raised that subscriber addition forecast for the quarter, the only question is how good the forward looking statement will be. Unless the recession significantly affects business and that is reflected in the forward looking statement, RIM should do very well after their earnings come out, making it a prime candidate for good short term gain.

Trades: March 27, 2008

Market is down today, and it took down most of my portfolio too. I closed out the position on Vale (Rio), and overall, made a little money on Vale, but there seems to be more opportunities there if the stocks go down further. Fundamentally Vale is in a good position because the world still needs raw materials.

Apple (Aapl) broke its recovery streak, and so need to keep an eye there. I’m running a loss with Apple, but may be I should take the loss right now, and then think about buying back Apple if it drops further. The current quarter for Apple is likely to be good, but it depends on the forward looking statement as well.

Genetech (DNA) is a long term hold, which means I bought it too high, I should’ve bought it at the mid 60s really. But with its pipeline of drugs, this will be a good stock in the long run.

Visa (V) is still a hold for the moment, but I think if it drops below $61, then it’s a sell and wait to see if there is another entry point later on.

Airlines

Airlines stocks has recently taken a pounding thanks to higher oil prices, continued competition for market share and the perception of a slowing economy. In fact most of these stocks are down near their 52 week low, having just bounced off of these levels recently. The legacy carriers (Amercian Airlines, United, Delta, Continental, Northwest, US Airways) aren’t the only ones getting hurt, the regional airlines are also getting squeezed, Aloha airlines just declared Chapter 11 last week due to heavy competition for inter-island travel in Hawaii.

So, what are the airlines doing to halt this decline in fortunes? There are a few things that airlines can do to hold on to their profit levels:

1. Raise fares, the last round of increase in prices initiated by United seem to be holding so far, everyone else is following suit.
2. Mergers, this would allow airlines can reduce overheads and get more structural efficiency, the most prominent of late being Delta and Northwest, although that merger has been nixed by the pilot union.
3. Restructuring, if merger is not an option, then restructuring becomes the next likely option, this is something Delta is exploring in the wake of failed merger talked with Northwest.
4. Cut back capacity on domestic flight and increase international travel. The advantage there is that international travel is more profitable in comparison to the domestic market and the market still has significant room to grow.
5. Remove older and less efficient aircraft from service. This reduces the operational cost of running an airline.

But each of these options can be risky. For example, raise prices too much, and cost conscious travelers cut back. This is also true for businesses that are mindful of increasing costs. Mergers typically do not work well, one prime example is the merger of US Airways and America West, after three years, the two companies still hasn’t fully integrated their operations. Restructuring could cause unions to launch into strikes which can cripple operations. Fare hikes aren’t always sustainable as airlines love to compete for market share, which often means that price hikes are likely to devolve into price wars.

So, what does this all mean for the stocks of these carriers? It means that the stocks are highly volatile and extremely dependent on the price of oil. The play in airline is highly risky, but a good short term could be to buy airline stock on the day when oil prices has risen near its peak ($110), and selling as oil drops (below $100). This should make some quick money, but requires a lot of attention on a minute by minute basis. Out of the group listed above, United (UAL) is probably a good candidate, aside from the stock’s inverse relationship to the price of oil, this is the most likely merger prospect of the entire group given how much its CEO has focused on the subject.

Remember, trading in these stocks are not for the faint of heart. The airline business in the US with the exception of Southwest have never been profitable, so, don't count on the earning reports to give a boost to the stock, and never keep airline stock for the long term.

Trades: March 24, 2008

Good day for the market, too bad my stocks are only starting to recover from a miserable January and horrendous February. Bought in a bit more Visa, but dumped some RIO, commodities seem a little risky right now, so any action has to be short term trades.

Visa IPO

Visa’s IPO last week was the largest ever. At $44 a share, anyone who got into the IPO got a bargain. But today, the stock retreated on what looks like a lot of profit taking on a very up day for the market. But oddly enough, so did Master Card (MA), its closest competitor. So what to make of this?

First, both Visa and Master Card derives their revenue by charging a small transaction fee to the merchant every time a cardholder makes a purchase. While they don’t actually issue the credit cards, the credit card companies act as the gatekeeper for all the electronic transactions between the merchant and the customer. So, basically put, every time you use your credit card, the credit card companies takes a small chunk, you don’t see it in the purchase price because the merchant is effectively selling his product as a small discount. While each chunk by themselves only amount to a few percent, when you have literally billions of transactions each day, it adds up to a lot of money.

Upside, Visa has a lot more room to grow in Asia, and with online shopping where just about everyone uses credit cards, Visa can derive a lot of revenue that way. Best of all, unlike banks, Visa isn’t actually loaning any money to the consumers, so there is no risk of exposure to bad loans, the banks take that risk. All of this is good news.

Downside, according to the IPO disclosure, Visa’s five largest customers account for 20% of their revenue, this could potentially become a big disaster if one of these big customers decide to stop doing business with them. There are substantial legal risks involved as well, currently, there are numerous litigations involving retailers, who are complaining about the amount of money Visa is charging the merchants. The biggest flag is that $3 Billion of the IPO proceeds is set aside for eventual settlements on these legal proceedings.

So, what does all this mean? In the short term, Visa might be in for a bumpy ride, as traders take profits from their IPO allocations. But in the long run, given the dominant market position Visa has, the only way Visa can make less money is if their biggest customers decide to stop doing business with them (unlikely given the brand power), or if the government limits the amount of fee that Visa can charge (unlikely unless the government is taken over by communists).

In the Beginning

Once upon a time, I was actually an engineer of some type. But along the way, I somehow decided that business was far more interesting. All these interesting case studies that are a combination of logic, psychology, and gut feel. I was already interested in stocks, but until I actually started getting more interested how business actually worked, I never understood the relations between stocks and business very well.

So, my key focus here will be

1) My thoughts on investment, and the type of investments.
2) My thoughts on finance and business items that I find interesting.

Then hopefully along the way, I'll learn something... and not forget it.