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Wednesday, November 29, 2006

current market thoughts

Most of my attempts to trade the short-term direction of the market over the years have pretty closely resembled my various relationships with those of the female gender. Flashes of brilliance, some short term success but it’s usually just a loud, flashy process that costs me money. Having said that, much as I can’t give up the eternal; search for the perfect woman, I do have an opinion on the market. I am firmly in the camp that says that the steady advance of the past several months has no basis in economic reality and is entirely liquidity fueled. At some point it should reverse back to more sane levels..Perhaps as far back over time as the 1200-1220 area. That seems obvious to me given an economy that is throwing very mixed signals with some signs of inflationary pressure. That’s how the bond and force markets seem to evaluate matters as well. It is my considered opinion that those two markets are much smarter than the stock market t over time. So, it would seem obvious.

Of course there are three other trades on the board that seem obvious and have seemed so for some time. Being long volatility from these levels makes sense. However it has made sense for about two years now and vol sellers keep making money and buyers are going broke. Credit spreads have to widen at some point. B rated corporate paper and sovereigns of tin shack nations should trade higher than 100bps over t-bonds. However emerging market and junk funds keep clipping 7% coupons and anyone with the credit spread on has long since been measured for a body bag. The yield curve cant stay inverted forever. But the hillsides are scattered with the body parts of those who have had the trade on since the original inversion. So, as obvious as it is that stock prices should decline, many of those who have shorted it find themselves on stretchers and sucking oxygen from a bag.

When I examine all the obvious trades that are killing people all over the financial landscape, and hear the continued blither and blather about small cap, large cap, allocations shifts, industry weightings and other such that pass for thoughtful analysis of the current markets, I like to review where I have been able to make some money over the years. Its out on the edges. I cannot ad value to the merits and worth of an IBM, or an Altria. 29 dozen guys and gals already cover the company down to the number of flushes in the executive washroom. Out on the edges, out among the cigar butts and trolls however I can find some things that work. Stocks like Biloxi Marsh and Lands or Telos Pfd stock have yielded decent gains. Same with fun little things like Trico marine and Foster Wheeler warrants. Out on the edges where its pretty just me and one or two other vultures digging around, where market direction is pretty much irrelevant, earnings forecast are considered to be exactly the useless SWAGS that they are and it is your ability to decipher a balance sheet that makes money.

So what’s out there on the edges now? A few things catch my eye. I still like Optimal group with a sparkling balance sheet and a business that was eliminated by the ban on Internet gambling( I hate this thing..with no internet poker I may have to consider getting married again just so there’s something to do at night). However they still have an okay payment processing business and there are several activists agitating for sale or a special dividend. Very little downside, lots of potential up. Canada’s bone headed move to start taxing companies set up as income trust makes stocks like rogers Sugar Income and precision Drilling very interesting. Rogers yield 11% cash and is buying back shares. PDS yields over 13%(for the options junkies among you, PDS has options and they are fairly juiced as volatility rose on the tax law changes) and has a very good business that is likely to grow at a good clip over the next five years. Lots of turmoil and angst here, but good upside and an attractive payment while you wait. Finish Line, the mall based shoe retailer has had problems of late but management is making the changes needed to restore the business. The stock is dead on cheap on the numbers, trading a little over book with a solid balance sheet. Lots of company here as FPA, Olstein and Thaler all own large stakes in the company. There are activists here pushing for value to be unlocked as well. A solid holding out here on the edge(again, it is optionable as well. Walter industries is interesting with its upcoming spin off of Mueller Water. The parts here appear to add up to over 70 bucks on a 44-dollar stock. How abut thinly trade bexil, which is 39 dollars in cash and t-bills trading for 30? The question here is what do they buy with the dough? No way to know in advance but the company has been around awhile and made some very good deals in the past. If they buy anything worth what they pay for it, the $ discount goes away. For those with a longer time frame and the ability to handle the volatility of it, a small position scattered across the SPAC warrant landscape appears smart as well. With built in 10 to 1 leverage if just one or two of the deals work over the next 4 years you walk away with a more than adequate return on your money.

I’m just not smart enough to figure out which sector is going to dominate, or calculate when the market will go the direction I think it should. I can’t tell you when the yield curve will steepen, volatility will spike or credit spreads will widen. I can tell you that hanging out here on the edge, buying things for less than they are worth, following the footsteps of graham/schloss et al seems to be paying off for me. As it has for years. I ll continue to attempt to figure out the market of course, and examine all those obvious trades, and join crossman and Thompson etc in wondering when and what will crack the market or trying to figure out just where in the hell consumer got all this money, but for day to day practice, the action is out on the edge of things, far from the thundering herd and babbling commentators. Now, I f I could just find a girl out here maybe I can make that work as well.

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