Deep Value Letter - Banner Ad / Email Capture

Wednesday, December 20, 2006

scattered thoughts

Holiday greetings from the slim one. Professor mcnabb stuck me with that nickname a few years ago and I have perpetuated it as I prefer it some of the others I have picked up. Around the island for some reason virtually everyone has me in his or her cell phone as harry potter. An unfortunate nickname thrown out one night during a lengthy session at the jetty that has stuck like glue. I am convinced there will be guys at my funeral many years from now, saying, Damn that harry P.sure gonna miss him. This does make finding a Halloween costume easier as I just simply show up as myself and announce that I am a middle aged gray haired harry potter.The latest was thrown out by one of my younger co-workers when I was spouting and pontificating on some subject…Who wound up father Time? I ramble, onto more important topics

The stock market continues to just confuse me. I do not see the catalyst for the continued run. Given the current economic situation which appears to be showing slowing activity, weakening real estate (I had actually been considering buying a place but after listening to some folks who know a lot more on the real estate market than I do decided that holding off until later in 07 makes more sense), yet there are still inflation concerns, as well as the geopolitical scene, a nasty war in Iraq that we appear to be losing, pressure from the Saudis to continue fighting there, north Korea, the current Thailand situation I can give you no reasonable explanation for a vix of 10. Makes no sense to me. I find that the fact that Birinyi and associate blogger poll finds leading pundits to be bullish on stocks, yet bearish on the dollar and housing. They are also bullish on bonds. I find that position indefensible. I realize that private equity and M&A activity provide some sort of floor as these enormous pools of cash are vociferously looking for a home and buying everything in their path. But straight up for 5 months with a declining risk premium? Makes no sense to me.

Of course I have been skeptical about the market all year. If it was more than an intellectual exercise for me and I actually traded this way I would be living in a tent below a freeway underpass. Fortunately the only market timing I do is increasing positions when prices fall. My style of investing in the very cheap tends to lead to me finding more bargains in down markets and less as prices rise. Hasn’t always worked that way but it has this year. I have been able to find more than enough kinky, twisted and just flat weird securities to have had a very good year in the market. I am not really adding any new stuff right now but staying with the horses I have been riding for several months. Nice screwed companies with high uncertainty and low balance sheet risk. FRN, OPMR, FINL, TRPS (okay this is actually a new one, a liquidation trading in the 70 cents area where I think the payout is closer to a dollar), PBY,BZL,HAWK,SCUR,WLT,MWA I still love the SPAC warrant game and the warrants in esa and aqr are my favorite plays at the moment. 80cents for the aqr warrants and 50 for the esa. To get a handle on the potential, the aqr warrants have a 5 dollar strike. Now consider this report from think equity
THINK ACTION:Preliminary asset valuation estimates of Jazz Semiconductor ahead of theirmerger with Acquicor resulted in a significant increase of estimates fortangible and intangible assets. While increased asset valuations will resultin higher D&A, lower gross margins, and lower EPS estimates, our revenue andEBITDA estimates remain unchanged. We view the re-valuation of assets as apositive development and our thesis remains intact. In addition, AQR announcedthat its $145 million convertible issue has closed. Reiterate Buy rating and$8 PT.

That’s a one-year price target. If hit, the warrants are now 3 and change. With 3 years to run. Anybody with any touch of speculation in their soul and a few years to wait it out should own a basket of these. Some won’t work. You ll lose 50 cents or so. Some will. You ll make several dollars. Works for me.

Early this year I had success selling puts as an entry point for a lot of value situations. It has become very difficult to do with the vix at these levels but I continue to look for situations where it will.MWA and AMAT in particular are stocks where I might want toll one or two month near the money options on any sort of overall market setback.

Random Musings as we approach the end of the year

Here we are. The Holidays are upon us and at last I am getting a touch..just a touch mind of you of holiday spirit. I look at the week ahead and realize that I have so much to do its ridiculous. I am not sure what happened but somehow from a quiet family dinner it has blown up to 15 or so people at my house Christmas Eve. SO I have all weekend taken doing the cooking cleaning and all that goes with that many people in my tiny little condo. Which means tonight is the only time to wrap presents. So the plan is to blast rat Pack Christmas music as well as some rock and roll holiday cds, uncork a bottle of wine and get it done. Those whose presents are wrapped last will just have to deal with the mess. As I have shopped this year I find myself wondering the same thing one of my very sharp co-workers asked yesterday “ Why are they lowering prices so quickly. Everyone is out and shopping and there doesn’t seem to be a lot of attention paid to price. I can only reach the conclusion that retailers are scared to death of an inventory overhang going into the first quarter and just simply want the stuff off the shelves.

Although long term I am very bullish on coal prices (it’s the only energy resource we have plenty off and coal to liquid technology is progressing nicely) short term it may be tough sledding. From today’s journal:
After a warm winter and a cool summer, the nation has amassed a Surplus of coal, causing a price slide that some analysts think has yet to hit Bottom. If demand doesn't pick up significantly this winter, it could mean trouble In 2007 for producers who've already endured a tough year. January was one of the warmest on record, and the summer was relatively cool. That lowered electricity demand for heating and cooling, reducing the amount of coal consumed by power plants. Coal stockpiles at power plants in the beginning of 2006 were precariously low. By summer, they were back to normal. By the end of the year, they could reach 138 million tons nationwide, or more than 14% above normal levels, according to John Hanou, vice president at the energy consulting firm Hill & Associates.
I like the group and follow it. I have done well selling puts on names like CNX and MEE but its also home of my single worst pick of the year ICO. I ll follow it as the year progresses.

Last night I had the most amazing dinner with my daughter. We sat and talked like adults and friends for the first time I can recall. We talked about books, her love of f Scott Fitzgerald and Hemmingway (this is huge for me. It took forever to get her to fall in love with reading and it didn’t happen until she was in her late teens. I had an able assist from haryy Potter and all those long hospital stays but I love it); we talked about ancient roman history and how she wanted to learn more about it; we talked about her career and school plans (she wants to teach and perhaps go as far as a literature professor); we talked about why men in their twenties as she so eloquently put it, suck (all they want to do is get drunk and have sex. I resisted the urge that this continues unabated pretty much forever. We just get a little more subtle about it); we talked pretty openly about while I m still single (hard to find good women who aren’t already involved after a certain age. That and the fact that I am somewhat of a handful to deal with). We talked and I realized that daddy’s little girl was no more. Although I will always carry the memories, she is now a woman in her own right. I saw for the first time a lot of the influence I have had on her over they years and thought to myself that if I have done nothing else right in this life, I had a big part of helping her grow into a great young woman. It was an awesome feeling.

I also had cause last night to reflect on how seemingly random events can have such a significant impact on our lives. Several years back I chanced across Victor Neiderhoffers column on the Internet. As Education of a Speculator was instantly my all time favorite investment book, I bookmarked his site and followed it for several weeks. One week I disagreed with something he wrote and emailed to say so. We had a most pleasant conversation and I was invited to something called “ the speclist”. A life-changing event. Not only has it vastly improved my trading and investing, taught me about statistics, introduced me to new books and opened up more intellectual avenues for me than you can imagine, consider this : first phone call of the night David Hillman to discuss how thoroughly I whupped him in Fantasy Football. Hillman and I have become close and talk often. Met him through the list. Traded a few Im’s with Ed Gross. Ed and I talk almost every day about markets,poker,sports and women. I stay with him in New York often. Met him through the spec list. Talked to a wonderful woman from the horse racing state. Met her because on my first visit to Chicago to visit my spec list friend Fred crossman we went, as we are wont to do, barhopping in the cold Chicago night and met her. I have made so many friends and gained so much knowledge as a result of that one simple email it is incredible. You just never know but it pays to look for opportunity in everything.

I had one other call last night. An old friend from back in my Jaycee days. He and I had spent a lot of nights in back rooms playing organizational politics, a lot of nights in hotel bars during conventions sharing scotch and stories. He fell out of touch after his wife died last year following a long bitter fight with cancer. Every once a while I tried to call him and just let him know I was around. Last night he answered we had a great conversation and plan to try and meet next week for drinks in Florida. It brings sharply to focus that we should never forget old friends or let people who have been important to us to walk too easily out of our lives. Not talking lost loves here..those are usually best kept far away I think, but those people with whom we have shared time, thoughts, goals and dreams. In this day and age time and distance are no real obstacle and it would be a shame to look back and say to yourself “ man I was really close to that guy. Wonder what ever happened to him. The old childhood song make new friends but keep the old/one is silver the other god seems somewhat apropos.

So now into the Christmas backstretch we go. I have wrapping to do. I need to go to the grocery store and get ready for the herd that descends on me Christmas Eve. I will spend the day cooking and griping about it as my kids their friends, my mom and sister come to the house. Frank and dean will be on the stereo, I ll be bitching, complaining about everything to hide the fact that I love every damn minute of it. Typical Melvin Christmas.

After the holidays I am off for Florida to start work on a new book project and then spend new years with friends. Looking forward to the good Florida sunshine and hopefully some soft Kentucky smiles. I will be back after the first as confused as ever about the market and eternally searching for weird little idea that just might makes us some money.

Happy Holidays

Friday, December 08, 2006

a holiday tradition..a dimal one perhaps but a tradition

Here we are, Early December. That can only mean one thing. That’s right dear readers it is time for Tim's annual holiday classic. Each year, for some twisted reason know only to myself..Well to be honest I don’t even know why I do it, I bastardize, plagiarize as just generally rip off some well known beloved Holiday yarn giving it a speculative, capitalist, libertarian and just plain weird spin. I of course insert characters from the spec world and sometimes from the real world to make it entertaining to all..or just because I think its funny. I like to do this early in the month so everyone has time to print it off in time for holiday bedtime reading. Surely even Mr., brooks needs a holiday classic to read this time of year eschewing those classics his kids love, the NRA manual and Bambi-He's What's for Dinner. The quest for a new story gets harder every year..We have done Yes, Virginia, It’s a Wonderful Life, naturally the night before Christmas and my all time favorite of them all, last years immortal yet easily forgettable rewrite of the grinch who stole Christmas. This year, I shall tackle the Granddaddy Christmas tale of them all..A Christmas Carol. And stand it firmly on its head

Our hero, Ebenezer Speculator sits at the end of the trading day, marking to mark his current positions. Good day for his egg nogg crack spread (long one, long one milk, short two bourbons) broke even on his march candy Cane short but as always the long Fruitcake trade settled heavily on his p and l. It seemed to him that he had been doing this forever and the watching of green and red blips fall across the screen seemed to be a non productive way to spend his days. I should be ding something productive with my life, something that adds value to the world, he thought to himself.” Feeding the poor, promoting world peace, teaching white men to dance, something that would add real and permanent value to the world. Sure, I am making money and all that and I employ a few people and helped others learn the tricks of the trade and make money. But what real value do I add to the universe sitting here greedily racking up profits for my own benefit while others fail and starve around the world. Surely, I could be a more productive member of society is some way.” At that point his nephew Fred burst through the door in his Cleveland Indians baseball cap, excited with the sprit of the season. “Quick, Uncle” he cried, “ housing starts are down, mortgage defaults are up and the world is awash in debt. We must short, we need to sell calls. Tis the season for economic collapse and profits all around!” Ebenezer look at his nephew and chided him for thinking only of profit for himself and not the plight of the poor around the world.”Bah Humbug. I am tired of all this buying and selling, selling and buying for no purpose other than to fill my own purse.”

The thoughts stayed with our hero as he made his way through the streets. He noted the homeless with their dire condition. He gave generously to the faux Santa’s ringing bells over little kettles, giving freely of his cash so they could continue the good work of forcing winos and degenerates of all forms to sing hymns to get a chicken supper and providing child care so the crack mamas could get to the corner and not worry about the fate of their little ones. He noted all the dregs and depressing things of the human condition. Of course had he lifted his eyes from the gutter he might have seen the towers of steel and glass that provided jobs for literally millions, the apartments full of people who earned their living through productive effort and cared for their families and raised their children to understand the value of education and hard work. He didn’t see the procession of cabs, buses and trains that provided cheap transportation to the public at a profit, or the store windows full of consumer goods, clothes, electronics and appliances that were sold at a profit to give us entertainment sustenance and make out lives easier while providing jobs for millions around the planet. That of course would negate the need for the rest of the story so he trudged homeward, eyes cast down not seeing the triumph of efforts and capital spread before him.

As he took his supper along with a generous glass of Irelands finest he read over the headlines of the evening papers. War here, war there, hunger, pestilence, disease. He knew that he must somehow find a way to make a difference in the world.

He awoke with a start to the clatter of chains and a soft moaning that grew increasingly louder. He recoiled in horror at the sight of a ghost, the ghost of his old trading partner when he first struck out on his own, the ghost before him was that of none other than Karl Lenin Marx Marly. They had separated after a few very profitable years when Jacob driven by the guilt of his wealth and desire to save the world. He had died in Outer Somalia when he was fried and eaten by a pack of savages who vastly preferred deep-fried ex day traders to the food presented by the various aid agencies. They were horrible fat(this was 2001. there was a excess of deep fried ex-day traders around) little men who dispatched of our crusader in quick order with a nice merlot on the side.“Karl,” cried our hero,” you have been dead now these many years. Why do you torment me at this hour? I must sleep as I have many fundraisers to attend this weekend for many liberal charities with heavy overheads and bizarre cost structures.”

“I am here Ebenezer to save form the mistake you are near making, the same fatal mistake of mistaking charity for a productive use of your time and effort..The type of mistake that leads to one being served up with a nice merlot deep in the darkest parts of the world.”

What chains are these you wear?

“The chains of every stupid do good welfare handout, government inspired relief programs that squelch the natural instinct of man to improve himself that I ever supported. The chains of every relief program that I ever collected money for only to have the cash sucked up in more fundraising drives and salaries for those who told us we were saving the world while what damn few supplies we ever sent to the poor were seized by roving warlords and midlevel bureaucrats. Tonight you shall be visited by three ghosts each with a lesson and warning for you. Take heed Ebenezer, take heed, lest you share my fate. The first shall be upon you at the stroke of midnight.”

As the ghost fade, or hero blinked in disbelief and swore he must be hallucinating. It must have been bad oysters or too much whiskey, a dream, nothing but a bad dream .Not as much of a nightmare of any his marriages, but still a bad dream. Back to bed, back to sleep he told himself.

At the stoke of midnight the first visitor did indeed arrive. Clad in pink slacks and a teal sports coat, he roused Ebenezer by smacking him firmly over the head with a copy of dimson marsh and stautons triumph of the Optimists, a most weighty tome capable of rousing one for sleep or knocking one back into it as the case demanded. “Come and see the past, of the profound impact on world history that speculators and investors have made.” With a flash they were gone into another time and another place. “But that’s me, as young man sitting at the ancient quotron cold-calling strangers to get business. Me, with no gray hair, no bifocals. Look at me so young and foolish thinking of nothing but making money.” And he watched himself as time and space compresses as I can do because its my story, watched himself in those first few years as a young salesman peddling stocks and bonds for companies no one had ever heard of, Golden Nugget, MCI, Microsoft, Amgen, Netscape. He watched as he helped raise money for companies that transformed the world with their technology and their medical devices and drugs. The specter whacked him now with Stigler Statistics on the table and they sped though days past seeing whole new industries, airlines, automobiles, computers created. Created with money raised in financial markets made possible by the liquidity provided by traders and speculated. Men who speculated to raise their standards of living and endowed educational institutions and libraries that made it possible for others to expand their knowledge, not with a hand out but an opportunity. He saw the million per cent a century return of the capital markets raise standards of living virtually around the globe and for the first time he began to realize that maybe, just maybe business and capitalism did far moregood than harm. Another smack to the head with a copy of Galtons Art of travel and he saw the history of other approaches, the complete and total failure of communist and socialist systems over the years and around the planet.

With a thump they land back in our hero’s apartment. “Why show me these things spirit. Surely in spite of these things I saw, I can still do more good acting out of charity than avarice.” With another smack of the optimist tome. Our spirit departs leaving Ebenezer crumpled to the floor.

As the clock strikes one, the second ghost, the ghost of speculative now shows. He looks disturbingly like Kenny Rogers and is wearing some sort of cheese apparatus as headgear with a twinkle in his eye like David Hillman might have if he ever did actually find someone incredible to actually agree to marry him..Oh wait that did happen and Hillmans been twinkling ever since. The spirit yanked Ebenezer from the floor, stuck a gin and tonic in his hand and off they went.

First to nephew Fred’s where he sat around with his boon companions and fellow traders Jason and Ryan. Jason sighed wearily: this market is killing me. After today’s trading debacle I m only up 913% for the year. I tell you I’m getting desperate..” Ryan was quick to agree ‘ If this keeps up next year I ll only be able to go to outer Mongolia and the north pole. I may actually have to skip paying a fortune to slip into communist dictatorships that are sworn enemies of the US. The horror of it all!”

“Guys”, said Fred, I am worried about Uncle Ebenezer. Why just yesterday I went into his office and showed him some great housing shorts and an ingenious way to be short stocks and long volatility at the same time. He didn’t pay any attention. He was too busy writing checks to the sierra club and the feed Sally Struthers s foundation! He’s losing his drive and mumbles all day of doing good.”

“Enough of the gloom” shouted Jason. “We shall go now to Melvin B’s and drink copious amounts of beer and then gather around a brightly decorated cell phone and call Chesapeake slim and berate him for his nefarious bad habits of drinking, smoking,and gambling, to say nothing of chasing women with Kentucky accents and only buying stocks under book value. It is after all, a holiday tradition.”

With the splash of a lime in a fresh G&T they were off again. They looked upon the voodoo prof and Elena living in Deltaville, va living a life of trading teaching and boating, said aforementioned Slim on his island, wring strange documents and perusing vague financial documents, mandatory glass of Famous grouse at his side enjoying the benefits of a capitalist society that allows a man to marry as many times as he likes and still figure out a way to pay for it, they saw the wiz and the Weston crew, trading and living lives, raising families, gaining knowledge as well as profits that enabled them to enjoy the fruits of their efforts, they passed over Hawaii where Mr. Sogi continues to trade and dabble in business enjoying the companionship of his incredible wife and the Pacific surf, Scott brooks , stalking profits all week and innocent fuzzy animals all weekend. All of them trading and investing in the markets, using the profits they reap for the betterment of themselves and the ones they love.

Thump back into the apartment, the spirit snatched way the gin and tonic mumbling about being in a hurry to get back and make dinner for Paula and departed. Before Ebenezer could compose himself the clock struck 2 and the last spirit appeared. With an I pod full of Cajun rock and roll tunes, a U of C bobcats sweatshirt and smelling of small town Chesapeake breezes he hurled Ebenezer into the future, a future where capital markets failed, there was no innovation. The poor die first and frequently as there are no innovators figuring ways to ever cheapen the cost of food and clothing, disease was rampant as the government stepped in and removed the access to capital markets and the profit incentive, no new drugs were discovered and those that remained were expensive. Energy costs were prohibitive as there was no capital to develop new alternative source or search for new discoveries of oil and gas. There were no new jobs created and the taxes collected to support the ever-declining system ensured that business could not expand and create new opportunites. It was a bleak world, one without the hope for improving the lives of ones self and loved ones. There were no traders or investors to put money into new ventures, no speculators to provide liquidity or generate profits that create jobs and support families. The only wealthy folks were those that worked at charities paying themselves fine salaries to collect what little money remained to dispense to those less fortunate..Which of course is everybody but you and I.

“This my friend”, spoke the spirit as he sipped a rare 30 year scotch from some obscure Scottish village” is what happens when there are no markets and no traders.” And he was off, back to fight the battle of the neighbors light pole.
“What a fool I have been” cried Ebenezer.” Thinking of my self as non-productive because all I did was trade an invest. How could I fail to notice that I have provided jobs for dozens of employees, taught many to make money in the market and support their families and put their children through school, or that the money I invested helped to create new technologies and industries, providing jobs and opportunities for literally thousands.”

He dashed to the window and cried to a young boy passing below.” You boy. What day is this” Saturday said the boy, Christmas eve” “Thank the gods I haven’t missed it..Boy do you know the newsstand around the corner. Take this 20 bucks and run round there and fetch me today’s Barron’s, FT and NY times. I must prepare for the next weeks trading.” Of course this being modern times and not dickensian London the kids was never seen again most likely spending the twenty on cheap booze and porno. We can only stretch our fiction so far. later our hero had to go to the newsstand himself to obtain copies and make his way over to starbucks to sip a large (grande,venti my butt. It’s a large coffee) coffee

An Ebenezer spent a nice Christmas with good friends and family, chatting with Jason, Fred, the voodoo prof and all the specs about trend and trades in the market, ready to return with a new zeal and new appreciation for the life of speculation.

“Heck,” he though to himself.” I may even call Slim and see if he’s got any of those weird little cheap stock ideas. It is after all the holidays.”

Best early wishes to all for a wonderful Holiday season and a may you trade well and learn much in the new year.

Wednesday, December 06, 2006

google swap

heres the list for this year. For the Google market cap of 149 billion, one could today buy in their entirety:
Walter Industries (wlt)
Peb Boys (pby)
Petrohawk (hawk)
Finish Line (finl)
Optimal group (opmr)
Nashua (nsha)
Precision Drilling (pds)
First data (Fdc)
Borders (bgp)
Friendlys (frn)
New York times (nyt)
Consolidated energy (cnx)
Fording coal (fdg)
Ipass (ipas)
Kingsway Fiinancial (kfs)
ADC telecom (adct)
United online (untd)
chesapeake energy (chk)
applied materials (amat)
Nabor drilling(nbr)
Patterson UTI (pten)
radio Shack (rsh)
Giffon (gff)
micron (mu)
Hudson city bank (hcbk)
cbs (cbs)
Genlyte (gy)
pacific sunwear (psun)
rosetta resources (rose)
Mirant (mir)

Google has about 3.5 billion in operating earnings. The portfolio sports 16.5 billion or so in same. If google can continue to grow at 30% a year for 7 years their operating cash flow will surpass that of the portfolio..providing of course that the portfolio rate of return remians stagnant and none of the excess 13 billion of operating cash flow is reinvested at any reasonable rate . should the portfolio rate grow at the 10 % level..not unrealistic considering the amount of excess avaible for reinvestment, it takes google 10 years to surpass in operating cash flow. again assuming that they can grow at 30% for the 10 years and no one comes along with better or new technology and reduces their competitive advantage. Of course we all know that in the stable world of technology that is unlikely to happen.

Tuesday, December 05, 2006

higher and higher

To the tune of the Jackie Wilson classic

your cash keeps lifting me
Higher and higher
Higher than I ve ever been before
So keep it up,quench my desire
To take the market higher and higher


You know your cash(your cash keeps lifting me)
You know your cash(your cash lifting me)
Higher(lifting me,lifting me)higher and higher(lhigher)
I said your cash keeps lifting me(higher and higher)

Once I was down on the year
No performance fee in sight
But the your cash came in
And we’ll make so much it’s a sin..cause your cash keep lifting me

This market just wont go down. Bad economic numbers? Great, the fed will lower. Lets go higher. Good economic news? See..I told you things were okay..lets go higher.There are signs of inflation, deflation, we re losing a war to guys who ride camels and cant read, ttwo of the craziest men in the world have access to nukes, there is going to be gridlock with a lameduck president( okay..I ll grany that this may in fact be a good thing), housing prices are in disarray, we re seeing rising defauklts and late pays in the sub prime mortgage market and NO ONE CARES. Lets party, buy some stocks, bid em up. The market climbs a wall of worry my ass. Its climbibg a ladder of complacency right now. You might be able to sell me the fact that this market is fairly priced..providing I ve been drinking heavily.but undervalued. I can’t see it. The bond market and the dollar are telling you its just not that good out there right now.We have rallied alost 12% sonce August without a real pause of any length and anybody who is not cautious now pretty much deserves what they get.

So what to do now? Same things I ve been doing. I really like the Energy Services Acquistion warrants here. There are no institutional shareholders in this one at all as thi game out after the SPAC game had cooled down. Marshall Reynolds is the CEO here and has a reputation of being an astute buyer and seller of companies and running them profitably. Given that we can buy 4 and a half year 5 dollar warrants for less than .40 each it’s a good cheap call on him achieving success again. I am still long Walters (WLT)
and selling dec and jan 50 calls against it. A buyer of BXL although its hard to get more than a 100 shares at a crack , of Optimal (opmr), IPASS (IPAS), Nashua(NSHA) Secure computing(SCUR and petrohawk Energy(HAWK). Right now I am over applying the concept of margin of safwety and only buying stuff below book value with a stron catalyst, usually in the form of an activist or two in the deal.

At some point we will get a sell off. When we do I ll be looking to ramp up and get big long. But right now, being cautious is paying and paying well. Buying below book and in some cases selling options around the position has been very profitable this year and has kept the over all risk profile fairly low. I d like to be aggressive here but I just cant get complacent enough.