Friday, December 29, 2006

Another Quick Update

You know what they say about weak hands... So, I sold off Apple (AAPL) yesterday partly fearing what else would come from the options backdating mess despite part of me saying it was unlikely to affect the company. My timing is impeccable, ugh. Today, the company cleared the executive team, including Jobs, and so the stock rebounded sharply.

But, let us not dwell on the past. Today, I continue my buying spree and add TODCO (THE) at 34.27. First mentioned a few weeks ago here, the share price has since come in about 10%. Anyway, it's only a starter position for now. I will likely grow this position in the next month or so, but we'll see how things develop before I do that.

Thursday, December 28, 2006

Quick Update

Increased the Form Factor (FORM) position by one-third at $37.00. Excluding any proceeds from covered call sales, the cost basis for shares is now $37.27.

*** Edit #1 ***

Sold off the Apple (AAPL) position at $80.04. Looking to add to the Linear Technology (LLTC) position. Found some time last night to go over the current portfolio holdings, and although LLTC hasn't been a good performer since I first purchased it, I believe it is worth quite a bit more than current prices.

*** Edit #2 ***

The order to buy more LLTC was filled at $30.30. Increased the existing position by 75%. Cost basis for the shares is now roughly $33.90.

Wednesday, December 27, 2006

Back To Business

Vacation time is now over, and it's time to regain focus on the markets.

Yahoo (YHOO) is a losing trade for me at this point, off 6%. I will continue to hold this, and I do hope that some (or most, but really, who am I kidding) of this end-of-year languor is due to tax-loss selling.

Now that Harrah's (HET) has been sold, I've got cash to deploy. I'm still fairly bullish on the general market, but I do feel that the easier money has been made with the sharp run-up that started mid-year. Still keeping my eyes on a handful of companies, and I'm likely to bolster some existing positions in the weeks ahead. Most likely candidates are Coventry Health Care (CVH) and Form Factor (FORM).

Today has been strong with the Long-Term Portfolio moving up nicely. However, Apple (AAPL) is moving down today on reports of serious stock option impropriety. I'm not sure if the sell-off will be short-lived or not, but my general feeling about these sorts of things is whether or not they affect the underlying business, and in this case I don't really think so.

Speaking of stocks in the portfolio... Altria (MO) is poised to finish the year at all-time highs. It went ex-dividend just last week and continues to track upward. Fortune Brands (FO) is also doing well, looking to end the year on a 52-week high. And, finally General Electric (GE) is starting to move. It hasn't been the greatest stock for me, but it does add a lot of stability to the portfolio. I've held shares for many years now, and continue to re-invest its dividends. Maybe its time to shine is now.

Monday, December 25, 2006

Merry Christmas!

Well, I've been here in sunny Southern California for a few days now. All has been well, and it's been pretty busy doing the typical holiday things with friends and family. Anyway, hope everyone is enjoying the holidays.

Thursday, December 21, 2006

Getting Cut

Long-Term Portfolio holding, Lifetime Brands (LCUT), sent out an earnings warning early this morning due to slower than expected sales. The company now anticipates that full year earnings for 2006 will fall in the 1.10 - 1.15 range as compared to their original forecast of 1.45 - 1.55.

This is a significant shortfall, and I will continue to monitor the stock. While I'm glad that I did not double up on the position a month or so ago when I had considered it (due in good part to gaamblor's take that trouble lay ahead), this is disappointing.

As one would expect, shares are trading sharply lower this morning. Most recent quote has it down almost 20%.

Wednesday, December 20, 2006

Gift Exchange Combinatorics

Well, I'm about to head to a holiday party. But, before I do that I just wanted to share a quick story with all of you.

So, our company promoted a holiday gift exchange recently, and a total of 19 people participated. Anyway, each person brought a gift and then each person was given one of the gifts randomly. There was nothing in place to ensure that people wouldn't be given their own gifts, and what happened was 4 of the 19 participants got their own gifts back. Pretty strange, and so I got a bit curious about the probability of such an occurrence.

I had to go back to some old math books that I haven't touched in a while and read up a bit on the inclusion-exclusion principle, but after some time, I was able to get the answer I sought. Just to double-check, I programmed up a quick Monte Carlo simulation, which pretty much corroborated the answer. After more digging, I learned that there's something interesting about this problem, which turns out to be a classic one. It seems that this problem is closely tied to the natural number, e, which I thought was really neat.

Anyway, the chance that exactly 4 of 19 people receive their own gifts is 1.53%. The chance that 4 or more people receive their own gifts is 1.90%.

Quick Update

Sold the Harrah's (HET) position this morning at $82.87. I guess I was slightly off as to how high shares would trade once the official announcement was made to accept a $90 per share bid. Time to move on, anyway. Along with their CEO, I also don't foresee any new bids in the next 25 days.

It's sort of sad to see the shares go. I bought into the company three times. The initial purchase was made in June of '03 at about $40. I added to the position about a year later in May of '04 just below $52. And, the final purchase was in October the following year near $59 after the hurricanes really took the shares lower. Thanks for the three and a half years. It's been fun.

Also, closed the Palm (PALM) trade at 13.73 earlier for a small gain of 0.13. Had I been blessed with the gift of clairvoyance, I would have dumped it near the open when it traded above $14.

Tuesday, December 19, 2006

Earnings Gamble

It's that time again... time to throw a small bet on the table. Picked up some shares of Palm (PALM) at 13.60. Sentiment has been remarkably negative, and it is trading at a 52-week low. Definitely catching a falling knife here. Some people like me will never learn.

And, thinking about what I said about Harrah's (HET) last night... I might be wrong in my estimate of where shares would trade should it officially announce the acceptance of a $90 offer. I failed to take into account the $1.60 in dividends that it would be paying out in the next year. Then again, it could choose not to pay it out, but I think that's unlikely.

Monday, December 18, 2006

More On Harrah's

So, we continue to get leaked information fed to us from the Wall Street Journal regarding the Harrah's (HET) buyout. The WSJ reports that the company's Board of Directors will be voting on the deal tomorrow, and a formal announcement should be expected as early as tomorrow. The paper is currently saying that the deal is for $90 a share. I guess I got a bit lucky when I picked out an acceptable-to-the-board buyout price in this post in November.

Anyway, what's the plan? Once the announcement is actually made by the company, I will be looking to exit. I'm not willing to wait for the deal to close for cash. Had the buyer been Penn National Gaming (PENN) and the deal was stock based, then I'd have to make a more difficult decision. As it stands, the answer is for me to exit. The question now becomes... at what price?

I'm going to make a list of some assumptions that I think are reasonable. Note that I am not sure how off I am to reality, so keep that in mind. Here we go.

1) It's a cash buyout at $90 a share.
2) Deal closes a year from now.
3) Deal carries a 2% risk premium.
4) There isn't any more investor hope for higher bids.

So, today's risk-free 1 year rate is 5%. Tack on a 2% risk premium, and we are looking at a total of 7% that should be made up in the next year. This translates to around $84 a share in today's terms. Maybe the deal risk is overstated by me. At 1% premium, we are closer to $85 a share. If my assumptions are anywhere near the actual values, then I guess I'm looking to exit right around $84-85. If I see any sort of significant pop past that, I'll call it a windfall and get out as soon as possible.

This might be an easy question compared to the follow-up... where should I deploy the funds from selling my shares. HET is one of the larger positions in the Long-Term Portfolio, and so it will provide me with the opportunity to fund a new position or two, as well as increase the size of existing ones. I'll keep you all posted.

Saturday, December 16, 2006

Compounding Isn't Intuitive

Not long ago, a colleague of mine asked me a bit about some financial stuff. I'm not really qualified to give out any advice, but I could always tell him what I thought about saving and investing for the long-term and how one should probably go about it. Anyway, in our discussion, we hit upon the subject of compounding, and at one point it was clear that while he understood how powerful it was, he clearly didn't give it enough credit. So, I bring to your attention the non-intuitive nature of compounding, especially at high rates of return.

Let me describe 3 scenarios, and without too much dwelling on the matter, tell me which of them you think is best for you. To simplify things a bit for this exercise, assume that you will pay all of the debt at the very end of the 25-year period, and not periodically. Also, for simplicity's sake, assume no external factors like tax, fees, etc.

Scenario A: You are given $10,000 by an anonymous benefactor. You are allowed to put the money into a special risk-free investment that returns 6% a year for 25 years, compounded annually.

Scenario B: A rich guy lends you $10,000 at the rate of 7.5%, compounding annually. After 25 years, you will have to pay him back the entire amount you owe him ($10,000 + all the compounded interest at the 7.5% rate). With that borrowed money ($10,000), you can invest it in a risk-free vehicle that returns 10%, again compounded annually.

Scenario C: Same as Scenario B, except that instead of $10,000 at the rate of 7.5%, you get $5,000 at the usurious rate of 16%. But, in this situation, you are allowed to invest risk-free at 17.5%. You still pay your debt at the very end of the 25 year period, and everything compounds annually.

So, of these 3 scenarios, which one is the best? Which one of these will net you the most at the end? This means you pay off all the debt in Scenario B and C (you have no debt to repay in Scenario A).

My colleague is not unintelligent; he's a very solid engineer. But, when he was given these three choices he chose poorly. It wasn't so much that he didn't make the best choice, but that he was surprised by the result, which convinced me that the math of compounding is clearly not intuitive. I suspect that the vast majority of people will also choose poorly, and it says a lot about how underappreciated the power of compounding is, especially when you are talking about relatively high rates of return.

Well, I guess this is where I give you the end results for each of the three scenarios presented above.

Scenario A: You were given $10,000 and owe nothing. Free money, yay! So, right from the get-go, you're better off than the other two, since you've got $10,000 net, and the others have $0. After 25 years, your money grew to $42,918 at the 6% rate. Not bad considering it was free money.

Scenario B: You borrowed $10,000 at 7.5%. After 25 years, you owe the lender $60,983. This is due to the 7.5% interest rate he was charging you. But, you were able to grow the $10,000 you had borrowed at 10%. So, at the time you paid your debt, you had grown the initial money to a nice $108,347. After paying off the debt, you are left with $47,364.

Scenario C: You borrowed $5,000 at a ridiculous 16% rate. After the 25 years is up, you owe a whopping $204,371. But, you were blessed with a beautiful return rate of 17.5%. You grew the $5,000 to a staggering $281,784 after 25 years of annual compounding. After your debt repayment, you're much better off than the other two people with a tidy sum of $77,413.

To be fair, I should note that after 10 years, the person in Scenario A is doing the best, followed by the one in Scenario B. The one in Scenario C is probably kicking himself at this point having only a net just over $3,000 vs. the one in Scenario A with nearly $18,000. It is in year 21 that the person from Scenario C overtakes them both and never looks back. Also, I should note that it is not until after the 24th year that Scenario B outpaces Scenario A.

So, the above scenarios are far from reality, because debt repayment doesn't work as above and also there's no risk-free investments yielding such high returns. But, the math is what it is. And, the fact that most people would not have chosen the best option says a lot about how little the public truly understands the powers of compounding.

Also, the above implies that if companies are able to achieve consistent high rates of return on investment, then it's not necessarily bad that they are taking on debt at fairly high rates. In fact, if they are able to keep their ROI at a high level over long periods of time, then taking on debt even at rates that aren't great would be hugely profitable.

Friday, December 15, 2006

Triple Pay

So, I log in to my bank account online to make sure that the paycheck direct deposit took place as it should. I'm a bit confused as my account balance is much larger than where it should be. Upon further investigation, there are three identically sized deposits instead of one. Somehow there was a glitch, and I got paid three times.

I'm thinking to myself... well that's funny, but I guess I had better talk to our payroll person when I get in today. But, I log back in about 15 minutes later, I see that there have been two reversals. I didn't realize they'd be so quick to catch errors like this.

In stock market news... the CPI number came out not long ago, and it was very good. The markets should move on this number. Maybe we'll get that year-end Santa Claus rally after all.

Also, the Wall Street Journal is reporting that Harrah's (HET) continues to evaluate its bids and is also contemplating a possible recapitalization of the company which would involve the payout of a special dividend to shareholders. And, I guess there's a joint-effort bid of $88.50 by Penn National Gaming (PENN) and a few financial partners.

And, Amgen (AMGN) is on the move this morning after Roche announced there would be a delay in the approval of Mircera, which is a direct challenger to Amgen's blockbuster drug, Epogen.

Wednesday, December 13, 2006

A Few More To Watch

Don't have much too much to say, but, I wanted to throw a few companies your way to keep an eye on. I have no current plan on owning any of them, but one each is interesting to me as a potential future investment. I haven't done much in researching yet, but at the moment, they are all on my radar.

P.H. Glatfelter (GLT) - This is an old company. When I say old, I mean it. It was founded during the Civil War. The company manufactures specialty papers and also high-tech paper. Their products range from the simple, like tea bags and coffee filters, to the sophisticated, like pressure-sensitive paper and metallized holographic paper.

Cutter & Buck (CBUK) - This is a small cap that sells golf sportswear as well as business and casual clothing for those in the mid-thirties or older. Not surprisingly, they cater mostly to the yuppie crowd. In addition to standard clothing, they also sell sportswear with college and professional team logos. In the last year or so, the company was highlighted in the Motley Fool's Hidden Gems newsletters.

TODCO (THE) - The company's name stands for "The Offshore Drilling Company." The company does contract drilling for oil and gas, mostly concentrating on shallow-water drilling in the Gulf of Mexico. They own a variety of drilling rigs, and customers rent them along with a qualified crew on a day rate basis. Additionally, they also operate their own fleet of ships and boats, which complements operations.

Four Square Interpolation

This post is for those who like to think about math or enjoy puzzles. It's not meant to be overly tough, and who knows there might be several ways that it could be done. Anyway, this problem came up during work this week, and I thought it was somewhat interesting. Maybe some of you will find it interesting.

Note that the y-axis might look flipped to you. This is because we are dealing with image coordinates, which are of the form (column, row).

Okay, so we've got 4 squares. Each square has a value associated with it: A, B, C, and D. The center intersection point is the origin (0, 0). Now, you see the orange point at some (x, y)? We want to know the interpolated value of (x, y) given the values A, B, C, and D for the squares. The range of (x, y) is bounded by the dotted square whose vertices are the center points of the 4 squares above. This is because if we were to get a point (x, y) that was outside of this bounds of the dotted square, then we would be dealing with a different set of four base squares.

So, let's take a few simple examples. Say we care about the yellow point at the origin. Then the proper interpolated value should be 0.25 * A + 0.25 * B + 0.25 * C + 0.25 * D. Say we are looking at the green dot at (0, 0.5). The proper interpolated value of that green dot should be 0.5 * C + 0.5 * D. Similarly, the proper interpolated value of the purple point should be 0.5 * B + 0.5 * D.

What we're really after is an interpolated value of the form: a * A + b * B + c * C + d * D. Simply put, how do you come up with the coefficients: a, b, c, and d.

So, give it some thought if you have the time and the interest. I'd like to hear what you come up with that works.

Tuesday, December 12, 2006

Let's Do Some Gambling

Okay, every now and then I gamble. Usually, it's on some trade. Once in a blue moon though, I'll throw some uninformed money on a sports game or two. Looks like we have a blue moon right about now.

I made two NBA wagers today:

LA Lakers at Houston. Houston Rockets -2.5 at +100
Denver at Atlanta. Atlanta Hawks +5.5 at +104.1

It's good to have some gamble in you.

*** Edit #1 ***

We're getting closer to game time, and a quick look at the current odds show that the wagers have moved against me. The bet on Houston can now be had at +104, and the bet on Atlanta is now listed at +135 with the confirmation that Joe Johnson will not play this game. This is what I get for being a sports betting sucker. But, it ain't over till the morbidly obese lady sings.

*** Edit #2 ***

O-fer. That's my name, don't wear it out. So, both bets went down in flames. Lucky for me, the bets were tiny. Still sucks though. Things were looking good for Atlanta in the first half, but they fell apart later on. And, the other game was pretty much meh.

A Quick Update and a Sick Verge

Well, I worked late tonight, and then I tried to go to bed. After only a short nap, I woke up. I'm on the verge of sickness. My body gives me an early warning when it comes to getting sick. I got that warning late Saturday, and I am not all that sure I'm going to be able to escape the grasp of the Cold. It is really going to suck if I get sick for real.

Anyway onto the important stuff... health is so overrated. Haha.

So, on Monday, Kongzhong (KONG) kept on trucking higher. On Friday, when it made the initial jump, I did notice a lot of largish blocks trading on the ask. Still no news, so maybe this is just an extension of a technical move. I continue to have no clue, but the move sure is welcome.

Today, the Wall Street Journal is reporting that Harrah's (HET) is going to be getting a sweetened bid of $87. Harrah's announced that they would be looking at all offers tomorrow, and today would be the last day for the submission of new bids to be considered.

And, we also get a new Buy rating today for a Long-Term Port holding. So, Sun Bancorp (SNBC) was started as a Buy at Sterne Agee. They put out a $23 price target, and cited double digit earnings growth, and they also mentioned that the increased M&A activity in the New Jersey region was not accounted for in the current share price.

Just over a year ago, I opened a position in SNBC mostly as a turnaround play. It was actively reducing its costs, and assuming their management would be able to pull it off, the shares looked undervalued. They also pay a 5% dividend via a 21:20 stock split annually. What initially turned my attention to the company was the strong insider buying. After seeing this, and doing some number crunching, I felt it was a good buy.

So, for just over a year the shares have given the LT Port a total return of 8.3%. This makes SNBC an underachiever compared to the 15% total return of the S&P. It's not a total dog, but it certainly isn't on Santa's Nice list this year. Maybe things will pick up in '07.

I'm still holding onto Yahoo! (YHOO) in the Trading Port. Thus far, it has dealt me a 3% blow. Hopefully, nothing but a mere flesh wound, but you never know. I still think there's good upside in the shares at this prices, but there is definitely the possibility that it continues to fall. This is not a stock for the conservative types.

Okay, I better give sleep another try.

Sunday, December 10, 2006

Unit Conversion and a Party

QB and I went to her company's holiday party on Friday. It was held in the main banquet room at the Historic Del Monte Building in Sunnyvale. The place was nice, and the staff there was very good overall.

The company also hired a professional photographer (who I wasn't all that impressed with) and also a close-up magician that would go from table to table doing some pretty cool tricks. For the most part, you would be able to make an educated guess at how each trick was done, but they were pretty neat for what they were.

The food was buffet style, but was of very high quality. They had a little bit of everything from salmon to vegetarian eggplant pasta to very fine tasting tri-tip steak. And, there was a very wide assortment of desserts to choose from at the end. I ate too much, and could barely finish a couple of drinks throughout the evening.

Also, there were some decent raffle prizes. They did three rounds of raffle drawings. Each round consisted of 5 prizes. The worst prize was a $100 gift card to Amazon. The best prizes were pairs of unrestricted airline tickets to anywhere in the continental U.S. Too bad we didn't win anything. All in all, her company did a fine job with the party.


Now, many of you have probably seen this already. But, I thought this was really painful and funny at the same time. I'm amazed at how this guy is able to remain calm as he explains that 0.02 dollars is very different than 0.02 cents. Even though he misspeaks a few times while arguing his point, it doesn't take much away from the ridiculousness of the situation. I would hope that I would be able to explain unit conversion better than he did, but it is quite possible that the customer service reps he speaks with haven't the ability to grasp such a concept.

Here's a taste of the conversation:

Guy: You agree that 1 dollar is different than 1 cent?
VZ Rep: Yes, definitely.
Guy: And, you agree that half a dollar is different than half a cent?
VZ Rep: Yes.
Guy: Therefore, you agree that 0.02 dollars is different than 0.02 cents?
VZ Rep: No.

Okay, here's a link to the audio: Verizon Customer Service Unit Conversion


Also, a buddy of mine started updating his blog with interesting, almost-daily facts that he is calling the Programmer's Almanac. Check it out, even if you're not a programmer.

Friday, December 08, 2006

King Kong

Today, the star performer of the LT Port is Kongzhong (KONG), which is currently trading up over 10%. I don't see any news, and it doesn't look like China stocks are moving, really. I have no idea why it's moving... maybe a technical move. I don't know. The only sad part is that it is my smallest position, and so this move doesn't really affect the port all that much. But, if it can keep on moving like it has been doing recently, maybe one day it will grow large enough to make an impact.

Wednesday, December 06, 2006

Taking A Shot

Well, I'm taking a shot with Yahoo! (YHOO). Picked up shares at an average price of 27.29 in the pre-market (bought shares as low as 27.10 and as high as 27.38). I would have thought that the shake-up announced last night would have been viewed positively. Basically, I'm betting that it my initial reaction is the right one and the minor sell-off this morning will be short-lived. The position isn't all that small, but I'm going to be watching it like a hawk and prepared to exit as early as today.

Tuesday, December 05, 2006

Stock Fusion and Fission

Today, First Marblehead (FMD) began trading at prices reflecting its 3 for 2 split. Just for the record, cost basis in this LT Portfolio position has been adjusted to 18.67. And, as an added bonus FMD is trading at a new high following the release of their expected revenue numbers from the securitization deal with the National Collegiate Student Loan Trust.

Yesterday, it was confirmed that all of the North Fork Bancorp shares were converted to Capital One (COF) as per my 100% stock election. The COF position roughly doubled in size as a result of this conversion, and effective cost basis for the position now sits at 38.61.

After some thought and digging, I think I'm going to be adding to my Amgen (AMGN) position. Their drug pipeline is pretty strong, and I want more exposure to biotech. I guess this means that I will probably be taking a pass on Genentech (DNA) after getting close to buying shares recently on a number of occasions. I might add shares as early as today, seeing as how it is currently under pressure.

*** Edit #1 ***

Order was filled to buy Amgen (AMGN) at 68.89. The LT Portfolio position has been increased by 50%, and the average cost basis for the shares is now 62.57.

*** End Edit #1 ***

As for Pfizer (PFE)... I'd stay away. That drug halt effectively killed off their pipeline. So what's more interesting is to try and figure out what companies it will buy. Its hand is now forced, and the company has no choice but to sustain its growth through key acquisitions.

Monday, December 04, 2006

Quick Update

Okay, I got a few minutes here before I head to lunch, so I figure I'll write this quick.

Earlier today, I entered into a buy-write trade with Broadcom (BRCM). Bought shares of BRCM at 33.47 and simultaneously sold BRCM Dec 32.50 call options (RCQLZ) for 1.55.

What's this mean? Well, it means that I effectively paid $31.92 for shares of BRCM that have a maximum profit potential when called away for 32.50. Basically, the options expire next Friday. If BRCM closes at 32.50 or higher, then I've realized the maximum gain of 0.58 (or 1.82%). If it closes from 31.92 to 32.50, then I gain from 0 to 0.58. Anything below 31.92 and I lose penny for penny.

So, I figured I'd take my chances here to capture 1.8% for less than two weeks time. This works out to more than 60% annualized.

Saturday, December 02, 2006

Poker Art

I'm not really in the mood to write a thousand words describing the last 8,000 hands of online poker that I've played. So, instead I made a collage for all of you. Enjoy!

Friday, December 01, 2006

Two Become One

Cue the Spice Girls...

Well, it's a done deal. North Fork Bancorp (NFB) is no more. Capital One Financial's (COF) aquisition of NFB has been completed. I elected my shares for conversion into COF stock, but I won't know if I actually get a 100% conversion or not until next week. Any shares of NFB that do not get converted will be converted to cash as per the merger agreement.

It was back in October of 2001, a couple of weeks before the 9/11 attacks that I bought shares in Greenpoint Financial. I held onto the shares as they appreciated. At some point they split 3 for 2, and then eventually, they were acquired by North Fork Bancorp in October 2004. And, now that initial investment finds itself in the same pool of COF shares as did the investment in Hibernia Corp.

Still waiting for a few stocks to come in a bit before I do some more buying. Have a good weekend.

*** Edit #1 ***

Just added to the Montpelier Re (MRH) position at 18.85 increasing share count by two-thirds. Average cost basis now sits at 18.66.