Thursday, November 03, 2005

A Mixed Bag

Today, First Marblehead (FMD) got hammered. Bank of America (BAC), one of FMD's largest customers, decided not to renew an auto-renewing contract with the company. It is still not certain whether or not they are going to walk away completely or if they will choose to renegotiate for better terms. Most likely, this move was related to the scandal a while back regarding the gift-giving and corporate romance between the ex-FMD CEO and a director at BAC. At the point of maximum damage during the scandal, FMD shares traded just below $21. It recovered shortly after, and even traded in the mid-$32 range. Well, after today's beating it is now sitting in the low $25's. One of the largest shareholders of FMD however, feels that today's trading demonstrated serious overreaction. Obviously, his opinion will be somewhat biased, but it is the content of his message that should be analyzed closely.

Enough of the bad news. The first bit of good news I received today was that Harrah's (HET) had a strong quarter showing all the naysayers that its earnings were nothing like those of MGM-Mirage (MGM). Then, after the market closed, Expedia (EXPE) reported its earnings, which were spectacular. It had already risen quite a bit, most likely due to the strong Priceline (PCLN) earnings report the day before. But, after its own earnings report, it moved an additional 15%. Also, EBAY made a strong move, which really helped out. I am going to be selling some November 42.50 calls to cover part of my position if I can get a good price on them.

Today's mixed bag really is a testament to why diversification is desirable. If your portfolio were concentrated in a single stock such as FMD, then today would have spelled disaster. You would be in a pit so deep that a quick recovery would be nearly impossible. But, when no single stock makes up an enormous percentage of your entire portfolio, you can absorb these spikes. While such spikes are plenty painful, they are not lethal.

I'm off to Vegas this weekend with PetDander and Alex. Hope to make some cash and have some fun too.

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