Tuesday, 29 June 2010

a short update.

The Raven has had a pretty decent week back in the saddle, generally being bearish has paid off. He's also made some good single stock calls, his longs like £BSY, $DD have outperformed their hedges, shorts like $AXP look like they are starting to breakdown.

The Raven believes that there are a lot of endowment type investors ie. investors that are using a 10-12month moving average to time their investment in the SPX500 and other equity indices; those averages were at the 1085-1100 level and he's been expecting selling to accelerate as we came closer to month end if we were below these levels. Tomorrow being quarter end could be pretty ugly as there doesn't seem to be much buying interest in the market out there. He's going to stay short and look to cover at most half of his position tomorrow over the day - but that depends on the volume profile and what the price action is like. He'll be a liquidity provider at the right price and odds.

He also noted some interesting comments by Team Macro Man, noting that fixed income markets and gold appear to be giving very different signals. Fixed income markets have seen longer term interest rates falling, this being a response to "European headwinds" one would imagine, and the belief that austerity measures and weak growth will neccessitate lower interest rates for longer. On the other side of the sovereign (what a great pun), it appears that investors in gold believe that ulitmately the action of keeping interest rates lower for longer will be more loose money hence real assets should rally. The Raven has lost enough money shorting gold this year to just leave this one alone for the moment, he thinks its a bubble, and the best way to trade this is going to be after it pops. He's seen enough adverts advertising how retail investors can get 30x leverage on their gold investments to know that its frothy. He's not going to short it again unless it crosses the 100d ma, increasing at the 200d ma and the 250d ma.

Returns from trendfollowing alpha's have been a bit of mixed bag, partly because of the squeeze and reversals in some trends earlier in the month, however they appear to be back on track. The Raven has looked at adding some better filters and money management to the system to try and improve the risk reward, however he doesn't want to compromise on robustness.

He took a good chunk out of $MU on the short side today, it had been pumped into earnings and looked pretty frothy given the market and how aggressive the whispered numbers were. He covered at the 8.73 level. If it does a lot more volume and breaks its resistance it'll be interesting to see where it ends up, its got a relatively cheap valuation versus the sector and improving fundamentals, so it may well become a good buy.

He had a quick scan over his M&A universe, really nothing to be done in that space at the moment by the classical look of things. He does however remain relatively bullish on UAUA post merger, he's keeping an eye on it; its not quite there yet.

It was quite interesting today to see the reaction to BP rumours. The JPM analyst put out a bullish "note", well actually it was literally a fictional piece, based on the idea that XOM would look to aquire BP at some point next year. He does point out more seriously that XOM could buy BP and potentially detoxify the situation if they can get a handle on the liabilities, and that they'd be buying a much lower rated asset. He notes that the company could pay up to 700p without the aquisition being earnings dilutive.

It certainley is interesting to hear valuations on the stock that are not talking about $400bn of liabilities. The Raven has done his own work, he thinks the size of the liabilities are likely to be more like $75bn.

Now today the dicussion has switched as to how much BP's assets are really worth. The Raven would argue that its all very well for JPM to look at different measures, but it seems strange that the market wouldn't apply some sort of uncertainty discount. using BP's old BR's EV to cashflow multiple we get to a stock price of;

BP currently has debt a BR debt measure of $47bn. It has operating cashflow-capex ~$10.6bn, putting that on a very high mutliple of ~20.7 = EV of $219, take off $75bn for the spill, $47bn of debt and you'd be looking at a stock price of ~345p. About 15% above where we are trading, hardly a screaming buy, or a decend margin of safety. Even if you take the better spill estimates JPM were coming out with at the beginning of the spill and put it on the old multiple you're talking about 507p, you're looking at a 40% discount to perhaps the most bullish possible scenario. Alternatively if you look at the fact that the credit market is pricing a high likelihood of default then we're talking about -100%. The Raven has been short, which he covered most of this morning when it appeared that the XOM rumours were gaining traction. He'll probably look to put on more shorts if it squeezes up.

Where would he buy it for a long though? well actually he'd buy the credit instead at this sort of relative pricing. As stupid as this sounds, but he thinks it'd be a buy more at the 130p level, but if its trading there, then for sure the market and media are going to be coming out with a lot more aggressive estimates for the spill costs, so obviously that value would probably be lower. As arrogant as this sounds, it does appear to the Raven that T2 and Whitney Tilson have got in way too early, especially as he doesn't feel that many pension funds have dropped the stock, or those div yield players have kicked it out of their funds, that would be significant selling pressure of a size that wouldn't be able to be absorbed by traditional short term liquidity providers, or hedgefunds, so it should produce a relatively high risk adjusted return just because of the size.

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