Thursday, 21 October 2010

$STX call

Company said they couldn't give future guidance or comment on PE approach given legality, which made for a short (if late and bland) call.

Interestingly they didn't participate in the "13th week", which $WDC had said was at twice the average rate of the prceding 12weeks. They think that the 13th week was busier because of pulled forward demand because of China's golden week, and quarter end dates.

$0.31 EPS and missed revenue.
49.2mm units (backs out ASP of $55) they said approx 8% q/q price decline. gross margin of 20.4%
'competitors more tenacious than years past'

long discussion on SSD's and hybrids in relation to notebooks, netbooks and MacBook Air.

general thoughts;
STX had popped up on the Raven's LBO candidates screen just based on historical numbers, however he'd excluded it because of the margin pressure and "third competitor" issue. To him it doesn't make sense for a PE firm to take such a big punt on storage when there are so many issues which management of the firm really don't have so much control over. Its also not apparent that higher financial leverage is either appropriate or adds value to equity holders. As the stories appeared in the WSJ its not to be written off lightly, there's a pretty good chance that a bid does materialize, and the rumoured price range is anything from $15 to $25. Anything above the 52w should be heavily mentally discounted.

FT article on Hitatchi Global Storage

Hitatchi is looking to sell its storage business, interestinly its lower margins and agressive attempts to take market share aren't helping the supply-demand imbalance. Strategically wouldn't it make more sense to buy the lowest margin competitor, accept market share and work on the cost base? the $1bn price tag for ~ $2.5bn of sales would value $STX and $WDC at $4.32bn and $3.84bn, or $9.15 and $16.76+$8.7=$25.5

Wednesday, 20 October 2010

$WDC earnings call

As the Raven has noted on the blog a few times, the sector will face margin pressure going forward. That's clear that this is happening from their current results. Yes sales hit estimates, net income was there, however that doesn't disguise what's happening with the MARGIN.
  • average selling price $46, -$3 lower than last year, -$1 q/q.
  • historical seasonality suggests this should be the best quarter for demand
  • gross margin adjusted for SGA was 15.8% last year 20.8%, unajusted 18.2% v 23.2%
  • margin decline driven by lower average selling prices, which is being driven by an excess of ~10mm units (Raven estimate), "6-8mm units need to get burnt off" ~ 5% capacity
  • management correctly say that Seagate's ownership structure won't matter to industry pricing
  • margin errosion is WITH them giving up market share to our ominous 3rd party
next quarter's guidance appeared to be 50-60c although the line was terrible and the accent heavy, so when the replays up it needs to be checked. Seasonally the coming quarters will be weak historically and there doesn't look like too much to get excited about buying this stock. Two interesting side points from the call; 1) company see increased demand for sea shipped product rather than by air, which can pull demand from back to school next year into the preceding quarter and 2) China's demand may change seasonality going forward, although hard to tell given economic volatility.

very roughly its got about $12 of cash, so its run rate p/e on next quarter is ~ 7.5, however;

The Raven wasn't so clear as to what effect the ipad is having for solid state devices, or just how much the company held back from shifting product to protect prices. The company is going to look at strategy and investment decisions and implied that some products didn't make sense at these prices...

Anyway its interesting and is definitely a better looking from the perch than Seagate, but if anything it and $STX are a short tomorrow and perhaps for the next few months depending on price action. Longer term though, enterprise does look a good bet, and of course it could be LBO'd. So its definitely a high risk position either way.

Friday, 8 October 2010

UK income distribution, FAIRNESS

We've heard much in the UK over the last few years about the inequality and unfairness in soceity. The Raven decided to look at some numbers because the political rhetoric as is often the case didn't match reality. Just looking at back of the envelope calculations some things didn't make sense. There has been much "taxpayer" outrage over bank bailouts (the fact that UKFI is actually breaking even on the bailouts is material for another post).

Wages; this is all earnt or income for a household, whether its derived from savings, self employment, salary, etc
Cash benefits; all cash payments directly from the government to the household
BIK; Benefits in kind; NHS, housing subsidy and travel subsidy
Other services; are the cost of the police force, army, government etc. The Raven's decided to allocate that evenly by household as its not obvious to him that any segment of soceity benefits more from it that one another, its clearly a cost so we must all be "enjoying" the benefit, even if it appears the ONS value this as zero.
Direct Taxes; VAT, fuel, etc
Vice Taxes; Tobacco, Alcohol and Gambling
Capital Taxes; Inheritence tax, Capital gains tax, dividend taxes, etc.

There are a few broad points to be made;
1) INEQUALITY, is nowhere near the levels thrown around by left wing commentators. They deliberatley exclude the value of services that soceity consumes and assume that these costs are magically absorbed by the tooth fairy. It seems contrived to be measuring income or household consumption to be only disposable income, when if one is even slightly unblinkered, it is very obious that households all enjoy police protection, the fire service the security of the army, etc. The Raven finds it outrageous that the ONS deliberately excludes these, but does include the NHS and housing benefits? by the ONS measure the lowest income household would have £18k and the highest income household £106k, whereas taking into account ALL services its £39k and £127k respectively. This is only half the story as obviously the government takes payments for these services so we should look at net income; in this case the numbers are £35k and £53k. How there is any uproar over inequality is amazing really. Especially when one cosiders the earned incomes were £5k and £101k.

2) As described before the majority of the population believes they are tax payers, and by this they believe net contributors, however looking at our numbers its pretty clear that only 25% of the population actually are net payers into the pot. The most disturbing indicator of the unsustainability of the system is looking at the middle of the distribution. A middle income house actually takes £15k more than it pays in tax, or to put that into budgetary numbers; £29bn. In fact subsidies of the middle half of the distribution total £117bn. A number not a million miles away from the current deficit of £150bn. To actually be a taxpaying household then one needs a household income of £48k.

It is very interesting that if one calculate the GINI index on earnings its 0.35, on ONS incomes 0.24, whereas taking into account services and actual tax paid its 0.05.

Friday, 1 October 2010

$EURUSD loss this month.

Its always cathartic to analyse a trading loss, and hopefully consign it to the box of expensive lessons rather than repeating it. With this being a rookie mistake and knowing what he did wrong before the event its not going to add much to knowledge box, but certainley requires some public self flagellation because he has clearly forgotten some basics.

The Raven shorted $EURUSD quite agressively on the 21st Sep, then got stopped out pretty quickly, then bought some downside puts, lost that premium and repeated it again. All in a loss of 10% of trading capital, even for a high return and volatility account definitely needs some serious thought.

The first short was at 1.3128 stopped out at 1.3160 on the same day, 21st Sep.

The put buys were on the 23rd Sep when spot was ~ 1.3333, where the Raven bought a lot of 1 week 1.32 puts, and the second lot 28th Sep spot ~ 1.3450 buying the 1.33 put, and on the 30th Sep spot ~ 1.36.

The first thing to do is rather similar to what one would imagine an AA meeting is like, admit your errors and sins, owned up to the actual errorS. Now time to understand the flaws personally.

There are several rods with which to beat his own back;
1) The cardinal sin; The first trade was very wrong on one level and right on another. Trading before the market has started moving in your direction is a mugs game, really that is unforgiveable, bad discipline and senseless. The small redeaming feature is that a moment of rationality dawned and the trade was cut because of sensible risk management.
2) The compounding error; Looking at the actual bond auction data and what was being reported was obviously too good a bait for the Raven's ego and it enticed him to make a classic error. He believed that the market was reacting to headlines, when he knew the headlines were wrong, which is the incorrect assumption to make. Similarly if you know an idiot is buying a stock and its going up, it doesn't mean that the stock should go down, however its very tempting to use this data point to falsely bolster one's confidence in the trade idea.
3) repeat step 1. correct to buy options to limit risk, bloody stupid to ignore your own first principles and trade against the market.
4) repeat step 2. further headlines, except now one has to be honest and admit that a degree of loss aversion and ego were kicking in, as well as a sense of frustration for making the error of step 1.

Its only now after getting a bloody nose and having portfolio level hard risk limits kick in that its really possible to step back properly and analyse the mistakes made. Additionally one can analyse the initial premise for the trade with less baggage.

Its not automatic that we should repeat the $EURUSD meltdown at the beggining of the year if we see a further melt up in European sovereign spreads. Perhaps we could see what we saw with the dollar in late 2008, a squeeze in the currency due to large losses being taken in that currency? similar to the squeeze in the Yen that Hugh Hendry thinks may happen.
On a similar thought to the Yen, HH points out that politicians and central banks need the political capital to act. Although he was talking about a different central bank and set of politicians one could apply the same logic to the EUR. Trichet is not going to trash the currency unless there is some real economic hardship, reaching as far as Germany, and for that to happen we'd have to actually see the $EURUSD a lot higher to slaughter their exports. Trichet is very arrogant (the irony isn't lost in this comment), so the pain level will have to be enormous.

The other side that really has to be mentioned is the sell dollar buy anything for the end of year trade, (which fits really well with long term trend following alpha patterns, ie. its about this time in 2004 they swung around after being down a similar amount).
Anyway just a thought, which is rather pleasant to have without the burden of the idiotic mistakes of September. At least trading stocks has been profitable.

1. I will not trade against the trend
2. I will not trade against the trend
3. I will not trade against the trend..........