Let the Carnage Continue

Well, I head off on vacation (thankfully) tomorrow. I'll be posting less and hopefully thinking about other things than meltdowns of financial companies. On the other hand, given my recent losses, I have moved my family from the Ritz-Carlton to Motel 6. They'll understand. No they won't!

I am almost speechless about today's stock market. The unfavorable bias towards MFI stocks continued. I show the Russell 3000 down 2.5%, while the median in the stock contest was down 3.4%. Pretty consistent with moi. I do plan to just ride it out. Everyday I get an itchy finger to change "something". But I know that I really don't know what to change, so no sense using a slot machine approach.

I did have 4 stocks in the green. Woo-hoo! Three more than the Dow could say. UG (I knew that 20%+ drop yesterday was overdone), KSWS, CHCG & WSTG.

The dour mood of the market was reflected in how WNR was treated. WNR had ungodly numbers, much like FTO yesterday (Western Refining Reports Record Second Quarter Results). Think about the numbers. For the 1st half of 2007 they made $3.22 per share versus $1.04 last year. In the past 3 months they had operating income of 241.5m vs 126.6m last year. Then think about this... (Western Refining sees higher throughput in third quarter) WNR expects to process even more barrels in the 3rd quarter. How many more you may ask? Not 5% more. Not 10% more. Not 20% more. 42% more! It boggles the mind! 42% more on what was an all-time record quarter! Granted, that is 42% more barrels, not 42% more income. But it illustrates how the purchase of GI has turned WNR into a monster. Sure spreads are down a little bit right now. Exact same thing happened last August. And as sure as the sun will rise tomorrow, the spreads will rise next spring. Why? There is limited capacity.

How did the market treat WNR for this wunderbar news? Down 7.3%! As JG says, the market just goes nuts from time to time. PACR, TGB & VPHM were all down over 10% on no news at all. I will just sit back in my lounge chair and wait for the market to normalize. I am sorely tempted to use a little margin. But I do have a big tax bill due September 15, so I'd best stay a little liquid, despite the temptation.

I appreciate all the commentary on my hypothesis yesterday. I still think it is true.


Below I list 10 "Blue Light" stocks that I placed in a tracking portfolio on July 24th. Now recall, a stock has to be down at least 15% AND still be MFI to make the BLS. Since then, the portfolio is down a stunning 15.6% vs about 5% for Russell 3000. Ouch.

Symbol	Shrs	Price Paid	Trade	Gain
-	-	9.89	1,011	8,269.98$8,269.98	ALOY	1,011	9.89	8.18	-1,728.81 $1,728.81	17.29%
-	-	15.81	633	10,254.60$10,254.60	AVR	633	15.81	16.20	246.87 $246.87	2.47%
-	-	15.64	639	9,457.20$9,457.20	HW	639	15.64	14.80	-536.76 $536.76	5.37%
-	-	88.37	1	84.00$84.00	IWV	1	88.37	84.00	-4.37 $4.37	4.95%
-	-	17.83	561	7,797.90$7,797.90	KG	561	17.83	13.90	-2,204.73 $2,204.73	22.04%
-	-	10.75	930	7,514.40$7,514.40	MTEX	930	10.75	8.08	-2,483.10 $2,483.10	24.84%
-	-	7.65	1,307	7,606.74$7,606.74	OPMR	1,307	7.65	5.82	-2,391.81 $2,391.81	23.92%
-	-	22.21	450	8,905.50$8,905.50	PACR	450	22.21	19.79	-1,089.00 $1,089.00	10.90%
-	-	10.35	966	8,220.66$8,220.66	TGIS	966	10.35	8.51	-1,777.44 $1,777.44	17.78%
-	-	22.99	435	8,369.40$8,369.40	TZOO	435	22.99	19.24	-1,631.25 $1,631.25	16.31%
-	-	8.95	1,117	7,953.04$7,953.04	USHS	1,117	8.95	7.12	-2,044.11 $2,044.11	20.45%
-	-	-	-	84,433.42$84,433.42	Total (USD):	-	-	-	-15,644.51 $15,644.51	15.63%

MFI Run?

Think about these facts:

Past 8 Trading Days: My MFI is down 2.8% S&P Small 600 is up 1.2%, S&P mid 400 up 1.2%
Past 13 trading Days: My MFI is down 10.8% S&P Small 600 is down 5.3%, S&P mid 400 -4.9%

What is going on? Why this 4 to 5 point differential with comparable indices? That is a big difference over such a short time frame. At first I thought it was a flight to quality. But when I look at this and see the difference exists in mid and small caps, it is more than that.

Today it seemed exacerbated. I saw PACR and UNTD, both of which I felt had strong earnings go from being nicely in the green early in the day to ending in the red. They were both down over 6% in the middle of the day. VPHM and GVHR were both down about 10% on absolutely no news on a big green day. What gives?

It isn't a sector. It isn't small caps. The only thing all these stocks have in common is MFI. Here is my hypothesis. JG himself suggested the same. The MFI stocks fell so much faster than the averages at the beginning of the correction that it has shaken people's faith in MFI. So since then, people have been selling on up days, pushing the MFI stocks into the red. I think a lot more people had been buying MFI stocks (and now selling) than perhaps we realize. And in addition, some of these stocks are not exactly high volume stocks, so if a small fund is unloading, it can really depress the price.

What does it mean if this is true? If you still have faith in MFI, it means this under-performance is temporary and we can expect the stocks to bounce strongly back. In fact, it implies that this is the best MFI buying opportunity since I started. What do readers think? Are investors giving up on MFI? If so, is that perversely good for those of us who stay the course?

Stock News

FTO - had an absolute blow out quarter (Frontier Oil Reports Most Profitable Quarter in Company History). I can not understand how the stock only went up 2%. Strangely, WNR (which did not report) was up 9%! FTO has an EV of about $3.5b. In the preceding 4 quarters (which were not shabby) FTO had EBITDA of $675m. In this quarter alone, their operating income before depreciation and taxes was 510m!!! That is ungodly. Yet the stock closed today at $36, essentially the same price from 12 months ago. Go figure. People will crunch the numbers and the stock will rise.

NOOF - what a disappointment (New Frontier Media Reports 2008 Fiscal First Quarter Results and Announces New CFO). Down 15% on subpar earnings. With these small companies, revenues can be extremely lumpy. I am not ready to throw out the bath water yet, but it was depressing.

UG - Ugh. You know it is bad news when the headline is bragging about how they have done in the past 6 months as opposed to the past quarter (United-Guardian Reports Strong Six-Month Sales & Earnings). Sure enough, when you strip out just the quarter it was just flat, this caused a 22% decline in the stock price. Y'know though, looking at everything, the 22% hit is ridiculous! I may step on the ledge (don't jump!) and claim that UG at $8,75 is extremely appealing.

Some one the Yahoo Board was clever. He said we all need to go home and download some porn while buying some Heelys. HLYS has been on the lists the past month or two and was down an unbelievable 48% today. I didn't study the report, but I can't believe the company is worth 1/2 today what it was yesterday. Ouch, my sympathy to those of you caught in that meatgrinder. Maybe I should not go to the top 25 approach.

Finally, I have switched my blog to a new color (green) to see if we can't get things going in the right direction again. Good investing everyone!

Hit Parade

The earnings are starting to really roll out. I'll have a long list after brief discussion. The dichotomy continued today. The median change today in the stock picking contest was down 0.33%. Meanwhile, the Russell 3000 ETF was up about 1%. I am at sure at some time it'll even out, but I suspect MFI investors are getting hammered all over the place. That being said, man are there some values out there right now!

My earnings thus far have been quite good. When I look at earnings, I now try to do so with a bent towards MFI. I am really interested in how Operating Income after Depreciation the current quarter compares with the same number a year ago. Because the difference between those two numbers will be going into the MFI calcs. I am also interested in how the enterprise value changes, driven largely by changes in cash and changes in debt.

1. ASEI - as I mentioned last night, they released their earnings and indeed they were very positive. The stock was up 8.5% today.
2. GVHR - they reported earnings this morning (Gevity Reports Second Quarter Earnings Results). While I wasn't blown away, it is clear that expectations were quite low as the stock had fallen in the past month from $18.78 to $14.07. The report was good for a 6.5% bump.
3. SHOO - reported earnings this morning as well (Steven Madden, Ltd. Announces Second Quarter Results). I that they were lukewarm, but the early traders liked them and the stock quickly traded up over 6%. It was all quickly given back and the stock finished down 1.4%.
4. PNCL - Reported earnings this morning (Pinnacle Airlines Reports Second Quarter 2007 Financial Results). They just aren't able to match last year's numbers. Not bad numbers, but certainly not inspiring. The stock traded down 1%
   
5. PACR - reported after the bell this evening (Pacer International Reports Second Quarter 2007 Financial Results). While the numbers were worse than a year ago, they were actually not that far off and the CEO made some noises about intermodal volumes improving. The happy hour crowd seemed pleased, and the stock traded about 14% up this evening.
6. TRLG - pretty much reported in line (True Religion Apparel Reports 2007 Second Quarter Financial Results). What really amazes me about this company is that they're expanding their sales network, but at the same time increasing their gross margins. I do think they're setting the table for some big numbers down the road.
7. UNTD - I was sorely tempted this afternoon to sell a chunk of my IRA and buy a bunch more UNTD. The stock was down 6.6% mid-day and had fallen in the past month from over $17 to below $12. I thought they reported a very nice quarter (United Online Reports Second-Quarter Results). They pay over a 6% dividend and what is very interesting is they are "transforming" (did you watch the movie?) from an ISP to a content company. Content & Media grew 29% YoY (13% QoQ) and is now 38% of all revenues. That segment gets a lot of advertising dollars and generates a lot of earnings with little capital (think Google). If that keeps growing, some one may want to buy UNTD just for that component as the company is priced like an ISP rather than a Facebook or Youtube. The stock is up about 6% AH.

The only other noteworthy news is that TGB has officially become a double for me. I am hesitant to celebrate as it is the portfolio in total that is important, not an individual stock. But I do wish I had a few more TGBs.

Here is a tracking portfolio that I set up on July 24th. It pretty much tells the story of the past 2+ weeks (note the portfolio is down a whopping 10.4% while the Russell 3000 is down 3.8%... sound familiar?):

Symbol	Shrs	Price Paid	Trade	Gain
-	-	9.89	1,011	8,633.94$8,633.94	ALOY	1,011	9.89	8.54	-1,364.85 $1,364.85	13.65%
-	-	15.81	633	9,602.61$9,602.61	AVR	633	15.81	15.17	-405.12 $405.12	4.05%
-	-	15.64	639	9,866.16$9,866.16	HW	639	15.64	15.44	-127.80 $127.80	1.28%
-	-	88.37	1	85.01$85.01	IWV	1	88.37	85.01	-3.36 $3.36	3.80%
-	-	17.83	561	8,959.17$8,959.17	KG	561	17.83	15.97	-1,043.46 $1,043.46	10.43%
-	-	10.75	930	8,193.30$8,193.30	MTEX	930	10.75	8.81	-1,804.20 $1,804.20	18.05%
-	-	7.65	1,307	8,201.42$8,201.42	OPMR	1,307	7.65	6.275	-1,797.13 $1,797.13	17.97%
-	-	22.21	450	10,084.50$10,084.50	PACR	450	22.21	22.41	90.00 $90.00	0.90%
-	-	10.35	966	8,771.28$8,771.28	TGIS	966	10.35	9.08	-1,226.82 $1,226.82	12.27%
-	-	22.99	435	8,865.26$8,865.26	TZOO	435	22.99	20.3799	-1,135.39 $1,135.39	11.35%
-	-	8.95	1,117	8,768.45$8,768.45	USHS	1,117	8.95	7.85	-1,228.70 $1,228.70	12.29%
-	-	-	-	90,031.11$90,031.11	Total (USD):	-	-	-	-10,046.83 $10,046.83	10.04%

Happy investing everyone! The MFI approach will rise to the top over the long haul.

Dichotomy

Anyone following MFI has to be struck by the dichotomy of the market recently. Examples are all over the place. Since I started the stock picking contest on the 1st of July, the median MFI portfolio is down 8.66%. Meanwhile, the broader indices are down 3.46%. That is a big differential in a month + a few days. JG told us that the MFI approach would under-perform 5 months out of 12. But I am surprised it is by 5 points.

Today was an extreme example. The broader indices were up about 1.7%. The median in my contest was down 0.16%. That is a humongous differential for a single day. It would be an interesting phenomenon if I was an uninterested observer. I expect it is being caused by several things (today at least).

1. There does seem to be a general flight to quality, meaning larger cap stocks.
2. I suspect financials out-performed today and they are not within MFI.
3. I suspect many MFI stocks were buyout candidates due to their financials and had gotten a premium (hoping they'd be bought out). With the credit market in turmoil, buyouts are on hold for the time being, thus the premium is being stripped away.

I suspect these are short-term changes. If you are not in MFI, this would likely be a wonderful time to jump in as the stocks have been beaten down unmercifully (and unfairly in my mind). The exact thing happened last June/July.

I did get some good news on several stocks:

THO - Announced solid sales, a great backlog and a "one time" special dividend of $2 (Thor Announces Record High Backlog, Cash at $345 Million; Sales for Quarter, Year; Declares $2.00 per Share Special Cash Dividend). I put the one time in quotes as they did this last year. This plethora of good news caused the stock to spike 7%. The news was released at 12:23, but if you were watching the newswires closely, you could have made some "fast money".

ASEI - announced their earnings after the bell. They were nothing short of outstanding (American Science and Engineering, Inc. Reports First Quarter Fiscal Year 2008 Results). This is a real feast or famine stock. They are now paying a 20 cent quarterly dividend as well. I had forgotten that. The stock is up 9% AH. That means I am up 40% on these guys as their one year draws to a close in September.

PACR - was upgraded by Bear Stearns (Pacer Intl upgraded by Bear Stearns). I guess they had fallen so far that someone had to admit they were a pretty good value.

Outside of MFI, Cramer is making people's head spin on TMA. I posted one headline where he said they were good to buy as they only sold mortgages to the rich (You Ask, Cramer Answers). That was July 31st.

Then on August 1st, an entire day later here is what he said: (Jim Cramer's Stop Trading! Sell Thornburg).

Today he sung from a different hymnal (Jim Cramer's Stop Trading! Don't Short Thornburg). As you might gather, I own TMA and yes, I am confused.

I do wonder, deep inside of me whether Cramer gets some information and tries to help the little guy. He was right, on July 31st, one should have sold TMA and yes, one then should have not shorted or even bought TMA this morning. I wonder whether he knew some big player was about to unwind their position on the 31st and tried to warn people ahead of time? Pure supposition, but it is uncanny how it has worked out. Here is the 5 day chart for TMA:



It was huge volume on the 1st, suggesting a big player could have been unwinding a position. Of course, I have held through the whole ordeal. Hmmm.

Bad Week - Words of Wisdom

Apologies for being a little remiss in my posting this week. I was off in NY for the past 4 days attending my nephew's wedding. Beautiful wedding in the lower Hudson Valley, gives me hope for the future.

On the plane ride back, I started reading Ken Fisher's new book, The Only Three Questions that Count. It is quite the opposite from the Dhandho Investor! Good stuff so far, I am about 1/2 way through. One of the questions deals with how to keep your brain from blindsiding your investing. Pretty timely chapter. When the market corrects (as we're seeing now) he argues that human behavior is to focus on your losers ("the dogs") and sell them. This is often the opposite of what should be done and it is important to stick with your strategy and not just over-react to a correction.

I know I have been doing that to some extent, but will try and resist going forward and get back on the plan of holding MFI stocks for a year. That has always been a major appeal of MFI is that it takes the emotions out of the decision-making, and in selling 3 or 4 stocks early I know I was wrong. I did re-invest the money immediately and I did move always into top 25 stocks. But still, I know I was too emotional (I am now rationalizing my breaking the rules).

Enough of that. It was a bad week, though not as bad as the previous week. Perhaps we're through the worst of it. Over my entire portfolio (MFI and non MFI) I have lost 13% of my value from the high on July 13th. That being said I am still up 4.2% YTD. Fisher did explain in his book that people are much more emotional about losses that gains. He said studies show that our happiness from a 25% gain can be wiped out by a 10% loss. Overall you'd still be up, but you would not have the happiness you would have if that stocks had simply moved up more slowly and you were 15% up.

Below is my weekly graph. Sadly, I am now in a virtual dead heat with the benchmark Russell 3000. Over the past 2+ weeks, I have given back my 5% edge. I do believe smaller cap stocks have borne the brunt of the sell-off disproportionately, as there has been a flight to "quality".