MSFT

[zippy1]

Parsad,

 

        Your lunch today saved me lots of money in FFH.

 

        Zippy.

[sswan11]

I have a friend who essentially a (current) HPQ lifer;  says one of HPQs profit "sweet spots" is the printer cartridge business, akin to razor (blades).

[Packer16]

If you like RE cos you may want to check out KW.  They have similarities to FUR buy without a seperate mgmt agreement (KW owns the asset manager) and they have been vetted by FFH.  KW reminds of BAM before it was valued as an asset manager.  They are selling at about adjusted BV with no value on the asset manager and have orginated about $2 billion of assets in 2010 and have the same size pipeline for 2011.  They have had high historical IRRs (mid-30s) and follow a value approach to comm RE development.  There origination is proprietary and they do not partcipate in auctions.

 

Packer

[biaggio]

I have a friend who essentially a (current) HPQ lifer;  says one of HPQs profit "sweet spots" is the printer cartridge business, akin to razor (blades).

 

I can vouch for cartridge business as I just replaced the ink for our HP color lazer printer...the genius engineers programed machine so that you have to replace all the color at once, even if they are not all done.

 

For $300 you get ~ 2500 pages (assuming 20% coverage)...initially I paid this at staples, but then I brought it back thinking that it was a crazy price to pay. (I ended buying knock off for$200 but still crazy...this lasts our family a couple years but I am a cheap bastard)

 

Have not looked at HPQ but plan to.

 

[ERICOPOLY]

I have a friend who essentially a (current) HPQ lifer;  says one of HPQs profit "sweet spots" is the printer cartridge business, akin to razor (blades).

 

That's what my father says too.

[ERICOPOLY]

I found this guys table rather informative regarding HPQ's past performance:

 

http://seekingalpha.com/article/251415-hp-an-unappreciated-steal

 

Anyhow, look their management expects EPS to be $7 by 2014.  That's their stated goal.  That seems achievable given their stock price (buybacks at great earnings yield) and huge cap-ex spending.  It will be even more likely if the stock doesn't go up.

 

Put a 12x trailing on it and you've got 20% compounding the next 4 years, or 27% compounding over the next 3 years with a 12x forward valuation.

[ERICOPOLY]

This is the kind of reading that makes me excited for my large INTC investment:

 

http://seekingalpha.com/article/266789-intel-no-longer-a-low-growth-company

 

My INTC strategy is similar to my JNJ strategy.

 

With INTC, I have the at-the-money 2013 $22.50 strike calls.  I put 10% down now, and buy the shares in 2013 for cost of $25.  At that point, I will be purchasing at effective price of P/E under 10.  Given their growth rate, I want to stake my claim now rather than hope and pray that it will still be around then at these price levels.  In fact, it will be cheaper than at the current price level.  I pay only 10% of notional for at the money calls that don't expire for another 21 months from now, yet they are growing earnings at double digit rates.  How inefficient can the options market possibly get?  I at least find the options pricing strangely working in my favor.

[shalab]

Ericopoly, interesting thought process. BTW, it seems you are fully in to the "non-deflation" camp  ;D

[ERICOPOLY]

Ericopoly, interesting thought process. BTW, it seems you are fully in to the "non-deflation" camp  ;D

 

Oh sure, we can still have our Japan, but that's not going to keep cloud computing from happening,

 

Don't they all have laptops and cell phones in Japan?  The cloud computing wave just means sales of really expensive Intel products to power the servers.

 

And a stock market down 80% in twenty years?  Don't make me laugh!  2x p/e for MSFT where they keep buying shares?  That's fifty percent EPS growth!  I think this stuff fails the test of logic.  It's one of those "nothing to fear but fear itself" sort of situations with MSFT and the Japan rumblings.

Some people will tell you that real unemployment is 20%, by the old way of counting it.  Yet these companies keep on growing .  Hrm.  Maybe the underemployed worker still needs a computer to do his job, and an unemployed person is using Monster.com to look for work.

[ERICOPOLY]

Over the past 20 years, have PC prices in Japan fallen more than PC prices in the US?

 

Just seeing whether we've both had the same deflation in tech, or whether Japan has had even more deflation.

 

Point being... if prices for PC's and software have followed the same trend in both countries, then one could argue that MSFT and INTC have thrived despite already having Japan-style deflation.

 

The argument goes that spending collapses because people expect lower prices next year.

 

But I already expect lower prices for PCs next year.  I've had that attitude for 20 years and pretty much everyone has.  So what, did that cause MSFT and INTC to deliver poor results?  Okay, for some companies it would be devastating... then my advice would be to not buy stock in "some companies".  Buy MSFT and INTC.  And AAPL and GOOG.

 

I'm not sure if the OEM price for Windows has ever changed since 1990.  It's like $50 or something like that -- and a consumer only buys one every few years.  So it's like $10-$15 annual expense.  Upgrading your laptop every 3 years, you spend roughly 4 cents per day on Windows software.  It's practically free already.

 

And does lack of demand for credit in the US have anything to do with credit growth in Mexico, one of Ciitgroup's most important markets?  Mexico private credit growing 12-13% in 2011.  I guess they don't care how indebted US consumer are.  I'd like to see deflation try to drive that one down by 80%.

[Guest Bronco]

Ericopoly, even though we clearly disagree on buybacks, I appreciate your sharing of your option strategy.  Not for me at current time, but I like your logic.

 

I remember doing the same thing with sd 5 calls.  Sold them too early though.

 

Jnj is such a great company.  Intc isn't really what I would call the sweet spot in tech but I do think they will reinvent themselves.

[ERICOPOLY]

Ericopoly, even though we clearly disagree on buybacks, I appreciate your sharing of your option strategy.  Not for me at current time, but I like your logic.

 

I remember doing the same thing with sd 5 calls.  Sold them too early though.

 

Jnj is such a great company.  Intc isn't really what I would call the sweet spot in tech but I do think they will reinvent themselves.

 

Yes, when I sink 33% of my net worth into JNJ at 11x P/E my future risk-adjusted returns will be epic because the day will eventually come when it's 17x or 20x P/E again.

[ERICOPOLY]

Intc isn't really what I would call the sweet spot in tech but I do think they will reinvent themselves.

 

I'll be getting it at like 8x forward earnings in 2013.

 

That's a sweet spot for me.

 

I mean, some guys have been holding RIMM at that price recently (before the selloff).  Risk adjusted, I rest my case.

 

[mhdousa]

Here is why I bought the JNJ 2013 near-the-money calls.  It provides a cheap entry point in 2013.

 

Go back to early 2009 in our big crash -- stock got down to about $47.  Okay, now grow it by 7% annually for 4 years.  That takes you to $61.  So the $60 strike 2013 calls allow you to make a 10% down payment today for a 2013 purchase at a mere 10% premium to the 2009 bottom.  

 

$61 in 2013 is the same as $47 in 2009.

 

Just planning ahead  :)

 

Is 7% annually a reasonable rate of value growth for JNJ?  I'm expecting it to be in the 11x forward earnings range by the time I buy it.  At any rate, HWIC bought theirs at about $60 in early 2007.  I'll be paying a 10% premium to their price -- but six years after the fact!

 

Hi Eric,

Sorry if this question is a little too basic, why didn't you just buy JNJ outright at $60.  You save the 10% premium that you pay for the calls, and you're getting the (assumed) increase in price between now and 2013.

Thanks.

-M

[ERICOPOLY]

Here is why I bought the JNJ 2013 near-the-money calls.  It provides a cheap entry point in 2013.

 

Go back to early 2009 in our big crash -- stock got down to about $47.  Okay, now grow it by 7% annually for 4 years.  That takes you to $61.  So the $60 strike 2013 calls allow you to make a 10% down payment today for a 2013 purchase at a mere 10% premium to the 2009 bottom.  

 

$61 in 2013 is the same as $47 in 2009.

 

Just planning ahead  :)

 

Is 7% annually a reasonable rate of value growth for JNJ?  I'm expecting it to be in the 11x forward earnings range by the time I buy it.  At any rate, HWIC bought theirs at about $60 in early 2007.  I'll be paying a 10% premium to their price -- but six years after the fact!

 

Hi Eric,

Sorry if this question is a little too basic, why didn't you just buy JNJ outright at $60.  You save the 10% premium that you pay for the calls, and you're getting the (assumed) increase in price between now and 2013.

Thanks.

-M

 

The calls don't have a 10% premium.  The $60 strike for example trades at a $2 volatility premium to the present share price.  So the cost basis 21 months from now is only 3.16% above current share price.  I actually bought the $65 strike for $4.25 though.  And then the shares pulled back 1/2 percent the next day and I checked the price of the calls and they had gone up 10%.  Go figure.

 

There are other considerations...

 

For example, volatility is extremely low right now.  If we get a big crash, volatility will explode and those calls won't drop much in price -- at least no where near as much as the share price.  Remember in March 2009 at-the-money 2011 JNJ calls were a 20% premium!  I remember this crisply because at-the-money 2011 FFH calls traded for the exact same premium as JNJ puts.  So you could write JNJ puts and use the proceeds to buy FFH calls.  At that time, FFH was unhedged, carried all kinds of assets that the market considered high risk, and was exposed to catastrophy risk.  Upside of FFH, but downside of JNJ.  Epic... makes me laugh.

 

[ERICOPOLY]

Hi Eric,

Sorry if this question is a little too basic, why didn't you just buy JNJ outright at $60.  

 

I was napping when the shares were $60.  Or rather, YTD I was busy watching a big portion of my money grow 54% in SSW.  On a thread last Sunday I discussed getting out of my SSW and just buying MSFT and JNJ.  The very next three days JNJ jumps $3 per share!

 

I was still sucking my thumb, but not wanting to feel beaten, I devised this plan to get it at an even better discount to IV.  Meanwhile, I play chicken with Mr. Market over the price of SSW, but I have $8 in short-term capital gains right now in SSW on a per-share basis.  So if I sell it now, I lose $1.60 per share right away at my 35% tax bracket vs waiting until end of July to sell when it's 100% long term capital gains at 15% tax rate.  My tax bracket is 35% because I spread my RothIRA conversion over 2011 and 2012, and the conversion was sizable.  I would have been able to roll it over back in 2009 (and in fact had already done so), but it got disallowed when my ORH gains from the FFH buyout blew my earnings through the roof.  It was really painful because I had done the rollover in early 2009 when the account value bottomed (actually the account only sagged 5% for the year at the time of the bottom), then the account tripled from there by year end.  So the disallowed conversion was substantial.  If only FFH had issued shares instead of cash for ORH, this never would have happened.

 

Cutting a long story short, $1.60 per share of SSW is more expensive than the volatility premium I paid for JNJ $65 strike at-the-money 2013 calls.

 

There is another school of thought that believe SSW is going to rise another 30%-40% from here... and it is yielding a lot more than the JNJ calls are costing me.

[ERICOPOLY]

So it's been two years since 2009.  If you are worried about a crash like that happening anytime soon, but don't want to miss out if you are wrong, then going the JNJ calls path and the rest in cash makes some sense.

 

$47 in 2009 was the JNJ bottom.  Grow it by 7% per annum two years and you get to about $54.  So a crash right now just like 2009 would drive JNJ to $54.  Then because I've only put 6.5% down payment on JNJ ($4.25 I paid for $65 strike calls is really only 6.5% down payment) at present prices, I can then invest go into margin by 1.065x and put 100% into JNJ at $54.  The dividend on JNJ will pay off the margin loan by expiration of the calls.  

 

But then I still own the calls too, so I can either sell them if I don't like margin of 1.065x (which doesn't scare me) or I can hold onto everything in a recovery and get some 2x notional leverage as JNJ once again shoots past $65 and onwards before the calls expire.  If volatility goes back to 2009 levels, even at stock price of $54 I might be able to sell the $65 strike calls for at least the price I paid for them a few days ago.  Talk about upside with no downside risk.  It's heads, I win!  It's tails, I win!

 

Or you can do what HWIC does and just buy JNJ and hedge with index shorts.  But that's getting very expensive for them because the market doesn't always go down.  Going forward, their hedges will likely outperform JNJ's decline by a wide margin.  But I worry that I could somehow be wrong about hyperinflation, so I want JNJ to run freely into the tens of thousands of percent gains without an index short dragging on it.

[ERICOPOLY]

And that line of thinking goes for all the calls, MSFT, INTC, HPQ, etc...

 

A big time market crash is going to send volatility so high that you'll be able to recover most of your cost basis and invest near the bottom.  But if the crash doesn't happen, volatility is so cheap that you'll be a winner anyhow.

[prunes]

How did you evaluate the $60 vs the $65 calls? The $60s seem like a better deal to me although I don't know as much about options as I imagine you do.

[ERICOPOLY]

How did you evaluate the $60 vs the $65 calls? The $60s seem like a better deal to me although I don't know as much about options as I imagine you do.

 

I've been having the same thought and considering switching.  That's why I initially starting talking about the 10% downpayment, because I was already evaluating making the switch to the higher down payment $60 calls that have less volatility premium cost.

 

I don't know much about options.  I could NOT accurately answer things like "what is a verical spread", or "bull spread", or all the other crap jargon.  I just use these things like an engineers uses components... you either build with them when they make sense or you don't.  They're just tools.

[ERICOPOLY]

VIX is at 46 month low.

[ERICOPOLY]

It's not so much that I believe it's low probability (although I do), it's that I can shrug it off safely with this strategy.

 

[ERICOPOLY]

Ericopoly - I think you are right about deflation being a low probability event. There was an article in WSJ about cost of things in Sao Paulo Brazil. Everything from movie tickets to office space is more expensive than US. In office space, it is more expensive than downtown manhattan but less expensive than midtown manhattan.

 

Housing is cheap in US big cities compared to any other in the world...

 

 

 

Median income in Australia is over $70,000.  And their dollar is stronger!  Imagine how cheap some of our stocks look to them... look, Kraft makes their Vegemite!  It's not like they've never hear of our global brands.  Why should foreign investors not be interested in buying up US multinationals?

 

10 years ago AUD was at $0.52.  Now it's $1.08. 

 

So like... because only 25% of KO revenue is in the US, then when will the world wake up. 

 

[goldfinger]

Why should foreign investors not be interested in buying up US multinationals?

 

American multinationals are definitely cheap and have been for a while. Small caps seem much more expensive in absolute and relative terms

(http://www.zerohedge.com/article/gmo-quarterly-review-us-small-cap-stocks-are-now-expensive-we-have-ever-seen-them).

Who knows if and when the herd realizes that and leadership changes. I am definitively in agreement with you and have been deploying cash into

ABT, JNJ, MSFT, DELL, HPQ, BAC, C, WMT, etc... over the last few months.

[goldfinger]

But I worry that I could somehow be wrong about hyperinflation, so I want JNJ to run freely into the tens of thousands of percent gains without an index short dragging on it.

 

How can we have hyperinflation when we are still a 14-15T$ economy? I mean by that that our productive capacity hasn't been impaired and we are not trying to make up for a that kind of a catastrophe by printing. I understand high inflation or a risk of disinflation to deflation but hyperinflation or hyper-deflation seem like very remote risks at the moment.