rovo's Market Journal -- 2011

[rovo]

Here is the update on the Apple plays I have working. Options are volatile and the following data reinforces that point. Prices reflect yesterday's close.

OPTION

BUY DATE

BUY COST

CURRENT BID

% GAIN

[/b][/tr]
[tr][td] AAPL Aug 20 2011 410.00 Call [/td][td] 18-Jul-11 [/td][td] $2.47 [/td][td] $1.50 [/td][td] -39% [/td][/tr]
[tr][td] AAPL Aug 20 2011 410.00 Call [/td][td] 27-Jul-11 [/td][td] $4.27 [/td][td] $1.50 [/td][td] -65% [/td][/tr]
[tr][td] AAPL Aug 20 2011 400.00 Call [/td][td] 2-Aug-11 [/td][td] $6.69 [/td][td] $3.15 [/td][td] -53% [/td][/tr]
[tr][td] AAPL Jan 21 2012 450.00 Call [/td][td] 2-Aug-11 [/td][td] $12.02 [/td][td] $10.50 [/td][td] -13% [/td][/tr]
[tr][td] Options Totals [/td][td] ---- [/td][td] $25,445 [/td][td] $16,650 [/td][td] -35% [/td][/tr]
[tr][td] AAPL Common Stock [/td][td] Feb & Apr [/td][td] $349.35 [/td][td] $377.37 [/td][td] 8% [/td][/tr][/table]

ETA: I just want to add, in my opinion Apple Inc. (AAPL) is a sreaming buy at the current level of about $380.

[rovo]

I have a few shares of Hillenbrand, HI, and here is a press release from this morning.

Hillenbrand, Inc., Hillenbrand to Acquire ROTEX
-- Hillenbrand continues to diversify its business for long-term revenue and earnings growth
-- ROTEX will become part of Hillenbrand's Process Equipment Group


BATESVILLE, Ind., Aug. 5, 2011 /PRNewswire/ -- Hillenbrand, Inc. (NYSE: HI) has entered into a definitive agreement to acquire privately held ROTEX Global, LLC, a portfolio company of Windjammer Capital Investors, for $240 million in cash, subject to certain closing and post-closing adjustments. The acquisition is expected to close in late August, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. Based in Cincinnati, Ohio, ROTEX is a leading manufacturer of dry material separation machines and replacement parts and accessories used in a broad range of domestic and international industries.

After the closing of this transaction, ROTEX will become the third line of business under Hillenbrand's Process Equipment Group. The two existing lines are K-Tron, which focuses primarily on feeding and pneumatic conveying equipment, and the Size Reduction Group, which concentrates on crushing equipment, conveying systems and screening equipment.

"ROTEX products complement both existing Process Equipment Group business lines, while giving us additional reach into new high-growth applications and geographies," said Kenneth A. Camp, Hillenbrand's president and chief executive officer. "In addition, the ROTEX global growth strategy allows us to leverage our existing plans for the Process Equipment Group's expansion, particularly in Europe and Asia."

On a trailing 12-month basis (July 2010 through June 2011), ROTEX's revenue was $90 million and earnings before interest, taxes, depreciation and amortization (EBITDA) were $24 million. Between 2006 and 2010, including the period following Windjammer's acquisition of ROTEX in March 2007, ROTEX's revenue had a compound annual growth rate of just over 10 percent and the company consistently improved its EBITDA margins.

"ROTEX is a well-respected international company that focuses on high-quality manufacturing, has enduring customer relationships and generates strong cash flow — all of which are key attributes for any company joining Hillenbrand, Inc.," Camp said. "We're delighted to welcome ROTEX to the Hillenbrand family of companies and to work with this experienced and talented management team, led by President and CEO Bill Herkamp. We believe our strengths in strategy management, lean business processes and talent development will help ROTEX reach even higher levels of success and allow us to build additional value for Hillenbrand shareholders."

"ROTEX has long known and respected the brands represented by Hillenbrand's Process Equipment Group," said Herkamp. "We're excited about the skills and core competencies Hillenbrand can provide and we're looking forward to working with the Hillenbrand team to enhance our global growth opportunities.

Financing
Hillenbrand expects to use cash on hand and cash available under its revolving credit facility to fund the acquisition. The transaction is expected to be accretive to Hillenbrand's earnings per share immediately, net of acquisition costs.

P&M Corporate Finance LLC is serving as financial advisor to Hillenbrand in the transaction, and Skadden, Arps, Slate, Meagher & Flom LLP and Baker & Daniels LLP are serving as its legal advisors.

More Information
Hillenbrand will provide additional insight into the acquisition of ROTEX during its third-quarter earnings call and simultaneous webcast, scheduled for Tuesday, August 9, at 8 a.m. ET. The webcast will be available at ir.hillenbrandinc.com and will be archived on the company's website through August 9, 2012.

To access the conference call, listeners in the United States and Canada may dial 1-877-856-1965, and international callers may dial 1-719-325-4853. A replay of the call will be available until midnight ET, Tuesday, August 23, 2011, by dialing 1-888-203-1112 in the United States and Canada or 1-719-457-0820 internationally, and using the passcode 7914711.

[livinincali]

I'm starting to hate Apple right now. Why do they have to make automation so incredibly difficult for no reason. I'm actually hoping their products start to die off so I don't have to deal with these convoluted engineering decisions.

[rovo]

Cali, I would like to either agree or disagree with you but I don't have a clue as to what you are saying. ;D

[livinincali]

I've been working on doing test automation on an iPad app and it's incredibly frustrating. It's just completely dumbfounding why some things work and other things don't work. Apple's "It just works" moniker certainly doesn't apply to the technical side of things. I do think Apple's mobile platform is going to suffer from the same things it's computer platform did in the 1980's eventually. Apple computers back then were technically superior in nearly every way except for development of applications for that platform. Eventually developers got frustrated and starting working with the more open PC environment and we all know what happened. I think it's going to happen again because APPL tight control policy makes it a pain for developers to deal with.

I just want to get things done and there's so many roadblocks.

[Trongersoll]

Aug 5, 2011 15:16:47 GMT -5 livinincali said:

I've been working on doing test automation on an iPad app and it's incredibly frustrating.

hmmm... you gots a robotic finger?

[rovo]

Now we're going to beat up on one of my holdings AAPL.

I never used an Apple computer because of the closed architecture of the machine. They seemed to always do the provided apps without problems but back then it was usually required to add hardware for any measurements and Apple just didn't allow it. The IBM clones, as they were referred to back in the dark ages, had hundreds of cards available to allow the computers to be configured to do most any application. When we couldn't find a card to do a specific task we would just design one.

I haven't considered using an iPad for other tasks but I suppose it is an inexpensive platform to work off of.

[rovo]

Trying to find the story on this but in the meantime:

8:22 PM ET | Associated Press
BC-APNewsAlert
WASHINGTON (AP) - Credit rating agency S&P downgrades US debt from AAA, first debt downgrade in US history

[rovo]

www.msnbc.msn.com/id/44040574/ns/business-stocks_and_economy/

US government loses triple-A credit rating
US debt now rated lower than European countries'; debt ceiling debacle

msnbc.com staff and news service reports


WASHINGTON — The United States lost its top-notch AAA credit rating from Standard & Poor's Friday, in a dramatic reversal of fortune for the world's largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus. The credit agency said late Friday that it was making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation.

U.S. Treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the United Kingdom, Germany, France or Canada.

The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.

U.S. government officials had been bracing for a downgrade.

CNBC's John Harwood reported that S&P told the federal government at 1:30 p.m. ET Friday that it was preparing to downgrade the country's rating. But Harwood reported that after U.S. officials pointed out an error in how S&P computed the ratio of U.S. debt to the gross domestic product, S&P decided to reconsider.

A source said S&P's calculations were off by "trillions," CNBC reported. A source familiar with the discussions said that the Obama administration believes S&P's analysis contained "deep and fundamental flaws."

Analysts said the main reasons for a downgrade include political confusion surrounding the process of hiking the debt limit and doubt that agreement would be reached on more deficit reductions.

"When they finally dealt with the debt ceiling they obviously kicked the can down the road, and the market did not need that. I thought at the time when they released it there would have been a downgrade," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Mass.

"I don't think it is a great shock. If it didn't happen now, I think it probably would have happened in a couple of months.

"A double-A plus is not a big issue, but it is going to have an impact. There are going to be ripples going across the pond."

On July 14, S&P put the government on a credit watch with negative implications, meaning there was at least a one in two chance the U.S.’s long-term debt would be downgraded within 90 days.

After Congress reached a deal this week on budget cuts valued at about $2.1 trillion over 10 years, the other two main rating agencies reaffirmed the nation's top credit rating status for now although said they would continue to evaluate the situation. S&P never issued a comment. still has not commented.

Moody's assigned a negative outlook for U.S. sovereign debt, meaning it could still downgrade the securities, although probably not anytime soon. Moody's said there would be a risk of downgrade if there is "a weakening in fiscal discipline, a deterioration in the economic outlook or if Congress fails to adopt more deficit-reduction measures in 2013.

Another major agency, Fitch, said it would complete its review of the nation's sovereign debt rating by the end of August and did not rule out a downgrade.

Standard & Poor's had warned that the nation's credit rating would be subject to a downgrade without a credible deficit-reduction package worth $4 trillion over 10 years. The package agreed to by congressional negotiators falls well short of that mark.

A downgrade could result in higher market interest rates and could force some fund managers to sell Treasury securities. But it is unclear what the result would be if only one of the major agencies issued a downgrade.

The rating agencies have been under fire since the financial meltdown of 2008 because they often gave high ratings to bundles of mortgage-related securities that were risky and ultimately failed.

[yclept]

Bad news indeed.

Looks like I should have held onto my SRTY -- oh well, I still have QID and DXD and can pile some more back into the triple shorts on Monday if it is appropriate.

But more importantly I need to get back into TBT. There are a lot of bond funds whose guidelines don't allow them to own anything but AAA rated bonds and they will be forced to liquidate treasuries if the rating service they are bound to is S&P, which is the most likely one since it is the oldest and biggest.

[rovo]

I'm not sure how the downgrade will affect the general market as it was expected to occur. I guess treasuries will drop in price but I just think the U.S.A. is still the most secure place to put money. But, like you say, some funds are required to hold only AAA rated. If interest rates go up, could it not pull money out of precious metals?

[clarkrl2]

On CNN the Anderson Cooper program interviewed John Chambers, Head of Sovereign Ratings for S&P who said he had talked to some of the holders who required a triple A and they said they wouldn't have to sell the US treasuries. Sorry but I couldn't find any link.

I don't really think they should have asked because the US is either AAA or not. Even though I'm short treasuries I don't think a massive sell off of treasuries would help anyone. This will likely turn into another round of finger pointing by the various political factions and cause the rates to rise a fraction of a percent.

Edit: Here's a link to the interview. www.allthingsandersoncooper.com/2011/08/anderson-cooper-360-friday-august-5.html The part about the AAA requirement starts at about 7:50

[rovo]

The threat of a down grade has been discussed for about a month now. I would think it has already been mostly discounted by the markets.

I'm also going to propose the downgrade will have little, as in less than 25 basis points, or no effect on Treasury notes being issued. These notes are competitively bid and where else will the money go for a small return and safety? Did I read correctly that last week the notes were being sold at a negative return? Did I also read where some banks were charging for taking very large deposits? Apparently safety with a known small loss is better than risk with unknown gains.

[yclept]

I think all one has to do is look at the majority of credit unions to see how banking used to be done. You pay people a fair interest rate for their savings. You use the money to make sound loans to people who are financially capable of paying the money back and have collateral to cover the cost of the loan should something awful happen to them. You charge them a few percent more than you are paying your depositors, which is your profit and covers overhead. You take lots of naps because the business model is simple enough to almost run itself. Maybe you buy a bunch of $12 (wholesale) toasters and give one to any depositor who puts $5000 into an account, and a bunch of fifty cent (wholesale) Harry Potter glasses to give away for $500 deposits. Then you take another nap. When you wake up, if nothing is happening, which will usually be the case, you give someone two Harry Potter glasses for a $1000 deposit, so they don't have to break it into two deposits and come back tomorrow. They will be eternally grateful. Then, if there's nothing else going on you can take your end-of-the-day nap.
As a result, you don't have to pull out a lot of hair while pondering how you'll ever bury the losses from bad loans you never should have made to people who had no hope of ever repaying them. You don't have to sit around all day thinking of new ways to screw more fees out of your depositors. You don't have to think of yourself as a sack of shit. And you are well rested.

[rovo]

Futures are bright red across the board this evening. Foreign markets had terrible loses. So, it looks like an interesting market day tomorrow. No predictions from me because I've seen huge futures moves evaporate in the actual market and I've seen them hold and drop the market like a rock.

I deleted any and all GTC buy orders in my accounts because tomorrow's bargain could be Tuesday's falling knife. Better to just wait and see what happens and be prepared for the eventual upswing to jump in further.

I have a handful of the ETF TBT, ultra-short long term Treasuries, and it rose nearly 6% on Friday. I see this as maybe going either way tomorrow. Treasuries are still the safest game in town so the prices could be bid up if there is panic. Or, they could be bid down due to the down grade by S&P. For sure, market forces will be raging tomorrow and it will be interesting. Scary but interesting.

[rovo]

It appears we are going to open much lower today. Sometimes the market confuses the heck out of me. The supposed reason for the pull-back is the downgrade of the credit rating of the U.S. debt notes. Looking at TBT, ultra-short long term Treasuries, and TLT, long U.S. Treasuries, we would expect TBT to be up and TLT to be down as investors flee the Treasury notes. However the reverse is true and people are buying Treasuries and driving the price upward, and yield downward.

So, if the Treasuries which were downgraded are rising in price and the general market is diving, then what is the logic? The downgrade does not directly affect the economy which is the driver for stocks. Oh well. I'll just sit back and see if I can weather this storm.

[Driftr]

From what I heard this morning, strength in Treasuries and weakness in stocks is being attributed to problems with Spain and Italy.

[yclept]

"So, if the Treasuries which were downgraded are rising in price and the general market is diving, then what is the logic?"

Methinks "logic" has little to do with it. It's fear. People also keep buying gold and silver. In my opinion "precious metals" are the tulips of our era.

[livinincali]

At this point we need a strong up day followed by a consolidation day before I'd consider long plays. No reason trying to guess at a bottom although I'm sure people are trying it today, as the move down is overdone. Right now we've got margin call selling plus the lack of a bid. One of the things that happened in the past 6-12 months was margin debt really ramped up towards the higher levels in 2006-2007.

[rovo]

The President is about to speak. This indicates the market will drop at least another 100 points on the DJIA. ;D

[livinincali]

Worst day for the markets since 2008. We're sure to see some huge up days along the way as things are volatile now, but it looks like we're now in a confirmed long term downtrend. I don't see any reason to buy longs until we at least take a stab at the 200 day moving average and see some follow through. Right now I expect to see the random 5% short squeeze up day that should be sold into.

[rovo]

I put a few orders in today but nothing filled. I'm mostly looking at buying Call options for the January, February time frame. I've just been watching the charts and keeping the prices below current trades and waiting for a reversal. If the reversal doesn't happen then I haven't spent any of my cash.

[livinincali]

I wouldn't buy call options with the VIX this high. The premium for time is just too high. If you wait for the VIX to make it back down into the low 20's then maybe but not at a VIX of 30+. If you wanted to bargain shop here I say buy the high quality names directly and keep a tight stop on them. These kind of markets have a habit of doing things that don't make any sense.

[rovo]

Ford went up enough today to wipe out yesterday's lose and so did Apple. The down side was HI and TBT both continued downward today.

Hillenbrand, HI, announced earnings last night and they missed by a penny. Pretty crappy results in my opinion. I got rid of some shares on the last upward move but not enough of them traded. It looks like I'll have to wait out another cycle to get rid of the rest of the shares. The dividend is 3.5% at my buy-in price so at least I'm getting something out of it.

Wacky, wacky market today with stuff trading all over the place. I know I'm in the minority but I think we have worked out the volatility and I expect a steady rise in AAPL and F for at least the rest of this month.

[rovo]

I've been pondering the release by the Federal Reserve for a couple of hours. If I understood this correctly they said they will hold interest rates at near zero for about two years and they will not be increasing their balance sheet. The balance sheet part means no QE3 from the Fed.

So here is my take on the statement ....

Publicly stating the low interest rates with a known minimum time frame allows longer term financial decisions to be made without the fear of rates changing suddenly. Very bad for my holdings in TBT but a very good thing to be able to plan for the short / intermediate term future.

No QE3 means less likelihood of further inflationary pressures. They will not reduce the balance sheet in the near term, meaning as holdings mature they will buy up new holdings to maintain a constant balance sheet.

The Fed is having a particularly difficult time in trying to fulfill their primary function of keeping the currency stable. I've seen Ben have to bite his tongue in many of the Congressional Hearings when being questioned. Who would want a job where you have the responsibility to keep the currency stable while at the same time you have a Congress and Executive Branch doing things to destabilize the currency.

So I see Ben and the rest of the Fed in today's statement saying ... here is what we are doing and going to do going forward. Now get used to it and do your job Congressperson.

I think he has thrown down the gauntlet and is not going to take their crap any longer. I would expect the next round of Congressional Hearings to be a little more exciting than those in the past.

[yclept]

The promise to hold interest rates where they are (which I would take with a grain or more of salt) effectively shortens the term by two years for every existing treasury bond. If one has a two-year bond, the risk of it falling in value prior to redemption is effectively zero. If a five-year, the risk is reduced to three years, with the most harmful (i.e. earliest two years that would compound for a longer period) period stabilized.

But I don't think they will keep that promise if inflation starts to go like a house-a-fire. They'll just renege and say something like "we know we promised, but this is a disastrously dangerous situation". Still, bonds are safer today than they were yesterday, which is pretty important since they are effectively paying no interest. Of course, should inflation take off, the principal is only nominally protected, the loss of purchasing power to inflation is only assured with TIPs and then only by using the CPI formula that underestimates the inflation rate.

[livinincali]

Wacky, wacky market today with stuff trading all over the place. I know I'm in the minority but I think we have worked out the volatility and I expect a steady rise in AAPL and F for at least the rest of this month.

I disagree. I think the volatility is only beginning. Bear market rules apply now. We're going to keep getting this huge up days every so often to keep the long term bulls hopeful that things are coming back only to see the market continue down. There will likely be one more huge explosive rally that is going to make everything look alright and nobody is going to take that opportunity to get out. The bargain shoppers will buy the market down and lose badly, as things that are cheap will continue to get cheaper. Value stocks at the bottom of a bear market cycle are usually around a P/E of 5-8. At least that's what the 1930's and late 1970's tell us.

[Driftr]

A few more auctions like today's 30 and you boys should be swimming in a sea of TBT cash.

[rovo]

Driftr, I am resigned to taking a loss on TBT. The recent uptick, and hopefully more going forward, will cut the loss some but I just don't see this as a winning trade based upon my old buy-in price. I'm not whining, just stating a fact.

[yclept]

Bought back into TBT today.

"I just don't see this as a winning trade based upon my old buy-in price"

That's water under the bridge. The only important question is whether or not it is a promising investment going forward from here. Obviously I'm of the opinion it is, but I was wrong on this one for a long time (all the way from last December until a week or so ago when I sold it). I won't let it do that to me again -- either it'll move in the right direction or it will get the chop. Off with their heads! Being a play against bonds, it can be seen as an artificial long on stocks, so is counter to my reading of the market direction. As a counter-play, it'll be given far less rope than would be the case if my bias was positive on stocks.