Zachary Scheidt

Cfa, long/short equity, dividend investing
Zachary Scheidt
CFA, long/short equity, dividend investing
Contributor since: 2006
good comments guys - one thing to note.. Since the high, FSLR has dropped 20% and while concerns in Europe continue to mount, there are other variables coming online.
BP's oil spill may eventually lead to a significant push towards alternative energy. We haven't seen the effect in solar stocks yet, but I'm digging deeper into the sector to see where the best opportunities are.
Debt and excess capacity continue to be significant challenges for many manufacturers, but if demand picks up sharply, the excess capacity could quickly be put to use, and pricing power may firm a bit.
There are several strong companies in the sector, but before buying I want to start to see some positive price action in key stocks.
Homebuilders have taken it on the chin in the past week and I've locked in some profits. While the majority of my positions are still in play, at this point in the selloff it seems wise to at least take some of the risk off the table and see exactly how much strength the sector can manage during any reflexive move higher.
So are you saying you ARE being responsible by defaulting on a contract? I've got six kids and a decent mortgage payment. Should I do the "responsible" thing and default on my mortgage so I can
-send them to a better school?
-work less and spend more time with them?
-buy "reliable" transportation - and what doest that mean - a BMW?
We all have priorities, but I think there's an ethical problem when people decide NOT to pay a mortgage - a contract that they have agreed to - not because they don't have the means but because they have other places they would "rather" spend the money...
Just my $0.02
Captainccs - You're going to have to excuse me for the following rant... Seriously, I apologize - it's not directed at you, but at the continual assumption that "shorting has unlimited risk" and casually assuming that this is better than the "limited risk" of buying into an extended market...
What kind of idiot would short a stock and continue to hold it for the "unlimited" risk you talk about? If the position moves against you, then CLOSE IT OUT! Risk control is the most important part of investing whether you are long only, long short, a daytrader, swingtrader, position trader, or horse trader! Of COURSE the mathematics say that risk is unlimited, but the practical application of shorting a stock or ETF or market would require you to manage that risk.
Too many people use this overstated technically true but practically obsolete statement to simply excuse themselves from having to think about BOTH sides of the market. Shorting stocks allows for diversification. It allows investors to take advantage of mis-priced securities. It brings truth to the market through the context of accurate price discovery. Short interest often acts as support when stocks are falling out of control. Shorting is a NECESSARY cog in the wheel of finance to keep equilibrium in place.
When was the last time you were short a stock that doubled overnight before you had a chance to cover? Ii'm sure it has happened to someone but those times are EXTREMELY rare - and almost always involve shorting a penny stock which has no liquidity and should only represent a small portion of an account (if any portion at all).
The idea that shorting stocks is inherently more dangerous than buying stocks, is morally wrong, or is a poor investment tool drives me nuts! (can you tell? :-) It especially bothers me because too many investors that COULD have protected themselves through this turbulent market period have decided NOT to because they heard that shorting was risky, or wrong.
To be sure, one must understand the risks involved with trading ANY security - from the long OR the short side. I would argue that too many individual investors enter the market without the proper knowledge base to make them competitive or keep them safe. But that's what sites like seeking alpha and are about - giving investors tools and the proper understanding to be able to make informed and profitable decisions.
You're reference to using puts is well taken. But options traders get nothing for free. The reduced risk in buying puts comes with a cost - that would be time decay if buying puts outright - or any number of other risks if a more sophisticated approach is taken.
But that brings me to a good point. When I recommend shorting a particular instrument (or when Ritholtz, Trader Mark, or Cramer makes a recommendation) the individual trader or investor can apply the best tools that he personally would like to use for that instance.
So if you like the idea of shorting retail - GO AHEAD and buy puts - or sell the calls - or set up a backspread strategy - use futures - use straddles, strangles, condors or butterflys (option strategies). That's what individual traders do! They take the tools available to them and create a trade which matches their risk tolerance, their aggressive or conservative approach, that ties with their existing positions, and that meshes with their view of the world.
OK - NOW that I've got that off my chest - thanks for the comment - thanks for reading - I really mean that.
Good points on the retailers going out of business (although I think the smaller pie will more than make up for the fewer eaters). We live in dynamic times and risk must be carefully monitored and managed to ensure financial survival. The point is that as individual traders, we should use the tools available to us in order to protect and grow our investments.
The best of success to all...
We've got a pretty polarized discussion here. Half seem to think this is a "BFD" (pardon the Biden reference) - and the other seem to think that "this too shall pass" and expect market's to get back to normal.
I honestly think the truth is somewhere in the middle. Goldman getting sued by the SEC is a BIG DEAL. And I certainly didn't mean to imply this wasn't the case. The action has ramifications that will take weeks and months to sort out. We're talking about risk for all other securities underwriters, for the financial industry as a whole, and essentially for our economy (as this lawsuit has ripples that spread into the very bedrock of free capitalism)
Remember, for a minute that when this security was being put together, John Paulson was a nobody - essentially a small-time hedge fund manager looking for a big break. The investment bankers thought he was a nut but liked him because he was helping them generate big fees by taking the other side of his trades. So if the concept is that a "mastermind" was picking out the mortgages that were destined to lose, keep in mind that Paulson had yet to be proven to be a mastermind...
Anyway, despite the fact that I think the suit really is a big deal, the current bull market is so very strong that it will likely take some time to set in. That's why I expected a relief rally shortly after Friday's air pocket (although I must say I didn't expect it to reverse the majority of losses on Monday and Tuesday).
The true test comes NOW after we have had time to adjust and evaluate the long-term ramifications. If the market can press to new highs and continue to operate with momentum, then I will have to step back, close shorts and take short-term stabs at the long side (while managing risk and continuing to build a short-list)
But if we are unable to retake the highs, if risk is actually going to be a factor when deciding what to invest in, if momentum stalls and "story stocks" lose their appeal, we could enter a short-sellers dream - an era of falling expectations and declining multiples.
If you're a bull, it's a concept you should at least be aware of and have a hedging plan to help you survive. If you're a bear, you should already have a game-plan in place complete with momentum stocks on the chopping block and an eye for particular profit points...
And if you're an agnostic?? Well, then you probably know all this already...
Wow - seems like I hit on a sore subject. To be fair, I will point out that I did say that there are exceptions to the experience level of the representatives ( and I know that there are some "business owners" who are legitimate in their endeavors.
But the stigma still stands. I've been approached by several Primerica consultants who explained over lunch or coffee how I could become a "business owner" and fit into the pyramid looking structure.
As a general rule, I was appalled by the knowledge and experience of these representatives (AND ONCE AGAIN I KNOW THERE ARE EXCEPTIONS) - but many of these reps were recruiting their parents, neighbors, babysitters and others to join in their business. If this is where middle income America is supposed to get their financial advice, we are in serious trouble.
Sticking to the investment - yes, you're right. My purpose is not to debate the merits of Primerica as a service to middle America but to analyze the stock as an investment vehicle. And with significant selling pressure likely to increase as Citi and other private investors dump their positions, I believe there is risk in owning the shares.
I could be wrong - it wouldn't be the first time and it certainly won't be the last. Primerica could shoot to $30 or higher. But with the risk of selling pressure and what I believe to be a poor business model, Primerica strikes me as a better short than long position.
Thanks for the comments guys,
Why pay 8-9% when current borrowing rates are much lower? I think the capital raise was really just to give the company more flexibility to act quickly when they are ready to pursue opportunity.
With available capacity on the credit line, the company could immediately purchase mortgage assets up for sale at an attractive price. But if the credit line was fully used and the company had to wait to pursue a transaction until a capital raise was already completed, the opportunity could be missed.
Obviously we're seeing this transaction differently, but I do agree with your point that the company could responsibly increase its leverage - not to the previous level of 4-1 or more, but maybe something in the 2-1 range considering the low cost of debt capital.
But isn't this transaction exactly what you're talking about? with a slight adjustment in timing?
CIM really IS paying down its repo line with a secondary (as you suggest) - this repo line has been used to make acquisitions. And in the future, I expect the line to be used again.
So the transaction is exactly what you are suggesting, we're just discussing it mid-way through the circle.
It could be that they were expecting the RMBS to decline sharply after the Fed purchase program was over. In this case it might make sense for management to have the capital handy early in the game so they could jump on an opportunity immediately without needing to take the time to finance the deal.
If they are just using equity capital to pay down a line, I agree - that doesn't make sense. Right now CIM's cost of funds is approaching zero. But if that line remains open and they can draw it down for opportunistic purchases along the way - then the dilution effect might actually disappear.
Thanks for the comment
Alan - agree on the attraction of the un-leveraged business model. and you're right... Credit is going to be hard to come by for a generation because traditional banks will be (rightfully) distrustful of the consumer. Traditional finance is a big mess that will take years and years to clean up.
Tom and Lower - you've got a point, there are certainly plenty of other opportunities and I'm pretty active in chasing those down too. A wise man (or perhaps a smart@$$) once told me it's immoral to let a fool keep his money - now I'm not sure I really agree with this, but its very hard to integrate social agendas into investment approaches. There are things I dislike about nearly every company I invest in - so the difficulty is figuring out the balance between social principals and investment principals.
You should know I respect your opinion and anyone choosing not to invest in a particular stock or industry based on their convictions...
Thanks for the comments guys,
I hope so too. I'm a little surprised that the stock hasn't had more positive action with the health of the IPO market. This should be a benefit and ample liquidity should drive not only profits but also investor confidence.
The dividend should continue to help support the stock, but I'm keeping a tight stop due to the failure for BX to participate in the current rally.
Jeff – I think you are taking that statement a bit out of context – I’ve never been one to rely solely on the government numbers – but you can’t deny most retailers have been reporting strong sales increases – and this is true not just for luxury spending but regular mom and pop stores – from basic essentials all the way to purely discretional items – you HAVE to account for these increases even if you throw the government numbers out the window.
AlexR – You make a great point – strategic defaults really ARE a stealth stimulus, and the bill is unfortunately paid by the taxpayers and by true paying homeowners who will see the value of their properties further decimated by the eventual foreclosures that MUST happen.
Donald – I agree with you in principal on the regional banks – but do you have some short opportunities in particular? Would love to see some tickers you’re watching.
Will DiJohn – you state that “anyone facing foreclosure is also facing bankruptcy” and you are right. So why would ANYONE in their right mind pile up cash that will be frozen and taken away during the bankruptcy process?
Atareen – you’re right – same song, second verse. I think it was
PTJ who said that the real tragedy of this crisis is that we haven’t learned a thing – in fact we’ve learned the WRONG lessons. The lesson consumers have picked up is that if you act irresponsibly enough, someone will come behind you and help you out.
Thanks for the comments guys!
Good service, accessibility, and name recognition are all things that have made the company successful. And I want to be clear - I'm not saying that I expect the company to STOP being successful. It's just that investors appear to have gotten ahead of themselves and are paying too much for the company.
Everything has a fair price. Markets can swing significantly above or below that mysterious fair price... But eventually fundamentals become important once again, and assets will trade in parity with cash flows, risk premiums, long-term growth, and terminal value.
My expectation is that the stock price will settle at a much cheaper level in the next several months. But of course if investors continue to bid prices higher for most Chinese stocks - HMIN will likely be supported by that movement. There is a function of the price (near term) that is associated with the Chinese market. But long-term we need to look at the value of the franchise.
Thanks for the comments guys.
I don't disagree with you, but has that fact already been baked into the price of the stock? HMIN is trading at nearly 40 times expected earnings for 2010. Any disappointment could lead to both revisions to estimates and a lower multiple. Just a 10% cut in earnings expectations (to 77 cents this year) and a 15% decrease in the PE multiple would leave us with a stock trading near $26 - at that point managers could begin to bail, sending the stock sharply lower.
I agree that the industry will continue to attract spending, but investors may have overshot the target.
Thanks for the comment,
KungFu – I understand that the backlog doesn’t tell the entire story, but it’s just one more piece to the puzzle. Over the last several years, the industry has been telling investors to look at deferred revenue as a means to determine the future health of the revenue stream. Now many want to say this measure doesn’t matter anymore. I do think we need to be very wary when an entire industry trades substantially higher and in defense the bulls state that traditional measures don’t matter anymore. I’ve heard that line too many times and it usually ends ugly.
Bernard – you certainly could be correct. And timing ANY bubble or inflated industry is always going to be difficult. For now I have stepped away from the short side (I’m one of those traders you mention) but as soon as the broad market and the industry begin to show signs of rolling over, I will begin to build a position. Today the market essentially seems to be taking a “risk on – risk off” mentality where traders add to ALL risk-based exposure when the newsflow is good and punish ALL risk-based positions when the news is poor. This may continue for quite some time but when fundamental valuation begins to matter once again, CRM investors will likely have a hard time justifying the price.
Thanks Bernard... I hope you're right. But if CTCT is going to trade higher, there will likely need to be a catalyst for analysts and fund managers to start paying attention. I don't know if that will be an earnings announcement, an article in Barron's about "entrepreneurial stocks" or a spot on Mad Money (just kidding) but I do think eventually this quality company will get its day in the limelight.
What other SaaS companies are ranked high? Any that have reasonable multiples compared to their growth?
mbkelly75 - Just a word about the price to sales ratio... The company actually books incentive allocation as revenue - and books the revenue in the period in which it was earned...
So picture this: A $5 bil fund managed by Blackstone is up 15% in the first quarter. Thats $750 million in gains and let's assume Blackstone captures 20% of profits. So $150 million would be booked as "revenue" because the company "earned" the incentive allocation during the quarter even if the fund didn't actually get to "collect" the allocation (most funds collect their incentive allocations at year end or even longer).
In subsequent quarters however, the fund could actually lose money and the "earned" incentive allocation would be negative - giving back incentive allocations that were never collected but were booked as revenue. If enough of the funds the company manages have this type of quarter, BX could post NEGATIVE revenue - and has done that in past quarters.
So I think some of the sales figures for this particular industry are volatile and don't necessarily tell you much about the long-term value of the company. Of course booking these incentive allocations will be very important, but looking at the last 4 (or 8) quarters of revenue is not as helpful as looking at the future business prospects and determining what opportunities could lead to significantly higher revenue, earnings, and distributions to shareholders.
Oh, and on the Schwarzman thing - I don't think its a crime to make money - but we need to make sure that executives (private equity, banking, and every other industry) are properly incentivized to create long-term value for shareholders. This is a responsibility held by the Board of Directors who are elected by the shareholders. So if we don't like the way a compensation package is written - we as shareholders should make our voices heard or look for other investment opportunities with policies we are more comfortable with. Just my $0.02 :)
Good comments guys.
Hello Shadab,
You're exactly right. Financing is still difficult compared to the environment five years ago. There are no consortium of banks willing to lend enough to get a $10 billion dollar deal done, but there are plenty of institutions that would offer a few hundred million.
This is perceived as one of the challenges for the industry, but it actually makes me feel a bit more comfortable owning Blackstone because I know that it will be more difficult for the company to use excessive leverage and get into trouble. Moderate leverage is good, but even a wise investment team employed by BX needs to have some checks and balances.
Thanks for the comment,
While I can't argue with your experience - I don't know who you work for or what type of oversight Blackstone offers - the company has a very strong track record of turning companies around leading to profitability. BX could certainly play the "smoke and mirrors" game for a time, but if this were to occur, investors would balk at purchasing IPOs coming out of BX. Eventually the plan would backfire.
While the situation is certainly not perfect, Blackstone actually offers economic benefit, and the returns are very lucrative - for the company AND for the investors.
Thanks for the comment...
Thanks for the comments guys - while there are so many different opinions on how to "fix" our system, the excessive borrowing from future generations is incredibly concerning.
To quote Bill Bonner, "It's not just immoral. It's fundamentally wrong - and mean - for one generation to spend the next generation's money."
The volatility is certainly picking up (both on positive and negative days). That has me trading smaller and managing risk more carefully. But it also seems to point to "churning" where investors are skittish and could very easily be convinced to throw in the towel and send markets lower.
I'm particularly concerned when looking at charts of major indices - noting that the small cap and higher risk indices have very decidedly broken their uptrends, while the Dow and to some extent the S&P is still hanging on. It seems the appetite for risk is diminishing which will initially hit the small cap growth sector, but in time should erode into the blue chip universe.
I'm picking up short exposure and yes it has me nervous. I'm one who got my hand slapped late this summer as well, but the risks are in full force. Beginning to build short exposure slowly and will pyramid as confirmation and profits accumulate.
It was impressive to see BX retaking it's 50 day on strong volume. I'm drinking the kool aid for now - the opportunity to liquidate positions at attractive levels should still be available, how else can you explain the popularity of the Hyatt deal?
The business model follows a "heads we win, tails we break even" as the company basically allows investors in its funds bear most of the risk while the potential for incentive allocations can be tremendous.
I'm bullish - holding in the ZachStocks Growth Model - and own $15 calls personally.
Optimism re-entering the market should provide some fuel for bears (myself included) as eventually the frustration will likely cause these weak hands to fold.
However, we need to watch retail figures carefully. If a positive market and investor optimism leads to consumer spending for a quarter or two, it could stall the eventual downturn in the market. I don't think the consumer has much dry powder even if he IS optimistic as lines of credit are being pulled and unemployment continues to rise. But we should be aware of this potential and initiate short positions carefully with risk control.
woohooo!!! the recession is over! I guess we're out of the woods now despite the fact that unemployment is continuing to rise, wages are falling, credit lines are contracting, credit defaults are rising, construction loan defaults are increasing, government debt issuance is huge and consumers are hunkered down and saving.
As I said, any GDP growth in Q3 will be a result of government spending and not a truly sustainable economic rebound. I'm still in that camp and expect the long-term recover to be much more difficult than many analyst predict.
Looking at a longer-term chart for both gold and silver, it's clear that we are not anywhere close to a speculative bubble. Gold is moving in a relatively predictable fashion based on its multi-year base and until we get a 30 or 40% move above the breakout in a few months time there is little reason to worry about a bubble.
Silver is in an even better technical spot as we are still working off the selling pressure from 2008. I would not worry about significant resistance until we approach $20 and even that would likely be short-lived. Remember, silver is consumed where as gold is largely placed in vaults. Expect silver to outperform over the coming months
As an AMTD customer, this actually works to your favor. They are not allowed to take a fill that is worse than the national best bid or offer. So if one of these parties can execute at a better price than you will immediately be filled. Otherwise it goes out to the entire market.
Since I'm NOT an ameritrade customer I should be complaining :-)
you guys got me on the typo. I'm amazed there aren't more of those as I type fast and proofread faster... My apologies to Roberts
We certainly could have some issues with defaults, but other positions will turn out to be better than expected. That's why the portfolio gets marked to market.
It's too bad the positions aren't liquid enough to short. Otherwise there would be an arbitrage situation and the stock would immediately approach NAV.
Thanks for the comments guys,
I haven't heard the CEO speak, but can say from everything I have read that their company is strong. That's why I'm actually torn - believe in the company but not in the stock.
CGP: I'm not sure that this would be a positive catalyst. We've all see the "buy the rumor, sell the news" scenario played out and this could be a similar situation. Everyone is expecting another push for universal health records, and once we get it the traders move on to the next opportunity. Timing is the hardest part of this trade, but The danger appears to be imminent.
Thanks for the comments guys!
I hear they've got some great research reports for slow market days :-)
Oh well, good thing i'm not sensitive
On Sep 01 01:25 PM TraderMark wrote:
> p.s. not sure why you got 2 negative thumbs up. You didnt pump
> did you?? ;)
Excellent timing on the sell Mark,
I do think you'll get that chance to buy China significantly cheaper but like your strategy of legging into it slowly. Up to this point in 2009, we have seen buying of every dip and while I stay awake at night wondering what will happen when no one is left to buy the dip, the larger trend is still higher.
This morning we're seeing some news about commodity buying again from China - Do you see a split Chinese market where hard assets are driven higher as the China reserve banks continue to build positions - while at the same time many equities associated with China business come under more pressure?
The Yuan peg will also be a huge factor as foreign exchange balances appear tedious. Many question marks surrounding China investments.
Burton A. J - because they would immediately move from "troubled" to "failed." No one wants to do business with a troubled bank. The entire system is built on trust and if you know first hand that a bank is troubled then it is only a matter of time before depositors pull out leaving the bank insolvent.
Ray - I agree with you mostly. The issue is not necessarily that we need MORE regulation as much as we need to require adequate disclosure. If banks were required to show just how ugly their balance sheets were (bring all those skeletons out of the closet and open your book to the public), there would no longer be an incentive to act irresponsibly. Consumers could easily see who were the stalwart banks and the market share would increase. Being responsible at this point would be akin to being profitable. Instead of heavy handed regulation, we need to properly align the incentives so that responsible business practices are rewarded, not discouraged.
Thanks for the comments guys,
Good information guys - Thanks!