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5/6/10 Macro View and Specific Equity Picks for the Long Term

|Includes:CNU, FMCC, HAS, LeapFrog Enterprises Inc. (LF), MAT, OMPI, TRV

              Officials confirmed that oil from the obliterated drilling platform in the Gulf Coast has touched land for the first time. Meanwhile, the Dow Jones dropped a breathtaking 1,000 points – before regaining much of that ground – to close several hundred points in the red.

          Overseas, Greece – ancient nest of philosophy, arts, and literature – is in the midst of great civil unrest: mobs are marching in the streets, overturning cars, clashing with riot police, and throwing fire bombs into the windows of banks. The Greek sovereign debt issue, compounded by years of falsified accounting figures, has reached a tipping point: commentators and analysts suggest the problem may spread through the EU like wildfire.

          On another front, Freddie Mac, the federally-backed housing agency, has come forward indicating it requires an additional $10 billion worth of funding to shore up its balance sheet. Also, in Norway, the volcano continues to pose potential problems to the airlines.

          All in all, there are enough systemic risk factors present in the global economy to create an environment of great uncertainty. This is showing up both in high volatility, and in what we might expect to see as a broad pullback in the equity markets following a 14-month run-up in the wake of the “great recession.”

          Boatfund is now positioned with well over 50% of holdings in liquid cash. Additionally, the remaining equity positions which have yielded fair return to date have been tagged with stop-loss orders to lock in profits should the markets spiral downwards again.

          Today, I cut my stake in Travelers Insurance (“TRV”) by 50%, leaving enough of a stake to easily make back roughly $20 in losses (that’s right, twenty bucks), on a good day, while providing exposure closer to 10% of my overall portfolio and creating, what for me, is a more pleasing level of risk.

          I have been building a stake in LeapFrog (“LF”), on the basis of what I perceive to be a wide economic mote. Leapfrog is the educational gaming name which is fairly universally recognized. Unfortunately, the company has not been profitable, and long term revenues have been shrinking over the last few years.

          This investment is of interest because they have been able to cut costs faster than their revenue has been decreasing. If the trends are sustainable, their EPS will be in the black by Q4 2010, their biggest season (Christmas). I believe their debt load is tolerable, their brand name is worthwhile, their stock has been badly pummeled, Milken (yes, Michael Milken) – who has a net worth of $2 billion – is a major shareholder, and with a market cap of under $400 million this company could easily exceed the toy-industry standard P/E of 15. Finally, another point of my investment thesis is that Mattel and Hasbro are flush with cash – they have so many millions of dollars lying around in the wake of corporate hording; that for them to scoop up Leapfrog in an all-cash offer is not out of the realm of possibility.

          Other long term picks I continue to maintain positions in are Obagi (“OMPI”) – based upon the BARE theme – and Continucare (“CNU”), for overall strong fundamentals and underpriced shares, further exasperated by misunderstandings about the Medicare Advantage cut-backs and failure to recognize CNU’s ability to garner alternative payor sources.


Disclosure: Long LF, Long OMPI, Long CNU