market haven monthly newsletter - april 2011

8/7/2019 Market Haven Monthly Newsletter - April 2011

1/13

MARKET HAVEN MONTHLYPAGE 1

T hey say the Fed will finish QE2 in June.That is when they are scheduled to make the last

of their monthly $75 billion purchases of

Treasuries. If the Fed does cease its purchases,

we believe that will be a negative for stocks.

Currently, the single major force holding upequity markets in our opinion is the activity of

the Fed (whos actions are being approved by

the Chinese purchase of Treasuries).

We do not believe, however, that the Fed will

bring an end to their quantitative easing. They

are carrying the economy on their backs. They

have been doing this since the U.S. fell on its

face in 2008. The administration picked up the

economy and began carrying it. The thinking

was, the economy would heal soonaided by the

brilliant capital allocation of the government

and then be back on its own feet in no time.

At that point in time, the thinking goes, the

government would be able to take some time to

patch itself up from the injuries it sustained in

order to carry the much larger wounded patient

on its back.

But what if, in the process of carrying the very

heavy patient on its back, the government

staggered and swayed, wandering off course

from where the economy was intending to go?

What if the government grossly underestimated

how long it would need to carry the economy?Would it continue to try to use government

policies to reach escape velocity even to its own

peril, thinking that more of the same will solve

the developing issues the whole while?

We believe the economy will continue to heal in

spite of the governments efforts. We believe the

U.S. economy will stand on its own feet. We

dont believe the government is stimulating a

healthy recovery and we dont believe it realizes

that its efforts are actually impairing the

recovery and creating another bubble. As a

consequence, not only does the economy have to

repair and delever, but it also has to create

workarounds for the harmful effects of the

governments misallocation of capital.

Thankfully, our economy is strong enough to

compensate for the misguided policies of our

leadership. But there will be consequences.

Market Haven Monthly

2011

APRIL


2/13


Wheres the Va lue?

Stocks

Our Static Model is an easy way to hedge out

much of the market risk in an unemotional way.

Through regular rebalancing and a fairly

conservative asset allocation, the portfolio has

done a good job of dampening volatility risk.

Additionally, the beta of our long portfolio has

historically been about 1.3 allowing investors to

get full market exposure while leaving some

cash on the sidelines. Net long exposure for the

Static Model is +50%. Our Timing Model, on the

other hand, factors in market valuations and

adjusts market exposure regularly. Net long

exposure currently is -30%.

Strategy StaticModel

TimingModel

Long Exposure +80% 0%

Short Exposure -30% -30%

Net Exposure +50% -30%

Market p/es are at 17.2x only slightly down

from last month. We would bet on limited

upside and lots of downside potential from here.Earnings are above trend and still rising. We

expect this to continue for a few more quarters,

which could contribute to stock gains.

Eventually, that will change. The rising yield

environment is not good for stocks. Corporate

spreads in the 80th percentile dont bode well for

stock returns either. One more thing wed like to

mention is that only 22 stocks make it through

our screens as buy candidates out of almost

2,500 stocks. That is less than half the usual buy

candidates.

What continues to give us pause is the Feds

loose monetary policy which still has the

potential to provide some more strength to

equities near term. Nevertheless, we wouldntadvise investors to be greedy and try to time the

tops. When conditions are iffy, move some

money to the sidelines.

One more thing to mention here is the number

of smart investors who are coming out as

proponents of stocks. Guys like Tepper,

Cooperman, Baron, et al. That is puzzling to us.They are spelling out the argument that bonds

are lousy investments; ergo stocks are the place

to be. Certainly the money flows could turn to

stocks and drive prices higher, but we are not

good market timers or chartists. Nor do we

trade on sentiment. We make recommendations

based on fundamentals and must stick to our

knitting.


3/13


Sectors

Since the number of companies making it

through our screen has diminished significantly,

it makes the sector weights appear a little more

dramatic than usual. Relative to the market as a

whole, our screens are showing that the best

places to find value are in materials, consumer

staples, technology, and financials.

The steep yield curve is a good environment for

financials, however, the financials continue to

suffer major setbacks recording fresh losses that

are scaring investors. We still think there are

opportunities in this space. Oil continues to run,

and with it oil stocks, as civil unrest spreads

throughout the middle-east. We still like energy

longer-term for the greater secular forces that

will play out. For now the run up in valuations

has left energy stocks too richly valued.

Materials companies have performed well and

still offer attractive valuations. We are buyers

and will name names later in this newsletter.

Individually, there have been some major moves

in some of our stocks recently. Lubrizol was

purchased by Berkshire-Hathaway. The stock

appreciate +30% in one day in response to the

news. Likewise, Cephalon rose +27% in one

day on news that Valeant Pharmaceuticals is

purchasing the company.

Market Cap

Mega cap stocks continue to become cheaper

relative to smaller companies. It is a general ruleof thumb that loose monetary policy benefits

smaller companies and this most recent

experience seems to be consistent with that

thought. Nevertheless, large, stable, profitable,

diversified behemoths are becoming better

values every month. Some of the largest names

are missing earnings expectations which is

sending share prices south for a time. We view

these misses as temporary and short-sighted.

The most short opportunities continue to exist

at the lower capitalization ranges.


4/13


Volatility

March presented some good profit opportunities

for those watching volatility. We laid out our

price target bands because the spikes in

volatility come along quicker than we publish

this newsletter. The VIX began the month at

20.4, jumped up to 29.4 shortly after the

earthquake in Japan and then settled at 17.7 at

month end. If you observed our entry levels, you

would have had a nice month. Well continue to

show those price targets.

VIX Weighting

35.0 0%

Commodities

We have maintained the view for some time that

SLV is undervalued vis--vis GLD. March

reflected some of that value difference. SLV was

up over +11% while GLD didnt beat +2%

which was still better than stocks. Although we

point this out for interested parties, we are not

as interested in owning silver.

The reason we continue to recommend GLD has

to do with the increasing global currency

imbalances. We believe GLD is a great place to

be long term and would continue to add to the

position. The Asian currencies are anywhere

between -35% and -70% undervalued against

the dollar. At some point, that difference will be

corrected. In PIMCOs vernacular, we have a

two-speed world economy. The fixed exchange

rate system that connects the emerging and

developed worlds must break at some point. In

our opinion, until another currency (or

currencies) shows itself to be a viable

replacement for the dollar, gold is the next most

widely accepted currency replacementover

silver.

The Japanese earthquake was an interesting test

that revealed the U.S. is still holding on to its

position as reserve currency. After the quake,

gold actually dropped and Treasury prices rose.

This will change over time.

We also must mention the increased inflation in

commodity prices. While really not demand

driven, we do believe the long-term demand is

there. Additionally, we believe the U.S.

monetary policy will continue to play to this

theme. We are long commodities.


5/13


Some Investment Ideas

Here are a few names that have shown up

recently as potential investment ideas on our

screens. Some of these may appear in the

portfolios. Some may not simply because the

names currently in the portfolio havent worked

their way yet.

Diversification is an important part of our

investment process. We like to have north of 30

names in the long portfolio and 60 or more inour short portfolio. We let the ideas that are

working continue to run. Conversely, the ideas

that are not working become a smaller

proportion of the portfolio simply by the

diminishing market cap they exhibit. This also

lends to the comfort we have taking chances on

stocks that may have headline or operational

risk from time to time.

Currently, there are eight stocks in the long

portfolio with unrealized gains of over +100%.

The average gain for those stocks is +192%.

Deckers Outdoor has been our most

profitable stock in percentage terms with a total

unrealized gain of +400%. There are seven

stocks showing negative unrealized returns so

far. The average loss of those seven is -19%. The

worst returning stock by percent in the long

portfolio is Amedisys . It is down -38% since we

purchased it. However, the stock is up +4.5%

since we recommended it in January.

Dont forget to do your own homework. Were

not your financial advisor so we do not know

your specific financial situation and what

makes sense for you individually. Dont take

anything we talk about as financial advice.

Vale S.A. (VALE) - long

VALE is the worlds largest iron ore miner and

the worlds second largest nickel producer. The

$177 billion company is located in Brazil. Global

demand is a wind to the back of this company. It

has an earnings yield of 9% although it is

expected to grow earnings at 20% per year. We

like the 2.3% dividend yield as well.

Rio Tinto (RIO) - long

RIO is the worlds second largest iron ore miner,

but is very diversified. It also operates in energy,

industrial minerals, aluminum, copper,

diamonds, and gold. The $140 billion company

is domiciled in the U.K. Again, we like the

secular market forces at work. Plus RIO is

attractively priced with an earnings yield of

9.7%. The company has low debt and strong

cash flow. It yields 1.5%.

On Semiconductor (ONNN) - long


6/13


As you may have guessed, ONNN makes

semiconductors. Specifically it makes power and

data management semis to be used primarily in

the auto and appliance markets. ONNN has a $4

billion market cap. It recently purchased

SANYO Semiconductor from SANYO which

should help the companys growth efforts. There

is a lot of cash on the balance sheet with not

much debt. The valuations are reasonable at

9.5x earnings and less than 2x sales. Earnings

growth could present some risk, but ROE is

solid enough to justify current valuations.

IBM (IBM) - long

Here is a $200 billion company that needs no

introduction. We like high quality international

companies during these economic times and

IBM fits the bill. They are priced reasonably at

12x earnings, but are very profitable, which

makes the valuation more compelling. They are

expected to grow earnings 9% per year, but with

an ROE north of 45% we are not that worried if

growth is slower. The markets seem to get hung

up more over growth than profitability. But well

take a no growth company with a positive ROE

over a high growth company with no ROE all

day. The dividend is only 1.5%, but has grown

over 60% in the last three years.

Par Pharmaceutical (PRX) - long

PRX is a $1 billion company that manufactures

generic drugs for the U.S. market. We love the

generics market given the aging demographic of

the U.S. Thats a theme youll get sick of hearing

from us if you read this publication long enough.

The tricky thing about this company is that

more than half of its revenues are derived from

just three products and the generics business is

becoming more and more competitive each year.

We believe PRX is trading cheaply enough with

an earnings yield of 11% that, combined with the

low level of debt on its balance sheet, will either

grow profitably on its own or serve as a good

takeover target.


7/13


Portfolio Changes Last Month

It was probably the biggest month of trading for

us in a very long time. We made 41 trades in the

short portfolio during the month of March.

While we expect turnover in the short portfolio

to be higher than in the long portfolio, this is

unusual.

Nine trades were made in the long portfolio

during the month of March.

Previously Mentioned Ideas

Below are the investment ideas that we have

highlighted in past issues. Additionally, we have

updated the current model recommendation for

each stock.

Marc h 2011

CNOOC Limited (CEO) buy

Credicorp Limited (BAP) buy

Abbott Laboratories (ABT) buy

Newmont Mining Corp (NEM) buy

Harris Corp (HRS) buy

February 2011

LHC Group (LHCG) buy


8/13


Compania Cervecerias Unidas SA (CCU) hold

NetEase.com Inc (NTES) hold

Aflac Inc. (AFL) buy

Microsoft Corp. (MSFT) buy

Janua ry 2011

Global Payments (GPN) buy

Amedisys (AMED) hold

Warnaco Group (WRC) buy

Alliance Resource Parnters LP (ARLP) buy

BHP Billiton ADR (BHP) buy

Dec ember 2010

Harbin Electric (HRBN) buy

Trina Solar (TSL) hold

Best Buy (BBY) buy

MasterCard (MA) buy

Cliffs Natural Resources (CLF) hold

November 2010

Global Payments (GPN) - buy

Research In Motion (RIMM) - buy

Cash America International (CSH) - buy

Telecom Argentina (TEO) - buy

Cephalon (CEPH) - hold

Oc tober 2010

Alpha Natural Resources (ANR) - hold

True Religion Apparel (TRLG) - hold

St. Jude Medical (STJ) - hold

General Dynamics (GD) - buy

Kraft Foods (KFT) - buy


9/13


Newsletter Portfolio Performanc e


10/13


Newsletter Portfolio Performanc e


11/13

MARKET HAVEN MONTHL

Symbol Name Price

Portion Of

Fund Shares Held Value

Current

Rating

NOV National Oilwell Varco Inc $79.27 6.0% 800.00 $63,416.00 HoldWDC WESTERN DIGITAL $37.29 4.9% 1,400.00 $52,206.00 HoldDECK DECKERS OUTDOOR $86.15 4.4% 540.00 $46,521.00 Hold

JOYG Joy Global Inc $98.81 4.2% 450.00 $44,464.50 HoldCOH COACH INC $52.04 3.4% 690.00 $35,907.60 HoldINT WORLD FUEL SERVICES $40.61 3.4% 880.00 $35,736.80 HoldFCX FREEPT-MCMO COPPER & GOLD CL B $55.55 3.2% 620.00 $34,441.00 HoldESV Ensco PLC $57.84 3.1% 560.00 $32,390.40 HoldHLF Herbalife, Limited $81.36 3.0% 390.00 $31,730.40 BuyNEM Newmont Mining Corp Holding Co $54.58 2.7% 520.00 $28,381.60 HoldMIDD MIDDLEBY CORP $93.12 2.6% 300.00 $27,936.00 HoldABT ABBOTT LABORATORIES $49.05 2.6% 560.00 $27,468.00 HoldNTRI NUTRI/SYSTEM INC $14.49 2.5% 1,820.00 $26,371.80 HoldMUR MURPHY OIL $73.42 2.5% 360.00 $26,431.20 HoldARLP ALLIANCE RESOURCE PARTNERS LP $81.43 2.5% 320.00 $26,057.60 HoldAFL AFLAC INC $52.78 2.5% 500.00 $26,390.00 BuyBAP CREDICORP LTD $104.93 2.5% 250.00 $26,232.50 BuyPCP PRECISION CASTPARTS $147.18 2.4% 170.00 $25,020.60 HoldHUM HUMANA INC $69.94 2.4% 360.00 $25,178.40 HoldMA Mastercard Inc $251.72 2.4% 100.00 $25,172.00 BuyMSFT MICROSOFT CORP $25.39 2.3% 970.00 $24,628.30 HoldHRS HARRIS CORP $49.60 2.2% 470.00 $23,312.00 BuyGD GENERAL DYNAMICS $76.56 2.2% 300.00 $22,968.00 BuyBHP BHP Billiton Ltd $95.88 2.2% 240.00 $23,011.20 BuyANR Alpha Natural Resources Inc $59.37 2.1% 370.00 $21,966.90 HoldGPN Global Payments Inc $48.92 2.1% 460.00 $22,503.20 BuyKCI Kinetic Concepts,Inc. $54.42 2.0% 380.00 $20,679.60 HoldTPC Tutor Perini Corp $24.36 1.9% 830.00 $20,218.80 HoldBYI Bally Technologies Inc $37.85 1.9% 540.00 $20,439.00 HoldCEPH CEPHALON INC $76.08 1.9% 270.00 $20,541.60 HoldFRX FOREST LABORATORIES INC $32.30 1.8% 580.00 $18,734.00 HoldJCOM J2 GLOBAL COMMUNICATIONS NEW $29.51 1.8% 650.00 $19,179.88 Hold

ENDP ENDO PHARMACEUTICALS HLDS INC $38.16 1.7% 460.00 $17,553.55 HoldACN Accenture Plc $54.97 1.7% 320.00 $17,590.40 HoldWMT WAL-MART STORES $52.05 1.4% 280.00 $14,574.00 HoldAMED AMEDISYS INC $35.00 1.4% 420.00 $14,700.00 HoldLHCG LHC Group, LLC $30.00 1.3% 460.00 $13,800.00 BuyALGT Allegiant Travel Company $43.81 1.2% 280.00 $12,266.80 HoldMDT MEDTRONIC INC $39.35 1.1% 290.00 $11,411.50 HoldESLT ELBIT SYSTEMS $55.17 1.0% 200.00 $11,034.00 HoldBBY BEST BUY CO INC $28.72 0.8% 290.00 $8,328.80 Hold

Long Portfolio


12/13

MARKET HAVEN MONTHL

Symbol Name Price

Portion Of

Fund Shares Held Value

Current

Rating

WY WEYERHAEUSER CO $24.60 4.5% -3,541.00 ($87,108.60) ShortARMH ARM HOLDINGS ADS $28.17 3.5% -2,410.00 ($67,889.70) ShortMF MF Global Holdings Ltd $8.28 2.9% -6,670.00 ($55,227.60) Short

NATI NATL INSTRUMENTS $32.77 2.1% -1,215.00 ($39,815.55) HoldPEGA PEGASYSTEMS INC $37.97 2.0% -1,030.00 ($39,109.10) HoldPTIE PAIN THERAPEUTICS $9.56 2.0% -4,020.00 ($38,431.20) HoldPXD PIONEER NATURAL RES $101.92 1.9% -350.00 ($35,672.00) ShortFXEN FX ENERGY INC $8.36 1.7% -4,010.00 ($33,523.60) HoldDNDN DENDREON CORP $37.43 1.7% -860.00 ($32,189.80) ShortCDXS Codexis Inc $11.82 1.7% -2,720.00 ($32,150.40) ShortREV REVLON INC'A' $15.87 1.7% -2,010.00 ($31,898.70) ShortOCN OCWEN FINANCIAL $11.02 1.6% -2,850.00 ($31,407.00) ShortCPTS CONCEPTUS INC $14.47 1.6% -2,170.00 ($31,399.90) ShortCOG CABOT OIL & GAS 'A' $52.97 1.6% -590.00 ($31,252.30) ShortRDEA Ardea Biosciences Inc $28.69 1.6% -1,080.00 ($30,985.20) ShortDXCM DexCom, Incorporated $15.52 1.6% -1,990.00 ($30,884.80) ShortGDOT Green Dot Corp $42.91 1.6% -710.00 ($30,466.03) ShortHOT STARWOOD HOTELS&RESWORLDWIDE $58.12 1.6% -520.00 ($30,222.40) ShortEVR Evercore Partners Inc $34.29 1.6% -880.00 ($30,175.20) ShortFL Foot Locker Inc $19.72 1.6% -1,530.00 ($30,171.60) HoldMCHP MICROCHIP TECHNOLOGY $38.01 1.6% -790.00 ($30,027.90) HoldQDEL QUIDEL CORP $11.96 1.6% -2,510.00 ($30,019.60) ShortTLM TALISMAN ENERGY $24.70 1.6% -1,210.00 ($29,887.00) ShortMNTA Momenta Pharmaceuticals Inc $15.85 1.5% -1,850.00 ($29,322.50) ShortEXEL EXELIXIS INC $11.33 1.5% -2,570.00 ($29,118.10) ShortFICO Fair Isaac Inc $31.61 1.5% -910.00 ($28,765.10) ShortSRSL SRS LABS $8.54 1.5% -3,330.00 ($28,437.87) ShortLEN LENNAR CORP $18.12 1.5% -1,550.00 ($28,086.00) ShortCMO CAPSTEAD MORTGAGE(NEW) $12.78 1.5% -2,190.00 ($27,988.20) HoldLUX LUXOTTICA GROUP ADS $32.78 1.3% -780.00 ($25,568.40) ShortFO FORTUNE BRANDS $61.89 1.3% -410.00 ($25,374.90) ShortLTD Limited Brands $32.88 1.3% -770.00 ($25,317.60) Hold

TIF TIFFANY & CO $61.44 1.3% -410.00 ($25,190.40) HoldEXP Eagle Materials Inc $30.26 1.3% -830.00 ($25,115.80) ShortNOVL NOVELL INC $5.93 1.3% -4,220.00 ($25,024.60) ShortACXM ACXIOM CORP $14.35 1.3% -1,710.00 ($24,538.50) HoldFDX FEDEX CORP $93.55 1.3% -260.00 ($24,323.00) HoldLGF LIONS GATE ENTERTAINMENT $6.25 1.3% -3,860.00 ($24,125.00) HoldEQT EQT Corp $49.90 1.2% -480.00 ($23,952.00) HoldMAN MANPOWER INC $62.88 1.2% -380.00 ($23,894.40) ShortKW Kennedy-Wilson Holdings Inc $10.86 1.2% -2,180.00 ($23,674.80) HoldBMS BEMIS CO $32.81 1.2% -720.00 ($23,623.20) HoldGKSR G & K SERVICES CL'A' $33.25 1.2% -710.00 ($23,607.50) HoldSTEI STEWART ENTERPRISES INC CL A $7.64 1.2% -3,080.00 ($23,531.20) ShortCADX Cadence Pharmaceuticals, Incorporated $9.18 1.2% -2,510.00 ($23,041.80) HoldALE Allete Inc $38.97 1.2% -580.00 ($22,602.60) HoldMSCC MICROSEMI CORP $20.71 1.2% -1,080.00 ($22,366.80) ShortPFS Provident Financial $14.80 1.2% -1,510.00 ($22,348.00) HoldTXI TEXAS INDUS $45.23 1.1% -480.00 ($21,710.35) HoldWTR Aqua America Inc $22.89 1.1% -930.00 ($21,287.70) HoldCFR CULLEN/FROST BANKERS $59.02 1.1% -360.00 ($21,247.20) HoldHTLD HEARTLAND EXPRESS $17.54 1.1% -1,200.00 ($21,051.00) HoldCBSH COMMERCE BANCSHARES $40.44 1.0% -497.00 ($20,098.68) HoldPC Panasonic Corp $12.59 1.0% -1,590.00 ($20,018.10) HoldRIGL RIGEL PHARMACEUTICALS $7.11 1.0% -2,800.00 ($19,908.00) HoldNVEC NVE Corporation $56.34 1.0% -350.00 ($19,719.00) HoldAA ALCOA INC $17.66 1.0% -1,060.00 ($18,719.60) HoldMYGN MYRIAD GENETICS $20.15 1.0% -920.00 ($18,538.00) HoldCYN CITY NATIONAL $57.05 1.0% -320.00 ($18,256.00) HoldXXIA IXIA $15.88 0.9% -1,090.00 ($17,309.20) ShortCMA COMERICA INC $36.72 0.9% -470.00 ($17,258.40) Hold

Short Portfolio


13/13

MARKET HAVEN MONTHL

CVC CABLEVISION SYS'A' $34.61 0.9% -480.00 ($16,612.80) HoldLM LEGG MASON INC $36.09 0.9% -460.00 ($16,601.40) HoldOMX OfficeMax Inc $12.94 0.8% -1,150.00 ($14,881.00) HoldNSM NATL SEMICONDUCTOR $14.34 0.8% -1,030.00 ($14,770.20) HoldCWT CALIF WATER SVC GRP DELAWARE $37.17 0.7% -350.00 ($13,009.50) HoldCNW Con-way Inc $39.29 0.7% -330.00 ($12,965.70) HoldMLM MARTIN MARIETTA MATERIALS $89.67 0.7% -140.00 ($12,553.80) ShortONB OLD NATL BANCORP(IND) $10.72 0.6% -1,130.00 ($12,113.60) ShortJNY The Jones Group Inc $13.75 0.6% -770.00 ($10,587.50) Hold

CGA China Green Agriculture Inc $6.90 0.5% -1,510.00 ($10,419.00) ShortBXS BANCORPSOUTH $15.45 0.5% -640.00 ($9,888.00) ShortFTR Frontier Communications Corp $8.22 0.4% -1,040.00 ($8,548.80) HoldPBCT PEOPLE'S BANK $12.58 0.4% -660.00 ($8,302.80) HoldHQS HQ Sustainable Maritime Indust $3.06 0.4% -2,290.00 ($7,007.40) HoldBKS BARNES & NOBLE $9.19 0.3% -600.00 ($5,514.00) Hold

market haven monthly newsletter - april 2011

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