Jeffrey McLarty

What does today’s market have to do with 3 mile Island? Oil.

I sat down with a top manager at Ontario Power Generation (the largest nuclear site in North America) late last night, a mechanical engineer and my girlfriend’s father. It is his opinion that the nuclear industry is a unique one, in the way that competition actually share intelligence and research, rather than attempt to leverage it over the competition. The reason is that, any accident looks bad on the entire industry. It is his opinion that without the problems at 3 mile island, the US would today, have ~70% of their power from nuclear. Instead, American’s have a sever case of NIMBY syndrome, and it stems from lack of education about the sector.

You can see where, uranium prices would be higher, oil would be cheaper, and the markets would not be selling off on oil climbing.

Nuclear is one of the only answers, technologically, because of the requirement for the base load. Sure, wind and solar can offset the need, but a sustainable base load, is a feat of engineering.

The picture show above, is 3 mile island.

Blows my mind, that a major market force, can, in this day and edge be summed up with “People are scared of what they do not understand”.

I have never met a blogger, who didn’t fall into the upper 1 percentile of most interesting and driven of people. For some reason they/we strive towards this surreal form of winning at whatever they/we do. I think, just because they/we want to.

First off line connection I ever made was with TJ Lynch, a real estate agent down on Roatan island. I picked him, because of his blog. I get down there, turns out the guy is just a complete pro, dominating his field, and a creative pioneer. Ever since then, I have made a point of going out of my way and/or jumping at the chance to touch base and connect with bloggers off line. Today’s meeting with Howard, and the one a few weeks ago with Dan, were both more supporting evidence for the thoughts outlined above. Both of them into money management, way too cool of guys, generous with information and guidance, driven, sharp, I could go on…but let’s just say…both gentlemen are seemingly at the top of their game.

Maybe the link (pardon the pun) is that the same type of people, all see the value of sharing information. That’s why, I’m long the flow.

I will continue to reach out to the community, because I think the ‘sphere brings out  some of the best of the best, who just want to dominate at whatever it is they do…

RIMM announces tomorrow.

It has become, a deal stock.  Everybody talks about it, everybody has traded it, everybody has a story about making huge bucks or losing some coin (mainly the shorts). 

See, same applies to GOOG.  Remember when GOOG announced, everybody had ZERO expectations, people were buying puts, and selling calls, scared it was going to tank…and then…and then…they blew away every-body’s guesses out of the water.  That’s all they are, guesses.  Look back at the twitter tape, there was only one bull in my twitter circle, who was long and proud.  Me.  Andy wrote a straddle, and got owned. See, you can look at the chart and see the pansies and bears sold all their shares or went short ahead of the CC.  That’s causality at work.

The market anticipated so much bad news, it priced it into the stock.  This happens, especially to deal stocks.  You know the ones, AAPL, GOOG, RIMM etc.

This is how you tell a deal stock, from not a deal stock:  Find an idiot, and ask them, if they know what a PE ratio is.  If they don’t know what a PE ratio is, you can use them as a test subject for your stock.  Ask them what the ticker is for company ABC.  If they know it, it’s a deal stock.  If they don’t, you guessed it, not a deal stock.

It’s also why, you don’t always have to chase smart money, you can chase dumb money too.  Deal stocks, they go up, higher and faster than anybody with a brain could anticipate. Because these are the only stocks idiots know about.  Idiots find out about them, and think, ‘maybe it’s going to keep going up…I better buy some’.  Self fulfilling prophecy.  So, there are more buyers for those stocks as opposed to the other, non deal stocks.

HEK is not a deal stock.  Will it one day be a deal stock, I hope so, but doubt it.  Because deal stock buyers, laugh in the face of multiplier expansion.

I am going to be off playing Tycoon in Toronto tomorrow…so I’m going to predict, my prediction.  Since RIM has become a deal stock, it’s going to go the opposite direction of the color it trades tomorrow.   If we see red ahead of the CC, look for springboard action in the AM, and get long at the end of the day.  If we see green, well, look out below.  Unless the chart looks like something leaked, don’t be stupid here.

I’m long either way, and I know I’ll do something dumb if I watch in real time.  I’m long, and I plan to hold right on through the worst of any possible sell off.  See, see right there, what I said, that’s me worrying.  A little light in your head should go off - that’s a bullish tell, that I’m worried about a sell off.  I don’t know anything anymore than the next guy does.

But I do know, markets are causal.  Fickle too.

Yes I am however, long a bunch of deal stocks…trying to quit…but they are just such quick fixes, you know?

Iiiiiiii’m a wierdo, I’m going to live blog, the reading of a book.  That’s right, I’m going to sit down, read a book from start to finish, reflect every other page and type when appropriate.  Question for my reader(s?) is, which one should I do?  If you don’t pick one, I’ll just…well…pick one myself, and do it whether you like it or not.

Joseph E. Stiglitz - Globalization & It’s Discontents

Joseph E. Stiglitz - Making Globalization Work

Alan Greenspan - Age of Turbulence: Adventures in a New World

Charlie Munger - Poor Charlie’s Almanack

Micheal Porter - Competitive Strategy: Techniques for analyzing Industries and Competitors

William Gross - Bill Gross on Investing

…it’ll be at least a week, because I didn’t pay extra for express shipping.  If you’re long AMZN, you can thank me later.

If you think I’m making up the problem of water scarcity, or you think it’s a problem for places far far away, or it’s just another hippy trend that isn’t real - talk to the developers in California who have piles of wood stacked up that they can’t turn into houses because the state won’t approve “will-serve” letters. In other words, the state can’t promise they will serve fresh water. Trust me, the state has no motive to stop economic growth like this.

Desalination is the process by which most of the world will likely turn to, as they need fresh water. Not too many investments open to the retail investor, yet. But eyes are open, and ideas are rampant.

I already own Hyflux. And I’ll likely buy a little ERII if I can get it for anywhere near $6 upon the ipo.

But thinking outside the box here, I’d like to own the names selling the membranes, and doing the chlorination & dechlorination, or pH neutralization. My favorite idea on how to invest in desal is buy the guys handelling/channeling the brine. The brine is the salt the facilities need to deal with. Usually it means dumping it back in the ocean, which, on a conservation of mass basis looks okay, but studies have shown clouds of shrimp dieing and discoloration of beaches. Of course, less unique, you could own the names selling oil-less pumps. That seems easy.

Check out this facility in Cypress:

Check out this bore in Australia:

It’s what’s used to drill horizontal holes for the brine. Link to Source.

Scott & Thiago both told me, independently, a while back about a company soon to IPO called Energy Recovery.

Less than 48 hours ago, they filed a bunch of paperwork with the SEC.

I’ve spent about 30 minutes looking at the numbers so far.  $8, the midpoint of their expected range, implies 57x 2007 ep, and Q1 ‘08 came in with lower eps than Q1 ‘07 by a penny.   Of course, sales were higher, and we are talking small cap here, to be priced between $250M and $500M, likely.

…is frigging cool

Search for words that are IN THE PICTURE…yah, like OCR recognition.  I see Flicker, Google, Microsoft, Facebook et al, snapping up this company soon!

http://www.truveo.com/Evernote-Image-Search-and-Capture-Demo-full/id/755121582 

Unless CCJ hits $55, or ENER hits $70, or CSIQ hits $45 (these are all >10% moves), and I take profits as planned on the July FSLR’s…all before tomorrow, and since I closed a 3 week trace on FCX…then I add 1.4% to my bottom line this month, or generated 5.7% on cash tied up…however you want to look at it.

All from shorting puts, for less than a month.

Which is why, I started http://FivePerFive.wordpress.com …read my logic on the ‘about page’.

And this doesn’t even include my buy-write retirement account where I was short puts to aquire RSX, and never got hit…or wrote out of the money $36’s holding HXU.to

booyah baby.

2nd biggest exporter in the world, is China. 2nd largest importer is Hong Kong.

The graph is per capita, the previous two facts are not.

Can you guess where there is opportunity is?

Source: China Water & Drinks Inc. 2007 Annual Report.

As oil rises, and urbanization trends continue, I’m thinking about what might happen.  Shipping rates go up - duh.  So, I think sales and margins will improve for concentrated solutions, where the competition selling finished products will be squeezed.

Eg. Canned frozen juice vs the 2L of ready to drink stuff.  If you have to ship 2L, you’ll pay more to ship a very comparable product.

…just thinking out loud…likely many have thought about this already…it just hit me today.

Investors & traders can now use real-time (Ok, 20 minute delayed) data from google finance, in google spreadsheets. Maybe this is nothing new, but I just jumped on it last night, and played around. I added all the US tickers I have positions in to a spreadsheet, then also added either my own weighted cost of capital present ‘fair value’ or morningstar’s ‘fair value’, along side the real-time quotes. I calculated what percentage they were away from the fair value. Here is the chart, I believe this chart will be dynamic, that is, it will change as market data does, and as I change the chart. For now, google spread sheet doesn’t let you play with a legend, so I couldn’t label the stocks. But in order on the chart below from left to right are:

AAPL, CCC, CLC, CL, CPA, CVA, FCX, GOOG, HEK, FSLR, ITU, JCI, MA, MFC, NTDOY, RIG, RIO, TTEK, UNG, V, VE

So you can read, AAPL, is about 4% below my fair value. I should be adding to CVA, JCI, RIO & VE (the four lowest bars) and FSLR is the highest above it’s fair value estimate so, investing via shorting puts seems like the right way to play it, for now.

I’m going to see what else I can cook up, or maybe i’ll go to sleep instead.

Note: UNG obviously doesn’t have a ‘fair value’ estimate. It’s the spot near the right with no bar.

I’m younger than most people into stocks, as such, there seems to be a demographic boom of sorts of my friends wondering about getting started. I have brainstormed, regarding 18 valuable concepts. Some are obvious, some are not. All seem simple, most are not.

1. Market Causality is Fickle

Stocks anticipate good news, and bad news. So, if you’re buying something, because of some event in the near future, the market may or may not have all the upside/downside calculated into the stock already. This is sometimes referred to as sentiment. It’s the reason a company can release record profits and the stock fall, or the flip side is, if a company doesn’t lose as much money as the street expected it will go up. This applies to all sorts of news.

2. The Present Value Of Money

Stocks are the present value of the cash flows associated with them. If the cash flows change or are expected to change, the stock moves. This means that target prices are dumb, and investors need to decide for themselves, if the current market price, is a fair price to buy or sell at.

3. Investments are relative

If investment A is likely to return 10%, while investment B is just as likely to return 20%, investment A will fall in value, the yield on it will rise as people sell it, and the yield on B will fall as people buy it. This is the main reason stocks movement is correlated. Equilibrium is constantly chased.

4. Greater Fool Theory & Time: Why Stocks Go Up

Two reasons stocks appreciate in value: 1. People bid up the price, essentially a supply & demand problem for a finite number of a certain stock. 2. Time slips by and the present value of the growing cash flow that the company generates increases as well as produces a yield on equity. Both of these have a reciprocal for why stocks go down.

5. Trends are Trump

A good business plan will fail if trends are not on the side of the investor. A bad business plan can succeed if the trends are on its side. Basically, trends are the wind that can either power the sail, or rock the canoe

6. Stocks are Shares

You own the good times and the bad times associated with a company, after you purchase stock. Deal with it. Become a client if you’re not already. Refer a friend if appropriate. Check in on the company however you can, get creative. You now own parts of that business, a business you want to see do well. This advice, is just so that you get into it, and have fun.

7. Markets always over-react

Only thing guaranteed on Wall-Street. Both directions. The market will stay irrational longer than you can stay rational.

8. Value vs Growth

Understand the difference, and risk associated with them. Value stocks are generally safer, with lower yields, while growth stocks are riskier and more volatile.

9. Reports: Read Them

Companies write reports for reasons. Read them all, if possible. 100 times better than internet forums.

10. Luck & Profit have zero correlation

Anybody who calls the market a ‘gamble’ couldn’t be more wrong, or stupid. Luck has nothing to do with profits, I suppose with the exception of factors driving you towards the purchase or sale. I’m talking about, people who “hope” their stock will go up, or maybe they will get “lucky” with this one. Luck is to casinos what intelligence is to the capital markets.

11. Analysts are just “doing their job”

There is little incentive for them to do stick their neck out, the majority run with the heard, and do their job so that they can go home when they are done. There are good ones, and bad ones. Dumb ones, and smart ones. Just like any other employee.

12. Options are tools, not toys

Just like everything else, they can be used as an indicator of the future, as well as are available if needed. Investors should understand them, at the least, and use them when appropriate like tools – not toys. Leverage is a double edged sword, and time pushes that sword against your neck if you’re long plain vanilla.

13. Cash flows Statements & Balance Sheets: Use them

These are the history of the company, the stuff behind the scenes, that most retail doesn’t understand. Learn about them on your own, and use the companies’ numbers if possible, because the quality of free data often reflects the price of the data.

14. Diversify, it’s fun

And you’ll go insane with paper draw downs if you hold only one or two stocks. You’ll make less irrational emotion based decisions if you do.

15. Technical Analysis = Emotions of Wall Street

Many dorks all around the world have spent allot of time perfecting some fancy mathematical models to prove that emotions effect wall street. I’m in the camp that believes news and fundamentals will trump technical analysis, and thus, put very little emphasis on using it. While it’s true, the technical analysis seems to work, it’s not smart to scale it’s application as well as time consuming to apply with short term trading strategies.

16. Nothing ‘keeps on going up or down’ for no reason

If you ever find yourself saying “I think it’s going to keep going up/down”, and you have no reason why, you’re being silly. You’re under informed, you should do more homework. I recommend 26 hours per day.

17. Law of Large Numbers

Big things move slower. Realize what the market capitalization of a company is no exception to this rule.

18. Due Diligence is for Under Performers

If you see a stock running at all time highs, and upon a 30 - 60 minute inspection you want to buy, do it. Buy a little. Then, read up, learn more, follow the company and add or sell if appropriate.

…Headed to for a week of (attempted) surfing…trouble…good times…and who knows what else…likely we’ll squeeze vegas in.  Going with two buddies who I went to university with, to visit our friend who is working at Becker Automotive Design …the makers of Jet Van.

Their customer list, is very ’je ne sais quoi’…includes Eminem, Dr. Dre, Jennifer Lopez, Adam Sandler, Shaq, Ben Affleck…lol…

I’m diving in, actually, I’ve already taken the plunge into the pools of information that’s out there on the topic of the world’s water situation.  It seems with every report I read, I get new ideas, and confirm old ones.  I definitely am more informed, and have changed some opinions on certain names, since my overhaul on PHO.  I’m by no means done learning about this sector, so please leave feedback if appropriate.

The world is about to spend $1 - $1.5 T over the next 20 years, to attempt to offset this sloppy problem:

As of 2006, one in three countries had water shortages.

Developing countries only use 11% of their water for industrial use.  Developed countries us 42% of their supply for industrial use.

The World Bank’s Forecast for the Middle East and North Africa suggests a 50% fall in per-capita supply by 2050.

Dubai obtains 95%, Saudi Arabia 70%, of their water from desalination. Think about that, hard.  Currently with desal, it takes 10MW to produce 100,000 L of water, making it 10x more expensive than harvesting rain water.  Numbers confirming this have varied depending on the report you read.  Apparently desal is 3x to 4x more efficient than it was 30 years ago…but same holds for lots of stuff.

In the UK, the infrastructure leaks 4.5B litres per day.  That’s a bath-tub per person PER DAY.

Average infrastructure in the US is 60 - 80 years old, engineers say, they were built for 50.

Currently, the US subsidizes 50% of the countries drinking water.

In North America, we treat 100% of the water in municipal systems to levels safe for human consumption, but only actually consume 1%.

…ok, I’m tired of re-iterating facts, and yes I have references, good ones too - but I just don’t care if you believe me or not.

The entire global ‘Water’ sector, is valued at $425B, by Goldman Sachs. So quick math, there’s room for at least a doubling, and likely a tripling in market caps inside the next 10 years as the work and contracts fall into place.  Since markets always over react, water will likely be a $2T industry by ~2020.  …But I’m just a young go getter, trying to figure this mess out.  I feel like I might be lagging the crowd in this investment thesis, because I’ve read lots of dated piece.  Who knows(?) While I may have lived through many other macro economic trends, I’m too young to have completely experienced (and understood) them, although I have read of many.

I already own TTEK and I’m getting more and more confident, less and less embarrased in my HEK purchase I made a week ago for different reasons I won’t mention.  VE is looking good to me at these levels, likely will also pull the trigger Monday.  I want MIL, PNR, BMI, ITRI, a little cheaper, then I’ll be a buyer.  ROP too.  Going to keep my eye on INSU, first sign of strength, I’ll be on-top of it. Not sure if I want to bother with HYFLY.SI, valuation is a bit high.

I’ve said that I wasn’t sure infrastructure was the best way to invest, but I’m taking that back and I’m looking for ONE good infrastructure stock.

The following is funny twitter conversation about 3 tickers and only two stocks, along with some insight. 

For a week now, I’ve been chasing CCC with limit orders, I might just pull the trigger Monday AM.  You may or may not know this man and this man already did. Of course I asked what’s the better play? He answered.  I looked at CLE, both of them, and was confused. But didn’t question him, and shrugged it off.  “Probably a typo” I thought.  I figured, he’ll probably blog it later.  A day or two later, I learned about CLC in a report by Goldman Sachs. It took me reading one annual report to convince me to buy some CLC…the lights went on inside my head - turns out, my name wasn’t the only thing he made a typo on.  I laughed.   I think this is a sign…I’m buying some CLC tomorrow, and save a little cash for a pullback.

In my opinion, and I would like yours on this, the trend in water, along with solar, wind, global banks, green stuff, and nuclear is what my generation of investors should be riding. no? are there others?  I’m talking 20 year trends here.

PS. I’m also finally buying CVA first thing in the AM too…but that’s another post.