Fleck on Fannie & INTC
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The Skinny on Fannie
"The company reported earnings of $23 billion over the last four years. The SEC is making them adjust them by $9 billion. So let's say earnings are really around $14 billion over four years. Fourteen billion, divided by four years, divided by one billion shares outstanding equals $3.50 per share. If their funding costs increase marginally, some portion of that will be wiped out. But assuming that doesn't happen, if we apply Countrywide Credit's multiple to the stock, we get a $35 to $40 stock price."
John also wrote: "One person asked me how the SEC investigation concluded so quickly. The answer is that the accounting irregularities are so obvious that there was no real subjectivity to the conclusion. In my mind, the charge proves that the company's model is not really profitable. I am sure those large institutions that really like the stock will buy more on dips. I'm also sure that analysts who have been recommending the stock will re-recommend it.
"My bet is that volatility over the next year will pick up dramatically as each new event will bring a little more light to my conclusion: The company's model is much riskier and has much thinner margins than the market currently believes. The only thing that allows the company to make 'a little money' is extremely cheap funding." That's as good a snapshot of Fannie Mae as one could ask for, and I agree with everything that John said. He's done a lot of work on the subject and is a very thoughtful fellow besides.
That Fannie Mae's news was greeted with a yawn is also a testimony to the insanity and speculation that we see in the market today. The level of complacency, smugness, brashness, arrogance, and delusion is probably the highest of all time, in my opinion. Obviously, if my view of the world and what's lurking out there is incorrect, then the assessment I've just given you is also incorrect. I think that's what 2005 is going to be all about -- sorting out just who is right on these big issues.
Fred Hickey's Good Chip Itanic
Turning to stock news for a moment, one of my favorite shorts and put positions over the last couple years, and certainly the last year, has been Intel. Last night, in another development indicating that AMD has indeed swooped Intel, Hewlett-Packard transferred the Itanium chip design team back to Intel. For those who don't know, Hewlett-Packard helped Intel develop the Itanium, the chip that Fred Hickey dubbed the "Itanic."
As I have detailed over the course of this year, AMD has beaten Intel on the design front with the Opteron and the Athlon. Those two parts continue to win all kinds of awards from unbiased observers, indicating that AMD has built a better mousetrap. To make that fact obvious to the world, all that we've really been waiting for is their endorsement by Dell. I believe that sometime in 2005, Dell will be forced to admit as much, due to demands from the marketplace. When that happens, I think it will be clear that as a technology company, Intel is truly an also-ran.
As I've stated often, Intel has become essentially a marketing company. They've used their prior monopoly status to beat people up to do what they wanted. They've kept foisting products on the market that are not really better, as they have attempted to make everybody think that improvement is all about clock speed.
See a Mess Coalesce for Intel
The realization by investors that Intel is technologically in second place is going to hit the company at a time when their balance sheet is swimming in inventory and their end market is saturated. Meanwhile, the PC market is liable to be even more moribund in 2005 than it was in 2004, because a lot of the equipment was bought to take advantage of the deduction for depreciation that expires this year.
Given how cooked I feel that Intel is, and given the ridiculously low level of option volatility, I am going to suggest (for the first time, and probably the last time ever) a specific option for folks to examine, to see if it fits into their investment profile. To me, the Intel 20s of January 2006 at around $1.30 are a unique way to capture macro trouble in 2005, Intel-specific trouble, and the absurdly low level of options volatility. I myself have purchased a handful of them in the last couple days, and I plan to buy more.
I am not suggesting that everyone go out and do this. I am merely suggesting that folks who operate in those kinds of instruments investigate them. Though options do allow you to control your risk, they oftentimes go to option heaven and you lose your entire investment, a not-trivial matter. In any case, that's the last I'll have to say about those options. If you decide to take a fling, please don't email me and ask me what to do next, because that would mean that you did something because I did it, not because you thought it was a good idea. |
