Tuesday, December 22, 2009

Bought 50 PVSW at 4.72-Lottery Ticket/Refiners/Bought 50 AMSWA at 6.02-LT/Bought 50 ACTI at 2.20-LT/Volatility and Vix Asset Allocation Model

The Great Leader here at HQ, always searching for a new Head Trader to replace the aging and frequently erratic Old Geezer, welcomed AL, Tennessee's favorite son, former VP, to HQ's trading operation, as our newly designated HT for the day. The Great Leader asked AL to do the honors and to turn on the IMAC computer at the HG trading desk. Al just looked perplexed, like the OG who sometimes tried to enter a trade when the computer was off. AL asked the GL in a whisper, barely audible except to the RB, "how do you turn this contraption on?", he said. Or, some think they heard that AL first asked in a whisper: "what was this contraption?" Whatever Al said, it caused the GL to turn a little red, blush a little, in fact that was the first time the peon minions and the minion peons at HQ saw a slight blush in the face of the GL, for surely the inventor of the internet could turn on a computer, we all thought, but none dared to utter a word, including the closet Republican LB who almost giggled, as the entire staff here at HQ started in unison to look at the side wall, as if the most interesting thing in the world was the remains of the bug the GL had just smashed with his shoe.

Now, some would later say that the GL had planted that bug before the incident with AL and the computer, just in case AL had a problem starting it, which would be embarrassing for the founder of the internet to say the least, and why was the bug strategically placed on the GL's shoe? Well, you can see what happened, really, everybody forgot about Al, the internet, and the trading desk, and just focused on that bug on the wall, when the GL, hardly making a sound, moving as fast as a caffeinated slightly obese man (according to that Body Mass Index promulgated by commie liberals) could move, slipped over to the trading desk and turned the computer on for AL, our favorite son here in the only known oasis for him in the SUV Capital of the World.

To digress, it may seem odd to refer to the Body Mass Index as a commie liberal plot against American Capitalism. Healthy Weight: Body Mass Index (BMI)} Headknocker was the first to see its true underlying purpose, an effort to undermine the very fabric of American Capitalism and to send our economy into a perpetual downward spiral. Item # 4 Sold AVY/ Really, isn't it obvious when you think about. How much of the economy is dependent on first putting excess weight on and then taking it off? Need HK say more on that subject. A Modest Proposal to the Democratic Party: Forget About the Surtax and Try a Tax on Fat/Charlie Rangel-A Pillar of Tax Morality? The More You Weigh-The More You Pay/ It is sometimes hard to follow the reasoning of the GL, but who could fault its logic? While many may have difficulty seeing the true purpose of the Body Mass Index, certainly all can see that the inventor of air conditioning, rather than W, was responsible for the Iraq Invasion.

The GL was looking about as nervous as anyone recalls seeing. Some even contend that the GL's hand trembled a bit when Al started to focus on the blinking green and red lights at the trading desk, and inquired whether he should buy just the ones blinking green. Fortunately, AL had to leave on urgent business before the start of the trading day, OG was returned as the HT, and some claim that they saw a glimmer of relief in the HK's face.

1. Bought 50 PVSW at $4.72-Lottery Ticket Category Yesterday (see disclaimer). Frequent readers of this blog know that the LB ventures far and wide in search of LTs. It is possible to buy just about anything since understanding the business is not a hard and fast requirement for LTs. LB will quote from Pervasive's last 10-Q filing to describe its business:

"Pervasive Software is a global software and services company focused on helping companies get the most out of their data investments through embeddable data management and agile integration software. Our embeddable Pervasive PSQL database engine allows organizations to successfully embrace new technologies while maintaining application compatibility and robust database reliability in a near-zero database administration environment. Our agile, multi-purpose Pervasive Data Integrator integration platform accelerates the sharing of information between multiple databases, applications, or hosted business systems and allows customers to re-use the same software for diverse integration scenarios" Form 10-Q

A more complete and harder to understand description can be found at Yahoo's Profile page. I always look at the Reuters.com "Key Developments" page for a synopsis of recent information that may be of importance.

Okay, that sounds interesting. LB has no idea what any of that really means, maybe it understands a little, even though it of course knows the meaning of every word in that quote. No matter, LB looked at other factors in selecting this company for OG to purchase yesterday morning, if the Old Goat agreed with LB's analysis which goes without saying, and that assumes that the OG can form an opinion in its usual morning haze before he has his intravenous shots of caffeine.

First, and this is important to the OG, Pervasive has 40.444 million in cash and marketable securities, no debt, and a total market cap of about 84 million at the $4.72 price. So almost 1/2 of the market cap is accounted for just by the cash. Second, this small software firm has remained profitable during the recession, earning 7 cents last quarter. The 1 analyst who follows the company, the lesser the better according to OG, has guessed at the FY 2010 earnings, ending 6/2010, at 30 cents with 47.54 million in revenues. PVSW: Analyst Estimates for Pervasive Software Inc The current price is near book value: PVSW So, that ends the analysis of Pervasive, LB has emptied its side of the brain on the page and summarized everything it knows about it.

Before turning again to the minutes summarizing yesterday's action here at HQ, LB would like to say a word. LB has better things to do than to research these LT purchases that the OG and his NO WIT ally RB are currently favoring. This is not the kind of activity that is a productive use of the LB's prodigious mental capabilities as a Stock Jock Extraordinaire. The heart and soul of this trading operation is LB, certainly all most recognize that fact, no that did not sound right. LB needs to start over. Strike "heart and soul" in the minutes and put " the REAL BRAIN, the only part of the Grey Matter than Amounts to Anything, the Stock Stud, the analytical Rule Making THINKING machine and Not A Wimp Too." LB is a wimp, a scaredy-cat too, worse even than a scaredy-cat, a girlie man, the RB muttered and that was proven back in early March for all to see. RB Touts His Horn as HQ Closes for the Evening Did Right Brain Call the Bottom?

2. Refining Stocks: Both Valero (VLO) and Delek (DK) were recently added to the portfolio. Bought 50 VLO at 16.3 Bought 50 DK at 5.75 Refining is another topic where my knowledge is far from adequate to make any serious investment. In fact, the full extent of my knowledge was set forth in a earlier post discussing Valero from October of last year, when I successfully traded it for a profit before repurchasing shares again a few days ago. Refiners: ALJ and VLO I mention this since an article from Morningstar is a good introduction to investment considerations involving refining.

3. Alcoa (owned): Alcoa rose almost 10% yesteray, almost tripling RB's investment during its March frolic and detour, based on an upgrade by Morgan Stanley to overweight and the announcement of a partnership with a Saudi Arabian company to develop an aluminum industry for Saudi Arabia.

4. Bought 50 AMSWA at $6.02-LT Category (see Disclaimer): Before Headknocker allowed this order to be entered, a limit order to buy 50 at $6.02 when the ask was $6.04, you know, the OG was just saving another buck, HK instructed the LB to determine whether this was a rule violation, in that it would appear to have exceeded the $300 maximum by $2 excluding commission. LB thought to itself, Why did the Lord stick me with these nitwits and no wits. But, LB did not express that sentiment to HK, remembering the last time a minion peon expressed a similar sentiment to our Great Leader, who promptly threw the HT threw the window here, then blamed the OG for not being quick enough to open the window first. LB reported back that there was no rule violation since AMSWA was traded for over a $150 profit as a LT before starting this blog, and that sum of course can be used to increase the LT maximum without triggering a rule violation.

As you would expect, once the order was filled at the limit of $6.02, the Old Geezer put up his hands expecting a high five for his trading acumen, and once again the Old Goat would be disappointed that no one at HQ appreciated his efforts.

Although AMSWA has a generous dividend for a software company, around 6% at my cost, it is not earning enough to cover that dividend, in other words, the payout ratio is well over 100%. Eventually, something has to give, either a dividend cut or an improvement in earnings, and I am hoping for an improvement in earnings once corporations loosen their IT budgets.

I have said many times that I am not much of a tech investor. I have at best a minimal grasp of American Software's business described by it as follow:

"American Software was incorporated as a Georgia corporation in 1970. We develop market and support a portfolio of software and services that deliver enterprise management and collaborative supply chain solutions to the global marketplace. We have designed our software and services to bring business value to enterprises by supporting their operations over intranets, extranets, client/servers or the Internet. ....

We provide our software solutions through three major business segments, which are further broken down into a total of four major product and service groups. The three business segments are (1) Supply Chain Management (“SCM”), (2) Enterprise Resource Planning (“ERP”) and (3) Information Technology (“IT”) Consulting. The SCM segment consists of Logility, a wholly-owned subsidiary (as of July 9, 2009) that provides collaborative supply chain solutions to streamline and optimize the production, distribution and management of products between trading partners. The ERP segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce, Flow Manufacturing and traditional manufacturing solutions, and (ii) New Generation Computing (“NGC”), which provides industry-specific business software to both retailers and manufacturers in the apparel, sewn products and furniture industries. The IT Consulting segment consists of The Proven Method, an IT staffing and consulting services firm."

Pages 18-19 Form 10-Q A more detailed description can be found at Reuters profile page. The firm is profitable and has no debt. In its last press release announcing quarterly results, American Software claimed to have achieved 35 consecutive quarters of profitability: AMSWA had 41.533 million in cash and investments as of 10/31/2009.

This is a link to the Key Development page at Reuters.com. The next dividend of 9 cents per share goes ex next February.

5. Bought 50 ACTI at $2.2-Lottery Ticket Category (see disclaimer): OG vaguely recalls that this one was a previous LT, bought and sold before this blog was started last October, but he is not going to check it. It was recognized when the name pop on a screen, looking for LTs, with search criteria that included cash per share, debt and share price.

This is how Actividentity describes its business:

"ActivIdentity™ Corporation . . . is a global leader in strong authentication and credential management, providing solutions to confidently establish a person's identity when interacting digitally. For more than two decades, the Company's experience has been leveraged by security-minded organizations in large-scale deployments such as the U.S. Department of Defense, Cadence Design Systems, Nissan, and Saudi Aramco. The Company's customers have issued more than 100 million credentials, securing the holder's digital identity. Our strong authentication, credential management, security clients, and authentication devices are embraced by large organizations and governments to defend against security threats and identity fraud." (page 3: www.sec.gov). The
"ActivIdentity Security Clients protect against unauthorized access by providing easy-to-manage enterprise single sign-on capabilities, strong authentication, and an enforcement point for corporate security policy. Using the proven, market-leading ActivIdentity Security Clients, organizations not only can address regulatory requirements by replacing static passwords with two-factor authentication, but also eliminate the need for users to remember multiple static passwords.
Whether using ActivIdentity ActivClient™ to secure workstations with smart cards and smart USB tokens, ActivIdentity SecureLoginSingle Sign-On to provide comprehensive enterprise single sign-on and password management capabilities, or ActivIdentity™ Authentication Client to offer additional authentication, user, and management services, ActivIdentity delivers a complete solution to meet the requirements of any organization.
ActivIdentity Authentication Devices provide organizations with a one-stop shop experience. ActivIdentity Authentication Devices range from Smart Cards, Smart Card Readers, Smart USB Tokens, OTP Tokens,DisplayCard Tokens, and Soft Tokens to Hardware Security Modules. ActivIdentity Authentication Devices provide the flexibility to deploy any combination of devices to best meet an organization's specific business needs, security requirements, and budget." (pages 23-24: www.sec.gov )

Cash and investments as of 9/30/09 was 92.222 million with no debt on the balance sheet (see p. 59: www.sec.gov) The market cap at a total cost of $2.24 is around . ACTI has not been profitable on a GAAP basis. Possibly, if the analysts are correct, a small profit may be realized for the FY ending 9/2010: ACTI: Analyst Estimates for ActivIdentity Corporation If the FY 2011 estimate of 19 cents is hit, then this one will start to look better then than now.

ACTI just agree to buy CoreStreet for 20 million mostly in cash. This is a link to the Key Developments page at
Reuters.com. I suspect that ACTI fell some yesterday in sympathy with Vasco Data.

6. Commodities and Diversification: This is a link to an article in MarketWatch that highlights that exposure to commodities did not serve to diversify risk over the past few years, since there has been a high positive correlation between stock and commodity prices. When stocks took off in March, so did commodity prices, and commodity prices tanked with stocks particularly during July 2008 to March 2009 period, as shown in this chart of GSG, an ETF for commodities which I have occasionally owned: ISHARES GSCI CMDTY ETF Financial planners can be simpletons at times. Asset allocation is not a static process, and its proper application requires a continuing analysis of many variables. Static v. Dynamic Asset Allocation

Correlations between asset classes can itself be volatile. Instability & Volatility in Asset Correlations In that post, I discussed when I would generally expect commodities to have positive and negative correlations to stocks. Sometimes there will be a strong negative correlation, and at others a weak or strong positive correlation. Those who posit a truism, that a particular asset will provide negative correlation under all circumstances, has not performed any analysis of historical patterns and is simply using a crutch, no doubt charging a lot of money for being wrong too.

I view this as an important paper written by William Coaker on the instability of asset correlations: http://spwfe.fpanet.org:10005/public/

I made the same point as made by the author of the Marketwatch article about the positive correlation of commodities and stocks in several earlier posts including this one from May: Item # 4 Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS

6. Volatility: The VXD, the volatility for the DJIA, continues to show the most stability, as previously predicted, and is showing good, continuous movement below 20, the important demarcation line in the VIX Asset Allocation model: Vix Asset Allocation Model Explained Simply With as Few Words as Possible The VXD crossed the 20 demarcation line on October 12, 2009 on a closing day basis, but has had some trouble staying under 20. VXD Index Charts I would regard the movement slightly over 20 and then below 20 to be normal given the prior heightened stages of volatility, and the residual effects of nervousness suffered by investors as a result of the the Near Depression. As with the volatility spikes after the 1987 crash, and the Nasdaq crash of 2000-2002, it takes at least a year for the human psyche to recover from the trauma. More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988 The Nasdaq volatility index is the VXN and I discuss its recovery period in this post: Parallels Between VXN 2001-2002 and VIX 9/08 to__ ?/Commodity ETFs

The VIX is moving toward stability, but has not yet crossed the 20 demarcation line. It closed yesterday at 20.49. VIX Index Charts - I have mentioned in several prior posts that I view this move toward stability as a positive. But the pattern is also consistent with the Phase I Unstable Vix Pattern, similar to what was experienced in the early stages of a bear market, when the VIX would move in a whipsaw pattern from 20 to 30 and back, with some temporary spurts above 30 and below 20. The difference now is that the pattern has formed not at the beginning of a bear market but at what will hopefully be its end.

I would have no objection to using the VXD for the VIX in the model. The stable VIX Pattern, defined to mean a probable bull market lasting for three or more years, is formed by continuous movement in the VIX below 20 for 3 months. We have yet to have a single day of that movement since August of last year when the market was clearly in a bear VIX pattern. At least, I can start the count already for VXD, starting after the recent disruption on December 10th when the VXD closed at 19.47. Subsequent closes have been: 18.70; 18.23; 18.8; 18.35; 19.77; 19.44; & 18.73. A close below 15 in the VXD would also be bullish in the model.

The model is best using as a guideline for asset allocation when a long stable pattern is disrupted by what I call a Trigger Event. These trigger events occurred in several stages for the last bear market with the first one occurring in August 2007: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern (see also: VIX and S & P Compared 1990 to 1997 Multiple Confirmations of VIX Model-Canary in a Coal Mine ) Before the Trigger Event, there will be Alerts that would require an immediate assessment of the conditions causing the alert, and their likely or possible impact on asset allocation.

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