GULP! "With a tough road ahead, can banks meet the challenge? - Dec. 30, 2005"

With a tough road ahead, can banks meet the challenge? - Dec. 30, 2005


Maybe my support for BAC (and position in CBH) isn't so good after all. We'll see......

BUY: Google LEAP Put Jan. '07

Right now, Google is on fire, mostly for good reasons (though a bad reason - thin float also explains things). The result is the 24th largest company in US markets by market cap, larger than big, important companies like Novartis and Wells Fargo. Valued at $125b ($420/share), Google will pass IBM's valuation if the stock rises just 7% more.

I'm a fan of Google, but I can't justify such a lofty valuation.

Google gets 99% of it's revenue from advertising. I don't believe that Google can continue the growth rate that justifies such a lofty valuation, nor do I believe that it's competitors will allow it - already MSFT and Time Warner are considering how to jointly maximize AOL's ad platform, while Yahoo isn't standing still either.

In financial terms, GOOG has $5B in revenue and $2B in EBITDA (or thereabouts), valuing the company at 25x revenue, or 62x EBITDA. (Current P/E of 93 and forward P/E of 49; PEG of 2.36). In short, it's an overheated stock.

But it's always dangerous to bet against a charging bull like GOOG. A mistimed short could cost a fortune.

So, betting that GOOG has to come back to Earth sooner or later, I just bought a LEAP put option at $320, dated January 2007. I paid $17/contract, so if Google drops to $303 before Feb 1, 2007, I'm in the money. If not, I'm out $1,700 (1 contract).

So, I'm gambling $1,700 that Google drops 28% over the next 14 months. If GOOG were to drop 33% to $281, I'd make a profit of $2,200. Should it drop by 50% -which I could easily see happening - I make $9,700 in profit.

(Or, I could always sell the LEAP before expiration. In this scenario, I could still make a profit before GOOG hits $303.)

It's a silly bet against the current wisdom, and I could be hilariously wrong (I've suggested shorting when GOOG was at something like $200), but I'm comfortable taking the risk. It's not for everyone. Is it for you?

A letter from New Orleans

A friend from my fantasy baseball league - Marcus Wilson - moved to New Orleans just before Katrina hit town. What follows is a note that he wrote recently to say how he and New Orleans are doing........



I have been debating which way to tell my story, the flowery way I normally write, or a "Just the facts Mam" approach. My life is now about barebones and straight talking, so I think my story should reflect that to some extent.

My apartment sustained minimal wind damage, just cosmetic really. We did not qualify for a "blue roof" from FEMA, as we had no tiles missing that I could tell. Our fridge was something of a debacle, but it refroze when the electricity was turned on a few days before my arrival, so it wasn't as bad as it could have been (imagine seafood, milk and cheese, chicken, various other pleasant things sitting in New Orleans heat for six weeks). A few days after my arrival it was replaced by my landlord. They have been really decent to us, didn't try and evict us, raise our rent, anything like that.

We are lucky considering what other landlords are doing and are trying to do. Rent in the city has gone up 25% percent in the weeks following everyone's return. There just aren't many livable places. I have been slowly cleaning up the house since I got here six weeks ago, actually a lot of it was stuff from our moving down in July/August that hadn't been taken care of yet. I think now our place is as good as it ever will be, but this is our little oasis in New Orleans.

My street, and the eight houses on it were the high ground in our part of town. When the levee broke north of my home, I fully expected to lose everything. I cannot tell you how lucky I feel. You travel south of where I live, and the water marks start to rise, reaching as high as 5-6 feet in some areas of my neighborhood. Some houses are just plain abandoned, others are being gutted. Debris lines the streets, although they have done a decent job of trying to remove it. My first couple of weeks back you could drive down any street and all you saw in the curbs was a four feet tall pile of house debris running the length of the street. I would complain about how the dump trucks picking up all the debris screw up the roads I take, but there isn't any other traffic to fight in New Orleans. I was just down in the French Quarter tonight and I parked in a nearly empty garage at the entrance to the Quarter, and could have parked at a garage in the Quarter.

This is a Saturday night. I was in the Quarter on a Sunday night pre-Katrina, 12am, and I could barely walk through the streets. Tonight we could have marched a band down Bourbon Street.

For several weeks the smell outside was unbearable as the piles of moldy debris were accompanied by the wonderful smell of thousands of rotten refrigerators. This smell doesn't compare to the smell that used to be outside our two competing grocery stores. I used to drive by with the windows up, and made sure not to breathe for just in case. There are places where trees are laying against (or through) houses. Power lines were down, cable and phone were out (phone lines still aren't working, won't be until 2006), gas hasn't been turned on for many homes, even if people are living there. Luckily it is still warm here (70 on Thanksgiving) but cold showers aren't fun for those without gas. We have television, phone, and internet through our cable provider, and that came back on within a week or two of being in town. Our heat is all electricity, so we avoided the gas issue.

Commerce for us has changed. We can no longer go down the street to the grocery stores, or to grab a meal. There isn't a single business open on a stretch of road near us that used to have three large grocery stores, dozens of restaurants and small stores, office buildings, etc. There are some parts of that street that don't even have street lamps, and the intersections are all four way stops as the street signals are out.

The city is but a shadow of its former self. Estimates say that 15% of the city has returned, meaning of city of nearly 500,000 is now around 75,000.
People predict this number will be steady until schools start to open in January, but that is another issue I will return to later.

The unofficial party city of the United States has a 2am-6am curfew, one that is enforced by the National Guard. Every day I see humvees somewhere on my drive. The numbers are not as high as they were, but they still remain visible. We saw all sorts of them on Bourbon Street the other night, a place that is a shadow of its former self. We figure there is something like an 8 to 1 ratio of men to women in New Orleans right now. In addition to the multitude of construction workers, emergency officials, and security, what you have is fathers that are back in the city, trying to repair houses, going back to work, leaving their families in a town with a school.

The excitement in New Orleans these days is if a business will open, when it will open, or something in the way of commerce that reminds us of what is now a forgotten era. My six weeks in the city don't give me a complete picture of what I am missing, but suffice it to say, it is a lot. Oh, we also get excited when we hear someone got a FEMA trailer. We actually have a trailer park at our school now. Twelve trailers taking up the entire Lower School parking lot, right next to our football field, the same field that did not see an a single game this year. We have a tradition of 4pm football games right after school, a tradition that was started by not having lights for the field years and years ago, and a tradition that has since saved the school from investing in lights.

The public schools in New Orleans were among the worst in the country before Katrina. A colleague of mine just came over from a middle school there, and the stories he tells are quite amazing, unbelievable to me. Of the 611 students in his old middle school, ten. yes, TEN, of them read AT grade level. They often didn't have enough textbooks for each student so one of their popular exercises in class was the copy the text by hand so that they could take it home to study at night. This is BEFORE the storm. Since the storm not a single public school in New Orleans has opened their doors. The teachers aren't being paid, and many are permanently moving away. A large percentage of the schools are flooded are won't be repaired. Many of the private schools in the area also aren't open, as they either flooded or lacked the personnel to resume school.

The two schools which we compete with for students have laid off a combined 120 teachers since the storm. My school has yet to do so, putting forth an incredible effort to retain faculty. They have also continued to pay us throughout the storm whether we are on campus or not. The financial burden this has placed on the school has only compounded the bill for renovating about 40% of campus.

We received anywhere from two to four feet of water on our campus, which included my classroom. I didn't lose much as most of my books and materials were on shelves, elevated high enough above the water, but there was still loss. My damage was not as severe as the Lower School, where all six of the multiage Kindergarten through 2nd grade classrooms were flooded as well.
Next time you are in primary classroom, look at everything that is within two feet of the floor, and you will come to grips with what these teachers and students lost.

Our greatest loss was probably in our Upper and Middle School library.
Every book on the bottom shelf was lost, including multimedia materials, reference materials, you name it. Luckily for us we have a two story library, so we didn't lose 20% of our collection more along the lines of 10% from my estimates. This still comes out to be over a thousand books, probably more.

Two years ago we built a new middle school and gymnasium. They flooded as well, meaning that we had to replace the wood floor of our basketball court, a floor that was only two years old. All the tile and carpet in the areas that were flooded had to be replaced. They had to rip out and replace the sheetrock in dozens of classrooms. Every seat in the auditorium had to be replaced. We lost around 5 pianos in our music room, a building which is schedule for demolition in the coming weeks. The list goes on and on, it would take me weeks to list the damage we have suffered. What makes the story even worse is that it is the same one being told over and over again by thousands and thousands of New Orleans residents, and often to a greater extent.

Despite what you have read above, our school is fortunate. The school is not in Orleans Parish, so the flood waters went down quickly, and people were also allowed back in much sooner to do repair work. Our head of maintenance was on campus a day or two after the hurricane and started remediation immediately. He had people on campus before any other school in the area. There have been a solid group of teachers on campus cleaning and gutting, trying to prepare school and help defray the incredible costs of cleaning up and rebuilding school.

As it stands, we are estimating a 5 million dollar price tag at our school for the Katrina disaster. You have lost or returned tuition, construction costs, insurance premiums, all sorts of things bundled into this. The school is hoping insurance will cover some of this, but we know it won't cover all of it. In the end we are going to have to fundraise more money this school year than the school has ever raised in a single campaign, and those campaigns last several years.

The school will continue on. We are already holding limited classes in the available rooms on campus. The school is going to be up and running at nearly full speed come January 2nd. We don't know if there will be much of a Winter Break for faculty, so I may not be returning home, but it will be nice to have some normalcy come January. We are expecting around 500 students when we being spring classes, short of our 750 pre-Katrina, but still a good number to start with. There will be job cuts in the spring as our numbers solidify and our projections for future enrollment become apparent, because you cannot keep our faculty intact when there are so few students in comparison. For those that do stay, it will likely mean a freeze or reduction in pay, a decline in benefits, and a return to the scrounging of public school teaching. My outlook is 50/50 right now. I come to the table with the ability to teach many subjects at a variety of age levels, this will, without a doubt, be my saving grace. That and I am cheap labor. Right now I am teaching art, history, and math. In the fall I could be doing something entirely different, perhaps even a trip back to the Lower School. On never knows in this uncertain life after Katrina.

I am healthy, usually happy, and paying my bills. Barb has returned to New Orleans (with our cat) so there is some normalcy for me. Shopping is an adventure, and I will likely be unable to find a teaching job should I lose mine in the spring, but there are more jobs around here than you can shake a stick at. I could work at Target for $12 an hour stocking shelved after hours, or work at Burger King and receive a $6000 signing bonus. The options are unlimited right now as the economy tries to figure itself out.

Heck, the Borders just opened back up, so I guess there is another old haunt
I could return to. I hope this finds everyone doing well, and know how
genuinely glad I am to call all of you friends. Your generosity was incredible, something I will never forget.