Correction Provides Opportunities & Insights

Yesterday's correction provides a great excuse to rebalance your own long term portfolio. If you experienced significant losses you might want to consider looking at allocating more money to fixed income like the Lehman Aggregate Bond ETF (AGG). If you don't have any international equity exposure, consider looking at MSCI EAFA (EFA) or an emerging markets ETF like the (EEM). If you have large gains in certain sectors consider taking some profits and putting that money to work elsewhere.

As a side note, the US government limits defined benefit contribution pension plans from holding more than 10% of assets in company stock. I would do the same for a defined contribution (401 K) plan. If your employer matches your contribution in company stock, there is nothing wrong with selling the stock and putting that money into mutual funds. Enron employees had over 60% of company stock in their 401K's before the stock plunged. My take is that you already have a lot invested in your job with your company so you need to diversify your future and invest in many asset classes.

Robert Greifeld Nasdaq (NDAQ) Update

Here are some recent comments by Nasdaq (NDAQ) CEO Robert Greifeld. I reiterate my "buy" on (ITG), (ISE), & (ESPD).

"In 2007, we will do a deal, we can't announce with who or when, but there will be a deal done."

"...we're focused on the domestic market. We're involved with a number of different conversations. There will be a transaction that happens in 2007. And the key thing for our shareholders is we will not do a transaction unless it meets our discipline."

Link to My Merger Candidates

Link to Full Greifeld Interview

Novastar (NFI) Tumbles

Subprime mortgage lender Novastar Financial (NFI) reported a quarterly loss of $0.39 today. Earnings were hit by defaults and write-downs. The company also said it may change its status from REIT to a regular stock. Say goodbye to that dividend. NFI is down 32% in after hours trading. I would continue to avoid the two well known publicly traded subprime lenders (NFI and NEW).

Greifeld's Next Acquisition

Nasdaq (NDAQ) CEO Bob Greifeld will make an acquisition in 2007. Shareholders will put pressure on Greifeld to get a deal done after losing the out on the LSE. The most likely US equity acquisition candidate is Investment Technology Group (ITG).

1. Investment Technology Group (ITG)

• Leader "...in trading technologies, algorithms and trading analytics..." (CIBC)
• Gaining an international presence ($0.06 of EPS in Q4)
• Joint venture w/ Merrill Lynch (MER-SP)
• Canada 45% growth
• Europe 19% growth
  
• Technology initiatives will drive growth in '07
• Global shift to electronic trading
• 10% y/y growth in Nasdaq and NYSE volume
• 16X forward earnings

2. International Securities Exchange (ISE)

• Electronic options exchange
• Recently introduced ISE Stock Exchange to compete w/NDAQ & NYX
• 22X forward earnings
• 20+% industry growth in '07 & '08
• Average price target $50

Note: As of 2/17/07, I have no position in ITG, NDAQ, NYX, or ISE

Nymex Holdings (NMX) Upgraded

JP Morgan (JPM) upgraded Nymex Holdings (NMX) this morning based on better than expected futures volume growth. I have been bullish on Nymex since its IPO and I continue to hold the stock despite its rich valuation. I have created a model in Excel to estimate revenue based on the published volume from nymex.com.

With average volume of 1.6 million contracts per day, total average net rate per contract of $1.16, quarterly expenses of $40mm, and a 45% tax rate. I estimate EPS for Q1 to exceed the current street estimate of $0.52. I expect Nymex to earn at least $0.55.

Note: I am long NMX

Stay Clear of Subprime Lenders

Don't be fooled by the high dividend yields of two subprime lenders Novastar Financial (NFI) and New Century Financial (NEW). New Century is going to restate results for 2006 and report a loss in Q4. Both companies are being forced to buyback subprime loans but don't have the cash to buy back the loans. Don't expect either company to continue to pay dividends. I would avoid both NFI and NEW.

Stretched Valuations, Yet Futures Exchanges Look Attractive

All of the publicly traded futures exchanges have had terrific runs since their IPO price. I have supported all of them since I started this blog. If you were only to own one I would buy the Chicago Mercantile Exchange (CME). Technology is crucial to the future of derivative trading and the CME Globex electronic platform should continue to drive high margin electronic trades. With owning the CME you get the CBOT and part of the Nymex (NMX) electronic trading. The advantage of owning a futures exchange is that both sides of a futures contract have to be traded on the exchange it was first purchased/sold on. With stocks, you can buy or sell shares on an NYSE listed company on the NYSE, Boston, Philadelphia, Cincinnati, Chicago, or Pacific exchange. The futures exchanges have a clear advantage over the NYSE (NYX).

Publicly Traded Futures Exchanges
CME/CBOT (CME) (PEG Ratio = 1.85)
Intercontinental Exchange/NYBOT (ICE) (PEG Ratio = 2.53)
Nymex/Comex (NMX) (PEG Ratio = 2.22)


Note: I am long NMX