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... «[Editor's note: It's likely that the steep drop in the VIX yesterday was related to Fed-related hedging by large institutions. When these institutions go to unwind their positions post-Fed, they create a large imbalance of pressure on the sell side, which sends the VIX down. This was explained to us by a market maker recently.] »

Também não sabia disto e pode atenuar o sentido bearish que dei ao VIX na minha análise. Thanks Camisa Roxa !

WEDNESDAY a.m.
December 11, 2002




Tenet Healthcare
By David Nichols and Judy Alster

We're going to veer away from the normal format this morning to talk about a compelling situation in a highly controversial stock.

The company is Tenet Healthcare (THC), the country's second-largest hospital chain.

Tenet owns or operates 115 acute care hospitals and related facilities in 16 states. With 28,000 beds, Tenet's hospitals are the anchors for its regional healthcare networks, which include specialty hospitals, outpatient surgery centers, home health agencies, rehabilitation and psychiatrics hospitals, longterm care, rural clinics and HMOs.

Tenet is an amazing story of market inefficiency, and how this inefficiency can now be exploited by those brave enough to wade into the situation.



One of the interesting things about this chart is how THC managed to climb straight up during the worst bear market in a generation. This was a safe-haven stock dearly beloved by mutual fund managers. But the consensus opinion got too rosy on Tenet, and a spot of bad news triggered an avalanche of sell orders. This is a textbook example of how opinion got slanted way too far in one direction, and the market needed to do something to right this imbalance.

Tenet had built up a large institutional following, and the thing about most institutions is they have discipline in their process. If THC fell by a certain amount, these managers had no choice -- they were stopped out and had to sell their entire stake. Even if they didn't want to sell Tenet at the low bid prices, they had to. There was no choice in the matter.

The huge supply/demand imbalance created a vacuum for the stock. Flying at $50 a share in late October, Tenet crashed to $15 on Nov. 8. Earlier the stock had held fairly steady at higher levels in early October when Medicare announced a new plan that would reduce its payments to hospitals. The real killer came after that, with news of two physicians at a Tenet hospital who were accused of false billing and unnecessary surgical procedures. Goodbye, stock price. Hello, FBI investigation.

More than 150 of the hospital's patients have died from invasive heart procedures and nearly 100 people have contacted lawyers about suing Tenet; they could seek more than $1 billion in damages. A Federal probe of alleged systemic Medicare billing improprieties didn't help the stock, nor did Tenet's admission of increasingly "aggressive pricing" (translation: continual overpricing), nor did the departure of two top executives as part of a management restructuring, or the rumors of a possible loss of Tenet's Medicare certification, or the endless analyst downgrades, or the class-action investor lawsuits, or the HMOs re-examining their relationships with Tenet because of the hardball pricing.

A closer look revealed massive insider selling in the weeks before bad news first hit the company, which the SEC is looking into. Messy.

But then something pretty unusual happened, at least in this day and age. Instead of waffling and stalling and clamming up, Tenet's management stepped up and addressed the problems head on.

To its credit, Tenet quickly realized that its pricing policies needed fixing and it set to work. The announcement that the company would be "more conservative" in its pricing wasn't good for the stock, since it meant lower earnings. But the price rose slightly on news that Tenet had purchased 10 million shares of its stock, and again on the candid revelation that its 2003 and 2004 profits would fall short of expectations due to lower prices and insurance payments. Tenet also announced a new pricing strategy that would freeze existing hospital rates, offer discounts to uninsured patients, and emphasize fixed negotiated payments rather than variable supplemental payments.

What this means, in all likelihood, is all the bad news is out on this stock. It should only get better.

The company has a strong $140 million in cash. The stock closed yesterday at bargain $17.60 with a market cap of $8.56 billion and a suddenly-low P/E of 8.3, subject to change as earnings fall and/or the stock moves higher. This company generates a tremendous amount of revenue, on the order of $14.2 billion for the trailing twelve month period. Book value is over $12 per share, and sales per share are over $28. Even in the worst case scenario, the company is poised to make $2.00 per share going forward.

Any way you slice it, Tenet is a dirt-cheap value stock now. Value managers are already sniffing around Tenet, with the braver ones jumping in now.

We can't say the stock will bounce straight up any time soon. Nobody can. This will be a "project stock". But with the bad news behind it, the surprises could start coming in to the upside. There's a great chance we could look up in 6 or 9 months and Tenet will be up 50% or more from current levels.

It's likely that these moves up will come in big jumps. If you wait around too long, you could miss the easiest money from these levels.

That's why you have to wade into these controversial situations early -- at least for a nibble -- and hang in there until the tide turns. You don't have to run out and load up to the gills on THC stock. Please don't.

Obviously the stock is cheap for a reason at this point, and you're going to see and read all sorts of negative things about the company's prospects. You have to remember that this negativity is creating your opportunity.

In our opinion, most of the risk is now removed from the stock. All of those holders that had to sell have already sold. It won't necessarily be easy, and it definitely won't be a straight line up, but we think Tenet is one of those "deep value" situations that merits taking a buy-and-hold approach.

Sentiment Dashboard


SENTIMENT TANK: The tank drained 5% of its bearish sentiment on Tuesday while the market advanced modestly. It used a lot of gas to make a small advance, which could be regarded as a bearish divergence. Something funky is going on.

The Sentiment Tank uses the Put/Call Ratio as a component in its derivation. The VIX dropped about 3 points (8%) while the CBOE Put/Call Ratio was 0.89. That's four of the last five days in which the Put/Call Ratio has been that high. (A reading of 0.80 is considered high.) Now the price for OEX options got CHEAPER on Tuesday while the volume of puts traded was high. It's supposed to work the other way. The VIX should RISE when the Put/Call Ratio is rising as investors scramble in fear of a crash. So, what's going on?

We're speculating here. It may be that open put positions were being closed out as the market bounced. Citizens would be selling their open put contracts in the main while market makers (MM) would be buying back their open short puts. (Those puts are hedged for the most part. So as the MM buy back the puts they're also ultimately causing stock to be bought, which bounces the market up at least a bit.) When the MM are buying back the puts get cheaper...they have the advantage in pricing to their own liking. That could drive the VIX lower while the market bounces. Until I get the Open Interest Figures for OEX puts for Tuesday this is just speculation. After I get that data it will just be "mainly" speculation. If indeed the speculation is correct, then that could leave the market ripening for another drop.

[Editor's note: It's likely that the steep drop in the VIX yesterday was related to Fed-related hedging by large institutions. When these institutions go to unwind their positions post-Fed, they create a large imbalance of pressure on the sell side, which sends the VIX down. This was explained to us by a market maker recently.]

If Sentiment Fuel drops below the key 55% level (which was how far the tank drained at the August high), confirming Tuesday's drop down from 61%, then we'll take the drop seriously and look for bearish sentiment to deteriorate further on a continuation of the rally.

MID-TERM GAUGE: Mid-term momentum dropped into the downtrend another 3 points to 23. Our Confidence Diffusion Index (CDI) pulled back from 5 to 4 as the tank drained and price rose on Tuesday. The momentum gauge is staying the course. And this kind of two-steps-forward, one-step-back action is to be expected on the CDI, as a variety of its components shift and shake with the market's short-term gyrations. The important thing here is that mid-term momentum is continuing and the general trend in the CDI is one of rising confidence in the downtrend. As the needle drops further and further into the downtrend the CDI will tend to rise. Then as the needle approaches 100 the CDI may start to regress. That's when we'll watch for a weakening of the trend, and to exit open positons.

LONG-TERM GAUGE: Tuesday's bounce bumped the long-term gauge up a point to 86 and knocked its CDI down a point to 3. The long-term gauge is still in the process of just rolling over. Its trend is declining, but it's very young as a signal.