Tuesday, September 4, 2007

Bookkeeping: Website changes

Just as an fyi to keep an eye out in the near future.

I have registered the following domain: fundmymutualfund.com
(yes unbelievably that is shorter than fundmyfund.blogspot.com) I will be making this the ultimate home for the blog, once I figure out the mechanics of a transfer of content.

I did some reading this weekend on blogs in general and the consensus advice is to get your own webpage address, better sooner rather than later. Easier on the readers and easier on the blogger. Since I'm relatively inept with this whole blogging thing past simple commands such as "publish post", I am trying the simplest solution for now, in which Blogger.com let's you transfer the entire site over to a new internet address. Testing it tonight, it seems to work when I toggled it, although not without a lot of confusion on my end. However, at this moment we are staying 'here' on the blogspot address.

My concerns are with the readers who have subscribed via subscriptions in their readers and/or via email. I want to make sure that transfers over as well (or if not make it apparent in big red 25 font type), and new posts are being sent to these people who have subscribed one of the 2 ways (email or blog reader). Also the past 4-5 days have been some of the highest readership days, so I don't want to make a move I am pretty clueless regarding the implications about in the middle of heavy readership ("heavy" for a new blog at least!) So hopefully I will come up with some boring posts soon and then readership will drop off, and then I can move the site in the still of the night, Baltimore Colts style! aha!

But this move will be on the horizon, so just giving a heads up.

p.s. Did you know the average blog reader spends 90 seconds on a blog (short attention span)? I was disappointed when I first started blogging, because I saw my analytics pages showing 2:30 minutes on average ... thinking, gosh I have a boring site; very few even bother to stick around for 5 minutes! But apparently I am above average ;)

Could Blue Coat Systems (BCSI) give it all back? One can hope

One notable loser today was Blue Coat Systems (BCSI), down 5.5% on very heavy volume. I theorized on BCSI here and here. I nibbled a tiny bit today since my position is nearly non-existant in the name. But a stock down in a tape like this on heavy volume is not normally a good sign. Or at least a strange one.

Looking at the chart, there is a gap created post earnings between $61 and $65. Interestingly, the 50 day moving average is $60 and moving steadily higher. Could a dramatic fall await Blue Coat Systems? A move this severe would represent giving back all gains post earnings. Possible?

One could hope... as long as one is not in the stock and wishing to get in ;) I have a large order awaiting @ $65 if so fortunate. However, a nice 5-7% drop tomorrow would certainly get me interested in moving in, in scale to this name.

Long Blue Coat Systems in fund; no personal position

Continuing to lighten up the Trina Solar (TSL) position

Trina Solar (TSL) - gotta say, one of the better trading stocks out there. With its move from $40 to $50 in a week, I am continuing to lighten the fund's load, and have it down to 1.4% from nearly 4% last week when the stock was smacked down post earnings. I'll keep the rest of the core position and look to buy back some of what I sold the past few days if the stock falters; I still have concerns about the polysilicon shortage in the sector, and Trina still is not a winning position for the fund, as this volatile stock dropped from $60s area to $40ish in just over a week. Talk about volatile.

Long Trina Solar in fund; no longer long in personal account (just sold)

And don't forget Broadcom (BRCM)

Everything I just said for Sandisk (SNDK) in the previous post could also apply to Broadcom (BRCM), except for a different niche. Broadcom (BRCM) is making the chips that are feeding all these routers that the networkers are selling like bananas. So its an ancillary play on the networkers; and the chart looks like a carbon copy to Sandisk.

Did I mention that hot quarter by Ciena (CIEN) ? (bought more CIEN today in the fund) Reminds me of the McDermott (MDR) story - great quarter, stock falls immediately post earnings, everyone asks why - and a few weeks later MDR is off to the races.

Looks like tech is really becoming the safety zone. Ironic though for all you NASDAQ dot com survivors.

Long Sandisk, Broadcom, Ciena, Broadcom in fund; long Ciena in personal account

Apple (AAPL) of my eye - or is it Sandisk (SNDK)

Apple (AAPL) really is an amazing story. What a transformation from 'computer maker' to digital revolution hero in a span of a few years. This is one stock I should never have traded from some of my initial buys a few years back - I always seem to be out of step in trading Apple - it's just one of those stocks. I won't talk much about Apple because I think the story is pretty well known - although I do agree with commentators who say, look out for their iMac sales - with this ability to run WinTel programs smoothly, there is no legitimate barrier to switching over to an Apple brand computer - halo effect people, halo effect; its a lifestyle brand!

Anyhow, the fund has a 1% stake or so in Apple (AAPL), nothing major - however I've been keeping an eye on a 'flash' from the past (oh a play on words) - Sandisk (SNDK) . Apple has this special media day tomorrow, and the rumor mill is swirling. Just type Apple rumors Sept 5th into Google and you will get everything you could ever want to know. However, a few of the sites have a very interesting note, such as this one. A full line of iPods, all using flash NAND memory. Hmmm.... good for Apple; great for Sandisk. Now Sandisk has already been breaking out, with a jump from $52 to $56 in the past week. Now Sandisk *IS* a cyclical play, but could be morphing.... well not into a secular play perhaps, but at least a company with the potential for longer term cycles.

I had a 350 share position going into the day (just under 2% of the fund's holdings) and added 100 more today on this continued breakout in anticipation of this rumor becoming fact tomorrow. We are moving to a flash NAND world, with or without this Apple announcement, and that bodes well for Sandisk - but this would just accelerate things.

Sandisk hit $58ish in early August before the market meltdown, so the market gods gave us another chance to get in with the recent swoon. A stall here at the $58 level would definitely not be a great thing as that would create a 'double top' (ooh bad TA term). But a break through $58 and it appears off to the races for cyclical Sandisk.

Long Apple, Sandisk in fund; no personal positions

I'm buying one group today: deep sea oil drillers

I've been waiting for this group to make a move and it appears, technically at least - they might be ready to go.

The fund's 5th largest position, Pride International (PDE) , announced after the close of business Friday it has completed its Latin America land drilling business which I discussed in an earlier blog entry here. This clears the way for Pride to turn from a land/sea driller into a pure play sea driller, and a focus on deep sea at that. Why is that important? Essentially the drillers are separated into 3 main groups: land, shallow water, deep water - of this group, the latter has all the pricing power in the group.

The names in the group I have been following (feel free to leave a comment if I missed one) are:
Transocean (RIG)
GlobalSantaFe (GSF)
Diamond Offshore (DO)
Pride International (PDE) (Pride is a not a pure play on the sector but morphing into 1 over time)

Transocean (RIG) and GlobalSantaFe (GSF) are merging to create a $50 Billion behemoth in the sector

GSF and RIG are essentially trading together, but I initiated a 250 share buy in GlobalSantaFe this morning (which will eventually turn into a Transocean position post-merger), as it trades at a slight discount to the acquisition price. I also added to a smallish Diamond Offshore (DO) position, and topped off the sector holding with a bit more Pride International as well. The charts for GSF, RIG, and DO all look stellar with a breakout above their 50 day moving averages (DO a few days ahead of the pack), and with the 2% spike today Pride is joining the pack. It needs to stay north of $35.50 at close to confirm this.

Again, I have liked this group for a long time. To buy them, you could take 1 of the 2 approaches. Buy them on the way down and wait out a turn - thus buying at potentially lower prices but sitting with shorter term losses and/or dead money for an indefinite time frame. Or wait for them to exhibit the turn and break out. While not being a TA maven, this appears to be a turn as all have recently hurdled some resistance.

As for valuations you ask? Well these are all trading at 10-12x 2007 estimates. Cheap you say!? Yes cheap, but this is a very cyclical business - and the valuations in the sector reflect that. The thesis from this blogger is these companies are moving from cyclical plays to secular plays, as it is getting more difficult to extract crude. The same thesis I am applying to the Core Laboratories (CLB), FMC Technologies (FTI), and National Oilwell Varco (NOV) trades. These 3 companies have already won over skeptics and now trade at 20+ forward PEs. The deep sea drillers, however, have not won over skeptics so certainly even a PE expansion to upper teens as these companies provide more predictable and consistent earnings would bode well, considering their earnings growth....

While I don't really want to be building too much more long exposure, as I await (tapping foot impatiently) this pullback (hello? pullback?), these names seem to be levered to the rising crude and I think just potently undervalued.

Long GSF, DO, PDE, CLB, FTI, NOV in fund; no personal positions

Saturday, September 1, 2007

The growing bubble in the Shanghai Index

I just found an interesting website, that probably says it all


I wonder if the formation of such websites signals a near term top, much like the infamous "magazine cover" indicator i.e. when you start seeing "How to Retire by Owning Real Estate" in 2006 or "It's Really Different This Time - How Dot Com Companies are Changing the World" in 2001 - on the cover of Time or Newsweek.

Again, this index (mainland A shares) trade in their own twilight zone as foreign investment is nearly impossible, and most mainland Chinese are only allowed to invest in this 1 index. 1 year ago the index stood at 1700, 1 MONTH ago it stood around 4000. Now it 5200.

1 year chart is here

Did I mentioned that a large portion of the "E" (earnings) in the P/E (of >50) are from investment gains and not operations?
Now bubbles can continue for much longer than we anticipate and the same arguements people are making now could of been made 2000 points ago. (and probably were) But these things never end well. It does not mean the Chinese economy is going to go south, as an economy and a market don't necessarily go hand in hand especially in such extremes. But at some point this will be very ugly for the actual market.

So keep speculating if you wish; but make sure you exit stage right or find one of the very few chairs that will be available when the music stops.

As an aside, the China economy is now suffering from both food inflation and impending wage inflation. Somehow 10% GDP growth is not so easy to manage (imagine that). How long before China becomes too expensive and capital moves to cheaper pastures like Vietnam. 2012? 2015? Remember in the mid 90s when Mexico was where all the factories were moving? How quickly they can turn on you....

Further analysis on Smithfield Food's (SFD) via Motley Fool

I had a post last weekend about Smithfield Food's (SFD) entry into China. Motley Fool followed up Friday with an article with some extra detail:
  • Smithfield's team speculated that China's hog market could be slashed by a whopping 20% due to disease. Given the country's problems, China could become an enormous market for Smithfield to tap.
  • After the conference call, Smithfield announced an official agreement with an "undisclosed" trading company to deliver 60 million pounds of Paylean-free pork to China through year-end. Sixty million pounds sure sounds like a lot of meat, but compared to the meat processor's typical yearly production, the number is fairly modest. However, management did indicate that more agreements could develop a long-term relationship with the unknown company.
  • So just how important is the 60-million-pound contract to Smithfield? Well, in 2006, the company sold 3.1 billion pounds of fresh pork products. The contract represents just 1.9% of that.
  • The deal might be modest now, but it indicates that Smithfield has a foot in the doorway of the hugely important Chinese market.
  • There is the possibility China may not become a significant importer from the protein king, and you wouldn't -- and shouldn't -- base your valuation solely on a chance that the country will drive significant growth for Smithfield.
  • Its (China's) industrialization has farmers dropping their pitchforks and abandoning their livestock for big city manufacturing jobs. And while the country has a large agriculture market, a lack of farmers cannot keep up with the demand of a rapidly growing population.
So this article picked up many of the themes I outlined the week before; but the point about more and more population moving from rural to urban is also a good one, and bodes well for food importers in the long run. This specific play is especially interesting, simply because pork is an especially favored food in China. Again, this is a very long term play and the stock is not going to spike due to financial results in the near term due to this China play (it could spike from contracts like it did last week). But definitely one to watch for continued progress into China.

As an aside, an astute reader emailed me with a small cap play on the pork growth story in China. It is an over the counter stock but apparently with plans to move to a major listing (application sent into NASDAQ July 19th). Stock name: Zhongpin (ZHNP) - the reader notified me of this stock @ $9.25, so let's keep a long term eye out on this one as well although it's a bit speculative at this point.

The financial results for ZHNP in its last earnings report are pretty outstanding:
* Revenues doubled to $64 million
* Gross profit +73% to $8.2 million
* Net income (not quite as impressive) +23% to $0.23/share

This is more of a consolidation and aggregration play of the local Chinese pork market by an emerging local player vs the SFD play which is new market entry of an established player. But again, we see this price inflation in China - pork prices for this company rose 37% year over year (it appears food prices worldwide are really shooting up) Gross margins dropped simply because inputs (cost of hogs themselves) are rising even faster. (part of this attributed to disease in the local herd in China) - this is a very thinly traded stock not appropriate at this time for the basis of the Marketocracy fund (nor available to it, due to the exchange it trades on) but another data point/source of info for this play into pork.

No positions in fund or personal account

I totally missed Crocs (CROX)

I'll admit it. I've totally missed out on this stock. Oh, I've heard about it daily since IPO but was always on the bandwagon of 'fad!'. I see them everywhere. I see knock offs at CVS for $2, so I wonder how it can have any pricing power, and how long before they become un-cool. While I got the Under Armour (UA) play from day 1 and have been on board there, Crocs never crossed my radar as a serious 'investment'.

Well, I've changed my mind due to a great early August article in RealMoney.com by Kristin Bentz (subscription required). Now generally it takes a lot more than an article to change my mind, but this was a comprehensive look at why the Crocs (CROX) story is real, expanding, and long lived. Since its a subscription service, I can't reprint anything but I encourage any RealMoney subscribers to read it. Especially Crocs haters (like I used to be).

Now in full disclosure I have no relationship with RealMoney other than I have been a subscriber for a looooooong time, I don't really know how long but the year started with 19** something, not 20** something. I was an avid reader back when JDS Uniphase (JDSU) was a stock every good housewife, and taxi driver had in their portfolio (pull up a 10 year chart on JDSU to see what I mean). For real time stories, analysis, and convergence of opinions from so many different good people, it can't be beat. Second disclosure is, they have a daily blogroll written by James Altucher, which I've been lucky enough to be featured on already. (Hi James) Third disclosure, is I really like to poke fun at Cramer :)

In today's blog roll I noticed the author, Kristin Bentz has her own website, Talented Blonde, where she has some smaller less detailed articles about Crocs.

Now with that said, back to Crocs itself. I've mentioned quite a few times already I am bearish on the domestic consumer, but Crocs is:
  • a cheap enough product that it should be ok even in a downturn in the economy
  • licensing itself like mad; heck I could get University of Michigan brand crocs if I wanted - and if there is one thing Americans are great for, it's paying XX% extra so they can buy the same product with an affiliation brand slapped on it - I believe that is MBNA's entire business model!
  • International sales are already at 50% of revenue, and growing by leaps and bounds.
  • Growth of a Crocs in 'wear to work' area - apparently this footwear is so comfortable, nurses, restaurant workers, et al.
So I've changed my mind. The growth opportunities still seem huge, although the shoes just look plain silly to me. But money doesn't look silly to me, so I will ignore the fashion. ;)

I don't feel so bad about missing this stock thus far, because analysts have been very wrong on the growth potential as well. Just 60 days ago the consensus was EPS for 2007 of $1.55 and 2008 of $1.97. Now? $1.96 and $2.53, respectively - increase of 26% and 28% respectively.

At $59, this gives forward PE of 30 (2007) and 23 (2008). Now I don't purport to know what a good valuation is for this company, since I am not sure what exactly to compare it to. But it's growth rate in the recent past is certainly WELL in excess of 50%, and I'd argue the near future could continue to see 30-40% growth.

Let's compare it to Under Armour for example - Under Armour is actually a smaller company than Crocs by revenue (surprised me too), with very similar growth rates on the top line. At $65, it's valued at 65x 2007 estimates and 50x 2008 estimates. Very expensive. Hence I have been out of the name for a while. But shorts constantly get burnt in it, so I wouldn't bet against it either due to that huge short position. Now why the difference in valuation between the two? Probably because most people are thinking like me before I read Kristin's article - we all like Under Armour because we can see a clear path to a Nike (NKE) / Adidas type company in a decade. With Crocs we see fad and no long term growth out over say 3 years. But based on the drivers mentioned above and in the article, I have to say this could be the wrong thesis. And if they are correct in 8-10 years when Crocs sputters out, doesn't that mean we still have a good 5 years ahead of us before the market starts to discount the slowing growth? I don't know the exact timeline of this slowdown in growth but it does not appear imminent. And this is where I will throw in the tried and true financial blog rhetoric of "just imagine 1.3 billion Chinese in Crocs footwear!" ;)

Now I have been waiting for some pullback in the shares the past 2 weeks, but Crocs has remained range bound in the $56-$60 area. Only on the waterfall panic selling of mid August did we see a spike down to the 50 day moving average (at the time $49) and for a few short hours it dropped to the mid $40s. With my general distrust of the long side of the market right now I don't want to over commit capital, but I definitely want to build up my smallish Crocs position here in the near/mid term as a multi-year play.

Long Crocs, Under Armour in fund; no personal positions

Where in the world is Eric Bolling?

I guess I was late to the party but my favorite Fast Money guy, Eric Bolling has apparently left the building according to '1440 Wall Street' blog. Now, that's a huge blow for the show, which is a favorite of mine. Bolling was the best of this crew, by a mile, in my opinion. Even though he was a technical trader by nature, whereas mine are more fundamental calls, his accuracy was awesome.

I also really liked Tim Strazzini, who disappeared in early summer. I liked him because he was very different from the other guys on the show, more introspective and long term thinking, so he offered a contrast to the other guys. I wonder if the flip flop nature of the show with the constant buys and sells didn't suit his style. Also he had the most unflappable hair, along with Jimmy Johnson formerly of the Cowboys....

How dissapointing; it appears this great show has already jumped the shark. Bolling *was* the reason to watch. I guess I await Fox Business channel now; this is a coup for them.

Long Bolling

Friday, August 31, 2007

Et tu, September?

Amazingly, the indexes were (drumroll) up for the month of August. After all that craziness. Go to this page and hit the button to the far right of the 2nd row "Hallelujah" (yes I wish I had one of these in my house)

Now for the road ahead. While October has historically had some of the scariest 1 day market events ... by "events" I mean down days so severe it will make parts of August 2007 look like child's play, September is actually historically the worst month of the year. 'Investment Postcards From Cape Town' blog shows this in graphical form with an entry here. When I see that, I want to hit the top 2 buttons to the far right of row 1 of the Cramer sound board.

Generally I put little stock in these things such as, the 2nd summer of a presidential cycle when an AFC team wins the Super Bowl, is a great time to buy. Blah blah. But the underperformance of September versus every other month of the calendar year is... interesting.

The more I chew on things the more I am worried about a market 'event' that won't make us trading on the long side too happy. Maybe this is the constant worry wart inside all people who have been in the market for more than 3 years.

But this is the ledger as I see it, and the roadmap ahead:

The Bad
* We are in inning 2? 3? of a housing correction
* Home prices are sticky; as homes are illiquid. We are just now seeing the first serious falls, and these drops so far, seem minor versus what should be coming down the pike in the most overheated of markets, as prices are so out of whack with income it's silly.
* The supply of buyers is constrained by much tighter mortgage standards - leading to pure economic theory, less supply of buyers, increasing supply of inventory = not good for prices. I mean really, who can afford a $500K mortgage in CA with a fixed rate of 6.25% fixed? That's a $3100 payment, before property taxes. There are only so many people in this country who can afford that. I'd argue a very small amount. Oh and did I mention jumbo rates are north of 7%? I am being generous with the 6.25% rate. The same example applies to the $400K mortgage in Seattle and northern Virginia, New Jersey, Hawaii, Boston, the $350K mortgage in Arizona, Nevada, Maryland, Chicago, Portland, Denver. Where will these people come from? When they cannot resort to interest only 2/28s?
* And after we bail these people out (not with Bush's plan, but with the next generation of Bush's plan that will need to be created), who is going to be able to afford to buy those homes when these bailed out owners want to sell? Or after the bailout will they be content to sell for $150K less?
* When people even in good financial shape see weakness in housing they also naturally get cautious and retrench on their plans to buy, and this feeds on itself (you go first... no you go first... no you... someone buy this house!)
* The retail "my house is my ATM" play, seems to be over. Retailers already foretelling this; remember stocks are discount mechanisms for the near future (6+ months out). Yes people have been calling this for years, but our consumption culture has always made them look like fools. But with the spigot of the ATM as a house now truly gone, people won't be able to refinance their credit card debt into a new mortgage. (and keep repeating every 2-3 years)
* Even those people who have no plans to sell their home, feel poorer on paper, and hence have natural tendency to tighten spending when feeling less flush in cash, even on paper.
* Same point above but in regards to stock market gains - how will they feel with a potential 15% correction in stocks? More retrenchment?
* Grocery inflation as this ill begotten push for ethanol (using inefficient corn) is rifling through feedstock, corn syrup and any of the thousands of items which use corn as a basis, and now seeping to the end consumer.
* Commercial paper market still extremely dysfunctional
* Bush's aid plan is going to help less than 100K out of millions who will be suffering in the home market
* The fact that free market Bush is even alarmed enough to come up with any sort of plan. Free markets are great... until something goes bad, I guess. Even for Republicans.
* Construction jobs - they are going to be accelerating into an abyss. Granted, some portion is illegal workers who were never on payrolls (official ones, that is) in the first place. But this is a trailing indicator. Who needs more homes when inventory is >9 months, on the way to ? 12?
* Mortgage jobs - huge cutbacks already announced and will be filtering through the future unemployment reports
* Financial jobs - we should start seeing lay off notices soon enough (next week?) I already read that across the pond there are cuts in credit departments already hitting. If we go back to pre 2004 levels of 'credit' (revert to the mean?) what does that mean?
* For those that remain, their year end bonuses will suffer. This year will be down, but NEXT year looks to be really down, as entire departments will no longer be needed/existing. What does this mean for the NYC and affiliated areas high end real estate market? I know, I know, those poor millionaires...
* Earnings cuts in the financials - just started getting downgraded this week by the analysts - how are they even going to be able to provide guidance in October when the location of all this credit risk is in many ways unknowable (how do you tell what % of loans in a CDO you own is going to default in the next 2 years?) We are probably looking at earnings revisions down #1 of a multi step downgrade program in these names.
* Internet ad spending down as financial companies provide a large bulk of it. Could Google disappoint? Psychological blow of all blows - the teflon stock of our era missing?
* China looking like an exact mirror to NASDAQ 1999-2001? New bubble? The Shanghia Index over 5000, was only 4000 just over a month ago, and almost 100% up in 6 months? 50 PE on an index? Oh and a large portion of those earnings are investment gains, not operational earnings. With a country full of newbie investors who have never been through any bear market? Remember what happened when China fell just 7% in Feb 2007.

I could go on, but I am getting depressed....

The Good
* Big Ben has a mighty white horse and has been shining his armor and is ready to arrive and with a simple few cuts, will solve all problems
* Presidential candidates will be jostling to propose bailout after bailout, inciting moral hazard issues up the wazoo. (It was a stretch to put this on the good side but I needed at least 2 items to consider this an official list)

And I think that's about it for that side. I guess you can throw out the 'natural resiliency of the US financial markets and economy' but will that really be a salve in next 6 months?

Now I like Ben; in fact so far, I like Ben a lot. I think "come to the rescue" Al would of cut at least twice by now and maybe even a 50 basis thrown in there for 1 of the cuts for good measure. Heck, the market could of been at 15K by now if Al was still around. But that would not erase what is going on behind the scenes.

The one pillar that has been the bullish bedrock is employment. It's still at a high level; the unemployment rate still is low (granted many people are underemployed and working 2 jobs to pay for groceries and energy costs), but this is the number in my book to watch. With the financial industry from mortgages, to construction, to fancy investment bankers all at risk now.... hmmm. And with every lost job is a small ripple effect on other parts of their local economies.

So I guess it comes down to:
101 reasons things that could cause downward dislocation and potential 08 recession or at least dramatic slowdown


Ben on a white horse along with government bailouts by frantic politicos who keep asking why does something like this happen every 5 years (answer: because the people buying you... err paying for your election drives generally profit from these excesses, and hence we never get preventative measures, just reactive and far more expensive 'solutions' after the fact).

Did I mention September is historically not a great month? Aye!
I hope this is not us in a few months

Continued building my ETF shorts today....

If you think I am a worry wart and all this is hot air, tell me why in comments and why you think this will all blow over in a few months.....

Enjoy the weekend, and time to buckle up for the months ahead....


Whether you are someone who prefers to work from home, or in regular business services, self care and defense is important. This is why medical insurance is emphasized upon. That does not imply that it is a debt solution or would prevent credit cards consolidation catastrophes. However, with creditcard users, such protection measures are nevertheless important.

Whose not participating today? A Top 10 list

Although this is a light volume rally with most of Wall Street away to the Hamptons... let's see who from the watch list is not participating very much in the rally. Note of course, 1 day does not make a trend but some of these have extended periods of weakness or 'flatness' despite a general up market the past 10 days. These are the 10 that are down to flat for the day.

Akamai Technologies (AKAM) - CDN/networking -> discussed here
Google (GOOG) - internet search -> discussed here
Bolt Technology (BTJ) - oil service
Yingli Green Energy (YGE) - Chinese solar power -> discussed here
China Sunenergy (CSUN) - Chinese solar power -> discussed here
F5 Networks (FFIV) - networking
Juniper Networks (JNPR) - networking
Riverbed Technology (RVBD) - networking -> discussed here
Limelight Networks (LLNW) - CDN/networking -> discussed here
CME Group (CME) - exchanges -> perplexed this one is so stagnant

Again this is 1 day, and a "white noise" light volume sort of day at that, but most of the group above has been pretty stagnant despite some serious rally attempts the past 10 days. The links provided for most have discussions on their potential for weakness at this time. JNPR, CME, and BTJ are the only names surprising me with their lack of movement, but extended/hefty valuations could be their issues.

Long AKAM, GOOG, BTJ, FFIV, JNPR, RVBD, CME in fund; no personal positions

A bit of a remarkable quirk

At this moment, 52 of the 53 long fund positions in the fund are in the green. And the 53rd, DHIL is flat (but it's a low volume stock, only trading 8000 shares so far today). That's a first.

All 3 short ETFs are obviously down. :)

Now, we await Bush...

Advance declines on NYSE are 8 to 2, and NASDAQ 7 to 3, so breadth is solid on a very light volume day.

Speaking of the technical analysis from beginning of the week - after all these gyrations this week; we are right back where we started. DJIA, SP500 right back at resistance, right below 50 day moving average, NASDAQ is a bit above, and Russell 2000 is unable to clear the 200 day moving average. So really we are right back where we started the week.

"Surprise event": Bush bailout

Well here is an external type of surprise event that can alter ones portfolio. Bush is supposed to speak this AM about proposals for bailing out homeowners in subprime. I am sort of shocked that it already has come to this, and will keep my opinions about this type of action by the federal government to myself.

News sources say this will only affect 80,000 homeowners, but with that said, the psychological effect off this should be very positive for financials, at least in the near term.

Thursday, August 30, 2007

Investor's Business Daily Interview with Blue Coat Systems (BCSI) CEO

Here is an interview just published on Yahoo Finance with Blue Coat Systems (BCSI) CEO. Some of the basics for those new to BCSI.
  • One thing its appliances do is called WAN (wide area network) optimization. This helps computer users in different places reach remote applications quickly and seamlessly, as if the programs were running on their local network.

  • IBD: Can you explain a little bit about what your products do and who buys them?

    NeSmith: It's mainly large enterprises that buy the products. The focus is around two things: One is how (via WAN optimization) you can accelerate business applications (for instance, so employees can easily use Oracle and SAP software that's running in a data center far from corporate offices). They (enterprises) want to get improvement in overall performance.

    We also focus on Internet access control and what you can do to protect users. Both of those things are really (our) basic capabilities.

  • NeSmith: The market we're seeing is probably a bit more hot than we originally expected. We're seeing a lot of activity. But I don't think it's so much change as (being) more intense than probably anybody originally expected.

  • IBD: What drives this and your other markets?

    NeSmith: Several things. There's remote data centers that you're consolidating into a few data centers. You're seeing the Webification of applications. You're seeing security problems around how people are using their networks. All these are actually the root drivers of our business.

  • IBD: What do you mean by a proxy?

    NeSmith: We call our product a proxy appliance. It sits between the user and the server. It acts like the server to the user, and acts like the user to the server. So we actually act on behalf of the user.

  • IBD: You nearly tripled your profit last quarter. What were the main reasons?

    NeSmith: The biggest driver is, we acquired the NetCache business a little over a year ago (from Network Appliance (NasdaqGS:NTAP - News)) and that's been a big contributor to growing revenue. And we've been making a lot of investments around WAN optimization functionality -- some of the acceleration benefits that we provide on the proxy appliance to help drive it.

  • IBD: Who are some of your larger clients?

    NeSmith: Our largest customers are banks, insurance companies, oil companies, pharmaceuticals, a lot of business with the government.

    We announced (in mid-August) West Palm Beach schools (as a client). They have a 160-node network, which we think is one of the largest acceleration networks in the industry. We probably have a little over 6,000 customers and almost 40,000 of our appliances installed worldwide.

  • IBD: Are you going into any other areas soon?

    NeSmith: We think the security/acceleration capability with the proxy appliance is enough, and we think there's a lot of room for us to grow in that market. So that's where we're going to stay focused for the near term.

Got networkers? Obviously, I don't have enough Blue Coat Systems (BCSI). The stock is currently @ $82, after reaching a high of $87 a few days ago. So it's only retreated to its 5 day moving average. I'd love a move down to its 20 day moving average waaaaay down there at $68 and ramping up by the day; hopefully some meaningful pullback ensues.

To remind readers about BCSI's relatively 'cheap' valuation vs Riverbed Technology (RVBD) - or maybe to remind readers about Riverbed's overvaluation?

BCSI @ $82 has forward PE of 42 on 07 full year estimate (which ends in Apr 08), and forward PE of 32 on 08 full year estimate (which ends in Apr 09)

RVBD @ $44 has forward PE of 69 on 07 full year estimate, and forward PE of 56 on 08 year full year estimate.

Now keep in mind, most likely both companies estimates are conservative so the valuations are not quite as full as they look; but neither is cheap. Also, these companies overlap in their competition in the WAN space but differ in other ways (BCSI has the security features, RVBD moving into the storage space in the future) - so there is no direct comparison as these are unique companies. Also hard to compare them directly to slower growing Juniper Networks (JNPR) which has a lower valuation, but slower growth rates.

With that said, I have been culling Riverbed Technology as it needs to grow a bit into its valuation and digest its massive 70% gain from April to Jul 2007 (in my opinion). I'd like to divert that money into BCSI on a pullback; although one could argue compared to RVBD, BCSI is a 'steal', even after this massive run from $61 post earnings. But in the meantime I am making Ciena (CIEN) my main networking play until these names come back to me, although Ciena has an overhead pricing issue due to some convertibles. I still think its valuation gap will supersede this in the medium term (4-12 weeks).

Bottom line is you need exposure to this space as its a secular bull market. Can we get better prices? I think we will, but it's just a guess on the market and its propensity to pull back. With so few 'relatively insulated' spots for uninhibited growth in the market, money will be pushing into these select names and by nature they will remain expensive; it's just a matter of degree.

Long BCSI, CIEN, JNPR, RVBD in fund; long CIEN in personal account

Test Portfolio for 2009

Click to enlarge

Bookkeeping: Fund positions updated

Just completed the weekly update of fund positions; obviously the tilt to the bearish side is apparent in the cash position and emphasis on index short ETFs.

Positions can be found in the right margin under the label cloud and recent comments areas. All positions of 1.0% or more are shown each week.

Being a long only fund, via Marketocracy rules, the only hedges I have are cash or buying short ETFs.

Cash: 31.3%
56 positions
53 long bias: 58.2%
3 short bias: 10.5%

Foster Wheeler (FWLT) and McDermott (MDR) looking strong

Well it's been at least 4-5 days since I last plugged these 2 names: Foster Wheeler (FWLT) , McDermott (MDR). After the consternation of why MDR was not following in the footsteps of the global instrastructure rebound, it's rallied from the mid 70s to the mid 90s in 2 weeks (+27%), and the chart looks tremendous. I have lightened up a bit on the rally, but will be buying back some of the trading position on any sizeable pullback. Foster Wheeler (FWLT) I was a bit more nervous about the fundamentals so I lightened up a bit more early, but its chart is also a thing of beauty. FWLT has rallied from roughly $90 to $117 today in past few weeks. (+30%).

I am excluding the peak bottoms at $85 on FWLT and upper $60s for MDR since those were 1 day events; you could of bought FWLT at $90 any of 3 days during the correction, and MDR around $75-$76.

MDR is now down to the 4th largest position at >3% of fund. I won't be selling it down anymore short of a rally to the $120 area. In fact, I'd like to add more if it falls as I feel the fund does not have enough since I lightened up a bit. It's been the #1 holding most of the past 2 weeks.

FWLT same story applies. However it's all the way down to a 1.4% position in the fund, as I booked more gains in this name than MDR.

Fluor (FLR) seems to have stalled out since it has such a premium valuation in the group. And Perini (PCR) the other major holding I have in the fund in this group has stalled out below its 50 day moving average so I have lightened up each time its gotten to its 50 day and failed, rebuying lower, and repeating the process - while keeping a core 10K position in the name.

Again, this is another secular bull market. To miss it, despite all the other issues, is a poor choice. The next time the market tanks and you feel sick to your stomach these are the names you want to be buying.

Long MDR, FWLT, PCR in fund; no personal positions

Google (GOOG) can't get any traction - it this why?

I have read this in multiple places but am on the lookout for 'contagion' plays from the mortgage fallout. This is an interesting one titled "Will Mortgage Collapse Hurt Web Ads?"

Some interesting points:
  • financial advertisers account for more than a third of all web advertising, and as the plunging share prices of investment banks clearly demonstrate, the mortgage crisis is affecting a lot more than the mortgage sector.
  • half of the top 10 were mortgage or credit-related marketers
  • But the mortgage collapse could still be the start of a big cyclical downturn. Bulls like Rick note that Bankrate is doing fine, that TheStreet.com's ad sales were up last quarter, and that Google continues to chug along. But as the Bubble 1.0 collapse also showed, this logic is irrelevant: The Internet leaders did fabulously for five years through June of 2000. It's what happens next that matters.
  • But the mortgage collapse could still be the start of a big cyclical downturn. Bulls like Rick note that Bankrate is doing fine, that TheStreet.com's ad sales were up last quarter, and that Google continues to chug along. But as the Bubble 1.0 collapse also showed, this logic is irrelevant: The Internet leaders did fabulously for five years through June of 2000. It's what happens next that matters.
  • And online revenue doesn't have to collapse the way it did in 2000 for online companies to get hurt and Internet stocks to get crushed. It just has to experience a normal advertising recession.
Very interesting points and they have some serious merit in my book. You don't notice all the ads because at some point you just begin ignoring them as white noise but based on how many refinance offers I get in the mail each week, plus all this advertising on the web that is EVERYWHERE for getting a mortgage or refinancing.... this has to be pulled back. What does that mean for Google (GOOG) ? Is this why the stock cannot get any traction even on big up days in the market? The stock is really having a hard time breaking out of its 50 day area band on the chart.

Hmmm... just trying to think of a scenario in October where the teflon stock of our time reports dissapointing earnings. On top of all the other bad news that will be hitting at that time... hmmm... I hope a perfect storm is not brewing. September and October have traditionally had some of the worst single months in the history of the market. A bad report by Google? Could it happen?

I'm going to cut back my Google exposure a bit here, about 1/2. The stocks lack of movement in any of these serious rallies has been a bit troubling, especially with the strength in tech. Again, when in doubt, move to the sideline and see how things pan out. A full blown recession in 2008 cannot be good for advertising either. We are no longer in a growth at all costs era of online advertising - it will at some point turn a bit cyclical.

Long GOOG in fund; no personal position

Ciena (CIEN) swings from +5% permarket to -6% open

I'm a buyer in scale of Ciena (CIEN) here on this drop to the 50 day moving average. A gift.

Per Reuters: "Ciena said it expects its adjusted fourth quarter profit per share to be "roughly flat" compared with its third quarter level."

Now this will disappoint the sequential growth crowd (of which I generally am a founding member), but the jump between this quarters expectations and reality was so high $0.41 vs $0.31 (32% beat) you cannot expect yet another huge jump next quarter. What is important is the trend.

So what does that really mean? That means they think they can make approximately $0.41 EPS next quarter. Companies generally are conservative so we are probably looking at a $0.43-$0.45 quarter.

As of 24 hours ago, what did analysts expect for the next quarter? $0.32

So that's a beat by about $0.09 - $0.13 next quarter... vs analysts expectations 24 hours ago.

Full year estimates for CIEN as of last night? $1.11 for 2007.

They just beat this quarter by a dime, and are now projecting next quarter to be off at minimum by 9 cents, so let's tack on another $0.19 to 2007 EPS. That takes us to $1.30 EPS for 2007 vs analysts expectation (24 hours ago) of $1.11.

That's a 17% increase folks. And at $36 this gives CIEN a forward PE of 27.7 for a company now growing at a 35-40% pace with margins expanding in a market Cisco (CSCO) CEO called the best he has ever seen.

I just added a big swig in my personal account as well; with the move down to the 50 day moving average ($36.20) this is a very nice opportunity.

Ciena is now the fund's number one position on this weakness, with a nearly 5% stake (up from below 2% last night). Pending a listen to the conference call tonight to make sure there are no cockroaches, I could be adding more tomorrow.

Networkers. Got some?

Long CIEN in fund, and personal account

Closing Yingli Green Energy (YGE) position this morning

My crack staff of 1 (myself) finally had time to listen to the Yingli (YGE) conference call last night; unfortunately Seeking Alpha did not have a conference call transcript so I actually had to spend an hour listening to the darn thing.

First, this was Yingli's first public quarter. I came impressed with the depth and breadth of their first earnings report, especially as a Chinese company. Some others I have read through from foreign companies lacked about 70% of the detail that Yingli was kind enough to provide.

Second, operationally I think Yingli appears to be doing very well all things considering (polysilicon shortage in the sector). Revenue growth is tremendous. Capacity expansion is on track. Gross margins are holding (22.7% in most recent quarter), whereas some other players are seeing dips to upper teens or worse. ASPs holding steady, whereas some other players are seeing some substantial dips.

Operationally I like the company. I like their guidance for 2nd half gross margins to hold at these levels. They have 50% of their polysilicon secured for 2008, despite massive expansion plans. I like their focus on Spain (80% of sales last quarter) which allowed them keep ASPs (Average Selling Prices) steady since Spain is not seeing the reduction in gov't subsidies that the biggest world market for solar power, Germany, has been showing.

But here are my concerns:
YGE is a recent IPO - therefore their last quarter they used a weighted average share count, instead of their full share count - which basically means if a company goes public on the 45th day of a quarter (90 days) their average weighted share count in their first public earnings report would be half of the true number. So on the earnings report just published they showed 79M outstanding shares, when the real number is closer to 127M.

Second, they have a confusing and not yet measurable (or at least clearly measurable) preferred shareholder dilution coming up, which could expand outstanding shares even further than the 127M. What exactly the number is, Yingli would not share on the call, despite being peppered by an analyst on the question. He speculated 180M. That is not a good thing.

Stocks are eventually measured on earnings per share. The more shares, the more diluted each dollar of earnings becomes. I remember when Yingli first IPO'd I was dismayed at the huge amount of shares they were bringing public - many companies of this size start with 20-40M shares. Yingli went with the nearly 130M. Hence their earnings growth (per share) would be stunted, despite huge pure earnings growth potential.

So let's look at their numbers.
Last quarter they reported $9.4M in net income.
They had two transitory expenses, which they considered accounting transactions, but essentially were a sweet deal for insiders pre IPO, which resulted in charges of $3.0M and $1.7M. Yingli stated for accounting purposes this was a 1x hit. So let's back that out and say the $9.4M is a good number for net income on $118M in revenue.

$9.4M over weighted average 79M shares = $0.12 EPS
however if it was spread over the 127M shares = $0.074 EPS

So you can see that's a nearly 40% drop in earnings. Even with continued huge revenue growth, growing earnings off a 127M share base is a lot tougher than say 22M share base that Trina Solar (TSL) has.

Yingli has guided for $460 to $480M in revenue for the year, so back half of the year I can only see about $0.20 more EPS generated, maybe $0.09 and $0.11 or so in Q3 and Q4, with expectations of revenue continuing growth (which I don't doubt), gross margins holding (always a question), and ASPs not falling (always a question).

Now that is the story when shares are 127M. What if there is more dilution that the analyst pointed to? While earnings (net income) will continue its great growth, the earnings PER share will be stuck in quicksand. To put into perspective how many shares this is, Sunech Power (STP), the largest Chinese PV maker has about 170M shares outstanding, and its 2-2.5x as large of a company as Yingli.

So this is my main issue, and reason to close this position. One smaller thing which bothers me is the reduction in R&D spending. Yingli spent a whopping $417K on R&D - as a percent of revenue that's negligible. Compare to Suntech's $4.2M. Trina Solar spent as much as Yingli and it's a substantially smaller company. R&D is important to reduce silicon usage, and keeping ahead of the curve in a market that will increasingly become commoditized over time.

If the R&D issue were the only issue, I could look it over, but the share count issue, especially with the unknown dilution possible in the future is the main issue here. It is too bad, because operationally I really like what Yingli has been able to do.

With the expulsion of Yingli Green Energy, I will be looking for a new candidate to fill out my basket of solar stocks - LDK Solar (LDK) looks like a candidate. I have traded this stock from the $20s in my personal account and the stock is now in the $40s and its chart has remained very strong despite the ups and downs of the market. LDK is a more narrow focus, selling wafers but it's an important part of the supply chain.


Long STP, TSL in fund; long STP, TSL in personal account

Ciena (CIEN) earnings strong ; stock up 5% premarket

Ciena (CIEN) earnings look strong on first glance

Expectations were $203M and $0.31 EPS

Numbers came in at @ $205M, and $0.41 EPS. Nice.

Important to me is the gross margin expansion: 47.7% overall (vs 42.3% last quarter)
Product gross margin: 53.7% (Ciena also does services which drags down their overall gross margin), up from 47.3% last quarter. This is important as the Juniper and Cisco's are in the 60%+ level gross margin, so Ciena is making serious strides to getting their product margins to a comparable level. Pricing power anyone?

Everything looks great on first glance. Did I mention networking is back?

Long Ciena in fund; no personal positions

Wednesday, August 29, 2007

New site design, from 2 columns to 3

A huge thanks to Amanda from www.bloggerbuster.com for helping a newbie blogger out with some technical issues. She installed a 3 column template for the website, and adding a label cloud where in a quick glance a reader can see all the topics I've blogged about, along with seeing which are blogged about the most. So a quick click on any name will take you to all blog entries that have to do with that label.

Let me know if you find this new format more informative, easier to navigate ;)
Anyhow, I am excited.

Also, thanks for Seeking Alpha and StraightStocks.com for accepting me as a certified contributor, considering the young age of the blog.

Now, if only I had 4 more hours in the day....

Inflation in groceries, Fed between a rock and hard place

I wrote Sunday: Will the Fed really cut rates?

It seems the pressure from all sources (financial, political, consumer, global) points that this must happen. But the Fed wants to hold the line on inflation.

I mentioned in that post some grocery inflation due to Tyson Foods (TSN):
"But Tyson was able to diffuse cost pressures during the quarter by passing them along to consumers. It hiked chicken prices by 18.8% from a year ago, beef by 13.0%, and pork by 6.1%. That depressed the amount of meat the company sold but helped it boost margins."

Sanderson Farms (SAFM), another chicken producer had its earnings yesterday and some striking numbers - much of it due to this misguided attempt to force feed ethanol down people's throats (when studies show it uses more energy to produce, than it creates!) - via Forbes/Reuters:
  • Increasing feed costs drove Sanderson's worse-than-expected performance. During the third-quarter prices for corn and soybean meal, Sanderson's primary feed ingredients for its chickens, increased 68.4 percent and 12.7 percent rom a year ago. Booming ethanol production has driven those prices higher by gobbling up corn supply and diverting other users to the corn fungible soybean.
  • Sanderson's Chief Executive Joe F. Sanderson Jr. said the high price of grains will continue to pose a threat. "Looking ahead, we expect the market for both corn and soybean meal to remain high and volatile into fiscal 2008,” said Sanderson.
  • During the quarter, prices for leg quarters were up 49.5 percent, while breast meat averaged 24 percent higher, and whole chicken prices were up about 17 percent.
The Fed's main goal is keeping inflation low - hence its bias until that surprise discount rate cut, was upwards... to fight this very real inflation in things people buy EVERY day. If the credit markets were not so damaged, I'd doubt there would even be an inkling to cut rates. Now it seems a foregone conclusion. The Fed is definitely between a rock and a hard place.

No positions

California home prices

There are many blogs out there devoted to the housing bubble. I have peeked in on some over the years; this one is really good: Dr Housing Bubble

I want to highlight this page specifically - on it you can see 10 of the cheaper homes (with pictures) in the area - most go for 200K-$300K or so. In most parts of the country these homes would fetch $25-50K. (if that) Its a quick and easy representative sample of what is going on out there.

Aside from entertainment value, the blog author makes valid points about rental rates. The main issue aside from lack of affordability of these homes for people with 'normal' mortgages is they make no sense in relation to rental rates in the same areas.

Bookkeeping: Closing Limelight Networks (LLNW) position

Just a quick bookkeeping note: for the same reasons I sold off most of my Akamai (AKAM) position this AM, I am closing my tiny Limelight Networks (LLNW) holding. The position was tiny in the first place and if I am going to be in this sector in any way, it is better to be in with the more stable and profitable player, AKAM. I don't need 2 names in the same spot.

LLNW is projected to make $0.00 EPS this year, and $0.14 EPS in 2008. Even if that is off by a factor of 50% (meaning the analysts are really underestimating the power of LLNW), at 2008 $0.28 EPS x 30 forward PE you get a stock price of $8.40.... in 16 months! Which is where it trades today. So probably dead money. Not that it cannot go up, but I'm trying to stick to the more sure names and hit a lot of doubles and singles, with a few triples thrown in. This is more of a whiff or home run play at this point, especially with the new data points emerging on pricing. Even if it doubled from here, I don't have enough skin in the game for it matter to the fund's performance - nor do I have confidence in this name to build a larger position at this point.

It is funny, as a private company Limelight Networks was touted as the Akamai killer, but once the reality was brought to bear in public markets it doesn't look so scary anymore. Did I mention Akamai has some patent infringement lawsuits pending versus Limelight? Essentially - why bother in this environment. And no rally at all on a day like this?

Down to 56 names in the fund, 53 long, and 3 ETFs that give short index exposure.

Long AKAM in fund; no personal position

Chinese solar stocks outperfoming today

The funds top 10 is overweighted with Chinese solar so on today's run I am going to lighten up a bit. Some of these stocks have had some serious weakness in the past few weeks based on concerns about procurement of polysilicon but are showing some nice rebound today.

I decided to average down on these names since I like the longer term story, but I did not intend them to be the 2nd, 3rd and 5th largest positions which Suntech Power Holdings (STP), Trina Solar (TSL), and Yingli Green Energy (YGE) had become. So I am taking some off the table here on the strength. I still would like to be overweight the names but not as 3 of the top 5 positions. While I have been selling off other names into strength, these stocks had remained down in general so I didn't have an opportunity to lighten up. I don't see any particular news other than an oversold condition. Taking about 10-25% off the table on these 3 names.

TSL +9%
YGE +7%
STP +4.5%

On the flipside, I continue to add to the ETF hedge shorts on this powerful and impressive rally. I guess Big Ben is going to whisper enough sweet nothings from his camp excursion in Wyoming to make it all better :)

Edit on the rally today: I see all the fuss is about Big Ben writing a loving letter to Senator Schumer. Without the benefit of sitting at home all day and hearing the CNBC hand wringing/cheering - you miss some of these things.

He wrote that Fed policymakers are "prepared to act as needed" if the market's turbulence hurts the economy helped pad the market's gain.

My take: Wow, what a shocker. The Fed is prepared to act as needed? Which is why they are here in the first place? I guess thats news worthy. It always amazes me what news events drive the markets. Didn't the 50 basis point discount reduction signal to everyone that the Fed is 'prepared to act' - or what about the Fed injecting liquidity into the market on a daily basis for 2 weeks? (seems like they were 'acting' there) Nope - it needs to be spelled out in a love letter to a Senator before people believe it. (But I could say the same about yesterday's end of day selling on Fed minutes written nearly 4 weeks ago! Why react to a Fed discussion back then before they took all these actions?) Humans and their emotions.... so amazing. As always.

Long STP, TSL, YGE in fund; Long STP, TSL in personal account

Cramer on Polo Ralph Lauren (RL) back in May

Every trader gets it wrong sometimes. However, the adherence to all things Cramer by the retail crowd bemuses me. I mentioned yesterday the tell that Coach (COH) is on the higher end consumer - someone also pointed out Polo Ralph Lauren (RL) . Looking at the chart I see a stock that has fallen about 30 straight points down, 30% in just 6 weeks. Ouch!

Just by chance I ran across this Cramer plug of RL on TheStreet.com, May 31st @ $98:

"Polo Ralph Lauren (RL) is headed higher, Jim Cramer said Thursday on CNBC's "Stop Trading!" segment.

Cramer said Polo is "stealing margin" from the major department stores, based on its strong brand. He likened this change to the 1990s, when the pricing power shifted from the PC makers ... to the makers of PC innards ... because the key intellectual property was based on those two suppliers.

"This is a balance of power shift," Cramer said. "Analysts are starting to get it." He said Ralph Lauren could easily hit $120 from a recent $98.

Oops. The stock traded between $95 and $102 for about 6 weeks before the above mentioned demolition. Now I don't know Cramer's 'holding' period but it sounded like a long term secular change as RL is stealing margin. Without a 'time frame' on his $120 call it's hard to say what it is. But $120 from here (low to mid $75s) is over 60% gain. I wonder if he is still bullish? ;)

Again, we all make some (in retrospect) dumb calls. I am sure I will have some doozies here for the world to read in the blog. But this call, in light of the overextended consumer, just caught my eye. I guess we can throw Polo Ralph Lauren (RL) in there with Coach (COH) and see both are 'telling' us the same thing.

Long Cramer for entertainment value and education only
No positions

Ciena (CIEN) reports tomorrow

Continuing on the theme that a secular bull market has returned to networking let's see what tomorrow brings Ciena (CIEN).

Analysts are looking for $203M in revenue and $0.31 EPS.

Last quarter Ciena recorded $0.26 EPS on $194M in revenue (revenue was up 48% year over year). This beat estimates by $0.01 on the bottom line and $14M on the top line.

They also lifted full year guidance at the time, pushing revenue growth year over year to 36% from a previous forecast of 27-30%. Gross margins, however, did fall from 44.6% to 42.3%. (Juniper and Cisco for example have >60% gross margins)

One main drawback is the extreme concentration on just a few customers - Sprint (S), Verizon (VZ), and AT&T (T), accounted for 50% of 2006 revenue.

Ciena was on the many go go tech stocks in the late 90s/00; interesting to see some of these names come back. If Cisco (CSCO) is any bellweather, I expect more positive news about the future and strong pipeline.

Investor's Business Daily ran a report here about CIEN on June 29th
  • "The underlying demand drivers for optical networking equipment have never appeared to be more robust," Piper Jaffray analyst Troy Jensen wrote in a client note.
  • Ciena makes equipment used in citywide networks and long-haul data lines. It also makes switches that get data to its destination and access components that help customers deliver telephone and high-def TV over the Internet.
  • Its customers are telecom giants, cable companies, large enterprises and governments.
  • Telecom companies and service providers laid vast networks of fiber that were to be the backbone of the New Economy. Then came the dot-com bust. Now, much of that dark fiber is being lit, thanks to video and a slew of other information-dense applications. Service providers are updating the switches in the system. And they're stringing fiber straight into homes to deliver even more services.
  • Internet video uses 1,000 times as much bandwidth as a single e-mail
  • YouTube. The Google-owned video-sharing site now uses the same amount of bandwidth as the entire Internet consumed in 2000, computer pioneer Michael Dell said in January.
  • Once a solely fiber pure-play, it went on a buying spree, picking up six companies since 2001. That expanded its product and customer base, turning it into a broader-based network services firm.
  • Ciena typically relies on several customers for almost half of its revenues -- four customers each contributed more than 10% last quarter. But because of various project cycles, that revenue is lumpy.
Long Ciena in fund, no personal position

Why a rally today?

I must say I am confused why there is a rally this morning. I am taking the opportunity to add back some hedges I sold yesterday (the short ETFs)

On the bad side of the ledger you have.... everything

On the good side you have a "surprise rate cut".

That doesn't seem to be a very good equation or bullish case. And with each day people expect a surprise intra-meeting rate cut, I guess it becomes a little bit less of a surprise, doesn't it? The Fed is having a club gathering in Wyoming so people are looking at commentary Friday and perhaps the "surprise" cut then.

So let's follow the path ---> no cut ---> Fed will cut by 1/4 at next meeting Sept 18 --> Fed will cut 1/4 in a surprise move before Sept 18

What's next once that is priced into the market?

I guess the only 'surprise' at this point is a 50 basis point cut before Sept 18... now that would be a surprise. But also would indicate - HOLY SMOKE are things THAT bad? This the same Fed that was considering raising rates 30 days ago, so an about face of that proportion, while perhaps causing a snap back rally in the market, would indicate there is a lot of cockroaches that the Fed is finally waking up to.

I'm just not buying this rally, or any good reasons at least behind it.

Level 3 Communications (LVLT) as a threat to Akamai Technologies (AKAM)?

I mentioned a few days ago the must read blog if you are a content delivery network investor; well today Dan Rayburn has a pretty bearish article if you are a Limelight (LLNW) or Akamai (AKAM) investor.

Some high (low) lights:
  • If you thought the pricing wars between the CDNs was fierce today, just wait till the next quarter when Level 3 enters the market with it's new content delivery service for video.
  • Based on everything I have seen, Level 3 has finished it's CDN initial build-out for the caching and progressive download of content and is nearly complete with being able to support the delivery of video via streaming.
  • And if my prediction is right, I expect Level 3 will come to the market with an aggressive marketing campaign talking to competitive functionality and performance at a much lower price. And I don't mean slightly lower, I mean less expensive by a wide margin.
  • While that would not be a new tactic by a CDN, (remember iBEAM?) it is unique to Level 3 since they own the network and should be able to have lower costs than anyone else.
  • Now I know that some CDNs will say that it does not affect them as they sell "value added services" and customers will pay more for those, which is true, but only at times. Not all customers need more than a CDN product and if that's all they are looking to buy, then additional services won't allow CDNs to keep their pricing higher for that specific customer.
  • Also, Level 3 is an interesting one to watch in that it also offers co-lo and other services, so some of the CDNs who offer those additional services are getting a competitor on multiple levels when it comes to the product portfolio.
  • Does cheaper pricing mean Level 3 is guaranteed to succeed? No. They have to prove they have a reliable network, have the geographic reach customers want and have all the other services that go along with a CDN offering like reporting, SLA, customer service etc. in order to be taken seriously. But when they have all of that in place, which I expect will be before the end of the year, Level 3 will have a service that the other CDNs will have to compete with.
  • Level 3 is not looking at this in the short-term and clearly wants to win not only the business that is out there today for short-form content, but really win down the road when it comes to long-tail content.
Now, I have to say this is a different animal than previous competitors to Akamai; as Level 3 owns its network, has billions in revenue already and can be aggressive on pricing to enter a market. I view it a parallel to when Microsoft (MSFT) entered the video game market with Xbox; video games were just a gnat on the elephant's (Microsoft's) behind in terms of revenue at the front end so they could afford to lose money and be aggressive on pricing. Now one could say, well how has it worked out for Microsoft in the long run? That is the wrong question - the question is, how did it work out for the other video game hardware/console makers. Yes, Nintendo is doing well but its due to a revolutionary product (Wii), but before that both Nintendo and Sony Playstation had to adjust and experienced some struggles. So even though the overall market (video games) is growing, as is the CDN market, an aggressive new player who can actually afford severe price cuts (unlike LLNW) could really hurt revenue/margins for existing players.

I am going to cut back my AKAM position 80% on this news and see how things shake out. If this was 1 isolated event, that would be one thing but there seems to be a lot of issues in regards to pricing as highlighted in this blog for the past few weeks, and each price reduction is lost revenue.

One could argue, why take such a strong action in the stock on a future event and one that is not even a guaranteed outcome? My answer is, with so many solid plays out there, with far fewer questions than the CDN space, why bother with large positions in a sector with storm clouds above? Competition is great the consumer of said products - not so great for the investor though. So I will retrench in this sector for now and see how it plays out in next few quarters.

Long AKAM in fund; no personal position.

Tuesday, August 28, 2007

Cisco (CSCO) has been a rock - the return of the network lives on

Cisco has been an absolute stalwart in this up and down market. While I am not traditionally a buyer of large caps or in this case mega caps; it has to bode well for the entire group

I have a basket of these names to play the trend:
  • Juniper Networks (JNPR)
  • Riverbed Technology (RVBD)
  • Blue Coat Systems (BCSI) [not enough though]
  • Ciena (CIEN) [still would like to see more data to see if this company is truly participating in the new boom but thus far its chart has held up]
Once the market settles down, this appears to be a bull market although valuations in some of the names esp. RVBD are quite stretched. I'd love to load up more at lower levels if the market is willing to give a gift. But here is a case where the technicals are telling you the same story as the fundamentals, so when both analysis are on the same page, you can feel a lot more confidant of the mid term holding period in these names... short term is always determined my emotion more than anything though.

Long JNPR, RVBD, BCSI, CIEN in fund; no personal positions

Names in the green today...

Always useful to see where the pockets of strength are on days like today

Stocks finishing in the green or very close
Core Laboratories (CLB)
Riverbed Technology (RVBD)
SanDisk (SNDK) <--- I bought a bit more of this today
Diamond Hill Investment Group (DHIL) <--- yes a financial that is up, now that's strength
McDermott (MDR)
Trina Solar (TSL) <--- well it has been beaten down so much of late not sure what today's strength really tells us
CME Group (CME)

And that's really all of interest in my watch group.

Long CLB, RVBD, SNDK, DHIL, MDR, TSL, CME in fund; long TSL in personal account

Quite an ugly close, Russell 2000 leading the way down

As mentioned in yesterday evening's post, the Russell 2000 has the weakest chart of the major indexes and it outperformed today; unfortunately it outperformed to the downside, with a 2.5% drop. The rest of the indexes weren't much better with losses in the 2.1-2.3% range.

NASDAQ has already fallen all the way from the 50 day to 200 day moving average in 1 session; whereas SP500 broke its 200 day moving average today with it's bad close. Only the DOW is more than marginally over its 200 day. So the technical damage continues. In 'normal' times, I don't focus so much on the averages, but these are obviously not typical days....

With the market ending on the lows of the day, generally this not bode well for the next morning. I sold a bit of the hedges (short ETFs) into the close, but only a bit. The fund was down 1.4% today despite almost being 1/3 in cash by mid day and >10% short at mid day. That speaks to the damage in individual names. Going to remain patient and apply cash judiciously with the assumption we have some more weakness ahead.

Even good old McDermott (MDR) which was the only infrastructure name up all day, went a bit negative at day end. I am glad I exited much of that Aluminum Corp of China (ACH) on the spike yesterday as it fell >8% today, as did iShares Xinhau China 25 (FXI). Might present a nice trading opportunity in the coming week(s).

Long MDR, ACH in fund; no personal position

Doug Kass of Realmoney.com reporting a pre Fed meeting rate cut is highly possible

Doug Kass is a well respected trader who writes for Real Money (Silver) and appears in many other places, both in print, on the net, and on TV. Today he says his contact in the Fed is giving an about face from earlier rosy views on the economy. This has him speculating that a pre Fed meeting (Sept 18) cut is in the offering.

While I think the a rate cut is already 'baked' into the market, my assumption is it would happen at the meeting and thus not have as large of an effect. However, a surprise cut could boost the morale (if even short term) of the market; even though it doesn't really solve any of the serious credit issues. But sentiment is sentiment.

While I remain in the 25% cash position, I have pared back the hedge ETF positions quite a bit. While none of the thesis laid out changes, sentiment could be affected near term with a 'surprise' (earlier than meeting) cut. Now normally rumors are just that, but considering the source, his relatively level of 'connectedness' (if that is a word), and the fact it came from a source inside the Fed, makes you take note.

A rate cut, to me, still remains window dressing for the issues facing the market. I still will be on the look out for lower levels to add to long positions. The charts across the board, still leave much to be desired.

Edit: With the sales of the ETFs to smaller positions, cash is now up to 30%.

Long SKF, SRS, TWM in fund; no personal positions

Coach (COH) as the true retail tell

Many people are citing the deteriorating retail numbers as a tell on the economy; citing Walmart (WMT) in particular - well I'd like to use Coach (COH) as my tell. This has been a wonderful stock that I've traded a few times over the past few years, but in truth just buying and holding this stock would of been the better play many times.

Since its summer lows in 2006 in the mid $20s the stock had risen to the mid $50s as recently as late April. Then a slow and steady decline has ensued.

When I started this fund in early August I put a tiny stake in Coach as my only retail play, but then quickly sold out at $44. I mentioned then: "Coach is a bit of a status symbol, and something many people in mid/upper class suburbia buy. The problem is many people in suburbia are overextended on their $600,000 home bought with 0% down interest only loans. This does not mean they they don't have good credit; it just means they are very leveraged. So it's a risk."

So in fact I think this is a lot better tell on the economy than Walmart. The core customer of Walmart is more of the discount shopper already strained by the hikes in gas, energy, and now grocery prices.... whereas the core shopper of Coach is the suburbia soccer mom who loves her trinkets (do you know there are even websites now where you can rent a purse, errr... handbag - in fact, I just googled and I also found a competing site.) This speaks to America's obsession with appearances and keeping up with the Joneses. Even when one cannot afford a handbag, one can pretend to show others they can afford it for the evening. So with this subset of consumer being the main subset buying $450K homes in northern VA, $600K homes in southern CA, $800K homes in northern CA, $400K homes in AZ/NV - many with little down and some scary initial 2 year teaser terms, I am watching Coach to see how it performs. To me, it's a great tell.

Even in this recent rebound the stock never bounced back to reach its 200 day moving average of $46, and its 50 day moving average is about to cross over ($46.50) the 200 day... the "death cross" discussed yesterday - bearish. Stock opened $45 yesterday and now down to $41.50. It spiked down to this level on the market washouts in mid August ($41) - but looks poised to go lower this time. If it does, what is it 'telling' us?

As an aside there is a gap in the chart in Oct 06 north of $36. If the market continues to wash out this level appears more likely by the day. If I could short in this fund, this is a name I'd be short - despite the long term play here and the international expansion opportunities. Coach will be a good buy again someday. But from cheaper levels in my opinion.

No position

Lightening up on many positions

Quick update:

Too many names to mention but just went through a slew of charts and most look identical to the index charts I mentioned last night - rebound to 50 day moving average and now falling back. So I am cutting many positions by 15-33% and raising cash.

If the market turns on a dime and breaks through these resistance levels, I will have to buy back a bit higher level, but right now the bias seems to be down, and I hope to buy back at lower levels.

Notable exceptions/pockets of strength are the trio of "not as cyclical" energy names I mentioned last week - all these are holding quite a bit above their 50 day moving averages. If the market tanks, they will fall too, but I want to be adding not selling these positions on pullbacks, plus none is more than 2% of the fund at this time.

Cash is up to about a quarter of the fund now.

Long Cash

China "A" shares bubble

Just thinking out loud. In February 2007, a 7% one day drop in China A shares (who trade in their own twilight zone) precipitated a worldwide market correction for 3 weeks....

With the equivalent of the US Fed in China raising interest rates multiple times this year, now >7%....
With the reduction of demand for A shares, in the form of opening new markets (Hong Kong) to individual investors....
With the growing backlash against China products due to safety issues....
Will that dent demand in the near term? Increase costs?
What about the price inflation in food in China?

What does it mean? What would a 20% reduction in 3 weeks in the China A shares mean for world markets? If a 7% 1 day drop caused some serious issues back in late winter. And layer that onto the current environment - how would people react emotionally?

I think the China A shares are due for a fall, they are exhibiting bubble like behavior and have been so for a long time. Having lived through NASDAQ 99-01, it sounds very similar - with the same news stories you read back then - housewives daytrading, investments being pulled out of savings and into the market, "how easy it all is", investment gurus sprouting up on the internet in China, etc. The case for China (India) remains strong for the next 10+ years, but the next 12-24 months? Hmmm.... everyone says there will be no issues with China until at least the summer Olympics in 2008. When everyone says something, that makes me nervous. Consensus and group think... wasn't that what got the quant hedge funds in trouble?

Now some people were calling for the fall of the NASDAQ by late 99, and the market just continued upward for nearly 16 more months thereafter so making a call and being right intellectually doesn't mean much if you waste all your capital (as many shorts did in those times). They were right eventually but most did not have cash to take advantage of the dramatic drop.

Again, this is a huge secular play - this coming out party for 3/5 of the world's population (China/India) but that does not mean there will not be dramatic drops during a long term uptrend. 40-60% annualized gains in emerging market mutual funds year after year just don't happen, but some people seem to be expecting it. Hence I am extremely cautious on this group. Without an instrument to directly short the A shares you can only sit and expound, but I think as important as the drop in that market (when it does eventually happen) will be the hand wringing of 'what does it mean?' - while I think its relatively benign other than a confidence killer, economically - once human emotion is involved, things can take on a life of their own so that will be the main worry.

For those who enjoy super beta and like risk.... one play might be some put buying on the FXI mentioned yesterday iShares Xinhau China 25 - just for reference with the ETF trading @ $145, a contract such as January 140s trades at 13.10/13.60 (FAHMH) - again these have surged based on the opening of floodgates to Hong Kong, but if there is any serious correction in the A shares, they would go down as well. FXI has gone from 120 to 155 in about a week (nearly 30%)... let's watch it.

No positions

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