Tuesday, September 11, 2007

Chinese Inflation Highest in 11 years - Why Do You Care?

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I talked about the bubble forming in Chinese A shares here. I am not the first nor will I be the last. I cited impending food inflation as a major issue. Well overnight China reported its highest inflation in 11 years. Now we were too busy here breathlessly awaiting our 25 basis cut to care about small things like the world's emerging superpower experiencing runaway inflation.... why should we care? That stuff isn't very cool or interesting. Big Ben talking in Germany - now "that's hot" (citation to Paris Hilton so she doesn't sue me for $100K)

Remember, our "everything will be ok thesis" is once we pull through this 'minor credit issue' the world's economies will pull us through that 'minor consumer slowdown' we are going to experience. But with the growing Chinese middle class spending more on food - this cuts into their spending habits... no? I mean only XX% of the population is going to be buying new Buicks or flat screen TVs and benefiting from the falling prices for some of those items that middle class are now enjoying - but everyone, from rich to poor, needs to EAT.

Also, remember we import so much from this country of "CHEAP" labor. What happens when they demand higher wages so they can do minor things like... EAT. Chinese companies are already skimping in quality control since they are trying to outdo each other on pricing - and you see the results in dog food, kids toys, and I am sure I already forgot a few others in the near weekly recall news. So increased safety regulations, increased wages for their workers - and suddenly Chinese goods become more expensive.... and who pays? The US consumer - in the form of potential inflation. On top of the high food and energy prices she is already paying.... but wait, that's what the Fed was fighting all these months... trying to keep a stern eye on inflation. Keep it at bay. But now, with the market crying for interest rate cuts like a 16 year old girl wanting the coolest, rad car for her sweet 16th from daddy - oh we have another rock and hard place quandary. Amazing how this is so circular.

But everyone tells me China was in the greatest industrial revolution in the history of mankind, minting 100s of thousands of middle class (and daytraders) by the month. Well nothing is so smooth. We, as humans, tend to extrapolate the most recent past out to the future. While this will be an economic superpower, managing 10% GDP growth is no easy task.

Check out these numbers:
  • Consumer prices rose 6.5 percent in August from a year earlier after gaining 5.6 percent in July, the Chinese statistics bureau said Tuesday.
  • The central bank and economists fear that surging prices for food, particularly pork, will start rippling through the economy as people expect further price increases and demand higher wages.
  • "Inflation expectations have begun to rise, and the government should do something significant," said Jim Walker, chief economist at CLSA Asia-Pacific Markets in Hong Kong. "Otherwise, the stock and property bubbles will get bigger and eventually crash."
  • The statistics office said inflation had been driven by an 18.2 percent leap in the cost of food, which accounts for a third of the consumer price basket.
  • Meat prices rose 49 percent in August from a year earlier, reflecting a shortage of pork, the staple meat in China. That results from a 10 percent drop in the Chinese pig population because of blue-ear disease and fast-rising feed grain costs, even as prices for pigs fell last year. Cooking oil cost 34.6 percent more in August than a year earlier, eggs were up 23.6 percent and vegetables 22.5 percent.
  • The rising cost of such everyday goods has people grumbling and leaders worried. Inflation was one factor in the unrest that led to the 1989 Tiananmen Square pro-democracy protests, which were crushed by troops.
  • The latest figures raise the risk of social unrest as the Communist Party prepares for its 17th National Congress, which starts Oct. 15. The congress is held every five years to decide leadership changes.
  • "Replenishing the hog supply will take time," said Carl Weinberg, chief economist at High Frequency Economics in New York. "This is a political problem that is likely to surface as a criticism of the government."
  • But many economists also say that the central bank may need to raise borrowing costs to limit inflation and slow growth. Inflation has now exceeded the central bank's annual target of 3 percent for four consecutive months.
  • To keep a lid on inflation and prevent the economy from overheating, the central bank has raised interest rates four times this year and ordered banks seven times to hold more funds in reserve.
  • "What worries me more is the liquidity in the market," Wuttke said. "There is so much money, and given all these exports and the money that comes back in U.S. dollars and also this easy credit, that really causes a major concern."
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Hmmm, with such an interconnected global economy it's amazing what the rocket ship rise in pork prices in provinces in China could do to main street America.... as a great philosopher of our time, Scooby Doo once said... "Rut Roh Raggy".

Interesting sidenote fact I learned while reading the stories tonight: China has a "Strategic Pork Reserve (stockpiled in cold storage and animals kept on the hoof)" - I kid you not. You know... like our strategic oil reserve, except ....pigs.

Amazing what you learn on the internet these days. ;)

Just another data point people.... remember what a 9% drop in China's market did in February/March 07. What if the domestic market (up 150%+ this year) drops say.... 20-35%. On top of all the other headwinds. Just something to think about. Nothing goes straight up, or 50%+ annualized for 5 years.... nothing. "It's different this time" <--- not so much.

Fed Interest Rate Cut Odds

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I put a poll up, so readers please chime in - what will Big Ben do next week? The poll will close @ 2 PM on the 18th.

Now, while I don't think it matters much (changes take quarters to filter through our economy) other than psychology for investors - here is how I think the odds stand and the market reaction ....

No cut: 20% - Market reaction: SELL-OFF! Market is so pricing in this cut, if Big Ben doesn't follow along people will be aghast and say the Fed 'does not get it', 'is behind the curve', and 'won't give us our lollipop back'.

25 basis points: 75% - Most expect this although after last Friday's job report the knee jerk is to ask for more. Also, others say the Fed needs to look ahead need and cut 50 basis points. While in economic theory I somehow agree with that (although from moral hazard I do not), I don't see this Fed being that aggressive. Market reaction: Probably some mild spike in first 15 minutes until people realize investment banks report after 4 PM that day. Doh.

50 basis points: 5% - As we all know a 50 basis point cut would solve all world hunger, make the poor rich, stop global warming, and bring back the any species of flora or fauna on the endangered species list. Also it would create rainbows as a side effect. So Wall Streeters demand it. It must be. To not do so would be foolish. Alan would of cut by 75 basis points already in 3 intraday meetings - heck he might of done it all in 1 fell swoop the first time the market fell below the dreaded 4.4% mark from all time highs. You know, Dow 13,400! We cannot allow these travesty's to happen. Market reaction: 1000+ rise in 3 days as rainbows abound.... rainbows have been proven to solve all credit ills and unfreeze commercial paper operations. Source: my imagination.

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So we shall see how things play out. More interesting to me, will be the bias going forward and the corollary discount rate cut; if Fed funds are cut 25 basis points, won't the discount also be cut 25 basis points to keep this 50 point spread? Or will wily ole Ben, only cut 25 basis points on the Fed funds but 50 on the discount rate? Or maybe no Fed funds cut but 50 on the discount rate!?

Oh high drama ....

Most important, outside of the outlier event, what happens on September 19th? Does the whining begin in earnest for the next meeting, 6 weeks away? Oh gosh. Say it ain't so.

Yahoo (YHOO) vs Google (GOOG)

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Now that the site has been up for a while I looked back at some of my analytical data to see what is driving data in the search engine space; Feedburner has some nice statistics on this.

If this random sampling is representative of what is going on in cyberspace, the story for Yahoo (YHOO) is even worse than I thought in search, relative to Google's dominance. Or, my blog is very hard to find in Yahoo Search. ;) Always a possibility.

But 96.8% of all searches that found my site came through Google.... leaving a whopping 3.2% via Yahoo. Ouch. And that does not even include the Google Blogsearch function which is its own animal. So either Yahoo does not index blogs very well, or Yahoo is getting their lunch eaten even worse than the big aggregation rating systems say. With that said, I love Yahoo Finance and use it constantly, but have to admit I never use the Yahoo Search anymore. Yahoo seems to be a more sticky site in terms I stay on its family of websites longer (which is probably still good for advertisers), but if I want to actually find something off the Yahoo network, Google it is. I guess it's not just me.....

Now I think Google might have it's own issues in the near term, but certainly search is not one of them. For those who are curious on what search term brought the most people to this little corner of blog land? Eric Bolling! :)

As an aside, for those of you who been around long enough remember ... Excite? Lycos? Yahoo? Oh where have you gone young exciting search engines of 2000 trading at 78x revenue..... I thought there was 1 more, but it's been so long the name escapes me.... Google is doing to Yahoo what AOL did to Compuserve (anyone remember Compuserve? Yeh, I thought so)

Long Google in fund; no personal position

Oh Cramer!

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Much as I love Cramer as an entertainer and a great hedge fund manager, you can see he is a momentum player of the worst sort at times like this. Not 3 weeks ago in mid August he was getting calls about blog favorites McDermott International (MDR) and Foster Wheeler (FWLT), and saying "Don't Buy!", "Don't Buy!" MDR was (split adjusted) mid $70s at the time and FWLT around $90 ... I am not picking their lows of August, just prices you could of picked them up during the week I remember him getting calls about the names and saying "now is not the time to buy". Meanwhile, 3 weeks later MDR is (split adjusted) nearing $100, and FWLT $120...gains of 1/3rd in each gain ... in 3 weeks.

Now it is fashionable to pick on Cramer and as a pure entertainer, and 'educator' to the unwashed masses I think he is a good thing. Perhaps his inability to turn on a dime with his picks hurts his credibility on the show, because if he says A about stock ABCD one week, and then the stock turns a week later, he can't change his pick that rapidly ... so maybe this is hurting his 'on air credibility' with his picks, but truly it appears when stocks are in uptrend he says buy, and when they are not he says don't buy. Classic momentum trading. While I agree with this to some degree (not buying stocks under specific moving averages unless they are in panic selling mode).... I found today's commentary on RealMoney.com (subscribers only) about how we are in at least a 2 year bull market for these names to be a bit hilarious considering he didn't want people to be buying 3 weeks ago, 33% lower. Funny. I guess the 2 year bull market for this sector was not in effect 3 weeks ago? (now in fairness he was bullish on these names earlier than 3 weeks ago, but not to buy on such serious pullbacks in the names befuddle me)

By the way, McDermott split today - technically a non-event, but seems to usually benefit a stock's investor base positively in the near term. For new readers to the blog, McDermott was the biggest fund holding the first few weeks of the fund, when it was in fact at far lower prices (buy low, sell high?) Or something.

p.s. I do agree on the 2 year (in fact more) bull market in these names, and when (if?) crude drops I expect these names to be sold off, which will just be another buying opportunity for people who don't understand the story. Same thing when China finally does correct....

Long McDermott and Foster Wheeler in fund; no personal positions

Russell 2000 Continues to Underwhelm

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While this rally looks ok on the surface it seems to be large cap dominated. And even then it's not that impressive (as of 1 PM... things can change on a moment's notice) - most major indexes are up 1% or so, but the Russell 2000? A whopping 0.04%. Small caps continue to be chucked out the window as people move up the risk ladder to safer investments and/or companies with more international operations, which generally are large caps.

But even the large cap rally .... its 6 to 4, advancers to decline. Not very impressed with it at this time.

Riverbed Technology (RVBD) Continues to be Weak

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You can see my thoughts on the weakness in Riverbed Technology (RVBD) last week here. The stock continues its downturn as the psychological barrier of $40 didn't provide much support. No major surprise there. With the stock firmly below its 50 day moving average of $43, the stock is now sitting at $39 which is where it bottomed out in the August drop (save for a few hours during the waterfall selling panic on the 16th). I added a tiny bit here today, but am awaiting the most likely scenario of a further drop to the 200 day moving average which is just below $36.

Charts like this are not very good ones to trade. The stock is sort of in no man's land - quite a bit below its 50 day moving average but still quite a way's away from its 200 day moving average. I did mentioned the overvaluation of Riverbed Technology versus Blue Coat Systems (BCSI) here, and this scenario of the 2 stocks reverting closer to each other's valuation seems to be playing out.

I see WR Hambrecht is out with a note, defending the stock and claiming some of the weakness is attributed to financial customers possibly pulling back on technology spending as they face fallout from the credit environment. Interesting theory, but I just think it's an overvalued stock compared to it's peers. Even if the stock of Riverbed falls to $36 (nearly 10% drop from here), it will be trading @ 56x 07 estimates and @ 45x 08 estimates. Compare this to Blue Coat Systems which at $77 is trading @ 40x 07 and 30x 08 estimates. Clearly Blue Coat remains the better value - but please note these are not 100% apples to apples competitors although they do have a lot of overlap now in the WAN space.

My goal/preference is to be more overweight Blue Coat Systems in the fund, over a smaller Riverbed Technology position, even though currently Riverbed is the larger position simply because its closer to my preferred price targets. I am hoping, if the market exhibits significant weakness, for a larger Blue Coat Systems fall.

Long Riverbed Technology and Blue Coat Systems in the fund; no personal positions


Adding to my UltraShort Financials (SKF) Today

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UltraShort Financials (SKF) bounced up 3% today, so I added more exposure to the fund. I really see no good news on the horizon and any bounces to me, are times to add.

Aside from some strength in Goldman Sachs (GS) yesterday, the rest of the sector looked quite impotent yesterday, and the fundamental background remains poor and worsening. It's going to be confession time soon enough, and my thesis is the market is not anticipating fully what is coming down the pike, despite the stock prices already dropping quite a bit.

What does this ETF short? The Dow Jones Financial Index

All holdings in this index here. It's a bit imperfect for what I want to do, but close enough. The top 5 holdings make up 40% of the index, these names are: Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Wachovia (WB)

Actually as far as financial stocks go, this top 5 has some stocks I don't think are so bad such as BAC, WFC, and WB. But again, its an imprecise tool, since I am limited on what I can buy in terms of short positions in the Marketocracy fund.

Long Ultrashort Financials in fund and personal account

Closing the Last of my Akamai Technologies (AKAM) Position

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I am closing the last, small portion of my Akamai Technologies (AKAM) holdings this AM.

For previous comments on Akamai please see this link.

In late August I had sold off 80% of my position around $32; thinking I'd keep the other 20% just to keep an eye on things; but the stock has just continued to degrade in that time. At this point, I can't really call any stock in this sector one of my top 50 ideas so I am going to exit for now and re-assess the landscape in the sector in a quarter or two. With a 0.2% position in the fund, it's just a 'holding' position for me, to sort of keep an eye on, but I can do that out of the fund as well.

There are too many cross currents blowing right now, most of which don't bode very well for pricing in the CDN market.

I am taking a roughly $600 realized loss in this position, but considering the name dropped from $34 to sub $30 in the time since I opened a position (>13% drop) its a pretty limited loss since I culled the name quite heavily on the last uptick in price. This does not mean Akamai can't rally in the near term but fundamentally and technically (stock wise) the stock has a lot of issues, so it's best to exit stage left and concentrate on other names for now.

No positions





Monday, September 10, 2007

Added to Blue Coat Systems (BCSI) Today

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Despite a downgrade this morning on valuation, Blue Coat Systems (BCSI) had an impressive day. BCSI closed @ $76.38 Friday, it opened around $75 before dipping to near $73 around lunch time. From that point, the stock did a near 45 degree angle run into the close north of $76. Blue Coat Systems (BCSI) was one of the stocks on my shopping list. While my dream scenario is a drop down to the 50 day moving average in the low $60s, I just like the fundamentals a lot, so I jumped in today since the stock hit its 20 day moving average (north of $72) and bounced back nicely. I added about 100 shares today in the $74s to bring the position up to around 1.9% of the fund. In the $74 range, the stock is down about 15% from its recent highs of >$87.

I'd like to add a lot more but was/am hoping for more of a pullback to top off the position. I am going to disagree with the analyst on his valuation call in this name.

For new readers, more about Blue Coat Systems here, or click on the label cloud to the right to see all posts regarding this name.

Long Blue Coat Systems in the fund; no personal positions




Financials Ugly: Washington Mutual (WM) Chimes In - Investment Banks Next?

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The market is cheap on earnings.

The subprime issue is contained.

That's been the mantra. I think the mantra is wrong. While the overall market is not expensive on earnings, certain parts are a lot more expensive than they look. Why? Well the earnings growth estimates are a hoax right now, specifically in the financial sector. Do they really know what's on their books? Do they really know their exposure? How would they know? Can some of these mortgage companies look into the hearts and minds of their newfound (2005/2006) borrowers and tell who is going to default? I know they exported much of these risks in CDOs to hedge funds, but their is still exposure - but no one knows how much. So their earnings are at serious risk.

Let's look at today's problem child, Washington Mutual (WM)

Per Reuters:
Washington Mutual Inc (WM) , the largest U.S. savings and loan, may set aside $500 million more than it had previously forecast for loan losses in 2007, amid what Chief Executive Kerry Killinger on Monday called a "near perfect storm" in U.S. housing.

The thrift in July had projected setting aside $1.5 billion to $1.7 billion for loan losses. Any increase would be Washington Mutual's fourth this year.

"Most housing markets appear to be weakening," Killinger said at a Lehman Brothers Inc. financial services conference. "We would not be surprised to see declines in housing prices in many regions of the country ... for the next few quarters."

Seattle-based Washington Mutual cut nearly 11,000 jobs, or 18 percent of its work force, last year, and has fallen to sixth in U.S. mortgage lending from third in 2005 as it reduced risk.

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Takeaway: Fourth increase in loss provision this year. And you think these companies have any visibility on their issues? Do you want to know the last time they increased the loss provision. WAAAAAAy back in.... July. So we are talking on average every 60 days this type of financial institution is needing to increase its loss provision. And we are to trust earnings estimates in this sector? Anything in the financial spectrum? I don't think so.

So yes they look 'cheap' on forward earnings - but can we believe any of these numbers? We are going to see a lot more interesting number coming in the next 10 days as many of the investment banks report. We already know what they are going to do - either miss or drop guidance. I might say, its possible some rescind near term guidance. Why throw up a number that you are clueless about? Major parts of their businesses the past 3-5 years have essentially 'ceased' to be in past month. How do you forecast that forward? Also will we start seeing the next round of layoffs for our economy during these announcements?

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Here is a must read article from CBSMarketwatch article dovetailing with this issue that I've been mentioning since the blog started - the 'blindness' to what is really going on in these major institutions.

Some highlights:
  • Will firms have to cut the value of assets they're holding, resulting in charges that will cut into earnings?
  • How much did the slowdown in fixed-income markets eat into the revenue that investment banks generate from selling and securitizing assets such as mortgage-backed securities?
  • How deeply has the credit crunch cut the number of M&A deals that investment banks work on, especially those involving private-equity firms?
  • Wall Street's titans dominate trading and sales of securities in equity, bond and other markets, while advising on and helping to finance some of the biggest mergers and acquisitions. They've also been at the center of a surge in financial innovation in recent years that's created a huge credit derivatives market and rampant securitization, in which assets like mortgages and other loans are sliced into asset-backed securities and sold to investors. But many of these trends, which just a few months ago produced record earnings on Wall Street, have abruptly halted and even gone into reverse as problems in the subprime corner of the U.S. mortgage business spread across most of the credit market.
  • The credit crunch has increased concerns about how well investment banks value some of their assets. The firms hold some complicated securities that don't trade much, making them more difficult to value than things like stocks and government bonds. "The more important, broader question is whether they can truly value the assets that they hold," Bove said. "And the answer is that they cannot. They've overstated their assets and therefore their book values, so the stocks should go lower."
  • When investment banks arrange financing for LBOs, they usually provide a bridge loan to help the deal close quickly. They then sell the debt in the market. When LBO financing stalls or fails, these banks are left with so-called hung loans. Such hung loans on the balance sheets of investment banks may have to be valued lower, cutting into earnings, Hecht and other analysts say.
  • The credit crunch has also disrupted several markets in which investment banks have generated lucrative fees recently. Sales of asset-backed securities are down 28% in the third quarter versus the second quarter and MBS issuance is off 24%, according to Banc of America Securities. Sales of high-yield debt are down almost 32% in the quarter, versus the previous quarter, the bank also estimated.
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Now the timing of all this is sooooo interesting. Fed announces their decision on the 18th mid afternoon, and these firms report on the 18th - 20th. So if we get the anticipated bounce from the 25 basis point cut, and then within next 2-3 days a slew of bad news from this sector - how will the market react? Assume its all a 1x charge and these banks took care of all their bad news in 1 quarter, or will they see this as the 1st shoe drop of an ongoing issue. I think the reality is the latter, but who knows how the market will view it.

No positions

Market Reacting Poorly to "Good News"

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Countrywide Financial (CFC) reported layoffs of 12k late Friday - while this utterly stinks for these people affected, generally the cold and steely hearted market loves this sort of news. Less people? Less costs! How is Countrywide reacting today? Down nearly 5%. That is a bad omen.

Intel (INTC) upped guidance for the full year - the stock barely budging.

Apple (AAPL) announces iPhone hits 1 million unit sold mark after just 74 days - allaying fears to some degree about the success, or lack thereof, of this product and after an early bounce, is now only mildly up.

When the market/stocks do not react very strongly to good news - this indicates an absence of buying interest. So these anecdotal signs, to me at least, indicate more weakness ahead. I have added to my UltraShort Russell 2000 (TWM) position this AM. The market is still only down marginally from all time highs in the face of a slew of negatives - I still don't believe it is facing much of the realities of a slowing economy. And the Russsell 2000 which focuses less on international companies who will have some offset to the slowing US economy, has been the weakest by far as we have discussed in the past.

Long Apple and UltraShort Russell 2000 in fund; long UltraShort Russell 2000 in personal account

Sunday, September 9, 2007

Bookkeeping: 53rd Edition of Festival of Stocks

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My blog entry regarding Crocs (CROX) was included in this week's Festival of Stocks where about 20 articles covering a bevy of stock/economic topics can be found - check it out if you have an interest.

Also, my Alexa.com ranking has jumped up 3.4 million spots in the past week; here I come #3 Google ;)

However, with the change in domain name coming down the pike, I think I have to start over from scratch with the new domain name. :(

Anyhow, should be an interesting week ahead; let's see what happens!

3 Titanium Stocks = 3 Weak Charts

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One area of the market that has seen a lot of pop in recent years is speciality metals. One subsector in particular has caught my eye; titanium. However, I am not the first to catch this trend, and stocks in this sector have seen enormous runs the past few years. But with their specialization in aerospace, chemical, oil related areas - they should continue their long term out performance. But are they buys right now? I'd argue no, based on their technical charts. Let me explain why below.

The 3 stocks that investors are latching onto as titanium plays (in order of size) are: Allegheny Technologies (ATI), Titanium Metals (TIE), RTI International Metals (RTI).

Fundamentally all look pretty sound.
Allegheny Technologies (ATI) trades around $95, with earnings estimates of $7.97 for 2007 and $8.74 in 2008, generating forward PE ratios of 11.9 and 10.8; however earnings estimate growth for next year is only 9.7%, with longer term growth estimates of 14%+. ATI has revenue of about $6 billion a year.

Titanium Metals (TIE) trades around $30.25, with earnings estimates of $1.61 for 2007 and $2.03 in 2008, generating forward PE ratios of 18.8 and 14.9; with earnings estimate growth for next year of 26%, with longer term growth estimates of 25%. TIE has revenue of about $1.5 billion a year.

RTI International Metals (RTI) trades around $66.50, with earnings estimates of $4.09 for 2007 and $5.26 for 2008, generating forward PE ratios of 16.3 and 12.7; with earnings estimate growth for next year of 29%, with longer term growth estimates of 22%. RTI has revenue of about $600 million a year.

Pretty impressive on first glance. However, the stocks have been quite weak of late, with RTI International Metals leading the downturn, with a severe downturn from them $100 level in late April to the mid $60s now, following a series of bad news events, the most recent of which was a downward revision of full year profit in late July due to an investigation by US Customs (which could potentially impact earnings if an adverse decision is made), along with a reduction in selling price into the Joint Strike Fighter program with Lockheed Martin (LMT). So while I mentioned the $4.09/$5.26 estimates for 2007/2008, these are actually materially lower than the $4.40/$5.75 estimates for the same time frames that analysts had for the stock 3 months ago. While Allegheny Technologies and Titanium Metals have not seen any revisions of the type, their stocks have falledn RTI downward over the ensuing months.

So here is a case where one can like the fundamental picture in the long run, but the charts (even for the most basic of technical analysis) are staying it's not time to get in yet. RTI has lost about 1/3rd of its value in the past 4 months. Looking at the chart, it broke below its 50 day moving average in early May, then broke below its even more important 200 day moving average (at the time just north of $75) in late July, and in mid August its chart formed the death cross, a bearish indicator where a short term moving average drops below a long term (in this case the 50 day moving average dropped below the 200 day). The stock has shown very little signs of life of late, not even bothering to retest a move back to the 50 day moving average, and stalling out intraday at $74 level on its best days. Until the profit picture becomes a bit clearer (i.e. stable), and the chart improves, this stock is best left alone. The stock is right around lows of the year, and the next truly solid base is the $40 level, which the stock hung around in July - October 2006. Could the stock get that low? I don't know, but I don't want to be bottom picking to find out. So a buy for this name would be better served either near that $40 level or a reversal in the chart, and a strong price move back above the 50 and 200 day moving averages - 50 day is currently @ $74, and 200 day @ $78.50. Nothing at this time technically indicates a reversal of this time was in the offering and in fact and moves upward would probably be best served to short the stock (although I cannot short individual names in this fund)

Titanium Metals has a similar chart pattern, although not quite as severe as RTI. After breaking down below its 50 day moving average in late May the stock has slithered around that level with intermediate breaks down below the 200 day moving average (but recovering), for most of June/July. However in early August, after the stock closed below the 200 day moving average, the stock has never truly recovered and has been stuck below this important level for the past month. Much like RTI, a death cross appeared in late August, signaling a bearish chart. Again, much like RTI, a trader would be shorting this stock on any moves up to the 200 day moving average. Looking at a longer term chart, there seems to be a low of support in the $28 level, so the price seems a bit boxed in here now. A break of $28 would bode quite ill for the stock near term.

Last, Allegheny Technologies (ATI) which is the only name of the 3 I hold in the fund; however I am down to a tiny holding position of 0.2% of the fund, pending a better chart. When I started the fund in early August, this was the only name of the 3 whose stock price was still holding above the 200 day moving average, so it's relative strength compared to the 2 others was the best in the group. However in the weakness of mid August the stock dropped below its 200 day moving average nad has not really recovered - it did close above the 200 day moving average briefly for 2 sessions but quickly retreated. The chart has not yet gone to death cross status, but the 200 day moving average is $100 and the 50 day is $102, so its not far away. Some decent support for this name could be found down at $85; however with the technical set up on the chart, it is hard to be bullish on the name until it breaks above both its major moving averages on some solid volume. Again, until proven otherwise, this stock is a short at it retraces back up to its moving averages, until the pattern changes.

So why talk about 3 stocks I am not buying in the fund? Well here is a textbook case of stocks I like from a fundamental basis, or at least a group I like from a fundamental basis - but the charts are saying don't buy at this time. My favoritism towards Allegheny Technologies, aside from its superior chart in August was its direct tie to the Boeing (BA) Dreamliner launch. However, the test flights for the Dreamliner have been pushed back (twice now), and this might be having some damage to the near term prospects to ATI. With that said, these companies interest me in the longer term, but right now they make up very little of the portfolio. Here is a case where knowing just the most basic of technical analysis (selling stocks as they break major support areas) could save you a lot of portfolio grief.

Again, 2 ways to play these type of names - try to bottom fish them (but picking the correct spot is always difficult) or wait for the momentum to return to their names, as they reverse and break back above key resistance levels. As an individual investors, we will never have as much info as the 'big boys' or the 'market as a whole' so watching the price can usually tell us when there is some material fundamental weakness potentially ahead. So right now this group is on hold for addition to the fund until better price action emerges in the names.

SA/SS

Long Allegheny Technologies in the fund; no personal positions

Saturday, September 8, 2007

Roughly 1 in 50 Californians is a Realtor

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This article is from late May, but it's astounding. 1 in 52 adults in California is a realtor (agent or broker). And as of the first half of this year, 2007, the numbers are still increasing... talk about a lagging indicator.

I looked up the stats on population in Wikipedia. California has 36.5M people. So assuming 1 in 52 adults is in this industry, backing that back into the total population that means of the 36.5M people in California 24.75M are adults or 68%. Why did I do that? Just curious how it compares nationally.

There are 1.3 million members of the National Association of Realtors (pure agents). Of those about 390K are in CA. Of 24.75M people in CA, 390K are realtors or 1.57% of the adult population.

The rest of the country has a population of 270M, assuming 68% are adults that is 184M adults.

So take out the 390K CA realtors out of the 1.3M total and that leaves you with 910K realtors for the other 49 states or 184M adults. Or 0.5% of the adult population.

So takeaway #1, CA has triple the number of people, as a % of population, who can be classified as a realtor (how many are active vs inactive could be a question), versus the rest of the nation.

Takeaway #2, 1 in every 200 Americans adults is a realtor (or at least has a license). That doesn't include the brokers. So you don't think the employment picture will be affected nationwide by this real estate issue?

Now this is back of envelope analysis, working backward and I don't have independent confirmation but mostly I wanted to see how the 1 in 52 number compares in CA versus the rest of the nation. Keep in mind, as an economy, if CA was a stand alone economy it would be the 7th largest in the world. So a slowdown there effects us all. They have a major gravitational pull.

More Retail Tells?: Harley Davidson (HOG) and Office Depot (ODP)

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I mentioned early last week about Coach (COH) as "the" retail tell, due to the consumer it serves. (as an aside the stock rallied to its 50 day moving average at $47 and was pushed right back down, typical behavior for weak stocks). I followed that up with some comments about a similar company, Polo Ralph Lauren (RL) (whose chart is about to get the dreaded 'death cross').

Another one I didn't think about that is a perfect tell, due to it's consumer base which is very similar to the Coach crowd.... overextended middle to upper middle income who in many cases use the house ATM to finance these sort of purchases. Well Harley Davidson (HOG) had some poor results, lowered guidance for the year and withdrew guidance for 2009. Oops.

"The company points to dropping demand and a promotion-heavy July to explain the shortfall."
"About 35% of purchases financed by Harley-Davidson Financial Services were subprime, and the troubles in this market are bound to be reflected in sales declines, much as they have in the auto sector."
"Growing unemployment figures could also have an impact on sales."
"Our U.S. dealers' retail sales have fallen sharply during August," said Harley Chief Executive Officer Jim Ziemer on Friday."
"Against the current economic background, we no longer expect worldwide dealer retail sales to increase during the second half of 2007."
"The company now expects 2008 earnings growth between 4 percent and 7 percent on moderate revenue growth and lower operating margins. It previously forecast earnings growth between 11 percent and 17 percent for 2008 as well as 2009. The company said it was not providing 2009 guidance now."
"Dealers of all leisure vehicles, such as motorcycles and all-terrain vehicles, are reporting that it's increasingly difficult to make sales as consumers become more cautious with their money, said Greg Badishkanian, a leisure analyst with Citigroup, which has Harley as a client."

And yes, don't get confused by the word subprime - many people who you'd consider to be well off in "income" are terrible with their credit - just because you make $90K a year doesn't mean you manage money well or don't spend above your means.

Next up, looking at the economy from a different perspective, small companies, we have Office Depot (ODP).

"At the Goldman Sachs retail conference yesterday, its CFO, Patricia McKay, said small businesses are slowing their spending and the retailer is also being hurt by the sagging housing market."
"The Office Depot miss follows a late August warning from Staples Inc that reported a 2% drop in same-store sales, down from 4% positive comps last year."
"The office supply sector has proven a good measure of economic activity for most of this decade, forecasting the 2002 economic recovery and now, apparently, an economic slowdown."

Just for data points that point to a 'reality' of a consumer who, without his main arms merchant, the house ATM, is pulling back.

No positions

Bookkeeping: Weekly Changes in Fund Positions

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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: 22.5% (vs 31.3% last week)
57 positions (vs 56 last week)
54 long bias: 65.7% (vs 58.2% last week)
3 short bias: 11.8% (vs 10.5% last week and close to 15% mid week)

Top 10 positions (excluding cash): 33.7% of fund
30 of the 57 positions are at least 1% of the fund's overall holdings

Major changes
A quiet week overall in terms of large dollar moves, but some of the larger moves:
  1. Added to deep sea drillers, especially heavy into GlobalSantaFe (GSF) which was the brand new position of the week.
  2. Added to the short ETFs early in the week and lightened up a bit Friday on the selloff,
  3. Added to Apple (AAPL) and Sandisk (SNDK) on their pullbacks to support
  4. Added to Gmarket (GMKT), a Korean version of EBAY, on its breakout over the 50 and 200 day moving averages in latter part of the week.
  5. Added some Riverbed Technology (RVBD) on it's pullback to $40
Long GlobalSantaFe, Apple, Sandisk, Gmarket, Riverbed Technology in fund; long Apple and Sandisk in personal account

Bookkeeping: Rising Tide Growth Fund Performance

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I will update the fund's performance every so often, either monthly or quarterly. I am measuring myself against the Russell 2000 since the majority of the holdings in my fund are small and mid caps. Marketocracy.com measures as a default against the SP500.

The fund is now about a month old; and due to a quirk of when I started the fund which was in effect Monday August 6th, my start date for all measurements is the close of Friday August 3rd which just so happened to be (aside from the close on August 15th during the worst of the correction) the lowest close of the year 2007, and in fact the lowest close since early November 2006. So this quirk will hurt my performance in the near term, as the fund was obviously nearly 100% in cash the first day, and it takes time to ramp into positions.

Meanwhile the Russell 2000 ramped up from 755.4 on Monday August 6th to 774.1 by Wednesday August 8th (+2.47%) and a day later on Thursday August 9th it was up to 795.7 (+5.33%). Meanwhile the fund was just transferring from 100% cash to some entry level positions during that time frame, missing out on most of that 2.5-5% jump. So it was a volatile time to start the fund, and if I had officially started 3 days later my starting point for the Russell 2000 would of been 795 instead of 755, well over 5% of difference. Since it took a few weeks to get the fund fully invested that was just bad timing. In 2-3 years time it won't matter much, but for month 1, quarter 1, and year 1 of the fund, that bad luck in timing will hurt near term performance measures.

With that said, since inception the fund is +3.54% vs Russell 2000 +2.70% = +0.84% outperformance. Nothing special there.

However, if I had 'officially' started the mock fund 2 days later, the Russell 2000 (basis 774.1) would of returned +0.21% and if I had started 3 days later (basis 795.7) it would of returned -2.50%. So the fund's Year to date return of +3.54% vs either of those numbers would look more impressive. With the Russell 2000 trading in the 770s/780s for most of the 2 weeks after inception, that is probably a more accurate 'start' point. Mentally I am using Russell 775 as a fair value starting point.

In the past week, the Russell 2000 has returned -2.15% vs the fund's return of +0.11% - so now that I am fully invested some of the returns are looking better. Obviously having the ETF short positions as the #2, #3, and #4 holdings in the fund, along with a >20% cash position the past week also helped to offset the losses in the long holdings.

Friday, September 7, 2007

Sector Strength: Deep Sea Oil Drillers

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I laid the case out Tuesday why this sector looked attractive and mentioned I was buying for the fund after a technical breakout. On a very negative day for the market this group is flat; a show of strength.

As of 3:40 PM with the all major averages down nearly 2% and breadth running over 8:2 negative
  • Pride International (PDE) -0.6%
  • Diamond Offshore Drilling (DO) -0.4%
  • The team of GlobalSantaFe (GSF) and Transocean (RIG) - future marriage partners +0.3%
One day does not make a trend but this group has shown a lot of strength of late as my post noted, and seem to be holding the resistance levels they finally broke through after a lull.

Another group I would consider for trading (not quite the secular story) is the coal group - they are almost ready to break out after a long lull - the story is not as good as the deep sea oil drillers, but for a trade the refiners and coal stocks are generally nice multi month moves you can do a few times a year. Will keep an eye out for them as they are nearing breakout stages.

Long Pride International, Diamond Offshore, and GlobalSantaFe in fund; no personal positions

This MOO for You? An ETF to Play the Global Agriculture Boom

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One of the themes the fund is currently investing in is the secular agricultural boom as people in developing economies upgrade their food quality, as their incomes grow. Thus far, I have been focused mostly on the fertilizer companies, although the equipment and seed plays have also done great. However, in the past few days I have read multiple articles on a new ETF which, if you want to play this trend in 1 fell swoop, provides an interesting (and global) way to diversify across multiple subtrends on this play. The ETF is called Market Vectors Agribusiness (MOO) ... yes MOO. How cute. Here is a fact sheet about the ETF.

Anyhow multiple press outlets have reported on this from Realmoney.com today (subscribers only), to Investor's Business Daily to IndexUniverse.com blog (this latter article has a chart of the top 10 holdings). Here are some details from the two free articles.

  • The fund tracks the DAX Agribusiness Index, and charges 0.65% in annual expenses.
  • Its only ostensible competitor, the Powershares DB Agriculture Fund (DBA), takes an entirely different approach to the space. DBA invests in agricultural futures contracts, while MOO invests in agriculture-related companies. The two are driven by completely different dynamics, and have performed very differently: DBA is up 9.67% year-to-date, while the index underlying MOO is up 32.40%. Both figures are as of July 31.
  • MOO is a truly global fund, holding 40 companies trading on 13 global exchanges worldwide. In addition to meeting minimum volume requirements, components of the index must be worth at least $150 million. The United States dominates the index with a 55% weighting -- the next-largest country is Canada at 9.3% of the index.
  • The DAX Agribusiness Index covers several areas of the agriculture market, including agriculture chemicals at 34.3% of the index, agriproduct operations (33.5%), agricultural equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).
  • Tokyo-based Komatsu, the world's second-biggest maker of construction and mining machinery, is the fund's largest holding. It accounts for 9% of assets.
Interestingly our old pork friend Smithfield Foods (SFD) is a small holding in this fund (1%) - hah.

So for one who wants exposure to this trend, but not necessarily picking and choosing individual names, this looks like an attractive offering.

No positions

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It is not very frequent that one comes across an amicable business opportunity. People usually tend to follow whimsical whims, leading to bad credit loan and eventually debt help. Not everyone is cut out for business card, however. This alone is responsible for quite a lot of mortgages. However, the incidence is less in individuals who have term life insurance policies. The frequency is somewhat balanced in credit cards users though.
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Juniper Networks (JNPR) the Networking Good Times Continue

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Tech Trader Daily blog has some analyst's comments following a meeting yesterday - these basically reiterate the "networking is back" theme I keep repeating. (as always take analysts' comments with a grain of salt, but with multiple takeaways being very similar, it seems to bode well for the space)
  • RBC Capital’s Mark Sue raised his price target on the stock to $35 from $3, citing “further clarity in the company’s ability to improve operating margins.
  • Sanjiv Wadhwani, of Stifel Nicolaus, upped his target on the stock to $41 from $30. He raised his 2008 EPS estimate to $1.14 from $1.10
  • Samuel Wilson, of JMP Securities, raised his target to $38, from $31, and says he “came away feeling appreciably more positive about Juniper’s financial prospects over the next 18 months.” He says Juniper “is on positive product cycles in several areas and actively addressing its previous execution issues.” Wilson raised his 2008 EPS estimate to $1.10 from $1.03.
Juniper Networks is a 1.5% holding in the fund, which I'd like to add to, but the stock never pulls back save for the waterfall selling in mid August. Current consensus on 2008 is $1.08 with a range of $0.83 to $1.15. The $1.08 is up from $1.00 two months ago. At $35, Juniper is trading at forward PEs of 42x 2007 and 34x 2008. Still pricey, but most likely we will see these estimates revised upward over time. While a company like Ciena (CIEN) is not a pure play competitor, I like Ciena (CIEN) more from a valuation standpoint (30x 2007 and 23x 2008), although the 'lumpy' revenue of Ciena makes it more of a quarter to quarter risk in terms of pleasing the street. Ciena is the fund's largest holding.

Long Juniper Networks and Ciena in fund; no personal positions

Apple (AAPL) in similar position to Sandisk (SNDK)

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Both have very similar technical set ups, falling to their 50 day moving averages ($130 or so for Apple) so to be consistent I added to my Apple (AAPL) position here as well. Essentially the same reasons as my previous post with Sandisk (SNDK).

Just for bookkeeping, I reduced my 3 large short ETF positions by about 15%; just to lock in some profits. Still expecting more downside in the coming weeks.

But I like these specific tech names to hold up relatively well; or at least outside of a waterfall selling event as we saw in mid August....

Long Apple in fund and in personal account

Sandisk (SNDK) is first in the "buying list" to pullback

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Sandisk (SNDK) is the first stock on the shopping list to pullback to support. It is now just below $53, from $58 just a few days ago; a 10% haircut and now scraping against its 50 day moving average. I will be adding some here, about 100 shares to build up my position. SNDK was already 2.7% of the portfolio going into the day.

Please note, Sandisk (SNDK) is very expensive on 2007 estimates of $1.36 but 21x 2008 earnings of $2.53 which will probably be quite understated by the time we get there. A move to $47-$50 if the market should tank would not surprise me.

With that said, getting more long anything right now is probably early. I think the whole market needs to rethink the earnings outlook for those companies tied to the US economy. So I will be patient overall. Everytime we have a bad Friday people trot out the Black Monday 1987 ghost, so look for some commentator today to call for it, along with the calls for 50 basis cuts needed today blah blah. Of course interest rate cuts take many months (quarters in fact) to work their way through the economy so if you cut on the 10th or 18th, does it really matter? Not a bit, other than for psychology.

Also word out Bin Laden will have a new video out .... also word out Greenspan calling current times mirror image of 1998 and 1987. 1998 I get... 1987? Seems a bit extreme, and I sure hope not. Not a great backdrop. Amazing how psychology changes so quickly in this market - wasn't it just Tuesday the market was up so much when people got back from the Hamptons? Not that I understood that move, but just shows you the emotion that goes into the daily white noise of the market.

Long SNDK in fund; no personal positions

The Real Problem with Housing

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An interesting local article on the front page of yesterday's newspaper.

New Houses Out of Most Families Reach

This speaks to the main problem with housing nationwide; not just in Michigan. Without the exotic mortgages, most have been priced out of the range of the 'common man'. Now one might read this article and say "yeh Michigan is an outlier, it's in a recession... blah blah" but the truth is Michigan still has some of the highest wages in the nations, although the economy is faltering. Teachers were the 2nd highest paid in the nation earlier this decade; still in the top 10 - the average blue collar worker still makes far more than anyplace else in the nation due to the unions, many engineers, designers, corporate headquarters are still here. So the wages here are very representative of that of the nation.

Yet with a median home price far below that of most of the nation, nearly 6 in 10 cannot afford a $175,000 house by traditional Debt to Income ratios. So how are people doing it in high cost states? Where medians are $350K? $400K? $450K? The bottom line is it's impossible - you can't have a housing market where 6% of the people can afford homes if you use a traditional fixed mortgage. Even with $0 down! Or even with 3/1 ARMs or 5/1 ARMs (remember those from the early part of the decade? Those used to be 'exotic')

The big picture being lost in these bailout schemes are house values have completely disassociated from wages in many large population centers in this country. So even with 0% Fed fund rates, short of a new era of exotic mortgages these homes are unaffordable except for the top 5% demographic. But when the median house (50 percentile) is only affordable to the top 5%, what does that bode? A retrenchment in prices just has to happen for the common man/woman to afford a home - the policeman, the teacher, the accountant, the postal worker - the jobs most of America does - remember we are a 'service' economy now, and service jobs by nature don't pay as well as the jobs they replaced. Wage inflation has been stagnant this decade, adjusted for inflation yet home prices in many areas have doubled in the past 5 years alone. It doesn't make sense, and people cannot put 60-70% of their take home pay towards a house payment - it leaves nothing for auto, food, energy, and "life". This is what the bailout herd does not get....

One Ugly Jobs Report

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That was an ugly jobs report. I anticipated bad news, but I thought the employment hit would really start in earnest in next month's report, as there is some lag in employment numbers but seeing this level of degradation in the employment picture shows us that "the bad" is coming sooner. Not only was this month's number bad but downward revisions in previous month's numbers as well.

This scenario was outlined in Et tu, September?
  • 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?
We were told this issue was contained... right? No spillover? Yeh, right. Even government jobs saw a reduction (that one even surprised me)

Well now the last pillar to the strong economy (employment) is starting to see the fallout; and without confidence you really can see some bad things happening. Those who worry about their jobs, or see peers lose them --> that's the quickest way to lose confidence.

All those hoping for weak numbers so Big Ben can save the economy with a 25 basis points cut, you get your wish. It was silly to think that this will someone 'save' us before this data comes out, and now looks even more silly. Now the conversation will turn to 50 basis points cuts and that sort of talk. The bottom line is, the cuts will only ameliorate the situation - a downturn is a downturn; this is more systematic of an issue - overinflated spending due to overinflated assets. Now when we revert to the 'mean', it will look like a downturn vs where we came from. Even though we should of never been at levels we were previously since those spending levels and asset levels were 'goosed' by cheap tricks.

The equity market seems to not be pricing any of this. Lower confidence, less jobs = less spending. Less spending = less profits for companies levered to the US economy. It's a chain reaction. As my earlier piece stated, earnings are going to need to come down. I see September a month full of earnings warnings, and October a month full of guidance reductions. Anyone who does not have a large hand in either secular growth markets and/or levered strongly to foreign economies has an issue - their future earnings are overstated. By the way Bear Stearns (BSC) and Lehman Brothers (LEH) are set to announce in the next 10 days. Should be some eye opening experiences.

If the market rallies or falls today is not really the issue - we have bigger fish to fry. The equity market has seemed to be 'wrong' for much of the past few weeks, so a continued flight to the "Fed will make everything ok" story, if it occurs in next few weeks, is still misguided... at least from this perch.

No positions

Thursday, September 6, 2007

Tomorrow's employment report

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The market awaits with baited breath tomorrow's employment report. Now, with employment being a lagging indicator I don't expect too bad of fireworks - more to come in the fall/early winter. But from some reading I have been doing the easiest to get rid of employees (temporary workers) are starting to see the axe in increasing numbers. They are the first to go. Now I don't expect a 6% unemployment rate, but would the economic picture be different at 5.4% in a year's time vs current 4.6/4.7%?

Now the bigger question is, what exactly would be a figure the market would want? A stronger than expected number or a weaker than expected number? If a stronger than expected number comes out (good for the economy), would it be bad for the market? I mean, all we want is speeches and Fed cuts, and that will solve all the issues, right? - so will Big Ben cut rates still if the numbers continue to look good at the macro level? So are we rooting for a weak number? Which would mean the economy is weakening pretty fast? Strange to want to root against the economy but this is the way of the market sometimes...

The Blog's 8 Most Popular Posts

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Today, the blog hit a milestone, a modest one at that... but for a newbie blog it's a big day - hitting >1000 visitors for the first time. In no small part to mention on TheStreet.com's Daily Blog Watch. Who knew Apple (AAPL) was such a popular topic ;) (p.s. some more interesting news today - Steve Jobs offering $100 rebate and apologizing for those suckers who bought the $599 iPhone in months 1-2 of launch - another bailout??)

Now my Alexa.com ranking (which ranks website traffic) has not budged one iota, despite the traffic increases the past week, but in doing investigation Alexa only counts people who have Alexa Toolbar installed on their browsers as "official" website visitors - how lame! I have been surfing the net for 15+ years and never installed the Alexa toolbar; so I am invisible to Alexa. So all those good readers of this blog who don't have it installed - you don't count! (ok you count to me, but you don't count to Alexa). Bah humbug. At least Google Analytics counts you, so I know you are out there. However, this puts a big crimp in my plans to pass Google as the #1 most visited site on the internet ;) . Only 7.1 million spots to go....

Anyhow, back to the task at hand - I thought since the blog gets new readers stopping in daily and I have yet to figure out how to install a "most popular post" gadget on the website, I will post the 8 most popular posts from the blog every so often (maybe weekly, maybe every 2 weeks?) so new readers can catch up if interested. Why pick 8? Why not! It is interesting to me to see what topics attract the most attention, and might be interesting to you to see what fellow investors are most interested in as well.

Top 8 posts in order of popularity
  1. Apple (AAPL) Comments
  2. I Totally Missed Crocs (CROX)
  3. Whose Not Participating Today? A Top 10 List
  4. Level 3 Communications (LVLT) as a Threat to Akamai Technologies (AKAM)?
  5. Trina Solar (TSL) conference call
  6. Where in the World is Eric Bolling?
  7. Investor's Business Daily Interview with Blue Coat Systems (BCSI) CEO
  8. Google (GOOG) Can't get any Traction - is this Why?
Honorable mention to yesterday's Starbucks (SBUX) post - which is also in the top few....

Housing Busts - 50% off sales

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Its easy to get lost in the aggregate numbers, but a quick look at YouTube shows some individual news stories that really reflect what is going on out there at a street level view.

50% off Florida condos, people who just bought last year are peeved

50% off Sacramento? No taker for this one

85 homes for sale in 1 neighborhood in Temecula; new homes priced 100K lower than existing homes

But I guess those who did not take the risks or speculate, can bail these people out.... I fear the Bush plan is just the first proposal and when this stuff really hits the fan and many more people are affected you will see a chorus for much stronger action. Again, I am aghast that free markets are all the fashion when things are up, but when the time comes to pay the piper free markets are no longer good enough. Sometimes a little basic regulation (preventative) is not a bad thing... much (not all) of this could of been avoided... it is fascinating to watch these bubbles repeat themselves, only the name of the bubble changes, the humans remain the same...

Update on Eric Bolling

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Judging from the web hits this site received on Google searches for Eric Bolling I am not the only one missing him....

The Big Picture blog (what an excellent blog with views on ... well the 'big picture' of it all; and cool design to boot) has an update from the Admiral himself; citing personal reasons at most.

I didn't mention it last week, but I can see the nature of this show burning one out. There are a lot of topics/stocks covered and to be on top of them all, 5 nights a week, seems a bit overwhelming. That said, when you love investing, it's more of a passion than 'work' so who knows if it's the complete story. That said, bring on Fox Business channel! ;)

Still long Bolling

Riverbed Technology (RVBD) very weak

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Riverbed Technology (RVBD) has been very weak the last 2 sessions. While I think the valuation is still rich, and a drop to mid $30s is certainly possible, I am buying back a portion of my trading position for the fund here.

The stock was nearly $47 Tuesday and just hit $40, so a nearly 15% drop in the last 2 sessions. I mentioned Blue Coat Systems (BCSI) is my favored play in the space here, due to attractive valuation vs Riverbed, but with this sharp fall I will begin nibbling on RVBD as well. However yesterday's drop was on quite huge volume and the stock sliced through its 50 day moving average (north of $43) as if it wasn't there. The stock dropped below $37 on the waterfall selling crescendo in mid August, and the 200 day moving average is now just below $36, so I wouldn't be at all surprised to see a drop to that level, especially if the market weakens. I'd be a more aggressive buyer at that level, but certainly am still hoping for a more sizeable drop in Blue Coat Systems as I opined here.

Long Riverbed Technology, Blue Coat Systems in fund; no personal positions

Keep in mind the shopping list as the market pulls back

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I'm going to just be nibbling in small bites in terms of adding to current positions on the long side, until I see that Friday job's report and the market reaction. But keep in mind the shopping list we discussed yesterday; look for entry points you'd find appealing. I would love to see a significant short term drop, to load back up the trading portion to my core positions, in these names.

I'm still short term bearish on the market as a whole - it seems the bond market has priced in a much worst scenario for the near term than the equity market has. My sense is to agree with the bond market.

Notable Calls blog analyst notes on Apple (AAPL) & Sandisk (SNDK)

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Notable Calls blog has some commentary this week on both Apple (AAPL) and Sandisk (SNDK)


First, Apple (AAPL) as we discussed yesterday in the blog - comments from N/C blog:
  • a sacrifice that may pay dividends if it boosts holiday sales and paves the way for a successful European debut.
  • Goldman Sachs (GS) notes the iPhone price cut came sooner and deeper than they expected. In short, it reduces EPS by $0.10 in FY2008 (ending Sept. 2008). That said, the firm is not reducing their estimates because, as they have indicated a number of times, they have long believed that their cannibalization assumptions for higher end iPods from iPhone have been too high. These two should roughly offset each other, leaving Mac to provide upside.
  • However, as Apple's product cycle story unfolds, the firm continues to recommend that investors buy Apple shares, especially on company-specific or broader market pullbacks. GSCO is maintaining estimates and price target.
  • RBC Capital notes that while the lower price itself was not unexpected, the speed of the cut -- coming 68 days into launch -- was a surprise; given recent checks (this week) suggested sustained sales momentum.
  • RBC believes this decision will prove positive in time, for three reasons: 1) it broadens iPhone's addressable market, after the initial surge (RBC's Technology Adopter Panel data suggests iPhone demand wanes at $600, rebounds at $399); 2) it strengthens iPhone's competitive position and lessens a major sales objection; 3) it may drive an upgrade cycle into the holiday season, particularly with users holding off for lower pricing.
  • Firm's sensitivity analysis suggests the iPhone price cut has a nominal (1%) impact on F07/F08 EPS and revenues. They maintain their F07/F08 estimates and outlook for 13.4M iPhones end CY08. Reiterates Outperform Thesis.
  • Banc of America believew the 8GB price reduction signals 1) unit sales are not living up to heightened original expectations and the ASP is now more in-line with other smart phones 2) possible positioning of its portfolio for a C4Q07 global (i.e. including the U.S.) launch of a 3G iPhone (vs. 2.5G now). Net, a lower than expected blended ASP likely in F2008 and F2009.
  • They are reducing F2008/F2009 EPS estimates to $4.33/$5.50 from $4.35/$5.57, and cash EPS estimates go to $4.97/$6.58 from $5.10/$6.70. Firm's target price is cut to $158 from $160. Maintains Buy.
Second, Sandisk (SNDK) as discussed a few days ago - comments from N/C blog:
  • Piper Jaffray reits their Outperform rating on checks showing growing consumer interest in music-enabled and data-oriented phones that should drive continued growth in NAND flash demand.
  • Further, checks noted solid sell-through of the iPhone, which they believe was the top-selling smartphone at AT&T and contributed to rising AT&T store traffic. Firm believes success of the iPhone will encourage other handset manufacturers to launch products with increased embedded NAND densities.
  • the trajectory of growing secular demand for NAND flash and SanDisk's plans to lower production costs remains intact.
  • Citigroup is very positive on SNDK saying the pullback in spot prices does not preclude an upward move in SNDK near or intermediate term. Viewing Street 4Q07E and 2008E EPS potentially 40% and 17% too low, the firm expects rising EPS to propel the shares higher in the months ahead.
  • the 2H07 and 2008 EPS upside they can see to Street estimates (royalty revenues, product gross margins; CIR ests increased on Aug 9) will become better appreciated, fueling a handsome move in the shares.
  • Catalysts ahead include new product potential for industry (video, handset, computing), SNDK-specific product drivers for C2008 (iNAND and SSD's) and benign 1H08 seasonality before a tight 2H08.
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Takeaways:
On Apple (AAPL) I repeat the Gillette model I mentioned yesterday. If Apple were ONLY selling hardware and not getting subscription revenue I would view the steep price cut as a major negative. But there is a means to this end - get this product into people's hands, and start collecting that revenue stream from the subscriptions - remember AT&T is doing the servicing and traditional back office operations needed for the subscriptions so just imagine what the margins will be for Apple on the the service side - I'd have to think sky high. I've been reading sacrificing price for volume is a losing strategy on other sites - I agree if again, Apple were a hardware play only in the phone business. They are not. My main concern with the iPhone has been the lack of hard keyboard; for a nation of "texters" (is that a word?) it seems like it could be a drawback.

Is the stock down today or tomorrow or next week? Who knows, and aside from short term trading positions it is pretty moot (although I do hope for a fall to $130 or below to add to my smallish position in the fund). In fact I am more interested in Amazon's foray into digital music/content store as a potential threat than $200 price cut in iPhone.

p.s. iPod Flash? Looks like a winner to me.

On Sandisk (SNDK), the analysts pretty much concur with my thoughts and that word I love, "secular", is popping up in their reporting now. We are moving to a NAND flash world and Samsung and Sandisk (SNDK) are the beneficiaries - Samsung is a conglomerate so hard to get a direct benefit in the stock price, while Sandisk is a pure play. Again, this is still going to be a cyclical business so buying this stock and then forgetting about it for 3-5 years - I don't agree with the strategy but for the next 9-12 months we should have an interesting play here, and then re-assess. I'd like a pullback to $53 or below to continue building a position in Sandisk.

Long Apple and Sandisk in fund; no personal positions.

Wednesday, September 5, 2007

Starbucks (SBUX) warns on higher commodity costs - this time dairy

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Per CNNMoney:
  • Despite the housing, mortgage and credit threats, Starbucks' (SBUX) legions of loyal customers are still lapping up its pricey lattes, company executives said Wednesday. However, the coffee chain's business is proving to be less resilient to rising dairy costs.
  • "We're still doing fairly strong. The macroeconomic factors have had some impact but not a huge one on our sales," CFO designate Peter Bocian told an analysts' gathering
  • However, the world's largest seller of gourmet coffee drinks has taken a more direct hit from escalating commodity costs, he said.

    "We have two major commodities, coffee and dairy," he said. "Coffee has a much bigger impact on our bottomline. We have done well to manage those costs."

  • But as dairy prices continue to rise, Starbucks responded by passing along some of the higher costs to its consumers by raising beverages last October and then again in July
  • "We took a hit from dairy costs in 2007,' Bocian said. "We expect some mitigation in 2008 but not in the early part. So this remains a negative [for us]," he said.
  • Bocian didn't say whether the company was leaving the door open for more price hikes down the road.
*****
Is it just me or do we see a pattern here? Or here? Or here?

I truly think Big Ben would prefer not to drop rates one iota. Perhaps the market is forcing the Fed's hand. But inflation seems to be raging in certain subsectors of the economy and it is reaching the point the consumer has to push him/herself away from the trough of spending. Not because he/she wants to mind you - no, we love to spend and it's going to take a lot to stop that. Maybe we are entering a period where "a lot" is finally happening.

That said, don't worry about all this hand wringing, CPI is only 2%.... why don't baristas understand that?

No position and not a coffee drinker (the idea of paying $5 for a latte? ugh)

Apple (AAPL) comments

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Per the Utility Belt blog,

  • for the 2007 holiday buying season, Steve Jobs today refreshed Apple’s (AAPL) entire line of iPod music and video players, from the tiny $79 shuffle to a new wide-screen iPod Touch -- an Internet-ready device that is like an iPhone but without the phone
  • The new version of the iPod nano, Apple’s most popular model, sports a wider screen that can browse through album covers, play games and show movies and TV episodes downloaded from iTunes. A 4GB nano costs $149, the 8GB version is $199.
  • The new standard iPod – renamed the iPod Classic -- is thinner and packs twice as much memory for the price as its predecessors, enough to hold up to 40,000 songs. The 80 GB model costs $249, the 160 GB $349.
  • The iPod Touch, like the iPhone, has a 3.5 inch screen designed to be controlled with fingertips. Although it can’t make phone calls, it is equipped with Wi-Fi, which means users can wirelessly surf the Internet, download YouTube videos, send and receive e-mail or buy songs directly from Apple or at selected Starbucks coffee shops. There are two models: 8 GB for $299 and an 16 GB for $399 and they will ship later this month.
  • Jobs also announced a steep price cut on the 8 GB iPhone, to $399 from $599 and discontinued the less popular 4 GB model. The price cut seemed to be an attempt to boost sales, which Jobs said are still on track to hit 1 million units before the end of September.
If you want a full blog of the live event as it happened minute by minute, it can be found here

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Takeaways? Some people are attributing negativity to the price drop in the iPhone. I think that misses the big picture. I think of Apple iPod/iPhone as the Gillette model or the computer printer model. Sell the hardware (who cares at what price) and milk the recurring revenue. With Gillette it sells the shaver for whatever, but make a boon on the razors; with the computer printer model it sells (or gives away) the darn printer, but make a boon on the ink cartridges. With iPod its the same idea with the iTunes, with the iPhone its the same idea with the phone service. From reports I have read, what can be told of the fee arrangement from AT&T subscribers of iPhone is a major victory for Apple. So if they get a few hundred less on each model, they are going to make that up in 6 months of subscription fees. How does Comcast make money? Selling set top cable boxes??

The $600 price point - you can get good desk top computers for that price - too pricey for the mainstream market (these expensive phones sell well in Europe but not here in the US where we are used to carriers giving away phones to sign up for 2 year contracts) So once the true Apple believers got in, your market is 'relatively' limited at that price point. So you drop the price. And you keep it relatively high to keep the Apple 'cache'.

This company just continues to give more advanced products (see Wi-Fi on next generation iPods) for lower costs and building upon a 'brand' - the halo effect is in full force. Again, each convert to iMacs through this halo effect is some serious dough for Apple as well.

Will be looking to add position on a pullback to $130 (50 day moving average)

Long Apple in fund; no personal position

Tyson Foods (TSN) warns

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I don't know when I suddenly became a beef/poultry analyst - until a month ago I never looked at these names, but they are interesting now for various reasons, especially the inflation angle and potential for exports into developing nations as those countries develop wealth and demand better food. Previous comments on both these topics can be found here.

Tyson Foods (TSN) results/guidance today leads us to the troubling question - what happens when you cannot pass on raw input costs to the consumer.... ? What happens to corporate profits? Well you get a Tyson Foods result.

Tyson Lowers 2007 Profit Forecast, Citing 4Q Costs, South Korean Beef Disruption SPRINGDALE, Ark. (AP) -- Tyson Foods Inc., the world's largest meat processor, lowered its profit forecast Wednesday for this fiscal year, citing rising costs and disruption of beef exports to South Korea.

"The fourth quarter is turning out to be more challenging than expected," said Tyson President and Chief Executive Officer Richard L. Bond. "Our beef business has been affected by higher than expected live cattle costs and a decline in beef revenues due to a disruption in South Korean beef trade."

"In chicken, we successfully implemented price increases earlier in the year, but gave up some sales volume as a result," Bond said.

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So what are some takeaways? First, while they were able to pass along the increased costs in chicken to consumers, it did affect sales. While 'eating' is inelastic; what you eat is elastic - you can move to cheaper foods (not happily) - but I think this is what is happening for the lower and increasingly, middle class consumer. If you are making $140K a year you don't really care much about this, but if you are making $55K all these added costs of life, to go along with your measly 3% annual wage hikes start to add up (but wait, the government tells us CPI is 2%, nevermind, not a problem - if only the grocery store would listen to the gov't CPI statistics!)

Second, inputs for feeding these animals, which we've discussed in earlier blog entries, are just skyrocketing... and when you cannot pass this all on to consumers, your profit margins get squeezed. Just like with housing, we have the parallel - the consumer can only take so much increase before they cut back severely due to wages not increasing at the rate of these goods. If one now buys beef 6x a month instead of 8x, or people on the lower end stop almost completely - that all adds up.

This grandiose push to ethanol is a classic case of unintended consequences. We are all paying for it at the grocery checkout aisle.

Why should you care? These are all incremental negatives to the retail class - when the house ATM was open these things could just be explained away - short on cash? cards maxxed out? Pull $10k out of the house to pay for that gas, energy, grocery,tuition, medical bill! No problemo. Now? Problemo.

No positions

AP: Pending Home Sales Sink in July

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Now didn't the realtors tell us last spring the bottom was in? Or was it fall 2006? Those silly realtors...

Nothing like asking people with their own skin in the game, whether the bottom is at hand... I believe some of the home builder CEOs were saying the worst was behind us last summer.

Note the comment from the realtors own economist (bottom of article) hah - some birds never change their tune.

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Pending Sales of Existing Homes Fell in July to Lowest Level Since September 2001
WASHINGTON (AP) -- Pending sales of existing homes fell in July to the lowest level in nearly six years as borrowers struggled to finalize home purchases, particularly in expensive areas.

The National Association of Realtors said its seasonally adjusted index of pending home sales for July fell 16.1 percent from a year ago and 12.2 percent from the prior month.

July's reading of 89.9 was the second-lowest ever for the index and its lowest since September 2001, when the economy was jolted by the terrorist attacks.

"Numbers like this should put to rest the belief that we've reached the bottom" in the housing market, said Joel Naroff, chief economist for Commerce Bancorp Inc. "There's still a lot of pain that's ahead of us."

The index is designed to predict sales levels over the following two months. A reading of 100 is equal to the average level of pending sales activity in 2001, when the index began.

Lawrence Yun, the Realtors trade group's senior economist, called the problems "temporary," and related to jumbo home loans above $417,000 that can't be packaged into securities sold to investors by government-sponsored mortgage giants Fannie Mae and Freddie Mac.

Some home purchases aren't closing because mortgage loans have been "falling through at the last moment," Yun said in a statement.



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