A day at Best Buy

Some anecdotal takeaways from a visit to Best Buy last evening.

Overhead in cell phone/iPod department:
* Completely sold out of specific video iPods - and not in this store but in most metro Detroit stores.
* Asked the cell phone rep, what % of people coming in for a new cell phone failed their credit check (my assumption was 20%?). Answer: 50/50.

Conclusions:
* Apple's product is still selling like hot cakes although at some point iPod will become saturated. (sales quarter over quarter ARE starting to slow)
* This Christmas season should be another huge one for Apple.
* Even in an economically depressed area as metro Detroit, people love their gadgets.
* Wanting something, and being able to afford it are two different things. I was blown away by how many people don't even pass a basic credit check to get a cell phone.

Long AAPL in fund; no personal positions

Must read blog for Akamai Technologies (AKAM) or Limelight Networks (LLNW) Investors

If you are an investor in this space, a must read blog is BusinessofVideo.com, written by Dan Rayburn. While not a financial analyst he is a content delivery network guru and a great read. Of his last few articles, I'd highlight the August 14th article "CDN Pricing Data: What the CDN's are Actually Charging for Delivery"; in it is a nugget about the pricing pressure Akamai (AKAM) is feeling the past few months from the top end customers, now that prices are becoming more transparent - along with trend changes in length of contract and how charges are accrued. It's a specialized site but one that investors in this space should keep an eye out on.

Long AKAM, LLNW in fund; no personal positions.

Despite the market strength, very little rally in the financials

Smallish fund holding Mastercard (MA) actually down a few %, fund holdings asset managers BlackRock (BLK) and Diamond Hill (DHIL) down, and the 2 exchanges: ICE & CME just up a tad.

Obviously a sector rotation but I thought all the talking heads said financials are a bargain at these levels?

Not so much apparently.

The large brokers are doing ok: Goldman Sachs (GS), Lehman Brothers (LEH) et al.

I am sure the holders of ICE and CME are perplexed why the stocks are doing so poorly in a volatile environment where every trade prints a new dollar sign for the exchanges - it just seems to be a flight from a certain 'sector' - no matter what sub sector of financials one is in. I think good opportunities in the names in the first paragraph will continue.

Large brokers, banks etc - wait a while on those. They are going to be showing some ugly earnings reports and guidance. When they start going up strongly in the face of bad news .. then you buy. Until then, nothing more than short term trades.

It does strike me as curious that the market can rally without financials ... but this has been nothing but a curious market of late.

Long MA, BLK, DHIL, CME, ICE in fund; no personal positions

McDermott (MDR) & Akamai Technologies (AKAM) doing well

McDermott (MDR) continues its 'catching up' as it has lagged its peers in this recovery. I let a bit go, but am keeping a nearly 4% position in the fund through thick and thin as I believe it's sorely undervalued.

I hope Dykstra caught the calls at the limit price he was looking for

Those Akamai (AKAM) buys the past 2 days are looking a lot better, especially yesterday's batch.

Glad I pulled back some of that short ETF hedge, but have to say this move is surprising. Perhaps so many people were waiting for the pullback, the market did what it normally does - the exact opposite. I will look to put back the portion I sold a few hours ago at a higher level in the market.

Long MDR, AKAM in fund. Long MDR in personal account.

Cutting back on some of the hedges

Have to say this market is more resiliant than I thought. The bipolar mood swing from last week to this week is quite astounding.

Culling some of the hedge exposure for now: TWM, SRS, SKF and will watch to see how things play out.

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

Aluminum Corp of China (ACH) continues its strong run

Interesting to see the divergence between what analysts are saying about ACH's near term future and the investors unquenched thirst for anything Chinese.

ACH actually reported a 5% drop in profits in 1st half 07, due to lower product prices, but the results were not as bad as analysts had predicted (hence "a beat")

Per Reuters:
Analysts said Chalco's annual net profit has likely peaked as the firm should face ongoing pressure on its bottom line in the second half with more alumina capacity coming on-stream in China.

"Alumina and aluminium prices could see downward risk in the second half," said Geoffrey Cheng at Daiwa Institute of Research.

He plans to upgrade full-year earnings forecast for Chalco from 10.6 billion yuan but would retain the underperform rating.

Spot-alumina price fell to 3,900 yuan per tonne in the first half of 2007 from around 5,650 yuan a year earlier as China boosted production and drove down world prices."

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So prices have fallen by 30%. Yet investors continue to gobble.

While you have to take everything analysts say with a grain of salt; it's interesting to watch this play out.

I am lightening my exposure to the name on this ramp up - the stock was in the low 40s before the earnings report and after 3 strong days is up to low 50s. I sold some more today for the fund. ACH is now down to a 0.75% position in the fund

Long ACH in fund; no personal position

Pain for smaller players in the solar sector: China Sunergy (CSUN)

There are some seriously poorly performing stocks in the solar sector, especially the smaller Chinese PV makers - and the way things are going some of these players won't be around for the long haul.

Out today is news from China Sunergy (CSUN), an IPO from May of this year and the news is poor across the board.

1. Quarterly Loss
2. Pricing Pressures
3. Lower production target due to inability to secure polysilicon
4. Oh yeh, and save the best for last: CFO resignation (CEO resigned not too long back)
   

But other than that, everything seems fine.... (ouch)

As mentioned previously in blog entries, the tight supply of polysilicon continues to be a pressure point for companies across the sector, outside of those involved in thin film, i.e. First Solar (FSLR).

The type of results from China Sunergy is why when asked "Why are these Chinese PV solar makers so cheap based on 2008 earnings?", the answer is - right now no one can believe those 2008 estimates because they are based on enough polysilicon being available and if available, available at price points that make the production profitable.

This is the first company I have seen that is severely curtailing 2007 production due to this issue: " The company now sees total shipments in 2007 to be in the range of 78 megawatts to 83 megawatts. It had earlier forecast annual production to be between 95 and 110 megawatts."

2008 expansion was also curtailed from 6 lines to 4 lines.

Other companies showing severe strain in recent quarterly reports are: Canadian Solar (CSIQ) and Solarfun Power (SOLF)

No positions

Update on Limelight Networks (LLNW), Akamai Technologies (AKAM) fallout from yesterday

I posted early yesterday morning that I was trimming the fund's already small LLNW position severely, and essentially only have a tiny holding position in the name. Sadly, I pretty much got out at the top as the stock just drifted down for the majority of the day.

I had bought AKAM the day before, and added more AKAM on the 4% pullback early, which I noted mid-day.

These seemed like a non event to me, and just a continuation of an existing agreement or small expansion. When financial terms of a deal are not disclosed, always makes me wonder. It is in the best interest of Microsoft and any large content provider for their to be competition in the space, so for all we know they are trying to keep Limelight in the game. But it appears Limelight's growth at all costs (i.e. price war) that has been speculated upon, cost them. Much like Intel vs AMD, it's hard for the smaller upstart to outlast the deep pockets of the established player. In this case AKAM = Intel, and Limelight = AMD. While AMD has had its spurts over the years, the easy (and more stable) play has been Intel. Hence my chips will continue to go to AKAM and with lowered expectations, hopefully after the next earnings/guidance we can begin our journey back to normalcy with Akamai.

I saw a late day article via AP with a Citi analyst that generally agreed with my line of thinking on the events yesterday:
"Citi analyst John Reilly Walsh said Thursday that investors in Akamai Technologies Inc. overreacted to news that competitor Limelight Networks Inc. will provide media streaming and content delivery services for Microsoft's Internet properties and Xbox Live."

However, Reilly Walsh points out that this deal isn't Limelight's first with the software giant. Microsoft has been a customer of both companies, using Akamai mainly for software downloads and Limelight for Xbox Live and MSNBC services.

"We view this announcement today as little more than Microsoft extending an existing relationship with a technology provider with whom they've had a 5-year relationship, not Akamai losing a customer," Reilly Walsh said in a note to clients.

Meanwhile, Reilly Walsh says it's not as though Akamai is "sitting on its hands in the gaming market." Though Limelight was chosen over Akamai because the latter couldn't accommodate a specific technical requirement of the original Xbox, Akamai is the content-delivery-network (CDN) for digital download services of both the Sony PS3 and the Nintendo Wii consoles.

"The 5 percent drop in shares this morning on what we view as 'non-news' is an overreaction," Reilly Walsh said. He believes the company's presentation at Citi's technology conference Sept. 6 could be a near-term catalyst for the stock, which he thinks is 'deeply oversold."

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While AKAM could be dead money in the near term, once the technical picture improves in the stock, this will be a position to build going into October's earnings.

AKAM is now up to 1.5% of the fund's holding; LLNW 0.2%

No personal position

Long AKAM, LLNW in fund

Trina Solar (TSL) conference call

Gotta love Seeking Alpha (click for link to conference call)

Don't have time to rip into this tonight but it's all about the gross margins in the solar space. With sky high polysilicon prices and a worldwide shortage (for now), it is very hard to trust the near term gross margin guidance for the next few quarters. Once a bevy of plants come online in the next few years this should not be a problem, but the landscape for solar power producers in 2010 will be quite different than the one today, so it doesn't help us assess the next 6-12 months by falling back to the "there will be plenty of polysilicon in 2010" arguement.

Long TSL both in personal account and fund

Countrywide (CFC) CEO very bearish

An excerpt from today's TheStreet.com market summary:

By discrediting virtually every step taken thus far to help the housing market and the mortgage industry, Countrywide Financial (CFC) Chief Executive Angelo Mozilo killed Wall Street's buzz about the credit crunch being over.

In an interview on CNBC Thursday morning, Mozilo also said he believes the U.S. is headed toward a recession, taking the wind out of any confidence boost that briefly came from news that Bank of America (BAC) took a $2 billion stake in the company via a convertible bond offering.

"When you have this level of delinquencies and foreclosures, there is no way it doesn't have an impact on psyches and wallets," said Mozilo.

"I don't see the light here," he added, noting that the current financial panic is among the worst he's seen in 55 years.

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There was a lot of hubbalo (ok that's not really a word) about Bank of America's $2 billion investment into Countrywide - but it's looking like Wall Street rich folks feeding on their own now.

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"The mortgage executive had no kind words for the Fed either, saying the central bank has done nothing to help Countrywide with its liquidity problems. The Fed's discount rate cut, which brought down the rate charged to depositary institutions that borrow at the Fed's discount window, is useless to Countrywide because it cannot borrow there for regulatory reasons.

After Mozilo's gloomy comments, it was hard for the markets to perceive Bank of America's $2 billion stake in the company as anything but opportunistic for BofA, which like many banks and Wall Street firms faces some of its own liquidity and balance sheet issues amid the credit crunch.

Indeed, Bank of America's little "confidence boost" was quite a lucrative trade for the mega-bank, and maybe better considered in the context of distressed investing.

Firms like Blackrock, TCW Group and hedge funds like Citadel, among many others, are amassing funds to invest in the distressed assets that will wind up on the bargain basement sale floor. Why shouldn't BofA get in the game? Certainly the markets have been abuzz with what value investor might be sniffing around at Countrywide.

The art of this trade, however, is that BofA gets paid interest for taking the stake and making its bet that Countrywide will exist in 18 months. The banks also gets paid while considering a full-out purchase of the mortgage lender.

Countrywide will pay BofA annual interest of 7.85%, or $157 million a year in perpetuity. If BofA chooses after 18 months, the company can monetize its stake by converting the securities into shares of Countrywide at $18 per share. Countrywide closed Thursday at $22.02.

But let's say Countrywide's stock falls below $18. That would make the security less valuable because conversion would be at a cost to BofA. If that happens, the bank has the right of first refusal to buy the company outright if any other potential buyer comes knocking. Countrywide at $22.02 per share is already considered a takeover candidate.

So unlike Citadel, which just made a bet that it got Sowood's distressed credit portfolio at a great discount, BofA gets the automatic hedge of an interest payment and the option to buy more at any price. Not to mention, BofA may be shorting Coutnrywide stock, a common strategy used by convertible bond investors to hedge against stock-price declines.

It's good to see that innovation on Wall Street is not dead, notwithstanding the demise of the CDO market."

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Pretty fascinating stuff, huh? Sort of lions feeding on the weak and sickly buffalo.

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As stated many times - I continue on with the belief the credit crunch is a multi-year problem that will rear ugly cockroaches over and over. Hence my ETF position shorting financials/real estate.

PIMCO's Gross calls for homeowner bailout

Bill Gross is one of the more influential bond gurus of our time. His monthly newsletters are great reading.

Today's posting has caused some big consternation as he is calling for the federal government to bail out the millions of homeowners who are going to go under water in the next few months/years.

A great read for this interested.

I have added the PIMCO Archives where all his commentary can be read to the favorite blog area in the sidebar.

These hedges are quite powerful instruments

The 3 hedge ETFs I have been buying this week are quite powerful products

With the market only down anywhere from 0.4-0.7% (based on the indexes)

TWM (Ultrashort Russell 2000) is up 3%
SRS (Ultrashort Real Estate) is up 2%
SKF (Ultrashort Financials) is up 2%

Now keep in mind SRS shorts the real estate index which is composed of mostly commercial real estate plays and has not been as subject to pull back as residential, and SKF shorts the Financial index which is dominated by the large multinational banks such as Citigroup which are not in that bad of shape vs many 2nd and 3rd tier financial companies. So they are not perfect plays on what I'd like to do be shorting but they appear to be the best we have at the moment.

TWM is up to 3.5% of the portfolio, SRS/SKF 2.2% and 2.0% respectively.

Long TWM, SRS, SKF

Added more Akamai Tech (AKAM) on the Limelight (LLNW) news

I thought the 4% drop in AKAM is unwarranted and added more this morning on the LLNW news.

Continuing to trim some other positions a bit....

No position

The case for Hong Kong and iShares Hong Kong (EWH)

The domestic market for Chinese stocks is overheated. That's putting it mildly. What I read that is happening in China is similar to what I read was happening in the US in relation to NASDAQ stocks in 2000. Housewives daytrading at home. Cab drivers giving stock tips. People emptying out savings account to invest.

Much of the problem is that until now, the 'red chip' index was a closed market open only to Chinese investors so it sort of trades in its own twilight zone. And suddenly well off Chinese don't have many outlets for their investing needs. So basic economics - lack of supply + huge demand = major price increases in equities.

BusinessWeek has a story that just touched on the surface that can be found here

The interesting points are:
200,000 brokerage accounts are being created each day - this seems impossible, but even if it is half that number, that is amazing.

And more importantly from an investing thesis:
On Aug. 20, the State Administration for Foreign Exchange unveiled a landmark decision to allow Chinese citizens to invest directly in Hong Kong stocks. The move is widely regarded as an attempt to siphon off some of the liquidity that has been driving equities on the Shanghai and Shenzhen exchanges steadily higher.

Previously, individuals were restricted to purchasing $50,000 per year in foreign exchange.

The reaction in Hong Kong was euphoric. The benchmark Hang Seng index climbed nearly 6% on Aug. 20 on the news, 0.62% the next day, and another 2.78% on Aug. 22. By some estimates, as much as $100 billion in additional money could flow into Hong Kong-listed stocks by Chinese retail investors in the next 12 months.

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Bottom line? There is going to be a lot of domestic Chinese money flowing into Hong Kong. A diversified way to play this trend is EWH - the iShares Hong Kong ETF. The ETF has popped in just 2 days from $16.50 to nearly $18.00 this morning, a 9% reactionary rise. So I am just starting a small position here and will be looking for a pullback to add more. This is quite an interesting opportunity with the potential for very nice long term returns.

No position