Tuesday, September 25, 2007

Is Revolution Money a Long Term Threat to Mastercard (MA)?

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With the upcoming IPO of Visa and the success of fund holding Mastercard (MA), this blurb I found about Revolution Money is quite interesting; and shows clearly the profound changes the internet 'could' be used for, if harnessed correctly.
  • Revolution LLC, an investment company created by AOL co-founder Steve Case, has launched a subsidiary called Revolution Money to offer consumers a secure credit card that has lower fees for merchants and a free online money transfer service.
  • The new subsidiary's chairman will be Ted Leonsis, vice chairman emeritus of AOL LLC and majority owner of the Washington Capitals and Washington Mystics.
  • In addition, Revolution Money has secured debt financing from Citi to fund growth of its prime consumer loan portfolio.
  • Revolution Money's goal, he said, is an "easy-to-use and secure payment system that puts money back where it belongs, in consumers' pockets."
  • Generally, when consumers use a traditional credit card the merchant is required to pay the card company an average of 1.9 percent of the total sale, but Revolution Money says its new payment system, based on a secure Internet technology, slashes those fees to 0.5 percent.
  • Revolution Money's first two major offerings are Revolution MoneyExchange, a service for social and instant messaging networks that enables consumers to safely transfer funds via the Internet for free; and RevolutionCard, a credit card protected with a personal identification number.
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Takeaway: This is interesting on a number of fronts. The reduction to vendors of fees from 1.9% to 0.5%, if it truly affects the market would be a sea change. While I am not saying Visa/Mastercard drop their charge to 0.5% but what if they are forced to go down even 0.4-0.6% over time? That would be quite negative for them.

On the other end, this is interesting from the perspective of a move more and more each year to a paperless society. I know myself, I barely ever use my checkbook anymore and my monthly bills are pretty much automated - I joke that if I get struck by lightning tomorrow, I think my bills would continue to be paid until the bank account goes empty. This move to transfer funds via social networks and instant message is also interesting. It looks like Paypal could have some more competitors coming down the pike.

While I don't think it's a direct threat at this time to these major franchises (i.e. ING Direct didn't kill off traditional banks) it does point to the direction in the future. And with some serious heavy hitters behind this project to boot. (for those who don't know Steve Case was essentially the face behind AOL in it's boom era)

Long Mastercard in fund; no personal position

This is My Favorite Type of Market

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I actually enjoy periods like this much more than when the market is up 200 pts or down 200 pts where it's more of a baby get thrown out with the bathwater environment.

Although I have 20% cash, the fund the past 2 days has trounced the indexes it is measured against, the SP500 and Russell 2000. Today the fund returned 0.64% vs SP500 -0.03% and Russell 2000 -0.35%. So that's a +0.67% vs SP500 and +0.99% vs Russell 2000. Yesterday was a similar spread.

While that doesn't sound so impressive, simply beating the indexes by 0.30% a week would equal 15.6% outperformance over the course of a year which, if replicated over the long run, is of course a rare feat for a 'mutual fund'. It is much harder to outperform with 30, 40, 50 names than 5-8. And considering I am only deploying 80% of my money and sitting with 20% cash I like it even more.

Now your returns will not be that consistent (0.30% outperformance week after week) and some weeks you will beat by 1.2% and some weeks you will trail by 0.5% etc, but in a calm market such as this, stock selection (which I believe to be a strength of mine) wins out. The hardest thing to do is to let your winners run, but at this point I am trying to remain patient and just let things play out as the "Bernanke put" has apparently made the market ignore any of the underlying economic risks again. So until that changes, you have to just "ignore" the economic news yourself on one level (i.e. this means understanding the economic background, and it's implications but at this point compartmentalizing it off to the side) Easier said than done.

While I sit in envy at some of the crazy moves made in the Chinese stocks and the smaller speculative solar stocks, this sort of fund is not focused on those type of names so I try to separate the two 'worlds'. This is a very narrow market in terms of what is working, but the parts that I have positioned the fund in seem to be the spots money is flowing into.

The best performing stocks (>3% return) in the fund today were
New Oriental Education & Technology (EDU) +6.8% (china related)
Intercontinental Exchange (ICE) +6.6% (added to SP500)
Ctrip.com (CTRP) +5.0% (china related)
CF Industries (CF) +4.8% (fertilizer)
Cummins Engine (CMI) +4.0% (remember, I just highlighted this stock this past weekend and bought yesterday and added a touch more this morning on its early morning pullback)
Crocs (CROX) +3.9% (it doesn't kill kids after all)
Garmin (GRMN) +3.5% (GPS positioning)
Apple (AAPL) +3.3% (we talk about this daily)
Gmarket (GMKT) +3.1% (Korean version of EBAY)

Only major losers were some smaller refining positions I have: Western Refining (WNR) and Frontier Oil (FTO) along with Bolt Technology (BTJ), a micro cap oil services company.

So while still waiting for some other shoe to fall, the Russell 2000 did bounce off the support levels I mentioned earlier today and at this point the market says all systems go, damn Target, Lennar or Lowes. My takeaway from this market is there are very few areas of growth left, and a lot of money chasing the few names/sectors that this growth is in. Many many stocks in this market focus on the insatiable US consumer demand to spend - so with that faltering, that doesn't leave a ton of other names that are sheltered from this slowdown. So those names are seeing tremendous and relatively relentless run ups, regardless of valuation. The trick will be knowing when to get out (or shave back positions) - something that is tough for anyone to do accurately.

A Quick Look at Lennar (LEN)

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I am not going to rehash the bad results Lennar (LEN) put out today. We know it is bad - we know it will continue to be bad in the near to mid term - and with a 4% drop today, I guess not everyone is yet on the bandwagon that it will continue to be bad for a while yet. Let's see what else we can find from various news outlets on the story.
  • From FT.com Lennar, the second-largest US housebuilder, said on Tuesday it would continue its aggressive discounting strategy as falling prices among existing-home sellers added to the woes of the sector.
  • From Reuters Lennar unclear how long inventory glut will last (wait, didn't Hovnanian CEO tell us the bottom was in? oh wait, he told us that each of the previous 3 quarters as well)
  • "Current market conditions are primarily defined by the overhang of inventory," said Stuart Miller, president and chief executive officer, on a conference call with analysts. "There continues to be a great deal of downward pricing pressure."
  • Miller also said the company has pulled back production starts 62 percent year over year. (this is actually good for the housing industry as a whole as less inventory will help)
  • Lennar on Tuesday reported its worst-ever quarterly results as the crumbling U.S. housing market led to a much wider-than-expected loss, sending its shares down to a five-year low.
  • Lennar, whose sales for the period dropped 44 percent, also said it had slashed jobs by about 35 percent and that further cuts would be necessary. (Look for these losses in jobless reports in October and November, and I believe it is hard for people out of work to consume)
  • "Consumer confidence in housing has remained low, while the mortgage market has continued to redefine itself, creating higher cancellation rates," he added. (did anyone tell us how many of those 2100 orders Hovnanian booked in its Sale of the Century actually worked out once those home buyers had to actually try to qualify for a mortgage? I never heard back)
  • Lennar said its loss included a charge of $3.33 per share for writedowns of land values and write-offs for land options it walked away from.
  • The company's home-sale revenue fell 44 percent to $2.2 billion, as the number of sold homes, excluding unconsolidated joint ventures, dropped 41 percent and the average sale price slipped 6 percent to $296,000.
  • During the quarter, Lennar offered buyers $46,000 per home in incentives to move homes it had built but not sold. That was up from $35,900 in the year-earlier period. (please take them... please)
  • The incentives and the lower home-prices resulted in home-sale gross margins deteriorating to 14 percent from 19.5 percent in third quarter 2006.
  • New orders fell 48 percent to 5,804 homes. Those who signed contracts canceled their orders at a rate of 32 percent.
  • From TheStreet.com CEO Stuart Miller said the housing market got worse throughout the quarter. He told investors the recent interest rate cut by the Federal Reserve will begin the process of helping the market, but it "most certainly will not be a panacea for conditions as they exist." The problem is that "supply and demand has continued to shift more rapidly than expected," he said.
  • In the last quarter's conference call, Miller said three things need to happen before the housing market gets better -- inventories of both new and existing homes need to stabilize and then be absorbed, mortgage markets need to settle and consumer confidence has to be restored. However, none of these have yet occurred, he said.
  • As prices for new and existing homes decline, builders are finding that they cannot sell homes for a profit because they purchased too much pricey land in recent years during the housing boom.
  • As aggressive price cuts have become the norm in the industry, homebuilders are being forced to write down the value of communities under development. The net result is that builders are selling many communities for a loss, only to raise immediate cash.
  • Lennar's aggressive price cutting is on display in Port St. Lucie, Fla., where the company is offering discounts to move townhomes at its Newport Isles development. Florida realtor Mike Morgan says Lennar is offering a 2,200-square-foot townhome for a listed price of $215,000. However, he says a Lennar salesperson said an offer of $195,000 might be accepted. Across the street, privately held Prime Homebuilders is offering a similar unit that is 1,600 square feet but with a price tag of $250,000 at its Portofino Court project. (oops)
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Takeaway: Well apparently this is all priced into the market, as the market refuses to flinch...

I will save readers from rehashing the reports from all the other homebuilders to come - they will be carbon copies. Let's see how these job losses start to effect the unemployment reports in October, November, and December. Remember each job loss has a ripple effect in that community.

A Technical View of the Russell 2000

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Interesting to view this Russell 2000 which focuses on more of the smaller stocks in the market than the Dow or SP500. After being the quickest to spike post Fed, it has now given back much of that gain in the past 2 days. More importantly the technical picture is starting to get dicey. It is once again testing its 50 and 200 day moving averages. A close below would once again put us on the bearish camp in this section of the stock market.

Overall, the big cap and mid cap names with heavy international exposure, along with momentum tech stocks have been leading the charge (outside of speculation in Chinese names). Financials have in general not participating and retailers took a hit yesterday - as I was saying before the Fed cut, anything facing the domestic consumer is not going to be helped by 0, 25, or 50 basis points and those are the type of companies that make up the Russell 2000. I did add a bit more UltraShort Russell 2000 (TWM) yesterday - I guess we could be heading for a very split market personality going forward where larger, more international facing companies still continue do well and the smaller companies facing the US consumer struggle. For example, today the "market" looks quite flat, as most indexes are weighted to the largest stocks - the Dow as I write this is about flat for the day, but the decliners lead advancers by a 7:3 ratio which highlights the weakness underneath the surface in smaller names.

In general for a sustained rally you'd be looking for participation from the financial sector and despite the fact Fed cuts are very positive for financial companies - they refuse to partake in this rallying. My position in UltraShort Financials (SKF) has actually been up most of the past week (excluding last Tue/Wed). Food for thought while we push up anything Chinese related 50% this past week.

Long UltraShort Russell 2000 and UltraShort Financials in fund and in personal account


Cutting back Exposure to some laggards - Sandisk (SNDK) and Perini (PCR)

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I've been looking through the portfolio the past few days to see what is not behaving very well despite the general upward movement in the market.

In tech, I have been slowly cutting back Sandisk (SNDK) the past week, but took a sharper knife to the name today, reducing exposure another 40% due to technical reasons. Post Fed the stock jumped back over the 50 day moving average ($53) but closed below it yesterday and continues trading weak today. So I am doing some selling in this name, and will revisit it later.

This brings the fund's exposure to Sandisk down from 1.7% to 1.0%.

Next is Perini (PCR) which I've been cutting heavily the past 2 days. This is an infrastructure play similar to Foster Wheeler (FWLT), McDermott (MDR), or Jacobs Engineering (JEC) but the stock has not bounced like those name - and it did not even make a strong attempt on trying to break above its 50 day moving average ($56 - $57 range the past week). In a word, the action has been very troubling in this name so I think something is going on behind the scenes as the valuation is quite favorable.

I am bringing the exposure in this name down from 1.8% to the fund down to 0.5%. With the troubling price action I'd normally cut this name out completely from my holdings but the stock is trading at 17x earnings for 2007, much cheaper than anything else in the space so I am curious to see where this is going. The stock bottomed out near $45 in mid August, and from best I can tell from this chart it is heading back there for reasons we don't seem to know yet.

The other name that still continues weak is the exchange CME Group (CME), but I already cut that position back down to 0.6% of the fund earlier. With the good news in its sister stock ICE today, the stock usually would at least run in tandem to some degree but it's still comatose.

So here are some examples of stocks that I am letting the technical picture guide me on what to do. A 'value' investor would probably be more interested in buying at these levels since the stocks are cheaper than where they were before, but this can lead to long periods of the stock either dropping slowly but surely and/or flat performance. I'd rather be buying more of them once they show they are ready to move, even if its at higher prices. Most troubling to me, is the lack of participation upward in the flurry of speculation that is back in the market.

Long all names mentioned in fund; no personal positions




Adding to my 2 Coal Names on this Pullback: Consol Energy (CNX) and Peabody Energy (BTU)

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Much like Crocs (CROX) last week, the charts for Consol Energy (CNX) and Peabody Energy (BTU) are setting up in a similar fashion. Stocks with good underlying strength that are now trending back down towards their 50 day moving averages.

When I started the positions on September 13th I wrote: "After such sharp moves up in the coal names, I'd like to see them even out a bit and pullback a tad, where I'd continue to build positions."

So I am following through on that strategy.

The fundamental reasons for buying into the coal space at this time can be found here. Again, buying on pullbacks such as this places the odds in your favor but is not fool proof. If the stocks break through their support you have to cut your losses in the near term and re-assess.

Long Consol Energy and Peabody Energy in fund; no personal positions

Finally some signs of life from Intercontinental Exchange (ICE)

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Intercontinental Exchange (ICE) has been a strange laggard in the past few weeks - as an exchange you'd think the increased volatility would be a great backdrop for the company. The stock is jumping today on news that it will be added to the SP500 index; a pretty prestigious inclusion.

I am actually going to take the opposite end of this trade and cut my position in half on this news. The stock still had been acting weak up to yesterday's announcement and a move like this, gap up, on non fundamental news is not something I want to be chasing. I'll see if I can buy back some of it about 5% lower in the low $140s.

Long Intercontinental Exchange in fund; no personal position





Home Prices Post Biggest Drop in 16 Years

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Via AP:
  • The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.
  • Home prices have fallen by more every month since the beginning of the year.
  • An index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991.
  • "The further deceleration in prices is still apparent across the majority of regions," MacroMarkets LLC Chief Economist Robert Shiller said in a statement.
  • A broader index of 20 cities fell 3.9 percent in July over last year, with 15 of 20 cities reporting that prices fell.
  • The five cities where prices are still rising -- Atlanta, Charlotte, N.C., Dallas, Portland and Seattle -- have reported growth is slowing in the past year. Atlanta and Dallas are close to moving into negative territory, S&P said.
  • Shiller, an economist at Yale University, told lawmakers in written comments last week that the loss of a boom mentality among consumers poses a "significant risk" of a recession within the next year.
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Takeaway: Nothing surprising here. The market has 'discounted' some of this; the question is how much. The bigger point (to me) is what is this doing for consumer confidence. The consumer game is based in large part of psychology so this continued uncertainty and feeling of 'being a little less house rich' each month tends to weigh on consumers. With the sales we are seeing such as Hovnanian's "Deal of the Century" and what I contend will be similar sales from other builders - this will eventually force current homeowners reluctant to drop their price to a point where its market competitive to do so. That should accelerate the price moves downward a bit...

Monday, September 24, 2007

And Here Comes the Reality Check in Retail

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We have been talking about this since day 1 of the blog.... and as recently as yesterday in the blog entry: A Lump of Coal for Christmas

Target (TGT) Lowers September Sales Outlook - Target cuts same store sales from 4-6% to 1.5-2.5%; weaker traffic particularly in Florida and Northeast.

Lowes (LOW) Issues Profit Warning - CHARLOTTE, N.C. (AP) -- Home-improvement company Lowe's Cos. on Monday said it now projects fiscal-year earnings at the low end or slightly below its prior forecast, citing lower-than-expected sales trends.
(oh and they blame it on drought conditions; amazing how the 5-7 year drought conditions weren't a problem the previous 4-6 years eh?)

Target was one of the stocks whose chart was still in decent shape whereas Lowes was too close to call. Judging by the fact Target is down 4% in after hours and Lowes 6%, you can kiss those charts good bye. Avoid 95% of retailers; this is just the beginning of what I expect to be a steady stream of lower guidance and excuses such as "cold weather" or "warm weather" or "too sunny" or "too rainy". The American consumer is pinched by lack of easy money via home equity withdrawals and inflation that the government believes is make believe. Period. Once this is priced into the stocks than you can buy these names. But we aren't there - there is still way too much belief that a fed cut here, a fed cut there, a little pixie dust here, a CPI report of 1.2% there, and the wallets will come in full force. I have no doubt the US consumer will come out in force for Christmas - that's what we do, that's what we are. But it won't be to the level people expect (save perhaps electronics/gadgets).

No positions

Crocs (CROX) Up 8% so far Today

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This just out - Crocs does not kill kids on escalators after all. Oh well, it let me load up on the name last week in the $54 to $55 range. Thank you sensational over the top media....

The Crocs (CROX) chart is exactly the kind I love to load up on, a strong stock that pulls back to a major support area (in this case the 50 day moving average, at roughly $54). Is it fool proof? No. Sometimes stocks go crashing through that support and you have to cut your losses because something is truly amiss in the name. But more times than not, with the right companies with strong fundamentals, they provide the best buying opportunities. Crocs is a 2.4% position within the fund.

Click on the Crocs label at the bottom of this entry for all earlier posts about Crocs along with charts.

Long Crocs in fund; no personal position

Another Day, Another Apple (AAPL) Upgrade

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Again, I try not to post about Apple (AAPL) every day but yet another upgrade today with significant upward revisions to estimates so had to mention it.

Citigroup raised its price target from $160 to $185, but more importantly are the reasons why which we've touched on here numerous times.... "citing surprisingly strong computer sales, falling component prices and Apple's recent price cut for the iPhone, the company's first cell phone."

The analyst upped estimates of PC units up from 2M to 2.17M (remember TheStreet.com was saying PC units could surprise by even more, up to 400K units)

(wait, wasn't everyone in a panic about how the iPhone was a failure due to the $200 price cut just two weeks ago?) Amazing how views change when you step back and avoid the knee jerk reaction.

On to the exact numbers: "Citigroup analyst Richard Gardner said in a note to clients that he had raised his earnings-per-share estimates for Apple to $4.76 from $4.30 for 2008, and to $6.35 from $5.55 for 2009."

So 2008 has been raised by 10.7% and 2009 by 14.4% - as I have been saying as people come around to all the layers of revenue streams, better margins, better Mac sales, etc on top of the baselines numbers, earnings are only going to continue to rip higher. Just using this 1 analyst, Apple suddenly went from forward PE on 2008 from 34 to 31. Neither is cheap, but that's a pretty dramatic drop. And I still believe by the time we get to the end of 2008 an earnings of >$5.00 is not out of the question. Still too many moving parts to say for sure with impossible to determine gross margins that far out but directionally the trend is clear. Up. It is hard for a company of this size/scale to constantly have upside surprises but with so many initiatives out there for incremental revenue with positive gross margin effects, more surprises should be out there in the years ahead.

I've been adding to the fund's Apple position here and there in drips and drabs, most recently in the $143s. I'd be itching to add quite a bit more if the stock (and markets) would agree to pull back some here.... Apple is now up to 2.5% of the fund's holdings. The stock is now matching all time highs hit in late July 2007. Hopefully nothing interesting comes out tomorrow on this name so we can have an Apple-free day!

Long Apple in fund; no personal position


Bookkeeping: Closing LDK Solar (LDK) Position

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Since I added a new name to the fund today, and I am trying to keep the total number of positions closer to 50 rather than 60, I decided to close out one of the smaller positions in the fund, LDK Solar (LDK). Since the original purchase price on Aug 30th in the $47 range, the stock has run up to $70. The chart is a thing of beauty and a momentum traders dream, but truth be told I never had a chance to build this position in scale, as the stock ran up to near $52 the very next day after I started the position, and then to near $58 the day after that. So while I have a >30% return, the dollar value to the fund was not significant. So a missed opportunity there, as I am still adjusting to making much larger buys in this fund, than I do for my personal accounts. :) $5k to $8k buys in the mutual fund don't have that great of an effect! So while happy I am continuing to identify quality stocks, I am missing out on some return by not buying in larger scale and with more conviction once I have identified those names. (note: by selling a stock with this chart, you are breaking the cardinal rule of 'selling your winners' but again I am trying to keep the fund concentrated in a limited amount of stocks so something had to go)

Right now anything that rhymes with mina, fina, pina or china is ramping up huge - I have seen some small cap Chinese stocks up >70% since last Tuesday's Fed cut. 30-50% gains are typical, even in mid caps. It's a 'bit' extreme, as those companies businesses obviously did not improve 50% in 4 days. While this can continue indefinitely as it's a speculator's market once again, I am not running this fund to play in that part of the pool, so I will say thank you and move on. I have a good bit of exposure to this space in the more integrated solar PV makers whose valuations I like better, Suntech Power (STP) and Trina Solar (TSL). Not that it matters but LDK Solar was downgraded today (didn't stop the stock from jumping up >5% in this madness for all things Chinese).

There was one interesting quote in the downgrade today: "He said LDK shows that companies without experience in producing polysilicon can enter that business quickly. That means new competition could spring up quickly, and the increase in polysilicon capacity over the next few years could drive prices down. He reduced his 2009 profit estimates."

This is basically my thesis on the whole group - while the above commentary is negative for LDK Solar, it would tremendously benefit those companies who are straining to find any supplies of polysilicon in today's constrained market. So when the market begins pricing this in, I don't know. But as it stands now companies like LDK have the pricing power and gross margins to prove it while the integrated names have seen gross margin erosion, hence the difference in performance of late. Eventually this will flip, so I am positioning the fund for that. Also, not that valuation matters to a momentum stock like LDK, but at $70 it is now trading at 58x 2007 estimates and 36x 2008 estimates. When I bought it, I was paying 39x 2007 and 24x 2008 so you can see in just 3 weeks how much the valuation has changed.

Long Suntech Power Holdings, Trina Solar in the fund; no personal positions


Bookkeeping: Initiating a New Position in Cummins (CMI)

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As discussed yesterday in great depth, I began my position in Cummins (CMI) today, about half a year late... just bought 40 shares or $5200 which is less than 0.5% of the fund. Will add to this stake on a pullback to low $120s when/if it happens. This makes 59 positions for the fund, more than I generally want, but only 36 of those positions make up 1% or more of total holdings. The other 23 are either awaiting a pullback in price to add in bigger scale or a stock whose chart is showing too much weakness, and has not yet made any sort of breakout above resistance levels. As always about 1/3 of the fund's money is in the top 10 positions.

Long Cummins in fund; no personal position.

So What's a Listing on Shanghai Worth? About $30 Billion

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Amazing. I mentioned last Wednesday in Chinese Oil is Flying, that PetroChina (PTR) will be listing on the Shanghia (domestic) market, which is basically the plaything of mainland Chinese investors and no one else really gets access - hence the valuations there are very out of whack with the rest of the world. Well today the news is out that PetroChina won regulatory approval (shocker!) and more amazing is what that is 'worth' - this is a $300 Billion market cap company and it is up 10% premarket. So simply by listing on Shanghai in addition to its current listings in Hong Kong/New York and flooding the market with new shares (4 BILLION) i.e. dilution to earnings per share - so they can raise money to explore more - that is worth +$30 Billion. I use to say only in America but I guess now we can say only in China.

Readers, this is not "like" the dot com days - this is in some ways worse - I can't recall anything similar pushing a stock up of this size - back then stocks used to go up 20% on news of a stock split, another non-starter (you get twice the shares for half the price) or 30% if you decided you were going to compete with Ebay in auction or Yahoo/Excite/Lycos in search - even if you had no expertise... as long as you mentioned you were gunning for them, your stock rocketed. Essentially the world markets have valued PetroChina at Z and a simple notification of listing in Shanghai means the company is now worth Z x 1.10. Classic.

No position

Sunday, September 23, 2007

A Lump of Coal this Christmas? A look at Retailers

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I decided to look this weekend at some of the major retailer names now that we've had a few days to digest this Fed cut. I am looking at these names strictly from a technical perspective. I remain bearish on the middle class US consumer, deprived of his/her ATM card (i.e. house equity), as housing prices in general fall and many new found homeowners (from 2005 onward) will find themselves upside down on their 0% down homes - along with the inflation the government tells us is nearly nonexistent (but Kroger and Albertson's refuses to acknowledge this fact when I try to explain why my bill should be at least 9% lower).

With the nearly nonexistent inflation also eating into restaurant's profit margins, I am pretty bearish on that group too; but I will focus on the retail plays today.

In general, stocks trading below both their 50 day and 200 day moving averages indicate severe weakness from a technical perspective. (especially when the 50 day average is below the 200 day). Stocks that are trading in between the 50 and 200 day moving averages are somewhat neutral; you want to see a stock break out one way or the other so it is sort of limbo land when the stock is in between. Stocks trading above both average, and especially when the 50 day is above the 200 day are usually in good shape technically.

At about 2:16 PM last Tuesday, a lot of short covering happened and formerly depressed retail stocks spiked; many bumping up and hitting their 50 day moving average (from below) - which serves as technical resistance. A few stocks shot through these levels, but many stalled there. Now a few days do not make a trend, but thus far, despite a solid Wed-Fri, many of these stocks faltered. This would indicate they would make some nice short plays here - so while I cannot take advantage of this trend in the fake fund I run, it might be something for the more avid trader to look over. Also by looking at what stocks are bucking the trend we can see where the real strength is in retail...

I will categorize some of the larger mainstream retail stocks into 3 buckets - those that are below both trend lines, those stuck in between the 50 and 200 day moving averages, and those above both trend lines. In this last category I will only include stocks that actually spiked off the Fed's decision and then fell back; this leaves out comatose stocks like Chico's (CHS). I also excluded drug stores/grocers which should be somewhat economically insensitive - tried to focus more on discretionary income. I also did not include 'retail' stocks that are a product, instead of a location i.e. Crocs (CROX) or Under Armour (UA)

The Good (above both trend lines)
  • Nordstrom (JWN)
  • Abercrombie & Fitch (ANF)
  • Zumiez (ZUMZ)
  • Target (TGT)
  • Costco (COST)
  • Dollar Tree Stores (DLTR)
  • Big Lots (BIG)
  • The TJX Companies (TJX)
  • Gamestop (GME)
  • Tiffany (TIF)
  • Blue Nile (NILE)
  • Amazon.com (AMZN)
  • Dicks Sporting Goods (DKS)
  • Cabela's (CAB)
The Neutral (somewhere between the trend lines)
  • American Eagle Outfitters (AEO)
  • Guess (GES)
  • J Crew Group (JCG)
  • Ann Taylor (ANN)
  • Best Buy (BBY)
  • Zale Corp (ZLC)
The Ugly (bounced post Fed but still below both trend lines)
  • The Limited (LTD)
  • Jones Apparel Group (JNY)
  • DSW (DSW)
  • Gymboree (GYMB)
  • Walmart (WMT)
  • Family Dollar Stores (FDO)
  • Home Depot (HD)
  • Kohl's (KSS)
  • JC Penney (JCP)
  • Macys (M)
  • Saks (SKS)
  • Staples (SPLS)
  • Barnes & Noble (BKS)
  • Circuit City (CC)
  • Bed Bath & Beyond (BBBY)
  • Williams Sonoma (WSM)
** The Barry Bonds Club (I am going to asterisk these names as they were too close to call in between The Good and The Neutral - stocks that had jumped up above their 50 day moving averages but now pulled back to fall right at or just below their 50 day - could break either way)
  • Men's Wearhouse (MW)
  • BJs Wholesale Club (BJ)
  • Lowe's Companies (LOW)
  • PetsMart (PETM)
SA/SS

Long Crocs and Under Armour in fund; no personal positions

Stock to Watch: Cummins (CMI) Hitting on all Cylinders

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Oh I couldn't resist that catchy headline (pun intended!).

I only have so much time in a day, and with my crack staff of 1 I can only investigate so many names. One name I have been hearing a lot (for example Cramer is a big fan) is Cummins (CMI), but I never took the time to really sit down and analyze it - engines? boring! However it's been on my long range watch list - so I decided to look at it in depth this weekend. What does Cummins do?

From Yahoo Finance profile: Cummins, Inc. engages in the design, manufacture, distribution, and servicing of diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide.
  • Its Engine segment manufactures and markets a range of diesel and natural gas-powered engines for heavy-and medium-duty truck, bus, recreational vehicle (RVs), light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail, and governmental equipment markets. It also provides new parts and service, and remanufactured parts and engines.
  • The company's Power Generation segment provides power generation systems, components, and services, including diesel and alternative-fuel electrical generators for office buildings, hospitals, factories, municipalities, utilities, universities, RVs, boats, and homes. It also offers engines, controls, alternators, transfer switches, and switchgears, as well as provides an alternative source of generating capacity.
  • Its Components segment produces filters, silencers, and intake and exhaust systems for on-and off-highway heavy-duty equipment. It also offers air, coolant, fuel and hydraulic filters, antifreeze and coolant additives, catalysts, particulate filters, controllers, and other filtration systems, as well as turbochargers for diesel engine applications.
  • Cummins' Distribution segment provides parts and service, and service solutions, including maintenance contracts, engineering services, and integrated products.
Whew, sounds like a snore! But do you know this is a play on China and India? The stock started 2007 at $60. Today? $130. That's 116% gain for this boring company. If only all our stocks were so boring.

From Cummins last earnings report on July 26th:
  • COLUMBUS, IND.--(BUSINESS WIRE)--Broad gains across most of the Company's product and geographical markets led Cummins Inc. (NYSE:CMI) to record revenues and strong earnings in the second quarter.
  • The Company today reported second-quarter revenues of $3.34 billion, up 18 percent from $2.84 billion in the second quarter of 2006 and 10 percent higher than the previous quarterly record set in the fourth quarter of last year.
  • Absent the tax benefit a year ago, net income increased 11 percent over the same period in 2006.
  • The Company's strong performance comes in the face of the emissions-related slowdown in the North American heavy-duty truck market, which is expected to be down 45 percent this year. Cummins' North American heavy-duty engine shipments fell 42 percent from a year ago, but significant growth in the Company's non-heavy duty truck engine markets and other product lines more than offset that decrease.
  • Based on its first-half performance and its outlook for the remainder of the year, Cummins also raised its 2007 earnings guidance today to $7.15 - $7.65 from $6.00 - $6.50 a share.
  • The Company's Engine, Power Generation and Components businesses all reported record revenues in the second quarter, while Power Generation, Components and Distribution reported record Segment EBIT.
  • The Company's share of the North American heavy-duty market continued to increase in the second quarter. Through May, Cummins had earned a 33.1 percent share of the market - up from 27.1 percent at the end of 2006.
  • The Company's Power Generation business continues to produce record sales and earnings, led by significant growth in the Company's commercial generator set and alternator product lines. Growth was strongest in North America, the Middle East and India.
  • The Company's Distribution business reported record profit and near-record sales during the quarter. Demand for power generation equipment increased significantly in North America, Europe and the Middle East.
Pretty much all you can ask for in an industrial name. Record revenues; strength overseas; raising guidance, etc. I've been looking at other ways to get to those record revenues in the Middle East - ways to take advantage of the massive revenue gains made from crude at double the price it was just a few years ago - the scope of companies is very limited. But here is one.

Cummins has a nice Powerpoint presentation (click to check it out) on their website discussing their firms past, current, and future done on September 18, 2007. Most interesting to me were slides 60 and forward. Presentations on join ventures in China, presentations on joint ventures in India (with Tata no less which is the General Electric (GE) of India), etc.

The company has about $700 million in sales in China now, projecting to more than double by 2011. India? I think they just cut and paste the same Powerpoint slides over from the China section of the presentation and copied the word "India" over "China". And these are not recent initiatives - the company has been on the ground in these countries for many years, laying a framework.

In 1999, 40% of Cummins' sales were foreign, 60% US. Now? 50/50. By 2011, foreign sales will be greater than domestic. It pays dividends... it buys back stock... and yes it's an old 'smokestack' type of business, but old is new again.

Let's look at current valuations. Unfortunately (for those left out) the stock just jumped from $120 to $140 in the day and half after Ben blessed us all to speculate again. 16% that quick? Not bad for a boring non tech name! Now its trailed back down to near $130. After a huge rise from $60 to $120 in January - early July 2007, the stock has been range bound digesting this massive 100% gain for 2 full months. A nice base has been built and the stock could be ready to move again; personally I'd like to begin a position in this name but hope for a bit more of a pullback - maybe low to mid $120s.

Let's look at Cummins' valuation - analysts are targeting $7.70 EPS for 2007 - this is at the high end of recently confirmed EPS guidance by the company of $7.15-$7.65. Next year? Almost $9.00. Both these numbers are up tremendously from before the last earnings report when analysts were figuring $6.45 for 2007 and $7.55 for 2008 - yet the stock price has been stagnant. Which shows you once again how the stock 'price' tells you way ahead of the 'fundamentals' changing (the huge rise in stock price in 1st half 2007). So for a company growing 15-20% (with international operations growing in excess of 30%), how is the value? Well it is not cheap, but not 'overly expensive'. At $130 we are looking at 17x 2007 estimates and 14.5 2008 estimates.

The chart also looks very solid (see below)

So here we have the perfect stock to play the environment for the next 18-24 months; slowing US consumer driven economy - worldwide growth in Mid and Far East regions. While no current position, I will be starting a smallish position Monday and then looking to add on a pullback of about 5-7% if possible.

SA/SS

No positions


Revisiting Google (GOOG) vs Apple (AAPL)

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Let's revisit one of the market's favorite stocks: Google (GOOG) which has shown signs of life lately. All earlier Google posts are found here, and my specific concerns from late August about the stock in terms of advertising slowdown from financial firms are found here. Barron's got on board with this thesis, this weekend, click here to see the story. With that said, Google is incredibly dominant in search, and along with Apple (AAPL), changing the way we do things in the technological world.

The bear case is Google is specifically levered to advertising, and specifically the ad world, especially online, is heavily based on spending by financial firms, many of which were mortgage companies. The bull case is "well this is Google (GOOG)", they have cut back on some of their labor spending which was very heavy in the past few quarters and a drag on earnings, and advertising is migrating from offline to online so as a secular trend any slowdowns from the financial space can be made up from other new advertising initiatives. Also there is the YouTube monetization although the case for that has yet to be made clear.

On a valuation basis, Google is not outrageously priced for a company which should be able to put 30-35% earnings growth as a realistic target in the next 3 years - the forward PE on 2007 is 36, and for 2008 it is 29. Now it is not cheap, and Google generally beats analysts estimates by a good amount, although last quarter they only 'met' expectations. Depending on how much they pulled back on new hiring, they could certainly beat the estimates of $3.75 this next quarter especially considering they did $3.59 in the previous quarter - $3.75 would only indicate a 4.5% sequential growth in EPS - very do-able. But is that enough to warrant this sort of valuation anymore? One can find 4.5% sequential growth in many companies. I still think there are some risks with the ad spending, even though they are destroying Yahoo (YHOO) in search.

The stock has jumped from about $525 to $560 since our friend Helicopter Ben told us it's cool to speculate again, which in dollar terms sounds like a lot but it is only 6.7%. I still think the easier money is to be made in other names, although a run to $600 is certainly in order and the stock chart now looks very good with the action the past 4 days. Even if Google can make a run to $700 from here in the next 3? 5? months that is a 25% gain. Not shabby, but I think there are so many other candidates where 25% gain can be had much easier. And if the general US economy either drops to sub 1% GDP growth and/or outright recession (however shallow) will ad spending (lifeblood for Google) continue at previous pace? Is Google that immune? Hard to tell - more importantly if the market has any questions/concerns some PE multiple contraction might happen. Hence, as much as I love Google as a company and all the great initiatives they are doing to make the web and our world easier and more interactive, this company has reached the sized that diminishing returns start to take effect. It's market cap is $174B, so a move to $700 would move the market cap to $220B. While I do think by simply cutting back hiring they can 'beat' the number, and investors might go giddy, the next 3-6 quarters (assuming a US economy slowdown) are more of a concern to me. Google is still tethered more to the US economy than most other stocks in the portfolio.

For comparison let me throw out another larger cap tech darling stock, Apple (AAPL), which currently trades at $144 and a market cap of $125B. To reach a market cap of $220B (or Google's value if stock price is $700), Apple would need to reach $253 or 76% higher from here. Analysts are pegging a growth rate of about 34% for Google in the next 5 years, versus Apple 24%... I think these 2 rates might converge, with Google going a bit below trend and slowing to upper 20s/lower 30s, and Apple above trend to mid to upper 20s. Hence I continue to favor Apple (AAPL) over Google (GOOG) - all things being equal (i.e. Steve Jobs not spending most of his afternoons in a court room) Both companies are literally changing our world for the better, and ironically while Google has far less competitors than Apple, I think the markets Apple addresses are bigger and more varied (cell phone, computer, music, tv distribution et al). Keep in mind, in it's core business, computer hardware, Apple still only has a 3% market share... just a double there over 3-5 years will mean significant earnings revisions upward.

Long Google and Apple in fund; no personal positions





Saturday, September 22, 2007

Bookkeeping: Weekly Changes in Fund Positions

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Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight each week the larger position changes.

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

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 19.4% (vs 23.0% last week)
58 positions (vs 58 last week) - Completed exited Baidu.com (BIDU), initiated Titanium Metals (TIE)
55 long bias: 69.6% (vs 68.1% last week)
3 short bias: 11.0% (vs 8.9% last week)

Top 10 positions (excluding cash) = 31.1% of fund (vs 30.1% last week)
36 of the 58 positions are at least 1% of the fund's overall holdings

Major changes and weekly thoughts
Quite an eventful week - everything was quiet and traders were awaiting news of the Fed decision Tuesday afternoon. Up to that point all index charts and most individual charts I follow were sitting near to a major support/resistance level. I had positioned the fund cautiously going into this announcement and the huge spurt upward left the fund really lagging the indexes on Tuesday, lagging behind the SP500 by 1.5% and the Russell 2000 by 2.5%. However, the fund made most of that up on Thursday and Friday. Considering the fund has been between 20-25% in cash and 9-14% short for most of the week, the results were pretty good since I was able to replicate most of the market's upside with only a 70% long exposure. This shows the fund's long positions were really working great; I just did not have enough scale to outperform, due to my caution on the market as a whole. Some of the larger changes to the fund below:
  1. I scaled back out of both long and short positions ahead of the fund meeting Monday. Since the action Tuesday was more akin to Vegas, I didn't want to be quite as exposed to a random event.
  2. I cut back my largest position Ciena (CIEN) from 5.7% to 3.4% when the stock spiked a bit. This is simply a move to try to keep as much money churning forward as possible. I am very bullish on the fundamentals in this stock, but due to a convertible debt issue with strike price $38.15, this has put a ceiling on the shares from best I can tell. Once the stock shows signs of life again I plan to jump in, probably in even heavier scale than I had these past few weeks.
  3. I cut back a bit on the oil deep sea drilling names; the chart for Pride International (PDE) took a turn for the worse early in the week, breaking the 50 day moving average Monday and Tuesday, but of course the Fed decision changed everything.
  4. I was adding to the fund's Suntech Power (STP) position throughout the first half of the week as it broke out above its 50 day moving average and held it; Suntech Power at 4.2% of the fund is now the largest long holding.
  5. I bought back some of my ultrashort ETF positions after the run up post Fed - partly because I think there are still a lot of cockroaches to be found once we hit earnings season in October and partly because on down days in the market this is the only way (aside from cash) to have any buffer for the fund.
  6. I added to my 2 coal positions, Peabody Energy (BTU) and Consol Energy (CNX) that I started the previous week as I said I would when they pulled back closer to support levels.
  7. I added to my Crocs (CROX) position on the bad rumor of the week; i.e. kids die on escalators when they wear Crocs... Crocs is now a top 10 holding in the fund. Why a retail name when I am bearish on the domestic consumer? First, this name has a lot of international exposure - second, there is a big difference in a $15K Harley versus a $24 shoe. My one concern is the CFO mentioned a move from 60 to mid 50s gross margins - I know that but does the average Joe who loves this stock know it or will he/she be 'disappointed' and flee in panic come earnings. Hopefully unit volumes sold will offset this.
  8. I initiated a sizable position in Titanium Metals (TIE) as its chart (along with many other metal stocks) changed 180 degrees post Fed.
  9. I followed through on my strategy to overweight Blue Coat Systems (BCSI) and underweight Riverbed Technology (RVBD) - although I like both names fundamentally, I like the valuation on Blue Coat Systems (BCSI) better at this time considering they have very similar growth outlooks. Hence I added quite a bit Blue Coat (up to 2.7% of the fund) and cut back my Riverbed (down to 1.0% of the fund) - this is almost the exact reverse of where the 2 stocks were two weeks ago in terms of weight in the fund.
  10. I closed the fund's Baidu.com (BIDU) position - great gains % wise, but I certainly did not buy enough back in August considering the tremendous run in the name. Right now anything with the word Chinese is behaving as anything with the word '.com' did back in the late 90s so it makes me nervous to see a repeat of this lemming behavior. I'd like to buy Baidu.com back, just at a lower price - this is simply a valuation call but momentum traders can take this stock onward and upward - but the risk/reward is now too weighted towards risk for my taste.
So that's the week in a nutshell. Going forward I am torn between knowing the Fed gave us a license to thrill/speculate versus my thoughts that many of the domestic related stocks (without heavy international exposure) are going to follow the fate of Harley Davidson, Ralph Polo etc and disappoint the street in October (especially in regard to forward guidance). Also the smaller, regional banks won't be able to hide their losses as the large 'black box' investment banks can. So it's a mixed bag. I think avoiding (most) retail (save those who have good international exposure), most financial, and restaurants is still the way to go.

Thus far, even on very strong weeks like this, the fund has been able to keep pace despite only being about 70% long, so if this can continue on 'up weeks', and can provide a some buffer on 'down weeks' I will be content. The long positions I have been picking have done extremely well, so on that I am happy. Post October earnings season, we can re-assess this strategy.

Friday, September 21, 2007

Bookkeeping: Rising Tide Growth Fund Performance

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Price of Rising Tide Growth: $10.731
Performance to date (vs Aug 3, 2007): +7.31%

SP500: 1,525.8 (+4.13%)
Russell 2000: 813.1 (+4.92%)

Fund vs SP500: +3.18%
Fund vs Russell 2000: +2.39%

Since the market cap of the median stock in the Rising Tide Growth fund is significantly below the SP500 index but higher than the median market cap in the Russell 2000, I am measuring the fund against both indexes to be more accurate.

Basis for indexes
SP500 (5 day weighted average Aug 3-9): 1,465.2
Russell 2000 (5 day weighted average Aug 3-9): 775

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

Norway Energy Policy vs US Energy Policy

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Pretty sad to see the differences between attitudes in Europe vs US in renewable energy. Where is our Manhattan project? You'd think Democrats would be behind this due to environmental causes and Republicans due to national security (less dependence on people who hate us for their oil) Instead we have almost nothing, especially comparative to the size of our country.
  • OSLO, Sept 21 (Reuters) - Norway's Prime Minister Jens Stoltenberg appointed a new energy minister on Friday and vowed continuity in policies for the offshore oil and gas sector as well as its renewable energy projects.
  • "We will continue our historical work with environmental friendly energy, we have one experienced minister stepping down, and one experienced minister stepping in," Stoltenberg said.
  • Haga said she will focus on boosting the role of renewable energy. Norway already mainly uses clean hydropower to produce electricity and has piled billions of crowns into projects to capture and store carbon emissions blamed for global warming.
  • "My biggest project is to speed up work on renewable energy," she said, calling it the "green gold of the future".
Amazing what lobbying money can buy you....

Meanwhile back in China - Price Freezes!

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This was before my time but I believe the last person who tried price freezes in the US was President Nixon. That didn't work out too well.

Well, now China has decided inflation has gotten out of hand so it's time to go to the tried and true price freezes. Once again, we see free markets rule on the way up! But when they cause ill effects its time for regulation. Click on the label at the bottom of this post ('china market') for my earlier thoughts on how this is all coming together. And yes this has an impact on the US consumer, as when wages go up in China to pay for inflating goods, that means inputs to US companies buying Chinese product goes up which means US consumers have to pay more out of their pocket - and we already are facing an increasingly strapped US consumer without his house ATM. (not to mention the value of the dollar is deflating by the day)

While the China Shanghai market can go on this crusade upward on onward into bubble land indefinitely (just make sure you have a chair when the music stops), let's look at what's going on, on the ground.
  • BEIJING: The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing's mounting concern over inflation.
  • Beijing also stressed the importance of holding down market-driven prices during the forthcoming holiday period, saying it would have a direct impact on the country's "development, reform and stability."
  • Ensuring stable prices would also create favorable conditions for the opening of the ruling Communist Party's five-yearly congress on Oct. 15, a statement issued by six ministries said.
  • The government still administers a vast array of prices, including those for land, transport, utilities and fuel.
  • The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August. <--- hear that? raise your wages....
  • Chinese leaders are nervous that a rapid erosion of living standards could trigger social unrest, as it has before in China, most recently in the run-up to the pro-democracy demonstrations in Tiananmen Square in Beijing in 1989 that were put down by the army.
  • The main source of inflation has been an increase in the price of pork, China's staple meat, caused by disease, rising feed grain costs and low prices last year, which deterred farmers from rearing more animals.
  • Separately, China is set to provide more aid to dairy farmers as part of an effort to control rising food prices, which have driven consumer price inflation, industry officials said.
  • They said the State Council, China's cabinet, was to meet Wednesday to discuss financial support for dairy farmers after increasing feed costs and low milk prices forced many to stop raising cows. "There has never been a meeting before of State Council leaders to discuss dairy cows," said an official with the China Dairy Association.
********
China is and will continue to be one of the great growth stories of our lifetime. However, 10% GDP growth and massive movements of population from rural to urban cannot happen without dislocations, possibly severe ones. We are starting to see some of them. When all this starts to effect markets is anyone's guess; and the government will do everything in its power to keep up appearances up to 2008 summer olympics. Past that point, it's going to be dicey. This is a 20-30 year story but all growth stories have their speed bumps. Right now markets are not pricing in any.... food for thought. Wait, food is too expensive. Dairy for thought.... wait, that's too expensive too... ummmm, toys for thought? Never mind... bad idea.

Quick fact - statistics show those living in rural areas and the urban poor spend 1/3 of their money on food. No, these are not the daytraders pushing the Shanghia market to bubble status. These are the regular folk..... and the vast majority.

An Apple (AAPL) a Day?

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As mentioned yesterday I try not to talk about this stock daily since one could create a whole blog around Apple (AAPL) but the good news just keeps on coming, forcing me to continue to write glowing blog posts...

Today's news from Scott Moritz over at TheStreet.com: Apple Mac Sales Surging
  • iPhone fever may have obscured the robust growth in Apple's (AAPL) Macs.
  • People familiar with the company say Apple is selling computers at a blockbuster pace. The Cupertino, Calif., company is expected to sell 2.35 million iMacs and MacBooks this quarter, TheStreet.com has learned. A sales number that high would beat analysts' estimates by nearly 400,000 units.
  • Pegging the average Mac sales price at a conservative $1,500, a beat of that magnitude stands to boost Apple's top line by about $600 million. Analysts expect the company to post fiscal first-quarter revenue of $5.94 billion.
  • The popularity of Apple's computer lineup has been fueled by a robust back-to-school buying spree and a revamped iMac roster, say industry watchers.
  • Apple has about 3% of the world's computer market share
  • Looking ahead, people inside the company and those close to Apple's plans say there will be a big announcement regarding a so-called subnotebook Mac. The ultra-thin device will have a 10-inch to 12-inch screen; sleek, rounded edges; and weigh less than 2 pounds.
  • The subnotebook's introduction is planned for next quarter, and the product is expected to be available for the holiday sales season. In preparation for a big year-end sales push, Apple has told some employees to cancel vacation plans "between Thanksgiving and Christmas," says one source familiar with the memo.
*******
Takeaway: What more is there to say? This company is a home run in every way - cool stuff, that is easy to use, that teenagers love, teenagers that turn into college students, who turn into young consumers. A company that can charge a premium on the same mass market components than other companies just due to cool factor. Think Nike of consumer electronics. This constant consternation about a price cut here, or XXX amount unit miss there, blah blah. Missing the forest for the trees. 3% computer market share. What happens if Apple gets 6% in the next 3 years? or 10%?

Looking at the numbers above, we are looking at potentially a 20% surprise to the upside on computer sales and a 10% upside surprise on revenue from the computer division alone! And now we are talking about an even lighter and smaller notebook? (other than concerns about too small of a keyboard) all I can say is "hit". But wait it took them 74 days instead of 43 days to sell out a million iPhones. Tragic ;) Again, the only fly in the ointment is this Steve Jobs options backdating situation... but operationally this company is turning into a 1 stop shop for everything consumer electronics; and can sell it all at a premium to competitors on 'brand' name alone.

Long Apple in fund; no personal position


Fertilizer Continues to Run: Potash (POT) and Mosaic (MOS)

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The 2 leading Canadian potash makers continue their run, with Mosaic (MOS) up 7.5% and Potash (POT) up another 4.5%. I mentioned the strength in Potash yesterday. While Potash is the Google (GOOG) of potash, Mosaic might be the AskJeeves ;)

Some more good news out earlier this week for this group:
  • Mr. Lee told clients in a note that Canpotex – a potash exporter wholly owned by Saskatchewan potash producers, Agrium Inc., The Mosaic Company, and Potash Corporation of Saskatchewan Inc., – has announced potash prices in Brazil will increase by $50 to $360 per tonne effective Dec. 1, 2007.
  • In Southeast Asia, meanwhile, the price of potash is set to increase immediately by $30 to $360 per tonne.
  • And even better for Potash investors, Mr. Lee doesn't expect the global price hikes to end there, saying there is room for significant increases in India and China as well.
  • "On a delivered basis, potash prices in India and China are currently about $270 per tonne and $235 per tonne, respectively. Based on prices in Brazil and Southeast Asia, we believe there is room for potash prices in India and China to move significantly higher in 2008."
  • Mr. Lee added that she feels her 2008 financial forecast for PotashCorp based on an average realized potash price of $208 per tonne appears to conservative. (I'd say!)
  • He noted that a $10 per tonne increase in her average realized potash price assumption would result in a 20¢ bump in her 2008 earnings per share estimate and an approximately $4 to $5 increase in her price target.
********
Takeaway: The only stock of the 3 mentioned above the fund does not hold is Agrium (AGU), as it's a mix of fertilizer/retailing, but that stock has also been on an incredible run. I discussed the squeeze on prices in yesterday's posting on Potash - simple supply and demand, economics 101. Here we have the results -> 10% increases in Asia immediately and by year end 15% increases in Brazil. Now the drawback is one of the biggest markets for fertilizer is the US and with the demolition of the value of the dollar this will hurt from a currency perspective on any sales to the US but the rest of the world looks like it will more than make that up.

So current consensus for Potash is $3.97 in 2008 - the analyst in the story mentioned every $10 increase in price adds $0.20 in EPS bump, so $30 = $0.60. The market is really putting a premium valuation on Potash right now, valuing each dollar of 2007 earnings with a 30 PE ratio. So from that standpoint $0.60 more EPS x 30 = $18 more in share price just from these price increases alone.

Looking at Mosaic (MOS), the street only values 2007 earnings at 19x (Mosaic has less growth potential/expansion versus Potash), however we can reasonably expect the $2.94 in 2008 estimates (listed as year end May 2009), to go up in scale as well.

It is very hard to put a good valuation on these companies - obviously fertilizer does not traditionally sell as such premiums, but we are not in a traditional time either. I hate to use words like "it's different this time" but with 20-30% of the world's population migrating to urban centers - its going to be different for a while. If these stocks are over or undervalued is hard to call, but if you felt the valuation of the companies was accurate pre-pricing change, this price increase alone means you need to push the stock price targets up as earnings will increase.

I will be looking to add on these names on any sizeable market pullbacks, and am kicking myself for selling off any I had at much more attractive prices in early/mid August.

2 PM EDIT: My research staff (uhhh, being me) missed the fact that there was an analyst upgrade today on Mosaic as well.
  • Shares of Mosaic Co., which makes phosphate and potash crop nutrients, rose in Friday morning trading, after a Citi Investment Research analyst upgraded the stock on stable pricing of a main fertilizer ingredient.
  • Citi's Brian Yu raised his rating on Mosaic to "Hold" from "Sell" and lifted his price target to $48 from $31.
  • Yu said the price of diammonium phosphate, a main ingredient in fertilizer, is unlikely to decline, as long as Mosaic can maintain its market position and production.
  • Yu hiked his fiscal 2008 earnings per share estimate to $2.78 from $2.27, and 2009 estimate to $2.69 from $2.05.
Talk about "behind the curve" - oh analysts. And he completely missed the potash story in the name. Bleh.

Long Mosaic, Potash in fund; no personal positions


Suntech Power (STP) Gets an Analyst Upgrade

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I have been adding to the fund's Suntech Power (STP) position on this breakout; today the stock is touching $40 on an analyst upgrade. This is currently the fund's largest long position at >4%, after I cut back on Ciena (CIEN) the past few days. (I will update the portfolio on the right sidebar by the end of the day)
  • NEW YORK (AP) -- Shares of solar cell maker Suntech Power Holdings Co. Ltd. edged up in premarket electronic trading Friday after a Jefferies & Co. analyst initiated coverage with a "Buy" rating, saying the company's Pluto technology will allow it to keep costs down.
  • Paul Clegg set a price target of $45 per share, a few cents above the all-time high the stock set in July.
  • Clegg expects Suntech to introduce Pluto technology next year. The company says the technology is less expensive to make than competing technologies, and also more efficient at converting solar energy into electricity.
  • "The company has developed a good overall reputation for quality modules at a reasonable price and continues to develop additional means of improving product quality and per unit economics through both better manufacturing and conversion efficiency gains," he said.
  • Clegg said Suntech has a history of exceeding production estimates. He said that trend should continue, and the company should beat analyst expectations for the year. He expects a profit of $1.13 per share this year, and far surpass Wall Street estimates by earning $1.78 per share next year.
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Takeaway: With the recent run in Chinese stocks, many now trade at valuations higher than their US counterparts. One can argue with the accounting standards in China, this might be an iffy proposition. I believe what many see as a 'not so expensive' Shanghai market, might look a lot more expensive if companies there universally used internationally accepted accounting standards - from many things I have read there is a lot of chicanery going on, but we can leave that for another day, and another bubble. I don't have such concerns with this solid company - they are the best capitalized, best managed, heaviest R&D spender, best connected Chinese PV solar player. Due to the quite large float, and larger share count (vs peers) Suntech Power gets left behind by the retail crowd since daytraders and momentum guys cannot push a stock like this up 40% in a week; but I believe as institutional interest increases in this sector they are going to be pushing themselves in the names that have some liquidity, and Suntech Power is the obvious choice.

The major US peer to Suntech Power is SunPower (SPWR). Let's compare the valuations:

Suntech Power (STP) $39
EPS 07: $1.01
EPS 08: $1.59
PE on 07: 39
PE on 08: 24.5

SunPower (SPWR) $82
EPS 07: $1.18
EPS 08: $1.96
PE on 07: 69
PE on 08: 42

So Sunpower, the US counterpart to STP trades at over 70% of its value - both companies have similar market caps and similar growth rates - Suntech Power actually has better margins across the board. With the market now 'marking up Chinese merchandise' to levels above US merchandise (for example CNOOC (CEO) is now valued higher on PE multiple than Exxon (XOM)), why such a discrepancy here?

One can argue if it makes sense for Chinese coutnerparts to trade at par or even higher values than US - there are good arguements both pro and con - but certainly in this sector we do not see that. So if this inefficiency is closed, we should see a nice ride up on Suntech Power despite its premium valuation. I am looking for a run to upper $40s by Q1 2008 - if we get more clarity on the polysilicon shortage issue in the upcoming months, it could be even quicker than that. For the longer term, much like the analyst I believe 2008 estimates are probably understated and if this shortage begins to clear up by latter 2008, earnings leverage will explode as polysilicon is 65-75% of costs for many of the Chinese PV makers.

Long Suntech Power, Ciena in fund; no personal position


Closing my Baidu.com (BIDU) Position for Now

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I am completely exiting my Baidu.com (BIDU) position at this point. While the general strategy of the fund is to never completely leave a position it likes, (but instead to lever in and out of names as they go up and down).... since the stock can continue to run far past what one might consider legit, this one has just risen too much. I never had enough Baidu.com in retrospect judging from the magnitude of this run but the stock has risen >20% in 5 sessions ($230 to $280), and is up enormously from my purchase points on Aug 10th (upper $180s, up almost 50%) and August 16th (mid $160s, up almost 70%)

With the crazy run ups in Chinese stocks the past few days as speculators latch back on regardless of fundamentals driving some stocks up 50% in just a week, it's just getting too hot and heavy in here for me; and generally I like beta.

I am exiting here; although the stock certainly should make a run to $300, with hopes of getting back in somewhere in the sub $240 range, or at least 15% lower than current prices. Even on the $8 or so in earnings for 2009, its approaching 40x earnings for 2009 at these prices. Too rich (for me); I will leave it to the speculators. And yes, I know all the bullish arguments - that's why I am in the stock in the first place - but at some point valuation does begin to matter, although we all have different perception of value, but that's what makes a market.

No position





Thursday, September 20, 2007

Now What Ben?

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Ok the black box financials are out of the way - what did we learn from them? Nothing other than they can pull levers to make their earnings pop out "not so bad" (vs lower guidance of course). Ben's chopper dropped 50 basis. Now what? It's been 48 hours since Ben cut, and singed the bears.

Now what? When do the calls start for 50 basis points at next meeting? Or wait; things are so bad we need an intrameeting cut. Do we wait until next Monday for that? Or tomorrow? What can be done to make these homes affordable and not make a few million people default in the next 18 months? And suddenly give all these people in the mortgage and construction business their jobs back. (ok we at least saved people's jobs in the financial sector)

I wrote yesterday:

As an aside, I am anecdotally reading unbridled enthusiasm of bulls everywhere from message boards to investment sites. Hence, this leads me to stick to my theory that once the market has sucked these players in to believing nirvana has arrived, another swift boot to the rear should ensue.

Yes some more deals will now get done - yes people's credit cards will now fall from 14.88% rate to 14.38% rate (maybe, these card companies don't pass everything along) and some people on the fringe with variable mortgages might be able to refinance if they are not upside down. But it doesn't eliminate all the other issues and does it really make banks trust what each other hold? Nope. The only healer for those issues are time and price. So while making the portfolio more long, I still remain cautious intellectually - and this unbridled and unrestrained call to arms by the bull camp makes the contrarian in me take notice. I still have this feeling in a few weeks, we are going to look over and who is laying next to us in bed, and wonder 'what did we just do'. ;) The strong sectors should continue strong, but those sectors that ramped the highest here in the past half day might just get a reality check, as most of their rocket fuel will be short selling and not a flood of new buyers.

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I don't know, I am seeing a lot of financial stocks falling back below 50 day moving average already (Morgan, Merrill, Bear, Lehman - I expected better guys!) - and the retail stocks showing some weakness ... again. Mother Goldman is still ok, but do we take it to 52 week highs in this environment? This 'rally' looks more and more like shorts covering. 1 day does not make a trend but this lack of follow through is a bit stinky. And oh yeh, SP 500 is 1% off all time highs.... make sense? Not so much. I will still have to lean (with nose closed) a bit bullish because the indexes technically look ok, but that can change in a moment's notice. And outright bulls need people like me... since I make up the wall of worry. And I am their contrarian signal - funny how it's all so circular, no?

But hey at least we brought unfettered speculation back to the US market (see previous post!) That's always a great thing! Right? Ben? Hello....?

Again I remain cautiously positioned and while I underperformed the last 2 days, I think some of these short ETFs and a high cash position will still serve pretty well for the next 6 weeks; it is serving very well today for example so I am making back some of that Tuesday underperformance. The next 7-10 days should be very telling - a retest of the indexes averages will be in order, and how they behave their will tell us if there is pent up demand for equities or we just hit fool's gold (I believe fool's gold is also at a 27 year high or maybe an all time high considering our politicians actions).

Yes those hocus pocus investment banks can hide stuff, but what about the smaller regional financial institutions who do normal stuff like... banking - what will they be saying when they confess? Answer: the truth. It's not pretty, unless your a millionaire. Confession time is October. See you then.

Long truth and reality

Market Watching: Another Day; Another Chinese Stock Goes Ballistic as Daytraders Play - China Southern Airlines (ZNH)

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Psst buddy, want a stock up over 40% in 3 days? Up 100% in 18 trading sessions? Think I'm talking some penny stock? Nah this one is touching $100! And a nearly >8 Billion Market Cap. I can sneak you in... it's a airline stock to boot.... what's that? Not profitable this year? Not a problem! Think 2012 estimates! (suddenly I have 1999-March 2001 flashbacks) It's deja vu, all over again....


Strength today: Potash Corp of Saskatchewan (POT)

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The fertilizer stocks continue their strength, led by the Google of fertilizer - Potash (POT). Unfortunately, the fund only has a 0.5% stake in Potash so it's not helping too much, but I do have some holdings in some of its peers. In fact, since fund inception the 5th best performing stock has been CF Industries (CF) with a +$4,422 gain as of yesterday's close. However, I pulled back on these names prematurely... wish I had kept more as I had far larger positions in early-mid August. I don't talk about these stocks much because it's a pretty simple thesis - more demand for quality foods + less farmers in this world + less land used for farming = more demand for efficient use of current crop producing land.

Here is a Reuters news report for Potash out earlier this week - the hits keep coming:
  • WINNIPEG, Manitoba, Sept 18 (Reuters) - Potash Corp of Saskatchewan the world's largest potash producer, sees tight supplies amid strong demand for the fertilizer in the coming year, its chief financial officer said on Tuesday.
  • "Our customers right now are on allocation. We're having a hard time meeting demand in 2007," Wayne Brownlee told analysts at a Bank of America investment conference in San Francisco.
  • "We expect that allocation process is going to continue in 2008, and even into 2009," Brownlee said, noting potash buyers currently have to wait about two months longer than usual to receive fertilizer because of strong demand.
  • As the middle class grows in China, India and Brazil, so has meat consumption, boosting the need for crop fertilizer to improve grain yields for livestock feed, he said.
  • The expanding biofuel sector has also raised demand for crops, Brownlee said. Tight world grain supplies have pushed grain prices to record levels, motivating farmers to apply more fertilizer, he said.
  • Potash Corp owns more than 75 percent of the world's idled potash capacity, which the company is moving to bring on line.
  • The company aims to produce 15.7 million tonnes of the fertilizer by 2015, up from about 10 million tonnes in 2006.
  • Potash projects gross margins will more than double as it expands, Brownlee said.
  • But competitors may shy away from building new mines because it costs more than $2 billion and takes seven years to see the returns, Brownlee said.
  • "So when you're making a bet on a potash greenfield mine, you're really betting on what the prices of potash are going to be in years 8 through 15 to get your return on that investment of over $2 billion," he said.
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Takeaway: Well what can I say; I am not sure if I have read a more bullish news item this year. Product is so in demand that customers are not only on allocation now, but in 2008 and potentially 2009 as well? Keep in mind that CFO's are usually a lot more conservative types than their glib CEO brothers....

For you economics majors out there, we all know what limited supply and more than healthy demand does for prices...

Potash has the premium valuation in the group of peers, but also has far and away the most capacity to expand production in the long run. It's not cheap to expand but if you think these long term trends are intact you just have to be in this sector. For those not sure where to start, think about MOOing...

Long Potash Corp of Saskatchewan, CF Industries in fund; no personal postions



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