Sunday, September 30, 2007

KBR (KBR) - Not just Military Contracts

The fund has a relatively small position in KBR (KBR), at only 0.7% of the fund's holdings. KBR is a global infrastructure company which has been spun off of Halliburton (HAL). Part of my hesitation has been an over reliance on military spending and the potential investor 'fears' if there is indeed a draw down in military spending in 2009-2010, especially if a Democratic candidate is elected. That said, it seems the Democrats are coming to grips that we will have a significant presence in Iraq for a long long time, although down from current levels. Just this weekend all 3 major front runners in the Democratic party said they cannot guarantee we will be out of Iraq by the end of their first term (2013!). Another fly in the ointment is many of KBR's contracts were no bid contracts which will fall under investigation by committee after committee the next few years.

With all that said, the earnings growth rate and international exposure of KBR is very impressive. Here is a new article via AP about the future diversity of KBR's business.
  • LEAGUE CITY, Texas (AP) -- KBR Inc., the former Halliburton subsidiary whose work for the U.S. military in Iraq has prompted congressional inquiries, plans to place greater emphasis on domestic industrial construction and other parts of its business, the company's top executive said Thursday.
  • The Houston-based company also hasn't ruled out potential acquisitions to expand its base, Chairman and Chief Executive Bill Utt said.
  • Utt acknowledged the military contractor and engineering/construction outfit was likely to continue to do less work in Iraq as troop levels decrease. KBR provides food, laundry and other support services for U.S. personnel.
  • As such, KBR will focus on getting back to its roots, Utt said, looking to land more industrial construction and other projects that contributed heavily to its bottom line 20 years ago. Such work accounted for several hundred million dollars a year in revenue in the early 1990s, he said, but had shrunk to less than $100 million a year ago.
  • "We see an opportunity with all the capital investment that's going on in the U.S., particularly in this Gulf Coast region, for us to re-establish our position as a constructor,"
  • The Army said last month it will examine as many as 18,000 contracts awarded over the past four years to support U.S. forces in Iraq, including awards to KBR, to determine how many are tainted by waste, fraud and abuse.
  • The company reported last month its second-quarter earnings rose 52 percent versus a year ago, helped in part by the sale of its stake in a British shipyard. Utt has said that sale is part of an initiative to focus on energy, chemicals and KBR's government and infrastructure arm -- considered to be the drivers of future earnings growth.
  • KBR has announced several new contracts in recent months, both in the U.S. and overseas, where it currently does 75 percent to 80 percent of its business.
  • Last month, Saudi Arabian oil giant Aramco and Dow Chemical Co. awarded KBR a contract to manage construction of a chemicals and plastics production complex in Ras Tanura, Saudi Arabia -- a plant that's expected to be among the world's largest petrochemical facilities. The companies didn't say how much KBR's contract was worth, but analysts have estimated the cost of the project is $20 billion and KBR's management portion could be worth several hundred million dollars.
  • That news came a few days after KBR said it received a $2.8 billion contract for construction of an Algerian liquid natural gas project.
  • On the military side, KBR in June was one of three companies awarded respective $5 billion contracts from the Army to provide food and shelter to U.S. troops in Iraq, Afghanistan and Kuwait.
  • Another contract, announced in May, to provide program and construction management services for the new Panama City-Bay County International Airport in Florida is indicative of the type of domestic work Utt said he hopes to increase.
  • "Where we can find opportunities to jump-start our growth a little bit better through an acquisition, we're going to be interested," he said.
Takeaway: So here we have the prototypical company to take advantage of all the global growth, with a 'special' relationship with the US government based on it's tight ties to Halliburton. It appears as some of the US government work draws down, the company will be able to offset this with other growth in new contracts, and its ties in the Middle East provide an entry to take advantage of the petrodollars flowing through the region. Much like Cummins (CMI), here is a stock that while based in the US, is essentially a play on foreign growth markets.

KBR is not a cheap stock trading at 34x 2007 estimates and 26x 2008 estimates, which compare about equally with Fluor's (FLR) estimates, and more expensive than Foster Wheeler (FWLT) or McDermott (MDR) - but its near term earnings growth rates are far and away the best of this group (although revenue growth in the next year leaves something to be desired). Technically the company has had a huge run, up from $29 to $40 in the last month (+38%). I'd like to add more KBR but would prefer to see a pullback to mid 30s range, or a 12-13% drop from here. This is the approximate location of its 50 day moving average at this time.

Buybacks are all the Rage - Is the Market Inevitably Going Up in the Long Run?

After reading about the latest intent to buyback $15 BILLION worth of shares from Chevron (CVX) following an earlier announcement this summer from ConocoPhillips (COP) for the same amount; along with Exxon's (XOM) continuous buybacks, this set me to thinking. Is the market simply destined to go up because we don't have enough stock for people to invest in? Basic economics - supply (of stock) shrinking, demand steady (or rising), prices must go up.

Without getting into a debate of what is in the best interest of the American consumer i.e. should these companies be spending even more in capital expenditures to try to find more oil in more difficult (read expensive) manners (which would benefit many) or should these companies be spending the cash for corporate buybacks (which benefit far fewer, i.e. stock holders) - let's take a step back and look at the really big picture.

First, there is a lot of money sloshing through this world. And more of it is printed each day, especially petro dollars - see the rising billionaire class in Russia, Middle East, Far East. Think of it as a transfer tax - money going from the many (consumers) to the few (those who own petroleum). Or just think of the new riches being formed as more money is being circulated through this world as more middle class consumers are created in the Far East, South America, parts of Russia, parts of Middle East. The underlying fact is the money supply *is* growing, whatever the debate of how it is being created. And it wants to be invested. I think this is part of why the private equity (bubble?) is formed (forming?) and won't be going away. Ultra rich back these firms. So again, worst case scenario is a flat demand for assets and I'd argue that one could say an increasing demand for assets such as equities.

Second, let's look at the supply of US stock. Do you realize the level of buybacks that have been going on? Not announced buybacks but tried and true "after the fact" reporting of buybacks is >$100 BILLION for 8 quarters in a row. It has accelerated lately... $118 Billion in Q1 2007, and $158 BILLION in Q2 2008. Even if we drop back to low $100s for Q3 and Q4 2007 that is an annual buyback bing of just under $500 Billion. On top of that is 6 previous quarters (back half of 2005 and 2006) of another $600 Billion+. So this is $1.1 Trillion of stock value that will be taken out of circulation by year end 2007.

What does that number mean? Well I wanted to find out myself. So I went to look at some median capitalizations in the US market. (off on a tangent here - it is hard for the common man to find a nice table of market caps sorted from highest to lowest for the SP500!) I had to use the Russell 1000 and Russell 200 indexes and work backwards using their median market cap figures.

For the Russell 200 which are the largest 200 stocks in the USA, the median market cap (meaning the 100th largest stock in the USA) was 31 Billion. The smallest market cap (meaning the 200th largest stock in the USA) was 11.8 Billion.

Then looking at the Russell 1000 the median market cap (meaning the 500th largest stock in the USA) was 5.75 Billion.

So more simply
100th largest stock in US = 31 Billion
200th largest stock in US = 11.8 Billion
500th largest stock in US = 5.75 Billion

So last quarter alone (Q2 2007) companies bought back $158 Billion of stock. Now that was of course mostly done by the largest companies in the US (the true mega caps with >$100 Billion market cap) but it doesn't matter WHO is retiring this equity, it simply matters that it is being retired from the market as a whole. And when it is retired that means SUPPLY of stock in the US as a whole is falling. Of course some of this is offset by new IPOs and new stock options and restricted stock being sold but in general those are drops in the bucket save for the Google's (GOOG) and VMWare's (VMW) of the world. Let's acknowledge those facts but ignore them for now. (I don't have any great source to see how much new equity is 'created' each quarter, but would love to see it)

So if we retired on average say $110 Billion a quarter, that is essentially saying we are eliminating 10 huge companies the size of 200th largest stock in the US (market cap $11.8 Billion) So supply of stock equal to 10 of those companies are disappearing each quarter; or 40 a year. Or if we move down the scale a bit to the 500th largest company size, which is $5.75 Billion, we are eliminating 20 of those companies a quarter; or 100 a year. These are not tiny fish, these are companies at the bottom end of the SP500...

Again, 'some' of this is offset by new shares and IPOs but for every VMWare with >$25 Billion market cap (but only part of it is freely circulating in the float to be part of the stock 'supply'), there are 20 tiny $200 million IPOs which don't add much new supply to the market. Also balanced against these IPOs are private equity deals that take supply off the market.

So after looking at this, and knowing we have a global demand for equities, in part driven by governments enriched with petrodollars, along with newly minted billionaires/multi millionaires being created - along with a dwindling supply of product (i.e. stock) to be bought here in the US - is it simply inevitible that supply/demand dynamics point to ever increasing prices as long as cash flows allow our domestic corporation to buy back stock at such a staggering pace?

Any comments on what I am missing in this analysis would be welcome. If it's (relatively) sound one must ask how one cannot be a bull for the medium to long term, as this 'transfer' tax pulls money from consumers/workers and into pockets of employers, only to redeployed (along with massive gains from petrodollars) into stock buybacks.

Revisiting 12 Stocks to Buy on the Next Pullback

I decided to look back at my post from September 5th: 12 Stocks to Buy on the Next Pullback to see how the individual names performed. Obviously the fly in the ointment is we never had any serious pullback so a lesson learned might be, just buy quality names!

While I mentioned 12 stocks to buy, this was a look by sector so I actually listed 19 names, and mentioned the reader could pick some of the names from the sector they preferred.

The SP500 in that time returned 3.70%, and Russell 2000 1.90% in that time for comparison

In the 'less cyclical' oil services group I said pick 2 of the following 3:
NOV +9.96%
CLB +11.85%
FTI +15.85%

In the deep sea oil drillers I picked:
DO +5.05%

In the solar power space I picked:
LDK +24.41%

In the networking space I picked:
BCSI +3.95%
However, please note BCSI has pulled back nearly 10 points from its highs on Monday where it hit $89.80 (it now trades @ $78.76) Using the $89.80 print, it returned >18.5%

In the "technology - all other" category I said pick 2 of the following 5:
RIMM +18.36%
GRMN +12.78%
SNDK -1.34%
BRCM +4.03%
AAPL +12.22%

As mentioned this past week, I have sold out of the GRMN position in the fund, and trimmed some AAPL (for good performance) and SNDK (for not performing well of late)

In the global infrastructure/energy buildout I picked:
MDR +11.23%
FWLT +12.72%

In the global agriculture space I said pick 1 of these 2:
POT +17.73%
CF +14.84%

In the China sector I said pick 1 of these 3:
ACH +9.46%
CHL +22.52%
LFC +22.04%

In the retail space my 1 pick was:
CROX +20.24%

So overall it's been a pretty dynamic group - the equal weighted return of all 19 names is 13.05% and if you were a trader and sold BCSI at its higher range before this tremendous pullback the return is 13.81%. Eliminating Sandisk (SNDK) would push up the performance by nearly 1% as well on 18 names. With that said, even the 13.05% basket would of crushed the SP500's 3.70% and Russell 2000's 1.90% for that time frame.

Once again I've taken profits on some of these names for the fund, as these are tremendous runs in such a short time span, but it shows quality stock picking generally is a better strategy than trying to time the market and looking for perfect entry points. However, I wish the fund's exposure to this 'favorite' list I compiled was larger over the past month. I certainly left some potential performance on the table.

Saturday, September 29, 2007

Bookkeeping: Weekly Changes in Fund Positions

Week 8 Major Position Changes

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: 14.3% (vs 19.4% last week)
57 positions (vs 58 last week) - Completed exited Garmin (GRMN), F5 Networks (FFIV) and LDK Solar (LDK), initiated Cummins (CMI) and Under Armour (UA)
54 long bias: 73.2% (vs 69.6% last week)
3 short bias: 12.5% (vs 11.0% last week)

Top 10 positions (excluding cash) = 36.2% of fund (vs 31.1% last week)
36 of the 57 positions are at least 1% of the fund's overall holdings

Major changes and weekly thoughts
A quiet week overall, although technically the charts of the major indexes improved. Economics fundamentals continue to call for caution yet the market seemingly is ignoring the news (or it's all 'priced in'). Some of the momentum leaders started slowing down at the end of the week, meaning either they are topping out or resting before the next push up. Small speculative stocks in both China and solar had huge moves this week. I did cut the fund cash position by 5% this week, putting some into more index short positions and into quality stocks that had pulled back. I still remain very wary with earnings season in October as holding such a large portfolio of names means 'something' will blow up (i.e. a great earnings report but "not good enough to meet expectations" can hurt your portfolio very quickly). Just the lemming behavior of Wall Street. If the market breaks down I won't hesitate to change back to a more bearish view but right now bad news is seen as good news (bad news = more Fed cuts) and that's all the market seems to care about now.

Some of the larger changes to the fund below:
  1. I initiated a position in Cummins (CMI), based on my expose last week on the name and continued to add to this position as it pulled back throughout the week. It is a 1.3% position in the fund.
  2. Closed my smallish position in LDK Solar (LDK), on the huge run by solar stocks.
  3. Cut back my position in laggards Sandisk (SNDK) and Perini (PCR) for technical reasons - of course Sandisk (SNDK) promptly reversed and made my decision look foolish.
  4. I continued building my coal positions in Consol Energy (CNX) and Peabody Energy (BTU) on low volume pullbacks this week.
  5. I sold completely out of my Garmin (GRMN) position and initiated a relatively small position in Under Armour (UA) on it's pullback after an analyst downgrade; making it a 0.70% position in the fund. I'd like to see more of a pullback in Under Armour to add more (or a jump back above its technical resistance points). I'd like to re-enter Garmin at a lower valuation down the road. Under Armour closed below its 50 day moving average for 3 days in a row so that is generally not a bullish sign. Hence my caution.
  6. I added to my UltraShort Russell 2000 (TWM) during the latter part of the week.
  7. I completely exited the position in F5 Networks (FFIV) - I like the networking space but am more confident in other names such as Ciena (CIEN) and Blue Coat Networks (BCSI) so increased those positions instead. The latter 2 names are now the top 2 long positions in the fund.
  8. I cut back (a bit) on some of the names in the fund with strong runs the past 5-7 days, Apple (AAPL), Crocs (CROX), and Suntech Power (STP) - still very bullish on all these, but they have made some very big runs in a short amount of time so I want to bank some profits and redeploy cash into other names I like that have pulled back.
  9. I added some Pride International (PDE) this week as the chart improved suddenly in the back half of the week. Pride is an oil driller which is focusing more on deep sea drilling (and a potential take over candidate) - and is the fund's 4th largest long position.
  10. I added to the fund's position in NII Holdings (NIHD) taking it from 1.3% to 2.05% of the fund's holdings as the technical picture finally improved.
  11. I started building back the fund's position in Western Refining (WNR) as the stock has fallen down to its 200 day moving average. This is a bit of 'catching a falling knife' so I am not totally committed yet as the stock could certainly fall further but it's down 25% in a month.
Once again, some reasons for caution in the weeks ahead. First October... well it's October - 1987 crash, 1997 major turmoil, 2007 ? . Second, any earnings period is a mixed bag - on one hand I love seeing updates to business, but on the other I dread seeing people's very short sighted reactions to long term businesses (i.e. people react violently on 90 days worth of data - a company could grow 65% year over year which is wonderful, but if expectation were 67% than the stock can drop 20%). Third, we get another employment report - my guess here is September's low number will get revised up but October will be somewhat weak. How the market reacts - who knows. Fourth, we've had a huge run (including some super speculation) and some of the leaders seem to be stalling a bit late this week. Once again it is too early to tell if they are truly stalling or just creating a base for the next move up. Ironically some of the weakest areas such as retail and homebuilders are showing signs of being washed out and potentially good for at least a very near term trade (up) as most of the bad news seems 'priced in' (for now). So many cross currents and I remain flexible as always on the roadmap ahead.

Friday, September 28, 2007

Chuck Norris Market Facts - Let's Have a Laugh

Let's have a laugh going into the weekend - for those who don't know "Chuck Norris Facts" is quite the internet phenomenon. Per Wikipedia:

Chuck Norris Facts are satirical "facts" about martial artist and actor Chuck Norris, which have become an Internet phenomenon and as a result have become widespread in popular culture. The "facts" tend to involve jokes and plays on claims of Norris' toughness, attitude, virility, "alpha-male status", sophistication and masculinity stated in an absurdly serious tone, for example:

Chuck Norris' tears cure cancer. Too bad Chuck Norris has never cried. Ever.
Here is a hilarious Bloomberg "article" about Chuck Norris and financial markets I found "laugh out loud" funny. Ok, maybe I need to get out more...

Chuck Norris doesn't target inflation. He roundhouse-kicks it until it begs for mercy.

The Chuck Norris dollar buys 3 Canadian dollars, and trades at parity with the euro.

Chuck Norris doesn't supply collateral, only collateral damage.

The tears of Chuck Norris would supply enough liquidity to solve the credit crisis. Too bad he never cries.

When the yield on a Chuck Norris bond goes up, the price also rises.

Chuck Norris trades on fear and greed simultaneously.

Alan Greenspan calls Chuck Norris ``The Maestro.''

Chuck Norris has already banked his dividend payment from Northern Rock Plc.

Chuck Norris funds at Libor flat.

Chuck Norris Asset Management made 50 percent on its subprime mortgage-backed bond fund last month.

Chuck Norris doesn't borrow at the Fed's discount window. Chuck Norris LENDS at the Fed's discount window.

Chuck Norris's curves never invert.

Net income at Goldman Sachs Group Inc. rose 79 percent in the third quarter; profit at Chuck Norris Securities Inc. climbed 80 percent.

There is no market regulator. Just a list of securities Chuck Norris allows to be traded.

Chuck's iPhone never needs recharging.

Chuck Norris doesn't buy gold to hedge against inflation. Gold buys Chuck Norris to hedge against inflation.

Chuck Norris charges the Bank of England a penalty rate for borrowing. And guarantees its deposits.

Chuck Norris is the pilot Ben Bernanke calls when he wants to shower the economy with dollar bills. Sometimes, Chuck refuses to fly.

Chuck Norris gets ALL of his funding from the asset-backed commercial paper market.

Chuck Norris doesn't mark-to-market. The market marks to Chuck Norris.

When the U.S. economy sneezes, the world catches a cold. When Chuck Norris sneezes, the U.S. economy catches pneumonia.

When Chuck Norris makes you a price, it isn't an offer; it's an obligation to buy.

Chuck Norris isn't a market maker; he IS the market.

Chuck Norris can still get a 125 percent mortgage on a $2 million condo without providing proof of earnings.

Chuck Norris subprime collateralized debt obligations still trade at 100 percent of face value.

Chuck completed Halo 3 on his Microsoft Corp. Xbox 360 on the day before the computer game went on sale.

Chuck Norris has a trade surplus with China.

Bookkeeping: Rising Tide Growth Fund Performance Week 8

Week 8 performance of the mutual fund

Comments: Another very solid week for the fund vs the indexes. The SP500 was essentially flat at+0.07%, and Russell 2000 was down 0.94% this week, but the Rising Tide Growth Fund was +0.90% so nice outperformance versus both indexes. Again, this was done with roughly 20% in cash (earning no interest) most of the week.

Price of Rising Tide Growth: $10.828
Performance to date (vs Aug 3, 2007): +8.28%

SP500: 1,526.8 (+4.20%)
Russell 2000: 813.1 (+3.93%)

Fund return vs SP500: +4.08%
Fund return vs Russell 2000: +4.35%

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 is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 2000 : 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

China Rally Sliced and Diced Courtesy of Bespoke

Bespoke has another awesome analysis, slicing and dicing the increases in the Chinese market year to date in multiple ways. Some amazing statistics:
  • China's Shanghai Composite is now up over 107% year to date. However, the average stock in the index is actually up 199% year to date. This discrepancy is because two stocks that collectively make up over 13% of the index are up less than 10% on the year.
  • With the exception of these two large companies holding the index back, most of the largest stocks in the index are actually doing better than smaller ones.
  • As shown, the decile (each decile represents 10% of the stocks in the index) of the largest stocks is up an average of 251% versus the decile of the smallest stocks that is up 163%.
Check out the link to see charts that break up the gains by market cap, and by industry/sector. Amazing run.

Ciena (CIEN) Analyst Day next Tuesday

I have been writing about the consistent snooze fest in Ciena (CIEN) since its blowout quarter results at the end of August.

To call the action in Ciena the past month frustrating would be an understatement; no movement at all - completely range bound. I am looking for a move past $40 as confirmation to buy in even more scale than I already have, but with an Ciena analysts day next Tuesday we might finally have some catalyst(s) to move this stock over the strike price ($38.15) of its debt convertible and off to new highs - I am adding back 300 shares here in anticipation of this being a potential catalyst. If the stock finally clears $40 and away from the demons of the convertible, I will be adding much more as I believe this stock should be a $45 valuation 'today'. The stock has been stuck on its 50 day moving average the entire month of September.

Ciena's EPS estimates for 2007 are $1.29 and 2008 $1.73, both numbers up substantially from before the last earnings report but the stock has done zilch. With the rebirth of telecom spending as we need 'fat pipes' to play all these Youtube videos, the networking sector has really picked up. Ciena has chunky revenue due to a concentration of customers so there is always the risk that a huge quarter can be followed by an inline one, but I can see this as a $53+ stock in about 12 months if the company continues to execute; which would be a 40% gain from here. The market is throwing money hand over fist at 'growth' but Ciena has been ignored in the past month.

Ciena is back up to 3.9% of the fund.

Seeking Alpha has a transcript of Ciena's last conference call here. As always I think its important to read the Q&A sessions of conference calls to get the real scoop.

Long Ciena in fund; no personal position

Federal Reserve Still Flooding Markets with Money. I Thought the Crisis was Over?

I didn't see this widely reported... but if it happened a month ago it would of been cause for great trepidation. Today, totally ignored.

Fed Adds $38 Billion Reserves via Repos
  • NEW YORK, Sept 27 (Reuters) - The U.S. Federal Reserve said on Thursday it added a total of $38 billion of temporary reserves to the banking system through four separate repurchase agreements.
  • The total amount matched $38 billion of repurchase operations on Aug. 10, which is loosely seen as the beginning of a crunch in the credit markets, when companies began to have difficulty accessing lines of credit due to problems that began in the subprime mortgage market.
  • But some analysts said Thursday's action by the Fed may not have entirely been an effort to re-ignite liquidity in credit markets, but may have more to do with making cash available to meet quarter-end needs, when hedge funds and other financial operations square their books.
  • "They want to make sure things run and flow smoothly over the quarter end -- it's not only happening in this country but it's happening in Europe as well," said Jeff Hlavacek, director of fixed income trading at BNP Paribas in New York.
  • Previous to Aug. 10, the largest amount of repurchase operations in a single day was on Sept 19, 2001, when the Fed undertook $50.35 billion of repurchase agreements.
  • The last time the Fed undertook four repurchase agreements in a single day was also on Sept. 19, 2001.
Takeaways: I am no credit expert but really if things were so hunky dory why is this going on? Why is cash "not available" to meet quarter-end needs if that is the reason. And why is SO MUCH needed? These amounts are staggering and levels equivalent to post 9/11 fundings. I also read on another site that $22 of the $38 Billion went to repurchase mortgages. The bailout continues behind the scenes.

Brings a whole new scale to "don't fight the Fed". Most important, I read a lot of financial news sites and only 1 reported this. Strange.

Short "everything is fine now"; Long "more interest rate cuts on the way"

Bookkeeping: Building back my position in Western Refining (WNR)

Western Refining (WNR), a smaller position in the fund, has been trounced the past month. After peaking at $55 four weeks ago the stock has been a straight shot down, now sitting at $41, which conveniently is its 200 day moving moving average. That is a 25% free fall in a month. I am going to take this fall, as a time to add 200 shares to my current position. If the stock shows good behavior here and begins to bounce back I will add more in the coming weeks.

As discussed in the past, refineries generally trade on the crack spread, essentially the variance between crude oil prices and refined gasoline prices. This spread has collapsed the past month, and the stock of most of the refiners have followed suit. This is a very cyclical dynamic, and makes for a few good trades a year. While I cannot call this a bottom, I like buying merchandise at 25% off sales.

The other refiner I own is Frontier Oil (FTO), which I have been tentatively building a position in as well (it has the best profitability due to its unique locations but still is affected to some degree by the crack spread degradation). Frontier Oil has dropped down to only its 50 day moving average so it could be vulnerable to more pullback.

There are not positions that will turn on a dime, but I expect by January 2008 we should see some return to normalcy in the crack spread. The stocks are now reflecting a lot of the bad news, and I expect quite poor earnings when these companies report, but the market is a forward looking mechanism so I begin rebuilding these positions here and re-assess from there.

Again these refiners, like coal stocks, are not like the other 85% of positions I hold which are really long term pure secular upswing type of stocks. These I put off to the side and trade them either on severe weakness (refining right now) or breakouts (coal right now) - but I will take severe profits in these groups when the time comes due to their more cyclical stock trading nature versus everything else I own. With that said, with no new refinery built in the US in 30 years and burgeoning energy demand worldwide, they aren't bad sectors to be in bed with either.

Long Frontier Oil and Western Refining in fund; no personal positions.

Bookkeeping: Adding to my Blue Coat Systems (BCSI) and Riverbed Technology (RVBD)

Blue Coat Systems (BCSI) continues to pull back so I continue to build out this position. The networking sector has stunk the past 2-4 days, not really partaking in the rallies.

Generally I prefer to add to positions as they pullback to their 50 day moving average, which for Blue Coat Systems is down near $71. But for very strong companies, sometimes in an uptrend they only pullback to their 20 day moving average, which is where Blue Coat is right now (just below $80). So I am adding more here with an eye to try to add more if it drops.

Blue Coat Systems is now the largest long position at 4.25%. With my general nervousness about the market as a whole (can the market go up for 2 months straight?), I am going to hold off adding more, and hoping the stock falters down to its 50 day moving average so I can load the boat.

As an aside, I also added a bit to my smaller Riverbed Technology (RVBD) position as I sold most of it higher in the mid $40s, as I am favoring Blue Coat due to valuation but that stock is sucking wind as well back down below $40, so I will be working on position building here, with hopes to add more around $37.

If you are a new reader please click on the Blue Coat Systems label at the bottom of this post to see earlier thoughts on this dynamic company.

Long Blue Coat Systems and Riverbed Technologies in fund; long Blue Coat Systems in personal account.

More Ritholtz: The Chicanery on Wall Street

Another entry from this blog regarding the recent Bear Stearns (BSC) situation. A common thing individual investors do when they make bad trades or things go against them is blame "the Street". I think mostly this is just excuse making. That said, after you've been watching this for so many years you see so much stuff happen that you just have to say, "boy the game sure is tilted to the guys at the top". You know, stocks up 14% 2 hours before a buyout announcement, massive buy calling ahead of a buyout (which the SEC says they will "investigate" and then we never hear anything else about it since our attention span is that of a fruit fly), independent hedge funds working together to relentlessly drive down (or up) smaller float stocks, and then things like what happened with Bear Stearns this week. There are countless examples.... and the truth is we only see what is at the tip of the iceburg. I can only imagine on what really goes on.

The way I treat this is thinking I am walking into a casino. The odds are in favor of the house (the big boys). If you know that walking in, you accept the environment and just realize its part of the culture. I feel bad for those new to the market who don't see these things, and get whipsawed/defeated by it. I was (we all were) in their shoes once as market newbies.

Here is the latest adventure for those who were not following it - on a quiet old trading day Wednesday the New York Times came out in mid afternoon with a report that Warren Buffet was interested in a 20% stake... Bear Stearns, listless, suddenly jumped up 10%. Now who can doubt such a prestigious organization such as New York Times? (and as Barry points out do you notice that everytime a company is in trouble rumors get started that Buffet will buy - reminds me of the dotcom days when every new startup was going to be bought by either Yahoo, Amazon, Ebay or Cisco).

Anyhow, this was refuted by Buffet yesterday. Case closed right? Silly rumor, probably got some hedge funds some 10% of profit that they could take off the table and show their clients how great they are! Well it runs even deeper than that. Out of the blue comes a $1 BILLION bond offering.

"At Bear Stearns, timing is everything. The struggling brokerage house raised at least $1 billion this afternoon with a surprise sale of 10-year bonds. The sale, which was met by strong demand in the bond market, comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor. One report said Bear has been talking with billionaire value investor Warren Buffett."

"On Thursday, Bear Stearns took advantage of that momentum and some strong demand in the corporate bond market to raise some money. Sources say the deal drew more than $3 billion in orders for $1 billion worth of bonds, though it may be upsized."

Takeaway: Ugh.

Barry Ritholtz on Bloomberg Finally Seeing the 'Truth' in CPI

One of my favorite blogs is Barry Ritholtz's "The Big Picture". He rails about the CPI just like I do (how its such a fictitious measure). He had a great entry earlier this week about how the mainstream press finally is coming around to this view. Now if you just care about stocks and your eyes get heavy when you read entries like this, I urge you to read on. It does matter.

Why does it matter? First, the Fed apparently makes decisions off this number so they are making decisions off fiction. Somehow I think as some of the top economics in the world (in theory) they are smarter than that to see what the reality is, but they can use these fake numbers to justify their pumping of the monetary system. Or maybe they are in such a high income bracket that the things that really affect people like energy, food, tuition, medical costs, don't affect them so they live in a parallel universe. Second, many pensions/wages etc are tagged to 'cost of living' and a favorite measure is the Consumer Price Index (CPI). So just imagine how much more it would cost governments and corporations if they had to pay at a rate that reflects true inflation? Answer: more than they want to. So a low (fiction) inflation number is great for them too. I am sure there is a third, fourth, and fifth negative associated with it but let's get on to the article.

On to Barry's post and Bloomberg's piece
  • We have long railed against the absurdity of the CPI data. The ridiculous adjustments, the lack of correlation between CPI prices and reality, as well as the Fed focus on the core
  • For the most part, the media has dutifully reported the nonsensical CPI data as if it were scripture. This drumbeat of criticism -- both here and elsewhere -- has begun to penetrate the MSM. We've seen a few critical columns over the past year or so. But I never expected to see this kind of critical reporting in a mainstream outlet: CPI's Lie on Household Inflation Doesn't Wash.
  • From Bloomberg: "The U.S. consumer price index continues to be a testament to the art of economic spin. Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.
  • Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.
  • Millions are falling behind inflation because wage increases aren't keeping pace with the cost of medical care, lost employment benefits, homeownership expenses, energy and transportation.
  • And there's also a goliath looming in the U.S. economy that makes the government's consumer gauge more deceptive. Even with the stinging reality that housing values are dropping in many markets, homeownership costs such as taxes, maintenance and financing are still rising much faster than the index."
  • Back to Ritholtz: Let's expand on some of those examples from the Bloomberg column:
  • Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.
  • Housing is the single-largest expense for most Americans -- as much as a third of total cash outlays. The Labor Department's Bureau of Labor Statistics only tracks "owner's equivalent rent" (OER). Housing costs/Owners’ Equivalent Rent is 23.158% of CPI.
  • During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% -- about half of its actual price increases.
  • Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That's more than double CPI inflation rate).Oh, and ‘Owners’ Equivalent Rent’ doesn’t account for real estate taxes.
  • A real CPI would’ve eradicated most it not all of GDP during that period. And the more realistic GDP figure would be more in line with the lack of growth in real income and ‘real’ jobs.
  • So why haven't we gotten a more realistic version of inflation -- one that has a high correlation with the construct known as reality? Well, it would wreak havoc with GDP, and potentially, the stock market. An accurate cost of living increase -- in theory, what CPI is supposed to measure -- would’ve eradicated a whole lot of GDP gains over the past 5 years.
  • That "Real Real' GDP figure -- adjusted for CPI inflation, which was adjusted for ACTUAL inflation -- would be far more in in line with the lack of growth in real income and ‘real’ jobs
Takeaway: I think this is why people (despite their out of control spending) in general feel uncertain about their financial situations (in aggregrate) despite government reports showing (in aggregrate) the best economic times of our lives. In aggregrate the US is doing great - in part due to statistical inaccuracy and in part due to the growing wealth inequality - the top 2-5% is now controlling more wealth than any time since the age of Rockefeller. So while in aggregrate times are great, the distribution of that wealth is becoming more narrow. I could write a 30 page essay on this topic but will spare you. Unfortunately we have a very financially illiterate country, so I just don't see any chance of backlash other than the constant unease people feel that "if the economy is so great why don't I feel better off". Now that was offset in part by the housing boom, but even that is now gone. Oh well, we can always fall back on buying things to make us feel better - that seems to be the American way!

Getting back to the CPI - what does upset me/many who watch this stuff is the outright deception in it all.

Long truth and accuracy

Thursday, September 27, 2007

Shortages Here, Shortages There - Iron Ore is the Shortage of the Day

I am losing track of all the commodities we are having shortages of. If it's not titanium, its copper, if its not copper its wheat, if it its not wheat its potash, if its not potash its (drumroll for shortage of the day) iron ore!
  • Shortage of supply coupled with high demand and continuing growth in Far Eastern steel production could see a big increase in iron ore contract prices next year.
  • With predictions of price increases for iron ore next year ranging from 25 percent to 100 percent, an investment in this sector may prove to be one of the best bets of all if one assumes Chinese and Indian growth continues at the current rate.
  • It also suggests that the world's biggest diversified miners, BHP Billiton, Rio Tinto and CVRD - all of which generate huge returns from their iron ore businesses are set for further big earnings increases in the year ahead consolidating their respective positions as world mining leaders.
  • Much of the speculation over the likelihood of high iron ore prices has come from reported analysis by Merrill Lynch and JP Morgan, both of which reckon that next year's contract prices for the big producers with the Chinese steel mills will be negotiated at around a 25 to 30 percent increase and Merrill feels even a 50 percent increase or more in contract prices is not out of the question.
  • Supply is seen as not meeting demand up until the end of the decade at least, and it could be the marginal supplier who will benefit most as the steel mills bid up the price to meet demand.
  • According to a Bloomberg report today benchmark prices may rise 30 percent to a record $66.40 a tonne next year, from $51.47 in 2007, according to the median forecast from eight analysts.
  • Should industrial growth in the Far East continue at or near the current rate, the supply/demand imbalance is likely to continue until the end of the decade leading to even higher achieved iron ore prices for the next three years.
I won't go on a "of course there is no inflation" rant ;) Ben pushed that worry off to ... to.... well, 'the future'. But my gosh it looks like a tidal wave of world wide inflation from these commodities.

Have you seen the charts of BHP Billiton (BHP), Rio Tinto (RTP), and CVRD (RIO) the past week? My gosh you'd think these were Chinese small cap stocks. I thought with their massive market caps of $100-$225 BILLION they could not move like this. Boy I was wrong.


CVRD (RIO), #2 Miner in the world has gained $25 BILLION in market cap in the past 5 sessions. There are only about 200 companies worth that much in total - wow. Thank You Ben for making this all possible.
  • Companhia Vale do Rio Doce (NYSE: RIO, $48.32 a share), the world's No 2 mining company, after BHP Billiton (BLT.L, £13.78), has gained more than $10 a share in the past five or so trading sessions, adding around $25bn to its market capitalisation. The gain alone is close to the entire value of Barrick (ABX, $32.13), by far the world's most valuable gold digger.
  • CVRD's performance has been based mainly on the group's ranking as the world's No 1 producer of iron ore, with 33% of the seaborn market.
  • Iron ore is used almost exclusively in steel making, and remains in heavy demand in China, which overhauled Japan as the world's largest buyer of iron ore in 2003. China is far from alone among developing economies in notching up significant annual rates of increase in its use of steel and related products.
  • CVRD's recent stellar stock price performance follows a series of upbeat forecasts for iron ore contract prices into the medium- and long-term. Last month UBS said it had increased its iron ore price forecasts to 25% in 2008, from 10% previously; Goldman Sachs JBWere last week increased to 30% from 9% previously; Credit Suisse Group is looking for a 25% gain, and RBC Capital Markets this week raised to 35% from 10%.
  • The global iron ore sector is dominated by CVRD, BHP Billiton and Rio Tinto
  • CVRD's recent stock price performance has been in spite of its substantial nickel division, where spot prices have been mauled in the past few months. CVRD, however, also maintains substantial operations in copper, and integrated aluminum (bauxite, alumina and primary aluminum), and also produces kaolin, and potash. [Did someone say potash?]
Well guess it was a mistake to not be looking at this sector simply because the stocks had such high market caps. I do have one other pure play iron ore stock I have traded in the past, and I will have to revisit that name and do some digging this weekend, errr I mean I will have my analyst team do some digging this weekend and report back to me. Last I looked it was more of a domestic play so I have to recheck it's international exposure but its chart is also ramping massively.

There's no party like a Ben Bernanke party - woo hoo.

No positions but I anticipate buying some of these names on the next (if ever?) pullback.

I am Adding to my NII Holdings (NIHD) Today

I don't think I've talked much at all about this stock - this is basically Nextel's South American operations, catering mostly to business customers. Home page for NII Holdings (NIHD) can be found here.

Company description: "NII Holdings, Inc., formerly known as Nextel International, ("NII") is one of the world's leading providers of fully integrated wireless communication services designed to meet the needs of business customers in selected international markets. Principal operations are in major business centers and related transportation corridors of Argentina, Brazil, Mexico, Peru, and Chile."

So while based in Reston, VA we have an interesting international proxy for business in the Brazilian/Mexican markets. This is a stock I have been following for a few years. Typically its pattern has been to bore the (edited!) out of you for months than take off. For example, last summer in the US market doldrums it traded in the range of upper 40s to mid 50s for 3 months. Then a quick move to $70 in a month's time. Then sideways for Oct, Nov, Dec, Jan. Then from $65 to $90 from late January to mid July.

Since mid July, NII Holdings has essentially fallen from $90 to $70 before beginning to pick up the pieces. Yesterday for only the 2nd time in 2 months did it close above its 50 day moving average. The last time it tried this, it failed (around early September), so no guarantees, but it is following up yesterday's move with a nice +3% move today.

That's the technical side - but I like this story, as with all holdings in the fund, due to its fundamentals. Earnings for 2007 are slated to be $2.20, jumping to $3.64 in 2008. That's a sizzling 65%, on revenue growth of $1 billion - or 31%. With that said, it has missed analysts estimates by 4% the past few quarters (each), but I think that is missing the forest for the trees with our obsession with 'beating ABC number" - the year over year growth is tremendous.

This puts the forward PE ratio of NII Holdings at 37x for 2007, but only 22x 2008. Compared to some of the rocket stocks and momentum names, this is downright cheap for this type of growth. Analysts are pegging the long term (5 year) growth at 40%. So the fundamentals look good, and the technicals could be shaping up correctly as well. So I am adding 100 shares to my existing 1.3% position and will continue to add if this strength continues and not a false reading. This will move the holding up to roughly 2.05% of the fund's holdings. It still is 11% away from it's all time highs around $90 and this should be a stock that makes a run to par in the coming 1-2 quarters.

Long NII Holdings in fund; no personal position

This Day in Bubbles: 3 Random Chinese stocks


I pulled up 3 random China stocks to see just how zany the action has been the past week and a half

They have 1 thing in common - their business all starts with the word "China"

China Precision Steel (CPSL) at its peak yesterday (must of solved world hunger) was up about 220% in 5 trading sessions
China Financial Online (JRJC) is still chugging today (+24%) (must of solved world poverty) and in the last 7 session has tacked on over 115%
China BAK Battery (CBAK) also is doing wonders (must of solved cancer) (+22% today) and is up 140% in 3 sessions

I am sure I could find more... just plug in search term "China" and find companies that have solved all the world's problems in the past 4-6 sessions.

So reminiscent of the dot com days - back then it was "new paradigm" "changing the way we do business".... now every breathless sentence starts or ends with ".... 1.3 billion people" or "100 million new middle class every year" (again let me reiterate it is a sea change what is happening to huge parts of the world, India/China and the long term case is fantastic) but nothing changed 150% this week other than Big Ben perhaps dropping 150% more dollars into the monetary system....

Not long companies that have not moved one iota for months, but suddenly are 150% more valuable this week versus last.... not that there's anything wrong with that

Titanium Supplies will be Tight through 2010

A reader over at SeekingAlpha sent this article regarding Titanium supplies - it sounds a lot like the steel market about 3 years ago (or oil, or iron ore, or wheat, or potash, or corn, or insert your commodity here....) where supplies cannot keep up with world demand. You'd expect some nice pricing power for these players in the next 3-5 years. (at least)
  • Buyers are correct in worrying about supply of titanium and titanium alloys through 2010. That’s the admission from Dawne Hickton, vice president and CEO of titanium producer RTI International Metals in Niles, Ohio, even though producers are dusting off expansion blueprints for titanium sponge and mill product capacity.
  • .... major jetliner makers already have a six-year backlog for new aircraft designs that call for three to four times as much titanium as older models.
  • Various buyer surveys by Purchasing have found concern about future availability of titanium—from sponge, the raw material, to final fabricated parts, which already take as long as 18 months for delivery these days.
  • Reason: One key factor is the time it takes to get new capacity on line. Hickton says 30-36 months are needed before a new sponge plant goes in operation and even longer for downstream capacity of mill products and finished fabricated parts—since production has to be certified to meet aerospace and medical industry quality requirements.
  • John Mothersole, an economist with Global Insight in Eddystone, Pa., tells the conference that global sponge capacity will increase by 14% annually between 2006 and 2010 to 220,000 metric tons... yet world demand will surge by as much as 40% in the same timeframe, keeping pressure on supply and prices.
  • And there’s also a chance that aerospace demand for high-grade titanium and titanium alloy mill products could grow by as much as 22% annually next decade— if and when the Boeing 787 and Airbus A350 and A380 programs really take off.
Oh I love it when supply only grows by Z * 1.14, and demand grows by Z * 1.40

Long Titanium Metals and Allegheny Technologies in fund; no personal positions

What's In Your Wallet? All My Holdings in the Fund

On the far right sidebar of the blog I show all the holdings of >1%, updated each week. In general I try to keep the majority of my holdings (not selling completely in and out) unless some major news flow or change in business (i.e. I got rid of Akamai Technologies (AKAM) a few weeks back) or stock just makes a huge run.

I decided to look at all 54 long holdings by sector to see how it breaks out, obviously this includes all the small fry in the fund as well. A better treatment of this is a weighted average (by dollar) (since the top 10 holdings account for 1/3rd of the fund's dollars) but without any export function out of that would take a lot of time, so I will just do a pure basic listing.

I am not going to write each stock name out but will list their symbol and sector - we'll go from largest sector to smallest

Energy: 13 names (24.0%)
  1. Coal: BTU, CNX
  2. Oil Services: BTJ, CLB, FTI, NOV
  3. Deep Sea Oil Drillers: DO, GSF, PDE
  4. Solar: STP, TSL
  5. Refiners: FTO, WNR (currently very underweight this group as 'crack spread' margins are very low at this time)
Foreign (ex-solar): 11 names (20.4%)
  1. Commerce: CTRP (China travel booking), EDU (China education), GMKT (Korean auction), NIHD (Mexico business cell phone)
  2. Country indexes: EWH (Hong Kong), EWM (Malaysia), EWS (Signapore), IFN (India)
  3. Indian banks: HDB, IBN
  4. Homebuilder: HXM (Mexico)
Technology: 8 names (14.8%)
  1. Consumer: AAPL
  2. Search/Advertising: GOOG
  3. Networking: BCSI, CIEN, JNPR, RVBD
  4. Chips: BRCM
  5. Storage: SNDK
Global Infrastructure: 6 names (11.1%)
Materials: 5 names (9.3%)
  1. Aluminum/Chinese: ACH
  2. Stainless Steel/Titanium: ATI/TIE
  3. Copper/Gold: FCX
  4. Cable: BGC
Financials: 5 names (9.3%)
  1. Asset Managers: BLK, DHIL
  2. Exchanges: CME, ICE
  3. Credit cards: MA
Agriculture: 3 names (5.6%)
  1. CF, MOS, POT
Retail: 2 names (3.7%)
  1. Footwear: CROX
  2. Sporting goods: UA
Industrial: 1 name (1.8%)
  1. Diesel/Emissions: CMI
So that should give a good idea of the fund strategy at least by number of issues - certainly dollar cost weighted would be more telling. At this point, most of these sectors have been run up quite a heavy amount since the August time frame so it's hard to throw a ton of new money at them, although I have been adding here and there either on pullbacks or new breakouts. I did sell out completely of two tech names these past few days: (BIDU) and Garmin (GRMN) and would like to get back into them but at lower valuations.

Going forward, I still hope for some 'medium' term pullback to add either to the list above or a few others. One sector I have been amiss not paying attention to is the dry bulk shipping names - they have had huge runs and while I still have reservations over how long the run can go (after all new ships can be build over time to bring up supply and if the global economy does slow the dayrates they charge would suffer) but on the other hand if one believes global trade in the next 5-15 years will continue to growth then there can be some case made for them on the long side as well. I will treat them as I do the refiners and coal stocks - while they have good long term stories they can ebb and flow in the near term more than other names.

I also have been looking at some other agricultural plays outside fertilizer i.e a Monsanto (MON), or CNH Global (CNH) on the equipment side. I also want exposure to Eastern Europe/Turkey and the Middle East petro dollars. I'd also like a lot more exposure to India but not many ADRs trade here in the US compared to the flood of Chinese companies listing here. India seems ignored to me, whereas the world focuses on China, China China...

Other than that, I keep reviewing the list and any new potential entrants and continue to avoid the US consumer (even Crocs is 50% overseas sales at this point). Most companies on the list has significant foreign exposure - now if we do have a global recession that would certainly change things up significantly but for now, we don't seem to be heading that way anytime soon. Ironically for once, it might be the global economy that helps keep the US economy from faltering too badly (versus vice versa).

Any comments on this group of stocks or other potential candidates are welcome...

Long just about all of it

Is the S&P 500 Expensive ?

Overpriced market you say? According to this chart on Bespoke Investment Blog, not so much (click to enlarge)

One could argue that next year's S&P earnings as a group probably are overstated if the economy is going to slow down, but even if they are 5-7% too high in aggregrate the index overall is still historically 'normal' - not too expensive, nor too cheap. As more profits go to corporations rather than labor (see stagnating wage growth for better part of this decade), along with many cash flush companies buying back stock thus decreasing the # of shares (and hence increasing the earnings PER share) - we seem to have hit a pretty nice spot for the investor class. For the rest of the population who rely mostly on income? Well I suppose the news is not good. As Cramer likes to say... America ... for the corporation, by the corporation.

Wednesday, September 26, 2007

A History of Home Values

Wow. Sometimes a picture is worth a thousand words. (click pic to enlarge)

Grabbed this from SeekingAlpha

Long affordability

Heebner vs NYC High End Real Estate

For those who do not know Kenneth Heebner, he runs multiple funds for CGM Funds. He runs very concentrated funds and many times has excellent knack and timing for sectors so I enjoy reading anything he says to get his views and compare them to mine. For example, he got out of the home builders and investment banks in just the right time....

In a Bloomberg Story, Heebner sounds bearish on NYC high end real estate. This is a tough call, because I agree that there are going to be some job losses but I believe most will be in the middle end... and in NYC I guess middle end means guys making $150-$300K. Most of the top end guys who really move the upper end of the market might see smaller bonuses but somehow I think they'll survive. Also areas with nowhere to build ala San Francisco or New York City have a unique supply/demand dynamic but perhaps if there are less guys making $300K, this means only so many people could actually bid on multi million dollar apartments.

Some interesting points:
  • Sept. 25 (Bloomberg) -- Kenneth Heebner, manager of the top-ranked U.S. real-estate mutual fund, sold stakes in New York property owners because prices will decline as banks, hedge funds and buyout firms fire workers.
  • The $1.7 billion CGM Realty Fund divested SL Green Realty Corp., Manhattan's biggest office landlord, since the end of June
  • ``You're seeing a retrenchment in the private-equity, hedge-fund and brokerage businesses, and there could be a lot of layoffs,'' Heebner, 66, said. ``That could have a devastating impact on high-end residential real estate in New York. Appetite for office space will also decline.''
  • The fund unloaded shares of apartment REITs Archstone-Smith Trust and AvalonBay Communities Inc. this year. Archstone-Smith, owner of apartments in cities including New York, Washington and San Francisco, is being bought by a group led by Tishman Speyer Properties LP in New York. Alexandria, Virginia-based AvalonBay Communities' biggest apartment rental markets include New York, Seattle, Washington and San Francisco.
  • He said he shifted more than half of the fund into global mining companies earlier this year. The fund's investment policy allows him to purchase shares of companies with ``significant'' real- estate holdings including those in the hotel, mining, lumber and paper industries.
  • The manager's top stocks in the real-estate fund are Rio de Janeiro-based Cia Vale do Rio Doce, the world's largest exporter of iron ore, and Potash Corp. of Saskatchewan Inc. in Saskatoon, Saskatchewan, the world's biggest maker of fertilizer.
  • At the $3.5 billion CGM Focus Fund, Heebner sold his 15 percent stake in investment banks including Merrill Lynch and Morgan Stanley during the second quarter. He said they will be hardest hit by the subprime rout.
  • Heebner said he started selling shares in real estate investment trusts late last year after Blackstone Group LP agreed to acquire Equity Office Properties Trust. The New York- based buyout firm paid $39 billion, including debt, to purchase the office landlord in February after first agreeing to pay $36 billion in November. ``We were predominantly invested in REITS at that time and we sold most of them because we felt the valuations got excessive,'' Heebner said.
  • Heebner, who had two-thirds of the real-estate fund in homebuilder stocks at the beginning of 2005, sold his entire stake by the end of that year. Homebuilder shares peaked in July 2005 and have since tumbled an average of 67 percent.
Takeaway: Interesting stuff. Right now the market (stock), does not seem to view any job losses in financials as impactful, judging by the response post Fed but let's see how it plays out. I also was curious to see his top holdings in his 'real estate' fund, including one of my favorites Potash (POT) - I am just wondering if the folks owning this 'real estate' fund really know what they own. I guess with those type of returns, most people are blissfully ignorant and content ;)

Long Potash in fund; no personal positions

Speculation Frenzy in China and Solar

It has been astounding to see 50-150%+ gains in a week in almost anything China. Stock after stock that is $3 a week ago is now $10. I had not even heard of most of these names as they are no name companies who have gone nowhere for months, but now just due to the fact they have "China" in the name they are suddenly worth 200% more... in a week.

Speculative frenzy at it's best. While I am a big bull in the long term China story, right now the 'market' behavior is reminiscent of days when companies literally changed their company name to include .com at the end - and got rewarded with 30% push the next day in their market value. Silly things like that - and this current behavior is the exact same. Today a stock having to do with China that is facing delisting and multiple lawsuits is up 30%, etc. Just throw a dart, and if the word China is in the name or its related to China it's apparently worth double what it was last Friday.

One sector I do know is solar, and many of the players are Chinese. What I remember about speculative excess in the late 90s/00 was these things would come and go in waves. Each wave generally started with the well known names, transfer down to middle of the pack names, and then near the tail end of the move the worst garbage stocks would rally enormously. Right now in the solar sector you are seeing yesterday and today the companies with the worst operations making huge moves. Obviously this fund doesn't own those names, but I do watch the entire group. At this point my sense (if patterns repeat themselves) that the move in this speculation is closer to the end than the beginning - again the reason being the worst of the worst are not being carried away in the speculative fever.

I don't know if it's me being tired or the market is tired, but I just wonder what is left to run up? Do we go back to the stocks that were up 50% on Friday but not Monday and Tuesday and now reinflate them another 50% from here? To me this is a bit of an unhealthy market, breadth (aside from today AM) is weak, speculation is mostly in the no name small caps in 2 sectors: China or solar, and major parts of the market have little bidding. The sectors that are in favor are up massively in 5 weeks. All this in a constant stream of pretty bearish news for the US.

On the flip side you have performance chasing funds who need to get long or risk getting behind the indexes, and a belief the world banks won't let anything bad happen to us. If one were to tell you last May that Countrywide Financial would be below $20, the investment banks would be down 20-35%, housing would be in total disarray and major retailers are seeing significant slowdowns, would anyone think the major indexes would be at/near all time highs? It is just hard to get enthused about this market, although it plods along seemingly ignoring everything and saying the Fed can take us out of this.

With the unemployment report I believe coming out a week from Friday and earnings announcements set to come out in October, I just can't get off this cautious view. I continue buying specific names with a plugged nose, but don't see me pulling in these short ETFs or lowering the cash position significantly until I see how the market absorbs what I perceive to be a lot of domestic companies giving lower guidance ala Lowes. If the market can shake all that off and say "none of it matters", then I suppose it is all priced in. Just hard to believe of the surface that it's that simplistic.

Long caution.

Closing the Fund's Position in F5 Networks (FFIV)

In keeping with the spirit of culling positions that are not reacting too favorably in this environment / trying to limit positions in the fund - I am closing the fund's position in F5 Networks (FFIV). This is yet another networking play, but I just don't have the conviction in this name that I do in Ciena (CIEN), Blue Coat Systems (BCSI), or Riverbed Technology (RVBD). Or Cisco (CSCO) for that matter! So with that, along with the technical picture I am exiting.

Earlier posts on F5 Networks (FFIV) can be found here - I'd like to see what the company has to say about the recent aquisition in the next earnings report/call on October 24th and then re-assess. With the sector overall doing well, hopefully F5 can partake.

My buys in F5 Networks in early August were in the (split adjusted) $32.50 to $37.00 range. With the stock around $37.40 today, I am closing this position with a flattish return. Technically the stock suffered the past 2 days - after a spike up to $41 last week (when the stock was above both its 50 and 200 day moving averages and looking good) the stock has promptly given it all back, violating first the 50 day average at $39 and then yesterday closed below the 200 day average of $38. Not a good sign. While technicals are not fool proof (see Sandisk from yesterday), I am going to remain consisent in how I treat these names when they violate key technical areas. Also, this brings the # of positions in the fund down to 57.

No position

Bookkeeping: I've been Adding to Blue Coat Systems (BCSI) this week

With the pullback of Blue Coat Systems (BCSI) to the low $80s I have been adding to this name a yesterday and today in the $82-$83 range. The stock pulled back after hitting $90 on Monday - by year end I would not be surprised to see $100. (barring market carnage of course!) The stock is trading at 42x 2007 estimates; not cheap at all but the market is paying far higher premiums for companies of far lower quality in other sectors.

In this environment of "see no evil, hear no evil" & "global central banks have your back, please speculate at will" I suppose one is forced to pay up for names one likes. Blue Coat Systems is now up to 3.7% of the fund's holdings.

Long Blue Coat Systems in fund and in personal account

Update on the Infrastructure Group and Oil Services

Some of the key names in the infrastructure group have stalled here in the past few days - the McDermotts (MDR), the Foster Wheelers (FWLT), the Jacob Engineerings (JEC), the Fluors (FLR), etc. After some massive gains, I am curious to see if the stocks will simply stay at even keel while they digest their huge moves up, or actually come back down some (I am hoping for the latter).

On the flipside, even with crude dropping the key service names I favor are refusing to really pull back even though other sectors in energy are dropping the past 2 days. I was hoping for some pullback so I could add to these names, but apparently I am not the only one in the world who really likes these names. Maybe people are finally getting it, that whether crude is $60 or $80 these companies are printing presses of cash. These names include Core Laboratories (CLB), FMC Technologies (FTI), National Oilwell Varco (NOV), etc.

Long McDermott, Foster Wheeler, Jacob Engineering, Core Laboratories, FMC Technologies, National Oilwell Varco in fund; no personal positions

Some Updates from Yesterday - Russell 2000 and Sandisk (SNDK)

I mentioned yesterday that the Russell 2000 had fallen back to some key support levels and the next move would be important as the small caps really were not participating in the rally. Well, at least for the short term, this index has passed its test and bounced back smartly from that support level; so for now that points bullish. For this market to truly rally the gains have to be a more widespread than the narrow market we have had since about Thursday of last week.

As for Sandisk (SNDK), which I cut back to a 1.0% holding yesterday due to a breach of a support level - well it made me look silly as it gapped up no less and broke back above its 50 day moving average - no sweat! Interesting.

Long Sandisk in fund, no personal positions

Swapping Garmin (GRMN) for Under Armour (UA)

Despite the market's day after day strength, I am starting to become even more cautious in the near term as we test all time highs in the Dow and SP500 (who would of thunk it?) . So I am going to sell out of my small Garmin (GRMN) position and buy into Under Armour (UA).

First, in regards to Garmin (GRMN), an excellent stock and company dealing with GPS - I initiated a position in this high flyer around $90 back on August 16th. A small position unfortunately. The stock is now near $120. So I am selling today at $117. This is roughly a 30% gain in about 5 weeks. Again, another case of the correct stock, but not large enough of a holding to impact the fund as a whole to a great degree. If I had a larger position I would not be selling completely out, and again when I add a new name I want to look for other names to cut out as I don't want the # of holdings in the fund to get bloated.

Garmin when I bought at $90 was priced at a forward PE of 27; at $117 that has now gone up to 35. While the company is hitting on all cylinders, as a hardware maker I just wonder when the lower priced competition is going to start affecting margins - but with that said, I have been asking that question for about 3 quarters now and the company just keeps on rolling.

I am replacing Garmin with the EXTREMELY pricey retail stock Under Armour (UA). It won't be a huge position - just beginning with a 125 share stake as the company has pulled back to its 50 day moving average on a downgrade this morning from UBS. This will give UA a stake of about 0.7% in the fund. I will see if I can add more lower although Under Armour has not fallen below its 50 day moving average since June. But if the market pulls back, it could fall through. The company was roughly $67 a week ago so I am buying about 12% down from its peak.

While I am bearish on retail as a whole a few speciality names I believe will pull through and this is one of them. However, at this valuation it's hard to get excited on major upside in the near term. So I will start slow and re-assess. (with that said, that is the exact same thinking for how I started my position in Garmin only to watch it run away from me) :)

Long Under Armour in fund; no personal positions

Tuesday, September 25, 2007

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

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.
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

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) (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.

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