Thursday, January 31, 2008

Serious Food Inflation (read shortages) Hitting China Due to Storm

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This is quite a storm and you see nothing about it on the US TV screens except a 20 second blip on CNN. Again, we are so inward looking - this is a massive situation.

Taking away the human aspect and thinking as investors, keep in mind the Chinese have been hard balling the potash consortium trying to get a better price. I think that option is quickly leaving the table.

Also this should do quite a heck of a dampening affect on Q1 GDP in China.

It is just the sort of things such as this that make a very tenous world grain situation turn into a potential crisis. And each day/week/month that passes can create a new crisis as it's all weather dependent. One day I guess people will pay attention. Until then we can hide under the covers while the Morgan Stanley analyst cries about the blip in potash inventories - "mommy mommy, I found a way to bring the stocks down to get clients in!" [Morgan Stanley Worried About Fertilizer]

Do they realize these companies have their customers on allocation? Allocation is a fancy word for RATIONING. Sounds very reasonable to cry about a blip up in potash inventories with your customer base on rations. Quality research work again from our lovely analysts.

Anyhow, on to the latest global crisis that does not matter because Britney Spears went into the hospital this morning....(I do like how the article rips on the yuppie professional Chinese haha)
  • Hundreds of thousands of desperate travelers, some hoisting terrified children or baggage over their heads, pushed their way onto trains Thursday as service resumed after the worst winter storms in decades paralyzed China.
  • Railway officials said the restored service could carry 400,000 passengers a day, but hundreds of thousands of stranded people, most of them migrant workers, were still waiting to leave the city.
  • A record 178.6 million people - more than the population of Russia - were expected to ride the rails. Most would be riding in "hard-seat class," in train cars with only hard wooden seats.
  • A top agriculture official warned Thursday that snow battering central China has dealt an "extremely serious" blow to winter crops, raising the likelihood of future shortages driving already surging inflation.
  • Regions hit by the worst winter storms in 50 years provide the bulk of China's winter fruit and vegetable production, Chen Xiwen, deputy director of the Communist Party's leading financial team, told reporters.
  • Chen said the overall effect on agriculture depended on how long the storms lasted and whether they moved into northern China, which produces most of the country's wheat and oil crops. "If it heads northward, then the impact on the whole year's grain production will be noticeable," Chen said
  • Along with crops, fish and poultry farms have also been hard hit, and much industrial production is at a standstill.
  • Transport delays have already driven up vegetable prices nationwide, with those in the hardest hit areas more than doubling. Wholesalers in Beijing were quoted as saying only about 20 percent of the usual supplies of fresh vegetables were reaching the city.
  • Chinese cuisine places an emphasis on fresh produce, much of which is now grown in plastic-sheeted greenhouses that have buckled and collapsed under the snow.
  • In the central city of Zhengzhou, tomatoes had doubled in price since before the storms hit, local media reported. Lamb and other meat prices soared in the southern transport and manufacturing hub of Guangzhou, and in nearby Shenzhen, the cost of 47 types of vegetables had risen by an average of 36 percent, the reports said.
  • Fuel prices have also increased, with anthracite coal for household heating rising by 75 percent to $208; per ton from before the snow.
  • Authorities have ordered a priority given to coal and food shipments, with all tolls, fees and restrictions waived. On the tropical island province of Hainan, transport bottlenecks maxed out refrigeration capacity, with large amounts of fruit and vegetables at risk of simply being left to rot.
  • Food shortages complicate Beijing's struggle to lower inflation by increasing supplies, a task the government has made a top economic and political priority. Double-digit increases in food prices for much of last year drove December's inflation rate to 6.5 percent.
  • In other remarks, Chen said January's inflation rate would likely stay around the December mark, despite the weather-related disruptions. (sounds like our government... whatever the reality is on the ground, just say inflation is contained and its not an issue - keep lying to the peons)
  • The government has already responded with a variety of measures, from freezing prices for a slew of goods, to boosting farm subsidies and curbing industrial use of corn.
Shortages.
Inflation.
Shortages.
Inflation.

I said it August 2007. I say it today. I'll say it in August 2008, 2009, 2010. These are the epidemic problems of our future.

I was holding off on buying Powershares DB Agricultural Fund (DBA) until it pulled back, but the thing never pulls back. [Food....Food....Food] Just like with coal... it time to bite the bullet and ignore the short term noise and understand this is probably the best hedge we have on earth right now. Crops. Any crop. Better than gold; at least you can eat this hedge. (I did buy some more gold today...)

And fertilizer... well, you know the story.

Long fertilizer and will be long Powershares DB Agricultural Fund tomorrow; long a lot of fertilizer in personal account


More Bailouts on the Way. I Cannot Even Keep Track of the Proposals Anymore.

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We have more bailouts coming, so many ... I cannot even keep count.

NY Bond Insurer Rescue Advances
  • New York Gov. Eliot Spitzer said Thursday a plan by the state's insurance regulator to bail out struggling bond insurers is making good progress amid fresh worries about the financial industry.
  • Feel free to click on the link for more details - it is too sickening of an assault of "free market capitalism" for me to even waste bandwith on it.
And then we're going to bailout the people buying subprime loans, and the owners of the homes. Again... I never, ever, ever want to hear about free market capitalism in the US again. It's a complete joke. Eventually as they throw one after another against the wall, one will catch. And the worse it gets the quicker one of these stinking heaps they throw against the wall will become "reality"

New Subprime Bailout on the Table
  • A proposal to bail out subprime mortgage borrowers who are at risk of foreclosure was floated at a Senate Banking Committee hearing Thursday.
  • Senator Chris Dodd, the committee chair, said he is working to create a Home Ownership Preservation Corporation, which would purchase mortgage securities that are backed by at-risk, subprime loans from lenders and investors.
  • Additionally the loans on these properties would be restructured so that borrowers could afford the new payments and remain in their homes. Borrowers could see their monthly costs drop dramatically.
  • According to today's testimony, the fund might require $20 -$25 billion in seed money from taxpayers and, after that, it should self-fund. (sure it will)
So what do we tell the people who already lost their home? You should of held out just a bit longer.

What do we tell people who act responsibly? You're stupid.

We are going to have a bunch of overpriced homes occupied by people with 580 FICO scores who the government lowered their payment from $3800 a month to $740. Who will be laughing at their idiot neighbors who took out a 30 year fixed at 5.75% and are struggling to make good faith payments in the multi thousands. With 150 more FICO points.

Very fair. I'm truly sick about all of it.

What a country.

Google (GOOG) Misses

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It wasn't that bad of a miss but good enough to spook people. Another one of my 13 2008 Outlier Predictions coming true ;)

So cutting back severely made me miss out on Mastercard (MA), but saved me in Google (GOOG) - I guess it's a wash.

Remember, there is a jobs number tomorrow... as for the # itself who knows. But clearly the labor market is weakening and keep in mind employment is a LAGGING indicator. Meaning by the time we see serious downtrends in labor it will also be recession time. Just look at all the news around you of layoffs. See Home Depot (HD) today, see Ann Taylor (ANN) yesterday. Look around closely and you can see it everywhere. It is around you - no matter what the government report says. That said, if anything positive comes out tomorrow the bubbleheads will say "see told you, no recession!"

Ignore government reports; listen to companies. Even if its bad news - its still a highly flawed report. [Monthly Jobs Report & Birth/Death Model]

p.s. it appears the market was thrilled with bond insurer MBIA's comments ... do you realize they only allowed questions that were emailed to them last night? No real live questions. And this is what we rally on? Quite pathetic.

Do you also realize that the rating agencies have been pressured behind the scenes not to lower the AAA ratings of the bond insurers? Because of the havoc that would cause. So they are told to lie, and everyone needs to wink and let the charade of AAA ratings continue, until we devise a bailout. This is our American, free market capitalist system at work.

Long Mastercard, Google in fund; no personal position

Pulte Homes (PHM) Up 11% on "Bad Earnings"

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I am going to start watching the trio of Ryland (RYL), Toll Brothers (TOL), and Pulte Homes (PHM) since one of these (or a basket of all 3) will eventually make up my homebuilder stake in the fund. While I still think it is too early to get involved in these names other than for short term trades, the market seems to think what is happening with the interest rate/rebates/bailout scenario is already enough to jump start the housing market. Obviously my countless commentaries point to me not agreeing, but I am always open to the fact I can be wrong. As I say nearly every day "Perception is Reality" - if perception is the housing market will turn in the fall, than it does not matter if it's truth or not - as long as it is believed, the stocks can react very well, no matter what the reality is on the ground half a year later.

It is interesting to watch Pulte jump 11% on what I would consider to be an abysmal report. But again, the market is forward looking and the assumption is (it appears) by next fall our home market will have bottomed. I won't be on that bandwagon, but the stock action is the stock action, and one must respect it. I like Pulte for the active - adult market, and this was one of the stocks I used to trade in my personal account during the "good times" in 2003-2005. Let's see what they have said

  • Pulte Homes (PHM) reported a wider fourth-quarter loss as new orders fell 29% from a year earlier to 4,562 units.
  • To us, this indicates that Pulte did not respond to market trends as much as Ryland (RYL) or Centex (CTX) which reported order declines of 7% and 10% respectively," wrote Banc of America Securities analysts led by Daniel Oppenheim, in a research note.
  • "We think this will lead to two issues: further declines in margins when they adjust pricing and more importantly, increased cancellations as buyers in backlog see the lower prices," the report said.
  • Pulte, the nation's third-largest home builder, reported a loss of $874.7 million, or $3.46 a share. The loss included $543.3 million of charges related to inventory write-downs, other land-related charges and impairment of goodwill. It also took a $622 million charge related to deferred tax assets.
  • Pulte said it ended the year with $1.1 billion in cash, exceeding its goal, and no debt outstanding under its $1.86 billion revolving credit facility. The company got some breathing room this summer when it renegotiated the covenants with its lenders.
  • With its focus on the active-adult market, Pulte is "well positioned to take advantage of significant demographic tailwinds," said Morningstar Inc. analyst Eric Landry in his latest review of the company. "Unfortunately, though, it entered the current downturn with too much land and debt, a condition that may hinder its prosperity once demand picks up."
  • Yet Pulte's chief executive, Richard Dugas, during a conference call Thursday was cautious in his outlook for the U.S. housing market. "For the home-building industry, the year 2007 will likely be remembered as one of the most difficult and challenging in decades," the CEO said. "Factors that signaled the beginning of this downturn such as high cancellation rates, elevated supply of for-sale homes both new and existing, and the tightening of mortgage availability simply worsened as the year progressed."
  • "By the end of the year gross margins remained under pressure as the competition for home sales intensified during this market downturn," Dugas said. "Consumer confidence continues to be depressed, particularly with higher energy prices and the fear of a recession on the minds of many potential homebuyers." He added: "The challenging market conditions that plagued 2007 will likely have a significant impact on 2008 as well."
  • Pulte's strategy since the third quarter of 2007 has been mothballing communities rather than selling homes at a deep discount, according to Anna Torma at Soleil Securities Group. "Additionally, the company announced it would reduce pricing and use incentives only in select communities where closings would lead to positive cash-flow generation," the analyst said.

So overall, outside of the ugly numbers... are some ugly words from the CEO about 2008 (no quick turnaround folks). That said, the market is ignoring the CEO and saying "we know better than the CEOs in the industry and it's time to take homebuilder stocks up because the Fed fixes everything". I happen to agree with the CEOs, but the stock market disagrees with me and the CEOs for now.

No positions


Mastercard (MA) Continues to be Priceless

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Please note, my caution caused me to cut back on my Mastercard (MA) position severely in the past week so I am not partaking much in this 9% move today, off of earnings. [Bookkeeping: Reducing 2 Names] However, this went under the "better safe than sorry" category since this was the type of stock that got ripped the minute they open their mouth, but the other part of better safe than sorry is you miss out on some gains. Mastercard once again proved their worth and remains one of the few financials which in my book deserve to actually go up, instead of going up only because "The Fed will Fix Everything" thinking.

Again my thesis, which I seem to be in the minority of,is that a strapped US consumer will in fact turn MORE to credit cards to get through the day to day. People have argued that the US consumer will just retrench totally so Mastercard (and VISA will get hurt). I believe each and every week more and more gasoline, grocery, etc type of purchases are going on cards as people fall further and further behind cost of living. I also think things that they used to do direct withdrawel such as electric and home heating bill, will be moved from "pull from checking" to "pull from my credit card". That said, perception is reality and I was worried perception of slowing US consumer would bring down this stock. Last, people forget this is truly an international play and as I have written in the past, many parts of this world are still mostly cash based societies so we have many years of "conversion" in those countries as we "Americanize them" and turn them into credit card drunk consumers. (just like us!) So I am happy I am correct on the call in this company, but unhappy I am not participating much in this move, considering I dropped 70% of my position in the last week. All you doom and gloomers got to me... :P
  • Credit card processor MasterCard Inc. said Thursday that strong spending abroad and its sale of stock in a Brazilian company boosted profit in the fourth quarter by about seven-fold. The Purchase, N.Y.-based company said profit in the October to December period rose to $304 million, or $2.26 a share from $40.9 million, or 30 cents a share, a year ago.
  • The latest results include an after-tax gain of $185 million from sales of the company's stake in Redecard SA, a company that signs up merchants in Brazil. Excluding that gain, profit came to 89 cents per share.
  • Revenue rose nearly 28 percent to $1.07 billion from $839.2 million a year ago.
  • The results were well above estimates, even excluding the one-time gain that analysts typically exclude. Analysts polled by Thomson Financial predicted, on average, earnings of 72 cents per share on revenue of $984.8 million.
  • MasterCard's full-year profit was $1.09 billion, or $8.00 a share, on revenue of $4.07 billion.
  • MasterCard does not have to set aside reserves for loan losses as many of its rivals do. Unlike American Express Co. and Discover Financial Services LLP, MasterCard processes card payments but does not take on the debt. (if you are new to the blog or Mastercard story, I must stress this which I try to do each and every time I write about VISA or Mastercard)
  • What could hurt MasterCard is a slowdown in U.S. spending that many economists are predicting in 2008. When cardholders spend less money, that means fewer fees from merchants. (again I think a stressed consumer will turn MORE to cards, not LESS as the current fear is)
  • Fortunately for MasterCard, it has increased its business abroad and thus benefited from the weakening dollar. The conversion of stronger currencies to the dollar boosted revenue by 4.7 percent in the fourth quarter, the company said, while international travel lifted cross-border transactions -- which generate higher fees than transactions within a country's borders-- by nearly 28 percent.
  • MasterCard's gross dollar volume rose 15.2 percent to $634 billion, discounting currency conversions, and the total number of transactions processed rose 17.2 percent to 5.2 billion.
  • Robert W. Selander, MasterCard president and chief executive officer pointed to South Asia, the Middle East, Africa and Latin America as high-growth regions.
  • While other big players in the financial sector are selling stock to raise their cash levels, MasterCard is continuing its stock buyback plan; as of Dec. 31, the company repurchased 4 million shares for $601 million, and as of Jan. 25, bought an additional 657,000 shares for $124 million.

Again, I got boxed out by the "fear of dark shadows around every corner" on this name - I admit; it stinks to see a formerly large position run without you. But you can't have everything (risk and safety) at the same time. Once the market returns to normalcy, this is a name I see back in the top tier of positions. Now I have to hope for a general market sell off to bring down Mastercard and continued drum beat of fears that have kept this name down the past month, to give me a better entry point. I am not interested in chasing it up at these levels in this type of market. I am sure we will find another opportunity down the road to buy cheaper.

Long Mastercard in fund; no personal position


Cameron International (CAM) Down 10% - Can't Win in Oil Services Right Now

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I don't own Cameron International (CAM), but it was one I was considering when I decided on Smith International (SII) instead... so today they have earnings, fine earnings, but guidance is again "disappointing". As with Smith International and a host of other names in oil services, whatever you buy - you lose money on, the minute they open their mouth during earnings. [US Markets Continue to Savage Oil Service Stocks]. This is why I reduced National Oilwell Varco (NOV) - since it had not opened its mouth yet. There is no winning right now in earnings season - bad news is punished, and good news is not believed and you are punished for future fears. Bear market baby. This is simply multiple contraction across the board.
  • Oil services company Cameron International Corp (CAM) reported higher fourth-quarter earnings on Thursday, boosted by strong demand from its oil and gas producer customers, but its shares fell 7 percent on a weaker-than-expected outlook.
  • Net income rose to $125.9 million, or 54 cents per share, from $96.5 million, or 42 cents per share, in the year-ago quarter. Excluding items, the company posted earnings of 61 cents a share, a penny above Wall Street's expectations and well above year-ago earnings of 47 cents a share.
  • Quarterly revenue rose 25 percent to $1.34 billion, spurred by strong revenue growth from its drilling and production systems business.
  • However, the company's first-quarter and full year 2008 outlook fell short of analysts' expectations and shares of the company fell $3.06 in pre-market trade to $40.
  • The Houston-based company forecast first-quarter earnings of about 50 cents to 53 cents a share and full year 2008 earnings of $2.45 to $2.55 a share. Analysts, on average, have forecast first-quarter earnings of 59 cents a share and full year 2008 earnings of $2.63 a share, according to Reuters Estimates.

Long Smith International, National Oilwell Varco in fund; no personal position


Bookkeeping: Adding Peabody Energy (BTU) on Earnings Drop

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Coal is one of the few sectors I am looking to add exposure to on any earnings misses. With the 10% drop in Peabody Energy (BTU) this AM off of earnings, I am incrementally (i.e. slowly) adding exposure here around $50. This takes my exposure back up to 2% of the portfolio (up from 1.5%). I am in no rush to add anything in this type of market. But I sold some shares off 2-3 days ago near $59 [Trimming Many Positions], so I am simply adding these shares back at a 15% discount. The stock broke its 50 day moving average and now has fallen all the way down to its 200 day moving average ($50.50) with today's move and is in fact now trading intraday below that level.

Folks this is the type of market we have. Buy and hold is dead for now. I have outlined the longer term story for coal, so I am going to be building these names on pullbacks. But with the market prone to more weakness, I am not going to rush. I really don't care about current earnings or even next quarter's earnings for this sector - the long term in both potential for massive increase in exports and rising prices will bode well. Again, no rush to load up. As you can see from guidance below, it's a huge range because there are a lot of variables in play. But Peabody especially with their Australian operations should benefit from this major weather issue in China. [China has a Power Shortage, South Africa has a Power Shortage]
  • Peabody Energy Corp (BTU), the world's largest coal producer, on Thursday posted lower fourth-quarter earnings, hurt by the company's spin-off of its Patriot Coal Corp PCX.N unit.
  • Net income was $35.8 million, or 13 cents per share, compared with $175 million, or 65 cents per share, a year earlier. Earnings from continuing operations were 71 cents per share, from 68 cent per share in the year-ago period.
  • Revenue rose 10 percent in the fourth quarter as the company sold more coal, offsetting lower prices at its Australia operations.
  • Peabody said it expects to earn $1.00 per share to $1.85 per share in 2008, with earnings before interest, taxes, depreciation and amortization (EBITDA) between $1.0 billion and $1.3 billion.
  • For the first-quarter, it expects earnings between 5 cents per share and 25 cents per share.

Long Peabody Energy in fund; no personal position


Wednesday, January 30, 2008

Earnings on Tap Tomorrow

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Hard to make a judgement call on how the reaction will be since euphoria could be rampaging for now so everything that was bad could be good in 24 hours. So I'll just list the interesting names on the list coming tomorrow since emotion is unmeasurable. Same world economy that (judging by stock markets) was going to implode 8 days ago, now has no worries :) Amazing to watch the swings in emotion.

Cameron International (CAM) - another oil service name similar to fund holding Smith Interational (SII)

Gold Fields (GFI) - gold. inflation. South Africa.

Google (GOOG) - fund holding that I reduced today.

Intuitive Surgical (ISRG) - classic momentum stock that is the type that has been punished relentlessly in 2008.

Massey Energy (MEE) - fund holding in coal - metallurgical. Still love this group.

Mastercard (MA) - fund holding which has high valuation. It has held up very well but is exactly the type of name people have been selling off in panic the minute the earnings release hits the airwaves, no matter what the earnings release actually says. I cut back severely in the past week for "safety" reasons.

Peabody Energy (BTU) - fund holding in coal.

Procter & Gamble (PG) - classic safety bellweather stock.

Tesoro (TSO) - refiner. Group had a huge 1 day move earlier this week due to Valero (VLO) earnings.

Under Armour (UA) - already preannounced to the downside. I was considering adding under $30 a week ago. Now $38. Ugh.

So a busy day for the fund. 2 coal holdings and 2 relatively highly valued stocks that up to 1 hour ago, were the type sold heavily the minute they released the earnings release. We shall see how the reaction is tomorrow. I am hoping for some further sell off in the coal names to rebuild larger positions.

Bookkeeping: Adding Short Exposure on this Rally

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I just don't buy it. People need to ask what is so bad that the Fed just cut 125 basis points in 8 days. That should scare them. That is historic.

That said, I was buying short exposure off the surprise cuts in August and it cost me for about 8 weeks... until the market came to face reality.

Now what? 8 weeks of no stimulus... and calls for more cuts within a few weeks. The market got everything it asked for (and more) - now what?

So another prediction came true, this one from last fall - Fed funds rate at 3% by spring 2008. Back than that was an outlier prediction. Now, it appears "slow to the game" but I did not expect 125 bps in 8 days. So about 3 meetings got squeezed into 8 days.

Now it looks like we go to replay of 2001 and head to 2-2.5% in the coming quarters.

S&P500 is now at 1375. Lots of resistance overhead. 1380, 1400, 1420
I'll expect a sell off to start from one of those levels after euphoria leaves the market....
I've added incrementally to a few of the Ultrashorts. And will layer in if we breach the 3 levels mentioned above.

Gold jumping

Inflation is going to be a beast... even more than it already was. In about 18 months I can see a massive uptick in rates to try to tame inflation. And people blaming Ben for causing inflation, and "bowing" to the markets. The same commentators who today will be cheering. Guy can't win.

But for now... "they" rejoice. Since all that matters is today. Main Street will suffer in the long run. NYC wins again. At least for a few hours/days/weeks whatever. Until reality returns. Cramer is screaming Alleluliah. So at least he is happy. All his buddies in Manhattan can enjoy they have manipulated Ben into a twisted mess.




Hungry Haitians Resort to Eating Dirt

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As I said, this "World of Shortages" I keep repeating will have profound global implications. And since it's food this time we are going to see a lot of suffering across the globe. I began item #3 in '13 Outlier 2008 Predictions' with

#3 Food inflation ramps worldwide causing serious issues and front page news in countries across the world. The US central bank says, really who cares, after all its not part of core inflation.

One example
  • It was lunchtime in one of Haiti's worst slums, and Charlene Dumas was eating mud. With food prices rising, Haiti's poorest can't afford even a daily plate of rice, and some take desperate measures to fill their bellies.
  • Charlene, 16 with a 1-month-old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country's central plateau.
  • The mud has long been prized by pregnant women and children here as an antacid and source of calcium....cookies made of dirt, salt and vegetable shortening have become a regular meal.
  • Food prices around the world have spiked because of higher oil prices, needed for fertilizer, irrigation and transportation. The problem is particularly dire in the Caribbean, where island nations depend on imports and food prices are up 40 percent in places.
  • At the market in the La Saline slum, two cups of rice now sell for 60 cents, up 10 cents from December and 50 percent from a year ago. Beans, condensed milk and fruit have gone up at a similar rate, and even the price of the edible clay has risen over the past year by almost $1.50. Dirt to make 100 cookies now costs $5, the cookie makers say.
  • "I'm hoping one day I'll have enough food to eat, so I can stop eating these," she said. "I know it's not good for me."
News like this won't hit the radar until it begins affecting people who actually vote. So while we have shortages throughout the country in food banks [One Lonely Voice Agrees with Me on Food Inflation], until it starts making a move upstream to lower middle class and middle class, in a large enough way - only then will it begin to be noticed as an "issue". And sadly the worst off in the US are far better off than many on this globe.

My prediction after seeing how this is so quickly creeping up on Americans is about a year from now is we will have another government rebate check mailed out to us.... to begin helping to pay for day to day costs of life... minor things... like food.

On the bright side, we bought off some votes in the farm belt with the ethanol proposals. And for the investor class, the stock market should be raging in a year with the huge amounts of money flooding into the system. (econ 101 = fixed amount of assets (stocks), huge increase in supply of fiat money = higher prices of stocks). Always a bright side, as long as you are not in the bottom 80% in the world.

Still Too Early to Buy Homebuilders Other than for Short Term Trades

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As I have been saying, we will get 25-35% type of bounces off of oversold levels in homebuilders from time to time. This has been going on for nearly 2 years now. We are in the middle of another. Eventually these will be "buys to hold". But I just don't think it's time even with the government abandoning any sense and allowing lenders to stuff Fannie and Freddie full of $700K+ mortgages (up from $417K). [I do believe this could prove catastrophic in the long run and a tax payer bailout might ensue in 3-5 years from this action but this government is all about solutions that fix things today, not in the long run]

Yesterday's Centex (CTX) report shows some of the signs why it is too early - it's not the numbers (they have been bad, remain bad, and will continue to be bad) but the commentary.
  • Centex (CTX) shares tumbled 6% Wednesday after the homebuilder's loss more than quadrupled in the latest quarter, while cash flow generation came in lower than expected.
  • On the conference call following the third-quarter report, the company said the level of discounts being offered for new homes are at record levels and that housing inventories and prices have not stabilized.
  • "The housing market continues to correct and tighter mortgage underwriting standards are affecting home prices," Centex CEO Tim Eller said in a statement.
  • For the quarter ended Dec. 31, Centex's loss swelled to $975 million, or $7.94 a share. That was substantially worse than the loss of 78 cents a share that analysts expected, according to Thomson Financial. (to analysts <--- oops)
  • In a note to clients, Pali Reseach analyst Stephen East said the results were disappointing. Centex underperformed on cash flow generation, orders, land charges and operating margin before charges, he said.
Again you want to buy these stocks maybe 6-9 months before a turn in the housing market. People now believe with the flooding of liquidity, lowering of 30 year rates, and the ability to stuff Fannie/Freddie with overpriced expensive mortgages, the housing market will be back by summer or fall. I just can't get on that bandwagon. In my opinion mortgage rates can be zero and for many people if they are forced to put a down payment down (in a country full of people who do not save), they still can't afford homes. So I am not sure where this flood of new buyers comes from. Without a return to 0% down mortgages we won't see any swift recovery. It's as simple as that.

What I do expect to see is a flood of refinancing so people can reduce their home payments (which is good for them), and/or extract equity to pay for day to day expenses (which is just a repeat of the bubble we came out of in 02-06). But this (housing) was an epic bubble - and epic bubbles do not get solved in 18 months. Especially with all the foreclosures that are just now beginning. All those homes need new buyers too... along with all the homes that people will just walk away from since they are upside down on. So we are going to see a "great reversal" - many homes bought in 2005-2007 are just going to be right back on the market - they won't have to be sold to be put back on the market. Owners who abandoned them (walked away) or were forced out (foreclosure) will be the cause for them returning to the market.

But the home builders are doing their part - they are doing "record" discounts on home prices... this will drive down median home prices. As I keep saying, it's existing home owners that will be the last to fall. They will refuse to sell their homes because they will get less for it than they bought it for in 2006 or 2005. But they will succumb and face reality eventually. When that happens in droves we should be near to a bottom.

From a new buyer perspective, I simply ask - why would people be rushing in to buy an asset when they see no bottom/floor. How many people (even those with cash) are going to running in to buy an asset that could be worth 10% less a year from now? I just don't see it... this huge rush of buying this summer.

Doesn't mean one cannot make some great near term trades (as the past week in the homebuilding stocks), but we are still quite a ways off from "buy and tuck away" time.

No positions

What Investment Bank to Buy?

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As I've written in the past [Jan 7 - Washed Out Sectors]

Also as I stated in my 13 Outlier Predictions for 2008, I do think the investment banks will in fact be a good investment in the latter half of the year - unlike the traditional banks who hold all this junk on their books, the investment banks are more like 'enablers' - they did hold some of this junk in their trading desks but as they write down quarter after quarter, the value will eventually be marked down appropriately and then they are good to go - no real exposure to the consumer. That said, part of their businesses are gone forever (or if not forever, until the next time the Fed cuts rates to 1% and hedge funds decide buying mortgages is a great thing), but they are the middle men of all the world's major financial transactions and M&A activity will continue, foreign cash rich companies will continue to buy up assets of our subprime nation, new IPOs will continue to be brought to market, all good and lucrative things. Aside from Bear Stearns (BSC), the other 4 investment banks will come out of this fine in the end. While the group is due for a bounce soon enough, I do expect some more pain in the first half of the year, but unlike the money center banks, I do expect the back half of the year to be quite fruitful for some of these players

So I am mulling over which investment bank to enter and when. The knee jerk reaction is to go with Goldman Sachs (GS) because they seem the least unscathed. But a series of news items from Lehman Brothers (LEH) makes me wonder about them as well, and truth be told they are in the best technical condition.

Lehman Brothers Hikes Dividend to 68 Cents, and Increases Share Buyback
  • Lehman Brothers Holdings Inc (LEH), the Wall Street investment bank, on Tuesday raised its common stock dividend 13 percent and said its board of directors authorized the buyback of up to 100 million shares.
  • The quarterly dividend will rise to 17 cents per share from 15 cents.
  • New York-based Lehman said the buyback program covers nearly 19 percent of its 530.6 million shares outstanding at year end, and supersedes a prior authorization.
These don't appear to be moves of a company going underwater - further Lehman has not had their hands out asking for foreign companies to infuse them with life saving cash. While the buyback on the surface is VERY impressive, what is "announced" as an authorization is very different from what really happens, so I'd like to see these shares actually bought back. It is very easy for any company to say "well we have authorization to buy back XX amount of shares", and then quite a few never follow through. But at least theoretically this is 1/5th of the shares of Lehman - very impressive if it happens.

As for the other 3 - Merrill Lynch (MER) has a great CEO now but appears to be an epicenter of subprime slime. A lot of risk but reward there ... still too early I think. Morgan Stanely (MS) I really don't hear much about but it's stock is moribund - no reactive bounce off Fed cuts tells me more shoes to fall and those "in the know" are telling us that by the stock not moving. Bear Stearns (BSC) is a disaster but you are playing Bear for a buyout offer. With a $12B market cap that is easy picking for China or a Middle Eastern buyout. But I don't really buy stocks for buyout potential; I'd rather have a nice business.

So at this time, going back to the previous two, I am leaning toward Lehman Brothers (LEH). As I wrote above, unlike the money center banks I think we might have 1 (or maybe 2) more quarters of write offs in the investment banks and then the decks should be cleared. So either "now" or "soon" might be the time to get in. What I will be looking for in LEH is a move above the 200 day moving average which sits at $65. Or (looking at the chart) an entry around $54 would also be potentially advantageous. So I want to buy on a "panic pullback" or "breakout". The stock traded $85 a year ago... so it has not fallen as much as the 3 not named Goldman, so the (potential) reward is not so great as buying one of those 3, but the risk appears to be far lower. Which suits me fine.

No positions but putting Goldman and Lehman on radar


More Economic News from the Companies Themselves

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I wrote this (in jest) yesterday

Kellogg (K), Kraft (KFT) - more CEOs who are going to try to tell us they see (haha) inflation or something. Silly CEOs.. there is no inflation out there. It's all in your imagination. More Fed cuts by the way! NYC and the top 1% must be saved! Go cry about your inflation to the bottom 60%.

But again folks, nothing to worry about here. The Fed is cutting rates (again), the Federal Government is sending us all rebate checks and that will solve everything! Don't you notice the market telling us that? Inflation is benign and under control. So ignore (once again) everything the CEOs are telling us, and buy those home builder stocks!

Kelloggs
  • Earnings for the December quarter dropped to $176 million, or 44 cents a share, from $182 million, or 45 cents a share, a year earlier. The food company backed its 2008 forecast, which falls below Wall Street's current projection.
  • Kellogg's gross margin for the quarter slid 50 basis points to 42.8%, hit by double-digit increases in commodity, fuel and energy costs. (but ignore that, inflation is just in your imagination and not a factor - PPI increases are negligible)
  • To partially offset the continued cost inflation, we have increased prices and pursued various productivity initiatives." (ignore that - CPI increases are negligible)
So with Kellogg's all you need to know is the CEO is not reading the government reports (again!), and does not realize that is rising commodity, fuel, and energy costs are not real. Further his price increases will not his American consumers, because government reports tell us CPI is rising 3%... what is all this double digit baloney? Obviously excuse making by the CEO.

Kraft
  • Kraft Foods Inc., the nation's biggest food and beverage maker, said Wednesday its fourth-quarter profit fell 6 percent due to higher dairy prices and one-time costs. Net income fell to $585 million, or 38 cents per share, for the three months ending Dec. 31. That's down from $624 million, or 38 cents per share, during the same period last year.
  • The company primarily blamed a nearly 40 percent boost in dairy prices during the quarter for the earnings decline. The high commodities costs dragged down operating earnings at the company's North American Cheese and Foodservice division by more than 53 percent. (ignore that, just imagination)
  • Kraft's operating margin dropped to 11.4% from 14.2% the prior year amid what the company called an "unprecedented" input cost environment.
Again, another CEO who truly does not understand our government reports. 40% dairy costs? I find that nowhere in any CPI or PPI report. So again, just a figment of another CEO's imagination and please ignore it.

I wrote this about UPS yesterday

UPS (UPS) - always interested in the bellweather transport companies commentary - probably they will say "things have slowed down, it looks like it will be slow next quarter - what's that? News flash, Fed cuts rates! Never mind - BOOM TIMES by Memorial Day!"

UPS
  • UPS (UPS) matched analysts' adjusted earnings estimates for the fourth quarter, but the package shipper predicted a "difficult" first three months of 2008.
  • Executives said UPS was hampered by the large spike in fuel prices in a short period of time in the fourth quarter. Usually, the company is able to pass increases in fuel prices along to customers, but executives said that wasn't as easy to do in the fourth quarter because of how quickly fuel prices rose. (please ignore the large spikes in fuel prices, just imagination running wild again)
So the first part of my prediction came true, and when the Fed cuts this afternoon (which again, solves EVERYTHING) I am sure the CEO will come back on the wire, and say "forget everything we said this morning, unicorns and butterflies are here again!"

And as I said with the other 2 companies, please ignore the comment about large spikes in fuel prices, because I don't see any of that in government inflation reports. So again, a figment of imagination by another CEO. And also ignore how the transport companies have been passing along fuel surcharges to companies - because when one passes along higher surcharges to companies, that also does not cause inflation.

Again, I am seeing a lot of imagination by all these CEOs of late as we've discussed this week. They are all seeing some sort of imaginary inflation that our government reports do not show. So obviously one is wrong. Since I always trust the government, it is very obvious that all these CEO's are living in an imaginary world and just making excuses for their poor performance. Thankfully we have Fed cuts coming anyhow... and that solves EVERYTHING. Even imaginary inflation. World of Shortages anyone? Stagflation? Nah.

At least Kool Aid is not going up in price!

Long imaginary inflation and CEOs who read government reports to see the "truth"

News Alert: Altria (MO) to Spin off Philip Morris International March 28

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Strange to see an earnings report released during the middle of the trading session, but Altria (MO) just posted theirs.
  • The Board of Directors of Altria voted today to authorize the spin-off of 100% of the shares of Philip Morris International (PMI) to Altrias shareholders. The distribution will be made on March 28, 2008, to Altria shareholders of record as of 5:00 p.m. New York City Time on March 19, 2008 (the record date).
  • Altria will distribute one share of PMI for every share of Altria common stock outstanding as of the record date, based on the number of Altria shares outstanding at 5:00 p.m. New York City Time on that date.
  • Currently, there is no public market for PMIs common stock. It is anticipated that PMI will be listed for trading on the NYSE under the symbol PM.
So it looks like a 1:1 distribution March 28th. And the new symbol for the international piece will be PM.

No position

Bookkeeping: Starting New Position in Kinross Gold (KGC)

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I began a new position in Kinross Gold (KGC) here around $22. I plan to treat this as a hedge that I increase and decrease relatively often, much like the Ultrashort positions. I am only beginning with 600 shares today or roughly $13.2K or a 1.2% position. I'd like to add more lower if the stock falters to $21 (or better $20). But with another round of Fed cuts and more "liquidity" coming from Europe in the coming months/quarters, I expect gold to continue its trek to $1000+. So I want to get some skin in the game here. My belief is the UK will buckle first (cuts cuts cuts), and then eventually the EU (begrudgingly). Today's 0.6% Q4 GDP in the US even shocks me... Q3 was near 5%, so that is a heck of a drop off in just 3 months. Scary bad.

I wrote my full reasoning here for choosing Kinross [Jan 28 - Stalking Kinross Gold]. The stock has dipped a bit since I wrote that piece earlier this week, about 2%. These stocks trade in a relatively narrow range so every bit helps. My other potential choice of gold miners was Barrick Gold (ABX), but as you can see below these 2 trade in near lockstep so I don't see a reason to go with a basket approach of buying both. (again the risk with buying just 1 miner is a mine closure, flood, emergency etc - along with political risk in the countries the company mines in).



Long Kinross Gold in fund; no personal position

Bookkeeping: Cutting Google (GOOG) in Half Ahead of Earnings

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What an environment for tech stocks. You open your mouth, you lose 20%. I have held Google (GOOG) in the fund since day 1 as a small position (1%ish)... I sold out briefly in late October [Closing Smallish Position in Google (GOOG)] as the stock approached $700, but did re-enter later in the year. But still it remained a small position, mostly due to valuation and having such a high market cap. The higher the market cap, the less potential long term appreciation.

However, since August I've had a bit of a concern about an advertising slowdown, more tied in with the mortgage company blowups (who do a huge amount of internet advertising) [Aug 30 - Google (GOOG) Can't Get Any Traction - Is This Why?] Google proved me wrong with an excellent earnings report last quarter, but now my worry extends more in a general economic sense. In a slowdown/recession the first thing to go is advertising as it is easy to cut. With that said, internet advertising is still in a secular growth trajectory. So the question is, when advertising will be cut, what will be the first to go? Traditional or online advertising? The second question is - does it really matter? Remember, 'Perception is Reality' - even if online advertising stays strong will people begin to move to the side of the aisle that says "so what, eventually advertising online will also be cut". If that is the perception than the stock will suffer, unfairly or not.

Either way, no reason to take the risk, and I am cutting my already small position in half. I have been debating this the past week, only to watch the stock continue to fall. This reduces Google from 1.1% of fund to 0.55%. If the stock implodes from that level, so be it - it won't have a large effect and I still like Google in the long run as a dominant franchise. I do expect its wayward competitor Yahoo (YHOO) to be bought out as I wrote in my 13 2008 Outlier predictions. I am selling 11 shares in the $550s. Technically the stock has closed below its 200 day moving average the past 2 sessions, which is another negative factor. Looking at a long term chart, there is some support around $500 and then $450. So those might be areas I buy back some stock if it falls; I still like the franchise - and one day the market will again embrace these names. But $450 is 22% lower from here.

Overall I have very small loss in Google, around $500 since inception. The stock has done a complete round trip since I began buying in August, and I have done very little trading in this stock, trying to just buy and hold. But as I keep saying, this is not a market for buy and hold investors and I gave up all my gains in this name. With earnings tomorrow, I don't want to bother with earnings risk, and this is exactly the type of name that has been punished brutally for saying "anything" - you say good things, you fall, you say bad things, you fall. So short of promising the world, I don't see how Google does not fall tomorrow. Not due to their business but due to fears and risk perceptions and multiple contractions. The stock now trades at 26x 2008 estimates, which is quite good for a company of its size growing so quickly - but I said the same thing for Apple (AAPL), and again in this environment, "value" means nothing. Earnings multiples mean nothing. All that matters is people don't want these stocks. Period.

Long Google, Apple in fund; no personal position


Tuesday, January 29, 2008

Byron Wien 5 Sure Things for a Turbulent Market

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Thanks again to reader for sending me this article from Seeking Alpha (my favorite website of course) ;). The more readers we get, the more "analysts" I get working the streets out there. Soon, I may have to fire my team of hamsters which until now were my team of analysts.

While I don't agree 100% with every comment Byron Wien says in this piece, I agree 97%. And some of it is almost verbatim to things I have written. And when I write some of the harsh things I have written (especially as with yesterday talking about how the US is really falling behind in so many ways) I sit back and think "Am I overdoing it?", "Am I sounding like a sky is falling type?", "Will readers think I am anti-American or something?" (answer: no, I am simply saddened to see much of what is happening - the cost to many, for the pleasure and profit of a few - and seemingly no end to it)... but then I read a story like this from a very respected (and much older) gentleman who seems to see things through the same lense I do, and I feel better in that I am not just a bitter dude blogging evil words. ;) I've heard his name bandied about many times, but have not read a piece by him.

Granted, we could both be wrong but he states many of the reasons I have been espousing re: this won't be your 2001 type of 2 quarters and done recession/slowdown/whatever. Again, these are mostly economic thoughts and the market can rally in the face of recession or bogged down sideways economy... but for those interested in someone else's thoughts on similar topics to which I blog about daily read on:
  • I'm as cautious right now as I've been in some time. Certainly since 1999. I think where I disagree with the two previous speakers is that I think what's going on here is more serious than people recognize.
  • What's going on in the housing industry is going to have long-term implications. You have probably two million unsold homes out there and I think that industry is going to be in the doldrums for at least two years. That means that all the people working in industries ancillary to the housing market, like the homebuilders, the mortgage brokers and so forth, are going to have tough times. Many of them are going to be laid off.
  • I think the credit situation is extremely serious. Not only are the money center banks suffering huge writeoffs and significant executive turnover as a result of it, but they are also going to have to shore up their balance sheets and they're probably going to require foreign capital in order to do that.
  • In addition to that, when they get financially solidified I think they're going to be very careful in making loans. So I think it's going to be hard to borrow money when people or institutions or corporations get the enthusiasm to do that.
  • I also think that America is not quite the place it once was. This is a global environment and America is losing ground. I think people underestimate the unusual position America was in after the end of World War II where we had enormous scientific talent, we had enormous manufacturing capability and the rest of the world was in economic shambles.
  • Today the rest of the world is in terrific shape. Some countries, particularly China, have infrastructures superior to ours and a scientific capability that rivals ours. We still have the greatest universities in the world, but many of the students coming to train here are going back to their home countries after graduation.
  • My view is that people underestimate the seriousness of the energy situation. We are only finding oil at a rate equivalent to replacing the oil production that erodes every year as a result of the existing wells getting tired.
  • In addition to that, China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumers 13 to 15 barrels, Japan, Korea the same amount. As China and India increase their consumption, even if the two and a half billion people there only increase their consumption a quarter of a barrel of oil per year, there's no way the world can meet that demand. So I think the price of oil is going a lot higher.
  • I also think that we have to recognize that we've been running a trade deficit now for a decade -- a serious trade deficit for a decade -- and that foreign holders of dollars have become increasingly impatient. I traveled around the world twice last year. I was in the Middle East twice and in China and India and I can tell you that while they are not going to sell any U.S. bonds, they may slow down their buying of them. Our demand for the kindness of strangers to finance our deficits is going to continue inexorably. So I think that's leading to a serious situation.
  • Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
  • Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year.
  • The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies.
  • Cotton is going to be the commodity of choice because the world's standard of living is increasing and the places where it's increasing fastest are warm and they don't wear wool, they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing and that's all you have to know.
  • Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the seven percent that they did last year.
  • Our portfolio is very heavily overseas, but we're in the agricultural area with Potash Corp (POT) and a lot of energy stocks.

Again, I agree with just about everything. I do think there is a potential for the dollar to be bottoming. Not because we won't continue to cut and turn into the American peso. But because I think things will worsen overseas, and the European countries will be forced to cut rates (both UK and EU) - that could help the US dollar "relatively speaking" as we bash it in the knee caps with repeated cuts. But otherwise... I agree with all he just said and have written all these things in the 6 months of the blog.

Long Potash in fund and personal account (and long any crop in the world in theory)

FBI Investigating 14 Companies Over Loans

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As I've been saying, we need to find a "fall guy" - this generations Jeffrey Skilling (Enron), or Dennis Kozlowski (Tyco), or Bernie Ebbers (Worldcom) - hell, Martha Stewart will do in a pinch!

Just step 1 of a long process. The next laughable step (again, humans follow the same path over and over and over) will be the politicians red faced and fist shaking "How could this happen!?!" as they have their hearings...a joke, all of it. When the money was rolling in, nothing was questioned. As long as the 'right people' were getting rich, no regulation needs to matter. Now, suddenly will come the wave of (fake) outrage.
  • The Federal Bureau of Investigation on Tuesday said it is investigating 14 companies for possible fraud or insider trading violations in connection with loans made to risky borrowers, and investments spun off of those loans.
  • Agency officials did not identify the companies under investigation but said the wide-ranging probe, which began in spring 2007, involves companies across the industry, from mortgage lenders to financial firms that bundle home loans into securities sold to investors.
  • The development comes as authorities in New York and Connecticut investigate whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors. (you bet they did, but I am sure their lobbying staff can make most of this trouble "go away" and if we repeat 2001-2003, they will pay massive fines.... fines around $5 million! Or about 0.001% of all the billions made in this fiasco. And admit no wrong doing. Because people who pay fines, of course do so out of charity.)

Those Who Cannot Learn from History are Doomed to Repeat It. And repeat it we will. By some bubble being birthed today with "easy credit 2.0", that will come to fruition (and then implode) circa 2012-2014. Count on it.


Earnings Preview Wednesday

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It appears we have entered the era of late August, September - where each bad data point is cheered by the market because it meant (Kool Aid!) more Fed cuts. We'll see how long it lasts. We have 2 long, cold months until the next Fed meeting after this month. Will we even make it to Valentine's Day before more clamoring for cuts begins? The folks in NYC are drug addicts... they need their cuts. As you can see I am near to my "utmost caution" allocation that I was hoping to get to by this time leading to the Fed meeting. 15% cash and >20% short exposure.

Altria (MO) - big MO! Let's see if they have anothing more to add about the Philips Morris International spin off - which I'd like to get my grubby hands on. After struggling the past week during "opposite time" (worst of breed rocks, best of breed stinks), the stock made a decent surge today.

Amazon.com (AMZN) - obviously best at what they do, but I could never get behind that valuation. And in this type of market where anything of remotely high valuation gets sand blasted, I wouldn't want to risk it. Anything remotely related to tech has been a disaster of late. Until I see Microsoft (MSFT) rewarded for it's great news and (in theory) "safe haven" status, it is hard for me to get back on the tech bandwagon.

Boeing (BA) - don't look now, but Mark is suddenly interested in this beaten down giant who is part of a worldwide growth secular growth market. In a better market, I'd be interested and I can see adding this later in the year.

Covance (CVD) - the last of the 3 major players in US drug research outsourcing. As I said, I looked at this group 8 weeks ago, deemed them to expensive. I looked again this weekend - still found them expensive, although I think it's a great sector.

Evergreen Solar (ESLR) - just has been a long term dog of the sector, constantly on the cusp of raging success and profitability. One day.... maybe. I suppose it will affect the solar names, but I see no reason to pile into a name like this on hope, when leadership companies are producing day in and day out. But we have to watch it since investors treat solar stocks like a monolith - they are either all good or all bad. One day that will stop. I hope.

Kellogg (K), Kraft (KFT) - more CEOs who are going to try to tell us they see (haha) inflation or something. Silly CEOs.. there is no inflation out there. It's all in your imagination. More Fed cuts by the way! NYC and the top 1% must be saved! Go cry about your inflation to the bottom 60%.

Legg Mason (LM) - asset manager who wishes they were Blackrock (BLK)

Merck (MRK) - one of the biggest producers of Washington DC lobbyists. I also believe they run a side business somehow relating to drugs.

Pulte Homes (PHM) - a company I actually like along with Ryland (RYL). And maybe Toll Brothers (TOL) especially if stuffing Freddie and Fannie permanently with $700K+ mortgages is the wave of the future. When I turn to homebuilders permanently, expect these to be the names.

Starbucks (SBUX) - yawn. New CEO who was old CEO will promise the comeback of the century. Rebate checks will allow Americans to buy 30 lattes each. Go look at a chart of Dell (DELL) and remember the last time a new CEO who was the old CEO came around. Yawn.

UPS (UPS) - always interested in the bellweather transport companies commentary - probably they will say "things have slowed down, it looks like it will be slow next quarter - what's that? News flash, Fed cuts rates! Never mind - BOOM TIMES by Memorial Day!"

Long none of the above

Pilgrim's Pride CEO Lacking Good Government CPI/PPI Data

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Following up on yesterday's Tyson Foods (TSN) commentary [Some Economics Signals from Companies Themselves], today we have earnings from the largest US chicken producer, Pilgrims Pride (PPC). But again, please ignore everything below because there is no inflation out there - it's only in our imagination per CPI/PPI data. But for those who like to imagine (or actually shop for groceries), I submit:
  • Pilgrim's Pride Corp (PPC) on Tuesday reported a quarterly loss instead of the profit Wall Street had expected, sending its shares down 8 percent, as the largest U.S. chicken producer faced much higher feed prices.
  • For the first quarter ended on Dec. 29, the Pittsburg, Texas-based company said its loss had widened to $32.3 million, or 49 cents per share, from $8.7 million, or 13 cents per share, a year earlier. Excluding a one-time income tax charge of $13 million, the loss was 29 cents per share. On that basis, Wall Street analysts on average had expected a profit of 34 cents, according to Reuters Estimates. (to analysts --> "Oops")
  • "Our feed-ingredient costs for the quarter, on a pro forma basis, rose 24 percent, or $157 million, when compared to the same period a year ago," Chairman Ken Pilgrim said in a statement. (hmm, I don't see anything like that in goverment reports - surely there must be an error on your side Mr. Pilgrim)
  • "Those cost increases -- when coupled with labor shortages, higher production, freight and fuel costs during the quarter -- offset most of the improvements in market pricing and product mix," he said. (Mr. Pilgrim, Fed cuts solve everything - remember how the August Fed cuts helped? And the Halloween Fed cut helped? Now stop your whining and enjoy the Kool Aid with the rest of us... go buy a home builder stock or something! Always takes the edge off of 24% cost increases)

So yet another CEO who clearly has no clue. If only he would read the government reports he would see inflation is contained, and benign. Hence, we can cut interest rates to zero if we choose to. Because inflation would somehow still be contained and benign. Ah, those government reports - so awesome.

No position


Credit Default Swaps Paint Ugly Picture for Homebuilders. Stock Prices of Late? Unicorns and Butterflies!

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You can't tell from the large spike in stock prices, but odds are increasing that we are going to get a bankruptcy in the housing sector. Or multiple ones. [Jan 11th - Standard Pacific (SPF) - the First Major Homebuilder to Go?] But maybe not in this era of government intervention and moral hazard. Perhaps a shotgun wedding will be arranged or a private equity or foreign buyer will be "gently persuaded" on the merits of buying a homebuilder. After all the US real estate market will come back. Heck, by spring 08 at this rate right? We can get those Fed cuts down to low to mid 2%s. We can increase mortgages covered by Fannie and Freddie to some ungoldy number like say $700K+ (oh wait, that's already taken care of) etc.

Well the bond market seems to say differently. I keep pointing this out because all fall while the equity market was drinking "Fed cuts solve everything" Kool Aid, the bond markets were signaling a different story. I remember repeated blog entries wondering how the market was not falling when the bond market was signaling bad things. Then in a span of 3 weeks in 2008 it appears the bottom fell out. Well humans are very pattern oriented, so we are in another phase of Kool Aid now. This time we are told to not fight the Fed. Just like we were told in August... October... etc etc.

Again it's a matter of perspective. If one believes this recession talk is nonsense, a media creation, and the US consumer will be fine once he is loaded with free money from China... I mean bonds sold to China because the US is broke... and refinancing boom 2.0 will save us, it's all upside from here in homebuilders, financials, and retailers. If not, you just sit and wait patiently for the impatient toddler that is the equity market to look to the bond market as its scolding parent and frown once again. We shall see how it plays out.
  • The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.
  • Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments. According to Byron Douglass, an analyst at Credit Derivatives Research, the most exposed are Standard Pacific, Hovnanian (NYSE:HOV) , Beazer, and Meritage. All are among the top 15 publicly-listed US homebuilders.
  • Mr Douglass said bankruptcies were "highly likely" among top homebuilders. Homebuilding is viewed as being the sector most threatened by the slowdown as housing has been the worst hit part of the economy.

One of 13 2008 Outlier Predictions made in December was not 1, not 2, but 3 major homebuilders go under in 2008. However, my prediction was made assuming free market capitalist society was allowed to reign. Obviously, that is a very bad assumption in 'socialist' USA, where no one is truly allowed to pay the price :)

No positions

Some Trina Solar (TSL) Updates

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Some updates for this portfolio killer on both production / sales....
  • Trina Solar Ltd., which makes solar wafers and related products, said Tuesday it has already sold most of its planned 2008 output.
  • The company said it expects to produce 200 to 210 megawatts worth of solar modules this year. As of Tuesday, it said it had sold 100 percent of the modules it plans to build in the first half of the year, and 75 percent of its expected output for the second half.
  • In the fourth quarter, Trina said it started two new solar cell production lines, processed 75 percent of solar cells in-house and began producing 220-watt multicrystalline-based solar modules.

....and polysilicon (althought without pricing information i.e. what price they paid it tells us very little)

  • Solar energy company Trina Solar Ltd (TSL) said on Tuesday it has secured more than 80 percent of its silicon requirements for 2008 and 60 percent of its needs for 2009.
  • Silicon is the key raw material that goes into solar cells and panels. Solar cell and module producers have been grappling with tight supplies of the material, leading to soaring prices. Silicon supplies are expected to become more ample next year as new production capacity comes online.
  • Trina said it sources up to 80 percent of its silicon requirements from reclaimed silicon sources, saving it between 30 percent and 50 percent when compared with spot market prices.

It all sounds good and dandy... "up to" 80% of silicon from reclaimed sources saving 30-50% compared to spot prices (currently $400) yet gross margins struggle near 20%. (some peers doing 4-5% higher)

The good news is the in house cell production - this is the long awaited step that should be helping gross margins. We'll see if there is proof in the pudding at the next earnings report in February. This stock seems to be a soul brother of Solarfun Power (SOLF) - a company which could not get out of this way for quarters on end during 2007, until finally a brief rocket shot in the last part of the year (only to give most of that back in 2008 of course). With the low stock price in relation to earnings estimates, it is clear management with its 2 faltering quarters has lost the trust on the Street and the earnings estimates (which show a huge variance of $1.65 to $3.40) are not believed. Further, you can see how many moving parts are in this industry. Low estimate of $1.65 with high estimate over 100% higher? Ugh. Some clarity would really help this stock.

Long Trina Solar in fund and in personal account


Fascinating Move by Walmart (WMT) - Continuing "Pooring of America" Scenario

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I thought Fed cuts fixed all these ills? Hmm....

Walmart Chops Prices in Bid to Lure Shoppers
  • Wal-Mart announced Tuesday that it will chop prices between 10 to 30% this week on groceries, electronics and other home-related products in an effort to keep its cash-strapped consumers excited about shopping.
  • While its rivals, including Target (TGT, Fortune 500), have seen sales decelerate dramatically in recent weeks from a consumer spending slowdown, Wal-Mart (WMT, Fortune 500) has been benefiting from more shoppers trading down to its discount stores.
  • The world's largest retailer recently reported that its December same-store sales rose 2.4%, which was at the high-end of its expectations for the month.
  • However, one retail analyst said the timing of the price cut, coming just ahead of the Super Bowl weekend, is a clever marketing move by Wal-Mart.
  • Wal-Mart spokeswoman Melissa O'Brien told CNNMoney.com that this month's week-long additional price cuts are "the first of more to come." "We will have more of these during the busier shopping periods of the year like Valentine's Day and Easter," O'Brien said.
  • In addition to the extra discounts on "thousands of products," the retailer said it will offer no interest for 18 months on purchases of $250 or more with a Wal-Mart Credit Card.

Very interesting. Very. I continue to eye Walmart (WMT) as a potential inclusion to the fund. While its not a typical holding, if the recession is farther and deeper than currently is consensus (and keep in mind, consensus 2 months ago was there will be no real slowdown), than this is an obvious beneficiary. Unfortunately moves like this, while driving traffic in, do hurt profits. But it is simply fascinating in a macro economic lense...

No position


Consol Energy (CNX) Profit Falls - But Who Cares?

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Consol Energy (CNX) reported a very ho hum quarter; in fact not so great (idled mine being a main factor). Similar to what it did 3 months ago [Oct 25- Consol Energy Reports as Expected]. But it doesn't really matter. I went bullish on coal in mid September when no one liked them [Coal Stocks Quietely in a Bull Market], and as each month passes and more data points come out about the shortages in energy [China has Energy Shortage, South Africa has Energy Shortage] I think coal is becoming more and more of a secular growth story - joining the agriculture names, and global infrastructure names as one of my favorite themes. Deserving a larger weight in the fund holdings. While I did sell off some names today, this is more a condition of a bear market, not specific to these stocks. On the next pull back (if/when it occurs) I plan to make these larger holdings than the basket of stocks I own has been the past 4 months (generally a 5-7% stake).

As energy shortages become more of a crisis the world over, I can see more countries hoarding their own reserves... and coal is turning more into a global marketplace - so those with excess will benefit. As other countries take their supply out of the world marketplace, the US producers, who do have excess, will benefit. And if there is one thing the US has excess of aside from "financial innovation" and hot air out of politicians, it's coal. And countries in crisis will pay up for this, especially with our trashed dollar making it so cheap for them to import. This was my original thesis back in the fall, and it is playing out like clockwork. So I plan to expand the fund position in this sector, as the secular growth story is building. So earnings here or there... whatever... the next few years are going to showcase coal in my belief. Of course in the near term, much like a gold miner, there is always risk associated with mine issues - so you will have opportunities along the way. But you can look at the chart of Consol Energy (CNX) above... and see a stock at a 52 week high... in *THIS* type of market. That tells you all you need to know. In fact it reminds me of the fertilizer stocks about a year ago when people were saying "what's the big fuss? why are these stocks ramping? Overvalued!!"

Consol Energy Profits Falls on Idled Mine
  • Coal producer Consol Energy Inc (CNX) said on Tuesday that despite soaring coal prices, fourth-quarter profit fell sharply, much of it because of idled production at one of its main mines.
  • Net earnings were $6.8 million, or 4 cents per share, compared with $115.3 million, or 62 cents per share, in the same quarter of 2006, the Pittsburgh-based company said. Revenue fell 3.7 percent to $918.6 million.
  • Consol said the Buchanan Mine roof fall that occurred last July, forced the mine to idle production and hurt net income by approximately $31 million.
  • There were additional expenses incurred in managing and monitoring the underground mine atmosphere since the mine was idled, as well as reduced income from lost sales.
  • Consol had expected to resume full production in January at Buchanan near Mavisdale, Virginia. But last week it said it hoped to enter the mine for evaluation and repairs on Jan 27.
  • In October, Consol lowered fourth-quarter and full-year production estimates, citing adverse geological conditions at two other mines as well as the idling of Buchanan.
  • "The idling of the Buchanan Mine for the entire quarter significantly capped fourth quarter earnings," said President and Chief Executive Officer Brett Harvey. "However, now that we have reentered the mine, I expect this event to move quickly to conclusion with the result that financial performance should improve substantially."
  • "Despite the loss of Buchanan for the entire quarter," Harvey added, "coal operations still managed to report a period-to-period increase in average realized prices of 5.1 percent, a modest increase in total costs per ton of 1.6 percent, an increase in operating margins of 20.5 percent and an increase in financial margins of 33.8 percent."
  • He said coal fundamentals remain good. "Global demand for coal is strong and sets a positive tone in both our export markets and the steam market here in the United States." He said steam coal supplies were in close balance with demand, while high quality metallurgical coal was in tight supply.

Wow a lot of bad news - imagine if Apple (AAPL) reported such a quarter? Instead of dropping 20% it would be down 90%. How bad did this hit Consol Energy? Off a massive 1.6%. That tells you all you need to know. Now I do hope the general market takes these coal stocks down so I can remount sold off positions at lower prices. But unlike retailers or financials, this is truly a growth market with fundamentals behind it... so you have to discern between one rally and another, as to "why".

One more thing... 10 Year US Coal Export Deals Possible

  • With overseas demand for U.S. coal so strong, CONSOL Energy (CNX) could this year sign the longest TERM contracts seen in recent years -- seven to 10 years in duration, CEO Bret Harvey said Tuesday.
  • With the strength of global coal demand expected to continue unabated this year, we could sign additional international contracts for steam coal this year with durations of seven to 10 years," Harvey said in a news release describing the company's fourth-quarter performance.

Bingo. Secular growth market.

Long Consol Energy in fund; no personal position (yet)


US Markets Continue to Savage Oil Service Stocks

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Even in the oil services world, the US (Gulf) markets are laggards. We seem to be screwing up every company, even in the best sectors. Smith International (SII) is selling off today on "record earnings" (but missing estimates) and weakness in the US markets contributed to not so great margins while also hurting near term guidance. 2009 should be a good year for this name, but with the market of an attention span of a 4 year old, 2009 might as well be 2019.

This is not a major position at 1.3% of the fund, and I was considering dropping it even further going into earnings, but since I was sitting on a quick loss in this position (bought in low $70s) I didn't want to sell. But once again, a lesson that the market reteaches you over and over. Better to take a loss many times, than wait and hope. Now I have a more meaningful loss as the stock is down 9% today. I'll probably exit this position wholesale if we get a decent bounce back to $60 because the specter of "weak US offshore" is going to hang over many names in this sector. I've tried to focus on more internationally focused names both in drilling and oil services, but the US weakness taints almost everything. So there is no escaping it.

I am going to use this opportunity to cut back on National Oilwell Varco (NOV) which is also a 1.3% position - before its earnings. I'm sure they will have an issue with the US as well. (who doesn't?) It's chart looks like Smith International's did 24 hours ago. So I want to take the sale when I can, better here at $65 than when it was $55 last week.... there really is no safe harbor out there. I have 225 shares, I am going to cut it back to 100 shares (selling 125) and then just keep it tucked away in some dark corner of the portfolio. If it sells off post earnings, well it is not a major part of the portfolio at that point. I still like this sector (oil services) but finding something totally not affiliated with the US is hard to do. Again, it is trecherous to be holding anything into earnings right now, and anything associated with the USA land, air, or sea - is causing pain. Unless your a homebuilder or financial of course since the Fed cuts fix everything. Or so the Kool Aid says.

These things are getting very cheap, Smith International now is trading at less than 15x 2008 estimates, but again - the market doesn't care about value and continues to selloff anything with any strength due to "disappointment". Why not buy "cheap" stocks? Well "cheap" stocks can remain so for many quarters... or years. This is what value investors do - they buy, and sit for however long until the market favors their stocks again. Eventually they are right but it could be 2 months, 2 quarters, 2 years or 5 years. And in between now and whenever "then" is, a lot of opportunity cost is lost. It is not a "right" or "wrong" strategy - good investors of all types of strategy can make money over the long run. But just not my cup of tea (mostly). Trina Solar (TSL) is a great example of a value stock - based on all perceptions of value it's cheap. Within the solar sector it looks even cheaper. Yet it does nothing month after month, but lose money for investors. One day it will probably make a 40% move in 1 week. But from what level? Those who bought in the $50s and $60s would not even break even if it made a 40% move from today's levels. That's the problem with value investing - you need to time your entries well even in that style of investing or you are doomed to lose money. Having a portfolio of 50 Trina Solars just seems like an exercise in frustration. Even having 3-4 of them hurts performance.

We want the money working for us now, in things that will be working in the coming few months - trying to find relative strength. I see a lot of good values in many sectors now - many considered growth sectors in fact. But that does not mean those stocks won't trade in a listless 10-15% narrow band for months or quarters to come. When their technical conditions improve, this will mean buyers (the big time buyers in the market) are once again interested in these names, and that's when I will return in larger scale to these names/sectors. I don't want a portfolio full of listless names, that can drift sideways or downs for quarters on end, waiting for the eventual day that the stocks bounce 30% in a week (that's what people who bought financials, homebuilders, and retailers have been doing the past 6 months) Eventually you will be "right" but off of what level? Usually a far far far lower level than you entered the stock. So you are just paring losses and wasting a lot of time, nothing else. I said the exact same thing for CNH Global (CNH) [Closing Last of CNH Global]- it was cheap before earnings... it got a whole lot cheaper after earnings... and it still is cheap. Who knows how much longer it will remain "cheap"? Maybe 1 more week? 1 month? 1 year? Until the market deems it's going to recognize "value", I don't see a need to sit there waiting for the market to come to it's senses. By the time it does, the stock could be far "cheaper" than it is today, which means by holding it, we lost even more money. Refiners, another group that was "cheap" for months on end... only to become more cheap by the week (losing investors money).

What appears to be happening is the same correction that took 60-80% off many retail, financial, and homebuilder stocks will now happen to most other sectors... because.... "well that's how it is". Sense has no room in the market in the near term and multiples are contracting across the board. At some point this will reverse and people will wake up and say "wow these things are darn cheap".... but until then these are just buoys in a rough sea, directionless and without any group of buyers willing to come to the rescue.

Smith International earnings
  • Smith International Inc (SII) on Tuesday reported a 17 percent increase in its fourth-quarter profit, but the results fell short of Wall Street expectations sending the oilfield services company's shares down 11 percent.
  • Flooding in Mexico and a drop in the number of rigs working in shallow waters in the U.S. Gulf of Mexico are among the factors that weighed on the Houston company's profit margins.
  • The company said its fourth-quarter net income rose to $167.0 million, or 83 cents per share, from $143.0 million, or 71 cents per share in the year-ago quarter. Revenue rose to $2.3 billion from $2.0 billion.
  • Analysts surveyed on average had expected a profit of 88 cents per share, according to Reuters Estimates.
  • Chief Executive Officer Doug Rock said in a statement that $3.70 to $3.80 per share would be a "reasonable" expectation for earnings in 2008. For 2008, Wall Street had expected a 2008 profit of $4.00 a share, according to Reuters estimates.

Long Smith International, Trina Solar, and National Oilwell Varco in fund; no personal position


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