Tuesday, February 19, 2008

Closing Thoughts for the Day

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Some closing thoughts for the day
  1. All rallies must be sold; we're in a bear market - until we begin making new highs (over previous highs), and some of the high beta names (Apple, Google) start participating it is all white noise to me. Technicals say broken stock market. Gap ups like this morning are what breaks bulls spirits over time
  2. Tomorrow everyone will focus on the bogus CPI number. The market will react, one way or the other - futures will make a huge U-turn at 8:30 AM and CNBC will go into overdrive analyzing a flawed figure. We'll laugh. We'll sing. We'll cry. Who knows. Whatever the number is; it is rubbish. Imported goods costs are up 13% year over year and you know how much of our product in stores is "made in the USA".
  3. Earnings #1: Crocs (CROX) - haven't looked deeply in the numbers but the stock is putrid after hours, down 13%. Again, not worth the risk - if you like gambling on earnings I advise you to find a local Indian casino. The stock market is supposed to be about better than 50/50 odds. Sure you miss out on a few like First Solar (FSLR) but this is not the market to take those risks. Secure your capital; making up a substantial loss takes a lot of work.
  4. Earnings #2: Hewlett Packard (HPQ) - looks solid from first glance but weakness in US, offset by foreign strength. Sound familiar? Problem is Cisco (CSCO) and the like are telling us the same thing....and the stocks sell off relentlessly. If the economy is going to rebound in 2nd half 2008 you want to be buying these stocks here hand over fist. I am not in that camp.
  5. Earnings #3: In yet another case of "where is the SEC?" - let's watch if Huron Consulting (HURN) misses tomorrow morning. Out of the the blue the stock erases 12% of value on 5x average volume... the day before earnings. A coincidence I am sure. Luckily I reduced this to a minor position but at this point anything short of a miss would shock me. But the SEC won't bother to investigate today's trades... but this is how the game is tilted to big boys and why you need to respect price action. The small investor gets left holding the bag far too much as "something is leaked" to those with the access... despite all the "rules" out there. We'll see tomorrow morning but this sort of action happens all the time and it rarely turns out well for the small guy.
  6. Earnings #4: Suntech Power (STP) reports tomorrow - I've taken this name down to below 1% as well. I know this name very well since I've been invested or trading it at least for more than a year. I have some concerns and I saw a Seeking Alpha article today which sort of fall in line with my guesses for why the stock is so weak.... but again, a stock breaking its 200 day moving average like this ahead of earnings usually (not always) signals the big boys are handing shares to small retail investors and heading to higher ground. I could (as always) be wrong. I've modeled this earnings report 90 different ways and I can get a worst case of $0.31 and best case of $0.47 (estimates at $0.36 but the range is much wider by the 16 analysts). The company guided for 50 to 100 basis point increase in gross margins for this quarter which would be 21.9-22.4% gross margin. If 22% is achieved and we don't have any major surprises in their operating costs or currency issues (like Yingli Green Energy was hit with), I see a beat. And perhaps a solid one. But there are multiple concerns go forward (aside from the Chinese weather issue which is more of a timing issue, nothing more) -> China is overrun with smaller PV panel makers. They don't seem to care one iota about profitability. Why do I say that? Because polysilicon (which is the building block of all solar panels) is costing $400+ on the spot market. Which means, any buys at those price point leads to margins being destroyed. But the little guys don't care apparently since they (I assume) think "build the revenue and profitability will come later". I think that is wrong (it is a commodity business) and most of these small guys will be out of business in 2-4 years (if not sooner). Or maybe the Chinese government will subsidize them - and they can surprise. But even the Taiwanese PV makers are saying it's just stupid to buy polysilicon at these prices on the spot market. But how does that affect Suntech Power (STP) and other larger public PV makers? Well it hurts all their financials - especially in the near term future. To support growth, (a) some portion of their polysilicon is supplied at fixed lower cost rates, and (b) some needs to be bought on the spot market (or near spot market pricing) - and STP is by far the biggest fish. So if they are worried about satisfying customers (who they want to make happy for the long term), and they are short on polysilicon through long term contracts they need to go on the open market. And buy at these runaway inflated prices that the small fry are causing. So this might cause some issues for future guidance on margins. And why I think the stock might be breaking down. Again, it is a theory but the small guy is always last to know - so the one advantage the small guy has is observing the price action - and the price action would imply something is amiss. Since I doubt it is something in the current quarter, I think it might be something in a future quarter. I can be 100% wrong. But we'll find out tomorrow afternoon. From the Seeking Alpha conjecture:

Hearing Street chatter Suntech guidance tomorrow morning will be disappointing on the GM side as the co has been struggling to get poly supply deals done, forcing it to buy from MEMC & Hemlock on the spot mkt.

'NCN Solar' comments:
Just a little comment on that, they will likely buy less than 10% of supply on spot but they likely won't go for more supply considering spot rates are over $400. About 50% is long term 40% is sort of in between, sort of deals they make, meaning not as good as long term, but much below spot.

Regardless, can't expect a great STP report, tho long term, you can't overly punish them for near term poly price issues, meaning there will be time to buy this one back its a supply issue, not demand, and I'm looking to buy FSLR tomorrow, if the STP report is weak in fact, and the group trades lower.

*****

Again, we are all speculating on that last piece. But stock weakness "usually" telegraphs something ahead of time. I will be very interested to see how it works out because I did not hear such language from Yingli Green Energy (YGE) but Suntech Power (STP) usually does a good job of describing the landscape for solar in their commentaries. And if it becomes an issue for them, it will become an issue for the whole food chain (save First Solar). This is not a 3 year issue because just like China overproduces everything, at some point they will overproduce polysilicon - but it a question of when. Once those prices do sharply fall, the margins for those PV makers who are still around, with scale... should explode. But investing in solar stocks right now is a high risk/high reward proposal - it was much easier in early 2007... and I theorize will be much easier around late 2009. Between now and then I expect a huge amount of volatility.

Long Suntech Power, Huron Consulting in fund; no personal positions


Bookkeeping: Cutting Back on all 3 Fertilizer Names

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Love the fertilizer sector. Hate the market. So I am going to cut back and hope to buy back at lower prices. As mentioned, the market is near the top of its recent channel and for some reason we've seen a quick intraday reversal. We've seen some tremendous moves in my favorite names so I am going to follow the playbook and continue to raise cash. I won't cut these names any further because Potash (POT) and CF Industries (CF) are now down to 2% stakes, and Mosaic (MOS) is now down below 4%.

Sold 100 shares of Mosaic (MOS) in $107s-$108s



Sold 100 shares of CF Industries (CF) in $123s-$125s



Sold 30 shares of Potash (POT) near $153



I'm not trying to nail the top, but simply layer in and out of core positions and lock in some nice trading gains. If the market selloffs, I plan to get back into all these positions in large scale. In a bull market, these would be wonderful charts to simply sit back and let the market push these names upward and onward. In this market, I just plan to sell to people who joined the party late, and then buy the shares back from them when they get disgusted they bought high... ;) (that's the plan anyhow)

Long all names mentioned in fund; long Mosaic in personal account

Update on "Reader Pledges' 6 Weeks In

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Thanks for everyone who has contacted me either by posting in the comments section on the "Readers Pledges Towards Raising $15M" post or contacted me directly via email. As I stated, I was not even going to begin the process of "fund raising" until a longer track record (at least 1 year) has been established but since readers were already reaching out to me, I decided no time like the present. Below is where things stand after just 6 weeks. Ironically my biggest readership concentration is NYC but only 1 investor pledged - I can only assume all those money managers are reading my ideas to use for their own hedge funds ;)

I broke the investment pledges into 2 pieces: (a) firm and (b) good probability. If both pieces are accurate that is already a potential $750K pledged towards the mutual fund once launched, which is a fantastic start. Thanks again readers. Hopefully once a full year track record is built, we'll get some more converts coming in.

And let me add, if you change your mind and want to rescind an investment pledge and/or change the amount, please let me know since I simply want to be able to see as the months go by, where I truly stand in this process. Thanks.

As always, you can see how I am doing by verified independent 3rd party metric here: 'Rising Tide Growth' performance

Group A: Firm commitments

Investment Who Where
$75,000 Self MI
$2,500 Michael D Oceanside, CA
$7,500 Oth Parts Unknown
$10,000 Dean D San Jose, CA
$2,500 Oza P MA
$20,000 Oren L Chicago
$10,000 Rob T NYC
$5,000 Ryan Seattle, WA
$7,500 Ted Sunnyvale, CA
$2,500 Brian P Cerritos, CA
$22,500 David B Middlesex NJ
$50,000 Ian San Antonio, TX
$40,000 LiquidWindows Deep in the heart of Texas
$5,000 Jonson LA, CA
$5,000 Jimidean Parts Unknown
$3,000 Brooks R Baton Rouge, LA
$5,000 Zlatanscores Parts Unknown
$3,000 Ben S Portland, OR
$5,000 Sheng S Omaha, NE
$10,000 msuberri NJ
$5,000 David W
Houston, TX
$10,000 Ryan T NJ
$3,000 NandaK Nashua, NH
$2,500 WaltF Parts Unknown (via email)
$2,500 Joe Scranton, PA (via email)
$2,500 Todd Parts Unknown (via email)



$316,500 TOTAL


Group B: "Good Probability" commitments

Investment Who Where
$250,000 David R South Carolina (via email)
$100,000 A.F. Los Altos, CA (via email)
$100,000 Satya Parts Unknown (via email)



$450,000 TOTAL

Failed Auction Rate Securities Seem to be Hurting Blackrock (BLK)

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Blackrock (BLK) is down nearly 7% today, and approaching its 200 day moving average ($180), so I am beginning to rebuild this position (again, slowly). This normally slow moving, quiet financial firm is down about 20% in 2 weeks. I am going to increase this position from 0.6% to 1.2% of the fund by adding here near $182. Since it could easily break this very important support level I don't want to go overboard, but this is one of the few financial based firms in America I trust, and it has been unscathed by the credit issues thus far, but as things degrade in theory, no one will be completely spared.



I've called the credit contagion a big "web"; we simply don't know all the places the damage will show up. As discussed this weekend, we saw auction rate securities failing to fund last week, and this appears to be hurting closed end funds, of which Blackrock is a major player in. As each week passes we seem to learn of a new credit derivative or acronym that seems to be blowing up. Quite amazing all these things function in the background for years on end and we never notice them, but in a credit/finance based society, so much is based on the flow of capital behind the scenes.
  • Some top U.S. asset managers that offer closed-end funds are warning their investors of lower returns as the credit crisis has severely disrupted trading this week in an instrument they rely on to borrow and boost fund returns.
  • Closed-end funds, unlike traditional open-end mutual funds, issue a fixed number of units and trade on exchanges. They borrow by offering preferred securities with short-term maturities of 7 to 28 days. New interest rates are set through an auction process.
  • This week, the auctions failed as the institutional and wealthy individual investors that usually snap them up have stayed away due to growing concerns about the credit markets. Banks that normally step in to buy unsold securities also backed out because they are already saddled with vast amounts of various securities whose values have tumbled with the credit crisis.
  • Nuveen, BlackRock Inc (BLK) and Eaton Vance Corp (EV) are among the leading players in the closed-end funds market.
  • Nuveen said the failed auctions affected at least 25 different fund sponsors. Its funds could see higher borrowing costs, hurting returns, and if the disruptions persisted, Nuveen may have to look for "potentially less favorable" avenues for borrowing, it said.
How long this remains an issue is an open question; again it's a crisis of confidence along with destruction of capital. All these write-offs of billions seems to be shrugged off by equity markets but it's real money even if the numbers are starting to numb people... after all what's another $5 billion among friends. But each billion has leverage against it, so it caused a cascading effect. Great on the way up; but destructive on the way down. Quite the soap opera. We'll see how Blackrock reacts; if things deteriorate we could see downside risk to $150s.

EDIT @ 12:42 PM: From the offices of "Better to be Lucky than Good" we have Blackrock responding to market rumors (have you read what a quality CEO Mr Fink is?) - it is quite nasty however, how these hedge funds can start rumors and cause a downfall in share price in anything related to financials ;) Stock quickly rebounds up to $190.

Blackrock said it has no material exposure or losses related to subprime assets or collateralized debt obligations, the company said in a statement Tuesday, responding to rumors and speculation of further losses from CDOs and subprime exposure. It noted that although it is company policy not to comment on market rumors, it decided to make an exception due to "the unusual nature of certain rumors circulating in the market place and inquiries the company has received." BlackRock also denied any knowledge of a Department of Justice investigation of the company.

Long Blackrock in fund; no personal position

Powershares DB Agriculture Fund (DBA) Hits $40 for First Time - Soybeans Now a Shortage

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I cannot keep up with all the shortages... it appears soybeans are now becoming an issue, as has corn, as has wheat, as has (insert world crop here), as the massive storm in China damaged 40% of the rapeseed (?) crop. It appears soybean is a substitute. As I wrote last week, I've been buying in 100 share lots on each dip in Powershares DB Agriculture Fund (DBA) and its now a 6% position. I do not know when this ETF pulls back; it is well overdue - but with the constant issues afflicting all the underlying commodities [As Asia Food Prices Bite, Analysts Warn of Worse to Come], it is simply difficult to find a rational reason to take profits here, even as the ETF hits $40 for the first time. So I'm just going to sit tight and google "wheat futures", "corn futures", "soybean futures" on a daily basis and watching this crisis unfurl in slow motion as the mainstream media totally ignores it....
  • Soybean futures rose to a record Friday, surpassing $14 a bushel for the first time amid expectations of rising demand in China for the grain used to feed livestock and make biofuel.
  • Soybean prices have surged 9.5 percent so far this year, buoyed by dwindling stockpiles and growing demand in China, the world's largest soybean buyer. On Thursday, China's agriculture minister said that bad winter storms had severely damaged 40 percent of the country's rapeseed crop — leading investors to bet the country will boost buying of soybeans to make up the shortfall.
  • Soybeans had a phenomenal run last year and are poised for another strong performance in 2008. U.S. exporters have already sold more than three-quarters of the soybeans the Agriculture Department predicts for the whole marketing year, which ends in June. Although current supplies appear ample, analysts say the market is headed into a downward trend and that farmers need to plant more soybeans than they did last year — when an ethanol boom led farmers to favor planting corn acres over soybeans.
Remember my thesis - as prices pull demand from 1 crop.... it just creates a shortage in the next. We need both acreage and yields worldwide to increase at much more dramatic rates. And any weather related issues (as we just have had in China) will cause even more stress.

Per Forbes
  • In 2007, U.S. farmers planted the smallest acreage of soybean fields in 12 years. Even with this year's price gain , there still isn't sufficient market incentive to get American farmers to plant soybeans.
  • A farmer's more tempting alternative is corn, which is cheap to plant and can be used to feed a family, farm animal or be converted into the trendy and tax-friendly alternative-energy, ethanol. Soybeans are expensive to cultivate relative to its yield, hence farmers shy from planting it.
  • Richard Feltes, a senior vice president at MF Global Research told Forbes.com, "The bean market is very aware of the need to increase soybean acreage in 2008. The price relationship needs to increase to induce farmers to plant beans instead of corn."
It all comes back to that massive boondoggle, our ethanol incentives. Corn is simply a "sure thing" thanks to the government incentives. At some price point soybeans will be worth the risk. We saw this play out in wheat. But can the world handle these price points? What a mess.

Anyhow, here's a chart you can take home to mom...



Long Powershares DB Agriculture Fund in fund and personal account

So Much for Friday's Goldman Downgrade on Coal

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These stocks are simply on an epic run due to worldwide shortage issues. Again, thank you China. So much for the Goldman downgrade - the whole sector is 5-8% up, regaining all of Friday's losses immediately.

As I wrote Friday [Beginning Small Stake in Arch Coal on Goldman Downgrade]

Myself, while I can agree with this call in the very near term (the stocks are very overextended) I disagree 100% long term - and although I've lightened up a bit on this large run in the sector I want a lot more exposure for the long run.

I have been lightening up on some of the fastest runners, and I sold a bit more Mechel (MTL) today near $118, as the stock is making an incredible run, but we appear to be heading to quite a perfect storm in commodities of all types. Stagflation in the US is looking more "in the bag" by the day. (I will laugh if tomorrow's CPI number comes in at something like 3.4%!) Not only is my World of Shortages theory playing out in every corner of the globe, but Fed induced liquidity will flood this world with useless dollars and they need to go somewhere - I believe the world's hedge fund computers are going to this area as well - notice crude making a run again to $100. Thank you Ben for Bubble 3.0.

Much like Bubble 2.0 (housing) this is going to cause serious pain - Bubble 2.0 hurt the US people more directly and financials institutions worldwide. Bubble 3.0 - if indeed focused on worldwide commodities is going to cause havoc globally, especially in food. But at least we bailed out NYC bankers and speculators. Always a silver lining.

p.s. Adding back to some of that Ultrashort Financial (SKF) I cut back late Friday. We are now at the top of our near term trading range, so it seems most likely we now revert down. If CPI even reflect 1/3rd of what is really going on in the real world we will start to have serious inflation fears begin to percolate in the mainstream media...

Long Mechel, Arch Coal, Ultrashort Financial in fund; long Ultrashort Financial in personal account


95 Best Performing Stocks the Past Quarter

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I've compiled a list of the best performing stocks of the past quarter below - it has been a shaky 90 days for the markets. After the January swoon, stocks have come back a bit but are still down (using S&P 500 as a proxy) about 6% in this measuring period. Many individual names are down far more.

I've expanded my criteria a bit to get some smaller companies in, and instead of setting the cuttoff at $2 Billion market cap I usually use, I've gone down to $1.5 Billion. I wanted to see every company of that size which returned at least 15%. There are 95 names. I am proud to say we have have owned the #1 stock in that time frame as our top long idea for the vast majority of the past 4 months, Mosaic (MOS). It was our top winner even when we looked back in mid December [Top Fund Winners & Losers] and continues to contribute greatly. Consol Energy (CNX) has been our largest coal holding for most of the past 5 months as well. You can also see a lot of coal and agriculture names throughout (FDG, FCL & ANR we don't discuss but are 3 coal names); 2 bull markets I've been pushing constantly since early in the blog. So while there has been a lot of volatility it has been rewarding to see, when you take a step back and give a longer time frame, our top ideas working very well.

Criteria:
  1. Market cap $1.5 B+
  2. Stock price return 15%+
  3. Average Trading Volume 100K+
  4. Stock price $10+
Green we own; blue we've discussed - please note ACI, MFA, KGC, and TMA were bought during the quarter so we did not capture all of the gains noted below

Symbol Company Name % Price Last Qtr.
MOS Mosaic Co 62.4
WCG WellCare Health Plans Inc 58.2
BMRN Biomarin Pharmaceutical Inc 49.8
GLYT Genlyte Group Inc 48.3
CNX CONSOL Energy Inc 47.4
CMP Compass Minerals International Inc 47.3
CLF Cleveland Cliffs Ord Shs 47.2
FDG FORDING INC 46.8
RRC Range Resources Corp 45.3
CREE Cree Inc 44.8
NX Quanex Corp 43.9
MTL Mechel ADR Rep 3 Ord Shs 43.7
CPHD Cepheid 40.7
ACI Arch Coal Ord Shs 40.5
SID Sid Nacional ADR Repstg One Ord Shs 40.4
ANR Alpha Natural Resources Inc 40.3
MEE Massey Energy Co 39.5
CF CF Industries Holdings Inc 39.2
ARXT Adams Respiratory Therapeutics Inc 39.0
R Ryder System Inc 35.4
WLT Walter Industry Ord Shs 33.9
ATVI Activision Inc 33.8
HES Hess Corp 33.4
MOGN MGI Pharma Inc 32.7
KOF Coca-Cola Femsa ADR 32.5
COG Cabot Oil & Gas Corp 30.8
POT Potash 30.8
TRA Terra Industries Ord Shs 30.7
FMX Fomento Economico Mexicano ADR 30.3
RESP Respironics Inc 30.0
NITE Knight Capital Group Inc 29.5
AYI Acuity Brands Ord Shs 29.5
AMKR Amkor Technology Inc 29.4
FCL Foundation Coal Holdings Inc 29.3
BPOP Popular Ord Shs 29.1
MFA MFA Mtg Invts Ord Shs 27.8
KGC KINROSS GOLD CORP 27.0
CLWR Clearwire Corp 26.8
CHU China Unicom Depository Receipt 26.5
PRXL Parexel International Corporation 26.4
GOLD Randgold Resources ADR 25.9
OI Owens Illinois Ord Shs 25.7
UAPH UAP Hldg Corp 25.3
TT Trane Ord Shs 24.9
CN China Netcom Depository Receipt 24.9
SHCAY Sharp Unsponsored ADR 24.3
CVI CVR Energy Inc 23.8
JOE St. Joe Co 23.4
HP Helmerich & Payne Inc 23.1
AEM Agnico-Eagle Mines Ltd 23.0
JOYG Joy Global Inc 22.5
MON Monsanto Co 22.4
FNF Fidelity National Financial Inc 21.9
NLY Annaly Mortgage Ord Shs 21.9
BVN Buenaventura ADR 21.2
KWK Quicksilver Resources Inc 21.1
WTI W&T Offshore Inc 20.9
CZZ Cosan Ltd 20.5
ACS Affiliated Computer Services Inc 20.5
AUY Yamana Gold Inc 20.4
CHA China Telecom ADR 20.1
CENX Century Aluminum Co 20.0
BUCY Bucyrus International Inc 20.0
CXO Concho Resources Inc 19.7
VIP VympelKom OAO 19.7
MLHR Herman Miller Inc 19.6
LSTR Landstar System Inc 19.4
CEF Central Fund of Canada Ltd 18.9
TNH Terra Nitrogen Co LP 18.9
OMG OM Group Inc 18.8
GNA Gerdau AmeriStl Ord Shs 18.5
TMA Thornburg Mtg Ord Shs 18.2
WMS WMS Industries Inc 18.2
NUE Nucor Corp 18.2
DE Deere & Co 17.2
AGU AGRIUM INC 17.1
RPM RPM International Inc 16.7
CPA Copa Holdings SA 16.6
SWN Southwestern Energy Co 16.5
ADM Archer-Daniels-Midland Co 16.5
PRGO Perrigo Co 16.2
WHR Whirlpool Corp 16.2
X United States Steel Corp 16.2
CHTT Chattem Inc 16.1
PDS Precision Drilling Trust 16.1
SPN Superior Energy Services Inc 16.1
KMP Kinder Morgan Energy Partners LP 16.1
ZMH Zimmer Holdings Inc 16.0
ABX BARRICK GOLD CORPORATION 16.0
CNW Con-Way Inc 15.8
ATW Atwood Oceanics Inc 15.8
FRO Frontline Ord Shs 15.7
SNV Synovus Ord Shs 15.6
MDC MDC Holdings Inc 15.5
CHRW CH Robinson Worldwide Inc 15.5

CVRD (RIO) Secures 65% Increase in Iron Ore Pricing

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On one hand this news is not surprising, on the other when you truly think about the implicit price inflation it is astounding. This has been a long awaited negotiation and it was just a matter of how high the increase would be... 65% year over year for iron. Amazing, and as we see in the stock price action of Cleveland Cliffs (CLF) of late ... much anticipated. All the 3 major minors are up significantly on the CVRD (RIO) news; BHP Billiton (BHP) & Rio Tinto (RTP) up in sympathy. Once precedent is set in the iron ore market, the others follow suit. Remember, as we wrote about in the fall, when shipping rates were higher than they are now... there were times late last year when it cost more to actually SHIP the iron ore from Brazil than the actual ore itself... which is astounding considering how expensive iron ore was getting.

World of Shortages anyone?
  • Japanese and South Korean steel mills from Brazilian miner Vale, the industry's first term deal this year, but agreed to a 65 percent jump in iron ore pricesAustralian miners may hold out for more.
  • Shares including Japan's Nippon Steel and China's Baosteel rallied on relief that the increase wasn't greater. The term price of iron ore, the main raw material used to make steel, has risen fivefold since 2001.
  • Term ore prices had been widely expected to rise by at least 50 percent after spot prices soared to record highs in 2007 and Chinese demand showed no signs of abating.
  • BHP Billiton (BHP) and Rio Tinto (RTP) would likely hold out for higher prices that would better reflect the lower cost of shipping iron ore from Australia and sizzling spot prices, industry sources and analysts said.
  • The 65-percent hike with Vale only related to iron ore and did not include shipping costs. BHP and Rio might seek to set a price including freight, analysts said.
  • The rise could squeeze margins for the steel industry, which is already facing high costs for coking coal and shipping, plus increased competition from Chinese plants.
No positions

Random Interesting Stories This Morning

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Some interesting stuff on Bloomberg this morning....

I like to talk about how computers really run the Street nowadays... a few interesting facts I did not know
  • Hedge fund assets have swelled to $1.87 trillion, almost four times more than in 2000, according to Chicago-based Hedge Fund Research Inc.
  • Referring to the slowing economy, he said ``the effect is going to be very muted by the fact that a large part of the participants right now don't really care whether the market is going up or down.''
  • Citadel Investment Group LLC -- Kenneth Griffin's Chicago- based hedge fund named to suggest a stronghold in volatile markets -- uses mathematical models and advanced computer systems to make investments that translate into about 5 percent of U.S. equity trading. (Citadel is one of the most amazing stories ever; a story about them here - but I did not realize they literally own 5% of all trades, wow)
  • D.E. Shaw & Co., which oversees $35 billion, relies on automated, 24-hour-a-day strategies that exploit shifts in asset prices around the world. The New York- based fund accounts for between 1 percent and 2 percent of trading at the NYSE.
No surprise with the Chinese storms but inflation is now highest in China in 11 years. Keep in mind this is WITH price controls rampant in this society; and also keep in mind food is a huge proportion of expenses for the vast majority in this country. We hear about the rising middle class in China constantly, but the great majority are still rural poor.
  • China's inflation accelerated to the quickest pace in more than 11 years after the worst snowstorms in half a century disrupted food supplies.
  • Consumer prices rose 7.1 percent in January from a year earlier, the statistics bureau said today, after gaining 6.5 percent in December. That was more than the 7 percent median estimate of 23 economists surveyed by Bloomberg News.
  • Food prices soared 18 percent after blizzards paralyzed transport systems and destroyed crops. The government faces the challenge of curbing inflation without derailing the expansion of the world's fastest-growing major economy.
  • ``Inflation is likely to have further legs to run even after the snowstorm effects subside because of fast growth in money supply,'' said Liang Hong, senior economist at Goldman Sachs Group Inc. in Hong Kong. February's rate ``might even get close to double-digit levels.''
  • Pork climbed 59 percent, edible oil rose 37 percent and vegetables jumped 14 percent. Inflation has soared since last year on food and fuel costs and a surging money supply poses the risk of broader price gains.
  • Soaring prices have the potential to lead to social instability, as illustrated by the Tiananmen Square protests and crackdown of 1989. The World Bank estimates 300 million Chinese people live in poverty.
  • ``Periods of significant social instability in China have always been prefaced by sustained food inflation,'' said Glenn Maguire, Hong Kong-based chief Asia economist at Societe Generale SA. ``Food inflation and its consequences are most acute in low-income rural areas and the inland mega-cities.''
  • There's pressure for prices to keep rising. Producer prices, the cost of goods as they leave the factory, jumped 6.1 percent in January, the biggest gain in more than three years, on oil and raw materials.
  • The trade surplus rose more than forecast in January and money supply grew at the quickest pace in 20 months.
China Central Bank is thinking of new innovations to combat inflation. What a problem to have - way too much money is coming into the country :)
  • China's central bank said it will increase innovation in monetary-policy tools after a report showed that inflation surged to an 11-year high. China's economy faces ``prominent'' problems such as imbalanced international payments and excess liquidity, the People's Bank of China said.
  • China will explore more channels for investing the world's biggest foreign-currency reserves, aiming for ``higher returns,'' the report said.
  • China will further develop the debt market, especially corporate bonds, according to the statement. It will encourage securities backed by mortgage loans (uh oh!) and by projects and explore the sale of municipal bonds to fund public works.
Bank of France Says Fed Overreacted to Market Declines. Oh, *snap* central bank on central bank sniping? Who says there is no excitement & drama in economics?
  • The Bank of France said the U.S. Federal Reserve may have cut interest rates too much and too quickly in response to financial-market declines. An unsigned article in the Paris-based bank's monthly bulletin, published today, said new financial products have amplified asset price swings.
  • The unusual criticism by one central bank of another may reflect the European Central Bank's reluctance to follow its U.S. and U.K. counterparts in cutting rates to cushion against an economic slowdown.
Australia has been raising rates to fight inflation, and it considered even stronger measures as inflation becomes very worrisome.
  • Reserve Bank of Australia board members considered raising the benchmark interest rate by 50 basis points for the first time in eight years this month to cool the fastest inflation in almost two decades.
  • February's increase was the bank's 11th quarter point move since May 2002, which has lifted the rate from 4.25 percent. ``The Reserve Bank is now realizing that the slow and steady tightening path it has followed for the past six years has not been sufficient to contain inflationary pressures,'' said Tony Pearson, head of Australian economics at Australia & New Zealand Banking Group in Melbourne. ``The message is clear -- more rate rises are coming.''

Monday, February 18, 2008

UK's Northern Rock Nationalized

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I am always fascinated to see the difference in media coverage between the US and UK newspapers - in the US, I read ho hum, the bank got nationalized, a few people will sue, and foreign markets are up on this good news. In the UK I read... outrage. :) I simply wonder if things truly spin out of control and this credit contagion cannot be contained, if we have a similar situation in the US. In theory the "malaise" could be curbed if the crisis in confidence is solved, but without balance sheet transparency which the banks refuse to bow to, I see things continuing to devolve. But anyhow, financials will surely be up on this great news that governments are being forced to take over assets ;) (just like great news that bond insurers are being split in two, because if you cut poison from the good piece, the poison disappears into thin air - like magic) The government says this is 'temporary' but refuses to say how long temporary means - the party line is until credit conditions improve. That seems to not have much truth to it... (politicians stretching truth? unheard of!)
  • The cost of the Northern Rock crisis has reached the equivalent of £3,500 (about $7000 USD per person) for every taxpayer as experts warned that the nationalisation rescue of the bank was bound to fail. Taxpayers' exposure to the beleaguered bank has doubled since the beginning of the year and now stands at about £110 billion (about $220 B USD)
  • The newly-installed chairman has been forced to admit that the bank may remain in public hands for "years" - undermining claims by Gordon Brown that the nationalisation was only temporary.
  • Plans are being drawn up to lay off thousands of bank workers, reduce the savings rates of a million customers and sell branches in an attempt to persuade the European Union to sanction the biggest nationalisation in Britain's history.
  • As the full scale of taxpayer liabilities became clear it emerged that more than 800,000 people with Northern Rock mortgages are now effectively in debt to the Government. There were growing concerns over the Government's ability to run the bank competitively, with senior City figures claiming that the business would end up being killed off. (governments run everything efficiently, no?)
  • Northern Rock's 180,000 shareholders began preparing legal action against the Government amid fears that they will be left with virtually nothing under the nationalisation.
  • Fears grew that other banks may be in trouble after the Treasury unveiled plans to allow the Government to take any financial institution into public ownership over the next year in a move described as "draconian".
  • Ministers came under pressure to release the advice they received from Goldman Sachs over the future of Northern Rock after it was alleged that critical decisions were delayed in September as Mr Brown dithered over whether to call an election. (ah, our friends are everywhere aren't they? Hands in everything, the world over)
  • Bank nationalisations in other countries have led to the banks being slowly wound up and closed - which can take decades. British experts believe the same could happen in the case of Northern Rock.
  • Peter Spencer, the economic adviser to the Ernst & Young Item Club, said: "I think the Government is still in denial and will have to come to its senses. It cannot resurrect this business. It's commercial folly. "The entire business model is a busted flush. I think any private buyer would have found it extremely difficult to have run it, and I think it will be almost impossible for the Government to float Northern Rock as a going concern again. The more I look at this, the more I come to the view that sadly Northern Rock really cannot be resurrected and has to be run down.
  • "The Government must realise the inevitability of a run-down. They are playing for time and they will run it down and it's a shame because the costs of keeping it going are going to be met by the taxpayer."
  • Ron Sandler, the bank's new chairman, insisted that his plan was to restructure Northern Rock then return it to the private sector - either through a stock market flotation or a takeover bid.
  • As Northern Rock's business is now entirely underwritten by the Government, European regulators are unlikely to allow it to offer market-leading savings and mortgage rates - as these would breach competition rules barring state aid. So the bank is likely to cut savings rates and increase borrowing rates, which will deter customers and trigger the company's slow demise.
  • "You will never recover your reputation for competence. You are politically a dead man walking and if the Prime Minister could actually make a decision he would move you." (touche!)

But other than that, it sounds like a wonderful situation and hopefully US banks rally off of such great news ;)

As I've been saying almost nonstop since day 1 of this blog, we are in unprecedented times - at least in the modern era. I only wonder what happens when Fed funds are 2% and credit costs continue to stay high what the "next" step will be.... the drama is killing me.

Short government's ability to run just about anything efficiently


Earnings on Tap This Week

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Just a few more weeks of the earnings storm to go...

Names of interest

Tuesday
Crocs (CROX) - this former fund holding was sold out as a risk aversion tactic. I actually like the valuation here, which is why I held on and was adding to the name as the stock fell; it would be especially interesting if last month's inventory buildup was indeed transitory in nature. Like most beaten up stocks this has the potential to go up 25% in a heartbeat as it is a heavily shorted name, and an "earnings beat" can move this stock quickly.

Hewlett Packard (HPQ) - this quality tech stock has been beaten down with the rest in the selloff. We can look to see if there is any view on world growth and potential slowdowns. This has seemed to weigh on all tech names. A good number might help inspire related names.

MedcoHealth Solutions (MHS) - formerly held name in the fund as a safety hedge. Will be interesting to see if they have any commentary on Walmart's proposed move to infringe on their space.

RTI International Metals (RTI) - Industrial metals name with some focus on titanium; an area I was involved with very early in fund history. I still see some potential for profits in this space, but these stocks seem to ebb and flow with the US economy.

Walmart (WMT) vs Whole Foods (WFMI) - Walmart is seeing benefits from its grocery division, but at whose expense? Will economic realities strap people's will to eat more healthy?

Wednesday
Agnico-Eagle Mines (AEM) - gold miner

Garmin (GRMN) - I held this GPS name briefly but I think the main ship has sailed; commodity hardware markets only have limited shelf life before fears of future profit erosion begin to weigh on a stock. Doesn't mean it cannot have a few more good quarters in it, but as a pure growth stock it was time to begin to be wary as of Dec 25th midnight 2007. I only am watching because some might still consider this a semi-bellweather for tech stocks.

Huron Consulting Group (HURN) - this is one of my current fund holdings which has a smaller arm that deals with 'reorganizations' (a nice term for bankruptcies); this is more of a 2009 trend than 2008 so it might take time for it to hit it's stride. The chart has recently denegrated so I've cut back exposure (rules are rules), but I still like the concept for 2009. There might be some concern that the rest of their domestic business (all forms of consulting) might be at risk however.

Oceaneering International (OII) - another in the group of oil service names I like, but the market has hammered relentlessly. Some uptick in the past 2 weeks, but the stock now approaches resistance in its chart (50 day moving average). Once this group shows technical strength I stand at the ready to move back in.

Suntech Power (STP) - my favorite Chinese solar stock from a stability and long term perspective. However, the stock performance of late has been troubling as it has shown little relative strength. Since I follow this name so closely, I will be very interested to see what they have to say, and if the chart is foreshadowing some issue. Further, the CEO is among the best so I'll be listening to future guidance (for the entire industry) closely.

The TJX Companies (TJX) - downscale retailer; if anyone is going to flourish in a recessionary economy, it will be a company like this.

Transocean (RIG) - deep sea oil driller; I don't own this specific name but the pattern has been set - weakness in US and shallow water; strength in deep sea.

Thursday
Barrick Gold (ABX) - the big fish of gold miners; Goldcorp (GG) - and another; Kinross Gold (KGC) - and another, except I own this one; Newmont Mining (NEM) - and another

Blue Coat Systems (BCSI) - a very big, early winner for the fund - but we've returned all gains (and then some) in this name. After seeing this report I'll probably decided whether to exit both this position and Riverbed Technology (RVBD). The "overhang" over both stocks is not something that can be fixed easily - simply fears of future enterprise spending slowdowns. There is no "solution" to that perception other than a large uptick in the US economy. So if these continued good reports by these companies don't do the trick; I'll exit for now and revisit the names at a later date. Much like Crocs this is a name that could be +/- 20% immediately after earnings; so I've cut exposure going into this week.

Chesapeake Energy Corporation (CHK) - one of the natural gas leaders; the stock has exploded higher in the past week. Will be curious what they attribute strength in ng to (switch from more expensive coal?)

Cleveland-Cliffs (CLF) - I've simply missed on pulling the trigger on this iron ore name multiple times over the past few months. I thought conviction about a global slowdown would hurt the stock over a longer period of time, but the emerging markets appear to be continuing on their merry way while developing markets slow. This is also a likely takeover candidate.

Express Scripts (ESRX) - see MedcoHealth Solutions earlier

ICON (ICLR) - this is a little Irish, drug contract research organization (CRO); a group I like save for the substantial valuation in all the names.

MGM Mirage (MGM) - you'd assume a struggling consumer would have less money to splurge in Vegas....

Olympic Steel (ZEUS) - I was high on US Steel (X) 6 weeks ago; nailed the sector but a rising tide did not lift all boats--> I picked the wrong horse - this name is on FIRE.

Pan American Silver (PAAS) - results might affect fund holding Silver Wheaton (SLW)

Red Robin Gourmet Burgers (RRGB) - would it be greedy to say "it's a restauraunt; it must be shorted"? Ruth's Chris Steak House (RUTH) too?

Friday

Nil

Jeremy Grantham has Some Sobering Words for "2nd Half Recovery" Crowd

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We've heard Soros [Soros Says World Faces Worst Financial Crisis Since World War II]....

We've heard Robertson [Julian Robertson Calling for Doozy of a Recession]....

We've heard Rogers [Jim Rogers Speaks]....

We've heard TraderMark [Entire Blog!]

And we add to this illustrious list of shining financial minds (what's that? TraderMark doesn't belong? Ok fine, be like that....I tried to sneak it in), but let's see what Jeremy Grantham thinks (Warning, this gentleman makes me sound like a roaring bull) But a great read so I copied the whole thing over from Barron's, just so you can hear something opposite of what CNBC says everyday. Can't say I agree with all of it, but unfortunately, a lot... suffice to say, he is not a fan of the Fed heads.... it makes me content that so many "old timers" agree with me, but makes me nervous if we are all correct the true fallout. He also has a relative strategy to my own; bet against US domestic, go long foreign and multi national who benefit from foreign to offset US weakness. Interesting.

  • ONE OF THE GRANDEST OF THINKERS AND MOST ELOQUENT of oracles, Jeremy Grantham has long been the voice of reason in an industry prone to excesses and embellishment. By taking the long view, blending quantitative strategies and technical analysis with sound and experienced judgment, Grantham, chairman of Boston-based GMO, consistently uncovers with his team the best values among a wide range of global asset classes.
  • The payoff is outstanding performance and risk management. In return, clients have entrusted the firm with about $150 billion. As the man who warned early of a worldwide bubble forming, we turned to him as that bubble has started bursting.

Barron's: ** You, along with George Soros, have called this the worst financial crisis we've had in the post-war era.

Grantham: This is much more global than, say, the savings-and-loan crisis was. The world is obviously much more globalized than at any time since the late 19th century and much more interrelated in almost every way, certainly financially. To have the leading economy and the reserve currency having a major-league credit crisis would by itself make it more important than earlier ones.

Secondly, this occurred at a time of what I believe is the first global bubble in pretty well all asset prices, so there is a much greater degree of broad-based vulnerability. Then it is a question of degree, and how carried away the sloppy lending was: It was very carried away. Not just in the design of needlessly complicated instruments, but in the enthusiasm -- recklessness one might say -- with which they were sold.

** Can these bubbles burst if the Fed is easing the way they are?

Well, this is an amazing little tidbit. People think the Federal Reserve can stop a bear market because they can throw money at it and lower interest rates. It is even more certain we can collectively stop a bear market if some fiscal stimulus is thrown in. To which I say, 'Oh, you mean like 2000 and 2002?' -- when they threw what I call the greatest stimulus in American history, an unparalleled series of interest-rate cuts, cumulating in two, almost three, years of negative real returns, real interest rates coupled with a really substantial tax cut, which would never have happened without 9/11.

The combination would have gotten the dead to walk, and it stopped the bear market eventually. But the Standard & Poor's 500 was down 50% and the Nasdaq -- which was all anyone talked about back then -- went down 78%. And a puny five to six years later, people are saying there is not going to be a bear market because the Fed is going to lower rates and because the government is going to have a stimulus package. But we have just been there, done that, and we had a nice bear market.

** What about places to hide?

That isn't something we can laugh off. Last time, there were plenty of opportunities: Bonds were cheap and TIPS (Treasury-inflation protective securities) were brilliant; real estate was cheap and REITs were brilliant. Even within equities, emerging markets were much cheaper than U.S. equities, and within U.S. equities, value stocks were only a little expensive and small-caps were only a little expensive and small-cap value was actually a little bit cheap. So you could really hide and could reasonably expect to make money, which we did in each of the three years of the bear market.

Since then, all those areas appear to have read the book on mean-reversion. Ten years would be a perfectly normal period of time to go from a peak of a great bubble [like the one in 2000], based on the history of bubbles and their aftermath, to the low. I have long thought that 2010 would be when we hit the biggest discount to fair value. Trend-line value on the S&P, by the way, in 2010 is 1100. (The S&P 500 traded at 1334 late last week.)

** What should we expect from the market between now and 2010?

In the fourth year of a presidential cycle, where you have a lame-duck president, the typical pattern of S&P 500 performance has been something like 10% below the normal long-term average (a 5.2% gain, inflation-adjusted), and worse if it is an overpriced market. A first year is never very pleasant: They average about 3% below normal. If they are overpriced, they do four points worse than that.

But if the party in power changes, first years tend to be eight points below normal. The following year is ugly, too. The average year two, since 1932, has been 10 points below normal and, if the market is overpriced, 15 points below normal. This is unpleasant. By a nice coincidence, those averages suggest the market will decline to 1100 in 2010, which is exactly the number we get to from a completely different technique -- building it from the grass roots through fundamental value. We do that by taking average corporate-profit margins, actually a generous average, assigning a normal market price/earnings ratio, and that gives you 1100 in 2010. This year, next year and the year after will all be uncomfortable years. One of them might be up, but my guess is it won't be up by much.

** What exactly will make them more uncomfortable?

Profit margins, the great prop to the market, surprisingly defied the laws of gravity for three years in the developed world and, particularly, in the emerging world and even in Japan. That was because the global economy was stronger than any corporation counted on and, in the U.S., consumption was always higher and our savings rate was always lower than any corporate economist would have suggested, going into negative territory. But there are a few near certainties in this business -- not many, but a few -- and one of them is that abnormally high profit margins will go back to normal. The timing is unfortunately shrouded in fog. The other near certainty is that house prices will go back to a normal multiple of family income. In the end, we, the people, have to be able to afford the houses and they are affordable at something around 2.8 times family income. When they peak in Boston at 6 times and nationally at 3.9 times, you know you are in for tough times.

Incidentally, it was late in '06 when [Fed Chairman Benjamin] Bernanke said he thought the high prices of homes in the U.S. merely reflected a strong U.S. economy. Was he not looking at the data? Did he not measure long-term house prices? Had he not seen how they ebbed and flowed as a multiple of family income, which they do here and in the U.K. and everywhere else? And with it being so obviously a bubble, how could he have said that?

** He was taking his cue from Alan Greenspan, who said we should all be taking out adjustable-rate mortgages.

Greenspan and Bernanke have taken a hands-off approach for two consecutive great bubbles, first in TMT -- telecommunications, media and technology -- and second, in housing. A hands-off approach is a polite way of saying they facilitated this. And what is the point of a 125-basis-point rate reduction, other than to provide reinforcement for the people who borrow short and lend long? From bankers who have committed every crime you could possibly accuse a banker of, to hedge funds who borrow short, leverage, and invest long in the stock market -- that's who really benefits from the interest-rate reduction. The economy, broadly defined, does not.

I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology. It is not driven by what I owe you and you owe me.

** So the Fed's actions won't stave off a slowdown?

Since when did the thought of an economic slowdown induce such hysteria? That was a response to the decline in global markets. It was aimed at the stock market. It was aimed at banking disorder and banking profits. It doesn't have that much of a powerful effect on the economy. If it had any more profound effect, there would be a positive relationship between debt increasing and GDP growth, and there is none.

** But it is driving down the dollar.

It drives down the dollar, which is inflationary, and, eventually, it could be seriously inflationary.

** Where else does this housing crisis lead us?

It has a lot to go. It still has to drop 20% to 25% to reach more normal levels, or if you prefer, it could wait five years for income to catch up, barring no big recessions. With the housing market gone, people turned to credit cards and with economic times slowing down -- whether there's a recession or not -- consumers are going to slow down a lot, are slowing down or have slowed down a lot.

** What about the dollar?

Currency is a real problem, I've got to admit. There was a time not that many years ago when we had a huge high-confidence bet against the dollar. It was technically overpriced, and we were running a huge trade deficit. Now, it is technically substantially cheap. But we are running an even bigger deficit. It is a conundrum. I don't think it should be a major, major bet. We are reasonably happy owning emerging currencies as a packet against the dollar for a several-year time horizon. I'm not particularly happy owning a packet of other developed currencies against the dollar.

Personally, I'm long the yen, the Singapore dollar and the Swiss franc. I'm certainly not long the pound: shorting the pound is a better bet than shorting the dollar.

** What other bets would you take here?

My favorite bet on Jan. 1 and today, for that matter, is going long very-high-quality U.S. blue chips with 50% of my dough, and long emerging markets for 50%, and shorting the Russell 2000 for 100%, or a complete hedge. In that bet, I'm long value because both of those components are cheaper than the Russell 2000. I'm long liquidity on average. I'm long momentum on average.

** What about growth stocks? Isn't there value there?

Growth stocks are expensive, but not quite as expensive as value stocks or low-growth stocks. Quality stocks are expensive but substantially less so than anything else. Emerging is expensive, but less so than anything less, and the fundamentals are so much superior to the rest of the world. Everything is expensive. All we are trying to do is extract some relative money, or by going short, actually make some real money.

** But how do you define quality these days?

We always defined high-quality companies as those with high and stable returns and low debt. Recently, we had to override, and exclude several banks from that list. Whether you like it or not, you have got to treat banks separately.

** What about the deal market, will that provide any lift to stocks? Microsoft's bid for Yahoo! hasn't done much for the market.

You might say that is a company in serious trouble being acquired by a company that is worried, maybe desperate. And that doesn't sound like a very strong deal to anybody.

** Fascinating as always, Jeremy. Thank you.



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