Tuesday, April 22, 2008

Earnings Preview Wed and some After Hours Reports Tonight

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Looks like Illumina (ILMN) did another great quarter tonight - I was hoping it would not so I could buy at a much lower price off of a "miss". No such luck. Former fund holding VMWare (VMW) made $2 million more profit this year than last - which is quite pathetic for what was supposed to be the next great tech stock; but expectations were so low that the stock is bursting higher in after hours. Former fund holding Broadcom (BRCM) also looks decent and expectations are so low, it is enough to get people excited. The bar appears still to be very low right now. Again, this earnings season is a time of wonderment and amazement and you just can never figure out the reaction to the news.

Names I'm watching for in a VERY busy day tomorrow and why...

Wednesday
Amazon.com (AMZN) - a sentiment name for the NASDAQ

Ambak (ABK) - strange how all the "issues" with these simply dropped off the radar - did all their problems get sweeped away? Literally it is as if these 2 bond insurers no longer exist. They were the focus of the market every day for a month and the "resolution" offered the names didn't seem to really fix the problem. Strange.

Fund holding Apple (AAPL) - even more of a sentiment name for the whole market - I expect great news and conservative guidance. Some quarters the market laughs off conservative guidance some they sell off the stock heavily... all on the same guidance. You just never know. Either way, whatever they say tomorrow, they will crush in 3 months at the next earnings report. And keep repeating the game.

Chipotle Mexican Grill (CMG) - a "story" stock in restaurants; great management, great brand, super high valuation.

Fund holding Core Laboratories (CLB) - oil services have been amazing of late.

Fund holding Homex (HXM) - Mexican homebuilder which has shown some nice strength of late

EMC (EMC) - not quite the bellweather it once was for tech

Foundation Coal (FCL) - coal. Need I say more.

Former fund holding Freeport-McMoran Copper & Gold (FCX) - enjoying the non stop move in commodities

PF Chang's (PFCB) - more "upscale" Chinese restaurant

Philip Morris International (PM) - after its recent spin off, this IPO has done very little. Will be curious about their first public quarter.

Parexel (PRXL) - another contract research outfit; PPDI reported tonight and looked very solid; another name where the chart was looking awful (PPDI) but the report was good

Pulte Homes (PHM), Ryland Group (RYL) - whatever they say, it's great because the world will be fine in 6 months; I like Ryland of the main homebuilders...

Range Resources (RRC) - this is one of the natural gas names I was considering adding to the fund and really like.

Former fund holding Schering-Plough (SGP) - this drug market was a disappointment

The Boeing Company (BA) - mmmm much like The Ohio State University; funny how Yahoo finance has it's name. I actually like this name down here and if I were running a mega/large cap fund with buy and hold philosophy I'd be building a stake now. Huge backlog, little competition, etc.

United Parcel Service (UPS) - this would matter but no one cares about the economy anymore. Just close eyes, and believe everything will be fine in 6 months... so earnings from names like this don't matter. Remember, like Intel they already lowered guidance so when they "beat" tomorrow and CNBC heralds the return of the economy, just keep in mind it is off a number they just lowered a short while ago. The spin will be fun to watch and maybe the market can rise 1000 points.

XTO Energy (XTO) - see Range Resources; simply an amazing run

Euro Hits $1.60 as ECB Hints at Rate HIKES

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Unlike the central bankers here whose main job is to bail out banks at the cost of rampant inflation which is the most regressive tax there is, the bankers in Europe are considering rate hikes... while we are about to cut yet again in a week. Now the hope was the poor Europeans would take pity on us and cut rates to bail us out (notice we go around the world with hat in hand?) - by cutting their rates it would make our currency/bonds slightly more attractive. That's the idea - the problem is most every country in this world realizes inflation is a beast. This was easily recognized long ago and I was saying this would be the outcome; even Greenspan said we were entering a new era in his book. [Dec 17: Greenspan Jumping on my Stagflation Thesis] But our financial system is so broken and levered, that capital is disappearing everywhere - all these writeoffs are just not accounting maneuvers - this is $200 Billion lost in the system and each of those billions is levered 3:1, 5:1, 10:1 even up to 30:1 if you are Bear Stearns. And Ben and his merry band of economists cling to the 1960s view that America is in a little vacuum and when the US slows, the whole world will slow and inflation (what little there is) will disappear. I said then this view is dangerous and the fact the guy who is the 2nd most powerful man in the US is clinging to this mythology should scare people. Thankfully a few of his minions are finally waking up to the fact that on July 1, 2008 inflation won't suddenly go away (what little there is), and that we are actually part of an ecosystem called "Earth" and don't exist in a vacuum. If they only read the blog....

A few other nations have followed us into the abyss - Canada is joining us in the cut parade due to proximity to US (more flooding of the world with paper currency), as is the UK (our subprime brother in arms). Meanwhile just about every other country in the world is raising rates to fight off inflation. As I've said since last summer thank god we have no inflation here and our government reports are so magical that they can somehow counteract the reality on the ground. Somehow inflation cannot cross oceans nor the Canadian or Mexican border or else our lower and middle class would have some serious problems. (2 months ago our CPI inflation was 0.0% - that's amazing magic) Again, I pray for the day the economic reports show negative inflation (deflation!) and the CNBC talking heads look into the camera and say -0.1% inflation today - woo hoo! Meanwhile crude is @ $120 and every food product is now up 30%+ year over year. It is such a circus that it would be funny, if not for the fact so many people who could least afford it are getting pummeled.

And I'd say we can stop blaming oil prices on the weak dollar; if true gold would of been ramping hard the past 2 weeks instead of being comatose. Supply/demand imbalances seem to be the main culprit. And stop blaming oil companies - people need to read up and see the policies of government and Federal Reserve are helping to cause the suffering - not "greedy oil executives" - but most are financially illiterate about what is really happening, so they cling on to the villain the politicians present to them. Run huge deficits, create paper money out of thin air, allow bubbles to keep repeating every 5-6 years now, kill off regulation because it "stops financial innovation and America's competitiveness", etc.

Oh well, bring the helicopters Ben... flood the system with more money so we can elevate all assets, including the stock market (banks are not passing this money out to customers - so I assume they are making nice trading gains with all the new shiny Treasuries the Fed is printing out like mad and exchanging for toxic waste mortgage paper). I continue to say, enjoy your stock gains but remember 8% gains in a 14% inflationary environment means you lost 6% this year in real terms. And your salary went backwards. And your cost of living went up (stock up on food stuffs now, they will only continue to go up with this flooding of the world with fiat currencies). But people continue to cheer on Wall Street. And the CEOs of banks are laughing to the... well... bank. The Fed has their back at least!

Anyhow, off to those silly Europeans who actually think inflation is a problem... funny guys...
  • The euro surpassed $1.60 for the first time as European Central Bank officials said they'll increase interest rates if inflation doesn't slow.
  • The dollar weakened for a second straight day as oil surged above $119 a barrel and Federal Reserve Bank of Dallas President Richard Fisher said inflation is starting to grip U.S. consumers. South Africa's rand appreciated against all of the major currencies on bets rising consumer prices will force the central bank to increase its target lending rate.
  • The 15-nation currency strengthened against the dollar as ECB governing council member Christian Noyer said policy makers will act to restrain consumer prices if inflation doesn't slow. ``Our big problem is to make sure that inflation falls back below 2 percent next year,'' Noyer said today in an interview on RTL radio. ``We'll do what it takes for that,'' he said, adding, ``If needed, we'll move rates.''
  • His colleague, Nicholas Garganas, said at a press conference in Athens that inflation will ``remain high'' in the coming months and isn't expected to fall at a ``rapid pace'' in the second half.
  • The Dallas Fed's Fisher said yesterday in a Fox Business Network interview airing today that inflation from rising food and energy prices has been so persistent that it's starting to affect consumers' expectations for future prices. ``I'm concerned that we might be on a path of higher inflation than we would otherwise have had,'' he said.
  • Fisher voted against interest-rate cuts at the Jan. 30 and March 18 meetings, and was joined in dissent by Philadelphia Fed President Charles Plosser at the March meeting.
Should be interesting to see how many dissents we get if they cut another 25 points next week. 2 is considered rare - 3 dissents would be outright revolt.

Thankfully there are no ill effects from the Fed policies - not according to government reports anyhow. When do we start hearing stories of people quitting work because its too expensive to get to their low paying "service job" that politicians say are "great for America" as we gut the production capability over the past 2 decades. Can't be too far off now.
  • Cabbies here complain their take-home pay is thinner than it used to be. Trucking companies across the country are making drivers slow down to conserve fuel.
  • And the rest of us? With gas prices now averaging $3.50 a gallon nationwide, according to AAA and the Oil Price Information Service, more and more Americans who have to drive are weighing the need for each and every trip.
  • "To get to the doctors and all that, it's an awful lot of money," said Carol Licata, a 75-year-old retiree from Arnold, Pa., who said a larger portion of her fixed income is now going toward gas. "I don't drive that often, but have to take necessary trips ... and (gas) takes a big chunk out of our budget."
  • In Los Angeles, for example, fiction writer Brian Edwards sold his gas-guzzling Ford truck and now relies on his skateboard or the bus to get around. (see this is the funny part of the wealth transfer or reverse colonization as I like to call it - the Asian nations have consumers buying up their first car - whereas the poorer Americans are giving up cars for... skateboards. Nice! Give it 20 more years and we'll be in exact role reversal - at that point the factories should start being built here to take advantage of the low cost labor of those working poor 3rd world Americans) Sharon Cooper of Chicago, meanwhile, said she is planning to buy a bicycle to use on her 2 1/2-mile commute to work.
  • "The farther you get from the wellhead, the greater the misery," said Tom Kloza of the Oil Price Information Service in Wall, N.J. "There's a lot of stations across the country that are literally on the brink of bankruptcy." Samer Katib, the manager of a Marathon station in Chicago, said business has fallen at least 30 percent this year because customers are cutting back on driving and only using their cars when absolutely necessary. "It's just go to your work and go home," he said of people's driving habits these days, adding that customers no longer stop in for profit-fattening drinks like they used to. "They need all their money for gas," he said.
  • "It's a mess here," Goldstone said. "People just are not shopping and everyone's trying to figure out a way to get people back in their cars."
Again, I continue to laugh at every rally in 'early cycle' retail, restaurant, homebuilder (which I own because of course everything will be fine in 6 months). When the 'strategists' are making hundreds of thousands or millions and they direct policy for investments, things like this just don't connect with their brain. We'll check back at $4 gas later in the summer. I'm sure that will spur the recovery.... "in 6 months". I keep saying this is the first consumer led recession since late 70s/early 80s. People just do not get it and are conditioned to "2 light quarters of recession and we are out so buy now or you miss the huge stock market move". I eagerly await the first muttering of "1st half 2009 recovery" on CNBC, pushing out the now popular "2nd half 2008" that every guest brings to the table.

And for you eager real estate investors? Here is a trend I'm giving you first... smaller homes... in inner ring suburbs. With heating costs and A/C costs killing people on top of gasoline prices - those outer suburb McMansions are going to be ghost towns left for the truly well off. The middle class will be moving closer to work, in homes they can afford to pay the utilities. Start scouting those type of homes - thats where the next real estate boom will be (2011). Or buy a farm.

Don Coxe Offers Coxe Commodity Strategy Fund

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A reader turned me on to Don Coxe with a story he emailed me back in January [Jan 18: One Lonely Voice Agrees with me on Food Inflation] - after doing some googling (is that a word?), I read up on some of this thoughts and it appears we are almost lockstep in our thought process. Much like Ken Heebner of CGM Funds I try to search for news about once a month on these guys to see their updated thoughts and cross reference them against mine. Specific to Coxe our thought process has been almost identical since I started pulling up news articles about him; Heebner meanwhile has been far more bullish/sanguine on the US economy....

For Canadian readers I believe this new "fund" Coxe is bringing out will apply to you, so I thought I'd highlight it... I mean since you cannot have me, you at least can have Coxe ;) But on a serious note, he approaches things identical to me with big macro economic thoughts/views and makes his investing decisions off of that... parallel to my "rising tide lifts all boats" strategy. He is also a huge believer in the long term in commodities as is Jim Rogers, and I [A Long Term View on Commodities] It is a strange methodology for a fund; it seems to be a "unit" with a warrant attached.
  • Don Coxe, one of the living legends of the world of big-picture investing, is set to have his name in lights, or at least on a public company.
  • Coxe, who has been in the investment world for three dozen years -- with a career ranging from an analyst at Gordon Capital to his current role as the global portfolio strategist at BMO Financial Group -- now has the Coxe Commodity Strategy Fund named after himself.
  • "The fund has been created to provide investors with long-term capital growth by executing the commodity investment strategies of Donald Coxe," said the recently filed prospectus.
  • Coxe, who is based in Chicago, and Sprott share a common investment thesis: both believe in a continuing strong demand for commodities.
  • "The demand for commodities can be expected to be driven by the needs of this bourgeoning middle class, as they acquire dwellings with both basic and modern amenities, automobiles and consume higher protein diet," said the prospectus, noting that Coxe will advise the fund on its commodity sector weightings and the selection of securities. The initial allocation runs this way: agriculture (28%); metals and steel (18%); energy (29%); and precious metals (25%).
  • Coxe's fund is offering $10 units with each unit consisting of a unit and a warrant. The warrant runs for three years and allows the holder to buy another unit at $11.25. The fund doesn't have a fixed term to maturity.
  • Of course there is a contrarian view about commodities. Victoria-based John di Tomasso, the CTA manager of the year according to U.S.-based Lipper, is basically bullish on the commodities though he is short the base metals, a group that includes nickel, lead copper, zinc and tin. The reason: "They have gotten wildly over-priced. The commodity thesis is well known but speculation has driven prices to wild heights."
Long Don Coxe

McDonalds (MCD), DuPont (DD) Continue the Trend - Overseas Strength Mitigates Weakness at Home

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This storyline is becoming old quickly [Apr 19: Dollar's Plunge Becomes Lynchpin for Q1 Earnings]... again, I've been using the Ultrashort of the the Russell 2000 instead of the S&P 500 or Dow 30 for this reason since August... large companies will win in this environment and small companies (who rely on subprime nation) will lose. I am using Ultrashort Russell 2000 (TWM). We are quickly running out of Dow 30 stocks reporting by next week, and then S&P 500 stocks (which are smaller than the Dow 30 but larger than most components in the Russell 2000) will be finishing off in the next week or two as well. Then we will be left with the stuff on the bottom of our shoes - companies that rely on Americans.

The more I read about these multinationals and how many now have 55-70% sales outside the US, the more I realize the US can go into a multi decade tail spin and the multinationals won't care one bit... sort of ironic.

McDonald's (MCD) first; they beat by 11 cents but 5 of that was currency - still its a 6 cent beat... I continue to believe this is a trade down play along with Walmart (WMT) BUT they still are going to be hit with commodity costs (I can't believe I can get a McChicken for $1!), and if the economic fallout is truly bad down the road, even they won't be immune. But so far so good. (Note I own Ultrashort Consumer Services (SCC) which holds McDonald's and Walmart as its top 2 positions, but that is out of necessity as I cannot short individual names - I'd prefer to short individual retailers and restaurants and avoid the "big 2" which should be relative winners in the coming/current recession)
  • McDonald's Corp. said Tuesday that its first-quarter profit rose 24 percent as the fast food company benefited from the weak U.S. dollar and strong global sales. For the January-March period, the suburban Chicago company earned $946.1 million, or 81 cents per share. That's up from $762.4 million, or 62 cents per share, during the same period last year.
  • The world's largest restaurant chain said European revenue climbed 23 percent to nearly $2.4 billion, while quarterly revenues in Asia, the Middle East and Africa grew 24 percent to about $1 billion. Both geographic regions posted double-digit profit growth.
  • In the U.S., same-store sales grew 2.9 percent during the quarter, but the company disclosed its comparable U.S. sales fell in March. That 0.8 percent decline was the first negative same-store sale figure in five years, analysts said. (uh oh)
Next, Dupont (DD) which is becoming a stealth agriculture play... but the weakness in the US overwhelmed that. Volumes down, but weak dollar comes in like Captain America to save the day. Or maybe it's Captain U.S. Peso.
  • Chemicals company DuPont said Tuesday that profits increased 26 percent in the first quarter, boosted in part by higher selling prices and the weak dollar.
  • Sales for the quarter grew 9 percent to $8.6 billion, thanks largely to higher local selling prices and the weak dollar, as overall volume was down 1 percent. Revenue totaled $8.77 billion, up from $8.16 billion.
  • The company's performance continues to be driven by growth outside the United States, with overseas sales accounting for almost two-thirds of total sales for the quarter. Volume in the U.S. was down 5 percent, while volume increased 4 percent in Europe and 6 percent in the Asia-Pacific region, the company said.
  • During the quarter, sales in emerging markets grew 25 percent, led by Brazil, China, India and Eastern Europe. Local selling prices increased 6 percent overall, more than offsetting higher ingredient costs.
  • Sales in the agriculture and nutrition unit increased 18 percent to $2.9 billion, reflecting strong global demand for DuPont's seed technology and crop protection products.
I don't know about you but when I read about all of this strength in other countries it sort of saddens me even further about our plight. We are like the old veteran ballplayer who is past his prime. Oh well, everything will be fine in 6 months everyone assures me... Viagra on the way!

Long Ultrashort Consumer Services, Russell 2000 in fund and personal account

Bookkeeping: Off with Some Mechel (MTL)

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Everything I just said for the fertilizers, repeat for Mechel (MTL) - one of my top 5 ideas, but way too hot in here. (Now if Cavuto mentions Mechel tonight I'll probably have to sell the whole damn stake off!)

Nowhere near any support. Will buy back lower. No change in long term prospects. Cutting from 2.1% of fund to 1.3%, with a sale near $159. I'll let someone else take the risk from here... if the mania continues the next sell will be $175.

Long Mechel in fund and personal account


Bookkeeping: Cutting More Fertilizer

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I know I said I wouldn't cut more, but I am going to cull more Mosaic (MOS) and Potash (POT) as they are relentless in their upswing and at this point nowhere near any support levels. Usually a significant event like a new IPO in the sector or a large buyout marks a near term top in a sector - I am not saying this Intrepid Potash (IPI) IPO is the thing, but I have not seen a level of bullishness in a sector as I've seen here, since the solar days of fall 2007. Even Neil Cavuto was talking about the Intrepid IPO last night. That scares me, and when these things reverse I'm going to call it the Cavuto top (granted, he did not know how to pronounce "potash" either).

I am going to cut more Mosaic here @ $140, and Potash @ $212. Granted, every sale the past 2 weeks has been a "mistake", but it's just way too bullish around here, and while I expect a blowout number from Potash on its earning reports, so does everyone else - and the natural inclination is a sell off sooner rather than later. I'll look to rebuy both lower - Potash maybe in $180s and Mosaic maybe $120s. I'm taking both positions sub 1%. (gasp)

I am that antsy about the bullishness, than even in my personal account where I've held Mosaic for a long time I am taking it down to "miniscule" level. ;) As I do with every sale of these names, I want to reiterate my long term bullishness. But this is getting ridiculous; the risk/reward is now firmly in the "risk" camp.

EDIT (Noon): Due to the voracious commentary and defense of the fertilizer stocks and why anyone would be so nutty to sell them, I am adding even more to Ultrashort Basic Materials (SMN) which is a bet against this space - I am also long in my personal account. I am a contrarian at heart and when everyone is on 1 side of the trade I just can't help but to be on the other side. So far I have gotten my socks knocked off in a bad way with this trade but with so much fervor I am getting more bullish by the minute to bet against the fever! :)

Long Mosaic, Potash in fund; long Mosaic in personal account




Intrepid Potash (IPI) Prices at $32, Trading in upper $40s

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Well as I stated in my post late last week [Apr 18: You Thought VISA (V) was the Hottest IPO of 2008? Wrong] if the fund was up and running I'd of been asking for tons of shares of Intrepid Potash (IPI)... after initially planning to issue 24M shares @ $24-$26, that got moved up to 30M @ $27-29 late last week, and then overnight that got moved up yet again to $32. At $32, I'd be willing to put 6-8% of my fund in this name, knowing it would trade to $40+ on hype alone (I facetiously said $60 but heck I was a lot closer at $60 than $32!). But it's gotten even further than that... in early trading the shares are trading in the $46-$54 range. And just like that, as an institution you can look "smart" by making 50%+ for 10 minutes of work... (shares bought at $32, trading in upper $40s) Another major advantage the big guy has over the small guy.

However, I am obviously not in that situation now, so I just am watching. I see Cramer pumped it yesterday as well, and judging from the # of hits to my blog last night, that caught the people's attention.
  • Intrepid Potash Inc, a producer of crop nutrients, on Monday raised $960 million with an initial public offering of shares that priced above expectations.
  • The 30 million-share offering sold for $32 per share, according to an underwriter. At $32, the IPO price was $3 above the top of the $27 to $29 forecast range. The offering had already been raised earlier from 24 million shares and an estimated price of $24 to $26 per share.

Coach (COH) with Interesting Report

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Coach (COH) is a name I always like to watch as a "tell" on the upper middle income US consumer in our conspicuous consumption culture - it is sort of in the same pan as Harley Davidson, speedboats, and Whole Foods (WFMI) - luxuries we don't need but we love our toys/excesses. I went negative on it last summer [Aug 15: Sold Small Position in Coach], and it fallen a long way since and I was curious how the market would react to its earnings today. I wrote last August:

I decided to sell it today after thinking about the situation further. While the stock has been a favorite of mine over the past year, I think the coming housing troubles will hurt even their spectrum of customer. While the VERY high end (north of Tiffany's and Coach, think Hamptons) is doing incredibly well, and to now the next level of US population has been doing well, much of the target audience of Coach in the US could certainly be affected by this slowing in housing.

Coach is a bit of a status symbol, and something many people in mid/upper class suburbia buy. The problem is many people in suburbia are overextended on their $600,000 home bought with 0% down interest only loans. This does not mean they they don't have good credit; it just means they are very leveraged. So it's a risk.

I expanded on this later in the month [Aug 28: Coach as the True Retail Tell]

So in fact I think this is a lot better tell on the economy than Walmart. The core customer of Walmart is more of the discount shopper already strained by the hikes in gas, energy, and now grocery prices.... whereas the core shopper of Coach is the suburbia soccer mom who loves her trinkets (do you know there are even websites now where you can rent a purse, errr... handbag - in fact, I just googled and I also found a competing site.) This speaks to America's obsession with appearances and keeping up with the Joneses. Even when one cannot afford a handbag, one can pretend to show others they can afford it for the evening. So with this subset of consumer being the main subset buying $450K homes in northern VA, $600K homes in southern CA, $800K homes in northern CA, $400K homes in AZ/NV - many with little down and some scary initial 2 year teaser terms, I am watching Coach to see how it performs. To me, it's a great tell.

You can see it has been pretty much been downhill since then...the stock is back down to $30 after a 7% fall this AM



So today, despite a beat on earnings and solid guidance the stock is weak on what appears to be margin concerns (probably needing to discount merchandise to keep it moving) But unlike the banks and homebuilders who have been going up no matter what bad news they report, it is interesting to note this name falling on what I would consider not so bad news.
  • Coach Inc., the largest U.S. luxury leather goods seller, said Tuesday its quarterly profit rose 8.3%, helped by strength both in the U.S. and abroad.
  • Net income for the fiscal third quarter rose to $162.4 million, or 46 cents a share, from $150 million, or 40 cents, a year earlier. Sales rose 19% to $744.5 million.
  • Profit met the average estimate of analysts, while sales exceeded their average forecast of $730.9 million, according to FactSet.
  • Gross margins, however, missed some analysts' estimates. Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 75% from 77.8%, affected mostly by the sharp rise of the yen over the period and by the continued promotional environment and channel mix, Coach said.
  • Coach said it's "prudent" to wait until its fourth quarter to give guidance for the coming year because of uncertainty in the economic backdrop. Coach is conducting a review of ways in which its brand relates to the consumer to help lessen the impact of a slowing economy.
Again it is more about the reaction to the news, than the news itself. The reaction is a bit troubling; frankly I am surprised in this "see no evil, hear no evil" market of late that the stock is being punished like this - I thought "bad news is great news!" was the current mantra. This is a quality company but it is operating in a tough neighborhood. Without as many of the "aspirational" American housewives able to pay for it's bags and/or fleeing to its outlet centers instead of mainline stores, the company will continue to struggle. As I have predicted, many retailers will begin to pull back from all forecasting for the year as the true economy shows in their numbers, as opposed to the multinationals whose foreign sales are masking domestic weakness. All their current 2008 guidance is fiction, and this will be proven true by December 2008. So they are not "cheap", despite what CNBC says. That does not mean they won't rally from time to time, especially when those rebate checks hit, Q3 GDP is artificially boosted, and the seals across financial media will clap their hands in glee. Then we'll go back to normal and/or wait for the next round of rebate checks to be sent to keep America spending over and above their means.

Coach remains a great tell on the American consumer who has been spending well over and above their means and now is being battered by reality, inflation, and lack of access to house ATM. Oh well. They still have China to conquer... no need to cater to Americans in about 5-10 years as wealth creation moves overseas....

No position

Two Good Earnings Reports - Jacobs Engineering (JEC) and Millicom International Cellular (MICC)

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Two very solid reports this mornings, one from a name in the portfolio, and one we recently sold out of due to a poor chart.

***********

Jacobs Engineering (JEC) posted 45% growth in earnings, up to $0.80 (vs expectation of $0.77) on revenue growth of 27% which was in line with expectations. Backlog, one of my favorite measures in this sector, increased another $5.5 Billion or 51% year over year, to a $16.2 Billion level. This equates to over a year and a half of business. Guidance was increased a bit from $2.95-$3.25 to $3.00-$3.30, compared to analysts $3.16. This is not the cheapest of the infrastructure stocks, but a very reliable company.

***********

Millicom International Cellular (MICC) also posted very good results and the stock is up 7% in premarket. I had sold the last of this position a few weeks ago [Apr 8: Bookkeeping: Closing Million International Cellular], since like Google, it was acting badly in a recovering market - but like Google the chart was a bad tell. On the bright side it indicates the fundamental work on this name was good, when even stocks we sell off are performing well.
  • Emerging markets telecom firm Millicom International (MICC) posted first-quarter core earnings in line with expectations on Tuesday and added 2.8 million new subscribers in the period, boosting its shares.
  • "Millicom recorded the second best quarter in its history in terms of net subscriber additions, adding 2.8 million in the quarter, following the exceptional final quarter of 2007," its Chief Executive Marc Beuls said in a statement.
  • The company added 3.4 million subscribers in the fourth quarter of 2007 and the increase in the first three months of the year brought the total number of subscribers to 26.2 million at the end of March, up 59 percent from a year earlier.
  • "Subscriber growth is really impressive and sales in Africa have picked up speed," said Bengt Molleryd, analyst at Handelsbanken.
  • The biggest growth in subscribers in the first quarter came in Honduras, Ghana and Tanzania, Millicom said.
  • The company, which operates in 16 countries in Latin America, Africa and Asia, plans to invest over $1a billion this year.
  • Millicom said, however, it would see a gradual decline in average revenues per user (ARPU) as it continues to target customers with lower disposable income. ARPU was $12.7 in the first quarter against $13.9 in the preceding three months.
  • "ARPU is a bit worrying, but it is a natural process that it will fall and I think that they can compensate for it as they continue to grow," said Urban Ekelund, analyst at Redeye. Millicom said that although ARPU would fall, higher volumes will bring economies of scale, helping EBITDA margins.
Long Jacobs Engineering in fund and personal account

Monday, April 21, 2008

Articles of Interest from Around the Net

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In the interest of time/efficiency I'll probably be going to some blog entries in the following format with some headlines with a short blurb and then interested readers can click on the link to read the full story. I need to spend more time reading and less time typing so while I'll continue full story summaries on most items, I'll put together some packages like this for those interested in reading further.

If you (reader) find anything of interest feel free to post a comment to this entry with a link but please use tinyurl.com to post the link.

Recent stories catching my interest:

The Economist: The New Face of Hunger (topic: food crisis and impact on world poor, something we predicted long ago and now hitting mainstream)
  • World agriculture has entered a new, unsustainable and politically risky period,” says Joachim von Braun, the head of the International Food Policy Research Institute (IFPRI) in Washington, DC. To prove it, food riots have erupted in countries all along the equator. In Haiti, protesters chanting “We're hungry” forced the prime minister to resign; 24 people were killed in riots in Cameroon; Egypt's president ordered the army to start baking bread; the Philippines made hoarding rice punishable by life imprisonment. “It's an explosive situation and threatens political stability,” worries Jean-Louis Billon, president of Côte d'Ivoire's chamber of commerce.
Asia Times: China caught in Potash Crunch (great summary of the main players in the fertilizer business and why I favor the potash companies in the long run - mini monopolies - talk of spot potash to $700 by this summer and $800 - or more - by fall; you know the names by now - Mosaic (MOS), Potash (POT), Agrium (AGU) and our new friend Intrepid Potash (IPI))
  • The magnitude and growth rate of demand from China still drives global commodity prices. But in the fertilizer sector, where China this month has had to agree to a price for potash more than double what it paid last year, the inflexibility of Chinese demand for food has made it difficult for the country's negotiators to hang on to the commercial advantages they are accustomed to enjoying from being the world's largest consumer.
Paul Krugman of NYTimes Says We are Running Out of Planet to Exploit - as an aside I saw a show on National Geographic that says if the other 95% of humans on this planet consumed and wasted like Americans did, we'd need 4 Earth's. That's a scary thought. This planet is simply not equipped to handle billions of "middle class" people - it needs most to live in abject poverty to support the number of people that live on it, which was the status quo for decades upon decades - but has changed with the rise of Chindia. [WSJ: New Limits to Growth Revive Malthusian Fears] We need major technological breakthroughs to reduce resource dependence over the next 5-10 years or it could create some very ugly situations. I've said since day 1 of blog, future wars will be over fresh water instead of oil.
  • It’s not just oil that has defied the complacency of a few years back. Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?
NYTimes: Sticker Shock in Organic Aisles - this goes along with my idea that when prices get high enough people, aside from the truly upper middle class and lower upper class, will be fleeing Whole Foods Market (WFMI) - economics over health - I continue to like that stock as a short on the "pooring of America" theme.
  • Shoppers have long been willing to pay a premium for organic food. But how much is too much? Rising prices for organic groceries are prompting some consumers to question their devotion to food produced without pesticides, chemical fertilizers or antibiotics. In some parts of the country, a loaf of organic bread can cost $4.50, a pound of pasta has hit $3, and organic milk is closing in on $7 a gallon. “The prices have gotten ridiculous,” said Brenda Czarnik, who was shopping recently at a food cooperative in St. Paul.
NYTimes: In Lean Times, Biotech Grains are Less Taboo - again, when push comes to shove economics wins over everything else - health, morals, taboos - the names here are Monsanto (MON), Syngenta (SYT), and a little Dupont (DD)
  • Soaring food prices and global grain shortages are bringing new pressures on governments, food companies and consumers to relax their longstanding resistance to genetically engineered crops. In Japan and South Korea, some manufacturers for the first time have begun buying genetically engineered corn for use in soft drinks, snacks and other foods. Until now, to avoid consumer backlash, the companies have paid extra to buy conventionally grown corn. But with prices having tripled in two years, it has become too expensive to be so finicky. “We cannot afford it,” said a corn buyer at Kato Kagaku, a Japanese maker of corn starch and corn syrup.
WSJ: Global Growth Creates Market Winners - well this story pretty much sums up my blog, but about 6-9 months too late - mentioning steel, agriculture, coal, energy :) Go global, find customers with deep pockets, and avoid subprime nation. (and it's sister, subprime UK)
  • Stocks are down so far this year, the U.S. economy could be in the midst of a recession, and the housing market's troubles could linger for many months. But a handful of stocks and sectors are soaring in 2008, believe it or not. Some of them, such as some companies in the steel and agricultural businesses, could continue to generate strong gains, analysts say, though others, such as some coal and energy companies, look like riskier prospects.
NYSun: Food Rationing in America? Sounds Outlandish? It's Already Happening
  • Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing. Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.
  • At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy. "Where's the rice?" an engineer from Palo Alto, Calif., Yajun Liu, said. "You should be able to buy something like rice. This is ridiculous."
CBSMarketwatch: Pilgrim's Pride (PPC) a major chicken producer is cutting production. We know what that means down the road... higher chicken prices. This is a theme I've been mentioning since last fall as yet another unintended consequence of the ethanol boondoggle... it will have lag effect and no one is talking about it now - check back by the fall or next winter. This will allow the food producers to increase prices but still to be determined if they will be able to increase them enough to offset the rising input prices to feed their animals. A lot of macro economic events happening here, and it's a matter of degree of what rises more, inputs or end food prices. I continue to watch iPath DJ Livestock ETN (COW) which plays on this theme from the cattle/hogs angle.
  • Pilgrim's Pride said Monday it plans to cut weekly chicken processing at its plants and may shutter another production facility to offset exorbitant costs for corn and soybean meal. Pilgrim's Pride, the largest U.S. chicken producer, said it will reduce weekly processing by 5% compared to last year's levels.
WSJ: Smaller Banks Begin to Pay Price for their Boomtime Expansion - this should be the next leg of the credit crisis... while the Federal Reserve and Treasury Department will bring all hands on deck to save the NYC based banks, the many smaller regional banks are going to get hit with effects of the consumer led recession. Unfortunately, Ultrashort Financial (SKF) focuses mostly on the large banks that the government is now backstopping so there is no easy way to get at these names without individually shorting.
  • Now, two years after its expansion push, Sovereign has quit making auto loans outside the Northeast because too many borrowers fell behind on their bills. Losses on the bank's loans ballooned. In January, to conserve cash as it wrote off more bad loans, Sovereign eliminated dividend payments. On Tuesday, the bank is expected to announce a 40% drop in first-quarter earnings.
  • Similar troubles are echoing through small and midsize banks across the U.S. In a bid to expand during the recent boom, many set up operations in unfamiliar markets or started pitching new products. Others, aiming to stave off encroachment by huge U.S. financial institutions, boosted their lending by offering easy terms or lower rates. Now the slowing economy is exposing bad timing and blunders.
NYTimes: A New Threat to Farmers: The Market Hedge - we discussed this a while back, how Hedge Funds were now piling into the commodities market and causing major disruption [Feb 28: The Hedge Funds are Coming! The Hedge Funds are Coming!] - what was traditionally used as a hedge by farmers to protect themselves is now a plaything for the locusts... I continue to believe as hedge funds control more and more of the world's capital there comes a time when their sheer scale and size must fall under some sort of higher level of regulation as they literally, en masse, can move markets. Perhaps only when a disaster strikes caused by hedge funds, will anyone care to broach this subject - give it 5 to 10 years. As more wealth is concentrated in fewer and fewer hands (sovereign wealth funds and hedge funds), we will have the same things we always have - out sized risk leading to terrible effect. And then the politicians will say "how did everyone miss this and why was there no regulation?" Blah blah.
  • But Mr. Grieder’s days on the farm in Carlock, Ill., are getting even longer. He now has to keep a closer eye on the derivatives markets in Chicago, trying to hedge his risks so that he knows how much he will be paid in the future for crops he is planting now. And the financial tools he uses to make such bets are getting more expensive and less reliable.
  • In what little free time he has, Mr. Grieder attends Illinois Farm Bureau meetings to join other frustrated farmers who are lobbying officials in Chicago and Washington to fix a system that was designed half a century ago to reduce uncertainty for food producers but is now increasing it.
  • But today’s crop prices are not just much higher, they also are much more volatile. For example, a widely used measure of volatility showed that traders in March expected wheat prices to swing up or down by more than 72 percent in the coming year, three times the average volatility for that month and the highest level since at least 1980. The price swing expected in March for soybeans was three times its monthly average, and the expected volatility in corn prices was twice its monthly average.
Summary: We have a major disconnect between Wall Street and Main Street, as the stories above show. And the inflation being created by central banks across the globe, I continue to believe is helping to inflate all assets, including equity prices, over and above where they'd be in a normalized supply/demand equation. Good for stock investors, bad for all consumers and the world's poor and middle class. US stock market watchers continue to live in a world of "the US is all that matters" and cling to the "as US slows, inflation will disappear" - I've argued this is wrong since day 1 of blog and Ben Bernanke has taken the other side of this trade. I think Ben will be wrong; unfortunately many on this globe will be hurt by this incorrect prediction by Uncle Ben and his merry band. As further insult to injury, we will continue to use fabricated government reports which says inflation is contained and not really an issue to continue our path of dollar destruction and inflation embellishment. Main Street will continue to get pummeled.

Long Mosaic, Potash in fund; long Mosaic in personal account

Bookkeeping: Taking some Jacobs Engineering (JEC) Off Ahead of Earnings

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Very good strength from this infrastructure name today, so I am going to take a bit off the top - not much because the chart is shaping up so well, but with Jacobs Engineering (JEC) reporting ahead of the bell tomorrow and a quite large stake I am going to reduce some risk with a share sell here in the low $89s. This reduces the stake from 3.3% to 2.8% of the fund. Still quite a large position walking into a potential trap that every earnings report brings... but I continue to marvel that this stock is trading right about where it was 2-3 quarters ago.

Today has been an excellent day; always like days where you can outperform the market with only 60% of your portfolio long, and 1/3 safely tucked in cash. Many of our top holdings continue to run...I continue to believe we have a ton of extended charts prone for pullback but I'm sitting with large cash stake, and letting the remaining longs run however long this can go...

Long Jacobs Engineering in fund and personal account


Manpower (MAN) as a Weak Dollar Play? Who Knew.

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There is only so much time in the day and only so many companies/sectors one can keep track of. My team of 10 analysts (read: 10 hamsters) did not realize that Manpower (MAN) was in fact an overseas, weak dollar play. As portfolio manager I made them run the wheel extra hard this weekend for not notifying me of this fact before hand. I wrote last week

Manpower (MAN) - a key tell on the temporary workforce in America and "blue collar" temps especially. Canary in the coal mine type of company.

So my team of analysts made me look bad, and when I saw the big move in MAN on this week's top returner list I had to go investigate... and I discovered a completely different company than I anticipated. France is their #1 country of business?
  • Manpower chairman and CEO Jeffrey Joerres noted that some of the company's European operations -- namely Elan, Germany and Italy -- reported revenue increases of 43 percent, 22 percent and 15 percent, respectively. Manpower's largest country of business, France, posted a 16 percent increase in revenue, to $1.7 billion.
Weak dollar play?
  • Employment services company Manpower Inc (MAN) posted much-higher-than-expected quarterly profit on Friday, reflecting strength in its international operations and the weakness of the U.S. dollar, and said second-quarter profit will be above Wall Street estimates.
  • Milwaukee-based Manpower, which generates the bulk of its sales and earnings outside the United States, said operating profit in its U.S. operations fell 37.6 percent, but were sharply higher in France, Italy and other international markets.
  • Investments in international markets, including Asia and the Middle East are paying off at a time when some large economies -- notably the United States -- are slowing, Chief Executive Jeff Joerres told Reuters in an interview.
  • "There was a lot of thinking, from the sell-side and the buy-side, that the gig is up and what we're seeing is that there are places that are slowing down, but the portfolio is kicking through," he added.
  • Revenue soared 19.0% in dollar terms to $5.4 billion, helped greatly by the weakness of the greenback. Excluding the positive impact of foreign-exchange transactions, revenue increased nearly 8%. (so 11% due to currency only!)
Potential Chindia play?
  • Marcon also said emerging markets tend to have higher gross margin than more mature markets. Developing countries like China and India have big labor markets and represent a significant long-term opportunity, Marcon said.
Moving more to permanent placement with higher margins?
  • Manpower plans to increase its percentage of revenue derived from high-margin permanent placement to 15% of total gross profit, up from the current 8% level,” Baird analyst Mark Marcon said.
People always comment or email me, how do I find ideas or develop thesis. Simple. I read, read, read, read, read. When the other hamsters sleep, I read. Hard work, but I have a big goal so I have to outwork the fat cats. Or hamsters. Or lemmings. Or Kool Aid drinkers.

Am I going to be buying Manpower tomorrow? No, and I think Europe is set to slow down so I don't know the company well enough to know the impact - but the name just got a lot more interesting and officially on my radar. If you read the points above and I didn't tell you what the sector or name of the company was you'd think I was talking about Deere (DE) or some other major multinational.

No position


Bookkeeping: Powershares DB Agriculture Fund (DBA) Starting to Look Toppy - Cutting Back

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The Powershares DB Agriculture Fund (DBA) is quite the imperfect instrument; it holds sugar, corn, wheat, soybeans. The problem is when some things go up, others go down... and this is one of those times. While corn is going up [Apr 3: Corn Jumps to $6 - Start Stocking up on Soda Pop], wheat and to some extent soybeans are going down. So net net, you are stuck with a mish mash. For much of the last year, corn was doing ok but the wheat/soybeans combo was driving this ETF. In the US we don't have single commodity ETFs but strangely in London it is available - even though the US is the breadbasket of the world. Why we don't have them available for individual investors is beyond me. Either way, we are stuck with a blunt instrument instead of being able to pick and choose.

While I believe all crops will go up over time, since the crop report [Mar 31: USDA Crop Report] we've seen divergence among the names (which I outlined above). So the ETF has been stalled. While I am unclear on the usefulness of technical moving averages on an ETF made up of 4 commodities (as opposed to an individual stock), I am clear that many speculators have entered the crop market of late and they come from the world of stocks. So they could be using technical indicators... as their influence increases in the commodity market, I'll give more credence to the fact that technical indicators might be of use. And if that is true, this is a chart that has weakened the past few days, and broke below a key support level this AM. So I'll play it safe and I'm cutting 75% of my position, down from 850 shares to 200 shares, selling in the low $38s. This takes the name from a 2.8% stake to 0.7% stake.

The ETF has been hanging around its 50 day moving average most of the past month, creating a lot of headfakes on both the up and downside. Every time it looks ready to make a substantial move, it sells off. We could just be basing for the next leg up, but that base could take months to build for all I know. For those who think this is the beginning of a larger move downward we now have the Agriculture Double Short ETN (AGA) [Apr 17: Four New Agriculture ETNs]

Again, I want to stress, I do not know how effective technical analysis is, on this ETF but for now I am going to treat it as a stock and take my position down. If we see any prolonged weakness in crop prices that could be the catalyst to cause fear and selloff in the fertilizer stocks... we shall see.

Long Powershares DB Agriculture Fund in fund; no personal position


92 Stocks Returning 11%+ Last Week

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So many good returns this past week that I had to put my cutoff up to 11% and still got 92 names. What caught my eye this week were the meat producers, Smithfield Foods (SFD) and Tyson Foods (TSN) coming out of nowhere to make huge surges this past week. I highlighted this group last fall, due to inflation concerns, and their weakness due to rising input costs. But eventually the worm will turn - they are taking out capacity (slaughtering) and this will cause meat prices to increase in the future - the stocks might be telling us this. Stock up your freezer.

Indian outsourcing was hot this week off some better than expected results. Everything else on the list looks very familiar; tons of energy names...frankly some of these names have been hitting our weekly list so many weeks in a row, I don't know how much longer they can continue going before - a selloff would healthy at this point
  1. Market cap >$2 Billion
  2. Ave volume >100K
  3. Stock price >$10
  4. Return this week 11%+
Green we own; blue we owned in the past or discuss in the blog

Symbol Company Name % Price 1 Week
CSE CapitalSource Inc 27.0
JASO JA Solar Holdings Co Ltd 20.8
AGU AGRIUM INC 20.7
INFY Infosys Technologies Ltd 20.3
YGE Yingli Green Energy Holding Co Ltd 20.2
SCHW Charles Schwab Corp 18.4
ASML ASML Holding NY Reg ADR 17.9
GOOG Google Inc 17.9
DRQ Dril-Quip, Inc 17.6
DOX Amdocs Ord Shs 17.5
MAN Manpower Inc 17.0
CTSH Cognizant Technology Solutions Corp 16.7
EAC Encore Acquisition Co 16.4
BJS BJ Services Co 16.3
CCK Crown Holdings Inc 15.8
BUCY Bucyrus International Inc 15.6
DRYS DryShips Inc 15.5
SAY Satyam Computer Services 15.5
SON Sonoco Products Co 15.3
CLF Cleveland Cliffs Ord Shs 15.2
FRE Freddie Mac Ord Shs 15.2
BOKF BOK Financial Corp 15.1
ELN Elan Depository Receipt 15.1
WFSL Washington Federal Inc 14.8
SOHU Sohu.com Inc 14.8
ETN Eaton Corp 14.8
SFD Smithfield Foods Inc 14.6
CMI Cummins Inc 14.6
WFT Weatherford International Ltd 14.6
CIT CIT Group Ord Shs 14.5
SFI iStar Financial Ord Shs 14.2
LEH Lehman Brothers Holdings Ord Shs 14.1
SINA SINA Corp 14.0
CNX CONSOL Energy Inc 14.0
CAT Caterpillar Ord Shs 14.0
NFX Newfield Exploration Co 13.8
MEE Massey Energy Co 13.7
KMX Carmax Inc 13.7
ANSS Ansys Inc 13.5
SII Smith International Inc 13.5
HES Hess Corp 13.5
FTI FMC Technologies Inc 13.3
BG Bunge Ord Shs 13.3
TDW Tidewater Inc 12.9
TSN Tyson Foods Class A Ord Shs 12.9
OII Oceaneering International Inc 12.8
SCGLY Societe Gen Spon Depository Receipt 12.8
VSEA Varian Semiconductor Equipment 12.7
FDS Factset Research Systems Inc 12.7
WIT Wipro Ltd 12.7
POT Potash Corp 12.6
WHQ W-H Energy Services Inc 12.5
BHI Baker Hughes Inc 12.5
BLL Ball Corp 12.4
SLB SCHLUMBERGER 12.4
CEO CNOOC ADR 12.3
NUAN Nuance Communications Ord Shs 12.2
NSC Norfolk Southern Corp 12.1
ALEX Alexander & Baldwin Inc 12.0
ATW Atwood Oceanics Inc 11.9
BGC General Cable Ord Shs 11.9
ACI Arch Coal Ord Shs 11.9
REP Repsol YPF Depository Receipt 11.9
LEG Leggett & Platt Inc 11.8
FRO Frontline Ord Shs 11.8
MCRS Micros Systems Inc 11.7
EV Eaton Vance Corp 11.7
JOYG Joy Global Inc 11.7
CTV CommScope Inc 11.6
BCS Barclays ADR 11.6
PNR Pentair Inc 11.5
CHKP Check Point Software Technologies Ltd 11.5
VMI Valmont Industries Inc 11.4
PDS Precision Drilling Trust 11.4
VMW VMware Inc 11.4
REPYF Repsol YPF Ord Shs 11.4
IT Gartner Inc 11.3
AG AGCO Corp 11.3
FWLT Foster Wheeler Ord Shs 11.3
AMZN Amazon.com Inc 11.3
LEA Lear Corp 11.2
SM St Mary Land & Exploration Co 11.2
ATR AptarGroup Inc 11.2
CF CF Industries Holdings Inc 11.2
RRI Reliant Energy Inc 11.2
DO Diamond Offshore Drilling Inc 11.2
MOS Mosaic Co 11.2
ITU Banco Itau Holding Financeira 11.2
PBR Petroleo Brasileiro ADR Reptg 2 Ord Shs 11.2
ANR Alpha Natural Resources Inc 11.1
URS URS Corp 11.0
JBHT JB Hunt Transport Services Inc 11.0


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