Wednesday, April 30, 2008

Readings from Around the Net

What I'm reading... with a quick blurb on each

In our Food Crisis section

WSJ: Grain Companies' Profits Soar as Global Food Crisis Mounts
  • At a time when parts of the world are facing food riots, Big Agriculture is dealing with a different sort of challenge: huge profits. (replace the word agriculture with oil and you'd have politicians yelling from the rafters about how this is evil)
  • The robust profits are emerging against the backdrop of a food crisis some experts say is the worst in three decades. The secretary-general of the United Nations, Ban Ki-moon, on Tuesday called for the creation of a high-level global task force to deal with the cascading impact of high grain prices and oil prices. He said that countries must do more to avert "social unrest on an unprecedented scale" and should contribute money to make up for the $755 million shortfall in funding for the World Food Program, which feeds the world's hungry.
USAToday: Tensions in Egypt show Potency of Food Crisis
  • There's no panic, no desperate scrambling for sustenance — a tentative sign of success for an emergency government plan that involves dramatic increases in spending on bread subsidies and the use of Egyptian soldiers as bakers. "Now we're able to find bread," says Dalia Hafez, 40, seated on a nearby curb in a cappuccino-colored headscarf. "Thanks God, the crisis is over."
  • For now, anyway. But the aftershocks from the food trauma here are only beginning to be felt. Tensions are continuing to build in this key U.S. ally, evidence that the global food crisis — the product of factors ranging from unusual weather in producing nations to increased competition for grains from biofuels programs — is now about much more than food.
  • "This crisis threatens not only the hungry, but also peace and stability," the head of the United Nations World Food Program (WFP), Josette Sheeran, warned in a recent speech.
  • That's certainly true in Egypt, the most populous Arab nation, recipient of $1.8 billion in annual U.S. foreign aid and a critical link in global trade sitting astride the Suez Canal. Its authoritarian government is faced with mounting labor unrest, profound public dissatisfaction over a yawning gap between rich and poor and questions over who will lead Egypt in the coming years. (hmm, sounds vaguely familiar to another country)
  • Former Pentagon official David Schenker, who lived in Cairo in the early 1990s and is with the Washington Institute for Near East Policy, returned here recently for a visit and was stunned at the sour public mood. "I was shocked," he says. "I find it very scary."
WashingtonPost: Siphoning Off Fuel to Feed Our Cars
  • "This is a fantastic time to be farming," Johnson says. "I'm 65, but I can't quit now."
  • Across the country, ethanol plants are swallowing more and more of the nation's corn crop. This year, about a quarter of U.S. corn will go to feeding ethanol plants instead of poultry or livestock. That has helped farmers like Johnson, but it has boosted demand -- and prices -- for corn at the same time global grain demand is growing.
  • And it has linked food and fuel prices just as oil is rising to new records, pulling up the price of anything that can be poured into a gasoline tank. "The price of grain is now directly tied to the price of oil," says Lester Brown, president of Earth Policy Institute, a Washington research group. "We used to have a grain economy and a fuel economy. But now they're beginning to fuse."
CBSMarketwatch: Ethanol Backlash Hits New Level as Food Prices Jump (we just discussed this yesterday)
  • An increasingly bitter public debate over the role that corn-based ethanol has played in driving up food prices is pitting some of the nation's biggest food manufacturers against each other, with hefty U.S. subsidies and mounting commodity costs at stake.
  • At issue is the Renewable Fuel Standard, a mandate to increase the volume of renewable fuels blended into gasoline to 7.5 billion gallons by 2012. It was created by 2005 U.S. energy legislation and expanded in last year's energy bill. Blenders of ethanol also get a 51-cent tax credit for every gallon of ethanol they blend.
  • Most commodities analysts agree that these requirements and financial incentives are one reason farmers planted more corn last year than they had in over six decades. They say ethanol has indeed played a role pushing up corn prices to record highs above $6 a bushel this year.
  • But most analysts, including senior officials at the U.S. Department of Agriculture, also cite a variety of factors for the run-up in corn and other grains -- including the high price of petroleum, a weak dollar that makes dollar-denominated commodities more pricey, droughts and increasing demand from emerging markets countries for meat and poultry. (and once again, all those OTHER factors are out of control - this one is IN control... but instead of fixing it we will continue to "debate" that the very obvious fact that there are multiple reasons... hilarious if it were not so sad and affected so many across the globe)
In our Pooring of America section aka "Just Wait, the Trickle Down Economy will benefit you any moment now"

USAToday: Walmart Delighted it is attracting more Affluent Shoppers
  • More affluent customers are shopping at Wal-Mart Stores (WMT) during the economic slump and a company executive said Tuesday that the retailer is in position to keep those shoppers when the economy improves.
  • Shoppers with a household income of more than $55,000 to $70,000 are categorized by Wal-Mart as more affluent than its core customers. Castro-Wright cited company research that showed that the number of more affluent shoppers increased 0.7% in February and was up 2.2% in March. [I predicted this one a long time ago - Dec 26: Target Shoppers Turning into Walmart Shoppers]
WSJ: Luxury Retailers Pin Hopes on Outlets - we discussed this in the recent Coach report
  • Bracing for a prolonged economic downturn, luxury retailers are lavishing new attention on their lower-end factory-outlet stores. The efforts reflect a new reality for retailers that are being squeezed by one of the worst consumer spending slumps in years. Sales at outlet stores are growing faster than those at full-priced stores at many chains.
  • The pattern is far more pronounced for some retailers. At Coach Inc., same-store sales at factory outlets rose a healthy 17.7% in the quarter ended Dec. 29, while sales at full-priced stores fell 1.1%; Coach no longer breaks out retail and factory-store results. (want to know why? soon the full priced stores will show negative comps and the factory outlets will be the only growth - so they want to hide that from you by combining the two numbers - again this means LOWER profits)
  • The resurgence of outlets entails new risks for retailers. For one thing, shifting sales to what is by definition a discount format can put pressure on profit margins.
And let's do a quick fly by on the housing bust, which should be recovering any moment now...

NYTimes: Federal Mortgage Plan Falls Short
  • Fewer than 2,000 homeowners at risk of foreclosure have been helped by a Federal Housing Administration program that President Bush promised would help homeowners who had fallen behind on their mortgage payments, federal housing statistics show.
  • F.H.A. officials have asserted in recent weeks that more than 150,000 people have benefited from the program, which was intended to help troubled homeowners refinance into stable, government-issued loans. But the vast majority of participants have been homeowners who have made their mortgage payments on time, not the borrowers in crisis who were the targets of the president’s plan, the statistics show. (laughable)
  • Democratic lawmakers estimate that at least 1.5 million people have fallen behind on their mortgage payments. Yet from October 2007 through the end of March, only 1,729 delinquent mortgages were refinanced by F.H.A., housing statistics show. Officials project that 4,000 such mortgages will be refinanced by the end of September. (targeted help, yep - very effective)
  • “Interest rates are no longer spiking,” Ms. Burns said. “People are going into delinquency not as a result of the resets, but because of the local economy.”
NYTimes: The Road to a Jumbo Loan Was Supposed to Get Easier
  • In early February, Congress gave beleaguered mortgage borrowers a rare cause for celebration. As part of the economic stimulus package, it passed rules intended to make it easier and less expensive for people to take out hefty loans in the nation’s costliest housing markets.
  • Economists and legislators said that helping tens of thousands of borrowers take out billions of dollars in new loans could stanch the bleeding in the housing market, spur spending and reduce the pain of a likely recession.
  • Instead, the effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment. (shocker; most government programs are so effective!!) Since the rules took effect April 1, many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected. Relief, they say, has been replaced by grief.
  • The program “is so much of a failure that it’s really unbelievable,” said Daniel M. Shlufman, president of the FCMC Mortgage Corporation in Clifton, N.J. Mr. Shlufman likened Congress’s effort to “coming up with a vaccine to a terrible disease, and then not giving it to people, or making it too expensive.” (hey it works like that in every other part of government)
Last we move to our World of Shortages theme

NYTimes: Oil Price Rise Fails to Open Tap
  • As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supplies would rise as producers drilled for more oil.
  • But as prices flirt with $120 a barrel, many energy experts are becoming worried that neither seems to be happening. Higher prices have done little to suppress global demand or attract new production, and the resulting mismatch has sent oil prices ever higher.
  • A central reason that oil supplies are not rising much is that major producers outside the OPEC cartel, like Russia, Mexico and Norway, are showing troubling signs of sluggishness. Unlike OPEC, whose explicit goal is to regulate the supply of oil to keep prices up, these countries are the free traders of the oil market, with every incentive to produce flat-out at a time of high prices. But for a variety of reasons, including sharply higher drilling costs and a rise of nationalistic policies that restrict foreign investment, these countries are failing to increase their output. They seem stuck at about 50 million barrels of oil a day, or 60 percent of the world’s oil supplies, with few prospects for growth.
  • “According to normal economic theory, and the history of oil, rising prices have two major effects,” said Fatih Birol, the chief economist at the International Energy Agency in Paris. “They reduce demand and they induce oil supplies. Not this time.” (it must be those pesky speculators causing all the problems!)
All things we've been talking about in the blog for a long time... now hitting the mainstream press in waves. Welcome aboard fellas!

Bookkeeping: Taking some Gafisa (GFA) off Table

I have no idea what has gotten into Brazil today as the iShares Brazil (EWZ) is up nearly 9%; that's the large caps index.. but Gafisa (GFA) is up 14% and since I just added to this Monday in the $38s [Bookkeeping: Adding Gafisa] I am going to cut back a bit here in the $43s. If anyone knows why Brazil is so happy today let me know in comments area; I do have a pretty good idea why Brazil is happy overall. It's Samba time!

Gafisa is now down to a 1.5% stake (it had appreciated to 2.1%); I will let more go north of $45 if we get there. Otherwise I am content to hold the rest since unlike my other homebuilders it's not in the United States of Subprime.

Totally unrelated educational moment of the day: Most Americans have the misconception that Spanish is the language of Brazil. It is actually Portuguese.

Long Gafisa in fund and personal account

Bookkeeping: I'm Meaningfully Adding Short Exposure here on the "Fed Pump"

That was our last catalyst to break through 1400. I'm going to be more negative and if we pop to 1410, 1420 etc on S&P 500 I will began layering in even more shorts.

Since I don't know what the flavor of the day will be (strong dollar? weak dollar? commodities are great? homebuilders are great?), I'm using the broadest short I have which avoids the Dow stocks (multinationals baby) and focuses on those needing the power of Americans, Russell 2000 (TWM) When the hedge fund computers decide if this is a time to jump right back in weak dollar plays, or to continue this recent rotation out - I'll pounce. For now - who knows what the algorithims are saying... they are probably fried.

As you see, the Fed once again is showing it is very intent on "fighting inflation" (not) In fact, I believe a lot of people (me included) are surprised there is not any stronger wording about inflation - even jaw boning (sp?) it would of gotten CNBC into a lather about how "hard the Fed is fighting inflation". They (Fed) still live in a fantasy world of "lower inflation in 2nd half". I guess they will hold that line until Dec 31, 2008 and then be forced to change language to "lower inflation in 1st half 2009". As with kids, watch their actions not their words.

Here's my take - the Fed is afraid of deflation. Deflation gets rich people mad - it hurts people with assets the most (all their assets get devalued - think Great Depression). Inflation, on the other hand, focuses its hurt on lower and middle class - it hurts people who consume. So you can guess which side the Fed is erring on (not the peons). It's either that... or they are truly believing the numbers coming out of the government about inflation (no problemo!)... I don't know which of those 2 thought processes that the Fed brain trust seems to be using... to fear more.

Long Ultrashort Russell 2000 in fund and personal account

MSNBC: Americans Tapping Attic for Spare Cash

Everything will be better in 6 months. Everything will be better in 6 months. Everything will be better in 6 months.

GDP still positive - no recession. GDP still positive - no recession. GDP still positive - no recession.

Unemployment rate low - Americans thriving. Unemployment rate low - Americans thriving. Unemployment rate low - Americans thriving.

Inflation nearly non existent per government reports. Inflation nearly non-existent per government reports. Inflation nearly non-existent per government reports.

Short, shallow recession soon to be over. Short, shallow recession soon to be over. Short, shallow recession soon to be over.

It's all priced in; buy stocks. It's all priced in; buy stocks. It's all priced in; buy stocks.

2nd half 2008 boom. 2nd half 2008 boom. 2nd half 2008 boom.

Stories of woe are a media creation. Stories of woe are a media creation. Stories of woe are a media creation.

70% of Americans live paycheck to paycheck - but don't worry. 70% of Americans live paycheck to paycheck - but don't worry. 70% of Americans live paycheck to paycheck - but don't worry.

Social acrimony will not be a major issue in the US. Social acrimony will not be a major issue in the US. Social acrimony will not be a major issue in the US.

There's no place like home. There's no place like home. There's no place like home.

Americans Tapping Attic for Spare Cash
  • The for-sale listings on the online hub Craigslist come with plaintive notices, like the one from the teenager in Georgia who said her mother lost her job and pleaded, "Please buy anything you can to help out."
  • Or the seller in Milwaukee who wrote in one post of needing to pay bills — and put a diamond engagement ring up for bids to do it.
  • Struggling with mounting debt and rising prices, faced with the toughest economic times since the early 1990s, Americans are selling prized possessions online and at flea markets at alarming rates.
  • To meet higher gas, food and prescription drug bills, they are selling off grandmother's dishes and their own belongings. Some of the household purging has been extremely painful — families forced to part with heirlooms.
  • "This is not about downsizing. It's about needing gas money," said Nancy Baughman, founder of eBizAuctions, an online auction service she runs out of her garage in Raleigh, N.C. One former affluent customer is now unemployed and had to unload Hermes leather jackets and Versace jeans and silk shirts.
  • At Craigslist, which has become a kind of online flea market for the world, the number of for-sale listings has soared 70 percent since last July. In March, the number of listings more than doubled to almost 15 million from the year-ago period.
  • Craigslist CEO Jeff Buckmaster acknowledged the increasing popularity of selling all sort of items on the Web, but said the rate of growth is "moving above the usual trend line." He said he was amazed at the desperate tone in some ads.
  • In Daleville, Ala., Ellona Bateman-Lee has turned to eBay and flea markets to empty her three-bedroom mobile home of DVDs, VCRs, stereos and televisions. She said she needs the cash to help pay for soaring food and utility bills and mounting health care expenses since her husband, Bob, suffered an electric shock on the job as a dump truck driver in 2006 and is now disabled.
  • But clearly, cash-strapped people are selling their belongings at bargain prices, with a flood of listings for secondhand cars, clothing and furniture hitting the market in recent months, particularly since January.
  • Earlier this decade, people tapped their inflated home equity and credit cards to fuel a buying binge. Now, slumping home values and a credit crisis have sapped sources of cash.
  • Meanwhile, soaring gas and food prices haven't kept pace with meager wage growth. Gas prices have already hit $4 per gallon in some places, and that could become more widespread this summer. The weakening job market is another big worry.
  • "I need the money for essentials — to pay my bills and to eat," Hadley said.
  • At, which helps novices sell things online, for-sale listings rose 66 percent from February to March, much faster than the 25 percent to 30 percent average monthly pace since the company was formed in September, CEO Maureen Ellenberger said. She said she was surprised to see that most of her clients desperately needed to sell items to raise cash.
  • On Craigslist, Buckmaster said, three of the four fastest-growing for-sale categories are tied to gas — recreational vehicles like campers and trailers, cars and trucks, and boats.
  • Baughman, who runs eBizAuctions, said that over the past four months she's been working with mostly desperate sellers instead of mainly casual ones. Most are middle-class customers who can't pay their bills and now want to be paid up front for the items instead of waiting until they are sold, she said.
  • The trend may be hurting secondhand stores too. Donations to the Salvation Army were down 20 percent in the January-to-March period. George Hood, the charity's national community relations and development secretary, said that was probably partly because people were selling their belongings instead.
Buy stocks, Americans don't matter to multinationals. Buy stocks, Americans don't matter to multinationals. Buy stocks, Americans don't matter to multinationals.

Do the Bottom 80% of Americans Stand a Chance? Do the Bottom 80% of Americans Stand a Chance? Do the Bottom 80% of Americans Stand a Chance?

Finally (A Year Late) Fertilizer Hits the Front Page of the NYTimes; and an Interview with Mosaic (MOS) CEO

Just in time for a sell off... the mainstream press finally wakes up to one of the best investing stories of the past few years... much of this is old news for blog readers but it continues to build on my World of Shortages theme... note how when new factories are created to generate more fertilizer, it leads to more energy consumption which leads to more water usage, and pollution and....

... again, I state this planet is not well suited for 6.5 Billion people unless 4.5 Billion live in abject poverty. The more wealth in this world and the more people move from poverty to "middle class" (we wouldn't call it that necessarily in the US), the more strains on the globe. We will have crisis after crisis until/if/when technological breakthroughs happen... but I believe the next 1-10 years will be fraught with crisis after crisis as world governments (especially ours) are reactive, not anticipatory. Even in the longer run the technological breakthroughs are going to be like plugging holes in a dam waiting to burst...

The problems we are beginning to encounter are global in nature and require cross border cooperation. If I know human nature, we will turn into a much more protective and nationalistic globe, not cooperative as each nation serves to protect its own. We've already seen this in grains as country after country has restricted exports and/or slapped tariffs. Even mighty United States puts enormous tariffs on Brazilian sugar ethanol so it can protect its own corn producers. We're just in the pre game warm up of this thesis.... first pitch has yet to really be thrown out. And as for those 6.5 Billion humans? Well we are headed for 9 Billion by 2042. So we have to cram another 40%+ people onto this globe.... this is why the commodity cycle in my opinion is just beginning and these "strong dollar" selloffs are (while predictable) very laughable in the "big picture"... but I do realize Wall Street does not have a timeline longer than "next week" and I'm talking issues over the next 30 years. The U.S. is 5% of world population (creating 25% of the pollution and consumption) - and we are headed to 3% by the middle of this century. Just imagine when the Asians pollute and consume at a rate of 1/5th of us... and there are another 1-3 billion of them (think 2020 to 2040). I continue to believe productive farmland anywhere on the globe will be the best pure long term investment...
  • (In Vietnam)... the widespread use of inexpensive chemical fertilizer, coupled with market reforms, helped power an agricultural explosion here that had already occurred in other parts of the world. Yields of rice and corn rose, and diets grew richer.
  • Now those gains are threatened in many countries by spot shortages and soaring prices for fertilizer, the most essential ingredient of modern agriculture.
  • Some kinds of fertilizer have nearly tripled in price in the last year, keeping farmers from buying all they need. That is one of many factors contributing to a rise in food prices that, according to the United NationsWorld Food Program, threatens to push tens of millions of poor people into malnutrition.
  • The squeeze on the supply of fertilizer has been building for roughly five years. Rising demand for food and biofuels prompted farmers everywhere to plant more crops. As demand grew, the fertilizer mines and factories of the world proved unable to keep up.
  • Some dealers in the Midwest ran out of fertilizer last fall, and they continue to restrict sales this spring because of a limited supply. “If you want 10,000 tons, they’ll sell you 5,000 today, maybe 3,000,” said W. Scott Tinsman Jr., a fertilizer dealer in Davenport, Iowa. “The rubber band is stretched really far.”
  • Fertilizer companies are confident the shortage will be solved eventually, noting that they plan to build scores of new factories. But that will probably create fresh problems in the long run as the world grows more dependent on fossil fuels to produce chemical fertilizers. Intensified use of such fertilizers is certain to mean greater pollution of waterways, too. (this is why potash has the widest moat - you cannot build a factory to create more potash - nitrogen on the other hand will be at most risk as it is much more easily replicated)
  • Agriculture and development experts say the world has few alternatives to its growing dependence on fertilizer. As population increases and a rising global middle class demands more food, fertilizer is among the most effective strategies to increase crop yields.
  • “Putting fertilizer on the ground on a one-acre plot can, in typical cases, raise an extra ton of output,” said Jeffrey D. Sachs, the Columbia University economist who has focused on eradicating poverty. “That’s the difference between life and death.”
  • From 1900 to 2000, worldwide food production jumped by 600 percent. Scientists said that increase was the fundamental reason world population was able to rise to about 6.7 billion today from 1.7 billion in 1900.
  • Vaclav Smil, a professor at the University of Manitoba, calculates that without nitrogen fertilizer, there would be insufficient food for 40 percent of the world’s population, at least based on today’s diets.
  • Manufacturers are scrambling to increase supply. At least 50 plants to make nitrogen fertilizer are under construction, many in the Middle East where natural gas is abundant, and phosphorous and potassium mines are being expanded. But these projects are expensive and time-consuming, and supplies are expected to remain tight for years.
  • Environmental groups fear increased use, particularly of nitrogen fertilizer made using fossil fuels. Because plants do not absorb all the nitrogen, much of it leaches into streams and groundwater. That runoff has long been recognized as a major pollution problem, and it is growing.
  • “This is a basic problem, to feed 6.6 billion people,” said Norman Borlaug, an American scientist who was awarded a Nobel Peace Prize in 1970 for his role in spreading intensive agricultural practices to poor countries. “Without chemical fertilizer, forget it. The game is over.”
On to the Mosaic CEO interview (thanks for reader who sent this to me)
  • It's not every executive who can claim to have improved his company's margins from nearly zero to more than 30 percent in less than two years. But Jim Prokopanko, president and chief executive of the Mosaic Co. since January 2007, finds himself riding a rocket driven by growing global demand for his company's crop nutrients and strained supply.
  • And Mosaic, the world's largest producer of phosphate fertilizer and second-largest supplier of potash, another key crop nutrient, is in the enviable position of controlling nearly every step in the production process from mining the raw material to shipping the finished product.
  • Though Mosaic is based in Plymouth, Minn., outside Minneapolis, more than half its $5.8 billion in sales last year were tied to the phosphate rock they take out of five mines in Central Florida and process at three area plants in Polk and Hillsborough counties.
Q. You've been in the business, previously with Cargill, for 30 years. Did you ever think you'd see diammonium phosphate (DAP) fertilizer selling for more than $1,000 per metric ton?

A. Never. This is absolutely unseen in my generation. And it came about very quickly.

Q. Is it a bubble?

A. We've seen spikes in grain prices before, but those were supply-driven, caused by floods in Mississippi or droughts in Canada. This is demand-driven by an increase in consumption the world over.

I think we've hit a tipping point because while we have very steady population growth, at the same time we're having strong world economic growth.

Though there may be a slowdown in the U.S., the economy is strong in areas of the world like Asia and South America with the greatest population growth.

And at $4,000 to $5,000 per capita annual income, people look to improve their diets. That translates to demand for more grain.

The world's inventory is also dangerously low. We're emptying the cupboard.

Q. So when grain prices rise, farmers plant more acres and want more productivity, increasing the demand for fertilizer?

A. Farmers, of every size, can't afford not to maximize their production. Their costs are also up. For the last two decades, the agricultural industry has not had very favorable returns; the profit has not been there. So there's been consolidation throughout the industry, including in the fertilizer business.

Two years ago, we closed a mine and two plants in Florida (the Fort Green mine and the Green Bay and South Pierce fertilizer plants, all in southwest Polk), which were high-cost facilities.

Though demand has grown, you can't just turn on a dime to produce more phosphate. We're running 24/7, mining 17.5 million tons of phosphate rock each year, and we're working to expand our mining areas, both here and at our potash mines in Canada. But if you started permitting a plant today, it would take five years to get it up and operating.

Q. In addition to phosphate rock, you need ammonia and sulphur to make DAP. How have those costs increased?

A. The cost of ammonia, made from natural gas, has tripled over 10 years. Sulphur, a byproduct of oil refining, has gone from $55 a ton to $450 a ton in the past year.

Ocean transport for fertilizer, from Tampa to India, used to cost $35 a ton. Now it's $100 a ton.

The world price for DAP is set by Morocco, which is the Saudi Arabia of phosphate with a 300-year reserve. Last year, phosphate rock from Morocco was $55 a ton; today it's over $250 and for the second half of the year it's going to be $350 to $400.

That sets a floor price for fertilizer producers who don't own their own rock, who have no choice but to buy from Morocco. But we own our rock.

Q. How are world markets changing?

A. China used to be our largest customer. This year China was a net exporter, supplying 5 million tons to the world market.

But China's government is very concerned about food security, and they've just put a 135 percent tariff on fertilizer exports. That will have a major impact on world supplies.

India is now our biggest customer, but the government caps the price of fertilizer to the farmer at $200 a ton and subsidizes the difference. This year, the Indian government will end up spending more on fertilizer subsidies than on its military. It's an impossible situation.

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

Bookkeeping: Cutting Some Cummins (CMI) & Mosaic (MOS); Adding Some National Oilwell Varco (NOV)

Well my 'dream' scenario of this morning did work out - I wrote this when Cummins Engine (CMI) was in the $59s

My hope right now is the stock runs to mid $60s, where I'd lighten up and then refill the position as it eventually falls back to fill that gap in the chart - ambitious plan but it would be a dream scenario.

Since I'm not watching every movement of the market (damn day job), I missed the move to $64, but I lightened my position here in the $63s, selling down my position by 40%. (200 of 500 shares) Again, I'd like to add this stake back on a pullback. So if I am wrong and there is no pullback then I still have 60% of my position to ride the wave. If there is a pullback, then I will buyback my shares let go here in the $63s with a target of $56.50 - this would be a 10% reduction... if it worked out that beautifully, well I'd be a happy camper. This selloff still keeps the name at 1.7% stake in case it continues to run.

I am still reticent to add a lot of commodity exposure - I can see the "play it by the book" robots who rule Wall Street to sell them off as the "dollar strengthens" but I am going to selectively make buys here and there. One of my favorite oil service names, National Oilwell Varco (NOV) has pulled back significantly here from nearly $76 to $66 in just 7 sessions - so I am going to take this 13% drop as a time to begin rebuying this position... SLOWLY. The stock has fallen to its 50 day moving average. Once again, I could see all these commodity names selling off more significantly as long as people rotate to financials, retailers, and other related junk and out of things that will actually work in 2nd half 2008. I'm taking NOV back to a 0.9% stake, but if crude "falls" to $105-$110, panic will be in the air and we'll hear how the Fed is doing such a great job of fighting inflation. Again, ignore it - the Fed will be keeping rates low through the election, and putting even MORE liquidity into the system through their alternative means. That is not fighting inflation - that is stoking it. The dollar rebound will be short lived in my opinion. But that does not mean the lemming hedge funds won't all pile out the same exit at once and cause harm to portfolios. Hence I am taking it slow adding to any stakes and anticipating a broader selloff on the "vigilant" Fed - a total misnomer.

EDIT: 12:50 PM - I missed the small fact that NOV reported earnings this AM - oops. Here they are. More hamsters (my analyst team) that need to be fired... (interesting comments on the North American land drillers who I've mentioned a few times now as showing great charts of late - this is another group, much like natural gas that I'd abandoned for a few years - major names NBR, PTEN, HP, a few others)
  • National Oilwell Varco Inc (NOV) said on Wednesday its first-quarter profit rose 44 percent as record crude oil prices boosted demand for its drilling equipment, particularly in offshore markets.
  • Still, the company's shares fell nearly 3 percent as its outlook, which noted improved demand in North American land markets and growth in deepwater markets, failed to inspire investors.
  • Here you have a company that is well positioned for the infrastructure build-out we are going to see in North America and internationally," Roger Read, oilfield services analyst at Natixis Bleichroeder, said. "But they didn't tell us anything we didn't already know two weeks ago."
  • Net income for the Houston company was $397.6 million, or $1.11 per share, compared with $275.9 million, or 78 cents a share, in the same quarter a year earlier. Net income for the Houston company was $397.6 million, or $1.11 per share, compared with $275.9 million, or 78 cents a share, in the same quarter a year earlier.
  • Revenue rose 24 percent to $2.69 billion.
  • Backlog for capital equipment orders for the company's rig technology segment increased to $9.9 billion, compared to $9 billion at the end of 2007.
  • On a conference call with analysts, National Oilwell's Chief Executive Officer said the company's outlook for North America had improved, citing the development of unconventional shale plays like the Marcellus in Appalachia.
  • "I would offer up that the land rig building in the lower 48 is going to improve dramatically this year," CEO Pete Miller told analysts on a conference call.
I took 150 of my 500 shares of Mosaic (MOS) off the table for no reason other than the ones listed above... I could easily see a scenario where hedge funds all do their silly dance of "strong dollar means I need to buy Macys" blah blah. I continue to target $110-$114 for this name, so I took some off here in the $122s. If I am wrong and the stock shows strength and the "commodities are dead" play is not on, then I'll be happy to add higher since my year end target is much higher. This is simply a bit of a short term play, and takes my exposure back down to a normalized 3.7% stake. Once the fluff of "weak dollar plays are over" I am going to build this position back to a 6-8% stake; I'll start in that $110-$114 area... and pray for $100 or lower ;)

I would like to add to my coal plays here, but again - I am fearing the herd trade of "the end is here for commodities" which might be playing out at 2:15 PM this afternoon.

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

Totally Not Stock Related: Official Iron Man Theatrical Trailer 2008


There are very few movies I ever get excited about anymore, since they are all so ho hum and/or repeats of various old themes; I probably go to 3-4 movies a year nowadays... but for anyone with a Y chromosome this one has to get your heart racing. Love the casting of Robert Downey Jr. - hope it is half as good as some of the trailers out there.

First Solar (FSLR) Keeps Doing Enough to Satisfy Shareholders

Despite the incredulous valuation First Solar (FSLR) continues to do enough to make shareholders happy. Let me be the first to say, despite my early entry into solar (about 1.5 years ago) I've constantly underestimated this specific name, and missed the boat - we've held it in the fund briefly but since I'm not a "growth at all costs" guy, but a "growth at reasonable cost" guy, I've had a hard time holding this (similar to (BIDU) where there is no reasonable metric of valuation which explains the stock price)

My worry with First Solar is simply an expectations game - they are reaching the stage that within a quarter or two they will finally be hitting the wall in terms of "yes we are growing at an incredible rate" BUT "investors expected us to grow even more".... when that quarter happens, the momentum guys will flee en masse and you'll see a large drop off in the stock price. I thought this quarter might be that quarter since the CEO indicated in the past that 1st half 2008 would be more flattish growth....but not yet - however sequential growth (that is, one quarter out) might be "modest" per the CEO's comments today; and this stock is not priced for modest sequential growth. You can start reading between the lines in their guidance regarding this situation - while they keep raising future guidance it's not nearly the pace of "surprise" as in the past. So I still see this as a potential risk, not from a company execution standpoint but a stock standpoint.
  • First Solar Inc (FSLR) raised its full-year 2008 revenue forecast to between $975 million and $1.05 billion from its previous estimate of $900 million to $950 million, Chief Financial Officer Jens Meyerhoff told a conference call on Wednesday.
  • The company, which makes thin-film solar products, raised its expected production forecast to between 420 and 460 megawatts of solar modules from its forecast issued in February of 400 to 430 megawatts
  • Meyerhoff told the conference call the company expects its second-quarter revenues to rise "modestly" from the first quarter level.
Analysts are currently pegged at $2.53 for 2008 EPS. I'll be generous and say they can do $3.00 - the stock is priced at 100x forward earnings. And 23x revenue. I know bulls will say, that does not matter - and thus far except for a few months - it has not. I'm as big of a bull on solar in the long run as you will find (I do expect some road bumps in the next few years however), but these are not sustainable valuations. In 2009 analysts have the company growing to $5.12 EPS - I'll say the analysts are wrong and FSLR can do $7.... that means the stock is now trading at 43x estimates almost 2 years out. The "law of large numbers" will eventually hit First Solar as it has hit all great growth companies, even Mr Google (GOOG)... once you get to a certain size you cannot just keep doubling revenue every year... I think that is going to be the issue for First Solar between 2009 and 2010; growth should drop to a still excellent 40-60% range - but you are paying a much higher multiple for that earnings. Further, all it's brethren on the polysilicon side who have been hampered by sky high costs are going to see relief by that point (2009-2010) and their costs are going to fall through the floor - so the competitive atmosphere will be very different than it is now in my opinion. But that is neither here or there for now, it continues to execute and one cannot have any qualms with the scintillating growth - it's just a matter of what price do you pay for that growth? And how much more upside can we squeeze out from here? This is always our question on every stock - what is the upside potential versus downside risk - I believe risk is beginning to become more of a factor as upside surprises are becoming harder to reach (simply due to law of large numbers). Again, let me reiterate - execution has been flawless.
  • First Solar Inc. said Wednesday that first-quarter earnings spiked, beating Wall Street expectations, as the solar module maker's revenue more than doubled.
  • For the first quarter ended March 29, earnings surged to $46.6 million, or 57 cents per share, from $5 million, or 7 cents per share, in the prior year. Quarterly revenue more than doubled to $196.9 million, from $66.9 million in the first quarter of fiscal 2007.
  • Analysts surveyed by Thomson Financial forecast first-quarter earnings of 47 cents per share on revenue of $183.6 million.
  • Operating expenses jumped 83 percent to $46.2 million as selling, general and administrative expenses more than doubled.
  • The company's foreign sales benefited from the weaker U.S. dollar.
No position in First Solar, but various solar positions in fund; long in fund - no personal position

Cummins Engine (CMI) Excellent Report on Strong Int'l Sales

I restarted Cummins Engine (CMI) in the fund 2 weeks ago as a "weak dollar" play - one thing that attracted me to this name in the fall was it's large (and very early) exposure to Chindia. Once I started seeing company after company make up all their US losses with major currency benefits from international sales (along with booming volume sales overseas) this seemed like a good time to re-enter this name. [Apr 18: Restarting Cummins Engine as Rest of the World Moves on Without USA] So far so good; earnings today booming on overseas sales. If not for a nasty gap in the chart which I would like to see "filled" i'd be adding to this position today. Instead I will add when the stock falls and fills this gap (in low $56 range). My hope right now is the stock runs to mid $60s, where I'd lighten up and then refill the position as it eventually falls back to fill that gap in the chart - ambitious plan but it would be a dream scenario. This stock remains dirt cheap.

I do want to STRESS that inflation is REAL and just by the 2 reports I am highlighting today you can see despite government's insistence it does not exist, it is SQUEEZING corporate profit margins - look for this to be a theme in the next year in many earnings reports. We are just seeing the first edge of this in this season's earnings reports and I don't hear ANYONE talking about it.
  • Cummins Inc. said Wednesday that first-quarter earnings jumped 33 percent as the diesel engine maker's international growth helped offset increased commodity prices and weakness in some U.S. markets.
  • For the period ended March 31, earnings rose to $190 million, or 97 cents per share, from $143 million, or 71 cents per share, in the prior year. Analysts surveyed by Thomson Financial forecast earnings of 89 cents per share on revenue of $3.33 billion.
  • Quarterly sales grew 23 percent to $3.47 billion, from $2.82 billion in the first quarter of 2007.
  • Cummins said strong performance in international markets helped offset rising commodity prices and weakness in some U.S. consumer-related markets, such as pickup truck engines, recreational vehicle products and recreational marine engines.
  • The company said sales growth was driven by its engine business, which is its largest segment. Demand was strong for medium-duty truck engines in the U.S. and for commercial generator sets in India, Great Britain, Asia and the Middle East. Demand also increased for turbochargers and exhaust aftertreatment products in North America and Europe.
  • Cummins' distribution business reported strong growth in Europe, the Middle East and Asia Pacific.
  • Also, the company's joint venture earnings jumped 86 percent, boosted by emerging markets such as China and India, and by the company's North American distributors.
Again, let me say, the rest of the world cannot decouple from the US; their growth will slow to some degree - BUT in a relative world, they are booming (if China's growth falls in half from peak we are still talking 6%+ growth) and many of these multinationals really could give a damn about the pathetic state of domestic affairs here. The rest of the world does move on, with or without us. Each year that passes we become less and less a share of global GDP. However, the global inflation our central bank is helping to stoke WILL be an issue for the entire globe (how much is to be determined but I fear it could be a serious blow)... I guess it's our way to payback the world - first we try to sink their banks with our toxic mortgage debt sales (risk free!!), and then when that doesn't work, we help exaggerate global inflation with 'easy money policies'... we are a mean bunch. But the rest of the world is observing these self serving actions, and it will be remembered.

Long Cummins Engine in fund; no personal position

Bookkeeping: Closing Chicago Bridge & Iron (CBI) Position

I am closing out one of my infrastructure stocks; Chicago Bridge & Iron (CBI) after a less than stellar earnings report. This is 2 days in a row an infrastructure stock has missed; yesterday was McDermott [McDermott Issues Warning] but I've decided to hold the latter for now. Main difference is despite the name, Chicago Bridge & Iron is based in the Netherlands and thus does not have the tailwind of the US Peso at it's back. Further, yesterday's fall in McDermott (MDR) took the stock down to its 50 day moving average, but not below... nor below its 200 day moving average.... today's fall in CBI has taken it down below both moving averages. So these 2 factors combined are why I am keeping one (for now) and letting the other one go. I have a big stable of infrastructure names, so I still have a big basket of names... I will be curious if the others create the same excuses of "weather" (MDR excuse) or "commodity costs" (CBI). I did not see Jacobs Engineering (JEC) complain about either in its recent report.

Last, I have been adding a lot of positions of late and want to streamline the portfolio and try to keep the long positions at a certain ceiling... so I've been mulling what positions to cut over this past weekend - this was one of the candidates, and this earnings report confirmed. While I can hold this for a while and hope for a rebound to curtail my losses I just decided to cut bait and focus energy on other ideas.

I'm selling my 1.5% stake which I started on November 12, 2007 for a net loss of $6000, selling today in the $42s. Again, for some this is a buying opportunity as the stock has retreated but I just don't like the lack of execution; this is not a 2-3 cent miss but a miss by a mile - again lack of managing Wall Street is not what I like in my holdings. I still like this name for the long run based on what space it operates in.
  • Chicago Bridge & Iron Co. said Wednesday its first-quarter profit rose 15 percent year-over-year but failed to meet Wall Street expectations, as escalating material and commodity costs offset revenue growth.
  • The engineering and construction company said net income rose to $42.2 million, or 43 cents per share, from $36.6 million, or 38 cents per share, a year ago. Analysts surveyed by Thomson Financial had expected much higher profit of 54 cents per share.
  • Revenue surged 68 percent to $1.4 billion from $857.3 million, in line with analysts' expectations. New awards for the quarter totaled $943 million, bringing CB&Is total backlog to $7.3 billion as of March 31.
  • "We are confident in our full-year forecast and in the continuing level of capital expenditures in the global energy market although challenges on projects related to labor productivity and escalating material and commodity prices have impacted the quarters results," said Philip K. Asherman, President and CEO.
Long McDermott, Jacobs Engineering in fund; no personal positions

Tuesday, April 29, 2008

Earnings Review - What Did We Learn by Ignoring CNBC & Government Reports?

First the market - we continue to cling in a tiny range... can't get over that S&P 1400 level no matter what. All week everyone sits on their hands and waits for the Gods from D.C. to tell us what they do with the peons... we expect 25 basis point and then statements saying balances are risked, we care about inflation blah blah. Or maybe even no cut. Either way it doesn't matter much - these are long term situations yet not a trader on Wall Street can hit buy or sell this week until they see the action. This has to be the most telegraphed "we are stopping after this meeting" I've ever seen but still the blackjack players are waiting to see the knee jerk reaction before placing chips. Will anyone care in October 2008 if rates are 2 or 2.25%? No. But for tomorrow it's the most important thing in the world. I'm more interested in Friday's piece of fiction from the government - you know, the monthly "no seriously - unemployment is not an issue" report.

A quick look back at some of the names I mentioned I was looking at earlier this week, all important data points for our forming our macro point of views so we can ignore CNBC blather and government reports which are useless.

In the restaurant biz, Buffalo Wild Wings (BWLD) shows why you don't want to be short or long going into earnings - too much risk, up 10% in after hours on ok earnings - when expectations begin to get so low, it becomes easy to pass the low bar. Their costs rose 22%. If this were a government report their costs would only be up 3%. That's like dog years. I actually like this company, so it's one reason I watch it; but just in a tough neighborhood (restaurants). Domino's Pizza (DPZ) did not far so well. Stop if you've heard this before but United States of Subprime sales down 5.2%, but international sales up 8.8%. In an interesting tidbit the CEO is saying they need to focus on the lower price market, something they've ignored for years.... translation - the pooring of America continues as real wages (adjusted for inflation) continue to eat away our middle class - and companies need to adjust. More and more people are entering the "lower class" so companies need to move "down market". What does it mean for companies? Lower profits. Folks, these are secular issues (not cyclical) . If you believe inflation is permanently going to be a higher issue in my "World of Shortages" scenario than profit margins will be permanently squeezed, and the living wage in America is simply not going to keep up - our lower class will only grow and the gap between rich and poor, already at levels last seen in 1929 will only widen. That's how you lead to social unrest. Unlike the late 1970s where workers were able to get wage increases of 10%+ to compensate for sky high inflation, we are in a new era where employers simply say, we'll find another you if you don't take this 3.2% wage increase. Bad for Main Street. Great for Wall Street.

In the pharmacy benefit space (names I like), MedcoHealth Solutions (MHS) did ok but since they did not give the lemmings what they wanted on guidance, the stock traded down. Express Scripts (ESRX) continues to hot home runs. If it's what the lemmings like or not in the near term, who knows.

Burlington Northern (BNI) - well they run a railroad - 3 words - ethanol, coal, fertilizer. I do want to highlight some points because as I keep saying, this railroad strength has nothing to do with "US strength in 6 months". The rest of the world continues to charge forward (although they will slow to some degree) while the United States of Subprime wallows.
  • Burlington Northern Santa Fe Corp., which operates the nation's second-largest railroad, said Tuesday that its first-quarter earnings jumped 30 percent on more rail shipments of farm products and coal, as well as larger fuel surcharges.
  • Chairman and Chief Executive Matthew K. Rose said, however, that the company continued to see softness in shipments of consumer products and housing supplies.
  • "It is hard to see any significant decline in commodity prices coming in the second, third or fourth quarters," Chief Executive Matt Rose told Reuters in a telephone interview. "But we're seeing a real dichotomy out there in the economy." "It really is a tale of two cities," he added
  • Freight volumes rose in the company's coal (up 6.7 percent), agricultural (up 15 percent) and industrial products (up 3.3 percent) divisions. But volumes at BNSF's consumer products division -- which includes hauling consumer goods and automotive shipments -- were down 8.7 percent, due to economic softness related to the slowdown in the U.S. housing sector, the railroad said.
  • CEO Matt Rose said that while he expects commodities will continue to perform well throughout the year, sagging U.S. consumer confidence and the housing slowdown will remain a drag on the economy for the remainder of 2008. "We're not expecting any significant breakout on the economic front," he said. (but Mr Rose - they promised me... in... 6 months... )
In the contract research organization space, US player Covance (CVD) was solid but shares were down early hard (recovered all day), whereas Irish player ICON (ICLR) had a very good report and the market rewarded it. From watching these guys over the years, ICON just seems to be best of breed.

US Steel (X) saw a MASSIVE gain from the US Peso - 59 cents. Considering they made under $2, over 25% of their profit is US Peso. No matter, it was only down 1%. People can't be bothered with details like that. Just imagine if we still had a manufacturing base how much of a boom town Pittsburgh would be nowadays. Actually much of PA and OH would be booming...

Valero (VLO) is a quality company but this refiner is simply stuck between a rock and a hard place. The sector has been decapitated, so investing here should be relatively low risk of an entry but one has to hope for crude to meaningfully fall (and I don't mean for a week or two) and/or things to reach a level akin to financial, homebuilders or retailers where as long as you assure investors you won't be out of business the stock can jump 20% on (any) earnings. These were some amazing stocks in spring 2007, not so much this year.
  • But Valero chairman and chief executive Bill Klesse said the fundamentals for gasoline are improving, including demand. On the Gulf Coast, he noted, the average "crack" spread for gasoline -- the difference between what refiners pay for crude and get for the gasoline they make -- has more than doubled in April versus March, from about $3 to $6.50 a barrel. At one point last spring, crack spreads reached as high as $37 a barrel.
  • The company noted the average price of the benchmark West Texas Intermediate crude increased nearly $40 a barrel in the quarter, while the average wholesale price of Gulf Coast conventional gasoline rose by about $34 a barrel.
Under Armour (UA) is a disaster - every time I think about buying them I have to remind myself... Nike (NKE) = global brand. Under Armour = United States of Subprime brand. End of discussion

Last, but not least, is a stock a reader mentioned Titan International (TWI) which is a derivate play on the global boom/ag boom - they make huge tires for agriculture and mining companies. Business is booming and they are jacking up prices, from 4-35%. In government terms that means they are dropping/raising prices from "-8% to 4%". But I try to stick to the real world. Keep in mind the below results are that good even with a huge share count increase
  • Titan International the Quincy, Ill., holding company for interests in wheels, tires and assemblies for equipment for agricultural, construction and consumer applications, swung to a first-quarter profit from a year-earlier loss on 12% higher sales. Earnings were $8.1 million, or 29 cents a share, compared with a net loss of $2.5 million, or 12 cents, in the year-earlier period.
  • Revenue reached $253.5 million from $226.3 million. Demand in the agricultural market was "huge," driven by increases in grain-based ethanol and soybean-based biofuel and the resulting higher commodity prices, Chairman and Chief Executive Maurice Taylor Jr. said in a statement
  • Titan Tire Corporation, a subsidiary of Titan International, Inc. (NYSE:TWI - News), will implement a price increase on Titan, Goodyear and General branded off-the-road (OTR), farm and construction tires in the aftermarket, effective June 1, 2008. The increase will range from 4 percent to 35 percent to offset rising natural and synthetic rubber, carbon black, fabric, energy and transportation costs. (no inflation here, move along)
No positions

Housing Stocks Continue to Ignore the News

At this point the "Decoupling" between reality and the stocks in some areas is reaching amusing proportions. I own 2 homebuilders, not because I believe in any imminent rebound, but because no amount of bad news can bring them down anymore. In fact, days like this are exactly why I own them - to counterbalance the commodity / global growth positions I own such beauties as Lennar (LEN) up 4%.

So when I put on my stock jockey hat I say "everything will be fine in 6 months, buy buy buy". And that's about the depth of my analysis.

When I put on my economist/strategy hat I continue my long held stance that we are still in the early innings (I've moved us up to 3rd/4th inning now that new home prices are being slashed) but if you look at the news flow, it is amusing when overlayed with the stock performance. You could say that for the whole stock market, but this group in particular. Remember, reality does not count in the stock market - only perception. Perception is things are going to be fine "in due time"... on the other hand MY reality is 2008 will be the year of the 'walk away" (people send it keys, and walk away from homes they are underwater on) , inventory numbers are at record levels but do not reflect the "trapped" people - people who want to sell but either (a) refuse to face reality and book their loss or (b) don't have enough money to bring to the table at closing to sell their underwater home, credit tightening so even less home owners are available to sap up inventory, people who feel like they are in a recession are not going to be rushing to buy homes, people whose real wages (adjusted for inflation) are becoming poorer by the day, so their buying power is falling (for homes as well), many potential buyers who should be ready to buy now were sucked in early in 2005-2007 by no down, cheap rate mortgages so that pool of people is nowhere to be found, foreclosures are just beginning as people begin to give up, and it still takes 6 months for inventory to come to the market, and median prices are still too high in most major urban areas for average people with average wages. That's 2008. 2009? Not much better. Get back to me in late 2009/early 2010.

But since none of that matters ("it's all priced in"), we have homebuilder stocks in our portfolio - and they go up on days like this when we see Case/Schiller Price Index shows nearly 13% year over year median NATIONAL price reductions (ouch), and foreclosures are at record levels. Thankfully, this will all be past us in "6 months".
  • Home prices have posted another record decline, as most of the nation's largest markets suffered double-digit drops over last year, a survey released Tuesday shows.
  • The S&P Case/Shiller Home Price Index, which tracks 20 of the largest housing markets, showed prices plummeting by 12.7% in the 12 months ending February. That's the biggest fall since the index began tracking prices in 2000.
  • Of those 20 metro areas, 17 posted their largest year-over-year declines ever. Ten of the 20 cities posted double-digit dips.
  • "There is no sign of a bottom in the numbers," S&P spokesman David M. Blitzer, said in a prepared statement. "Prices of single family homes continue to drop across the nation."
  • "This is huge," said Dean Baker, an economist with the Economic Policy Institute. "Back a couple of years ago, people were saying, 'Housing prices are not like stocks; they change slowly,'" he said. But the drop in home prices appears to be accelerating. Indeed, Baker said that at the rate prices are falling, as much as $6 trillion in home values could be wiped out from the top of the market in June, 2006, through the end of this year. (what's a few trillion among friends? Uncle Ben and his merry band are printing 24/7 to help replace this lost value - replace one bubble with the next)
  • Prices in the Las Vegas metro area have plunged more than any other city, down 22.8% over the 12 months through February. Miami prices plummeted 21.7%. In Phoenix, they've fallen 20.8%. (so let's review, plunging tax revenues, with government loaded with workers, who need to cut either services or increase revenue - yes you guessed it job losses at the state and local level combined with higher taxes for the minions - all sounds like a recipe for a recovery in "6 months")
  • The declines create a vicious cycle, according to Peter Schiff, the president of the investment firm Euro Pacific Capital. He was sounding alarms about the housing bubble more than two years ago. "People wanted houses as vehicles to make money," said Schiff. "Now that they can't make money, they don't want the houses anymore."
On to foreclosures
  • The number of U.S. homes heading toward foreclosure more than doubled in the first quarter from a year earlier, as weakening property values and tighter lending left many homeowners powerless to prevent homes from being auctioned to the highest bidder, a research firm said Monday.
  • On Monday, the Census Bureau reported that the number of vacant homes for sale has hit a record high. The report shows that 2.9% of U.S. homes -- excluding rental properties -- were vacant and up for sale in the first quarter. That translates to about 2.28 million properties - the highest quarterly number on record since 1956.
  • Nationwide, 649,917 homes received at least one foreclosure-related filing in the first three months of the year, up 112 percent from 306,722 during the same period last year, RealtyTrac said.
  • The latest tally also represents an increase of 23 percent from the fourth quarter of last year.
With my stock market hat on, I am debating whether this is great news or incredibly great news - it falls somewhere in between the two. I mean any news is good news, so this news is better than "any news". All I know is the bull case for a 2nd half recovery is shaping up beautifully; everything is discounted from here to 2037. Buy stocks.

Long Lennar in fund and personal account

Agco (AG) Unfairly Hit on its Guidace

Agco (AG) is a former fund holding that remains my favorite equipment name; but as I've stated in the past I am using the fertilizer names as my proxy on the group due to the extra risks associated with equipment (plus the pricing power in fertilizer is unmatched). You can see from the chart at bottom of the entry that despite great fundamentals, the farm equipment charts look nothing like the fertilizer charts, so this focus on a "theme" (agriculture boom) but deciding how best to ride said theme, is important. I am highlighting their earnings report, to showcase that one needs to read about related stocks, even if not directly invested. I found a few very interesting comments... note the stock is down 8% today because they "missed" estimates. That is baloney and a good stock market lesson. Agco got hit the last time it reported for the exact same reason [Feb 7: Agco Reports - Guidance Disappoints] So last time around they beat by 19 cents but said they were aiming for $2.75 in EPS with "hopes of $3".

Now, 3 months later? They beat by a mile again (14 cents) and 'raised' THEIR guidance from $2.75 (hoping for $3) to $3.00-$3.15. That's an upgrade. But the analysts were in @ $3.23 so the news headlines blaring are a "miss" on guidance. Not from my perspective, but this is the Wall Street game.

Now I did find the Agco comments about the weakness in US farming interesting... it seems even our farmers are weaker than the global average? I am used to reading about it in every other industry (US market stinks, but international sales fantastic) - but I did not expect it in farming... here is my theory. All these farm bills go mostly to large corporate farmers (Cramerica, for the corporation, by the corporation). As with all things the small guy gets the short end of the stick. Agco says the weakness is in North American small tractors... which is what smaller scale farmers, mom and pop would use. So from that angle, if the thought process is correct, I could see the reasoning - higher fertilizer prices, and fuel costs are squeezing small farmers despite record crop prices - they get little of the $300B in farm subsidies since that is reserved for people who pay for politicians campaigns (corporations), so despite good times all around, they are "relatively" (still better off than the average American of course) more weak than the corporate farmers. Just a thought process, and I could be wrong on that....

Now the last interesting point is how the wet weather, which we've highlighted in the past, is causing late planting in corn. Remember folks, we need to have a string of great weather and bumper crops across the glove so that the world does not go into a new stage of food crisis. So far, it is not looking so good.
  • Agricultural equipment maker Agco Corp (AG) reported stronger-than-expected quarterly earnings on Tuesday as sales grew by double digits in nearly all its regional segments outside North America.
  • The company also raised its full-year guidance, saying strength in South America and Eastern Europe would more than offset growing weakness in North American demand for smaller tractors.
  • Ann Duignan, an analyst at Bear Stearns, said Agco's combine sales were a standout during the quarter, outperforming rivals in both North and South America, and she predicted the market would "react favorably" to the results. (not so much Ann)
  • But the good news from Duluth, Georgia-based Agco was overshadowed by concerns about wet weather in the United States, which has created bad conditions for corn planting and dragged the whole agricultural equipment sector lower.
  • In a report released on Monday, the U.S. Agriculture Department said that only 10 percent of the corn crop had been planted so far, down from 23 percent last year and a five-year average of 35 percent by this time.
  • The news pulled Agco and rivals CNH Global (CNH) and Deere & Co. (DE) lower in early trading on the New York Stock Exchange. All three companies have seen their profits rise, and shares surge, as a result of the push to develop corn-based ethanol and other biofuels, which has sent commodity prices soaring.
  • Agco said its first-quarter net profit more than doubled to $62.3 million, or a share, from $24.5 million, or 26 cents a share, a year earlier. 63 cents Analysts had expected earnings of 49 cents per share, according to Reuters Estimates.
  • Sales rose 34 percent to $1.79 billion, ahead of an average Wall Street estimate of $1.63 billion. Revenue from South America was up by 44 percent.
  • Agco said spending on strategic initiatives would limit improvements in operating margins this year.
  • The company also said it was targeting 2008 earnings of $3 to $3.15 per share on sales growth of 20 percent to 22 percent. Last quarter, Agco said it expected to report a full-year 2008 profit of $2.75 a share -- though it said it had a "goal" of hitting $3 a share.
No positions

Bookkeeping: Beginning XTO Energy (XTO) Stake

This will add to my basket of natural gas stocks; XTO Energy (XTO) is my 3rd name in the group... this is a technical buy - I have a watch list of about 15 names, and XTO fell to its 50 day moving average today, so I begin my stake. This company seems very aggressive and has been (and looks to continue to) make acquisitions...

Technically the stock has retreated from a high of $70 a few days ago to its 50 day moving average (13% fall in stock price from peak). The 200 day moving average is down at $54, where I would love to add in scale to this position. My other natural gas positions have yet to reach their 50 day moving averages but when they do, I plan to add more layers in.

I started today with 1.6% stake in the low $61s.

Here is a recent conference call via Seeking Alpha which is well worth the read.

Long XTO Energy in fund; not long in personal account but may be "soon"

Sterlite Industries (SLT) Reported this Weekend

I missed this earnings report from Sterlite Industries (SLT), but the company continues to look good. While copper is not necessarily my favorite metal, the company is branching out into various base metals (zinc) and more importantly is located right in the center of the decades long boom coming in Asia. The stock has been very range bound, but I think this reflects a weak India market in 2008 more than anything... the past few sessions the stock finally is responding. Now the ironic thing is these countries who are actually prospering have the exact opposite problem we have - their currencies are strong, and hence they suffer in currency translation...
  • Highest ever annual production across all metals
  • Costs lower across all operations, inspite of a challenging environment
  • HZL to become worlds largest integrated zinc-lead producer by 2010 announces expansion projects that will take its total integrated zinc-lead capacity to 1,065,000 tonnes per annum with fully integrated mining and captive power generation capacities.
  • Copper cathode production at the Tuticorin custom smelter was 339,000 tonnes for FY 2008 compared with 313,000 tonnes in the corresponding prior year. Overall the plant performance was good, with copper recoveries highest ever at 98% plus in FY 2008.
  • Copper revenues for FY 2008 were Rs 12,658 crore, an increase of 7.9% compared with the prior year, primarily on account of higher volumes and better LME prices, mainly offset by an appreciating Indian rupee.
  • Aluminium production in Q4 was highest ever at 92,000 tonnes, taking the full year production to 359,000 tonnes. Revenues and EBITDA for FY 2008 were Rs 4,170 crore and Rs 1,435 crore respectively. The positive impact of higher volumes on sales in FY2008 was primarily offset by the appreciation of the Indian rupee.
  • Mined zinc metal production in FY 2008 was 551,000 tonnes, an increase of 9.1% compared with the previous year. Revenues and EBITDA for FY 2008 were Rs 7,878 crore and Rs. 6,223 crore compared with Rs. 8,560 crore and Rs. 6,644 crore, respectively in the corresponding prior year. The positive impact of higher volumes on sales and EBITDA in FY2008 was offset by adverse impact on account of a decline in zinc LME prices and the appreciation of the Indian rupee vis-à-vis the US dollar.
Sterlite Industries is India's largest non-ferrous metals and mining company with interests and operations in aluminum, copper and zinc and lead. It is a subsidiary of Vedanta Resources plc, a London-based diversified FTSE 100 metals and mining group. Sterlite Industries' main operating subsidiaries are Hindustan Zinc Limited for its zinc and lead operations; Copper Mines of Tasmania Pty Limited for its copper operations in Australia; and Bharat Aluminum Company Limited for its aluminum operations. The company operates its own copper operations in India. The company has entered the commercial energy generation business and is in the process of setting up a 2,400MW independent power plant through its wholly owned subsidiary, Sterlite Energy Limited.

Long Sterlite Industries in fund and personal account

Quick Word about Commodities

Commodity stocks are weak. No shocker; I've written for 3 weeks now they are getting more extended by the day/week and due for a meaningful pullback. I was early in my comments since the stocks kept running. I've written for 2 weeks now that as the Fed signals it is done cutting we'll get a knee jerk dollar rally and the robots that are hedge fund traders will sell off commodities. That "rotation" is now happening. [Sector Rotation?]

It's now been 6 weeks since we had the last round of "commodities are dead" - we were long overdue for hand wringing. [Mar 22: Alert: Commodities are Dead] After that panic, in which the fund took a hit (as always), many stocks rallied on order of 40-50% in the following 6 weeks.

The medium and long term does not change. We are having major deflation in our #1 asset, housing. We have a Federal Reserve that does not care about inflation although they try to talk a good game (watch their actions, not their mouths). We have major structural deficits and candidates (all 3) who don't seem to realize this and all their plans are about giving away more of the store and creating even bigger deficits. We have a US populace that does not understand that you have to give something up if you want to address said deficit. This populace gleefully cheers as candidates promise one thing after another, without addressing where the money is coming from.

We give out rebate checks we cannot afford. We will (in my opinion and I stated this the minute the last "stimulus plan" was announced) have another stimulus plan before the election. We have trained the American people to ask for handouts. Handouts we cannot afford as a nation. The backdrop is not for a stronger dollar long term - sorry. It might rally for 2 days, 2 weeks, 2 months. But our structural issues are immense (Medicaid/Medicare will be a national disaster in about 10 years) and no one who is running save Ron Paul was addressing them because its political dynamite. Read this to see where we are headed [Mar 26: Annual Spring Warning on Entitlement Programs Falls on Deaf Ears] Instead of building solar farms or nuclear plants we are passing farm aid to the tune of $300B for corporate farmers, in times they don't need it. [Mar 27: Farm Lobby Beats Back Assault on Subsidies] Etc. I can write about 100 reasons why we just continue down our path of fiscal stupidity; and why I am going to agree with Jim Rogers that the US Peso will be permanently impaired... but nothing straight down (or up). In short we are going to topple over from our own weight... we know one thing in this country the past 2 decades - "kick the can down the road". Well the end of the road is within sight in 10-15 years. The whole thesis for a "stronger dollar" has nothing to do with the US improving - it has to do with Europe breaking down.... i.e. eventually their economy will weaken and they will need to cut rates. That is not a thesis on US "strength"; it is a thesis on "relative weakness". That's why any "strength" in the US dollar will be relatively short lived.

The same stocks everyone was so high on not even a week ago (and people questioning why I would sell), now people will scratch their head, wonder if the era is over, etc. Blah blah blah. That's why I was selling into that strength. My thesis is none of these stories change, only their stock price changes in the short run. So I'll be building stakes, in layers, as these stocks fall - I will be too early on some of my stakes, and I'll catch the bottom in others. Just like in my sales - I was too early on some of the sells, and caught the top in others. I have no idea where the stock prices will be in 2 days, 2 weeks, or 2 months, but I have a good idea where they will be in 12 months. So I'll be selling shares I probably will be buying in the coming week to the same people who wonder why the heck I would sell last week when euphoria was running rampant. One day the story will change, and I'll move on to a new set of stocks. But for now it's just white noise, daily movement up and down that people think signals either (a) a bull market for 52 straight weeks or (b) the end of an era. Nothing is ever so extreme.

If you keep catching the middle of moves, albeit missing the very tops or bottoms..... year after generally provides very good returns. But you'll take short term hits all the time. I just sold off Mastercard as an example @ $267 - it could go to $300 for all I know. But I made my batch of money, now I have that value in cash, and I'll look to buy it (or something else) lower. Sell euphoria, buy consternation.

Bookkeeping: Taking Profits in Mastercard (MA)

This is one of my favorite business models, but with a gap so wide in the chart, I simply am going to take a large profit off the table here and buy it back on the inevitable pullback.

I only have about a 1.2% stake with today's jump of 10%+, but I am going to cut 80% of my stake around $267 and buy back later in the $240s or lower.

Long Mastercard in fund; no personal position

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