Monday, July 21, 2008

Add Mervyn's to Our Growing Litany of Retailers Headed to the Great Sunset

We've predicted the great demise of US retail for a long time in the blog; we simply have overbuild our consumer culture based on a national savings rate of zilch. I can't short individual REITs so I am stuck with Ultrashort Real Estate (SRS), but I would prefer to focus those REITs who focus on malls and strip centers.

After Linens 'n Things [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer] came Steve & Barry's [Jul 10: Another Retailer (Canary in Coal Mine Down]. Now Mervyn's looks like it's on the fast track - coming from the auto industry I can tell you when "key vendors halt shipments" you are essentially done. Now Mervyn's has been weak for a long time, but like any herd - the sick and diseased will go first. And another group of future Walmart workers, federal government workers, and healthcare workers is born.

But don't worry folks, as oil pulls back and gas heads "down" to $3.40 the American consumer will be back! CNBC promised.
  • Mervyn's LLC, the long-struggling California department-store chain, is fighting for survival as some of its vendors have halted shipments to the company and key lenders have pulled financing, according to people familiar with the situation.
  • In recent days, Mervyn's executives have been trying to persuade vendors to ship merchandise to the retailer for the crucial back-to-school season. If that effort fails, the company could be forced to file for bankruptcy protection as soon as this month and shut down, according to these people. Mervyn's operates 177 stores in seven states, mostly in California.
  • A Mervyn's liquidation would deliver another blow to the nation's mall owners, which are suffering through a torrent of store closings. Linens 'n Things, Goody's Discount Clothing and Sharper Image are just some of the chains that are closing stores or shutting down for good this year.
  • It would also be an embarrassment to Mervyn's owners. Private-equity firms Cerberus Capital Management and Sun Capital Partners, along with three other partners -- including real-estate investor Lubert-Adler -- acquired the chain from Target Corp. in 2004 for $1.2 billion. The group put up about $400 million in equity and financed the rest. [embarrassment yes - but still lucrative - see below]
  • But while thousands of employees would lose their jobs and their vendors would get hurt in a Mervyn's liquidation, the private-equity buyers wouldn't stand to take much of a financial hit. That is because when they bought the company they structured the $1.2 billion deal as two separate transactions -- one for the retailer and a second one for the retailer's real estate. [aha, the barbarians at the gate ARE smart after all - generally most of these private equity firms buy these companies and load them up with debt and make sure their firm is paid through the nose - yet another example of heads we win, tails we still win - as long as they can find a new set of suckers... err, shrewd investors to offload debt on]
  • The real-estate arm has been a lucrative investment, according to people familiar with the deal. It leased many of the stores to Mervyn's and has sold and leased certain properties to other retailers. And through sale-leaseback transactions and the appreciation of real-estate values over the past several years, the buyers have more than doubled their money on the real-estate investment. Those profits have far exceeded losses on the retailer, according to these people. In a bankruptcy of the store operations, the real-estate arm would become a creditor. [I just have to laugh at that last point - so one part of the private equity business becomes first in line to receive money from the bankruptcy of the other part - what a system folks!]
  • Two retail experts familiar with the bankruptcy planning at Mervyn's said the retailer's sales began to tumble quickly as the real-estate slide began in California and Arizona. Mervyn's tried to cater to Hispanic consumers, many of whom have been hurt by the downturn and job losses in the mortgage and home-building industries. [everyone assured me in spring 2007 not to worry about housing - it is only 4.5% of GDP; a pittance]
  • In the spring Mervyn's lender CIT Group Inc., which has severely cut back on its business loans overall, stopped providing financing to the chain, according to people familiar with the matter. This caused Mervyn's vendors to get nervous, and many began withholding shipments to the company.
  • Among Mervyn's largest landlords is Macerich Co., a Santa Clara, Calif.-based real-estate investment trust that owns 72 U.S. malls.

If you are ever interested on how gamed the system is you should read this story [BusinessWeek - April 10: Where's the Beef?] on what private equity has done with Burger King - they are "brilliant" in the fact they have created a system where they win no matter what. As long as new suckers are born every day, these guys will win. This was an eye opener for me when I first read it a few years ago.

Long Ultrashort Real Estate in fund; no personal position US Food Groups Plan Hefty Price Increases

Remember, my thesis for the 2nd half is food inflation, or what I call agflation, will replace energy inflation as the major gripe. (I've told readers to stock up on any foodstuffs that can be stored all year) That said, I need to qualify that with the provision that home heating costs this winter will be a "shock and awe" issue for American consumers, most who will be blindsided. If not for the fact this is a regulated market and does not reflect market supply/demand in full, it would go from a crisis to a disaster. Just do a google search on term 'natural gas prices' in the "news" tab, and you can see utility after utility submitting substantial price increases to their state regulators. Thankfully inflation is only 5% (cough) or I'd be worried.

Back to agflation the current trick if you are not in the know is the food companies have kept prices flat in many cases - while shrinking the boxes and/or amount of product in said packaging. Oh Mr. Lincoln, it does appear you can fool a lot of the people, a lot of the time - until it reaches a simply egregious stage.

If I could only buy a futures contract on American anger I'd be so long on that instrument..

  • US food companies are preparing another round of hefty price increases as soaring commodity costs force them to pass on rises to consumers.
  • Sara Lee, maker of meat products such as Jimmy Dean sausages, said costs would compel it to push up prices on meat lines by up to a fifth later this year.
  • Kraft Foods, Kellogg’s, ConAgra and Tyson are also pushing through increases, which are expected to contribute to inflationary pressures in the US. (but the type of inflation that does not matter - after all food is volatile and therefore doesn't count to the Federal Reserve)
  • The increase in food prices was steep in June, when they moved up 0.8 per cent compared with 0.3 per cent in May.
  • In June, meat prices surged to a 22-year high because of record costs for corn and soybean, food crops for livestock. The US Department of Agriculture expects pork production to fall 3 per cent in 2009, against a 1 per cent fall for chicken and beef.
  • Bill Lapp of Advanced Economic Solutions, an agricultural consultancy in Omaha, said higher prices looked set to prompt the biggest decline in meat consumption for 27 years. (demand destruction as the pooring of American rampages)
  • Kraft Foods, which has said it will push up its prices by 12-13 per cent this year, said some of its cheese categories could rise 25 per cent.

We have placed investments in certain food categories but thus far the commodities have not worked out anywhere as well as the fertilizer investments.

Catching Up with Manpower (MAN)

Last quarter we stumbled upon Manpower (MAN), which previous to now I had thought was simply a US centric temporary staffing agency. [Apr 21: Manpower as a Weak Dollar Play? Who Knew] Since we know the US Bureau of Labor Statistics provides ridiculously faulty labor data (along with other forms of data) we are always on the lookout for data from important companies to tell us what is really going on. Not only does Manpower give us an inkling on how things are going domestically but they have a lot of data points from Europe as well. In fact most of their business (surprised me last quarter) is in Europe. Verdict? Not so good.
  • Employment services company Manpower Inc (NYSE:MAN - News) said on Friday that business was slowing in large Western European markets, including France, its biggest operation, sending its shares down 11 percent.
  • Manpower also reported lower quarterly earnings, but still topped expectations, and gave a disappointing forecast for the current period.
  • Chief Executive Jeff Joerres said on a conference call that its business in Germany, Italy and Spain was soft. "We do believe we will see further softening in Europe in the third quarter," he said.
  • He said the company did not see the U.S. market gaining any strength in the near future. Milwaukee-based Manpower generates the bulk of its business in Europe.
  • Helped by the weak dollar, revenue rose 17 percent to $5.90 billion from $5.03 billion in the same period a year ago. But without the effect of the favorable currency comparison, revenue increased just 5 percent, the company said. (and once again the US Peso is helping to create an illusion of "some strength")
  • Goldman Sachs analyst David Feinberg reiterated his "Conviction Sell" rating on the stock, noting that June labor statistics saw a decline in temporary payrolls of 7 percent and 7.5 percent respectively from the U.S. and France.

No position

It's Goldman Sachs World - We Just Live in It

Long time readers know my views on Goldman Sachs (GS) - the company that has people placed in key positions throughout both Wall Street and Washington D.C. At this point there is not even an attempt to hide the interconnections anymore ;) I guess that means the system they've helped to create to milk has cracked. For that that don't know- U.S. Secretary of Treasury Paulson used to be the CEO of.... Goldman Sachs.
  • Goldman Sachs Group Inc.'s most senior financial-institutions banker, Ken Wilson, is temporarily leaving the firm to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis, according to people familiar with the matter.
  • The Treasury and Federal Reserve are grappling with how to respond to the threat of bank failures, flagging capital levels and crises of confidence in important institutions such as Fannie Mae and Freddie Mac.
  • President George W. Bush made a personal call to Mr. Wilson in recent days, asking him to assist Mr. Paulson.
  • Mr. Wilson's appointment is the latest in the ranks of Goldman employees who have moved into public service.
  • And it reflects the seriousness of the issues before the Treasury, which is trying to instill public confidence in the financial system without pushing the federal government into a posture of expensive public bailouts.
[Jul 3: Invisible Hand Video]

Long Goldman Sachs in fund; no personal position

WSJ: Export Boom Fuels Factory Town's Revival

Always on the look out for slivers of good news; perhaps the administration's goal is to lower the value of the US peso to the point that the country will return to its roots as low wage, very cheap place to locate manufacturing ;)

  • This is a town manufacturing once deserted -- and is now reviving. On a blustery January afternoon in 2003, nearly 900 workers at the town's second-largest manufacturer, a cookware factory, switched off their machines and were told the company was moving operations to Mexico.
  • Today, many of those workers are back at the same plant making pots and pans for new bosses. At a factory next door, workers are churning out energy-efficient industrial light fixtures. Across town, one company is using a former shipyard to produce 250-foot-tall steel towers used for wind turbines.
  • Sons and daughters who had abandoned the town are returning with business degrees and breathing new life into old factories. Among them is Tim Martinez, who left Manitowoc to study economics and business in Milwaukee. He bought the pots-and-pans plant, reopened the aluminum foundry and later brought in Brazilian cookware maker Tramontina to restart the assembly lines.
  • "America got tired of manufacturing," Mr. Martinez says. "But it remains a great way to make money." A rugged cadre of producers like these in Manitowoc have survived a decades-long shakeout of American manufacturing -- and are now leading a largely overlooked revival.
  • The economic forces working in favor of U.S. manufacturing include a weaker dollar, which is helping drive sales for exporters and their suppliers. Rising transportation costs are encouraging companies to buy and produce more goods closer to home. An infrastructure and mining boom abroad is boosting orders for the huge cranes made by Manitowoc Co., one of the town's oldest companies. At the same time, rising labor costs in some countries are starting to make outsourcing less attractive. [Econ 101 - all themes we've been pointing to]
  • To be sure, American manufacturing has deep problems. Inflation and a sharp slowdown in the U.S. economy are hurting a wide array of producers. Nationally, only about 10% of the U.S. work force is currently employed in manufacturing. That's down from a peak of about 42% in the early 1940s, and about 18% in the 1980s.
  • Last year, the U.S. exported about $1 trillion worth of goods, up 39% from 2002, when the dollar started its decline.
  • The comeback has been helped in part by what Manitowoc doesn't make: Few companies here are tied to cars or home construction, two ailing sectors. Instead, its diversified base churns out parts for Israeli smart bombs, the ice-cream machines found at most Dairy Queens, and the pipes that carry oil to shore from offshore platforms. Not to mention malt for beer, sausages, and air horns for ships. (you can never go wrong servicing sausages hah)
  • Like many global producers, Manitowoc Co. sets prices in Europe in euros. Each time the dollar drops, the price tag on a crane sold there translates into more dollars. With demand for cranes red hot, the company says it has no incentive to offer discounts. Last year, Manitowoc saw its sales grow 37% to $4 billion. The company recently reported its backlog of orders for cranes had climbed to $3.3 billion, up 72% from the same time a year ago.
  • As the largest private employer in town, Manitowoc Co.'s success has rippled through the local economy. Manufacturing tends to have a larger economic "footprint" than other sectors, meaning strong orders for one company foster strong orders for its suppliers.

[May 21: Who is the World's Largest Merchandise Exporter? Not China. Or the U.S.]

Sunday, July 20, 2008

Bevy of Earnings - Monday on Tap

The next 2 weeks have an enormous amount of earnings data - most days we're going to have to break this out daily to keep up. There is a lot to look at but I'll try to focus on a key few names that readers might be interested in.

For our fund holdings here is the breakout for the week
  • Monday: Apple (AAPL)
  • Tuesday: Illumina (ILMN), Jacobs Engineering Group (JEC), XTO Energy (XTO)
  • Wednesday: (BIDU)
  • Thursday: Cabot Oil & Gas (COG), Vale (RIO), Potash (POT)
  • Friday: N/A

Now on to Monday specifically...

First of all Apple (AAPL) the serial "underpromiser" - the question each quarter is how the market reacts to this underpromise. I say every quarter add 15 cents+ to whatever they say. 2 quarters ago they said 94 cents - and the stock was absolutely obliterated (and we went along for the ride). I said nonsense - in Apple years 94 cents means $1.10 but it's like talking to a wall when hedge funds go wild. What did they end up reporting? $1.16 [Apr 23: Apple Nice Solid Result] But using "logic" didn't help us from avoiding a massive plunge in the stock and our account value in this name.

So now they have guided to $1.00, I wrote in April that means $1.22; analysts have them at $1.08. Let's see how it plays out . Either way I've cut back exposure as you know I believe "tech is safe" is a ridiculous thesis, even though I like a few names like Apple the best. But with expectations high and the stock at a premium valuation I'd rather let this play out and hope the market panics on a conservative guidance so I can buy lower. If not, we have plenty of other opportunities.

Outside of the portfolio here are some major names I am watching

  • American Movil (AMX) - powerhouse telecom company in Latin America; valuation has come in quite a bit from the past few years and growth is still solid. Chart has been very weak though.
  • American Express (AMEX) - always on the look out for further delinquency data, and of course they deal with more of the higher end customer
  • Bank of America (BAC) - as we wrote in the weekly position update, the behavior of the financials early this week will be telling. Specific to BAC, how is the absorption of Countrywide Financial and that mess of mortgages they took on affecting them?
  • Homex Development (HXM) - we just closed out this Mexican homebuilder position to raise cash late last week
  • Schering-Plough (SGP) - a former holding that was sort of a snoozer; with the move to healthcare as a safety valve sector how will the market react and/or what is the company specific news to this former favorite who has fallen on hard times
  • Steel Dynamics (STLD) - if I wrote this 3 weeks ago it would be "steel is great, hedge funds like steel - buy steel". Now I write "steel is awful, China doesn't need steel and the story is just an overblown mirage - sell steel." Of course the truth is somewhere in between.

Bookkeeping: Weekly Changes to Fund Positions Week 50

Week 50 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 1.1% (vs 0.0% last week)
56 long bias: 89.7% (vs 89.2% last week)
9 short bias: 9.2% (vs 10.8% last week)

65 positions (vs 67 last week)
Additions: Goodrich Petroleum (GDP), Kinross Gold (KGC)
Removals: Core Laboratories (CLB), Homex Development (HXM), ICICI Bank (IBN), HDFC Bank (HDB)

Top 10 positions = 34.1% of fund (vs 34.6% last week)
47 of the 65 positions are at least 1% of the fund's overall holdings (72%)

Major changes and weekly thoughts
A very busy week in the markets, and the first move up after 6 weeks down. It was a bit of a frustrating week for us because while "timing the market" overall is a fool's game overall, it has been a necessity the past year as huge convulsions either upward or downward have been the order of practice, and our stocks do not trade in a vacuum. The reason I say it was frustrating is because last week in our summary we wrote

At 89% long exposure this is the farthest we've been "unhedged" since week 24, which was mid to late January. Since then, the only similar positioning was week 33, at 84% long, which was mid to late March.

So positioned perfectly in terms of "aggression" but still had our hide nailed to the wall, as even being 89% long we lost 2% for the week as our stocks were not the flavor of the week. Somehow we lost money being nearly 90% long and our #1 position being subject to a takeover - that requires a certain level of skill. (ahem) And this, my friends, is the reason stock markets are an ever challenging puzzle. It is amusing to see the same people who a week ago would not touch stocks calling for the upteempth bottom and how bullish they are after this reversal. Human psychology is half the battle (or more) in the near term.

Our "global growth" stocks were trashed this week, as commodities are viewed as a monolith. By that I mean corn = oil = iron ore = nickel = natural gas = potash = insert anything and it's all the same to hedge funds. Aside from this being ridiculous, one could actually make a case some commodities should BENEFIT from others weakness. For example, a large input into nitrogen fertilizer is natural gas. So as natural gas prices fall - why would nitrogen fertilizer stocks falter? No good reason - but that is like talking to the mob. Logic has no place when billions upon billions are fleeing into financials, retailers and homebuilders. (or at least short covering) Myself, I don't have an idea where oil is going but again, the same folks touting it as the ultimate place to be, now are cowering and calling for $70. And they call John Kerry a flip flopper. Not 3 weeks ago I wrote 'Can a Top in Oil be Far Away?'

Shall I say the near term top is in for oil when OPEC calls for $150-$170 crude? I'm already on record saying food will replace energy as the inflation of choice in second half.... let's see if I can extend this winning streak - we'll revisit on Labor Day.

The irony is I have purposely been avoiding oil exposure (ex Petrobras (PBR)) because I felt it was parabolic and needed a strong pullback, but here we are getting punished because again nitrogen fertilizer = crude oil. :) The one area we are susceptible is natural gas since people do tend to trade these two together but the traditional ratio of natural gas to crude is 7:1, meaning crude $130 = natural gas $18. Natural gas is in the mid $10.00s. But these markets trade on technical patterns so with some break down in their charts, the speculators, err the natural laws of supply & demand might cause more weakness in the near term. But again oil at $80, $100, $120, or $140 should not effect demand for oil rigs or other services, but since this is all "one big trade" - those stocks also took punishment this week.

As for the market as a whole, I still remain quite antsy and in fact with a 10%ish hedged position (+2% for gold) feel underweight my "insurance". I was hoping some of my top holdings would pop when the market bounced, and I could layer out of some exposure and rotate it into more short exposure but something about the best laid plans... Earnings should continue to dominate and the market reaction to Bank of America (BAC) Monday, and Wachovia (WB) and the death spiral that is Washington Mutual (WM) on Tuesday will be telling. The latter is the largest Savings & Loan in America and frankly appears headed for IndyMac status. If "bad news" is ignored and or this fantasy of "the results are horrid but we expected putrid" pushes the stocks up, then we can become more constructive near term. But in no way shape or form am I buying a coast is clear signal in this sector and am hoping to see Ultrashort Financial (SKF) - which we began rebuilding slowly on Friday - fall to the $110s so I can reload. (cannot believe this thing hit $200+) On the flip side, we'll see how long this commodity rotation lasts - in the past corrections this year, it's been a 6 to 15 day phenomena (each iteration lasting a shorter amount of time) so by the end of this coming week, if this rotation does continue into the early cycle stocks I'll be more aggressive in building the short ETFs betting against them. Doing it now risks getting your head chopped off as shorts who pressed their bets found out this week. Also keep in mind our government is now creating a halo effect (for this week at least) banning naked short selling on 19 financial securities. I could write 20 entries on that topic, but I'll spare you.

We had a VERY busy week in transactions as we took advantage of this reversal to cut back positions that actually were up this week (after being beaten into the ground for much of the past month), and rotated the exact opposite direction to the market - buying the leaders of the past few months as they were pummeled.

The larger weekly changes (chronologically) to the fund below:
  1. Monday, nothing material outside of some changes in Ultrashort allocation as all the King's Horses and all the King's Men pulled an all nighter Sunday to save Humpty (again) - it's now happening every 3 months.
  2. Tuesday, we closed our long held position oil service stock Core Laboratories (CLB) to raise cash to apply to other bargains being created in the market. This worked out obviously in retrospect as the oil/nat gas complex was creamed later in the week, but it was just fortunate timing for us.
  3. I meantioned Tuesday we were finally getting fear, and that I was looking for some combination of (a) S&P 500 falling to 1170 (b) Google filling its gap down to $460 and/or (c) the Haynesville 4 natural gas plays to finally fall apart. Well it almost all happened but later in the week - S&P ended up at psychological level 1200 instead of 2005 lows of 1170, Google broke down post earnings Friday and fell to $470s, and the Haynesville 4 were torched later in the week.
  4. Warburg Pincus took a 5% stake in WuXi PharmaTech (WX) and since this is one of my few healthcare names I added some exposure through the week in small increments. On a side note, Intuitive Surgical (ISRG) of course took off this week after we let go of it last week - healthcare after all. Earnings are Tuesday, and I said I'd buy it back on a re-emergence over its resistance levels which it achieved Friday. So we'll re-assess after earnings - it could pop or not post earnings, not worth the risk for me.
  5. Mosaic (MOS) sold off a major nitrogen plant which I view as a positive long term - I added a small layer of this name during the week as it weakened, along with Cleveland Cliffs (CLF) in the $106s, and A-Power Generation Systems (APWR)
  6. Lo and behold the next morning we received word of our #1 position being bought out for a nice premium by another of our positions - great news! Err, not so much. Now it's just a big mess. I did add some Cleveland Cliffs (CLF) early in the morning in the $98s and then later in the day Alpha Natural Resources (ANR) which after popping to near $120 - fell down to $103. That didn't seem sensible - something must of been amiss. If only I knew.
  7. To raise funds for the Cleveland Cliffs purchase I had to close out a minor position in Homex Development (HXM). Which of course popped Thursday/Friday - it would not of affected us much dollar wise - but it still was bemusing to watch every transaction blow up in our face. Are we having fun yet?
  8. To raise funds for the Alpha Natural Resources purchase, we had to reduce some exposure in LDK Solar (LDK) as it hit technical resistance. Not that solars respect technical conditions most of the time - a very "sentiment" driven group.
  9. Our Haynesville 4 finally started breaking down Wednesday so we chose one - Goodrich Petroleum (GDP) - and began a starter position around the 20 day moving average, hoping to eventually layer in at the 50 day moving average which was nearly 15% lower. Little did we know we'd have a chance the next day.
  10. Wednesday, we continued to add some natural gas exposure as we had held off during this entire correction - this was the literal last group to sell off - so we added to Encore Acquisition (EAC) and EOG Resources (EOG). Now if natural gas does indeed weaken further there could be further weakness in these names but compared to where these names have traded over the past 4-6 weeks we are getting some solid prices. Compared to where they traded 6 months ago, still very elevated prices.
  11. Thursday after a 2 day spike in finacials, homebuilders we begun layering out of DR Horton (DHI), Lennar (LEN), and Ultra Financial (UYG) - frankly among the few winners we had this week. If/when they continue their oversold bounce we'll continue to layer out of exposure.
  12. After losing a third of its value in 60 days we decided it was time to begin rebuilding Vale (RIO) - the Brazilian mining giant. Still a relatively minor stake at 1.2% of portfolio.
  13. I cut (to raise cash) a lot of the remaining Blackrock (BLK) after a stellar earnings and even more importantly the news that Merrill Lynch (MER) won't be selling its stake at this time. I still have some doubt that they won't be forced to sell some of their position to stay afloat as we get into 2009. Let's see how it works out.
  14. We added to two of our service names (the last 2 we own actually) in the oil patch that we had cut back on earlier rallies, Atwood Oceanics (ATW) and National Oilwell Varco (NOV). Again it makes little sense for these to sell off when there is a literal shortage of deeper sea oil rigs as these guys print money at oil $80, 100, $120, or $140.
  15. Mechel (MTL) reported another great earnings early this week, and on Friday as the stock continued to weaken to $40, I said I'd like to pick some more up near $38 or it's 200 day moving average. The stock fell there later in the day and we added some. Unfortunately there is now news that the Russian government is not happy that Mechel management is so smart as to position themself as a global powerhouse, and it's time to reward some of their not so smart peers by limiting profit potential at MTL. This could be a game changer or a lot of fluff - I don't know. If Mechel does break down below its 200 day moving average I just have to cut back the stake until more clarity is offered even if its a terrible price. It is hard to sell a stock at forward PE of 8-9 growing at 60% on the bottom line but if the chart corrodes, I won't be the only one. Even IF all these government changes happen you probably still would have a company growing at 25-35%, and the P/E would still be ridiculous.
  16. I closed our mini basket of 2 Indian banks simply because I have some worries out the Indian story - on a 5 year time horizon I believe this is a terrible price to sell, but on a 3-6 month time scale I don't know. Since I don't know, and I have more conviction elsewhere I sold.
  17. I took some profits out of technology as the "technology is safe" thesis blew up in the hedge funds face - as both Mercadolibre (MELI) and Ciena (CIEN) bounced into resistance off very oversold conditions we took some off. I am *hoping* they have another bounce in them so I can layer out at higher prices but somehow feel doubtful.
  18. Since the mood of the market changes by the day/hour/minute I am not sure what exactly will be loved next week and what will be hated - so to have some hedging but without having an idea of what to hedge - we added back an old position to the portfolio Kinross Gold (KGC).
The above do not include the majority of my trades in my Ultrashorts which I am trading quite often as the market ebbs and flows

Even Persian Gulf States, Sitting on Gobs of Oil, are Moving to Coal

Thanks to a reader for sending this article... quite fascinating really when you sit and think about it. Especially the fact the Gulf countries, sitting on piles of dead dinosaurs, are moving into coal. We've been talking a lot about this sector of late, almost as much as fertilizer in the fall. Hopefully the drama in this sector modifies soon and we can move into calmer times where fundamentals trump paranoia.

I can sum up this thesis very succinctly - economics trumps environment. Unfortunately in a bottom line business of making investors money, I can only worry about the economics.
  • Der Spiegel, the German newsmagazine, explained earlier this month why the Persian Gulf states are switching to coal. “[They] may be sitting atop massive oil reserves,” the magazine said. “But with prices for crude skyrocketing, it makes more sense to sell it than to use it. Instead, the Gulf states are turning to coal for their own energy needs – to the detriment of the climate.”
  • “Demand for coal plants,” the magazine says, “is growing rapidly across the globe.”
  • Abu Dhabi (largest of the seven UAE emirates) has announced that it will switch to coal-fired power plants.
  • Dubai (the second largest) is already building four of them – with a combined output of 4,000 megawatts – as a first-phase investment in coal.
  • Apart from the United Arab Emirates, Oman (widely regarded as “the next Dubai”) has signed a contract with South Korea for the construction of several coal-fired plants.
  • Beyond the Gulf, Egypt proposes to build its first coal-fired plant on the shores of the Red Sea.
  • Russia has announced plans to build more than 30 coal-fired plants by 2011.
  • China connects a new coal-fired plant to its electrical grid every 10 days – and intends to keep doing so for several years. Less known is China's decision to construct a massive coal-fired plant in Inner Mongolia that will convert the region's vast coal reserves into oil.
  • The coal-to-liquid process used by this plant will consume twice as much coal and produce twice the CO{-2} emissions as the simple burning of coal in a conventional power plant.
  • The Kyoto Protocol, incidentally, classifies the Gulf states as developing countries – meaning that they are under no obligation, oil revenues notwithstanding, to reduce CO{-2} emissions.
  • They have opted for coal for a single compelling reason: cost. They can produce a megawatt-hour of electricity using Australian coal, Der Spiegel calculates, for $17.49 (U.S.). Using natural gas, the cost rises to $41.34. Using oil, the cost rises further to $79.50.
  • One of the ironic differences between Germany and the Gulf states, Der Spiegel observes, is the absence of solar energy investment “in the sun-baked Gulf states.” Germany produced 1,300 megawatts from solar installations in 2007; the Gulf states combined produced 36 megawatts. (that's beginning to change)
  • Other German Greens are championing – you are ready for this, right? – coal. “The more strident of the anti-nuclear politicians in Germany are now advocating new coal and gas plants to ward off a certain electricity supply crisis,” Mr. Aplin says. “Why is coal in this mix? It is cheap and domestically available.”
  • Two days ago, though, Germany's Finance Ministry issued a remarkably candid public statement. It conceded that Europe's proposals for reductions in greenhouse gases – without the participation of all major contributors worldwide – will be pointless. (Bingo - for every light you turn off in your house or change from 22 mpg to 27 mpg auto, entire cities are being built in other countries - without everyone cooperating there is no "saving the Earth" - and you know how well countries cooperate. The U.S. won't even enter these agreements, and is the biggest pollutant, and China has other issues to deal with - although her people are choking on the air)
Takeaway: Sell coal. The charts say you must, and it's time to go long Macy's instead, since gas will drop to $3.25 and the malls will be teaming with Americans deprived for well over 3 months from buying a new pair of shoes. Heck, they'll probably fly to Las Vegas to shop at the Macy's there since the commodity bull is dead. CNBC told me. Die coal die.

Long a whole lot of coal in fund and quite a bit in personal account

Saturday, July 19, 2008

The United Kingdom of Subprime follows us into the Abyss

I've called the United Kingdom the mini brother of the United States of Subprime - the great idea of a financed based, credit fixes everything, housing bubbles are fun, service economy. Big credit to a series of articles Mish found - instead of just redirecting you to his site these are worthy enough to post in full. And don't forget Spain - their housing bubble actually (from afar) looks even worse than ours.

Some sobering headlines.... and these are the things I've been forecasting for the U.S. since the blog began last summer - remember state and local budgets are set mid year. I believe by this time in 2009 you are going to hear serious despair from local municipalities. In fact the outcries in certain states will be hot and heavy this fall at the education level. The tax revenue is shrinking (real estate and retail). And very few in America know how to save for a rainy day. So either taxes must go up, and/or services/salaries/benefits must shrink - since the foxes run most of the hen houses in America you can bet salaries and benefits for those at the decision making level won't be shrinking - so it will be layoffs at the lower end (peon class) along with higher taxes for everyone in the tax zone. We're early here. As always. Give it a year.

It appears Britian has become "Americanized". [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%]

Taxpayer Can Bear No More, Admits Alistair Darling
  • Taxpayers are at the limit of what they are willing to pay to fund public services, the Chancellor has said in an interview with The Times.
  • In his gloomiest assessment yet of the state of the British economy, Alistair Darling gave warning that the downturn was far more profound than he had thought and could last for years rather than months. (I'd appreciate some of that honesty in this country - Uncle Ben appears to finally be cracking and admitting the "recovery" might take into early 2009, after denying it all of 2007 and early 2008. Paulson? He'll be hanging 10 after January 2009 so what does he care - just keep reassuring us the economy is stronger than the number look, and fundamentally this is a growth economy hitting a few speedbumps - keep the sheep fed)
  • He revealed that he told Cabinet ministers this week that there would be no more money for schools, hospitals, defence, transport or policing. (that's a problem - can I offer the American solution? Gas up Helicopter -> Print more money) He confirmed that the Treasury was considering revising its fiscal rules to allow more borrowing to deal with the economic problems. (aha! I see you are learning)
  • He said that he did not believe that voters, already struggling with higher food and fuel bills, would be willing to pay more tax.
  • “My judgment at the moment is that there are a lot of people in this country who feel they work hard, they make their contribution and they’re feeling squeezed. (hmm, in D.C. they have yet to figure this one out since the "aggregrate government reports show everything is honky dory" - in fact we are whiners per Phil Gramm) :)
  • His disclosure came as latest figures showed that public borrowing rose by £9.2 billion last month, well above City forecasts of £7 billion and the highest for June since 1993, when monthly records began. Borrowing of £24.4 billion between April and June was a postwar quarterly record.
  • Laying bare for the first time the Government’s assessment of the scale of the downturn, he said that Britain could still be suffering by the next election, expected in 2010. (now you're getting it)
  • On the vulnerability of banks, he said: “The real problem we are facing today is a consequence of the fact that too many banks at a very senior level didn’t understand the extent of the risk to which they had become exposed.” (hmm, but these people are paid extraordinary amounts of money because we are told on these select few humanoids are smart enough to be CEOs, and hence should be compensated as such - I notice a disconnect)
  • Total tax payments fell 1.5 per cent last month compared with the same time last year, against a Budget forecast for a 4.5 per cent rise over the full financial year. (6.0% variance - not good. Batman, to the Printing Presses!)
Darling Under Pressure on Record Public Debt
  • The Treasury sank deep into the red over the past three months as the economic downturn undercut tax receipts forcing it to borrow record amounts, official figures showed this morning.
  • Over the first three months of the new financial year, April to June, the Treasury had to borrow £24.7 billion - the highest figure since records began in 1946 and up by a startling two-thirds from the £14.7 billion total for the same period last year to an all-time high for this period.
UK Budget Deficit Balloons to Widest Since 1946
  • Brown's pledge to hold debt below 40 percent of gross domestic product is under threat as the economy edges towards its first recession since the early 1990s. The slowdown puts Brown at risk of breaching the two fiscal rules he created as finance minister in 1997, when he promised to borrow only for investment over the economic cycle and keep debt below 40 percent of economic output.
  • Relaxing the rules ``would in essence offer scope for more spending and lower tax revenues, a larger budget shortfall in the years ahead and more gilt issuance, and it deals a major blow to the credibility of macroeconomic policy making in the U.K.,'' said Russell Jones, the head of global fixed-income and currency research in London at RBC Capital Markets. (but other than that, things are looking rosy)
  • The slowdown is cutting revenue from sales tax, housing transactions and company profits.
  • The U.K. budget deficit will reach 3.3 percent of GDP this year and next, the European Commission, the European Union's executive agency, forecast in April. In the 27-nation EU, only Hungary faces a bigger shortfall this year at 4 percent of GDP. The deficit in the U.S. is forecast at 5 percent of GDP and 1.9 percent in Japan. ``The figures were horrific, absolutely horrific,'' said Philip Shaw, chief economist at Investec Securities in London.
"Horrific, absolutely horrific" would be considered "deficit fighting" in the United States of Subprime. It's all relative baby. We seem so immune to deficits here no one even raises a fuss anymore as the national debt spirals onward and upward. Not to worry - just have more kids and grandkids - they'll take care of the mess we leave behind.

Now about that second stimulus plan....

95 Stocks Returning 12%+ this Week

Well unlike the past month when we had a dearth of names, and had to bring our % gain threshold down to 7%, we have a bevy of winners this week. Pretty much everything that suffered the most the past 6 weeks enjoyed their dead cat bounces this week. Obviously since we don't own much of this "merchandise", we did not partake much in the festivities this week - mostly it was our minor "barbell" positions (stocks we don't really like but own for periods like this). It was a George Costanza week - own the opposite of what you normally would want to own.

  1. Market capitalization $1.75B+
  2. Average trading volume 100K+
  3. Stock price $10+
  4. Returns 12%+
Green names we own, blue names we have owned in the past or discussed in the blog. ICICI Bank (IBN) we sold Friday. So we got ya some financials, some retailers, some homebuilders, some more financials, some casinos, some auto companies, did I mention some financials? Not much to really discuss this week - this was short covering in my estimation and anyone who has been buying these the past 4-5 weeks has been summarily dismantled. In my estimation this is a great list... of stocks you should mostly avoid the next year+ except for 5-10 day periods when they bounce like mad after going through death spirals. When the economy truly does recover, this is the list you want to be buying 6 months in advance. Today is not that day.

Symbol Company Name % Price Change 1 Week
BRL Barr Pharmaceuticals Inc 45.5
GM GM Ord Shs 32.9
LEH Lehman Brothers Holdings Ord Shs 32.4
FNM Fannie Mae Ord Shs 30.7
PHM Pulte Homes Ord Shs 28.4
BAC Bank of America Ord Shs 26.9
VMC Vulcan Materials Co 25.0
BLK Blackrock Inc 24.8
RYAAY Ryanair Hldgs ADR 24.5
XL XL Capital Class A Ord Shs 22.3
LEG Leggett & Platt Inc 21.5
CMA Comerica Inc 21.5
MDC MDC Holdings Inc 21.3
WFC Wells Fargo & Co 21.1
CCL Carnival Corp 21.0
RCL Royal Caribbean Cruises Ltd 20.9
JPM JP Morgan Chase Ord Shs 20.7
FOSL Fossil Inc 20.6
LULU lululemon athletica inc 20.6
CUK Carnival Depository Receipt 20.3
MAT Mattel Inc 19.8
C Citigroup Ord Shs 19.5
BBT BB&T Corp 19.4
AF Astoria Finance Ord Shs 19.3
JEF Jefferies Group Inc 19.2
LYG Lloyds TSB Depository Receipt 19.2
AEO American Eagle Outfitters Inc 19.0
IRE Bank Of Ireland ADR 18.9
RF Regions Financial Corp 18.4
LEN Lennar Ord Shs Class A 18.0
BCS Barclays ADR 17.8
IHG InterContinental Hotels Group ADR 17.5
BEAV BE Aerospace Inc 17.3
STT State Street Corp 17.2
OC Owens Corning 17.1
EDU New Oriental Education & Technology 17.0
DFS Discover Financial Services 16.5
VMI Valmont Industries Inc 16.4
RSG Republic Services Inc 16.3
M Macy's Inc 16.1
DHI D.R. Horton Inc 15.7
STMEF STMicroelectron Ord Shs 15.6
ALD Allied Capital Corp 15.5
KEY Keycorp Ord Shs 15.5
SFD Smithfield Foods Inc 15.4
MS Morgan Stanley Ord Shs 15.3
GME GameStop Ord Shs Class A 15.2
ADS Alliance Data Systems Corp 15.1
LII Lennox International Ord Shs 15.0
LFL Lan Airlines ADR Rep 1 Ord Shs 15.0
BSX Boston Scientific Corp 14.9
PNC PNC Finl Service Ord Shs 14.9
CYN City National Corp 14.8
LUV Southwest Airlines Co 14.8
SCHW Charles Schwab Corp 14.8
SHW Sherwin-Williams Co 14.7
PKG Packaging Corp of America 14.4
ATVID Activision Blizzard Inc 14.4
LAZ Lazard Ltd 14.3
PENN Penn National Gaming Inc 14.1
ZNH China Southern Airlines ADR 14.0
VLY Valley National Bancorp 14.0
APH Amphenol Corp 13.6
TKS Tomkins Depository Receipt 13.5
ORI Old Republic International Corp 13.4
MCO Moody's Corp 13.4
FDRY Foundry Networks Inc 13.3
CNW Con-Way Inc 13.3
SPR Spirit Aerosystems Holdings Inc 13.2
COH Coach Inc 13.2
LVS Las Vegas Sands Corp 13.2
JBHT JB Hunt Transport Services Inc 13.1
MAS Masco Ord Shs 13.1
STM STMicroelectron Depository Receipt 13.1
NDAQ NASDAQ OMX Group Inc 13.0
KMX Carmax Inc 12.9
AIB Allied Irish Bks Depository Receipt 12.9
TRN Trinity Industries Inc 12.7
ANF Abercrombie & Fitch Co 12.7
WYNN Wynn Resorts Ltd 12.7
IBN ICICI Bank ADR representing 2 Ord Shs 12.7
GS Goldman Sachs Ord Shs 12.5
SLM SLM Ord Shs 12.4
HOG Harley-Davidson Inc 12.4
WB Wachovia Corp Ord Shs 12.4
LUX Luxottica ADR Reptg One Ord Shs 12.3
NUAN Nuance Communications Ord Shs 12.2
STI SunTrust Banks Ord Shs 12.2
ALTR Altera Corp 12.1
FAST Fastenal Co 12.1
STJ St Jude Medical Ord Shs 12.0
NTRS Northern Trust Corp 12.0
MER Merrill Lynch Ord Shs 12.0

Mechel (MTL) Profits Appear to be Coming Under Scrutiny

Ah, the joys of investing in non capitalist societies. It appears there is a movement afoot in mother Russia as Mechel (MTL) seems to be printing too much money. In-country steel makers (Mechel's peers) are getting the short end of the stick and the government wants to fix that. Just replace the term "steel makers" with "financials" and you can see the United States is not very different from Russia. ;) Only Russia dresses up the actions in much more flamboyant ways.

An interesting story out this week below, certainly could go a long way in explaining the weakness of late - although all the metal companies have been mugged of late.
  • The Mechel group -- Russia's leading specialty steelmaker and one of the leading producers of coking coal in the world -- has lost 5% off its Moscow-listed share price on Thursday, following the public announcement two days earlier that it is under Russian government investigation for price-rigging and other anti-trust violations.
  • Russia's Federal Anti-Monopoly Service (FAS) announced on July 15 that it has opened an inquiry into price-rigging and other anti-trust violations by the Mechel Group's coal division. The move is the first ever taken by Russia's anti-trust watchdog against coking coal suppliers to the Russian steel industry. (how convenient)
  • Mechel is very sensitive to signals from the federal government, as the steel division has been a takeover target for two years past. For the time being, Mechel is claiming it knows of no complaints from clients regarding its coking coal supply or price policy. The company spokesman has also announced that "we haven't received any official documents about the case."
  • The FAS action may, however, be the prelude to intensifying pressure on Mechel to limit its coking coal exports, and restrain share-listing ambitions for the coal and iron-ore division, and possibly for the ferroalloys division also.
  • The last major problem Mechel had with a federal government agency in Moscow occurred in late 2004, when agents of the Interior Ministry raided the offices of a Mechel trading subsidiary in Moscow, searching for documents related to what appeared at the time to be a tax investigation. No charges or administrative proceedings followed, however.
  • Company sources said at the time that the raid was intended to deter Mechel, which held a 17.1% stake in rival steelmaker Magnitogorsk Metallurgical Combine (MMK), from bidding for the 17.8% state stake on auction later that month. Mechel then sold its stake to controlling MMK shareholder, Victor Rashnikov, who went on to bid successfully for the state stake. (Russia at its best)
  • FAS Russia, being concerned with possible price increase for coking coal and coal concentrate on the Russian market, sent enquiries to all main producers of coking coal and coal concentrate in order to study the level of coal supplies to domestic market, pricing procedures and price behaviour, as well as the planned level of supplies and prices for the year 2008."
  • The FAS action may be a harbinger of the warning that Mechel's good fortune must now be shared with the rest of the domestic steel sector, and the state as well. (not good)
  • Russian law provides that price-fixing violations are punishable by a fine of 1% to 15% of a company's profits gained from those sales. It is not clear, however, for how long the alleged price-fixing has been going on.
  • A report by MDM Bank analyst James Lewis warns that "perhaps more important than the possible consequences for Mechel, though, are those for the industry: We view the allegations as possibly the latest in a string of recent measures to control rising coal prices and, in turn, steel prices. These started with discussions of export taxes on steel back in May (in which the FAS was also involved) and continued earlier this month with consideration of restrictions on coking coal exports. Now, rather going after the industry as a whole (efforts that have so far resulted in no immediate relief to rising coal and steel prices), it is possible that the government could be targeting individual producers. Whether or not Mechel was indeed engaged in price-fixing, we believe that such individually targeted measures could be more effective in convincing all major Russian coal producers (Mechel, Raspadskaya) to tread more carefully in their pricing policies."
So quite an interesting situation. This also plays into another them of mine, the long term protectionism of resources. We've talked about this in agriculture extensively this past winter. This appears to be a power play to protect the domestic steel industry by trying to keep (a) Mechel exports low; keep product in country and (b) restrict prices on domestic metallurgical coal so Russia's steel makers won't suffer. Neither is good for an investor. Ironically Mechel itself is a steel maker and is getting punished for it's forward thinking vertical integration!

This is too bad; obviously it is impossible to predict the outcome but these sort of actions and/or the restriction of the mining IPO would not make us happy campers. We've been waiting for that IPO for a long time. [Dec 12: Mechel Reports Earnings, Considers Mining IPO]

Long Mechel in fund; no personal position

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