Thursday, July 31, 2008

FT.com: Mittal (MT) Considering Bid for Alpha Natural Resources (ANR)

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Thanks for a reader for highlighting this to me We so deserve this ;) Somehow we are the only investors in America whose top position lost its value after getting bought out.

I wrote [Jul 16: Thoughts on Cleveland Cliffs (CLF), Alpha Natural Resources (ANR) Deal]

If other bidders emerge, Alpha Natural Resources is a massive strong buy for obvious reasons

Folks, I've written multiple times on how I differ with Ken
Heebner on playing the steel trend - I've chosen to play the inputs (metallurgical coal/iron ore) versus the actual steel producers where he is overweight. I think both strategies work, but I think the inputs have some inherent advantages as I've written out multiple reasons, including takeover potential. [Jul 6: Is the Buck Finally Stopping in Steel?]

Ironically, I think I've written at least 5 times that I've been amazed that
Cleveland Cliffs (CLF) has not been taken over and still remains an independent company. [Jul 9: Cleveland Cliffs Up 15% on Guidance and Starting a Dividend] So to see them actually be the acquirer is sort of funny. I still think a combined Cliffs Natural Resources - if the merger goes through - would be a very attractive target for one of the major steel players such as Mittal (MT).

Lo and Behold... tonight we hear
  • ArcelorMittal is considering breaking up the $8.8bn (€5.6bn) takeover of US coal miner Alpha Natural Resources by Cleveland-Cliffs with a counter-bid
  • ArcelorMittal, the world’s largest steelmaker, is also looking at waiting for the deal to either fall apart or create one digestible takeover target. ArcelorMittal indicated it was willing to make an all-cash offer for Alpha in June, prompting the target company to seek other higher bids, said people close to the companies. They said ArcelorMittal’s approach was pegged at or near $110 a share.
  • Alpha was able to drum up a higher cash-and-stock offer from US iron ore miner Cleveland-Cliffs, and then returned to gauge whether ArcelorMittal would top it. Rather than besting Cleveland-Cliffs’ bid, however, ArcelorMittal pulled back to evaluate the few other large North American coal assets on the market. That left Alpha matched with Cleveland-Cliffs, and the companies announced a deal on July 16.
  • Their proposal has run into a significant snag, however. Top Cleveland-Cliffs shareholder Harbinger Capital opposes the transaction, and holds enough shares to make the two-thirds vote needed to approve the deal difficult to win.
  • Unless Cleveland-Cliffs can change Harbinger’s mind, the companies may have handed ArcelorMittal, a key Cleveland-Cliffs customer, an advantage.
  • “It’s safe to say their (Mittal's) strategy of buying smaller coal assets in central Appalachia has been tougher to execute than expected, so they’ve got to go for the big guys,” one merger adviser said.
  • Rather than entering into a bidding war, ArcelorMittal or another steel or mining giant could potentially buy either company more cheaply if the deal falls apart. As one of many foreign companies shopping for assets in the US, ArcelorMittal may also want to avoid generating the impression that it broke up the deal, one person close to the company said.
  • If the deal wins approval, the company, which would currently have an enterprise value of about $18.5bn, could still make a target. Iron ore and metallurgical coal are steel’s two key ingredients and demand for both is hot. (to everyone but Harbinger and hedge fund computers)
A fascinating snippet from the article (boggling!)
  • A Cleveland-Cliffs spokesman said the company had not heard from Harbinger since it initially rebuffed the deal.
Summary: Boo Yah. I really am amazed that a hedge fund is stepping in on management's toes like this and ruining their strategic deal in their quest for maximizing profits. I believe this will be a trend that happens more and more as more and more capital flows to these "dark pools" of money. But it is sort of sad that companies are beholden to 1 shareholder to this degree. As I've said - the combined company would be a powerhouse, even if I believe Alpha Natural Resources should wait it out since it will be a $200 stock on it's own in a year.

Very interesting folks. Keep your popcorn warm - this should put a floor under the stock price of Alpha Natural Resources. EVEN IF CRUDE falls $110 from here. ;) But it could take quite a while to play out - especially when Harbinger is not even returning phone calls. Nice.

I still believe our other 2 metallurgical focused coal stocks will also be in play in the coming year. Or sooner. I really need my real mutual fund up and running so I can take advantage of these deals and profit potential. Ugh.

Long Alpha Natural Resources, Cleveland Cliffs in fund; long Alpha Natural Resources in personal account


Schwarzenegger Orders Cuts Amid Fiscal Crisis - Workers to Minimum Wage

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We'll see how much of this is theater versus reality but some interesting developments happening across the United States of Subprime. This is one of our big calls not as much for THIS budget year (summer 2008 to summer 2009) but NEXT budget year (summer 2009 to summer 2010). Remember, California if it was a free standing country would be the 7th biggest economy in the world.

[Jul 25: States Slammed by Budget Shortfalls]
[Apr 25: Shoes Beginning to Fall in the States]
[Dec 16: California in a State of Emergency - Coming to a Theater Near You]

Normally I'd worry when I read a story like this but since Jim Cramer has called the bottom in the stock market, we have nothing to fear but reality itself...
  • With California's cash dwindling and legislators still debating a new budget, Gov. Arnold Schwarzenegger eliminated 22,000 part-time and temporary state positions Thursday and ordered that 200,000 state workers receive the federal minimum wage.
  • His signing of the executive order had been expected since last week but stood as a stark illustration of the cash problem facing the nation's most populous state. Schwarzenegger apologized to state workers but said he had no choice.
  • Lawmakers have yet to agree on a spending plan a month after the state's fiscal year began, leaving California without the ability to pay for contractors, the higher education system and legislative employees.
  • As of June, more than 30 states faced deficits totaling a projected $40 billion, or more than triple the gap of the previous year, according to the National Conference of State Legislatures. ($40 billion? Can't you just write it off?? - works for our banking system - that's not even 1 good earnings season for our banks. That's peanuts! Uncle Ben - to the presses! Pronto!! Oh wait, you only do that to bail out the executives at our banks - never mind then - let the states and their people suffer. Suckers.)
  • Schwarzenegger also cited a 2003 California Supreme Court ruling allowing him to slash the pay of regular full-time employees when the state lacks a budget. By law, those workers must be paid at least the federal minimum wage of $6.55 an hour and will be reimbursed once a budget is approved.
  • The administration estimates that immediately terminating the contracts and suspending overtime would save the state about $80 million a month. The deferred wages would take several weeks to implement, saving the state $300 million to $400 million a month starting in late August.
  • The governor's order is certain to be challenged. The state controller has said he will not comply, in part because he said the move is likely to invite lawsuits from employee unions. Controller John Chiang, a Democrat, has said will issue employees their regular paychecks, setting up a potential legal skirmish between his office and Schwarzenegger's.
Just a canary in the coal mine. Give it 15-20 years at the federal level and even with the ability to continuously print new money to devalue the paper in our pocket, at some point the bleep hits the wall. Such as when $1 of every $4 of GDP in this country goes to pay for health care. [May 23: David Walker on CNCB this Morning] We're just doing the previews of the real national emergencies here in the next year or two at the state level. [Mar 26: Annual Spring Entitlement Warning Falls on Deaf Ears] States are limited by the fact they cannot print money out of thin air. Federal government can still get by for another decade or perhaps two on this "printing" option... until the rest of the world balks on subsidizing us since we've become a high risk i.e. subprime customer. [Apr 15: Could the US Lost its AAA Rating?] I wonder what our FICO score would be? 400? 450?

Now about that next stimulus plan to spend money we don't have....

Bookkeeping: Adding to Massey Energy (MEE)

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It's been a very busy day for transactions...

I normally don't add to a stock before earnings because there is a 50/50 chance of reaction either way. And it might not really matter what Massey Energy's (MEE) earnings are tomorrow because all that matters anymore in the commodity space is the price of oil. Of which I've been a near term bear. [Jun 26: Can a Near Term Top in Oil be Far Away?] I just did not expect every commodity within 6 degrees of Kevin Bacon to also be systematically destroyed with oil. Lesson learned. That said (ok maybe lesson not learned) I still believe in the coal and fertilizer stories. So I'm going to increase my exposure to Massey ahead of earnings tomorrow pushing the stake up from 0.6% to 2.5%. Purchases in the $73 range.

The stock is down 8% which can be attributed to (a) oil is down hence every commodity must be destroyed and/or (b) Consol Energy (CNX) laid an egg. One thing about Consol is they are notorious for production problems, lawsuits, or some problem here or there. Luckily we exited [May 30: Closing Consol Energy] but really it does matter - stocks that have given great earnings and guidance are being hammered just the same... Kevin Bacon after all. These are again 2009 stories but the market obsession with quarterly earnings has befallen CNX.
  • Shares of Consol Energy Inc. fell sharply Thursday after the coal mine operator said its second-quarter profit dipped 34 percent as productivity problems pushed up costs.
  • Consol said revenue and other income totaled $1.21 billion in the second quarter, compared with $1.06 billion in the same period last year.
  • The results fell well short of Wall Street's expectations. Analysts polled by Thomson Financial were expecting Consol to earn 80 cents per share.
  • Shares of Consol fell $12.64, or 14 percent, to $75.86 in midday trading.
  • Chief Executive Brett Harvey pinpointed productivity problems that left highly productive longwall mining sections idled for lengthy periods as miners prepared new mining areas for problems in the quarter. In coal mining, lower productivity forces up costs per ton, eating into profits.
  • The result was essentially flat production at higher cost. Consol said it produced 16.6 million tons during the quarter, compared with 16.4 million tons in 2007. Operating costs per ton rose to $32.03 from $25.46 a year ago.
  • Currently, Consol is seeing 2009 prices ranging from $100 to $110 a ton for lower-quality coal for electricity generation to $265 a ton for high-quality metallurgical coal used to make coke for steel mill blast furnaces, Harvey said.
  • As a result, Consol is hoping to increase annual metallurgical coal production by 3.5 million to 5 million tons over the next five years, Harvey said. "That's where we're focused right now."
It's been an interesting quarter for coal - most of the names have performed well in earnings, but two have laid eggs. And again, it has not mattered because even those that have performed have been punished with the fall in crude. But I believe there is a better than average chance that Massey will fall into the better than expected group. And as you can see from the statements from Consol, metallurgical coal is the focus - which is a strong area for Massey. And for a few of the other names which have outperformed this quarter. I've cut back my coal exposure overall and with other companies embroiled in buyout talks, this leaves us to focus on Walter Industries (WLT) and Massey Energy in the metallurgical space. It is interesting to reconcile the recent price action with the reports and articles of shortages of coal in certain parts of the world, but the market is the market. Money flow and perception is all that matters in the near term.

As a side note (thanks to reader for sending this to me) the rumor mill is heating up around AK Steel (AKS) as a buyout candidate. I point this out because that's part of my thesis for the metallurgical coal (and in fact perhaps all coal) producers - with the cheap U.S. peso we're giving away our farm piece by piece. AK Steel actually has been the subject of takeover rumor for 8 of the past 5 years, but I think there could be some truth to this one. The time is ripe to strike and consolidate the sector even further. And 4 names at once? Hmmm....
  • U.S. steelmaker AK Steel Holding Corp (AKS) is looking to sell itself and has had talks with several parties, according to a dealreporter.com article published on the Financial Times website on Thursday.
  • The company is seeking an all-cash deal, mergers and acquisitions website dealreporter.com said, citing unnamed sources.
  • The website said ThyssenKrupp AG, Evraz Group SA, CSN and Severstal were interested in AK Steel.
  • This is not the first time AK Steel has been a rumored takeover target. Over the last two years, United States Steel Corp (X) and Arcelor Mittal (MT) have also been named in various reports as possible suitors for the company.
Long Massey Energy, Walter Industires in fund; Massey Energy in personal account

Bookkeeping: Restarting Millicom Cellular (MICC)

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When last we left Millicom Cellular (MICC) in early April we had a nearly $100 stock [Apr 8: Closing Millicom Cellular] The stock ran up after we sold to $120 but about a week ago Monday was back to exactly where we sold (did I mention this is not a buy and hold market?) But after an earnings miss a week ago Tuesday, the company has traded down to low $70s during a violent sell off.
  • Shares of Millicom International Cellular SA declined sharply Tuesday after the Luxembourg-based wireless carrier reported second-quarter sales and profits that failed to meet Wall Street expectations.
  • Millicom shares fell $22.02, or 22.6 percent, to close at $75.48.
  • The company said earnings rose to $1.22 per share, up from 98 cents per share in the year-ago period. Revenue jumped 37 percent to $843 million, up from $613 million.
  • However, analysts polled by Thomson Financial expected, on average, income of $1.34 per share on revenue of $864 million.
  • Millicom provides cell phone service mostly in developing regions in Latin America, Africa and Asia that have little or no wireline infrastructure.
  • Also Tuesday, Millicom said it has agreed to buy Amnet Telecommunications Holding Ltd. for $510 million, giving the company a boost in Central America, its most important region with 43 percent of worldwide revenue and 38 percent of subscribers.
I still like the story - the company is still growing at a rapid clip - it simply missed analysts expectations. The company is now very cheap on every metric; 2008 estimates have dropped from the $5.75 range to $5.50 and 2009 from the $7.15s to $6.75. I don't expect the future growth rate to be quite as stellar as the past few years, but 20-25% growth rates for a forward PE of under 14 should give us some leeway here.

This market seems to sell strength and buy weakness, but only if you time your entry into the "weakness" well. So MICC fits in that mold of a beaten down stock. Technically the stock is potentially forming a nice double bottom from levels last seen in September 2007. This is not the type of chart I normally buy because falling knives can remain falling for weeks, months, quarters on end. But we'll give this one a try - the past few days the stock has bounced around the $70-$74 range and volume has dried up significantly which hopefully means sellers have been exhausted.

If the stock does bounce we'd probably see a move to the mid $80s before there is any major resistance as this is where the "gap down" began. I might simply take the money and run there or see if they can provide a more reassuring report in 3 months time and see if we can get $100ish. If the stock breaks down below $70, we'll probably take the small loss and exit since the next support level is .... in a galaxy far far away.

We restarted Millicom International Cellular (MICC) into the fund today with a 1.7% stake in the $75-$76 range. The company has no subprime exposure (although I believe that would be a good thing in terms of what the hedge fund computers like to buy now) and last I checked does not have potash, coal, natural gas, crude oil, iron ore, wheat, corn, nickel exposure. But it does have foreign exposure and as you know - when the U.S. sneezes every consumer the world over turns in their cell phones and says "we don't need this anymore". Or so says the hedge fund computers.

Millicom International Cellular S.A. and its subsidiaries provide mobile telephony services in Central and South America, Africa, and Asia. The company offers prepaid services using mass market distribution methods; and broadband Internet, fixed wireless telephony, and public telephony, as well as operates an international gateway, a high-speed data business, and a television station. As of December 31, 2007, it had approximately 23.4 million subscribers and interests in 16 mobile operations in 16 countries. The company was founded in 1968 and is based in Leudelange, Luxembourg.

[Nov 7: Starting a Position in Millicom Cellular]

Long Millicom Cellular in fund; no personal position

Bookkeeping: Initiating Flowserve (FLS) Position

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The market continues to not reward these global growth companies for stellar earnings. As I wrote this AM, Flowserve (FLS) posted some fantastic earnings and a huge guide up on 2008 estimates [Flowserve Mighty Impressive Earnings]

After gapping up to the mid $140s, the stock is back down to $137s... to completely fill the gap it would need to go down to $135, but I'm willing to put a stake in the ground here. Beginning with a 1.3% position and willing to build on pullbacks. $115-$120 would be a nice area as this is where the stock has bottomed twice in the past month. Considering they just raised 2008 estimates by $1.25 it wouldn't make much sense to see such a fall, but what has been making sense of late. Throw a conservative 15 P/E ratio (for 100% earnings growth) on this extra $1.25 of 2008 earnings and you have +$20 in stock price. Instead we get +$3. I guess "it's all priced in"

EDIT 12:15 PM - that didn't take long. The bear market sneered at us for daring to buy anything. Already down to $130. So the gap is now fully filled and the stock is right back at its 50 day moving average. Folks buying in the mid $140s this morning are already enjoying a quick trip to the house of pain. Off in the distance a bear could be heard laughing. I'll take it up to 1.6% stake here with another smaller purchase. Next addition will be down in $115-$120 range. Which might be in a few hours. Just imagine if they had dared to miss ;) Let me guess - oil is down $3 so every stock that was loved yesterday when oil was up $3 must now be sold. Got it.

I have to tell you this weakness in the global infrastructure names is mind boggling to me - Fluor (FLR), Jacobs Engineering (JEC), and Foster Wheeler (FWLT) are acting as if the world will end as oil falls to $120 (or $100). If you read the press releases on the type of contracts these names are putting out on a weekly basis it's an embarrassment of riches (wind, gas, petroleum, solar - they're everywhere), but the hedge fund computers prefer banks I suppose.

Flowserve is not the exact same type of company but off the same theme - yes the globe will slow but those with money (petrodollars and huge trade surplus) will continue their advancement. [Jul 12: Where is your Gas Money Going?] [Feb 27: $2 Trillion of Petrodollars Needs a Home this Year] We'll continue to purchase companies out performing in this period of market madness. But we won't make large purchases until the market acts rational and technicals improve.

Flowserve Corporation develops, manufactures, and sells precision-engineered flow control equipment, as well as provides a range of aftermarket equipment services. It operates in three divisions: Flowserve Pump, Flow Control, and Flow Solutions.
  1. The Flowserve Pump division offers engineered and industrial pumps and pump systems; submersible motors; replacement parts; and related equipment primarily to industrial markets. Its products include centrifugal pumps, positive displacement pumps, and specialty products and systems, such as hydraulic decoking systems, reactor recycle systems, and cryogenic liquid expanders.
  2. The Flow Control division designs, manufactures, and distributes industrial valve products, including actuators and accessories, control and ball valves, lubricated plug valves, condensate and energy recovery systems, pneumatic and electro pneumatic positioners, smart valves, steam traps, manual quarter-turn valves, valve automation systems, valve/actuator software, nuclear valves, and quarter-turn actuators.
  3. The Flow Solutions division offers mechanical seals, sealing systems, and parts principally to process industries. Its products include cartridge seals, dry-running seals, metal bellow seals, elastomeric seals, slurry seals, split seals, gas barrier seals, couplings, and accessories and support systems.
Long all names mentioned in fund; long none in personal account

Bookkeeping: Cummins Engine (CMI) Trade Working Well - We're Adding Back

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We scooted out of most of our Cummins Engine (CMI) last week and then immediately after an excellent earnings report yesterday [Cummins Engine Continues to Quietly Execute] with the last of the position sold out at $74. I wrote

Now as much as I like this story we see a potential top forming and everything good is to be sold in this trecherous market; all gains are erased quickly. So I'm taking this down to a 0.1% holding position and selling the remaining portion around $74. Frankly I didn't hold much since I sold on that spike to low $70s last week. And we will buy back on a pullback... or if the stock continues upward through the $75 level we'll buy on "technical" strength. Right now good results are not keeping stocks up for long so until that pattern changes we'll obey the markets wishes and sell strength.

So we got our pullback as the stock is in the $68s this morning where I am going to rebuy a solid stake here and take Cummins Engine back from a 0.1% stake to 1.5% . It could potentially go lower since there is a "gap" in the chart to fill in the mid $66s, but we made some decent change by exiting through the low to mid $70s and getting back in 5-8% lower. It doesn't sound like much but in this market where pulling teeth is the order of the day, it's something.

The overall market is shrugging off bad news for now so we have to look to be somewhat constructive...

Long Cummins Engine in fund; no personal position


Bookkeeping: Adding to Mastercard (MA)

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Got my wish for some weakness in Mastercard (MA) stock post earnings, so added some this morning in the $240s. I haven't had time to look at the earnings but whatever the fuss is (I am sure it's a "slowdown" of one sort or another) I am ok with for the long term. I am not adding a ton here because this was a gap down in the chart, and there is better support in the $220s, but since we cut this name back sharply from our portfolio I'm willing to begin to layer back in with today's 10%ish haircut. We bought in the mid to low $240s and have taken our stake up from 0.8% to 1.4%.

I'll edit this post later in the day with some earnings commentary. But essentially everything I said for Visa (V) last night applies to Mastercard (MA).

Long Mastercard in fund; no personal position


Bookkeeping: Beginning Exactech (EXAC) Position

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Interesting.. Exactech (EXAC) which we highlighted yesterday is being pummeled on what I considered to be excellent earnings. As it falls over 15% this AM I am going to begin my position with a 850 share stake in the low to mid $25s. As I wrote yesterday [Potential Portfolio Idea - Exactech (EXAC)]

The company reports after the bell tonight so the gambler would buy ahead of earnings hoping for the pop. I'm not the gambler. So we'll watch tonight to see how they do after the bell.

So this worked out very well for us in retrospect... without access to an analyst report I can only assume the slow growth in the shoulder segment (up only 4%) might be causing a fuss. But the overall numbers continue to track well and they are still shooting for $0.94 to $0.98 in EPS for the year.
  • Exactech, Inc. (Nasdaq:EXAC - News), a developer and producer of bone and joint restoration products for hip, knee, shoulder, spine and biologic materials, announced today that revenue for the second quarter of 2008 increased 38% to $43.7 million from $31.6 million in the second quarter of 2007. Organic growth, excluding acquisitions and distribution terminations, was 28%
  • Diluted earnings per share for the quarter was $0.24 based on net income of $3.0 million. This compares with net income of $1.4 million or $0.12 diluted EPS a year ago. Net income increased 115% to $3.0 million. Exactechs second quarter 2007 net income included an impairment charge of $1.5 million. Excluding this charge, the second quarter 2008 diluted earnings per share was $0.24 compared to $0.20 in the second quarter of 2007.
  • Knee implant revenue increased 21% to $20.5 million
  • Hip implant revenue increased 4% to $5.7 million
  • Biologic services revenue increased 21% to $4.7 million
  • Shoulder implant revenue increased 69% to $3.9 million
  • Exactech President David Petty said, U.S. sales grew 24% to $28.8 million from $23.3 million in the comparable quarter in 2007. Our international business received a boost from the contributions of our European distributor start-ups, with second quarter sales increasing 79% to $14.9 million from $8.3 million in the second quarter of 2007. International sales for the quarter represented 34% of total sales, compared with 26% in the same quarter last year.
  • Chief Financial Officer Jody Phillips said, Gross margin percentage for the quarter was 62.6% compared to 62.7% for the comparable quarter last year but was ahead of our expectations due to higher manufacturing volumes.
Guidance
  • Looking forward, the company said it anticipates 32% to 36% revenue growth for the full year 2008, targeting a range of $164 million to $169 million and diluted earnings per share for the year 2008 in the range of $0.94 to $0.98. For the third quarter ending September 30, 2008, the company targets 23% to 33% revenue growth to the range of $37 million to $40 million and diluted earnings per share in the range of $0.21 to $0.23.
For now, we have started a 850 share position in the much loved "healthcare industry" with a 2.1% stake in Exactech. The stock is down about 20% from recent highs with today's visit to the woodshed. There should be good support in the $24-$25 area from where this stock made its most recent breakout.

Long Exactech in fund and personal account



Oh, Facts!

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Darn those facts - they keep getting in the way of a rally attempt.

For those of you new to the blog I encourage you to read my December 2007 predictions and how they have turned out so far [Jul 14: Reviewing December 2007's Roadmap & Views] I find it ironic that the "market" is supposed to be the best predictor of the future yet last fall (September/October 2007) the market shrugged off the embryonic stage of the credit crisis and pushed to all time highs. Somehow its predictive powers missed multiple stages of stock price implosion, especially that of the November 2007, January 2008, and March 2008 kind. It missed the need for the Federal Reserve to take historic actions, and create unprecedented financial bailouts. Then the "best predictor of the future" once again went on a 2 month rally after the Bear Stearns bottom, rallying in April and most of May 2008. Why wasn't it predicting the June 2008 stock market implosion (one of the worst months in history), 7 out of 8 weeks straight down, the Fannie Mae, Freddie Mac bailout, and the like.

This is the problem with the market - those of us who have been calling it correct can be swooshed away in one of these big rallies and to remain short and inflexible will lead to a lot of short term losses during times of heavy Kool Aid drinking by market bulls. I remain fully negative on this economy but cognizant that periods like early fall 2007 and late spring 2008 when the market rallies on any whiff of "hope" can obliterate short positions. Even if intellectually these rallies are garbage. Hence why one must remain a flip flopper - the punditry are looking for ANY silver lining to run this market up. ANY - the latest are things such as "yes house prices are falling at historic rates - the like of which we've never seen but in 7 of 20 cities surveyed they fell LESS than last month - the bottom must be here any moment" Etc.

So the reason I am bringing this up is a few figures out today - first the GDP which is Gross Domestic Product. This number is published, and then revised constantly and even then I doubt it is very accurate. But as we look back we had the seals clapping all over financial TV and media that fourth quarter GDP was positive and the doomsdayers were creating lot of fuss when none should be - well that "positive" GDP just went negative as the revisions started coming in - now Q4 2007 is -0.2% instead of the +0.6% all the bulls were waving in our face as a "resilient economy".

Next we move onto 1st quarter 2008 which is going through its first revision and is already losing steam, its down to +1.0%, and folks that number is pure garbage - to find out why read this [May 1: Is it an Official Recession? NY Post Says it Should Be] The Cliff Notes version is "official inflation" is 4.0% at the time; but the government agency who creates GDP says, nah it's only 2.6% inflation - so lo and behold instead of a negative GDP we had a positive GDP since we had a 1.4% swing. Not withstanding that 4% inflation is also a corrupt joke - we had negative GDP in Q1 2008 as well, if the government had used 4% inflation.

So the "official" definition of recession? Two back to back quarters of negative growth - we just had them in Q4 2007 and Q1 2008 (reality version). This quarter? Positive 1.9%. Awesome - the economy is back! Not so much. This quarter's GDP strength was brought to you courtesy of your grandchildren's hides. They will pay for this quarter's strength with the $160B tossed into this economy from the stimulus check. So make sure to thank them the next time you see them (if you have any). And this number will be revised lower over time - be sure of it... even with all the stimulus we threw at it.

Now tomorrow we have the monthly employment report which is a farce in itself - I try to restrain myself from talking about it too much and just refer people to another site who breaks it down each month for the illusion it is. Again if you are new to the website (within past 30 days) I'll refer you to last months posts [Jul 3: A Quick Word about the Unemployment Report] Cliff Notes version - the government created a Birth/Death model of jobs that are "too new" to measure so creates numbers out of thin air to juice this report - lately they've been creating a whole lot of jobs in the construction, financial, and retail areas - areas we are seeing bankruptcies and job losses across most of the country. But nevermind that - the government is seeing jobs no one else does. Further the main jobs being created? Federal government. Healthcare. The two areas we should be cutting jobs because they are creating a national strain of epic proportions.

We do have a weekly jobless claim figure and traditionally when it goes over 400K people get worried. We've been assured for months on end "why the fuss" it's only in the mid 300s to upper 300s. Of course people do not realize the massive US economy is not a like a video game where someone with a controller can change direction in a 15 day period. It's more like a ship... let's say the Titanic for example... that takes a while to turn. Why all the fuss by the doomsdayers? Because weekly unemployment claims just hit 448,000. And continuing claims? Approaching 3.3 million.

But not to worry - the same people who throughout late winter and spring 2008 were telling us this too shall soon pass and the "2nd half 2008 recovery" is soon upon us, are back out there today saying.... not to worry. So again the market, the "greatest discount mechanism" in the world could be up, could be down - I have no idea. But I am sticking by my guns that this economy is degrading and all you need to do is read company reports... and ignore the vast majority of the government's data, especially those with multiple inputs that can be "adjusted" - those are the ones full of "silver linings".

Summary: Don't worry. Be happy. Find a silver lining. And drink your Kool Aid.

Cleveland Cliffs (CLF) with Blow Out Earnings

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I am purposely using the same headline time after time this week - "(insert iron, coal or fertilizer name here) with Blow Out Earnings". It's been a heck of a performance for these names... Cleveland Cliffs (CLF) simply continues the train. I know, I know - I should be getting some restaurants because as gas drops to $3.25 they will roar back, and I'm looking backwards instead of forwards. Sorry, I just can't tear myself away from 100%+ growth, and punishing analysts estimates. Full report here.

Contra thesis? As China devolves into slowdown, and takes all the world with it, there will be little need for steel, or fertilizer, or coal. YET, I am to believe the U.S. is set to recover in early 2009. So we can have it both ways, correct? The global growth thesis is dead ... but the U.S. (which last I checked is the largest consumer of almost anything on this planet) rebounding (as the pundits tell me) won't be good for said consumables. Hmm... somehow the logic escapes me. Now if you are in the camp that the world is completely doomed and all countries will be devolving into recession - you have a point to be bearish. But too many people are having their cake and trying to steal our cake too.
  • Cleveland-Cliffs Inc (CLF) Inc said on Wednesday its second-quarter rose sharply, helped by higher margins in its iron ore business. Cleveland-Cliffs said its net income rose to $270 million, or $2.57 per share, from $86 million, or 83 cents per share a year ago. Excluding adjustments to first-quarter sales related to the timing of international pricing settlements of iron ore, the company earned $2.21 per share, above the analyst consensus estimate of $1.99 per share, according to Reuters Estimates.
  • Cleveland-Cliffs, which earlier this month announced plans to acquire Alpha Natural Resources Inc (ANR), said it is receiving positive feedback about the proposed deal from the majority of its largest shareholders. (except for 1, the big 1)
  • Consolidated second-quarter revenue for the Cleveland, Ohio company rose 84 percent to a second-quarter record of $1 billion. The jump in revenue was the result of the strong market for iron ore and metallurgical coal.
  • For 2008, Cleveland-Cliffs said it expects to realize an average per-ton price of $90 for North American iron ore in 2008, up from its previous estimate of $85 per ton.
So from the update we received in today's full earnings report it appears everyone wants this deal to go through - both companies, most major shareholders - except for 1 party. Jul 17: High Drama at the Cleveland Cliffs Corral]

Long Cleveland Cliffs, Alpha Natural Resources in fund; long Alpha Natural Resources in personal account

Flowserve (FLS) Mighty Impressive Earnings

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We've danced around this kinda, sorta global infrastructure play for the past year but never devoted an entry to it. Based on these sort of earnings from last evening, it is time to begin taking a more serious look. Granted, when the "global growth" stocks sell off (with oil) this just goes down with the rest so it would not really provide any non correlation with many other parts of the portfolio but it's quite a story. While sales were "only" up a quarter, profits doubled - that's quite a feat. Full report here.
  • Flowserve Corp (FLS), which makes industrial pumps and fluid handling equipment, almost doubled its second-quarter earnings, helped by strong demand, and it raised its outlook for the year.
  • The company posted net income of $122.9 million, or $2.13 a share, compared with $63.2 million, or $1.11 a share, a year earlier.
  • Sales rose 24 percent to $1.16 billion
  • Analysts on average expected earnings of $1.49 a share, before special items, on revenue of $1.13 billion, according to Reuters Estimates.
  • The company said it continues to see strength in its large project infrastructure business globally in the oil and gas, power, chemical and water markets. (sounds a lot like our global infrastructure stocks that absolutely get destroyed each time crude drops even $5, as if all these projects suddenly get cancelled)
  • Backlog increased 34% to a record $3.05 billion from $2.28 billion at December 31, 2007.
  • It raised its 2008 earnings outlook to a range of $7.20 to $7.50 a share, compared with its previous forecast of $5.90 to $6.20 a share (wow) Analysts were expecting the company to earn $6.31 cents a share, before items, for 2008.
To put that in perspective analysts already had $7.50 in estimated earnings for Flowserve....

.... in 2009.

And just like that the company went to under 20x 2008 earnings.

That was a nice upgrade by BMO Capital on July 7th
  • Charles Brady raised the Irving, Texas, company to "Outperform" from "Market Perform" in a client note early Monday. Shares are trading at a "compelling" price following a sharp decline last week, he said, and there is no weakening in demand among its oil, gas, chemical and power markets.
  • In addition, Brady said Flowserve is positioned to continue to see strong bookings and sales growth. The company should also enjoy improved operating margins through 2010 thanks to better pricing, aftermarket sales and efficiency.
  • "We believe Flowserve is in the midst of a multiyear uptick in top-line revenue growth, margin expansion and earnings growth," Brady wrote.
I realize the airlines, retailers, and banks are "compelling valuations" but really with such performance in so many sectors despite the doomsdayers - I don't understand the compulsion by people to run into fractured businesses, when we have incredible secular growth stories without 90% of the headaches. We have a 10-20 year once in a lifetime global industrialization/modernization movement and people are fussing because oil is $80, $100, $120, or $140. Whatever. This should bode well for our global infrastructure names...

No position other than "impressed"


Wednesday, July 30, 2008

Visa (V) Rings Up Very Good Earnings - Should Bode Well for Mastercard (MA)

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We don't own Visa (V), but we do have Mastercard (MA) which reports tomorrow. I'll repeat every quarter people do not realize the international opportunities these 2 companies have. Visa was very solid tonight
  • Visa Inc.'s profit rose a better-than-expected 41 percent in the most recent quarter, as more money changed hands using its credit and debit cards -- particularly outside the United States.
  • Visa it earned $422 million, or 51 cents a share, for the April-to-June period. That is up from $299 million in the same period a year ago, before the company went public.
  • The results, reported Wednesday after the market closed, included litigation and restructuring costs. Excluding those costs and other items, earnings per share amounted to 59 cents. Analysts had anticipated 48 cents per share, according to Thomson Financial.
  • Operating revenue rose to $1.61 billion, above the average analyst forecast, from $1.37 billion a year ago. The driver was a 19 percent jump in payments volume, or the amount of money spent using a Visa-branded product, to $652 billion.
  • Visa's payments volume -- one of the company's key performance measures, along with transactions -- rose 19% to $652 billion in the quarter. Total volume rose 22% from a year earlier to $1 trillion.
  • The number of total payment transactions on Visa cards rose 15% to 10.7 billion.
  • The company now has 1.6 billion cards carrying the Visa brand, it says.
  • The April-to-June quarter, Visa's first full quarter as a public company, saw defaults and delinquencies surge in a growing swath of consumer debt. But Visa, like MasterCard, processes card payments for banks and other institutions, and takes a cut from the purchases made on the cards. The banks are the ones that lend the money to cardholders, and take the losses when they default. (important to note this economically, not important for Visa or Mastercard specifically)
  • "Despite a challenging economic environment in the United States and a softening in traditional credit card spending, the strength of Visa's debit business drove solid growth in the region," Visa's CEO Joe Saunders said in a statement.
  • He pointed to strong expansion in the Asia Pacific region, Latin America, Canada, Central and Eastern Europe and the Middle East.
  • The United States accounts for about 63 percent of Visa's total payments volume. U.S. payments volume rose nearly 12 percent to $388 billion, while payments volume outside the United States rose more than 31 percent to $264 billion.
  • "Greater use of cards leads to increased transaction fees, and zero extended credit shields Visa from any default risk," wrote Celent analyst Red Gillen in a note. "Whether consumers pay off their credit cards or not, Visa's skyrocketing growth is not affected." (Bingo was his Name-O)
  • Some analysts have noted that banks' decision to pare back credit lines to consumers could lead to lower spending volumes for card processors like Visa. (always a risk)
  • It raised its outlook for adjusted operating margins for 2008 to the mid-40 percent range, up from the low-40 percent range. And Chief Financial Officer Byron Pollitt said during the analyst conference call that the company is considering a share repurchase program as early as 2009.
I'm not sure why people are paying nearly 25% more in valuation for Visa over Mastercard, but we've had Mastercard and we'll continue to keep it, although the businesses are of course very similar. Similar growth, for cheaper valuation, always is something I like. I was hoping for some kind of miss from Mastercard so we could cheap up shares cheaper but it appears this won't be happening.

Long Mastercard in fund; no personal position

First Solar (FSLR) - You Can't Stop Them; You can Only Hope to Contain Them

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Another fantastic result from First Solar (FSLR)... they keep justifying their sky high valuation [Jun 17: Energy Conversion Devices Now Trades at Par with First Solar] This is one of the few names in the space not constrained by the polysilicon shortage and they've taken full advantage of it. We don't own this name anymore but I added a bit to Energy Conversion Devices (ENER) today (also not affected by polysilicon prices) earlier in the day in anticipation. First Solar has yet to really disappoint in its public life, unlike its brethren, some of which make it a habit to do so. I won't name names to protect the innocent.

We'll see how the stock reacts, but on a cursory glance of fundamentals, everything looks quite juicy. Remember it's not the news, but the reaction to the news. Keep in mind analysts estimates $217M revenue, $0.58 EPS. Much like the fertilizers at some point you get so large the PERCENT increase cannot keep up with previous quarters, but the magnitude of the numbers are still impressive. If all I did was read earnings reports of stocks we own or follow in our sectors you'd think this market would be at Dow 20K!

They do have one of the shortest press releases out of any company I follow - short & sweet. Astounding 36% sequential revenue growth, and 247% year over year growth. For earnings the numbers were 49% sequential growth (wow) and some mind numbing number that blew up my calculator when you do year over year (excluding tax benefit) Gross margins now up to 54% from last quarters 53% - staggering in comparison to polysilicon based peers. I keep thinking this stock is too expensive and "next quarter" will be the one where expectations get too high and it will fall flat. First Solar keeps telling me "No soup for you". Bravo.

Only fly in ointment is no guidance so everyone has to hold their breath to see what they say so the market lemmings can react violently one way or the other the minute it is uttered.
  • First Solar, Inc. (Nasdaq: FSLR - News) today announced its financial results for the second quarter ended June 28, 2008. Quarterly revenues were $267.0 million, up from $196.9 million in the first quarter of fiscal 2008 and up from $77.2 million in the second quarter of fiscal 2007
  • Net income for the second quarter of fiscal 2008 was $69.7 million or $0.85 per share on a fully diluted basis, compared to net income of $46.6 million or $0.57 per share on a fully diluted basis for the first quarter of fiscal 2008. Net income for the second quarter of fiscal 2007 was $44.4 million or $0.58 per share on a fully diluted basis, which included a one-time income tax benefit of $39.2 million that resulted from the reversal of valuation allowances against previously established U.S. deferred income tax assets.
Classic double bottom formation - why didn't my on staff technician notify me? Wait, I am the on staff technician. Bah.

[Apr 30: First Solar Keeps Doing Enough to Satisfy Shareholders]
[Feb 13: First Solar Out with Another Great Set of Earnings]
[Nov 7 - First Solar (FSLR) Impressive Numbers]

Long Energy Conversion Devices in fund and personal account

Signs of Hope? Bueller?

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Financials Up. Oil and the Commodities Up.

On the same day.

That's new.

A handful of stocks I like, instead of falling back from support, are breaking through. Also positive.

Also with 10 minutes to go we have a chance to close over S&P 1280. Also positive.

I've cut back short exposure materially here in the past 30 minutes. Still heavy cash but if we can continue I might actually be buying something tomorrow ... and with a "better than expected" GDP "in the bag" tomorrow that might be the rocket fuel (i.e. Kool Aid) the market needs. Friday is a complete wildcard - if there is a bad number and the market rallies you know it is happy time. It's not the news; its the reaction to the news.

If we break last week's high (1290ish) shortly I'm going to get more bullish. If we break the 50 day moving average in the low 1300s, I am going to make Larry Kudlow sound like Peter Schiff. ;)

At this point in the market the only thing I am trusting are technicals so we'll shed the bear skin and move to grabbing the red cape ----> if technicals say it's time go "turn". And we could (?) be at the cusp... at least a short respite Mr. Market?

If we break back below S&P 1230, this post never happened. ;)

The following message was brought to you by the team from Kool Aid.

Bookkeeping: Cutting Some Goodrich Petroleum (GDP)

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With natural gas stock Goodrich Petroleum (GDP) up 16% I am going to let some go here at $51 for a loss. So oil is up $3 and these stocks now rule; whereas yesterday's favorites the airlines are demolished. More day to day lunacy.

I am cutting it back from 1.6% of fund to 0.8%.

Normally I'd say something about fundamentals or technicals but none of it matters anymore. If crude goes up this stock goes up. If not, it goes down. It's as simple as that. So if someone could flip a coin and tell me what oil will do tomorrow I'll have a good idea if this will be a bad sell or a good one. Since my crystal ball is broken - I'm cutting some exposure back.

I do like the action (perking up) in coal and fertilizer but those are all just one big oil trade nowadays. If oil is up tomorrow - they can go up. If oil is down they will get trashed. That's all the market is now. Fun.

Even infrastructure stocks are now proxies for oil - today they ramp, after being trashed for weeks. When oil is up $3 construction programs live. When oil is down $3 construction programs die. This market would be very simple if someone could tell me what oil will do every morning at 9 AM by the time it closes.

Long Goodrich Petroleum in fund; no personal position


Are You Struggling?

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So today oil is up $3 so it's time to pile into all the same stocks that have been hated for weeks. And then in 2 days when oil is down it's time to sell them all? Is it really that simple to the hedge fund computers? Is that all the market has become? It seems so.

If you are struggling in the market don't feel too bad - I keep saying this is a market lacking in any serious logic and very little works for extended periods of times. Many, many (and I mean many) sites/writers I've been reading for years (including the bear of 2000-2002) have similar words to Robert Marcin on Realmoney.com

This is one of the most complicated markets I can remember in my career. Many stocks are down and cheap with solid fundamentals. These usually represent attractive longs. Also, sentiment is a bad as it gets. That also usually means a bottom.

Yet fundamentally, things are deteriorating with the potential to get much worse. The uber bear case has a spreading global recession and still expensive stocks in the case of a global economic meltdown.

Therefore investors are shooting economically shares first and asking questions later. Bullet proof stories or defensive plays, ie expensive stocks are gaining at the expense of cheap ones. That makes life tricky for a deep value guy like myself.

I am limiting my bets in this type of market. I believe that the big bottom will come this fall on a deteriorating economy(no more rebate checks) and negative political sentiment from a democratic administration. In this environment, small/mid caps drop more than large caps, the VIX hits 35, and you hear "it's not too late to sell" form the talking heads on CNBC.

At that point, I hold my nose and buy like crazy and pray I am not too early. Til then I stay more defensive than not.

Position: none

So if you are struggling you are not alone. I've read the same sentiments countless times. No trend lasts for more than a few days - market down 2.5% Monday, and then up 2.5% Tuesday? Banks great one day, oil great the next? It's so simplistic in the thinking - and its all based on random events of a bipolar nature. Until trends last for more than 3-4 days this market has no place for investors - only traders ....and daytraders at that. Everything now is complete randomness; you ride the trend of the "day" and then get out. Because tomorrow could be 180 degrees the opposite.

Quite possibly the brightest mind of our era is down nearly 20% this month in his mutual fund. Berkshire Hathway is down 25% for the year. Safety stock is just a code word out there.

I remain defensive until something begins to work for more than 5 days in a row. Despite all the end of world talk Monday and yes, we've finally got a bottom in financials Tuesday - we've gone nowhere in the big picture - almost exactly where we left off Friday with a lot of volatility thrown in the mix. I'll keep repeating the mantra - when a sustained move happens we'll miss the beginning of it and catch up later. Until then, there is no reason to get excited by 24, 48, or 72 hour moves no matter how breathless the CNBC anchors become. Someone else can be the hero and "catch the bottom" - many have been trying for 12 months now and constantly blowing up their investors capital.

Tomorrow? Another random 2 sided event - 2nd quarter GDP. Friday? Another random 2 sided event - employment report. Even if I *KNEW* what the numbers were for each, I could not tell you how the knee jerk reaction in this market would be. The world is not changing every 24 hours but you could not tell if you only looked at the stock market. As they say, when in doubt - sit it out. Monday when the market crumbled we were up 0.6%. Yesterday when the market sung alleluiah - we were down 0.8%. So I'd say we are quite perfectly hedged. Yes we're going nowhere fast, but either is this market. We're not going 100% cash, but we're "sitting out" as much as possible until things clear up - whether thats in 24 hours, 2 weeks, or 2 months. Until then, it is just gambling. And you can go to Vegas for better odds. If your time frame is 2 hours or 2 days you will act very differently than I will; but that's not our time frame.

Those who actually have their capital left when the market returns to some semblance of normal will prosper. Most others will be sitting on huge losses they just hope to make up. We don't want to be in the latter camp. And that's my strategy at this time in a nutshell, agree or disagree - you will see what I'm thinking and why.

Bookkeeping: Cutting Ctrip.com (CTRP) on its Mysterious Rise

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Chinese online travel stock Ctrip.com (CTRP) is acting strange today - it's suddenly shot like a rocket up nearly 9%. In a bull market I'd say "someone knows something" and is getting in ahead of an official announcement. In this market I simply say "thank you, I'm cutting back". This chart should look very familiar - its the same chart across a multitude of names I've cut back into on any stock surge. Broken down stock, revisiting a resistance area.

So I continue this defensive measure into a stock market I don't believe in. We've done with with about 20 stocks the past week. All these stocks are in prove me stage, until shown otherwise and I continue to be ok with giving up upside to protect capital until the indexes overall improve. A lot of leadership stocks I look to are showing no signs of life other than oversold bounces when the Kool Aid is hot and heavy. No sustained excellence from them. Hence I don't believe in this rally, and I'll take the "other side of the trade" of the CNBC pundits.

I've cut Ctrip.com down to a holding stake of 0.1% down from 1.2%, with a sale around $47. I continue to build cash in this environment which I don't trust. Again, as I repeat daily now, if I am wrong (which has a 50% chance) and this is the beginning of the next leg up, we'll miss the beginning of the move and trail the market. If I'm right (50% chance) you'll thank me later as you watch your other mutual funds implode ;)

[Feb 28: Ctrip.com Continues to Impress]
[Jan 5: Zachstocks on Ctrip.com]

Long Ctrip.com in fund; no personal position

Potential Portfolio Idea - Exactech (EXAC)

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As I wrote in this weekend's summary, after a good 11 months to start the fund's life, we've been disemboweled in the month of July, so I wasted a nice Michigan weekend (they are rare, trust me) scrounging through the underbrush to find ideas that ARE working in this environment. There must be something working. By "working" I mean down less than 15% in the past 2 months (it's all relative). And further - trying to avoid names the hedge funds won't ruin - which means smaller than our normal fare. I found a few ideas but the smaller you go the more risk (and potential reward) you have. Two of the companies I found report tonight and since I am risk averse I won't buy ahead of earnings but the first I am interested in (I've actually had this on a watch list for a few months but have not had time to research it until I got peeved with the rest of the portfolio this weekend) is $350M market cap Exactech (EXAC).

For those of you who follow the orthopedic market, you would be familiar with a Stryker (SYK) or Zimmer Holdings (ZMH) which used to be great growth stocks. Still solid stocks but slower growers nowadays. Exactech (EXAC) might be thought of in the same vein but of a much smaller variety- or we could place it into a very broad category which would include NuVasive (NUVA) another name of similar ilk (but much more specialized) [Jul 25: NuVasive - At What Price Growth? It Seems "Any" Price] Again, this is in a "favored" sector (healthcare), does not have FDA risk like a biotech (a few of which I also found this weekend), and is of the size that hedge funds are not smashing or pumping it (and reversing course) on a weekly basis. It's off the beaten path.

From the company website:

Exactech, Inc. is an orthopaedic company that develops, manufactures, markets, distributes and sells orthopaedic implant devices, related surgical instrumentation and biologic services to hospitals and physicians in the United States and internationally.

Product list here

I don't want to recreate the wheel when others have already done a good job so I will point out this excellent summary on SeekingAlpha from last fall - The Long Case for Exactech
  • Exactech (EXAC) is a micro cap orthopedic implant device manufacturer with strong management and large insider ownership that is primed to reap the rewards of the aging populations in western cultures.

Cummins Engine (CMI) Continues to Quietly Execute

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Cummins Engine (CMI) has been beaten down with the rest due to its subprime (err, that's not it)... due to its natural gas (err, that's not it)... well I don't really know why other than it opens on the stock exchange every day and hence should be sold. I continue to like this long term story, and earnings continue to shine through. The is a prototypical stock we want to own as it increasingly avoids America - overseas exposure continues to be very under estimated by the investing community. The stock is up 10% this AM. Full report here.

Folks at this point about 1/3rd through earnings season, this could be the best our stocks have performed in any earnings season since we launched - we are seeing impressive stuff across the board, even outside the commodity space. But this is the worst our fund has performed in any earnings season since our stocks are not the flavor of the day. Only on Wall Street... only on Wall Street. I shudder to think what would happen if one of our stocks dared to miss if this is how they are treated when they are all smashing earnings estimates. That is usually the fear I have going into an earnings season - but now we are being punished even on good earnings. Even the gains are short in nature and quickly reversed.

Frankly this is why it is hard for me to get bullish for more than a 48 hour period. If we are not rewarded for standout earnings, than we have to buy the junk of the market. Stuff that only rebounds for a short time before they continue their wayward swirl down to the sink. With our time horizon, it's not in our playbook to do that on a consistent basis. So we have to remain patient and eventually stocks are a reflection of their earnings power. But certainly they are not in the short run. But on a fundamental basis, I am absolutely thrilled with what our companies have been reporting. Our stocks continue to get "cheaper" as prices fall or flatten as earnings increase. While the "flavors of the day" continue to get "more expensive" as prices increase on falling earnings. But this is the market of today, and in due time - it will reverse. But it doesn't feel too swell right now to watch this unfold. July 2008 - the month that will go down in infamy for Rising Tide Growth fund! Bah.
  • Cummins Inc (CMI), a U.S. maker of engines and power generators, said its earnings in the second quarter rose a better-than-expected 37 percent as strong international sales overshadowed weakness in some key North American markets.
  • Cummins reported a second-quarter net profit of $293 million, or $1.49 a share, up from $214 million, or $1.06 a share, in the same period in 2007. Analysts' average profit forecast was $1.23 a share, according to Reuters Estimates. The results included a $6 million charge related to damage to several facilities caused by this summer's flooding in the Midwest. Ann Duignan, an analyst at JP Morgan, estimated that cost the company 2 cents a share. "Without this, EPS would have come in at $1.51," Duignan said.
  • Sales at the Columbus, Indiana-based company rose 16 percent to $3.89 billion, ahead of an average forecast of $3.86 billion.
  • Some of the sales growth came from strong sales of its commercial generators to customers in the developing world, including the Middle East, Latin America and China.
  • Cummins said sales outside the United States accounted for 61 percent of its business during the quarter, up from 54 percent in all of 2007 and 57 percent in the 2008 first quarter.
  • Sales of its more consumer-related products in the United States tumbled during the quarter as falling home prices, tight credit markets and rising energy costs soured consumer confidence and kept buyers out of truck and motorhome showrooms.
  • Cummins said sales of diesel engines to Chrysler for the Dodge Ram heavy-duty pickup fell more than 60 percent, and RV engine sales fell nearly 40 percent.
  • Looking forward, the company expects full-year sales to grow 15 percent, up from a previous forecast of 12 percent.
Now as much as I like this story we see a potential top forming and everything good is to be sold in this trecherous market; all gains are erased quickly. So I'm taking this down to a 0.1% holding position and selling the remaining portion around $74. Frankly I didn't hold much since I sold on that spike to low $70s last week. And we will buy back on a pullback... or if the stock continues upward through the $75 level we'll buy on "technical" strength. Right now good results are not keeping stocks up for long so until that pattern changes we'll obey the markets wishes and sell strength. No change to the story fundamentally - in fact it improves each quarter. I'm not the best technician but this appears to be a chart every hedge fund computer would buy north of $75 (on strong volume).

[Apr 30: Cummins Engine Excellent Report on Strong International Sales]
[Apr 18: Restarting Cummins Engine as the Rest of the World Moves on Without USA]
[Sep 23: Stock to Watch: Cummings Hitting on all Cylinders]

Long Cummins Engine in fund; no personal position


Federal Reserve Continues Its Historic Actions

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Not a surprise but the Federal Reserve is going to continue its corporate welfare - i.e. "exchange the banks junk for US Treasuries" program, and is now adding very long term loans (3 months instead of 1 month) for the commercial banks. So we continue to exchange lower grade mortgages, auto loans, credit card loans, student loans - just about anything, and trade it for US Treasuries. So the junk sits on the balance sheet of the US Taxpayer and the liquid Treasuries go to the banks. It's good to be a bank CEO - too bad they screw it up with greed once every 8-10 years and send the economy into recession. And we wonder why they continue to take such outsized risks? Because we cannot let them fail. At least the big guys. And sometime in December I am sure they will say - well we are extending this junk for Treasury program out again to summer 2009... despite the "1st half 2009 recovery".
  • The Federal Reserve said Wednesday it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy.
  • The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
  • Another program, where investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said.
  • And, it also will let commercial banks, in a separate program, be able to bid on cash loans that last longer -- for 84 days, besides the 28-day loans now available (why don't we just end the charade and make it 3 years? We should be "healed" by then)
  • The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets." The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent." (fragile? Everyone told me Merrill Lynch offloading their assets yesterday at 22 cents on the dollar marked the bottom and its all upside from here? Hmmm... )
  • The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans.
Again, where it the "welfare" for the peons of the country... you know... individuals. I'd like to trade my mortgage in for a nice horde of US Treasuries. And then keep rolling that over every 6 months and say "well I'm just not ready to take my mortgage back, I'm still under stress - you keep it Mr Bernanke"

[Jul 11: More Historic Actions (Potentially) by the Fed]
[May 4: Moral Hazard Run Amuck]
[Mar 22: A Historic 9 Days for the Federal Reserve]

Bennigan's, Stake & Ale Close - File For Bankruptcy Protection

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I really need to start a new category for the blog: bankruptcies. It really is a shame these companies are closing their doors in the midst of the long awaited 2nd half 2008 recovery. I mean... it really is a shame these companies are closing their doors as we are looking forward to the 1st half 2009 recovery. However, I don't know what we even have to recovery from since the economy is fine, not in a recession or even close, and its just a few stumbles in an otherwise sound system (source: GWB)

So we'll add these 2 names to our growing list - and trust me a lot of mom and pop type places in strip mall complexes i.e. non chains - are going to be drowning and they won't be getting any press so they'll just go quietly in the still of the night. Because the small business sector is BOOMING if you read the unemployment reports that come out every month (a new chapter of fiction this Friday) - they're adding jobs like mad if you listen to the government report, right OfficeMax?
  • Adjusted earnings beat Wall Street estimates, but executives cited a "difficult sales environment" that hurt results.
  • Small business owners have cut back on spending in the weak U.S. economy, hurting results throughout the office supply sector.
Hmmm that doesn't quite jive with the birth/death model in which the Bureau of Labor Statistics somehow finds hundreds of thousands of "small business" jobs that no one else can find. But I digress - the point is if you think its bad at the retailers and restaurants who at least have some size and scale just imagine what its like at the 1 off mom and pop places.

I've ignored most of the smaller airlines which already went belly up to focus on retailers and restaurants. Ironically I expect these latter 2 groups to have a huge run sometime in the next 6-9 months as the Kool Aid of the economic recovery flows hard and fast. Remember, gas at $3.25 makes all the other problems disappear into the ether - the hedge fund computers say so. Watch for it.
  1. [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer]
  2. [Jul 10: Another Retailer (Canary in Coal Mine Down]
  3. [Jul 21: Add Mervyn's to our Growing List of Retailers Headed to the Great Sunset]
  • National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees. (even more workers for Walmart, healthcare and federal government jobs)
  • It is one of the country's largest restaurant bankruptcies and eliminates two sit-down chains that have been part of the casual-dining landscape for decades. The chains will liquidate and aren't likely to re-open. (riddle me this - these 2 chains have survived for decades in bad times and good, but all government economic reports show things really aren't "that bad" so why would they shut down now.... hmmm... hmmm..... hmmmmMMmMmMmm)
  • Employees were told there wouldn't be enough money to pay them for the rest of the week, these people said.
  • The pub-themed Bennigan's had 310 restaurants in 32 states. It was founded in 1976. It is heavily concentrated in states like Texas, Illinois and Michigan. It posted U.S. sales of $542 million in 2007, according to Technomic Inc., a food-industry research and consulting firm.
  • The filing is the most extreme sign yet of how midpriced sit-down restaurants are undergoing one of their worst periods in decades. High ingredient and labor costs are eating into profits, and several years of rapid expansion by bar and grill chains has left a glut of locations in the market. Pressures on consumer spending like high gasoline prices and dwindling home values have prompted consumers to eat out less often or switch to cheaper fast-food meals. (all conditions we prediced as the blog was launched - 70% of Americans living paycheck to paycheck and used to living in an easy credit, house ATM world with lower inflation would not adjust well to this new era. We're overbuilt - we have enough for a society of 500 million people, let alone 300 million)
  • Earlier this year, the parent companies of the Bakers Square, Village Inn and Old Country Buffet filed for Chapter 11 bankruptcy protection, citing falling sales and rising food costs. (oops I missed those - darn I wondered what happened to Old Country Buffet)
  • A host of other chains -- from Outback Steakhouse to Ruby Tuesday -- are also struggling. (Ruby Tuesday's you say? Yep - nailed 'em --> Jan 11: 3 Months Later Let's Look Again @ Ruby Tuesdays)
See, we were negative on restaurants way back in the day - a few of these on the short side of the ledger sure would of helped propel our fund even higher - but we can't. So we didn't. But we did say it... [Sep 19: Tough Times Ahead - Restaurants?] Remember this was in the era of "no slowdown, just a few blips in the subprime market - the financials have now thrown the kitchen sink quarter out there and we're fine from here".


Just for kicks I looked at Kona Grill (KONA), another smaller chain last night, and according to Briefing.com they pretty much hit the trifecta - misses (current Quarter) guides lower (next Qquarter) guides lower (full Year) - Pretty sweet. Must be a buy since it does not have potash, coal, iron, or natural gas exposure. Those areas "stink". Exposure to US consumers? Not a problem! Gas is going to $3.25 and the world will be fine.

4:02PM Kona Grill misses by $0.01, reports revs in-line; guides Q3 EPS below consensus, revs below consensus; guides FY08 EPS below consensus, revs below consensus (KONA) 7.45 +0.00 : Reports Q2 (Jun) loss of $0.08 per share, $0.01 worse than the First Call consensus of ($0.07); revenues rose 4.5% year/year to $20.2 mln vs the $20 mln consensus. Co issues downside guidance for Q3, sees EPS of ($0.09)-($0.13) vs. $0.00 consensus; sees Q3 revs of $19.5-20.5 mln vs. $22.67 mln consensus. Co issues downside guidance for FY08, sees EPS of ($0.43-($0.58) vs. ($0.28) consensus; sees FY08 revs of $80-82 mln vs. $85.29 mln consensus.

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