Monday, October 27, 2008

Japan's Lost Quarter Century

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We've talked about the United States Lost Decade earlier this year [Mar 26 - WSJ: Stocks Tarnished by Lost Decade] when the market was essentially flat over the past 10 years.... and more recently [Oct 7: Bloomberg - 2000s Stock Market Worse than 1930s] as the market has now lost substantially over the decade. The inference here is we were told "we'll never be like Japan because our economy is so dynamic, flexible, and innovative" - we'd never have real estate bubbles combined with financial bubbles combined with a stock market that went nowhere for a decade. Nope - free markets would never allow that. We're better than that. That's proven to be a farce.

As we now muddle through our more than lost decade, Japan has cratered to now have a Lost Quarter Century. (chart via BeSpoke blog)


For those who are relatively young, Japan was the shining light of the world economy in the latter 80s and many stories were told about how they were poised to take over the U.S. as the dominant economy. They are still #2 in fact, but after a series of bubbles, thrown in with deflation, thrown in with interest rates near 0% for much of the period - they've never regained that former luster. The one place the 2 countries certainly differ is our savings rates - the darn consumers there do not spend over their head day after day, year after year so the domestic economy could roar - so it's been hard to get back to the go go days.

Now the conventional wisdom here is (again) we are not like Japan. Once the US consumer has a few quarters under his belt he will go back to his free spending ways. But those same people told you we'd never be like Japan with series of bubbles, stock market that is awful, historically low interest rates (we should be heading back to Greenspan rates of 1% by this week), and deflationary under currents in major parts of our economy (housing for one). That could never happen here. Just like Americans could never be forced to save - whether by choice or not. [Turmoil May Make Americans Save; Worsening Nasty Recession] My thesis is Americans don't WANT to be savers - it is not in our cultural DNA. But what one wants, versus what one is forced to do are two very different things.

I'll have a story up tomorrow on the rise of the working poor in Japan - if I put the story on the website and took out the word Japan and replaced it with the United States you wouldn't be able to tell what country they are talking about - it sounds identical... but just remember "it could never happen here".

As an aside I saw an interesting comment on Realmoney.com today. A commentator said if you use the 1966 HIGH and adjust for inflation the stock market is up 35%.... i.e. less than 1% annualized from the 1966 high. Of course that is an index and if you bought Microsoft (MSFT) in 1987 you'd of done better but a lot of arguments can now be made against both buy and "hold" and "index investing" over the "long run". And how different are we from Japan really - at its core stocks (in aggregate) should reflect the growth rate of a country and it's businesses and there is only so much a mature economy can grow. Obviously by picking correct sectors you can outperform the indexes most of the time (just not at the current time) but the 82 to March 00 bull market might be the best "market" era we're ever going to see in our lifetimes. (consider it as an offset to the 1966 to 1981 bear market)

For now let's look at Japan's stock market.
  • The last time Japan's Nikkei 225 Stock Average was at today's level, headbands and legwarmers were in, Steven Spielberg's E.T. topped box offices, and Michael Jackson's Thriller was about to be released. That was 1982, the fifth year of a rally that pushed the Nikkei to nearly 40,000 by the end of 1989 in an asset bubble that purportedly made the land around the Imperial Palace as valuable as all of California. The Nikkei today slumped 6.4 percent to 7,162.90, the lowest since Oct. 7, 1982.
  • The measure's 53 percent tumble in 2008, fueled by the credit crisis, slowing economic growth and as the stronger yen threatened exporters' profits, has made shares ``shockingly cheap,'' said Peter Tasker, a strategist with hedge fund Arcus Investment Ltd. and Dresdner Kleinwort in Tokyo.
  • Shares on the Topix index, the broadest gauge of Japan's stock market, trade at 0.89 times book value, the first time the average has been below 1, according to Mizuho Securities Co. That means the companies would be worth more if liquidated.
  • Japan in the early 1980s was a different country from the one it is today, with the stock market akin to ``the wild, wild east,'' said Tasker, 52, who's been a resident since 1983. ``You had this feeling that almost anything was possible for Japan,'' he said. ``I'm shocked; the Topix has been trading below book, which we never saw even during the darkest days of 90s and in 2002 and 2003.''
  • Back in 1982, Japan was just hitting its stride as the baby boom generation reached peak productivity. (sort of like the US in the 1990s?) Inflation had been tamed through conservation efforts during the oil shock of the 1970s while the U.S. entered a recession resulting from Federal Reserve Chairman Paul Volcker's 15 percent interest rates.
  • Japan's vertically integrated electronics companies were the envy of the world as both the breadth of products and constant innovation gave them dominant market share. (I thought only the US economy was innovative? Seems the code words of "flexibility" and "innovation" didn't help Japan so much)
  • Then came the crash in 1990, followed by a generation of economic stagnation and deflation that ripped apart the lifetime employment system and saw once vaunted companies such as Yamaichi Securities Co. disappear.
  • ``We're in a reverse bubble now,'

Mechel (MTL) is now a $4 Stock

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Long time readers will remember former holding Mechel (MTL).... I just pulled up a quote and see it is hovering just over $4. Ouch. Russia has been among the worst stock markets this year, closing their market almost on a weekly basis now. Mr. Putin didn't help Mechel either with his "interest" in the company's business practices.

This was once a near $60 stock. By "once", I mean early summer.

[Jul 25: Russian Stock Market Plunging]
[Jul 24: Mechel Down 20% on Putin's Comments]
[Jul 23: Closing Mechel]

No position


Bookkeeping: Adding to Luminex (LMNX)

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Luminex (LMNX) has now dropped 50% in a month, and given back the entire move of the past year. Another "round trip". Since there is no systematic approach that works in terms of investing these days, I'm trying new varieties such as "buy a layer of stock every 50% drop". So with Luminex down 50% in 30 days we'll put a layer on here in the $14s. When it gets to $7 we'll buy another layer, than $3.50, than $1.75, and so on and so forth. Somewhere around $0.10 we'll go all in. ;)

As long as there are not product recalls I still think healthcare stocks should be among the best to weather the recession. For example in southeast Michigan there is 1 industry where I see construction cranes - hospitals. Remember our new age US economy - shopping, housebuilding, federal government/defense, and healthcare. At least the latter two seem to have bottomless pockets.

Since we sold a larger healthcare position this morning, and are hovering below 50% long exposure I'm trying to find something to at least keep up the mantra of being a long focused mutual fund (i.e. at least 50.1% invested on the long side) I'm increasing Luminex from a 0.6% stake to 1.9% with purchases in the mid $14s.

This is one of the few companies we own that is not currently profitable, but having profits has not helped any of the other names so I suppose it is a moot point. Earnings (or lack thereof) are Nov 6th.

[Sep 16: Bookkeeping - New Position in Luminex]

Long Luminex in fund; no personal position


LDK Solar (LDK) "No Need to Raise Capital for 2 Years"

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This story is a sign of the times...
  • Chinese solar wafer maker LDK Solar Co Ltd (LDK) has no plans to raise funds from the capital markets for the next two years as it has enough cashflow to fund an expansion which would more double its capacity by 2010, its chief executive said on Friday.
  • "We are one of the most profitable firms in the sector and our profit exceeds $100 million each month. The proceeds and our cash flow are far more than enough to fund the expansion," he said.
  • In September, New York-listed LDK raised $192.4 million from a secondary offering of 4.8 million American Depositary Shares.
  • ....would also consider making acquisitions especially in the upstream polysilicon business
  • Peng, also chairman of LDK, also said that he did not expect any negative impact from the global economic turmoil, as its order book was filled until 2018. "I am not worried at all, as we are booked for the next 10 years. Some have already paid roughly 10 percent of their orders as a sort of down-payment," he added.
Solar stocks have absolutely been beaten to a pulp as it is a capital intensive business and large projects by utilities and the like also require capital markets to be functioning in an orderly fashion. There seems to be a perfect storm against the sector right now.

LDK Solar is another 5 PE stock, with a 40-70% growth rate. As I'm doing with everything right now, if I assume next year is the biggest disaster in economic history and growth is cut by 50% (instead of growing by 40-50% as currently estimated), then in a year we have a 10 PE stock a in what should be a trough in the global business cycle. LDK Solar has raised guidance multiple times this year, but to no avail. [Oct 8: LDK Solar Raises Guidance - Again]

Almost every Chinese solar stock is now below its IPO price.

[Aug 11: LDK Solar Crunches Estimates]

Long LDK Solar in fund; no personal position


Sohu.com (SOHU) Quadruples Profit, Raises Guidance, Announces Share Buyback ... and gets a 4% Pop

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Sohu.com (SOHU) is the perfect example of the stock market today. They did a triple play today - beat on earnings, raised guidance and to top it off announced a $150M share buyback or just under 10% of their market cap. For all that we are seeing just over a 4% gain. That's laughable. If you miss in this market or lower guidance you can drop 30-40% in a heartbeat. If you do everything right you can gain 4%. That folks is the definition of risk/reward not in your favor.

We sold the last of our Sohu.com on Sept 9th in the $65s; it is now in the mid $40s - another "round trip" in the making. If fundamentals meant anything I'd be a buyer here, but there is no point when any news only matters for a few hours before a stock is sold off.


Earnings
  • Sohu.com Inc., a Chinese Web portal, said Monday that its third-quarter earnings spiked as the company benefited from increased Internet use in China following the 2008 Olympics in Beijing. For the quarter ended Sept. 30, earnings more than quadrupled to $40.3 million, or $1.02 per share, from $9.7 million, or 25 cents per share, a year ago. Excluding special items, earnings totaled $42.8 million, or $1.08 per share, compared with $11.7 million, or 30 cents per share, in the prior year.
  • Quarterly revenue more than doubled to $120.7 million from $51.5 million in the third quarter of 2007.
  • Analysts polled by Thomson Reuters, who generally exclude one-time items, forecast third-quarter earnings of 95 cents per share on revenue of $114.7 million.
  • Sohu said its advertising revenue jumped 62 percent over the third quarter of 2007. The company's online game revenue more than quadrupled to $54.6 million, driven by the company's massive multiplayer online game Tian Long Ba Bu. Wireless revenue more than doubled to $14.5 million.
Guidance
  • Sohu.com Inc., a Chinese Web portal, forecast fourth-quarter earnings well above Wall Street's expectations on Monday, after reporting that its third-quarter earnings spiked. Sohu expects earnings per share to range from $1.20 to $1.25 in the fourth quarter and for revenue to fall between $118 million and $122 million. Analysts polled by Thomson Reuters forecast quarterly earnings of $1.08 per share on revenue of $116.5 million, on average.
Share Buyback
  • Sohu.com Inc., a Chinese Web portal, said Monday its board has authorized a stock buyback program of up to $150 million through the end of 2009, after reporting strong third-quarter earnings growth.
  • "The strength of Sohu's strong balance sheet and operating cash flow allows us to take advantage of opportunities surrounding the volatility in U.S. equity markets to repurchase stock and add value to Sohu's shareholders," said Chief Executive Charles Zhang.
Can't ask for much more than this; but in this market it simply does not matter if your investment time frame is anything longer than 6 hours.

No position

[Jul 28: Sohu.com - Another Hit Earnings and Gaming Unit IPO Spinoff]
[June 23: Sohu.com - Analysts Rush to it's Defense]
[Jun 20: Sohu.com Sees Ad Revenue Slowing in 2009]
[Feb 5: Initiating Sohu.com Starter Position]
[Feb 4: Sohu.com Also Impressive]

Update on Thoratec (THOR)

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Not sure what was said on this morning's conference call but it seemed to make people less desperate. Instead of selling down 50% as was the situation after hours we were able to get out around $21.50s which was a 12% loss. Whomever sold in afterhours Friday is probably feeling not so great about it.

12% losses are now just normal day to day action in this market for the average stock - so considering the news we'll take it. Instead of a $10K loss as I expected to take, we are taking a bit over $2k. The company reports Oct 30th and I expect Thoratec to smash earnings, but the problem for now is future guidance.
  • The company urged patients to have their HeartMate II Left Ventricular Assist Systems implants checked after confirming 27 reports of cases in which wear and fatigue to an electrical wire required the devices to be replaced. The reports occurred over five years and are based on 1,972 implants. In five cases, the device could not be replaced and the patients died.
  • RBC Capital Markets analyst Ryan Bachman reaffirmed a "Sector Perform" rating but cut his price target to $18 from $21. "The nature of Friday's dramatic press release caused investors to initially fear the worst, but after speaking with management, we believe the near-term financial impact may not be as bad as initially thought," Bachman said in a note to investors. "The situation is not good, to be sure, but it may not have warranted the 50 percent sell-off seen in after-hours trading Friday afternoon."

No position

China Paper: U.S. Has Plundered Global Wealth with Dollar

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Very interesting, and indeed frightful, story on Reuters this weekend. This won't get much attention state side, but effectively the newspaper quoted is essentially a mouthpiece for the "state".
  • The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
  • The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
  • The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.
  • Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.
  • "The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University. Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.
  • Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.
  • "How can Europe and Asia grasp each other's hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?" he said. "The world is waiting for this Asian-European meeting to achieve big results in financial cooperation."
Considering the following statistics the long term implications of this type of commentary could be quite dire indeed. This is a warning shot over the bow - where they take it from here in terms of implantation over the next few years means very much, as we are indeed hostage to our creditors. The U.S. is still too much of the world GDP from said creditors to go "cold turkey", but it sets up a plethora of fascinating potential outcomes in the 5-15 years ahead.

Out of the $9.7 trillion of foreign-held U.S. securities of all types, $1.2 trillion was held by Japan, $922 billion by China, $921 billion by the U.K., $740 billion by bank depositors in the Cayman Islands, $703 billion by depositors in Luxembourg, $475 billion by Canada, and $396 billion by Belgium. Middle East oil-exporting countries held $308 billion.

Out of long-term U.S. Treasury securities held by foreigners, Japan had $553 billion and China had $467 billion. Middle East oil exporters held $79 billion.

We've highlighted in the past how domestic decisions in our financial realm have created a growing discontment across the world with the U.S. [Sep 18: Views of US from Abroad] & [Sep 27: Interesting Reactions Worldwide - What Years of Neglect and Lack of National Policy is Creating]


Sunday, October 26, 2008

Regions Financial (RF) Gets Government Infusions

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Get your fresh hot US taxpayer money.... Regions Financial (RF) joins the party along with a handful of others. All we need is BB&T (BBT) to partake and then all 3 of our banks are backstopped by the US government, with Hank P. as our fellow shareholder. RF continues to make dramatic almost daily 10-20% moves; this holding makes me sea sick.
  • Regions Financial Corp. said Friday the U.S. Treasury Department will invest $3.5 billion in the bank as part of a larger effort to stabilize the credit markets and restore confidence in the nation's financial system.
  • The investment will increase the bank's Tier 1 capital ratio to about 10.5 percent, well above regulatory standards for a "well capitalized" bank.
  • Regions will pay the government a 5 percent dividend, or $175 million annually, for each of the first five years of the investment, and 9 percent after that unless the bank redeems the shares.
  • The government will also receive 10-year warrants for common stock, giving the Treasury the opportunity to benefit from an increase in the company's share price.
  • The announcement was made after the close of regular stock trading, sending the bank's shares up 84 cents, or 9.4 percent, to $9.78 in after-hours trading. The shares closed down 85 cents, or 8.7 percent, to close at $8.94 during the regular session.
Long Regions Financial, BB&T in fund; no personal position

Bookkeeping: Closing Thoratec (THOR) First Thing Tomorrow

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From the category of when it rains, it tsunami's - one of only 2-3 stocks in our entire portfolio that have held up, Thoratec (THOR) put out a press release after the bell Friday that wear and fatigue on its heart pump may require surgical replacement and could be fatal.
  • Shares of Thoratec Corp (THOR) lost more than half their value after the cardiac device maker said wear and fatigue related to its implanted heart pump may require surgical replacement that could potentially be fatal.
  • The company initiated a worldwide medical-device correction of certain batches of the pump after 27 confirmed reports of damage to the percutaneous lead that required pump replacement.
  • In five of these cases, patients expired as a pump replacement was not feasible, the company said in a statement.
  • Thoratec had won U.S. regulatory approval for the device, HeartMate II Left Ventricular Assist System, in April. The device is designed for people with severe congestive heart failure and few medical options.
Heartmate II was essentially their driver and the reason the stock had a stunningly good quarter last time around, and had excellent prospects ahead. [Aug 4: One for the Radar - Thoratec] Well that is now toast - they have a conference call slated Monday but I'm having none of it - I will sell with the lemmings Monday and we're done with it. The thesis is destroyed here, and if this is a $5 stock or a $15 stock - irrelevant at this point. Management credibility broken here, and litigation process will be started imminently.

We actually had a profit on this position even in the pathetic mess of a market. That will be gone. I'm estimating our 2.4% position will be cut by 50% immediately Monday morning based on the after market quote on Thoratec (THOR), so our gain Friday will turn into an immediate $10K loss Monday. Can't do much about this one; I remember the havoc done to Medtronic (MDT) a few years ago when their much broader portfolio was hit with similar worries and the stock was hit quite hard - this is much worse from the perspective this is a very narrow portfolio of products that just was called into serious question. Even if worries prove to be overblown in the long run; a dark cloud will hang over THOR for a long time.

Just awful luck on top of everything else. Usually such bad news is precipitated by the stock selling off as "someone is tipped off" as almost always happens on Wall Street - this was one well kept secret as the stock was showing unusual strength considering the market. A conference call is slated Monday 8:30 AM - I just hope they say enough that the stock is not down 60-80% and only down 50%.

Long Thoratec in fund; no personal position (will be exiting Monday AM)


Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 12

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Year 2, Week 12 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 position [SHV] + cash): 28.1% (vs 32.8% last week)
31 long bias: 53.1% (vs 65.8% last week)
7 short bias: 18.8% (vs 1.4% last week)

39 positions (vs 39 last week)
Additions: Linn Energy (LINE), Illumina (ILMN)
Removals: Portfolio Recovery Associates (PRAA), MFA Mortgage (MFA)

Top 10 positions = 45.6% of fund (vs 39.7% last week)
23 of the 39 positions are at least 1% of the fund's overall holdings (59%)

Major changes and weekly thoughts
To reiterate a theme we've been repeating for the past few months; the market is simply acting unlike anything most people alive have seen. We are at standard deviations of unheard proportion in terms of sentiment, fear levels (VIX, VXO), % of stocks below this moving average or that moving average, % the indexes are below the 200 day moving - signal after signal that point that we should at least have a cursory snapback rally that lasts more than 4 hours. But we never get that move that in theory would happen over a sustainable period of time.

Even more alarming is there appears to be no asset class that is working as we see in the hedge fund world. Some of the best of the best, such as Citadel, are down 35% in their top 2 funds, and has also moved to 30% cash. This is with only about half their money ever devoted to equities i.e. currencies, debt, et al - none of it seems to be working. Plus they're "hedging" against their own positions and still suffering. Ken Heebner, noted as the most savvy mutual fund manager over the past decade is down 36.5% in 4 weeks; and 45% in the past quarter. These are 2 representative samples of both the hedge and mutual fund industries, but we see it repeated in countless other places. Stories such as CALPERS selling stock to raise cash are making the rounds.
  • California Public Employees' Retirement System, the largest U.S. public pension fund, is selling stocks to ensure it has enough cash to meet its obligations, the Wall Street Journal reported on its website on Friday.
  • The pressures come as the fund, known as Calpers, has had to raise cash to meet commitments to private equity firms and real-estate partners, the Journal said.
All these would, from a sentiment standpoint, indicate some bottom must be here or near. But many have been thinking that for a few weeks - in fact on Oct 10th many long time bears, Ritholtz, Hussman, Jeremy Grantham to name a few changed their tune to bullish - to no avail yet.

The list of well-known names identifying value on the U.S. stock market at current levels is growing by the day and includes the likes of Jeremy Grantham (GMO – “Careful buying is justified"), Warren Buffett ("Buy America. I am"), John Hussman (Hussman Funds - "Why Warren Buffett is right") and Barry Ritholtz (The Big Picture - "Another buy in"). Even perma-bears such as James Montier and Albert Edwards (Société Générale - "Turning more bullish") are increasing their equity exposure, albeit only for the short term.

Some of the smartest names such as Sam Zell are in there buying, and seeing positions smashed within days. One would think a margin call would play out relatively quickly (weeks) but it appears there are so many interconnections that when trigger A hits in section 214 of the financial markets, it sets off some unforseen trigger B in section 405 part of the market. The lack of visibility into all of this, much like the lack of transparency into the financial institution (who a year ago were assuring us everything was fine) creates complete lack of trust.

Basically this is like the twilight zone and nothing that has worked in the past is working now. Bloomberg reports - $10 trillion has been lost worldwide in October and half the world's markets have lost 50% or more year to date. And that it's time to get long Morocco apparently.
  • More than $10 trillion has been erased from the market value of shares worldwide this month
  • All 48 of the developed and emerging markets tracked by MSCI have declined in 2008, with 22 losing at least half their value.
  • The 73 percent plunge by Russia's Micex Index is the steepest. Benchmark indexes for China, Greece, Ireland, Peru and Austria retreated more than 60 percent. The S&P 500 dropped 40 percent. Morocco and Jordan have done the best, falling 6.4 percent and 19.2 percent, respectively.
  • The 73 percent plunge by Russia's Micex Index is the steepest. Benchmark indexes for China, Greece, Ireland, Peru and Austria retreated more than 60 percent. The S&P 500 dropped 40 percent. Morocco and Jordan have done the best, falling 6.4 percent and 19.2 percent, respectively.
Even being bearish I find worrisome because it is the easy trade and one day like the Monday 11% rally we had two weeks ago can kill a month of gains in 7 hours if positioned wrongly. I remain high in cash but after last week's experience of having little short exposure and paying a high price for it I got some back late in the week. Not sure if it will help at this point since individual stocks are falling so much more than the indexes.

The larger weekly changes (chronologically) to the fund below:
  1. Monday, an analyst note came out saying a standstill agreement between Cargill and Mosaic (MOS) expired on the 22nd. This drove the stock up and off of last Friday's lows it was up near 30% so we took "some" profit (not enough in retrospect) and put some into Potash (POT) which was only up a bit that day... of course that proved to be a money losing expenditure within days as well.
  2. I closed two positions, one in Portfolio Recovery Associates (PRAA) and one in MFA Mortgage Investment (MFA) - as with almost any sale the past few months these were good sales - because the stocks cratered later in the week. PRAA's chart is incredibly horrid and makes me wonder if "something is amiss" or someone is being liquidated; 45 degree angle down from $37 to $30 this week.
  3. Tuesday, first thing in the morning, I cut Apple (AAPL) going into earnings to avoid risk of knee jerk reaction - the stock dumped all day falling from high $90s to low $90s during the session. Despite a nice earnings report (and tepid guidance) the stock popped later in the week but only to regain where it started the day Tuesday. I kept liquidating the rest of the week in small piece because the stock held up. This is a very backwards situation to normal practice as we would usually look to stocks that hold up as beacons of strength but in this market you are happy to sell anything without a huge loss. This is a sign of the times.
  4. We've tried good news, we've tried buybacks, the last thing we can try are companies with huge dividend yields. This way if the yield is 20% and the stock drops 20%, at least we are "even" a year later. Based on multiple sources of information, I went into Linn Energy (LINE) as a starter position with a 16%ish yield when we got in. This area has many many many names and different flavors of the same idea - high yield "partnerships"; I am not an expert on this group but people who follow this area seem to be seeing some historic yields and valuations - nothing else is working so we will try it.
  5. Wednesday, we restarted an old position for us, healthcare diagnostic company Illumina (ILMN) which was down 17% on earnings (although at the time I could not identify a culprit) and 38% from where we sold it about 6 weeks ago.
  6. Thursday Alliance Data Systems (ADS) reported solid earnings, jumped up 5% to around $50 - and we took that profit immediately because that is all we can find nowadays. By the next afternoon the stock had fallen as low as $42s. Just a pathetic situation.
  7. We added to our pawn shop, EZCORP (EZPW) which was down to the mid $13s from the mid $16s, just 48 hours earlier - i.e. 18% loss in 2 sessions. There seemed to be some negative reaction to competitior Cash America (CSH).
  8. We added to contract research organization ICON (ICLR) which was selling off nearly 20% on competitor Covance's (CVD) earnings? I guess. I have no idea what ICON was beaten so severely when just this Tuesday it reported stellar earnings. 48 hours later it's being hammered on a competitor's commentary. Again, proving the frustration in this market as no amount of good news seems to provide a shelter for long.
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

60 Minutes: T. Boone Pickens

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We've written quite a few stories on Mr. Pickens [Jul 8: Readers Homework - Do Your Pickens] [May 20: Boone Pickens - Oil to $150 by End of Year] and 60 Minutes also had a comprehensive story this weekend, although blog readers will be familiar with much of it. Amazingly his hedge fund is down 50% although we reported he had an awful July in mid August; according to this weekend's report he's down from $4 billion to $2 billion in the hedge fund.



If you've been watching television lately, chances are you've seen a white-haired Texas oil man promising he can save America from foreign oil by using wind power, solar energy and domestic natural gas. He's T. Boone Pickens, and he's playing the role of pioneer and provocateur, in a massive national campaign warning of an energy crisis as dire as the current financial one.

As 60 Minutes contributor Charlie Rose reports, Pickens says he has a solution - a plan that might sound unrealistic in the current economic climate - but one he hopes will be good for the country and good for Boone Pickens.

60 Minutes: The Bet that Blew Up Wall Street

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Some good stories on 60 Minutes this weekend that relate to the website. I read on another site that no bank would agree to be interviewed with 60 Minutes on the credit default swap issue. Some interesting historical items in this story as well - i.e. I never heard of a bucket shop of the 1900s... about a 15 minute video here if you are interested



The world's financial system teetered on the edge again last week, and anyone with more than a passing interest in their shrinking 401(k) knows it's because of a global credit crisis. It began with the collapse of the U.S. housing market and has been magnified worldwide by what Warren Buffet once called "financial weapons of mass destruction."

They are called credit derivatives or credit default swaps, and 60 Minutes did a story on the multi-trillion dollar market three weeks ago. But there's a lot more to tell.

As Steve Kroft reports, essentially they are side bets on the performance of the U.S. mortgage markets and the solvency on some of the biggest financial institutions in the world. It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages.

It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea.

Bookkeeping: 'Rising Tide' Performance Year 2, Week 12

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Year 2, Week 12 performance of the mutual fund

Comments: Completely at a loss this week as we continue an avalanche of selling pressure; effectively the margin call of a lifetime. Despite sitting 1/3rd in cash we managed to lose a lot more than the market and stock after stock was dismembered, far more than the markets. Thursday, half the stock we owned lost from 7-18% - and the market was actually up that day. Friday we were hammered again. I'm at a complete loss as nothing works on the long side - not good earnings, not stock buybacks - not anything. Buying anything just creates a loss and all facets of fundamental investing have become useless. I can't add anything to that. In other similar eras companies would start buying each other out, but you need credit markets in most cases for anything of scale and with that effectively shut off it seems like there are no buyers for the market except daytraders who are in and out in a few hours. Investors seem to be nowhere to be found. As I said this week, even in 2000-2002 after you had these traumatic losses you'd get spike back bounces that lasted weeks, or even months. Now we have a day and a half at most. It is unrelenting.

For the fund, effectively every position lost - many huge. Individual stocks we held did far worse than the indexes, as a lot of pain seemed to hit healthcare, and solar stocks are pricing in no access to capital for customers or the companies themselves it appears. Everything else, just sold off - no matter if they reported good earnings or any other positive news was to be found. A complete buyers strike is all I can guess at. There is no value that matters since the sellers are being forced out of positions lower and lower in price.

The S&P 500 lost 6.8% and the Russell 1000 lost 7.1%. Despite 1/3rd in cash Rising Tide Growth lost 14.1%. I am boggled by the performance this week versus the indexes, considering only 2/3rds of the portfolio was even exposed to the market. So after running ahead of the market for a few weeks in year 2, we are now back essentially in line with the indexes after this week's disaster.

*** Year 1 Results here: +10.1% vs -14.0% S&P (+24.1%)

Year 2 Metrics


Price of Rising Tide Growth: $7.551
Year 2 Performance to date (vs Aug 1, 2008): -31.42%

Comparable S&P 500: 876.8 (-31.43%)
Comparable Russell 1000: 471.5 (-31.69%)

Fund return vs S&P 500: +0.0%
Fund return vs Russell 1000: +0.2%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of July 2008.

Basis for indexes for year 2 is closing price August 1st, 2008.
SP500 : 1,260.3
Russell 1000 : 690.3

Please click here: fund performance for previous updates

Friday, October 24, 2008

PNC Financial (PNC) to Buy National City (NCC)

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As speculated [Oct 9: WSJ - PNC Financial Might Make Play for National City] PNC Financial is indeed buying the struggling Ohio regional in a "take under". They also are receiving a substantial sum from the federal government. The strong will eat the weak; PNC is up in a miserable tape. This creates the nation's 5th largest bank and makes PNC "too big to fail".
  • PNC Financial Services says it is acquiring National City for about $5.58 billion and will receive $7.7 billion in capital from the federal government. PNC will pay $5.2 billion for National City through a stock transaction that values National City at about $2.23 per share, a 18.9 percent discount from Thursday's closing price of $2.75. The remaining $384 million will be a cash payment to certain warrant holders.
  • Each National City shareholder would receive 0.0392 PNC share for each National City share.

Long PNC Financial in fund; no personal position


As We Said Yesterday

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860...840... then 2002 (around 770 on the S&P 500)

Obviously we will have some wicked volatility here but I don't expect anyone to be buying (for holding) ahead of a weekend with 'Black Monday' talk that will reigning the airwaves this weekend.

I'm sure we'll hear of some hedge funds blowing up again - there appeared to be no catalyst for this morning's carnage (UK GDP poor, we know that - Japanese exports poor, we know that)

The irony is that the two world currency's offering the lowest rates are both spiking which simply tells you we are unwinding positions in hedge funds all over the place. They "borrowed cheap, to buy" meaning for a long time they were borrowing Japanese yen at very low interest rates to lever up and buy buy buy. The fact the yen is now spiking with the dollar says to me a lot of positions are being unwound and hard. As if it were not obvious.

So expect a hard core rally sometime during the day but as I've been saying when the entire market can go down 3% in 30 minutes due to some unknown hedge fund imploding there is no place to put long term buys in here. I'd expect some stand to be put in at intraday lows of Oct 10th which is that S&P 840ish level; we'll see how many buyers attempt that. There is simply no place for investors right now to enter - only daytraders.

Baidu.com (BIDU) Crunched on China Economic Fears

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Perception is reality. In company after company it does not matter what the company reports at this time, even if it's a "beat and raise" - the perception is those numbers that were beat are the "past" and no longer pertinent, and the guidance offered in the future won't happen either. The former point always amuses me because why do we bother to report earnings at all if they are going to be immediately ignored in lieu of "future guidance"? We spent 90 days fretting over a number, and within seconds we say "who cares, tell me about the future!" And the latter factor (ignoring future guidance) is simply afflicting almost every company. I'm reading through many earnings reports, but want to highlight a few names we don't currently own and Baidu.com (BIDU) is one of those high growth stories that should last for years. (albeit nothing can grow 100% year over year forever, it WILL slow) But, this has been a large hedge fund holding and right now it is dangerous to hold anything "they" hold en masse. But we're keeping this name on the radar. The stock was crunched 15% yesterday on fears of Chinese advertising slowdown, despite stellar earnings. Julian Robertson is a recent buyer and this is the cheapest I've ever seen Bai... ah, nevermind.
  • Chinese Internet search leader Baidu Inc (BIDU) posted a 91 percent rise in quarterly net profit, after a surge in Web usage tied to the Beijing Olympics, and said it expects continued strong revenue growth.
  • Baidu's shares have fallen by about a third over the past five months, in line with general weakness in global markets, raising the possibility the company could be considering a share buyback with its some $340 million cash stockpile. "We do want to definitely put the cash into the best use," Jennifer Li, the company's chief financial officer, said during a teleconference with analysts. But the company did not have any plans to do so, she added.
  • Net income rose to $51.2 million in the third quarter from $24.2 million from a year earlier. Net profit per share was $1.47, beating the $1.27 per share forecast by Reuters Estimates.
  • Baidu's revenue increased 85 percent to 919.1 million yuan from a year earlier, largely in line with analysts' forecasts.
  • For the fourth quarter, the company said it expects total revenue ranging from $151 million to $155 million, which would represent growth of 80-85 percent growth over a year ago.
  • Baidu began developing a new consumer-to-consumer (C2C) platform a year ago, which was beta launched last week, moving into a market dominated by Taobao, an affiliate of Alibaba.com
  • Citi Investment Research analyst Jason Brueschke expects a strong finish to the year for the Beijing-based company. He rates the stock "Buy." "Baidu (revenues) are wholly domestic and derived from an extremely broad customer base, offering investors a highly diversified and hence less risky (revenue) stream," he wrote in a note to investors. That said, he added Baidu is a pure advertising company, and its revenue is correlated with the health of the underlying Chinese economy -- which is slowing.
No position


Wall Street Journal: Pension Funds Taking Serious Hits

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Some of the information in this story is just rich. First, since California's pension plan has taken such a large hit, there is potential for cities and counties to have to increase contributions - in the face of a municipal disaster via lack of funding that is now hitting and will increase next year (lower tax revenue via real estate, sales taxes, business taxes). There have been a few similar stories I've been reading the past few days - since many pensions are underfunded we have to invest in the stock market to make up the shortfall. Works great on the way up; not so much on the way down.

Second (and that much more darling) are the folks at our investment banks who were able to sell our national pension guarantee organization in D.C. on the 'safety' of mortgage backed securities. Seriously, I cannot make this stuff up. There is so much damage left behind by these used car salesmen with MBAs who left with the commission, whose executives left with the stock options and bonuses, and saddled the nation (and world), with the garbage. As a reward for this behavior? We're bailing them out. Something seems amiss....
  • The California Public Employees' Retirement System, the nation's largest public pension fund, said recent investment losses from the financial crisis could cause cities, counties and other state employers to pay more money to the pension fund, starting for some in July 2010. Calpers said that assets have declined by more than 20% from the end of the June 30 fiscal year through Oct. 10; total assets as of Oct. 20 were about $193 billion. It would lead to an estimated increase in employer contributions to the fund of 2% to 4% starting in July 2010 for some employers, and for the rest in July 2011, unless those losses are reversed, according to a Calpers memo.

  • The increased contributions would be greater if the fund's assets decline further by the end of the fiscal year of June 2009. However, the contributions would be smaller, or even nothing, if the fund reverses those losses.

  • The declines are taking a toll on Calpers funding status, which is the fund's assets divided by its liabilities. That ratio would be down to 68%, based on the market value of its assets, unless Calpers reverses the current level of declines. Analysts suggest that the ratio for healthy pension funds should be at least 80%. At the end of the June 2008 fiscal year, Calpers was 92% funded. It was at 102% funded at the end of June 2007. (how quickly things can change)

  • Separately, a House committee said the U.S. Pension Benefit Guaranty Corporation lost at least $3 billion in stock investments in the 11 months through August. Documents obtained by the House's Education and Labor Committee show the agency invested a "significant portion of its funds in mortgage-backed securities," according to a statement by the committee. (ahhhhhh!!!! - can we sell them to the government??? wait! this is already owned by the government! Well we are told that if we hold them for a very very very very very very long time - that we will make money so I'm sure this is just a short term problem. Yep. That's what King Paulson told us - the magic TARP makes all values go up over time) PBGC is a government agency that insures private pension plans, manages failed pension plans, and pays benefits to workers in those plans. (on the plus side, at this stage in the economic cycle I anticipate very few failed companies whose pension plans we need to bail out, so we can wait a very very very very very very long time for these mortgage backed securities to return to 'fair value' - ahem)

  • Charles Millard, head of the PBGC will testify before the House Education and Labor Committee Friday regarding the "agency's financial problems that may threaten the retirement security of millions of Americans," according to a statement by the committee. The committee said Mr. Millard "rebuffed a committee subpoena in July that demanded the agency to turn over documents regarding a report into the agency's mismanagement and lax governance practices."

Notice a pattern? The ones lecturing Wall Street are no different - in fact interchangeable.

What a mess.


Thursday, October 23, 2008

Circus of a Day

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The good news is S&P 860 which was the first of our 3 levels held at least today. Can you trust it? Nothing can be trusted nowadays.

The bad news is another day of incredible volatility where nothing made sense. We keep saying the volatility is unprecedented but it just keeps getting wilder. Today we moved in a >16% range.

9:45 - 11:00 AM (1.25 hours) +4%
11:00 AM - 3:00 PM (4 hours) -6.5%
3:00 PM - 4:00 PM (1 hour) +5.8%

I can only assume everyone is positioned for 3 PM hedge fund selloffs and when it doesn't happen you have a massive short covering. 3 PM has been the hour of power.

Honestly every day this week (until today) since we were 1/3rd cash we'd done about 2/3rds of what the market did. When the market was up 3% Monday, we were up 2%. When the market was down 6% Wednesday, we were down 4%. Today our week was obliterated. Whatever happened today was a complete disaster as we got whipsawed left and right with only about 4 holdings on the long side that were positive; so we were completely out of sorts with the market. 15 names (almost half the stocks we own) lost 7% or more. So it was a "good" day for the market but a completely perplexing and thoroughly frustrating day on this end. One of many.

This is one of those days you punch up the NAV of your mutual fund at 6:00 PM and ask what idiotic moves this stupid fund manager did today to lose 4% on a +1% day in the market. Answer: I owned stocks. Non commodity/global growth stocks - that got smashed left and right. Today the grim reaper came for health care, pawn shops, solar stocks, et al. 5 "safe" healthcare stocks lost between 7 and 18%. If it's not one thing it's another.


(I'm in purple - the market is in red)

Return to 2002...

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On the S&P we have 860, then 840 (the lows earlier this month) and then if that does not hold we look destined to revisit the lows of 2002 which appear to be the 770s. What you can see from this chart is what took 5 years to create, took 1 year to destroy. Fear v Greed. It seems almost certain now considering no one but daytraders even try the long side anymore because a hedge fund can blow up and take the entire market down 3% in a matter of 30 minutes. And it can happen at any moment. What's disconcerting is one could construe a move to the mid 800s as a triple bottom (if you believe we retested and formed a double bottom 4 days after we made the low Oct 10th) Triple bottoms almost never end well. You can also see as bad as 2001-2002 was, and those of us who lived it were disgusted by it, we never had a move of this magnitude without any short term rebound during that period. Those horrific drops during that time frame, always followed up with some sort of hectic bounce. This time we are getting nothing or at most 1 day bounces that are erased immediately - back then it was multi week and even multi month bounces. So that era was more stair step - this is like an elevator. (unless you were a tech stock investor i.e. NASDAQ - back then - it was an elevator - but now we're talking the whole market, not just tech stocks)


If things really spin out of control (as if they have not already) we have some support in the 650s-680s from 96 era; and if that does not hold mid 400s from 1994. Mid 400s is obviously almost a 50% drop from today's low.

The big difference from 1987 is companies were in there buying their own stock hand over fist. Now companies are hoarding cash afraid of lack of access to credit, which not only hurts buybacks but hurts any chances of a slew of takeovers. I suppose if we drop the 400s, those countries with cash (hi China) can come in with direct cash infusions and pretty much buy up the rest of the U.S. they don't already own.

I am hoping this dire posts marks a self capitulation as I mentally throw in the towel and talk about S&P 450 :) But just from a technical standpoint - it looks scary.

So 860, 840 and then 770 to deal with first. Then we exit the 2000s and return to the 1990s.

CNBC: Greenspan "I Was Sorta Kinda Wrong"

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Greenspan admits error. Shocking. Self regulation does not work. Shocking. Here is why Mr Greenspan - it goes back to our "heads we win, tails we win" executive compensation system. [Oct 4: Credit Crisis Sharpens Anger over CEO Pay] Who cares about risk when you retire with generational wealth whether you destroy a company or not. Why we are of the belief that the rank and file peons in a company must excel or at least be competent to keep a job and get pay raises, but at the very top echelon one must get extreme compensation even if the job done is a complete disaster (some get paid more in getting fired than staying on!) is beyond me - the best selling job ever done. (aside from that whole bottled water thing) Why one set of rules for 99.9% of people, and another set of rules for the top 0.1% in a company - again, beyond me.

But we can't police compensation (how socialistic) at the top, because the board is doing a great job of self regulation; boards usually headed by... the CEO. Yep.
  • Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities.
  • Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said to the House of Representatives Committee on Oversight and Government Reform.
  • "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006. Mr. Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong. Mr. Greenspan said he had made a “mistake” in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions. (the self interest of the company does NOT come before the self interest of the individual human - we are self serving greedy by DNA - self preservation and all - survival of the fittest - acquire the most wealth and resources - blah blah)
  • “Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,” Mr. Greenspan said. “Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.” (thanks for the news flash)
  • At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said. Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer," he said. (and where did all that easy money come from?)
  • "The consequent surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem," he added. (the credit agency disaster was the topic de jour yeserday on the Hill - those folks are also a complete disaster. Imagine that - companies who are paid to rate debt, and the money for services rendered comes from the people who issue the debt - no conflict of interest there)
  • Greenspan urged that securitizers be required to retain "a meaningful part" of securities they issued. (finally a good idea - when you have to actually partake in the junk you sell - you actually will give a darn. A 5% stake in every loan would of stopped this in its tracks - but that's REGULATION and regulation is evil - it stifles innovation - or so we were sold year after year)
  • He also conceded he was "partially wrong" about his belief that certain derivatives, such as credit default swaps, did not need to be regulated. (wonder what it would take to be "completely wrong")
So once again for those not keeping track, the solution for regulators (esp. the Federal Reserve) especially those steeped in ideologically against regulation, and being asleep at the wheel is.... give more power to the Federal Reserve. Logical. Very.

Heckavu job Greenie!


Bookkeeping: Adding to ICON (ICLR)

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The action is so random and nonsensical. This Tuesday we wrote about the excellent quarter from ICON (ICLR) - the stock was in the mid $30s. I said I would not buy until it crossed back over $37 as a sign of strength. Well.....the stock is down 17% out of the blue. Now it is down in the mid $25s - losing 25% of its value in 2 days. Excellent.

We'll buy some here.... and then we can sell it on a return to low $30s for a 20%+. Hopefully. I'm increasing ICLR from a 0.5% stake to 1.9% with purchases in the $25.50s.

I do see competitor Covance (CVD) just had an ok quarter with a "warning" about the US dollar but Covance is not ICON. ICON just reaffirmed this 2 days ago - but as we've been saying there seems to be no differentiation among investors in specific companies in a sector anymore. Everything is bad ... or good. But mostly bad. There is a reason I own company one over the other. This speaks to the frustration with this market - cherry picking the good companies in a sector is useless. Time to go bang the head against the wall for a few more hours; let's sell off Google based on the Yahoo earnings. Or Apple based on Dell earnings. Or McDonalds based on Hardees earnings. Why not - it's all the same thing.
  • Drug development services company Covance Inc. said Wednesday its third-quarter profit rose 15 percent on higher revenue from early- and late-stage development programs. Profit rose to $51.1 million, or 80 cents per share, from $44.6 million, or 69 cents per share, last year, Sales rose 13 percent to $467.4 million from $414.7 million a year ago.
  • Analysts polled by Thomson Reuters expected profit of 80 cents per share on revenue of $452.9 million.
  • However, the company said a stronger U.S. dollar will likely crimp momentum, as 40 percent of its total sales come from overseas.
Long ICON in fund; no personal position


Bookkeeping: Adding to EZCORP (EZPW)

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It is very hard to buy anything in this environment where you can be down 20% on any purchase within hours. On TV this morning a CNBC reporter said 2 hedge funds were being liquidated yesterday which caused the meltdown. So right now aside from all the other issues, we are hostage to the hedge fund liquidations - as we have said countless times. The good news is there are only 8000 hedge funds (err, were). So if we lose 2 a day that means in 4000 days we should be fine. Always a silver lining. On a serious note it is just a pathetic state of affairs where companies who execute are treated no different than those that don't. This 4-6% daily swing action is keeping everyone out because the ability to lose so much money in such a short amount of time makes it not worthwhile to participate. And when you do participate you are just throwing darts since what you buy could be liquidated by a hedge fund within hours. So your odds are no different then a casino - as I've been saying over and over. The ultimate in frustration. This is why we continue 1/3rd in cash.

Looking at today's action I see weakness in EZCORP (EZPW) which is down 8%, and it looks like its based on earnings from recent Cramer pick Cash America (CSH). [Oct 20: Cramer Jumps on Pawn Shop Bandwagon] As I've said many times I want to have limited exposure to the cash advance business due to regulatory issues, and CSH has as of this quarter nearly 40% of business in that line of work while EZPW has less than 30%. So at risk of losing more fingers I am going to buy some EZCORP as it's down 8% in sympathy with its peer, and take it from a 0.5% stake to 1.6%. EZCORP reports November 6th and I expect good things. The chart stinks but charts have lost effectiveness the past few months. If you sold each time it broke support you'd be selling at the wrong time - in fact you need to buy the breakdowns and then sell the jumps up - a very backwards time. Everything we learned about technical analysis is also being proven useless in the current market.


Another peer in this group, First Cash Financial Services (FCFS) which is more heavily into the pawn shop side had a good quarter reported earlier this week, but is in the midst of exiting some of its non "core" business. But again we're focused on the pawn shops which are now seeing mid teens same store sales growth and this will only get better as the economy worsens into 2009. If not for the auto business it is now exiting I was strongly considering FCFS as an option as well.
  • First Cash Financial Services Inc. says growing revenue streams from its pawn shop operations have prompted the company to lift its earnings expectations for 2008.
  • Arlington-based First Cash Financial (NASDAQ: FCFS), which operates pawn, loan and check-cashing stores, has increased its 2008 earnings per share guidance to an estimated range of $1.24 to $1.26 per share from its previous range of $1.17 to $1.20 per share. The company essentially upped its guidance by 33 percent to 35 percent after noticing an uptick in revenue growth and profitability within its pawn shop operations.
  • Revenue from pawn shop operations alone made up 78 percent of the company’s total quarterly revenue, First Cash said.
  • A one-time charge of $52.6 million related to the discontinuation of the company’s auto loan business also was recorded in the most recent quarter, having an impact on the company’s final net earnings.
  • The company operates 495 pawn shops and short-term loan stores. It opened 18 new stores in the third quarter, including 16 in Mexico.
Now we compare to Cash America (CSH)
  • Payday lender and pawn shop operator Cash America International Inc. on Thursday said its third-quarter profit fell 8 percent as expenses rose, but adjusted results topped Wall Street expectations. For the three months ended Sept. 30, Cash America said net income rose to $18.9 million, or 63 cents per share, from $20.6 million, or 68 cents per share, in the prior-year quarter. (only an AP writer could figure out that 63 cents "rose" from 68 cents - aye our education system is so bad)
  • The results included $2 million, or 9 cents per share, in one-time costs associated with spending related to election ballot measures in Ohio and Arizona, plus nearly $1 million in lost revenue from Hurricane Ike. Adjusted for these items, per-share profit came to 72 cents, the company said. (ok now it "rose" after these adjustments)\
  • Revenue rose 9 percent to $252.2 million from $231.5 million.
  • Analysts polled by Thomson Reuters, on average, expected profit of 65 cents per share on revenue of $254.2 million.
  • Cash America said the revenue increase reflected a 14 percent gain in total fees and service charges for pawn loans to $47 million, and a 15 percent boost in merchandise sales to $105.5 million. Daniel R. Feehan, president and chief executive, said pawn loan balances were up 16 percent year over year.
  • The company also narrowed its outlook range for full-year earnings, and offered a fourth-quarter guidance range mostly above Wall Street estimates.
  • The company said it expects additional expenses in the fourth quarter on election-related spending regarding ballot initiatives in Ohio and Arizona, after spending $2 million on such activities in the third quarter.
  • The company said it has adjusted its fourth-quarter loan products "for a negative result in the Ohio election," and "has de-emphasized" cash advance lending, or payday loans, in Pennsylvania and Minnesota as a result of expected regulatory changes in early 2009 and late 2008, respectively. Due to the regulatory changes in those states and Florida, where the company said payday loans were profitable in 2008 but will either be unavailable or "available only at significantly reduced economics in the coming year," the company said it expects 2009 earnings between $3.35 and $3.55 per share. (again, reasons to avoid the cash advance side of the business)
The only reason I see for the stock to sell off is the narrowed full year guidance or comments on 2009 regarding payday loans which should come as a surprise to no one paying attention? And/or this is a bear market and everything falls. They "missed" but due to Ike and spending on trying to stop their cash advance practices from being curtailed in a few states... anyhow we don't own it but I'm throwing it up there for information purposes.

One more sad story of the pooring of America
  • PORTLAND, Ore. (AP) -- At All That Glitters Jewelry and Loans, aesthetic and sentimental values get checked at the door. Here, patrons line up to pawn their memories for money. "Once upon a time, I didn't know people who would hock their things," said Sheli Johnson, 56, who is married to a construction worker and has been out of work since breaking her pelvis five years ago. Now she's one of the growing number of Americans looking to sell a ring or loan a bracelet, just to get by. In recent weeks, jewelry buyers and gold brokers across the nation have seen a sharp increase in customers -- of all economic backgrounds -- trading in their possessions for cash.
  • Cash for Gold USA, an Internet site that offers customers a chance to mail in pieces of gold -- anything from class rings to dental fillings -- in exchange for a check, has seen business quadruple in recent months thanks to high gold prices, (I've seen these guys advertising even on CNBC!)
  • In Midtown Manhattan, Gene Furman, the owner of Empire Gold Buyers, has seen a roughly 25 percent increase in walk-in traffic since major investment banks and other financial institutions ran into their own financial difficulties. The company schedules about 50 to 60 buying appointments a day, and not just with the familiar faces. Furman said he sees all sorts -- even the one-time Wall Street powerful -- looking for any way to get some cash on hand.
  • Another Portland jewelry buyer said the market has never been so good -- or so depressing. "Little old ladies are coming in with Whitman sample boxes empty of candy and filled with odds and ends and trinkets," said Dan WenDell, owner of Diamond and Jewelry Buyers.com. "I used to be in the jewelry business," he said. "I am in the recycling business now."
  • One was full of diamonds. "It was my wedding ring," Johnson said. Another was crowned with a red gem. "A friend of mine gave me this." The last was a simple diamond ring. "My husband got it for me."
  • Other customers had similar stories. A construction worker was pawning his wife's diamond earrings because jobs had dried up. A woman, who was selling some rings her husband had left behind when he died, said her Social Security check doesn't stretch as far as it used to.
  • "You feel bad for people, and we try to say we're here to try to help you as best as we can," he said. "We have some small-business people who come in here and need to make payroll. Everything from 'I need a tank of gas' to 'I need to take my daughter to the emergency room for medical and we don't have any funds.'" ("richest country on Earth, but if you need to go to the hospital 40% need to hit the pawn shop I suppose")
  • The high price of gasoline is why Jeff Silverstein of Ridgefield, Wash., sold his wedding ring to All That Glitters. "I'm still married," he said. "There were just other things we needed more." (well at least national GDP has been rising all decade - since that's accurately reflecting state of things for normal working class people - it's just a mental recession as Phil Gramm tells us)
[Jul 24: Cash America (CSH) and EZCORP (EZPW) Both Report Today - Starting Small Stake in EZCORP]

Long EZCORP in fund; no personal position


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