Friday, October 31, 2008

Bookkeeping: 'Rising Tide' Performance Year 2, Week 13


Year 2, Week 13 performance of the mutual fund

: Another volatile week in a series of incredible volatile weeks... 2 months in fact. With a big rally this week we avoided living through "the worst" month in stock market history and instead have been upgraded to "one of the worst" months in history. At this point, and this is just a gut call, the market feels empty - it can be moved so quickly and direction changed on a whim. This would make sense from the perspective that the marginal trader in this market the past half decade especially has had the margin call of a lifetime, and those that remain around have moved to high cash positions. So this allows the hedgies that still play to have outsized weight on the market. Even today which now "feels" like a calm day would of been considered head spinning 6 months ago. From top to bottom we only had a 4% range (and I use the word "only" in relation to what has been going on to the past few months), but we rallied up 4% then at 3 PM down 1.5%, and then spun and made an about face with 10 minutes to go for one of our traditional "multi % move in 10 minutes or less" that have characterized the last hour of trading for a while now. Something is going on in the background, but I don't know what it is and the SEC sure won't bother to figure it out.

What I see in the market is continued "student body left" and "student body" right trading. Everyone is keying off the S&Ps (or their index of choice) and if it's going in the right direction every stock is "good" and if it's going in the wrong direction ... well every stock is "bad". This is still not a healthy thing. We need to see separation among stocks and sectors. Further, the VIX is still above 60 which any other time in history would be "historic" and "emergency panic" - today it's a "calm day". Much like we'd complain about $2.40 gas two years ago, now we say "whew! that's nothing versus where we have been lately" - this is the same parallel I see in the market now. It's still not really too healthy.

The leadership is also poor - by leadership I mean there is none. Today for example it was mostly retailers. Earlier in the week commodities. Neither are leadership - they are completely broken sectors that were oversold by historic levels, rebounding to a more normal reversion from the mean. The only sector I see working consistently is airlines - which is nothing more than an anti-oil trade. I'd also like to ask out loud how come with all the debt airlines have NO ONE is buying their credit default swaps and crying in the media that they won't be able to roll over their paper and hence the stocks should lost 90% of their value within 3 sessions. I mean they are even doing that to casinos nowadays but somehow the airlines are bullet proof? Some of the most debt laden companies with the best performance - only in this market of nonsense. But the larger point is where will the leadership come from - you can't go to global growth names because of the global slowdown and you can't really believe in US centric names unless you're going to pull out the same old tired thesis the bulls pulled out this summer about how $1 less per gallon will save the consumer. So after this initial move from a deeply oversold condition I'll be interested to see where the bulls plant the flag in terms of the "new leadership" group.

I pointed out last week's intraday highs on the S&P (985) as the point I'd like to see the market pass to become more bullish - we made an attempt today and lo and behold 983 was hit, before a rejection ensued. But the action seems a bit more positive - but again we're comparing it to what was shaping up to be the worst month in history. Next week we have the Tuesday US election and more important the monthly labor report. Obviously if you are paying attention you see large job losses announced left and right, 3000 here, 5000 there, 7000 over there. This will be filtering into the claims over the next 1-6 months and we're going to see some quite scary numbers. How quickly they filter through is anyone's question but it's not the news but the reaction to the news that matters. At some point you get numb to the bad news just like we did earlier this year when financials rallied as no amount of write off mattered anymore - we had become numb to it. So when you start seeing good stock reactions to bad news - you have a rally you can believe in. But still within a bear market. On the "positive side" ideas we've been presenting in the blog for the past 16 months are now spoken about EVERYWHERE - so at some point it gets discounted. It is when these thoughts are only whispered on some "doomsday blogs" (i.e. us) that we should of been more worried - when everyone else caught the drift of the severity of the situation the reaction even surprised us in it's severity (along with the Margin Call of the Century). So now everyone knows things are rotten aside from a few remaining pundits they trot out on CNBC - now it's a matter of degree, severity, and duration. I don't know the answers myself - we'll have to see how the 21,181 solutions presented by government work and if banks stop hoarding. If so, we'll just have a lengthy recession in which we'll exit with a much tighter credit world. If not, we have a lot worse backdrop. I think we'll know within 3-4 months which fork in the road we'll take.

For the fund I spent most of the week selling into the strong rally. We made money this week which I guess cannot be complained about but we lagged due our performance Tuesday. We almost always lag the huge up days in the market since we are always carrying cash and some short exposure but we had quite a bit on the short side Tuesday and hence all our long gains were extinguised by the short side (i.e. we were "perfectly" hedged) and we made nothing on a day the market was up 10%+. I can only imagine the calls coming into the office by enraged shareholders Tuesday night... every other day of the week we either kept pace with the market or outperformed despite holding very large amounts of cash and not being very exposed to the market. But Tuesday led to under performance versus the indexes.

The S&P 500 gained 10.5% and the Russell 1000 gained 11.0% on the back of Tuesday's monster rally. Rising Tide Growth gained 4.7%. We actually had a very quiet week - Monday while the market was down 3%+ we were down 0.3%, Tuesday while the market was up 10%+ we were up 0.3% and so on and so forth. Made some up of Tuesday's lack of participation in the back half of the week, but we had almost no volatility this week while the market acted like a 3 year old on a sugar high. So we're back to trailing the market in our year 2 after being ahead for a short while. We've trailed the market mightily the past 2 weeks as volatility whips us around.

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

Year 2 Metrics

Price of Rising Tide Growth: $7.902
Year 2 Performance to date (vs Aug 1, 2008): -28.24%

Comparable S&P 500: 968.8 (-23.1%)
Comparable Russell 1000: 523.3 (-24.2%)

Fund return vs S&P 500: -5.1%
Fund return vs Russell 1000: -4.1%

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

Bookkeeping: Adding to Kendle International (KNDL) Ahead of Earnings

For those who are newer readers, my general ethos is avoid stocks around earnings - while many get a kick out of the gambling associated with piling into stocks ahead of earnings hoping for the huge win - I find it a very risky game that has more bad outcomes than good. But the big moves in the small % of situations keep luring the gamblers... err investors... back to this (ahem) strategy.

Kendle International (KNDL) reports on the 4th and I am going against my normal rules to add quite a bit of exposure ahead of earnings. We've outlined this week how the contract research organizations have been a total disaster of late [Oct 28: Contract Research Organizations Taken to Woodshed] as there are now worries about both the US dollar and pharma companies trying to save money any way they can - including less outsourcing of research. Since costs are generally higher when they do the work in house that seems backwards but no one said companies were rational. They might also just cut back on drug R&D altogether if credit conditions continue to be poor and funding remains difficult. Those are viable issues but the stocks have now priced in a ton of bad news. Parexel Interational (PRXL) who had the most blatant warning, along with some company specific issues has been cut in half, in the past 7-8 sessions. Kendle International meanwhile, simply by being in the same industry, also has been cut in half. I don't necessarily expect great things from Kendle as there do appear to be headwinds in the industry, but it is now valued under 10x 2008's estimates, which is cheaper than the company which had the major warning in the sector, PRXL.

Under a portfolio management view, with the understanding I've been selling long exposure all week, I am willing to take a flier on this one and do some buying on the long side. #1 the stock has been trashed as if it had the earnings warning, even though it has not and #2 the stock has not participated in the rally - so if this rally has legs (which I have doubts until we break over S&P 985) stocks that have yet to rally should pick up steam. This could also be viewed as a transfer of long exposure from stocks at resistance to those nowhere near it - many of the stocks I sold off now have run up to important resistance levels and face some work to do to continue up. Kendle, at $18, is a full $11 away from any serious resistance if it should provide some reassurance on the call.

I cut some Kendle earlier this week at higher levels during the obliteration of the sector but am now taking it from a 0.9% stake to 2.9% stake. I am also adding to Life Sciences Research (LSR) - same boat, same sector, same chart, same valuation in the lower $16s and taking it up to a 1.4% stake from 0.4%. From $16, the 20 day moving average is way up at $23.

If the market "melts up", I am poorly positioned as are many so we'll all be scrambling to add long exposure from here. Funny - a week ago to the day the S&P opened limit down in premarket and no one wanted stocks - now my normal sources of info on the web are all rampant bulls. Human emotions - they are a funny thing. Any real move should have sustained legs so while not fun to miss the beginning, we can catch up later if there is any duration to it. A market let by consumer discretionary is simply not one I believe in - these are simply oversold stocks rebounding from stock prices that signaled the US was shutting down its doors for half a decade. But the action still looks suspicious to me with these huge 2-3% moves in 10 minute spurts. But we're only 8 S&P points away from my 985 point and in this market that can be done in 90 seconds.

Long Kendle International, Life Sciences Research in fund; no personal position

Bookkeeping: New Position in PIMCO Strategic Global Government Fund (RCS)

Continuining my path to full fledged fuddy duddy, I've been looking at bonds for return for the first time in my life. In normal bear markets bonds have held up reasonably well but in "this mess" bonds have been demolished along with stocks. All asset classes short of US Treasuries have been decimated. This led me to thinking about buying a high quality US Corporate bond ETF/closed end fund. You can get a lot more yield with "junk bonds" but at this stage of the economic cycle, with what I believe will be an ugly recession still ahead I don't want to take that risk now since I can see quite a few companies going out of business in the next 18-24 months. Perhaps a year from now a junk bond would make more sense as the reality of the coming situation is further priced into the market.

Instead I'd rather be in something like iShares Investment Grade Bond (LQD) which is yielding in the mid 5% range, while holding a lot of higher quality debt. Typical holdings include Johnson & Johnson (JNJ), Walmart (WMT), Berkshire (BKRa), and IBM (IBM) debt - safest of the safest. Looking over the past half decade this normally always traded in a 0 to 1% premium to NAV but spiked to 2% this year. However in the past month its cratered (on a relative basis) from a +1 premium to -2% discount to NAV. That is a very rare occurance for this sort of holding - and just reverting to the mean on that gap would be a 2-3% gain. So in theory you could get mid 5% yield plus a 2-3% appreciation in the underlying instrument as we move from a rare discount to a more normal small premium to NAV. So 7.5% to 8.5% potential for instruments that should be "relatively" risk free - the biggest and best US companies debt.

LQD is high on my list and I may yet buy it, but as I was researching the corporate bond alternatives I came upon an interesting fund that I am going to choose today instead - it is PIMCO Strategy Global Government Fund (RCS) - website here.

Primary objective is to seek to generate, over time, a level of income higher than that generated by high-quality, intermediate-term U.S. debt securities.
  • Invests primarily in a diversified portfolio of U.S. and foreign government securities.
  • Seeks to generate greater income than high-quality intermediate-term U.S. debt securities, while maintaining a comparably stable net asset value.
  • Also seeks to maintain volatility in the net asset value of the shares comparable to that of high-quality, intermediate-term U.S. debt securities.
  • Leverages PIMCO's core analytical and risk-management capabilities.
It currently yields in the mid 8%s and trades in the lower third of its historical range of premium to NAV - generally its been trading at a 5 to 20% premium the past 5 years, and is currently around 10%. Most importantly is what it owns - it is focused on Fannie Mae, Freddie Mac, and Ginnie Mae debt. What is Ginnie Mae? It's basically what Fannie and Freddie have now become - mortgage backed debt explicitly guaranteed by the US government. So the nature of this instrument's holdings has changed since the take over of Freddie/Fannie - in the past the Ginnie Mae debt was explicitly guaranteed while the Freddie/Fannie was "wink wink" guaranteed. Now it is all guaranteed - unless your thesis is the US government will default on it's debt. I don't see that happening for about 15-20 years out. And most others never see that happening. So in theory just about all the holdings are government backed and (cough) "risk free". With the Federal Reserve killing all US savers with their interest rate cutting, this yield is bordering on 3x as much as many CDs.

On a 1 year basis RCS has traded in a $9.25 to $11.75 range other than in the panic lows earlier this month where it traded in the $7s! $8s for 2 days. Outside of that, $8.75 has been the panic floor. So we're buying it today in the $9.20s and $9.30s. So obviously if it just sits here we get an 8.5% yield which in this market is like 50% in a bull market. And if it makes a move into the $10s or even better $11s - we throw some nice capital appreciation on top of it. The last positive is this is a PIMCO based which is the most stable (and largest) bond shop in America so we should not run some risk of some unknown event that other money market or bond funds might run into (have to think of every contingency nowadays)

I'm working on about a 5.5% position in that range that we'll be buying and hopefully be done by end of the day. It's relatively low volume and by rules I only get 10% of every real world trade counted towards our purchase i.e. 1000 shares in the real world translate to 100 shares in the account. RCS trades about 115K shares a day, and already we are through 35K so we might not complete this today. Since this whole bond business is new to me I'll consider adding more once I watch this for a few weeks/months and see how it behaves in real time. It won't be something we trade very often at all, but a place to stash long exposure in a market that has no rhyme or reason and where stocks act like pinballs.

Any reader who happens to own these type of instruments on a normal basis, feel free to comment or email and give me your thoughts and pros/cons you see to my analysis.

From a contrarion point of view I want to bet against myself and go 100% long because when someone like me is buying bonds it must mean the bottom is in ;) Next.... as you watch me turn to Certificates of Deposit as a risk aversion tactic it's time to 2nd mortgage your house (errr, ummm.... ) and go on margin on the long side.

Long PIMCO Strategic Global Government Fund in fund; no personal position

Bookkeeping: Cutting some Sequenom (SQNM)

Sequenom (SQNM) is jumping 10% today and is up from $14 to $18+ in just a few sessions so I'm going to take this opportunity to cut back hard on the position; we are selling in the $18.10s down from a 1.9% to 0.5% stake. The 50 day moving average is in the lower $19s and if technical analysis means anything in this era, we'll be an avid buyer above that level if the stock shows strength.

Until the market stops acting like a casino we are going to continue to retrench. Just as Wednesday the market lost 3%+ in a 10 minute span late in the day, yesterday we had a 2%+ rally in a span of 10 minutes on the S&P in the last half hour. Something just appears fishy for the market to be moving around this rapidly in 5-10 minute spans, especially late in the day.

I'll be a buyer on strong pullbacks, but unless the overall market breaks north of S&P 985 as I wrote yesterday, I'm not a believer in a sustained move - but even "choppy sideways action" would be a huge improvement over what we've sustained the past 2 months. Targeting which stocks to buy is difficult as the biggest movers just seem to be reverting to a mean. Chasing them up after large moves has proven to be folly so until that pattern breaks we'll be sellers, not buyers after these big moves. If the pattern changes, we'll change along - but not until....

Long Sequenom in fund; no personal position

Bloomberg: Credit Tsunami Swamps Trade

A very interesting story on Bloomberg which leads to the question I posed yesterday in the coal piece - how much of the "global slowdown" is true supply/demand characteristics and how much is outside financial influences - in this case the inability to access credit. We'll never know in aggregate but a lot of interesting anecdotal evidence is emerging that the credit situation is a major issue. Then once you have all that answered the next question is when does credit get back to a "new normal" and what will new normal look like. When you have those answers, please email me ;)
  • Richard Burnett's lumber company had started loading wood onto ships heading for China. More was en route to the docks. It was all part of an order that would fill 100 40-foot cargo containers. Then Burnett got a call from his buyer at Shanghai VIVA Wood Products Co. The deal was dead. He told Burnett, president of Cross Creek Sales LLC in Augusta, Georgia, he couldn't get a letter of credit to guarantee payment for at least six months. ``It was like a spigot got cut off,'' Burnett said, recounting the transaction that fell apart in July. The inability of buyers in China and Vietnam to get letters of credit has cost his company as much as $4 million this year, a third of projected revenue, forcing him to lay off 15 of 35 employees, he said.
  • Suppliers of oil, coal, grains and consumer products from Chicago to Mumbai are losing sales as the credit crisis spreads beyond financial institutions, and banks refuse financing or increase the fees for buyers. Coupled with declining demand, the credit squeeze is threatening international trade, one of the lone bright spots in the global economy.
  • Global trade volumes may sink next year, their first decrease since 1982, according to Andrew Burns, a lead economist at the World Bank. While there is still uncertainty over future prospects, trade may contract by as much as 2 percent, after annual increases of 5 percent to 10 percent over the past decade.
  • ``We only see this kind of shock when we have outbreaks of war, or maybe the oil shocks of the 1970s,'' said Kjetil Sjuve, a commodities shipbroker at Lorentzen & Stemoco AS in Oslo. ``This lack of credit was a shock to the entire economy. We were hit second after the banks.''
  • Of the $13.6 trillion of goods traded worldwide, 90 percent rely on letters of credit or related forms of financing and guarantees such as trade credit insurance, according to the Geneva-based World Trade Organization. Letters of credit are centuries-old instruments that allow far-flung partners to complete large transactions. An importing company gets its bank to issue the letter, guaranteeing payment for a delivery. That bank provides the letter to the exporter's bank, which then guarantees payment to the exporting company. The system breaks down when banks don't trust one another and are unwilling to accept a letter of credit as proof that payment is coming.
  • From 2000 through last year, the use of letters of credit declined to about 10 percent of global trade transactions, the IFC's Stevenson said. Over the past six months, they began ``roaring back into fashion'' as sellers sought to guarantee payments from buyers they no longer trusted, he said. At the same time, liquidity problems caused banks to increase charges.
  • The cost of a letter of credit has tripled for buyers in China and Turkey and doubled for Pakistan, Argentina and Bangladesh, said Uwe Noll, director of country risk sales at Deutsche Bank AG. Banks are now charging 1.5 percent of the value of the transaction for credit guarantees for some Chinese transactions, bankers say.
  • ``The whole global trade production line relies on letters of credit,'' Matt Robinson, an analyst at Moody's wrote in an Oct. 23 report. ``No letters of credit, no transactions -- and no transactions mean no international trade.''
  • James Morrison, president of the Small Business Exporters Association in Washington, polled 1,000 of his members this month on the impact tight credit is having on their ability to trade. By a margin of six to one, companies that had tried to get export financing recently said they faced ``unusual difficulties.''
  • The same is true in Brazil. An Oct. 23 report from the country's Confederacao Nacional das Industrias, which represents 27 industry groups and 7,000 trade associations, found that Brazilian companies of all size are losing access to credit.
Well it appears our Federal Reserve has another thing to backstop - the worldwide letter of credit operations. I wonder what the price tag is - doesn't matter though. Our pockets are limitless and printing presses never wear out.

We'll have to see if this situation improves in the coming months now that the world's central banks have come to the rescue of the banks. I'm surprised the railroads which ship items to US ports did not talk about this or perhaps I just missed it.

Wall Street Journal: Universities Begin to Feel Crunch

All these stories we post continue a mosaic of higher costs of living for Americans in the long run as median wages falter. In the "richest country on Earth" many kids have been forced to borrow $20,$30,$40K to get higher education - creating a ball and chain around their lives for the first decade post graduation. Or robbing their parents the ability to save for retirement. The house ATM hid this situation for half a decade but now we're seeing reality. Looks like costs are set to even go higher... remember our thesis that state budgets are going to be a complete disaster in 2009 - which means sharp reductions in what states can give to their state universities.

At some point the discounted cash flow model is going to show that it is better to begin work at 18 - at a lower wage - and skip the 4 years of wasted earnings potential plus the massive debt many are now being forced to pay off from their higher education. In fact, I would not be surprised if we've already passed that point for many careers outside law, medicine, and the like. Remember the chart we outlined in September at how far ahead of inflation college tuition is rising. A breaking point must be reached at some point as people cannot borrow against their homes to help their kids go to college.
  • The financial and economic tsunami that has ripped through Wall Street and the housing market is beginning to wash across the college green. Higher education hasn't yet seen anything to compare with foreclosures and bank nationalizations in the private sector. But seized-up credit markets, shrinking endowment funds and a reduction in state subsidies are punishing universities from California to Vermont.
  • A campus construction boom is slowing, administrations are cutting jobs and faculty may be forced to pay more into their pension funds. The demise of a $9.3 billion investment fund used by 900 colleges has some schools scrambling to pay their bills.
  • College construction soared to $15 billion in 2006 from $10 billion in 2001 (50% increase in 5 years? obnoxious)
  • It all brings a gloomy pall to what has been, until recently, a booming industry. Higher education has grown rapidly in the last half-century into a formidable slice of the economy. U.S. colleges and universities spend $334 billion annually, employ 3.4 million people and and enroll 17.5 million students. (aka it's now a "big business" but without the cost cutting of most enterprises)
  • The boom was powered by a growing stream of donations, strong returns on endowments, rising enrollments and tuition prices that climbed well above the rate of inflation -- paid, more and more, by families who borrowed heavily to meet the bills.
  • he cratering stock market has already hit endowments. Falling markets typically take a toll on gifts, many of which are made, for tax reasons, in the form of appreciated stocks and bonds. Analysts and schools are predicting even bigger tuition increases than those seen so far. But this time, families may be in no position to meet the higher bills. Falling house prices have sapped their ability to use home-equity loans for tuition payments, and the credit crunch has forced many lenders to stop making student loans. (bingo)
  • "This is the worst environment for colleges I can remember," says Mark Ruloff, a consultant at Watson Wyatt in Arlington, Va., who advises college endowments. With their ability to raise capital curtailed by the crisis, schools may be forced to sell their most liquid endowment assets at a time when the markets are not offering much, he predicts.
  • Molly Corbett Broad, president of the American Council on Education, which represents 1,600 colleges and universities, says public schools face the greatest challenge in a slumping economy because they get as much as three-quarters of their revenue from state taxpayers.
  • She says students could face double-digit tuition increases next year, up from the typical 4% to 6% level in recent years. Some university presidents privately confided to her that their institutions, which she declined to name, are even considering midyear tuition hikes. (how much blood can you squeeze from a rock?)
  • Ms. Broad adds that small private colleges without hefty endowments may have to consider merging with bigger rivals.
Some examples of the current situation, and again - we haven't seen anything yet...
  • University of Massachusetts system this week said it would have to cut its budget by about $25 million, or 5%. The flagship Amherst campus froze hiring in all but the most critical positions.
  • Boston University's president sent faculty a letter late last month announcing that the school is imposing a freeze on new hires and new construction projects.
  • The state of Colorado has frozen hiring and state construction projects, including about $50 million worth at public universities
  • The Tennessee Board of Regents, which oversees the University of Memphis, five other universities and 13 community colleges, has been forced to cut $58 million since July. Bob Adams, vice chancellor for business and finance, says the system, with 190,000 students, may have to increase tuition "fairly significantly" next year. Including tuition, room and board and other fees, students typically pay $12,500 annually.
  • The University of Memphis recently announced a voluntary employee buyout program. Mr. Adams says schools are also delaying equipment purchases, such as laboratory equipment, and library acquisitions, including books and subscriptions. He says he suspects that classes will get larger because of rising enrollments and shrinking staffs.
  • The University of California, Berkeley, faces $28 million in cuts or unavoidable cost increases for the academic year that began in July. He says that rising health care costs will result in an 11% increase in the cost of providing medical and dental benefits to staff starting in 2009.
Every time I read these type of stories I remember the CNBC pundits in summer 2007 saying "what's the big deal even if housing slumps (not that it will!); it is only 4.5% of GDP" What they forget is housing is the base of so much tax revenue in this country... the dominoes will fall one after the other through the system. And universities are actually going to have to act like private enterprises...

Thursday, October 30, 2008

Sequenom (SQNM) "Misses" But We Really Don't Care

Near term results for Sequenom (SQNM) are really a moot point as we're looking to mid 2009 forward on this story; the main issue in this new and (not so) improved environment is making sure young companies have cash to get them to the point where they turn cash flow positive. The New York Times actually had an article on the struggles young biotech companies are having in this new world.
  • So many biotechnology companies talk about “extending the runway” these days, you might think they had entered the airline business. But for them, runway refers to the time before a company runs out of money. And with financial markets in turmoil, the runways are looking dangerously short for many small biotechnology companies.
Honestly any revenue, or margins or financial issues at this point outside of cash are meaningless in my assessment - but for historical context we'll post the results.
  • Sequenom reported total revenues for the third quarter of 2008 of $11.6 million, an increase of 18%, compared with total revenues of $9.8 million for the third quarter of 2007.
  • Gross profit margins improved in the quarter to 60.9% from 54.6% in the same quarter last year.
  • Operating expenses rose to $17.8 million from $11.2 million in the third quarter last year due to additional expenses associated with the research and commercial activities for the Companys molecular diagnostic programs and approximately $1 million in fees associated with new technology and intellectual property licensed during the third quarter.
  • The net loss for the third quarter of 2008 was $10.4 million, or $0.18 per share, compared with the net loss for the third quarter of 2007 of $5.5 million, or $0.14 per share.
  • We are pleased with our results for the quarter, remain cautiously optimistic for the fourth quarter, and are reaffirming our full year 2008 revenue guidance of $50.0 million, said Dr. Stylli. We expect the Genomic Analysis business segment will reach cash flow break-even during 2009 with current growth rates and operational leverage. We believe we have sufficient capital to commercialize our noninvasive prenatal tests and turn profitable on a consolidated basis in 2010 or 2011 without further equity financing requirements.” (that's the only sentence that matters in the current report - debt is negligble)

  • Net loss is expected to be approximately $39 million, up from prior guidance of $36 million, due to costs expected in connection with the acquisition of the CLIA-certified laboratory (CMM) and other licensing activities.
  • Cash burn is expected to be approximately $36 million, compared with prior guidance of approximately $30 million, due to the expected completion of the acquisition of the CLIA-certified laboratory (CMM) and related capital expenditures required to prepare the laboratory for large volume commercialization, and intellectual property related expenses, among other expenses.
The company presents at 3 health care conferences in November, but this is really a "milestone" story at this point; each step to the holy grail should add to valuation. This should be one of those home run or strike out type of stocks. Obviously we're here for the home run potential but in this market where "risky, growthy" stocks are eschewed, and "investing" is laughed at while day traders play in the sandbox - it might struggle for a while.

[Sep 23: Sequenom - All Systems Go on Down Syndrome's Test]
[Aug 13: Beginning Stake in Sequenom]

Long Sequenom in fund; no personal position

Thoratec (THOR) Smashes Earnings; Somehow Guides Up

As I expected Thoratec (THOR) demolished earnings expectations as this quarter's sales came before the product recall of their heart device. What boggles me is they have the confidence to increase full year guidance. In full disclosure I did not listen to the conference call nor do I have access to analyst reports so I don't know the full details of the recall but it sounded pretty serious on first glance. So while the results were expected to be strong this quarter, I'm surprised how adament they are on guidance. I see no further details in the press release on the recall. The stock in after hours is up 10% and right back to where it was ($24s) the trading session before the recall was announced.

I'll admit being confused by this one; will have to find some time to listen to the conference call to get a take on why the bad news of last week has been brushed to the side. My main beef here is lack of long term visibility on Heartmate II; hopefully this was just a big pothole that was quickly corrected but who knows and in this market with so many cheap valuations there doesn't seem to be a great reason to risk capital on a story with so many questions at this point. But maybe we'll revisit some day down the road as this product seems to have a high uptake among doctors.
  • Cardiac device maker Thoratec Corp (THOR) posted quarterly results that topped market estimates, helped by strength in its heart device HeartMate II LVAS, and raised its full-year outlook for the second time in less than three months.
  • Reports Q3 (Sep) earnings of $0.17 per share, $0.07 better than the First Call consensus of $0.10; revenues rose 44.0% year/year to $80.8 mln vs the $69.4 mln consensus.
  • The company said its implanted heart pump HeartMate II LVAS helped generate a 68 percent rise in revenue at its cardiovascular division, and it added 17 new HeartMate II centres in the quarter.
  • Looking ahead, the company now sees earnings of 54 cents to 59 cents a share and revenue of $302 million to $308 million for fiscal 2008. In August, it had raised its full-year outlook and had forecast earnings of 47 cents to 52 cents a share, before items, on revenue of $285 million to $295 million
No position

Bookkeeping: Taking Profits on AeroVironment (AVAV) "Cramer" Effect

I did not notice the performance of AeroVironment (AVAV) yesterday because so many stocks are now being whipsawed 10-25% a day up and down but it looks like the stock was mentioned by Jim Cramer on Monday's Mad Money and the stock has screamed higher - I am cutting the vast majority of the position and selling to Cramer nation and taking it down from a 1.0% stake to 0.1% near $36.

This is what kills me about the stock market - you can have an excellent small cap stock, with excellent fundamentals but until someone with a bull horn gets on a mountain top and screams about it, it can trade in oblivion for quarters or years. [Sep 16: New Position #2: AeroVironment]

As I think through the credit crunch (I have a good piece from Bloomberg coming tomorrow) - if indeed it is protracted - we know there is one bulletproof customer in the world who seems to spend like there is no tomorrow - the U.S. federal government. (for example in this morning's GDP, spending by government increased from +4% year over year two quarters ago to +6% this past quarter - I can only imagine what that number will be during the current quarter - take out the government spending and the faulty inflation assumptions and GDP would be far worse than the happy go lucky -0.3%). So as I survey the stocks who live off the government, obviously the defense plays stand out - in our focus group this means AeroVironment and Emergent BioSolutions (EBS); the latter has been an excellent performing stock in this horrid market. Both these names are over all moving averages. Because of course their customer spends... and spends... and spends... and never stops.

Anyhow this thesis of "the only safe customer is the federal government" would limit long ideas to a very few but it is what it is. So as much as I like AVAV I am going to hand off our shares to the Cramer lemmings and then try to get them back lower. In this market, I'm sure it won't take too long.

If the polls are right, then Barack Obama will be our next president. It’s news most aerospace and defense investors don’t want to hear. But not every company in that sector might suffer if the Democrats take the White House. In fact, Cramer thinks AeroVironment could do quite well.

AeroVironment [AVAV 34.75 0.99 (+2.93%) ] makes small, unmanned aerial vehicles or UAVs, which Obama supports. UAVs range in size from something a soldier can carry into combat to those closer to person-flown planes. And most often they’re far less expensive than the F-16s or F-22 Raptors the U.S. uses, and there’s no risk of losing human life.

This is a small, $580 million company (with a clean balance sheet, no debt and about $112 million in cash) that competes with giants of the industry like Northrop Grumman [NOC 45.64 0.57 (+1.26%) ] and Lockheed Martin [LMT 79.96 1.35 (+1.72%) ]. But CEO Tim Conver told Cramer Tuesday that “very well positioned” to compete in this space. AeroVironment four industry competitions, beating some of the largest prime contractors in the world to do it, and the company is the only supplier small UAVs to the Department of Defense. Plus, there’s a big pipeline of new products on their way to market.

There is only a small group of stocks that Cramer thinks can rally on that poll-predicted Obama win, and AeroVironment is one of them. He said this stock could jump “very quickly” after the election, so he’s bullish on AVAV.

Long AeroVironment in fund; no personal position

Bookkeeping: Cutting Across Board

The S&P 500 is butting up against the 20 day moving average which it did yesterday afternoon before being pummeled in the last 15 minutes - roughly the 960-970 range. To see a change in character I'd like to see a move back over S&P 985. Until then I assume all rallies will fail until proven otherwise. There is still some upside between S&P 960 and 985 but I'm will to give up that portion of the move for safety reasons.

With that said, I am taking another layer out of many positions and rebuilding hedges to the short side. One group that has been destroyed has been solar; First Solar (FSLR) put out a nice report last night and it seems people realize the world is not ending or that sector won't b e dead in 2009. Not that it helps much, because many of these stocks have lost 70%+ of value in past few months and this 10-15% rebound means very little in the big picture. Perception is reality unfortunately. With their debt loads and need to access capital markets this might not be the correct group to own right now but so many are trading at 2-4x PE ratios it seems obnoxious to sell down here; but I am cutting back. But it is not just this group; I'm taking profits in many names and cutting back long exposure.

Again if we can begin to stair step higher and not be so volatile I'll be happy to be bullish but we've made 15% on the index in basically 1.5 sessions. The market lacks any fundamental bent and is trading on emotion; as hard as it is to believe you can see fear turn to greed very quickly and a move over the Oct 17, 20, 21st intraday highs would probably be a trigger - that level is S&P 985. But for now I assume there will be many people who are happy to sell for less losses than they had on their books 3 days ago and that will create some overhang for the bulls. But in this market things can literally change in 5 minutes so we'll be flexible if sentiment changes. Apparently yesterday the market sold off 400 Dow Jones point based on a news report of 1 comment GE's CEO made at a dinner in Spain. Which shows you this market is nonsensical and not a place with any real support. But that must be balanced against the oversold condition on so many stocks along with a potential "double bottom" formation on many indexes. Put simply - who knows and in 10 minutes the whole complexion can change so we're limiting risk and willing to pass up upside for that.

Coal Earnings this Week

Many coal companies are reporting this week, and how much they beat or did not beat estimates are not the issue at these valuations and after such historic drops in stock prices. The main emphasis now is on future prospects, and the thoughts on 2009 and forward. We see a mixed bag of comments... again my main surprise here is at these valuations a cash rich foreign suitor is not coming in to buy entire companies outright. [Jul 18: Wilbur Ross Believes M&A Activity in Coal Will be Unprecedented in Next 12 Months] With the issues in credit markets it is hard to tell if that is the culprit or foreign companies are just being cautious.

I'm still a long term bull as I think the US dollar goes back to it's multi year trajectory (down) in the future, helping US multinationals (East Coast coal producers for example) and the same foreign markets will continue in their needs. Ironically if the US imposes stricter regulation on coal it could cause some impairment to production which should be beneficial to pricing. Also a lot of people simply don't want their kids to grow up to be coal miners so labor shortage seem to be quite striking in the industry.

But for now, until people can see a global economic pickup within 6-9 months, these global growth/commodity names can only be trading vehicles because institutions need to come in and provide a sustained bid. Prices for coal actually held up far longer than oil or natural gas but in the past few weeks as the credit crisis truly stalled everything, the spot pricing has been hit hard. Or it could be that hedge funds are liquidating what they can (see gold which should of had the move of a lifetime during this panic) - it's hard to tell how much of the price of anything hedge funds are involved in is liquididation and how much is true supply/demand characteristics.

Arch Coal (ACI) reported Monday
  • Strong coal demand fueled Arch Coal's profits in the third quarter, but as prices have started to soften the miner is planning to shutter some operations and it slashed its 2008 earnings guidance on Monday. Arch slashed its full-year earnings estimate to a range of $2.30 to $2.55 per share, down from $2.50 to $2.85. Analysts had expected $2.68.
  • Although Arch Coal’s third-quarter profit tripled on strong demand, the miner thinks turmoil in the global economy will weigh on demand for the rest of the year.
  • Natixis Bleichroeder analyst Jeremy Sussman said that Arch Coal (nyse: ACI - news - people ) has already signed contracts for about 35 million tons of coal for 2009 delivery at $18 a ton, above the $16 a ton many had forecast – a slight positive.
  • Sussman said that part of the problem is that the coal producers in the Powder River Basin, a region in southeast Montana and northeast Wyoming, didn’t see the run-up in coal prices that producers enjoyed in the East. Coal in the East is worth more because it has a higher heat content. Additionally, East Coast producers are also able to export coal more easily to Europe.
  • "Despite the significant decline in coal equity value since July, underlying coal supply-demand fundamentals remain positive and suggest to us the correction has been overdone," Steven Leer said. "We do think the anxiety of the global slowdown is creating or causing our customers to be cautious,"
  • Each ton Arch sold fetched on average $20.38, up from $16.02 a year ago but down from $21.04 during the second quarter. The company's operating margin per ton averaged $3.73, roughly double from $1.87 average a year ago.
  • Arch also estimates that 15.5 gigawatts of new coal-fueled capacity are under construction in the U.S. and expected to come online within the next four years, meaning more than 55 million tons of new coal demand annually.
Patriot Coal (PCX) and Walter Industries (WLT) reported Tuesday
  • Coal mining company Patriot Coal Corp. said Tuesday that it swung to a profit in the third quarter because of accounting adjustments stemming from its acquisition of a coal company during the quarter. The company again expressed disappointment in production from its Appalachian mines during the quarter.
  • Patriot, the third largest coal producer in the eastern U.S., said it earned $73 million, or $1.01 per share, for the quarter ended Sept. 30 compared with a loss of $39.5 million a year ago. Revenue rose 67 percent to $489.6 million in the quarter from $293.3 million a year ago. Patriot said it made $122 million in the quarter in purchase price accounting adjustments stemming from its acquisition of Magnum Coal Co. The adjustments reflect what Patriot said was Magnum's below-market sales and purchase contracts.
  • Production rose by 2.2 million tons to 8.2 million tons in the quarter, but still below the company's earlier forecasts. Earlier this month, Patriot slashed its production outlook by 1.4 million tons because of what the company said are common problems throughout the central Appalachian region, including a shortage of skilled workers, difficult geologic conditions, downtime from safety inspections and a delay in getting a permit for the Hobet mine.
  • In the last quarter, global financial markets have obviously become increasingly challenging. As a result, banks, funds and other financial institutions have been forced to liquidate their energy positions, including financial coal contracts, in order to generate cash. This has contributed to the approximately 25 percent decrease in over-the-counter traded prices for Central Appalachian thermal coal over the past three months. The API2, a traded financial contract for thermal coal delivered into northern Europe, decreased 40 percent as traders liquidated their positions. The Company believes the majority of sellers in the OTC coal market have been traders and financial entities, while, importantly, the majority of buyers have been coal producers and consumers.
  • Central Appalachian coal inventories of electric utilities are near five-year lows and down considerably from this time last year.
  • Globally, countries like South Africa, Vietnam, Russia and China are decreasing their exports of coal in order to supply domestic demand. Finally, tight credit markets will significantly increase the cost of and add constraints to borrowing money for development of new coal capacity in most countries, including the U.S. and Australia.
  • Walter Industries reported net income for the third quarter ended Sept. 30 more than doubled to $55 million, or 97 cents per share, compared to $24.4 million, or 46 cents per share, in the year-ago period. Earnings would have been $1.27 a share, but unusual items related to the financing and homebuilding businesses reduced that amount by 30 cents a share. Those businesses are slated to be separated from Walter Industries early next year.
  • "Despite recent cutbacks in global steel capacity, we remain on track for record earnings in 2008 and 2009 as our premium, hard coking coal remains in high demand," Chairman Michael T. Tokarz said in a statement.
  • Results reflect average metallurgical coal selling prices of $161.92 per short ton, an increase of 81.5 percent from the prior year, and includes new contract pricing on 1.1 million tons, as well as deliveries of 300,000 tons at rollover pricing from the prior contract year.
Alpha Natural Resources (ANR) reported Wednesday
  • Alpha earned $69.9 million, or 97 cents per diluted share, in the period. Alpha earned $8.9 million, or 14 cents per share, in the same period last year. Coal revenue climbed to $623 million, from $440.9 million a year ago, on the strength of metallurgical-grade coal prices.
  • Alpha offered little reassurance about the remainder of 2008 or next year, saying it is not reaffirming earnings, production and revenue guidance issued last July. "Issuing guidance at this time can't be done with any comfortable level of assurance and so it's just not prudent to do so," Chief Executive Mike Quillen told analysts during a conference call.
  • Alpha warned that labor shortages and government regulatory activities are hurting production at some underground mines and some costs are rising more than expected, including the price of coal purchased for resale.
  • Alpha's coal sales dipped slightly to 7.3 million tons in the quarter, compared with 7.6 million. However, prices that have more than doubled from a year ago boosted Alpha's profit margin per ton to $21.43 in the third quarter, from $9.95 per ton a year ago.
  • The company said it realized an average of $130 a ton on metallurgical coal sales during the quarter and $112.90 through the first nine months of 2008. Average prices are on track to be far higher next year. For 2009, Alpha has signed contracts for 5.4 million tons of metallurgical coal at an average of $194 a ton. Another 7 million tons of 2009 met-coal production remains unsold and unpriced, Alpha said. Recent price and production cutbacks by steel producers have left the market for that coal uncertain.
  • All of its planned thermal coal production is locked up for 2009. Approximately 62% of planned thermal production in 2010 -- or approximately nine million tons -- was uncommitted and unpriced as of October 13.
I'll miss Alpha Natural Resources (ANR) once its merger goes through - it had some of the most detailed earning reports out there.

No positions

Continuing Saga of Volkswagen

We are obviously not involved with this "greatest short squeeze in history" as Volkswagen is on a German exchange and I wouldn't touch something this random and crazy with your 10 foot pole but some interesting developments - first Porsche (which is trying to buy shares of Volkswagen) agreed to sell 5% of their stake to let some shorts cover. Already their investment might go down as one of the greatest ever at the prices they are going to be able to sell at.
  • Porsche Automobil Holding on Wednesday said it would sell up to 5% of its stake in Volkswagen AG to meet unprecedented demand for the Wolfsburg automaker's stock after arguably the biggest short squeeze in stock-market history.
  • The move's designed "to avoid further market distortions and the resulting consequences for those involved," Porsche said -- but laid the blame for this week's massive rise in VW shares squarely with the short sellers themselves.
  • The scramble for Volkswagen shares, already apparent during the last two months, intensified when Porsche over the weekend revealed that it had increased its equity stake in VW to 42.6% from about 35%, and more crucially, that it had options to buy another 31.5%.
  • Porsche shares vaulted higher, rallying 35% as the luxury automaker's market capitalization reflects just a fraction of the valuation of its VW holding.
  • The stake sale could lead to profits of roughly 1.5 billion euros, Commerzbank analysts said, estimating that Porsche's strike price was 100 euros and that the VW shares are sold at 200 euros each. (nice trade!)
Second, and more interesting are some of the names involved on the short side - again some of the "best of the best" in hedge fund world are getting blown up on this trade. It is really amazing to see these same names in so many stories of similar ilk - SAC and Highside are among the largest and Greenlight is run by a respected value guy who is supposed to be conservative. Live by the sword, die by the sword I suppose. Goldman Sachs (GS) and Morgan Stanley (MS) both denied they were involved in this but their stock prices were hammered Tuesday before the denials - somehow I think where there is smoke, there is fire especially with Government Sachs. If you see so many of your customers in on a trade - I doubt as a prime broker your trading desk is NOT piggy backing. But that's ok, our tax payer money will make sure they offset any losses at the banks.
  • Hedge funds around the world absorbed a punishing blow Tuesday, as soaring shares in Germany's Volkswagen AG created one of the biggest losses from a single bet in recent memory.
  • The funds are expected to face billions of dollars in losses, according to prime brokers familiar with the positions, because they were wagering that VW shares would fall. Instead, shares of the big German auto maker soared 82% Tuesday. VW shares are up 348% over the past two days and 267% in the past month -- as short sellers rushed to pay ever-higher prices for shares they need to exit from positions.
  • Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital, according to people familiar with the funds.
  • With VW shares pushing astronomical levels, some hedge funds are calling foul. They are accusing Porsche, already a 42.6% VW holder, of misleading them about its intent to gain full control of VW. (hold on while I shed a tear here.... kind of reminds me of the investment banks crying foul on naked short selling; something they and their clients benefited from for years - but when it was turned on them they cried about it) On Sunday, Porsche disclosed it held so-called cash-settled options to potentially acquire another 31.5% of VW, which could give it a near-75% stake in the German auto giant. Many funds had been focused on Porsche's previous statements, which they say suggested Porsche would not make such a move.
  • Some of these firms say they are writing letters to regulators or are considering doing so, asking that Porsche's actions be examined. (hedge funds to regulators: "we demand a bailout")
  • "The biggest problem is that Porsche appears to control over 70% of Volkswagen and didn't have to disclose that fact," a move that would have to be disclosed in most developed markets, says Max Warburton, an analyst at Bernstein Research. "Under German law they don't have to disclose what they're doing, but earlier this year they put out a press release denying speculation that they would build" their Volkswagen stake to these levels.
  • Although investors in Germany must disclose when they accumulate a stake of as little as 3% in a public company, they aren't required to report certain options that track a stock's movements but don't give a holder an underlying vote. (I just find the kettle calling something black hilarious - "lack of public disclosure" claims by hedge funds? hah - if the rules are too vague then don't play on that jungle gym)
Somehow karma appears to be involved here....

Wednesday, October 29, 2008

CNBC: U.S. May Back $600 Billion on Troubled Home Loans

Some may say "well they finally got around to addressing the mortgages themselves" but lost in the summer and fall of bailouts - people are forgetting the U.S. already committed $300 Billion to a home owner bailout this summer. It was supposed to help 400,000 people - you never really hear about that program anymore - I wonder where that $300 billion disappeared to. I tried to search on the blog via term 'bailout' to find the post that explained this summer's program but too many entries were returned; if that is not a sign of the times I don't know what is.

So this one is going to be sold as a bailout to home owners but effectively its a bailout for mortgage holders - i.e. those stupid enough to buy these "AAA" rated instruments as nearly risk free ways to get premium income. Really besides being unfair to those who did the right thing as home owners, it's not going to work for a great many people - many who got homes in this era should never of gotten them whether at 5% interest or their newly ballooned 12% interest. I read this past weekend that under current loan modifications the mortgage owner reverts to default within months 1/3rd of the time. So we're just doing more kicking the can down the road and wasting all of our money doing it. So we'll "bailout" hedge funds, banks, investment funds by backstopping these mortgages under the wishful thinking that the vast majority will stay in home (as unemployment ramps in the next year) and keep paying and we'll just take minor hits; when the reality is we're going to be on the hook for some major losses instead of the original investors as people who are going to default, in most cases will do at any rate. That's my take anyways - whatever cost is associated with any program I'm tripling.
  • US regulators are working on a new federal program that could provide government guarantees for up to $600 billion of home mortgages to help prevent foreclosures, a source familiar with the discussions told Reuters on Wednesday.
  • The plan, being hammered out by the Federal Deposit Insurance Corp and the U.S. Treasury, could provide guarantees for up to 3 million at-risk mortgages, said the source, who spoke on condition of anonymity because the program is still being discussed.
  • The plan would provide federal guarantees to entice lenders to ease the terms of troubled mortgages—something that lenders have been reluctant to do on a large scale so far. The expected cost to the government would be a fraction of the value of the guarantees, as the intent of the program is to prevent defaults on home loans. (yes, except when the home loan does default - then whose on the hook - you guessed it. So that "fraction of the cost" turns into "the full cost" very easily. But you can't say that when you are selling the program)
  • The program would be managed by the FDIC and would be available to banks, savings and loans, investment funds, hedge funds and other mortgage holders, the source said. It would encourage the lenders to rewrite the distressed mortgages, converting them into affordable plans. (#1 will taking a loan from 9% interest rate to 6% really make it affordable to most? #2 as home prices continue to fall, will all these people who are the main target - the 2003-2007 crowd of mortgage holders - want to stick around in homes where the mortgage is in excess of the home value? #3 so we're going to bail out investors as well? because in 2005-2007 in many of the high appreciation states ala California, Arizona, Florida anywhere from 25-40% of purchasers were investors #4 if you plan to rewrite the value of the mortgage down to current prices, then what happens when prices fall an additional 10%? A new rewrite i.e. new losses for government? #5 - oh nevermind, no one listens)
  • The source said that under the program, the government guarantees would include second loans on homes, such as home equity lines of credit, so that lenders would not lose any money in a mortgage modification. (that's just scary - those with second loans and HELOCs are among the most extended and likely to default by inference that they took 2nd loans and HELOCs out in the first place)
This actually might help credit markets because it basically backstops CDOs (if it were large enough) but it's not going to help a lot of the people in the program in my opinion, other than to forestall the inevtible for 3-9 months. But that's ok - as long as the investors are guaranteed we're all happy here.

Bookkeeping: Taking some Luminex (LMNX) Profits

The casino action continues - I added to Luminex (LMNX) Monday in the mid $14s. It fell yesterday to the mid $12s. Today its north of $17. Nonsense - all of it. I'm cutting my 1.9% stake down to 0.4% while watching in shock and awe at the moves out there. Tomorrow it could be up 20% or down 20%. Depends if the marble goes into a red slot or black.

We mentioned Las Vegas Sands (LVS) yesterday; it is up 100% today. How appropriate that a casino stock acts like this in a market that has turned into a literal casino.

Long Luminex in fund; no personal position

Ultrashort Emerging Markets (EEV) Should Come with a Warning Handle

Ultrashort Emerging Markets (EEV) should have a warning label on it; we were "fortunate" to have a 0.1% stake in it yesterday but going back to yesterday's discussion about how asset allocation is everything - just having this hedge on yesterday alone can cost you nearly 40%. I routinely carry this as a 3-4% stake. You can see it's doubled earlier this month in under 2 weeks, than in the past few sessions nearly been halved. Yowsers.

I'm spending a lot more time with these ETFs rather than individual companies since everything is so random on an individual company basis; and as I look what to rebuy to begin rehedging I was shocked to see the price back in the $110s (or $100s) when I saw it yesterday in the $170s.

p.s. maybe we'll call this the Volkswagen bottom. It has been so unrelenting easy to be a short for so long - for once something blew up in their face on a massive scale. Too soon to tell.

Long Ultrashort Emerging Markets in fund; no personal position

Apple (AAPL) Surging on Talk of Share Buyback

Some interesting comments on the blog of late debating the merits of buying stocks with dividends versus not. I don't have a problem buying stocks without dividends since many stocks I focus on are relatively young and in high growth states. In markets like this they are punished since the growth is questioned; but if they have "must have" products or in highly defensible niches that fear is usually very overblown. The other issue is many companies don't like to issue dividends even if they can (see Microsoft for a long time) because it means they've turned from a growth stock to a value stock. So more important than actually spitting off dividends is the ABILITY to spit off dividends (i.e. high cash on balance sheet and positive cash flow).

Stock buybacks have interestingly mean almost nothing in this horrid market - usually this has proven to be a great defense but the selloff is so relentless stocks with buybacks are punished just the same as those without. But in this respite in the market, Apple (AAPL) is surging on reports they might finally deploy their $25 billion war chest. This company is a splendid cash cow as the chart shows. Right now about 1/3rd of its market value is cash.
  • Apple is sitting on a huge cash reserve — $24.5 billion as of September and growing at the rate of $8 to $10 billion a year – that’s doing almost nothing for it.
  • The money is earning about $1.55% interest after taxes, according to a report issued Wednesday by Bernstein Research’s Toni Sacconaghi, at a time when the company’s stock is trading at a unusually low (for Apple) multiple of 15 times earnings.
  • “Mathematically,” he wrote “share buybacks boost EPS only if a stock’s P/E multiple is lower than the reciprocal of the after-tax interest rate earned on cash.”
  • Apple has been trading at 30 to 40 times earnings in recent years, which Sacconaghi believes is one reason Apple has not initiated a stock repurchase program in the past 5 years.
  • But today, according to Sacconaghi’s model, Apple is trading at about 18 times his fiscal year 2009 earnings estimate (and about 13 times earnings using non-GAAP numbers).
  • Ten billion dollars spent purchasing Apple share, he estimates, would boost the company’s (GAAP) EPS about 4%. A $20 billion buyback program would boost it about 9%. And if the $20 billion program were front-loaded — completed in the first fiscal quarter of 2009 — the company’s EPS could jump as much as 15% (or $0.75 a share).
  • According to Sacconaghi, better than the alternatives: making a major acquisition, paying a substantial dividend or continuing to let its cash horde grow
  • A big dividend — say, 5% — would consume only about half Apple’s cash flow, and a special dividend would dilute Apple’s earnings growth too much to please shareholders.
Some combination of a dividend and buyback would be nice, but again this is an analyst speculation - nothing else.

Long Apple in fund; no personal position

Jim Rogers on Bloomberg

More Jim Rogers - more sense. 10 minute video. Still bullish on agriculture. Still bullish on gold. More comparisons of US to Japan. Warning of massive inflation coming down the pike...

[Aug 22: Checking in with Jim Rogers Part II]
[Aug 21: Checking in with Jim Rogers Part I]
[Apr 8: More Jim Rogers]

Mark Cuban: Is this the New Normal?

Mark Cuban is known by most as a very rich guy who owns the Dallas Mavericks. He actually had the timing of a lifetime as he sold a company called at the height of the internet boom to Yahoo (YHOO) for a cool $5 Billion. Literally a year later it would probably of sold for $100 million. Right place, right time. But he is also a serial entrepreneur and a very bright guy; most guys who have blogs are ;)

Cuban has an interesting post up on his blog asking if "this" is the new normal? Some interesting comments that dovetail some of what we've been talking about here. The portability of money and "attention span" of investors is something that I do believe has changed things permanently. Anyone who has time should go read the Yahoo Finance Message board for CGM Focus (CGMFX) which is a mutual fund - there is day to day analysis on what manager Ken Heebner SHOULD or SHOULD not buy, what he is doing WRONG or RIGHT, and all the focus is on short term results. When someone with a sterling 20 year record is constantly doubted, really there appears to be no way to please the attention deficit masses. Other people are out there swing trading mutual funds - moving in and out on weekly basis from one to another within a family. If you have 3 bad months, people flee en masse to the next hot thing. It appears now we see the same thing on the institutional side based on the hedge fund situation. The implications of this are vast. Everything is about the near term - if you have a bad month or bad quarter you can lose a lot of assets as a money manager. Almost no one cares about the long term it appears - so many managers are rushing into the same trades and trying to squeeze return for the very short term (month or quarter). By long term I mean "2 years", not 5 or gosh sake 10 years. But 1 year of underperformance vs peers effectively kills a business now. You simply cannot blame the managers in my opinion for this; they are catering to their customers.

The same customers who I see on the retail side, many of whom never even open up an earnings press release - they read the headline and then make a "decision"; if the stock doesn't hit some magical whisper number, the lemmings sell en masse. If a company dares to think for the long run and spend money on Research & Development, in our current thinking we punish them because that means EPS will be lower than it could be in the short run; even if its in the best interest of the company to spend money to innovate for the long run. The customers demand "always positive" results - how many hedge funds can sit and buy what they believe is under valued merchandise and sit on it for 3-5 years waiting for the market to see it's value? Same in mutual fund world. So the "customer" is driving this change - yet another aspect of our Ritalin happy, video game mentality of instant gratification that has seeped into all forms of life.

Interesting fact I heard on CNBC last night - only 6% of Japanese are invested in their stock market - in Germany and France it's 20%. Due to the 401k plans and the like in the US it is well over 50%. Which is why the stock market cratering (again - twice in the decade) is much more damaging to the US consumer (with his 0% saving rate) than in other countries; much less of their populations are affected. It will be interesting to see if this number materially changes over the coming decade.


“Past Performance is No Indication of Future Results”. Its a statement attached to every financial salespitch ever offered. So why is it no one believes it ?

Turn on CNBC, Fox Business, Bloomberg, and every other comment from the “experts” mouths are “historically when the Dow ….fill in the blank….” or “for the last X years, every time the market did X, then Y has happened within Z months”

Folks, it is different this time. Until this past year, at no other time in the history of the US Markets has there been Investment Banks investing for their own accounts to the tune of 30 or more to 1 leverage.

At no other time in the history of the Markets are there 17k mutual funds and more than 10k hedge funds. All competing with each other for the right to make a ton of money off of your money.

At no other time in the history of this country did savings fall as far below zero pct of income

At no other time in the history of this country were net effective interest rates as far below zero

At no other time in the history of our markets have the words “blue chip” completely lost their meaning.

At no other time in the history of our markets has the money of consumers been so portable and movable between hedge funds and mutual funds. Which means that at no other time have mutual funds and hedge funds been so susceptible to redemption runs.

At no other time have consumers been so in the dark about what is happening with our funds. At least George Bailey could see the line at the bank and know what was happening. We as consumers have zero transparency as to whether or not there is a run on our funds, so we run to take out our money first, just in case. The result is a virtual run on the fund where we hold our money, except that no one knows about it but the fund itself, and they aren’t going to say a word for fear of making it worse.

At no other times have financial engineers and investors been so in the dark about how bad the runs on funds have been, so we sit on the sidelines, dribbling in cash, not wanting hedge and mutual funds to dump their shares into our bids.

At no other time have their been 3 financial news networks and thousands of websites providing so much financial information and opinion. The sum of which has definitely lead us into a situation of “Paralysis by Bullshitalysis”. Everyone is afraid to buy. Everyone is afraid to sell or short. Sales forced by de-leveraging is the catalyst for the market. However, there are so few buyers, the de-leveraging sales are taking forever.

Who knows what the new normal is. No one has any idea what is going to happen in this market. NO ONE. Personally, I am completely hedged. I bought puts, sold them. Sold Puts, bought them back, then decided to hedge every long dollar and then some with big puts on the market. This allowed me to be protected on the down side, and tip toe on the long side. As stocks go down, my hedge allows me to buy more of the stocks I like. If the market takes off on the up side, hopefully my longs will more than cover the cost of my puts. If the market does nothing. I’m stuck right where I am, with my puts losing time value every day.

Maybe it will work, maybe it won’t. What I do know is this, everyone is a genius in a bullmarket. The last 5 years, that wasn’t a stock market. THIS is a stockmarket. This time it is different. This may just be the new normal.

Manitowoc (MTW) - Cranes are an Endangered Species

There used to be a joke way back... well this summer - what was the most common bird in the Middle East? The Crane. This was due to the construction boom happening [Jul 12: Where is your Gas Money Going?] [Feb 27: $2 Trillion of Petrodollars Needs a Home this Year] ... the stock that engendered the crane boom was Manitowoc (MTW). Something tells me cranes were the favorite birds of hedge funds as well - the stock is down 80% since mid June. Today they dared to reduce 2008 estimates by 5%, and the stock is down 14% as reward; on top of the other 70% it had already fallen.

You'd think it was an unprofitable debt laden piece of trash. Not so much.
  • The company also lowered its profit outlook for the full year to a range of $3.15 to $3.25 per share. Analysts expect $3.44 per share in 2008.
At some point in latter 2009 there is going to be some huge money to be made in being LONG global growth stocks as China reflates its economy and brings along greater Asia - and European countries that did not follow stupid US financial policies (looking at you UK and Spain) will begin to pick up as well - remember our thesis; the world will lead the U.S. out of this mess, not vice versa. We just need to make sure we have capital left by the time that time comes around.

But for now, yet another 3x earnings darling. Save the cranes.

No position

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