Tuesday, April 28, 2009

The Latest Hugh Hendry; and Jim Rogers in Time

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First, let me start off with a short interview with Jim Rogers in Time magazine (follow the link to get the whole thing) I just grabbed these two blurbs since much of what was covered, we've already discussed - as always Rogers has a lot longer term view than today's average investor

(1) The market is up from its lows and the most recent unemployment numbers are slightly better; what do you say to people who say, 'Well, we're nearing bottom on this'?

I think we've seen a bottom. I don't think we've seen the bottom. If America's determining its policy on whether the stock market is up for a month, America's in worse shape than I'd realized. We could have a rally for who knows, six months, a year, we could have a rally for a while after having had the kind of collapse we did. In the '30s the stock market rallied frequently. But in the end it was still the Great Depression.

(2) Do you think this crisis is just going to solidify the advantages of China and these other Asian and Southeast Asian economies?

Well, again, throughout history, the center of the world has shifted to where the capital is, where the assets are. You don't see any period in history where things are shifting to the debtors, and America's the largest debtor nation in the history of the world. Unless something's different this time, unless the world's changed very very dramatically, the center of the influence, the center of power, the center of the earth, the center of the globe, is going to be shifting towards Asia, because that's where all the money is. Have you ever heard of anybody saying, "Let's go to where all of the debtors are"? It just doesn't happen that way.

****************

Second - let me repeat I am amazed how CNBC Europe (and Asia) appear to spin in completely different axis that BubbleVision aka CNBC America. In this opening salvo, the anchor reads an email to Hugh Hendry - look guy, anyone who followed your advice of late is down 30-40% based on what you recommended when we last had you on.

Do we EVER hear that on US version? No, we hear gleeful backslapping and chortling... so you've been wrong 9 of the past 11 times you appeared but (breathlessly) we await your next pearls of wisdom. (although they never state the part about being wrong 9 of the last 11 times) And whatever you say, we'll pass it along to our viewers with confidence and rigor! Because you're a pundit, and we celebrate you. Buy stocks.

Just a short 3 minute video here with Hendry (p.s. his response to the email is CLASSIC Hendry!); again I don't necessarily agree with all he says (in fact sternly disagree with some of it) but I always like to hear viewpoints of bright minds. [Apr 16: Hugh Hendry, Citiwire Interview] [Mar 20: Hugh Hendry of Eclectica Asset Management is Wickedly Good] I love his comment about the GDP accounting done by Madoff. We showed in 2008 how the US "keepers of data" were "adjusting" things because we could not be allowed to have a "recession" before the election. For example one quarter in 2008 (I believe 2nd?) as oil was $140, food prices were flying, every commodity was at generational high, along with the normal inputs jumping - we had one government agency that was reporting 4%ish inflation WHILE the "keepers of GDP" said inflation was 1%ish and lo and behold - we added 3% to GDP. Magic!

Almost every government data report has now been massaged over the years, as we showed multiple times in 2007 and 2008 (I got tired of pointing it out, since as long as we all belief in myth we can trade off of it). Bottom line - you cannot handle the truth, so here are the "adjusted" numbers which don't compare apples to apples to what we used to tell you in the 60s, 70s, and 80s. Not much different than what we do with earnings nowadays - just exclude all those 1x expenses (that happen every quarter) and away we go. We're all Madoffs in our own way.

*************

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn "still has a way to run," Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC Tuesday.

World gross domestic product looks overestimated, because global consumption has been based on debt, and this cannot continue, Hendry told "Squawk Box Europe."

"In the last five weeks we had a rally in risk. Big deal," he said.

"I am fearful of the surplus countries, like China and Germany. I think GDP has been overstated," Hendry added.

"My notion was, you had Bernie Madoff doing US GDP accounting." China "built capacity to serve a world that doesn't exist. We're drowning in capacity. The idea to propose we build more… that ain't a remedy," he explained.

Although companies' results beat forecasts, this is mainly because they marked their expectations too low, but their outlook is grim, according to Hendry.

"I believe the downturn in the global economy still has a way to run. We've only been given evidence of further deterioration," he said.

The rise in bond yields shows that the yield curve is flattening, pointing to more economic weakness ahead. What it reveals is that it's terrifying. This rise in bond yields shows… the private sector is countering the Fed and is tightening policy," Hendry said.

During the Great Depression, there had been rallies in the stock market, but stocks generally fell, Hendry reminded, explaining his bearish stance on stocks. He added that nobody can predict where the bottom was for the stock market.

"Monkeys spend all their time picking bottoms. I refuse to pick bottoms as I don't live in trees," he said.

******

Two other commentaries (no video) here and here

  • "As a society, we have taken debt… to almost four times greater than the economy. That's unprecedented. And it's a turning point," Hendry said. "Governments around the world want some inflation, and they are targeting inflation. It's one thing to target it and another to achieve it. Who wants to take on debt today?" Because of this, the economy will continue to contract and commodities such as oil are not a good bet either, according to Hendry.
  • Bonds are not a good buy for the summer, as they are usually an investment for the second half of the year, and investors should be "patient and scared" and, at the end of debt deflation, may get "fantastic values".
  • Gold has behaved as a risk-free asset, but Hendry said he hopes for a correction in the price of gold to around $600 to $700 per ounce, from the current level of $898, to start buying. "I'm not saying it will happen, but stranger things have happened," he said. "Gold investors have had it easy. I expect gold to get a bit more uncomfortable for the people who hold it in the short term." "The intellectual case for gold is very strong. Governments are printing money, but only God prints gold and that takes billions of years."
The 2nd piece is interesting and thought provoking...
  • "When I think of QE I think about the quantitative theory of insanity. This is an idea from the British writer Will Self who says there is a fixed portion of sanity in the world at any one time. So as one group becomes more sane, another group becomes more insane. In our case, as the Fed and the BOE have become more sane by printing money the so called gurus like Soros and Buffett suffer a deficit of sanity. They are saying the actions of these central banks will lead to inflation. I contest that.
  • The central banks are replacing the dollars and pounds destroyed in unprecedented amounts by the recession. I am a friend of the central banks – they understand the history of the 1930s and are trying to prevent us returning there. This destruction of dollars and pounds is creating a scarcity of money. We are losing dollars and pounds from the system.
  • Perhaps the real question is whether the central banks should be even more aggressive. The Fed is creating $2 trillion, but maybe they should be creating $10 trillion. I don’t think 2 is the right number. Based on the Taylor rule on employment and inflation, the Fed's own forecasters think interest rates should be at minus 5. That would imply a level of money creation at $10 trillion.
  • The private sector has got it wrong. The private sector is refusing to spend and that is going to have the effect of making money even more scarce. That will push us closer to depression. That is why I say the central banks are our friends; they are trying to help the economy recover while the likes of Buffett are arguing against these actions. I think he is wrong."

Bookkeeping: Covering Most of iShares Barclays 20+ Year Treasury Bond (TLT) Ahead of Fed

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I am covering almost my entire short against iShares Barclays 20+ Year Treasury Bond (TLT) ahead of the Fed meeting tomorrow. We spoke about this instrument in our weekly round up

I'd like to talk about bonds but this market is completely out of the hands of supply /demand - the Federal Reserve has made this their plaything. But the market has started to make the Fed unhappy and prices are faltering, causing yields to begin to rise. The all important 3% on the long bond is the line in the sand - each time we get there Bazooka Ben says no more! We can't have mortgage rates go to "unnatural" levels like say ... 5.4%. So I'd expect trench warfare to be announced Wednesday to get this to "bend" to the will of the Federal Reserve. Because that is how central planning works.

If I knew the Federal Reserve were not involved, I would be piling into this short hand over fist, but we now have to learn to trade under the USSA regime. On the chart below you can see the huge reaction 6 weeks ago when Uncle Ben announced quantitative easing; I want to avoid that in case he comes with a bigger bazooka tomorrow - so I am going to lock in my gains in the $99s - I'll keep 5 shares around just as a holding position.

This is not a fast money trade - but this will be a position we'll be holding for years as our belief is the massive amount of debt the US is unloading upon the world will require higher and higher rates. But that's logic, and supply/demand - things that used to work in the market. Now we need to compensate for the other factor: The Not so Invisible Hand. What "it" does is unknoweable. We've been shorting around $104 and covering around $101s in multiple iterations - slow, boring but it's been working. Now we've firmly broken out of the "range" as noted this past weekend.

Ironically, I've chosen the much more conservative route of shorting iShares Barclays 20+ Year Treasury Bond, rather than being long Ultrashort Lehman 20+ Year Treasury (TBT) which was a position we held in the old tracking account (that did not allow shorting). I haven't done a study to see how this Ultrashort does in terms of losing performance over longer periods of time, like all the other Ultrashorts do - but one day when I find time I need to sit down and do it.

If you are newer to the blog and want further details on the longer thinking behind this see [Nov 21, 2008: Bookkeeping: Initiating Ultrashort Lehman 20+ Year Treasury]

Short iShares Barclays 20+ Year Treasury Bond in fund; no personal position

Bookkeeping: Some Selective Purchases

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I am hoping the market itself sort of calms down and stays in a relatively wide range (although tomorrow at 2 PM will provide the normal nonsense knee jerk reaction to Fed announcement) and we can perhaps get back to stock picking for the first time since summer 2008. That said, I've been saying that for the better part of a year... but it almost feels "normal" at this moment.

Fidelity National Financial (FNF) was down about 3% after hours on the first blush on earnings but obviously my blog entry turned the tide ;) [Fidelity National Financial Misses; Underlying Metrics the Real Story] It is now up 6%, I added a bit this morning and I think the earnings story here should be powerful as we move forward. When your top problem is a flood of business is coming your way, and you are having a hard time dealing with it... that's a good thing.


First American (FAF) reports on the 30th and usually I don't bulk up ahead of earnings but I am going to buy some portion back of what I sold ahead of the FNF earnings... essentially FAF is a smaller version of FNF and won't have the acquisition noise.

I am also adding to Allegiant Travel (ALGT) - I didn't add yesterday on the big dip; some risk that the swine flu will accelerate and cause more damage but ALGT is not an international player so as long as the US situation does not get too whacky it should be ok. I bought some near $50 and continue to find this name dirt cheap at just over 10x earnings - there was what appeared to be a dilutive offering last week, but a reader commented these were not new shares but simply insider selling i.e. converting non float shares to future floated shares. In that case it is not dilution like I thought.

I have and continue to like Priceline.com (PCLN) - it was hit on the swine flu situation and I almost pulled the trigger but with earnings on May 11th I decided to wait. So far this earnings season being cautious on earnings has left some good profits on the table so this might be another one. [Feb 19, 2009: Priceline.com Impresses on Earnings] [Dec 19, 2008: Priceline - Back on my Radar]


There are some shorts I am eyeing but it is difficult to pull the trigger when every dip is so aggressively bought. They have to be done with such short durations that it is almost not worth it at this time; so I am mostly just watching. The Chinese large caps (US listed) continue to lag as has been the case (as we've noted multiple times) the past 2 weeks.

Looking through the list of names of interest we presented [Earnings of Note Monday-Tuesday]
  1. We said Office Depot (ODP) was the flier of the week as a sub $3 stock, it is up well over 20% today as they stated nothing much more than we plan to stay in business. And of course they beat lowered expectations even as small businesses across America shut down.
  2. Northwest Pipe (NWPX) is a small cap water infrastructure play - I didn't see a great report but great is not needed in this type of market - the stock is up nearly 15%.
  3. Under Armour (UA) is up nearly 15% on a nice surge in sales (new footwear lines) but profit up only a tad. Good enough in this market.
  4. Lazard (LAZ) - a peer to our Greenhill & Co (GHL) disappointed and is down 7%; I am not a big fan of Lazard but the market took up all these boutique firms on the same thesis. GHL is holding in there quite well considering the "student body left" environment at flat on the day - that is assuring. As I wrote when I started Greenhill [Apr 8: Bookkeeping: Starting Greenhill & Co] Lazard is the cheapest of the peer group I was looking at, but also had the worst chart. There is usually a reason for such things
  5. Traders continue to pile into restaurants as if they are internet stocks circa 99... Buffalo Wild Wings (BWLD) surging ahead of earnings tonight. Again, we are almost at the point where we will soon see "sell the news" reaction as expectations are beginning to get out of hand in casual dining - not sure how many times the same old stocks can rally on the same "surprise". [Apr 23: America's Hottest Sector - Casual Dining]
Dendreon (DNDN) publishes a more detailed analysis of their data around 2 PM today - the stock continues to fly so I assume "those in the know" know it's going to be good. [How One Reader Found Dendreon]

Outside of that I am seeing a lot of interesting activity in low priced tech/telecom stocks - the bar is so so so low - even Tellabs (TLAB) is a hot stock again. With the cash horde in the larger cap companies a lot of small / medium cap names are being tossed around by traders as "the next acquisition". Ciena (CIEN), a former holding, was the hot name of the day tossed around yesterday due to call buying en masse.

Long FNF, FAF, ALGT in fund; long ALGT, FNF in personal account

U.S. Steel (X) Ugly. Way Ugly.

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Not sure how to find a green shoot in this mess from US Steel (X) - I am sure there is one somewhere along the lines of "it can't get worse". If traders follow the Alcoa (AA) model from about 2 months ago, where they said just about everything bad one could ever imagine, AND priced a secondary - you should be buying X hand over fist. Because George Costanza runs the market. (I am not being facetious)

They lost $3.84 vs analysts expectations of $1.69, revenues fell 47% year over year. Order rates falling off a cliff, prices falling off a cliff. They don't see anything good happening in Q2 thus far (i.e. no magic words of "stabilization"). They cut the dividend, and are negotiating on covenants. On the bright side they are hitting their retirees health insurance - in 2 America's (corporate versus human) that's a great thing. Remember, we are vying for the "worker less" economy - that helps corporate profits. Aside from improving profits, the jobless can spend more time shopping (i.e. driving the US economy) - we all win under this scenario. So all in all this string of news can only mean one thing... recovery is imminent and green shoots are flowering throughout the steel industry. Buy US Steel in huge quantities because the market looks ahead and see the recovery that the CEO cannot.

Via AP
  • United States Steel Corp. posted its first quarterly loss in more than five years as the recession pinched demand for the metal, and the company announced steps to cut costs and raise capital including deferring contributions for retiree health insurance.
  • The results were even worse than Wall Street had expected, and the company predicted another loss in the second quarter. Pittsburgh-based U.S. Steel said sales tumbled 47 percent to $2.75 billion from a record $5.2 billion a year earlier. The huge steel producer said Monday it lost $439 million, or $3.78 per share, in the first three months of the year. That compared with net income of $235 million, or $1.98 per share, a year earlier. Analysts expected a loss of $1.69 per share on sales of $3.14 billion, according to a survey by Thomson Reuters.
  • The company said it would reduce planned 2009 capital spending by $330 million, slashed the quarterly dividend to 5 cents per share from 30 cents per share to save $116 million a year, and reached agreement with the United Steelworkers to defer up to $170 million in required retiree health and life insurance trust contributions.
  • U.S. Steel also said it planned to offer 18 million shares of stock and $300 million in senior convertible notes and use the proceeds to repay a $500 million three-year loan due next year. And it said lenders had agreed to eliminate financial covenants from a revolving credit facility and term loans. (that is probably the only real positive from this gusher of bad news; again I find it curious once the government got into the banks how all these covenants are being renegotiated left and right - I am sure just happenstance)
  • "We continue to face an extremely difficult global economic environment," said Chairman and Chief Executive John P. Surma. "We expect an operating loss in the second quarter as our order book remains at low levels" and plants continue to incur carrying costs. Surma said the troubled state of the automotive and construction industries made it difficult to forecast "beyond a very short horizon." (remember, only the stock market in its "Oracle like" nature can see beyond the short term - CEOs who live and breathe business every day have no idea compared to the "wisdom" of the market)
  • However, the company said it would get some relief in the second quarter from lower raw-materials costs, sales of carbon dioxide emissions allowances, and savings from consolidating European raw steel production at one plant in early April.
  • Industrywide, shipments of steel from U.S. mills fell 52.4 percent in February compared with the same month last year, according to an industry trade group. Mills have turned down production to less than half their capacity. (all together now folks: "it can't get worse" "the 2nd derivative improvements we will soon see - i.e. it will get worse less quickly - are worth at least 200 more S&P points")
  • Last week, Nucor Corp., another major U.S. steel maker, reported its first loss ever and forecast an even bigger loss for the second quarter. Nucor executives said conditions were the worst they had ever seen. Steel demand in the U.S. is “virtually non-existent,” Nucor Chief Executive Officer Dan DiMicco said after his company announced the company’s first quarterly loss last week. (again repeat after me: "it can't get worse than the worst they had ever seen - and glimmers of hope are emerging via green shoots")
Via Reuters
  • "Certainly the share issuance is a dilutive factor," said Luke Folta, analyst at Longbow Research. "With the earnings estimates that were out there, certainly no one had a high level of confidence in the numbers. People had to somewhat expect the dividend cut."
  • "We anticipate that structural change at the firm may be necessary, such as the sale of some assets or the possible permanent closure of some facilities," said Tony Rizzuto of Dahlman Rose & Co. (good, get rid of those pesky humans - they just cost money)
Via Bloomberg
  • Steel industry conditions are very bleak,” Chuck Bradford, a metals analyst at Bradford Research Inc., said today in a telephone interview. “Whenever you have to cut back on operations, a lot of the costs continue, so your costs go up dramatically on a per-unit basis.”
  • Moody’s downgraded U.S. Steel’s senior unsecured debt to Ba3, three levels below investment grade, from Baa3, the lowest investment-grade rating. "We do not see market conditions improving in any meaningful way and do not expect U.S. Steel's performance for the balance of 2009 to materially improve over the first quarter, although actions being taken to reduce costs could contribute to marginal improvement in the overall cost position," Moody's said.
  • The average price of hot-rolled steel sheet, the benchmark product used in cars and appliances, fell by more than half to $471 a ton in March from a record in July, according to Purchasing Magazine.
To end... I must once more remind you... CEOs do not know their own business; the stock market knows better so please ignore quotes such as this
  • "We sure hope things improve, but we don't have anything today that tells us that," Chief Executive Officer John Surma told Wall Street analysts on a conference call. "No one really has much visibility."
No one, but stock market speculators Mr. Surma.

No position

Jacobs Engineering (JEC) Disappoints "The Street"

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An adverse reaction this morning to former fund holding the Jacobs Engineering Group (JEC) earnings report. It looks like they met expectations for this quarter but cut the full year - it is sort of ironic really; they are doing far better in sum total than many companies jumping 20,30% on earnings but they did not lower the bar to such an extreme level as many of those companies. Such is the way of the market. If the globe is recovering this is the type of company that should start seeing their long term projects (backlog) start to pick up. This reaction is especially bemusing because all the world's hopes are on (a) government backstops and (b) government infrastructure projects. Fluor (FLR) and Jacobs Engineering (JEC) are the best of breed names with the broadest portfolios so I'm keeping my eye on them for "green shoots".

Via Reuters
  • U.S. construction services firm Jacobs Engineering Group Inc (JEC) posted a higher quarterly profit, but cut its 2009 earnings forecast, even as its backlog for orders grew 2.5 percent. Jacobs slashed its earnings estimate to a range of $3.10 to $3.50 a share, from a prior forecast of $3.55 to $3.90 a share.
  • For the second quarter ended March 31 2009, the company earned $109.3 million, or 88 cents per share, compared with $99.3 million , or 80 cents a share. Revenues rose about 12 percent to $2.98 billion from $2.66 billion.
  • "While we viewed a downward revision in 2009 guidance as likely on energy markets pressure, we are slightly surprised by the extent of the cut," Keybanc Capital Markets analyst Tahira Afzal said in a note.
  • Goldman Sachs analyst Joe Richie said the magnitude of the guidance cut is somewhat perplexing given an in-line earnings quarter and better-than-expected awards.
  • FBR Capital Markets analyst Alex Rygiel said calculated new awards were $4.5 billion during the quarter. FBR's Rygiel said investors will remain concerned about backlog declining due to the company's exposure to the global oil, gas and chemical markets, which represent about 55 percent of its total revenue.
Full report here
  • Commenting on the results for the second quarter, Jacobs President and CEO Craig L. Martin stated, "We have produced positive earnings growth on a quarter-over-quarter basis for the last 15 straight quarters, so we are disappointed to report earnings below that of last quarter. That being said, the second quarter was a good one in many ways. Our earnings remain good and exceed year-ago earnings by 10%. Our backlog grew quarter-over-quarter and year-over-year in a very complex market. Going forward, we expect the markets to remain complex. Our public sector business remains strong, while the heavy process business is highly uncertain."
Jacobs, with annual revenues exceeding $12 billion, is one of the world's largest and most diverse providers of technical, professional, and construction services.

[Jan 27, 2009: Jacobs Engineering - Solid Earnings Report]
[Jan 21, 2009: Jacobs Engineering Continues Reels After Suncor Spending Cuts]
[Dec 3, 2008: Back of Envelope Look at Infrastructure Stocks]
[Nov 4, 2008: Business as Usual at Jacobs Engineering]
[Jul 22, 2008: Jacobs Engineering Earnings]
[Apr 22, 2008: Good Earnings Report from Jacobs Engineering]
[Oct 7, 2007: Sector Focus - Infrastructure]

No position


Bookkeeping: Covering Most of Capital One Financial (COF) for Now

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The market continues to be resilient and each dip is aggressively bought. I believe Capital One Financial (COF) is extremely overvalued but for now it trades back over the 50 day moving average so I want to cover the majority of my short after taking extreme pain Friday. I took losses on some shares I had to let go as a risk control measure Friday and am offsetting with some smallish gains today. Today's cover is just north of $16.00. In retrospect it is obvious that covering any of the position as it ramped north of $19 was in error, but you don't know it at the time - a stock trading at $20 can go to $25 just as easy. Now perhaps we have a double top forming on the chart but as we've learned this can move +/- 20%+ in any 1 day. Too hot to handle for now.



Until a resolution is made between (a) breaking north of S&P 875 or (b) falling below the 20 and/or 50 day moving averages - we appear to be in a relatively narrow range where traders buy at the lower end of the range and sell at the top end. Until that changes, that is the range.

Short Capital One Financial; no personal position

The Economist: A Glimmer of Hope?

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I wanted to post snippets from this week's cover story of The Economist just for cover art alone - I love it. Just love it. Obviously this sums up my thought process as we enjoy the "paper printing prosperity" (P-cubed) where so much money is thrown at the system, a parallel economy of fiat money props figures, while hiding the ugly beneath. Setting us up for the dropping of the Emporer's clothes later in 2009 or early 2010 ... and even if we do "get there" (recovery) I believe the shape and scope of it will disappoint those waiting on the other side. The type of damage for the world's driver (the US consumer) is on a scale people simply are glossing over.

Let's look at what they have to say...

THE rays are diffuse, but the specks of light are unmistakable. Share prices are up sharply. Even after slipping early this week, two-thirds of the 42 stock markets that The Economist tracks have risen in the past six weeks by more than 20%. Different economic indicators from different parts of the world have brightened. China’s economy is picking up. The slump in global manufacturing seems to be easing. Property markets in America and Britain are showing signs of life, as mortgage rates fall and homes become more affordable. Confidence is growing. A widely tracked index of investor sentiment in Germany has turned positive for the first time in almost two years.

  • But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.
  • Begin with those glimmers. It is easy to read too much into the gain in share prices. Stockmarkets usually rally before economies improve, because investors spy the promise of fatter profits before the statisticians document a turnaround. But plenty of rallies fizzle into nothing. Between 1929 and 1932, the Dow Jones Industrial Average soared by more than 20% four times, only to fall back below its previous lows. Today’s crisis has seen five separate rallies in which share prices rose more than 10% only to subside again. (or as I like to say, this stock market has forecast 5 of the previous 0 recoveries)
  • The economic statistics are hard to interpret, too. The past six months have seen several slumps, each with a different trajectory. The plunge in manufacturing is in part the result of a huge global inventory adjustment. With unsold goods piling up and finance hard to come by, firms around the world have slashed production even faster than demand has fallen. Once firms have run down their stocks they will start making things again and the manufacturing recession will be past its worst. (agree, this is the "replacement cycle" we've been talking about that is the "baseline" activity in the world economy - very different than a true growth cycle)
  • Even if that moment is at hand, two other slumps are likely to poison the economy for much longer. The most important is the banking crisis and the purge of debt in the bubble economies, especially America and Britain. Demand has plummeted as tighter credit and sinking asset prices have exposed consumers’ excessive borrowing and scared them into saving more. History suggests that such balance-sheet recessions are long and that the recoveries which eventually follow them are feeble. (but as narcissistic people, we believe we can run away from history, instead of learn from it)
  • The second slump is in the emerging world, where many economies have been hit by the sudden fall in private cross-border capital flows. Emerging economies, which imported capital worth 5% of their GDP in 2007, now face a world where cautious investors keep their money at home. According to the IMF, banks, firms and governments in the emerging world have some $1.8 trillion-worth of borrowing to roll over this year, much of that in central and eastern Europe.
  • These crises sent the world economy into a decline that, on several measures, has been steeper than the onset of the Depression. But the collapse has been countered by the most ambitious policy response in history. Central banks have pumped out trillions of dollars of liquidity and, in rising numbers, have resorted to an increasingly exotic arsenal of “unconventional” firepower to ease credit markets and loosen monetary conditions even as policy rates approach zero.
  • ... action on the current scale has never been tried before and nobody knows when it will have an effect—let alone how much difference it will make. Whatever the impact, it would be a mistake to confuse the twitches of an economy on life-support with a lasting recovery.
  • A real recovery depends on government demand being supplanted by sustainable sources of private spending. And here the news is almost uniformly grim. Take the country many are pinning their hopes on: America. As the inventory adjustment ends and the stimuli kick in, America’s slump is sure to ease. Cushioned by the government, the economy may even begin to grow again before too long. But it is hard to see the ingredients for a recovery that is robust enough to stop unemployment rising. Weakness abroad will crimp exports. America’s banks are propped up with public capital, but their balance-sheets are clogged with toxic assets. Consumer spending and firms’ investment will be dragged lower by the need to pay back debt and restore savings. This will be a long slog.
  • In Britain, given the size of its finance industry, housing boom and consumer debt, the balance-sheet adjustment will, if anything, be greater. The weaker pound will buoy exports, but fragile public finances suggest that Britain has much less scope to use government spending to cushion the private sector than America does—as this week’s flawed budget made painfully clear. [Apr 23: Britain's Deficit Reaches World War 2 Levels; Little Room to Maneuver]
  • The outlook should in theory be brighter for Germany and Japan. Both have seen output slump faster than in other rich countries because of the collapse in trade and manufacturing, but neither has the huge private borrowing of the sort that haunts the Anglo-Saxon world. Once inventories have adjusted, recovery should come quickly. In practice, though, that seems unlikely, especially in Germany. As the output slump sends Germany’s jobless rate towards double-digits, it is hard to see consumers going on a spending spree. Nor has the government shown much appetite for boosting demand. Germany’s fiscal stimulus, although large by European standards, falls well short of what it could afford. Worse, the country’s banks are still in trouble. Germans did not behave recklessly, but their banks did—along with many others in continental Europe.
  • Japan has acted more boldly. Its latest package of tax cuts and government spending, unveiled in early April, will provide the biggest fiscal boost, relative to GDP, of any rich country this year. Its economy is likely to perk up, temporarily at least. But its public-debt stock is approaching 200% of GDP, so Japan has scant room for more fiscal stimulus. With export markets weak, demand will soon need to be privately generated at home. But the past two decades offer little evidence that Japan can make that shift.
  • For the time being, the brightest light glows in China, where a huge inventory adjustment has exaggerated the impact of falling foreign demand, and where the government has the cash and determination to prop up domestic spending. China’s stimulus is already bearing fruit. Loans are soaring and infrastructure investment is growing smartly. (I contend a lot of these loans will go bad in a few years since the end demand is simply not there and we have overbuilt areas that are simply seeing more building - but that's a problem for them I suppose, not us as stock speculators) Yet even China has its difficulties. Perhaps three-quarters of the growth will come from government demand, particularly infrastructure spending.
Conclusion? Tell me about the Green Shoots
  • The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.
Oh.

When you really sit back and think about it - so much of the world economy was built on Americans overspending. Hence you see the solution by the government - drive down rates even lower than the Greenspan era that got us here, make money even cheaper, and ask Americans to do it one more time. A lot of my theories for the intermediate term are based on Americans acting in self preservation and not making the exact same mistake twice within a decade. But as always, I could be wrong and underestimate the quench to not think about the future and spend like drunken sailors with money fellow citizens don't have.

Oh yes, that was the bright side of the story... if you really want to drown your sorrows go ahead...
  • Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit.
But other than that? Everything's super. Or will be. In 6 months. Just trust us.

Another take via Willem Buiter, London School of Economics













Monday, April 27, 2009

Baidu.com (BIDU) Beats & Provides Nice Top Line Guidance

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After some serious issues surrounding the "purity" of their search results last November [Nov 18, 2008: Not a Good Week for Chinese Dot Coms] (boy, that seems ages ago) and the associated after affects [Dec 11, 2008: Baidu.com - Lowers Guidance, Stock is Up] it appears all is well on mothership Baidu.com (BIDU). Now before I go into the earnings data, I will say growth has slowed down quite a bit here (even with the increased guidance) - and investors are bidding Baidu.com up at 40x forward estimates for 2009. Not that valuation has mattered much in this market....

Analysts were looking at $116M in revenue with $0.76 as consensus EPS; in the "earnings game" the "beat and raise" is the all important technique and Baidu came through. Earnings at $0.86 on $118M in revenue (41% growth year over year); revenue for the next quarter is guided higher than analysts expectations and no talk of an EPS figure. The stock is up about 3.5% after hours as I write this - I've sold most of my position here after this 100% type of run off the lows but growth mutual funds seem happy to keep bidding it up at any price. There is a lot more value in some less followed names in the general "Chinese internet" space but Baidu.com of course has a singular strangehold on search.

I will say it is quite interesting how this business, in it's early life all things being relative is already subject so seasonality far above what Google (GOOG) faced even at a more mature stage. How much is pure seasonality (Chinese New Year) and how much is due to the adjustments they had to make after their "oopsie" in November - impossible to tell.
  • Baidu had more than 185,000 active online marketing customers in the first quarter of 2009, representing a 14.9% increase from the corresponding period in 2008 and a 6.1% decrease from the previous quarter.
  • Revenue per online marketing customer for the first quarter was approximately RMB4,400 ($644), a 22.2% increase from the corresponding period in 2008 and a decrease of 4.3% from the previous quarter. The sequential decreases were primarily due to the usual seasonality associated with the Chinese New Year, a weaker economy, and the carry-over effect of the actions Baidu took near the end of 2008 to improve the quality of its customer base.
They do enjoy a very nice tax rate...
  • The effective tax rate for the first quarter of 2009 was 12.9% as compared to 6.9% for the corresponding period in 2008. The increase in effective tax rate was primarily due to the expiration or lapsing of tax holidays previously enjoyed by some Baidu entities.

Full report here.

Via WSJ
  • The company, which holds a commanding share of the Internet-search market in China, had warned earlier this year that its online marketing customers might scale back on spending and said the removal of some sponsored links in the fourth quarter would also impact the first quarter. Baidu faced pressure to more clearly differentiate paid from unpaid search results.
  • "Despite the typical seasonality associated with the Chinese New Year holiday and overall macro economic challenges, we were able to deliver strong results by focusing on executing initiatives that drove overall performance," said Chief Executive Robin Li.
  • Deutsche Bank late last month initiated its coverage of the company with a buy investment rating, saying Baidu's traffic volume and ad sentiment was rebounding and noting the company had absorbed the worst of the global slowdown's effects.
Long Baidu.com in fund; no personal position

Fidelity National Financial (FNF) Misses; Underlying Metrics the Real Story

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Fidelity National Financial (FNF) missed their estimate relatively large but a somewhat muted reaction after hours - this is more of a multi year play on housing recovery so I am more interested in what they have to say than the numbers. That said I wish it was up 30% on a massive loss while the CEO says he sees stabilization - but we don't seem to own those type of stocks.

Analysts are just guessing at the numbers as the range was -0.05 to 0.31, and they basically hit the low end of the range with a 6 cent loss. MANY caveats I will lay out below since a very large integration was undertaken that slowed them down this quarter but will be a major tailwind as we move forward. This was a digestion quarter. The stock is down 50 cents in after hours but judging from the stock price I was thinking this sort of thing was being telegraphed. I cut back to about a 1.9% stake as the stock was at threat of falling below its 50 day moving average after testing it just about each day for 2 weeks straight. (i.e. not participating in the rally) I'd love to see a pullback to $16s to reload up.

Here are the results with the important commentary; I might be the only financial presence on the internet who actually cares about this result since tonight it's all about the Baidu.com (BIDU) economy. Keep in mind First National did a quite material acquisition so these are not organic numbers; and the "losses" are due to the acquisition
  • Revenue up from $1.13B to $1.36B
  • Earnings/loss from +$27.2M to -$12.4M (more on this later)
  • Cash flow from -$74.9M to +$128.3M (awesome)
In this quarter in 2008 they opened 562K orders and closed 308K orders
In this quarter in 2009 they opened 746K orders and closed 429K orders

So that's a 33% gain in opened orders and 39% gain in closed orders year over year (not organic though, partly due to acquisition)

This follows up on very positive comments they made a quarter ago [Feb 4, 2009: Fidelity National Financial Seems to be Turning the Corner] on a surge of titles changing hands... but even more good news it sounds like below
  • "The highlight of the first quarter was the continuation of the strong open order volumes that began in very late 2008," said Chairman William P. Foley, II. "The significant strength in refinance volumes has, however, caused an increase in the time it takes to close an order, as we really only began to see an increase in closed order volumes during the later part of the quarter. We expect that trend in increased closed orders to continue as we head into the second quarter.
  • Additionally, we saw a surge in open order volumes in the first three weeks of April, nearing their highest levels of 2009." (bodes well)
Update on acquisition
  • "We also made significant strides on the integration of the Lawyers and Commonwealth operations during the quarter, realizing run-rate cost savings of more than $231 million as of March 31, 2009, versus our original synergy estimate of $150 million and our revised synergy estimate of $225 million. Most importantly, the Lawyers and Commonwealth operations returned to profitability for the month of March, before the impact of the synergy bonus, and these underwriters are positioned to generate increasing profit margins as we enter the second quarter and beyond."
Financial impact of acquisition
  • "As we discussed during our recent equity offering, operating performance in our title business began the quarter slowly, but picked up as we got into the month of March. In January, we recorded a pre-tax loss of approximately $11 million, as the legacy FNF business was profitable, but the Lawyers and Commonwealth operations lost more than $17 million on a pre-tax basis. In February we recorded a pre-tax loss of approximately $5 million, as legacy FNF was again slightly profitable and the Lawyers and Commonwealth operations improved to a pre-tax loss of only $5 million. In March, we recorded $15 million in pre-tax earnings, but those results included a $20 million synergy bonus and approximately $6 million in other than temporary impairments related to several equity securities.
  • Before those two items, we generated approximately $41 million in pre-tax earnings, which we believe to be a more meaningful representation of our operating performance in March, as legacy FNF generated a high single digit margin for the month and the Lawyers and Commonwealth operations recorded a mid-single digit margin."
Effectively this was a messy quarter while they turned around the Lawyers and Commonwealth acquisition - it sounds like by March things were humming. That is actually a very quick time to turn around a business, so color me impressed. Hopefully next quarter we have no such issues.... but in a lemming market where all that matters to 98% of participants is the "headline" or "Briefing.com beat!" this sort of good news below the fold will go unnoticed.

Follow up on their share offering
  • "Finally, on April 20, 2009, we closed on a public offering of our common stock for net proceeds of approximately $331 million. There were two primary reasons for the issuance of stock. First, we will repay $135 million under our existing credit facility on April 30, 2009. We are also examining the option of repurchasing a meaningful amount of our existing bonds, both of which will reduce our debt to total capital ratio from approximately 32% to somewhere near 25%, a level more in-line with our historic debt to cap targets. This reduction in leverage will provide increased financial flexibility for FNF. Second, as the leading title insurance company in the country, we believe the strength of our balance sheet, including unrivaled claims reserves, shareholders' equity, investment portfolio and modest financial leverage, will allow us to differentiate ourselves in the marketplace, particularly in the commercial area."
I don't see anything to not like here - the good metrics were hidden below their acquisition costs and turnaround actions but this purchase makes them the giant in the field. By a mile. Judging from what they said ex-integration this should bode very well for smaller peer First American (FAF) which we of course, also hold.

[Dec 26, 2008: Ways to Play the Housing Boom - Title Insurers]

Long FNF, FAF in fund; no personal position

Fund Performance Period 4

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Please note all data is through last Friday's closing prices....

For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence we're "starting over" in terms of performance with portfolio "B" as of early 2009. Detailed history on on the first year and a quarter can be found on the above mentioned tab.

Under the new tracking system, our third 4 week period is now complete.

(click to enlarge)


This four week period the market was continuing a quite epic run from the S&P 666 bottom. Lower quality stocks on the long side did well, generally of the $15 or below stock price - along with high beta household names. While we were positioned pretty well for a turnaround off the bottom, the first 3 weeks of this rally fell in Period 3 (which we caught), and I expected some sort of breather than never really came - weeks 4-5-6 capped off a 6 week rally and last week, while the S&P was slightly down - the fact there was still no meaningful correction after such a huge run was as good as continuing an upward slope. In a word our performance was poor in period 4; although I have much stronger words to describe it mentally.

For the fourth "four week" period we booked a -6.6% return, versus the market's +6.6%, so an under performance of -13.2% during the past four weeks. On a cumulative basis we are now +7.6%, versus the Russell 1000's -6.6%, so an out performance of +14.2% for our "year to date" if you will. (thus far 16 weeks)

Please note we did not start on Jan 1st... so this is not an apples to apples "year to date" performance but close.

Taking a step back if you would of told me 16 weeks into the year we'd be beating the market by 14% I'd be very pleased. My mental goal is to try to beat the market by 15% a year (which over the long term only a handful of the elite hedge funds have done) So we're off to a great start in relation to our goal, but considering where we were as of the end of Period 3 it is not fun to give that much out performance back. That said, the pace we were on through the first 3 periods (beating the Russell 1000 by 27%) would of prorated to beating the market by 117% over a year, which I was saying was not feasible with the type of system I run in a pseudo mutual fund and we should expect to come back to Earth in due time. I just had hoped the retracement from orbit would not all come in such a short amount of time.

Of the -6.6% for the period, we literally lost 4.6% of it in 1 hour Thursday, and 2+ hours Friday morning of last week, so a more palpable -2%ish for the period was on the plate late Thursday until a surge out of nowhere took us from S&P 841 to S&P 87os. That added 3.5% to the indexes and took away over 4.5%+ from the fund - netting out to a 8%+ loss versus our index in literally 3-4 hours of work. It can turn that quickly on you.

***** Long/Short Discussion below

The story of the period was quite simple - most of the stocks we owned did ok, but people were moving away from leadership stocks and moving to low(er) quality type of speculative stocks - our main top performers were in fact of these types: the Lennars (LEN) [due to trading], Excel Maritime (EXM), Gafisa (GFA) ... a lot of low priced beaten down stocks of variable quality. But that is not the main part of our long portfolio. What is ironic is we were not really pressing shorts as our eventual target on the S&P was 870 to 875 - many times during these 4 weeks we were positioned anywhere from 2:1 to 4:1 long v short, with 50%ish in cash yet that overweight skew to long was destroyed by the rampant moves up in our short bucket. Many names we had bet against had one day gains of 20-30% (multiple times) in commercial real estate, credit cards, casinos, consumer discretionary and the like. Charts meant nothing in these groups as resistance lines were sliced through as if they were not there - so it really felt like investing with the knowledge base I had 7-8 years ago. i.e. nearly blind. Fundamentals meant nothing and then technicals also meant nothing. Most of the day to day gains was based on betting on the "student body left" direction of the day (mostly up), and many gaps up (and a few down) started almost every day - along with crazy action in the last 30 minutes (mostly up again). So that was the story of the quarter - the much underweight short exposure completely trounced any long side gains even though our scale of long to short was indeed, correct.

Taking a step back, while smarting from these recent kicks to the teeth - we are still up for the year, and doing better than most mutual funds. But 4 weeks ago I would of imagined we'd of been the top mutual fund in the land - and that has a much nicer ring to it. The "long only, 100% invested" guys have been romping the past 2 months and "catching up" to us. No system works in every time frame, and this was not the time for us to prosper. Effectively we've washed period 1 out, when we beat the market by 12% with period 4, when we trailed by 13% and we'll go from here. We have our capital intact, we are not down on the year like many funds, and frankly unlike 99.8% of funds out there we will be able to hedge or perhaps make money on the next downside. If there ever is another one ;) So when day day (if ever) comes we'll hopefully pull back away from both the index and our competition. At this point, until things start making more sense to me I am going to have smaller exposure to the market until / when / if I am seeing some patterns that begin to utilize many years of experience, rather than a craps shooting table.

We'll check back in four weeks with a new update.

[Jan 30, 2009: Fund Performance Period 1]
[Mar 2, 2009: Fund Performance Period 2]
[Mar 30, 2009: Fund Performance Period 3]

*********
As always, if you are interested in this type of fund as a worthwhile consideration for future investment, please consider reading why this blog exists.
  1. [Jan 7, 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 26, 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
Or if you are just here for daily market / economic commentary or stock trades to follow on your own, consider supporting the blog via donation (paypal buttons can be found on the upper right margin of the blog)

Thanks

As Expected Buyers Rush into Whirlpool (WHR)

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Slowly but surely we continue on the path of utopia for corporations - the "worker less" economy. Without workers, profits should boom - Whirpool (WHR) cut 5000 heads last fall and has been able to maintain a profit. Cutting the remaining workers benefits, 401k plans and the like is also a boon for the green shoot economy. $2.6 Billion debt offset by $140M cash? Foggetaboutit!

Now while certain talking heads are saying the results show housing recovery, this doesn't seem to exactly be what the company is saying but let's not get mired in the details when we're talking green shoots. By the way Bloomberg reports 15% of all American homes now sit empty; I assume 8% of those empty buildings are overrun by green shoots.

Now to give kudos to Whirlpool (WHR) they are doing what is necessary - but at some point you cut to the bone, and an economy needs people working to actually pay for the products from these companies. But at least there is always China, Brazil, and India. Again valuation begins to come into play - at $3.50 (midpoint of their 09 guidance) you are paying 14x FORWARD estimates for... an appliance maker.

Via Reuters
  • Whirlpool Corp (WHR) reported a surprise quarterly profit on Monday as cost-cutting efforts helped the world's biggest appliance maker weather a slump in global sales, and its shares rose as much as 17 percent. The maker of Maytag and KitchenAid appliances also backed its 2009 profit forecast of $3 to $4 a share.
  • Whirlpool, whose other brands include Jenn-Air, Amana, Brastemp, Consul and Bauknechtand, reported first-quarter earnings of $68 million, or 91 cents a share, compared with $94 million, or $1.22 a share, a year earlier. Adjusted for one-time items, profit came to 59 cents a share, while analysts on average were expecting a loss of 18 cents, according to Reuters Estimates. (that's actually a pretty good number)
  • Sales at the Benton Harbor, Michigan-based company fell 23 percent to $3.6 billion.
  • Whirlpool, which has been in talks with banks about renewing credit lines, has frozen salaries, reduced its contribution to retirement plans and taken other steps to cut costs.
  • Based on current economic conditions, the company expects 2009 U.S. industry unit shipments to fall about 10 percent to 12 percent from 2008 levels, compared with its prior outlook of a 10 percent decline. In Europe, Whirlpool expects 2009 industry unit shipments to decline some 10 percent from 2008 levels. It had previously expected a fall of 8 percent in the region. (so both these regions Whirpool is saying things are worse than they previously thought - which seems to fly in the face of green shoot talk but...)
  • For 2009, Whirlpool sees free cash flow of $300 million to $400 million.
Via AP
  • "Looking at the components of demand, we now expect to see a 41 percent decline in new home completions," said Mike Todman, president of Whirlpool North America. "This is down approximately six points from our previous estimate. "Our forecast for existing home sales remains unchanged at a 9 percent decline."
  • But Whirlpool executives believe "it is just a matter of time" before shoppers start buying more major home appliances, Todman said. (eventually as things break down, they must be replaced - which is why we'll always still have at least a "replacement" rate level of purchases in the economy) "Some consumers continue to delay replacement purchases, even for appliances that are beyond repair, due to the economic uncertainty," he said. "However, many of our products are considered basic necessities by consumers, and any purchases that can be delayed ultimately will be replaced."
  • Earnings were boosted by cost-reduction and productivity initiatives, Whirlpool said, but that was offset by higher material costs and substantially lower global sales and production volumes.
  • North American sales of $2.1 billion were down 20 percent from the first quarter of 2008. Whirlpool Europe reported sales of $696 million, down 26 percent, while sales for Whirlpool Latin America dropped 26 percent to $689 million and for Whirlpool Asia fell 13 percent to $120 million.
  • While sales in most of its major markets were weak, "demand was relatively stable" in Brazil, India and China, said Roy Templin, executive vice president and chief financial officer. (this is BIC - we like it better than BRIC)
No position

Bookkeeping: Covering Best Buy (BBY) Short

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I am covering one of the 3 retail shorts, Best Buy (BBY) for "flat" - swine flu is good for shopping. How? I don't know - but the market speaks in tongues. And "flat" is the new +60% on the short side of the ledger so I'll claim victory. The stock is being bought on each dip to the 20 day moving average; identical to the S&P in fact. As I wrote in the weekly summary I am pulling back some short exposure until I see this market below the 50 day moving average. (Below S&P 825)

I cut back on Macy's (M) and Bed Beth & Beyond (BBBY) before people run into them... the most resiliant consumer on Earth apparently does not even need work to shop. It's in our DNA people. This group is going to be one fantastic short once this fantasy of the consumer is back is blown apart and people expect more than -6% same store sales and tons of heads rolling at every company to "make the number". But later in time....

All news is good news; even swine flue. It allows lagging sectors like healthcare to participate in the rally.

Remember BioCryst (BCRX) and the CEO who denies they will benefit from swine flu? Up nearly 100%. Bet on red. Or black. Just bet. I said it had a chance of 250% gain, almost halfway - tomorrow should get it there.

Short Macy's, Bed Bath & Beyond in fund; no personal position

Earnings of Note Monday-Tuesday

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Some names I am looking at early this week

Monday

Fund holdings - Baidu.com (BIDU) and First National Financial (FNF). The former broke through the 200 day moving average Thursday but I cut it down to 1 share on super froth. The latter has been stagnat the past 8 days, with each day an intraday low hitting the 50 day moving average. Very strange. I cut back a bit to a 2.5% stake since I have double jeopardy in these guys with FNF and FAF. I expect good things but the stock action has been weak"ish" and this is the more expensive of the two - not that it matters because nowadays all sectors move together.

Masco (MAS) - if the Mohawk (MHK) gameplan is on, all they have to say is business has stabilized at multi decade lows and a nice 30% gain should be had. The company is expected to lose money in 2009 and make a whopping 18 cents in 2010, so at $10 it's already at 50x 2010 earnings but analysts don't see the roaring housing market of spring 2009 forward that the stock market does. Whirpool (WHR) is in the exact same spot... also reports Monday - even better Whirlpool has debt issues and pension issues - which means it should go up 50%.

Qualcomm (QCOM) - moved its earnings to this week from last I believe due to finalizing a patent dispute with Broadcom (BRCM). I believe this dispute has been going on since horse carriages were all the rage... or at least it seems like it (ok really it's been since 2005). QCOM is a stealth play on Chinese upgrading cell networks as their technology appears to be the favored son.

Short holding SL Green (SLG) - about $4 BILLION worth of stock has been issued by REITs the past month, and there seems unquenchable thirst by investors to be diluted to no end. SLG has not done one yet - wouldn't it be timely to announce one on earnings? If the swine flu can knock this market down for longer than 30 seconds I will cover some portion ahead of earnings - I still contend the office market in NYC is in serious trouble but no one else seems to be worried judging by the stock.

Smith International (SII) - oil services has begun a breakout; it looks like hot money is desperate to find new themes so it is turning under every rock. Southwestern Energy (SWN) - natural gas and crude - it feels so 2007 all the sudden; breaking out.

Tuesday

Agco (AG) - Brazilian agricultural equipment maker; mini Deere (DE) if you will - like everything else beginning to break out. I will actually be interested in what this company has to say since I am a big fan of agriculture.

America Movil (AMX) - big fish in Latin American cell phones; like everything else nowadays - breaking out on the chart as of last week.

Buffalo Wild Wings (BWLD) - their results last quarter set off 90 days of victory; frankly at this point the casual dining group is so overheated we should start seeing "sell the news reactions" - imperative word being "should". Plus who wants to go eat out when swine flu is all the rage? Panera Bread (PNRA) - same.

Celanse (CE) - classic early cycle chemical company - these have been flying.

Cerner (CERN) - electronic medical records; we don't own this one but own a peer so we'll see what they have to say about any Obama money in the quarters to come.

Jacobs Engineering Group (JEC) - one of my favorite global infrastructure names; relatively quiet but beginning to break out late last week. (broken record). Chicago Bridge & Iron (CBI) has been a very poor man's JEC, but in this market you buy the poor man since those are the heavily shorted.

China Eastern Air (CEA) & China Southern Air (ZNH) - these might be down heavy Monday on swine flu.

Group 1 Automotive (GPI) - believe it or not automotive dealerships have been among the hottest sectors of late under the radar. I was toying with multiple plays in this group about a month ago but never pulled the trigger. With so many dealerships closing and the Federal Reserve backstopping anything under the sun, and providing the return of the house ATM, this sector is roaring.

ICON (ICLR) - the contract research organization group has been destroyed since Kendle came out last week with a warning and some peers came out later in the week with similar news. But 1 thing solves that; swine flu! Watch the lemmings run right back into anything "health" related since its all about the speculation of the day in the casino. ICLR has been the best operator of the group over the years so I'll be curious how badly they are getting hit with what is happening in the sector.

Lazard (LAZ) - a competitor to our Greenhill (GHL) in boutique banking

Massey Energy (MEE) - trying to break out... I am noticing a trend here; big money is trying to push into commodities as of middle latter last week - coal, nat gas, oil services. Student body left is buying them all.

Northwest Pipe (NWPX) - this is one of the Obama infrastructure plays in relation to water pipe rebuild I was considering a few months back. It only trades 110K shares a day so its too low volume for me to move in and out of easily.

Office Depot (ODP) - flier of the week; its in retail, its under $3 - that's all you need to know. As business picks up in the US, of course office supplies will be needed, even as unemployment rises and companies shut down. Just think like George Constanza - with this market it should be $5 post earnings.

Sociedad Quimica y Minera de Chile (SQM) - if electronic cars are really going to take off, the lithium angle is embedded inside SQM. I've never owned it but it has always been an interesting stock, especially with the fertilizer / lithium combo.

Under Armour (UA) - it makes clothes. Clothes are hot in the return of the consumer. Plus bulls contend Under Armour apparel protects against swine flu. (ok, not really). Surprise, surprise as with anything related to the consumer it is breaking out. I really look forward to the day I can short all these "the consumer is back, even at 10%+ unemployment rates" retail stocks back to where they belong.

United States Steel (X) - sort of range bound past two weeks; takes a massive leap of faith to jump in these steel names right now. But only if you care about fundamentals.

NuVasive (NUVA) Not for the Faint of Heart

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NuVasive (NUVA) is an interesting smallish cap medical device company I've followed for a long time. She is not for the feint of heart - and this stock's reaction around earnings season is why earnings are the best of times / worst of times for me. I love the new data points; I hate the raging stampede of lemmings over reacting. This chart alone shows you the "full round" trip you've encountered in the past 2 earnings reports - did business really change that much at all during this time? No. But if you were an unfortunate owner 3 months ago you were dismembered... or if you were a lucky soul who decided to ignore a lousy chart and just buy in, you were rewarded handsomely last week with a gain of nearly 30% in 2 sessions. And for all that - you basically are back to where you were before the 2 earnings reports.

We were out of the stock before the swoon, only because the chart was acting quite bad - but either way, this is the type of action that will destroy the accounts of both shorts and long if you are around for the wrong 1-2 days.

A quick look at the latest earning report and what made everyone "happy" again.
  • The company lost $4.3 million, or 12 cents per share, compared with a loss of $7.7 million, or 22 cents per share, during the same period a year prior. Revenue rose 56 percent to $80 million from $51.2 million. Excluding charges for litigation and buyouts, the company said it lost 2 cents per share. Analysts polled by Thomson Reuters expected a loss of 20 cents per share on revenue of $74.8 million.
  • The company boosted its full-year outlook, partly citing Osteocel sales. It now expects profit between 11 cents and 13 cents per share, up from prior guidance of 2 cents to 4 cents per share. That figure excludes litigation and buyout charges.
  • Revenue is now expected to range from $355 million to $360 million, up from prior guidance $345 million to $350 million. The company sees 2009 adjusted earnings of 94 cents to 96 cents a share, up from its prior view of 83 cents to 85 cents a share.
  • "In our view, spine fusion surgery has not seen signs of the slowdown as contemplated for other orthopedic markets which are more elective in nature," said Chairman and Chief Executive Alex Lukianov, in a conference call late Wednesday. "We feel strongly that we have a long global runway of growth ahead of us."
Full report here

The company stock was destroyed on fears of patients putting off spine surgery - the bulls (correct) take was a spine is a little different than a knee replacement. But perception is reality.
  • "NuVasive showed the ability to leverage its better sales results, and earnings were much better than expected in the first quarter," said Thomas Weisel Partners analyst Raj Denhoy in a note to investors. He reaffirmed a "overweight" rating and agreed with the company that growth in the spinal fusion market will likely not slow dramatically. "Once patients reach a point of needing fusion, waiting is typically not a long-term solution," he said.
  • Meanwhile, BMO Capital Markets analyst Joanne K. Wuensch reaffirmed a "outperform" rating, also saying there appears to be no slowdown in the spinal fusion market.
NuVasiva also made a small purchase - a company named Cervitech, for at least $47 million (and up to $80 million)
  • The maker of surgical treatments for spine disorders will pay $47 million upfront with an additional contingent payment of $33 million following Food and Drug Administration approval of Cervitech's PCM cervical disc system. The device is currently in clinical trials scheduled to be completed by the fourth-quarter. NuVasive said it anticipates asking for FDA approval in the first quarter of 2010.
  • The company said it expects modest sales outside the U.S., with annual revenue of about $100 million within three years of the product hitting the market in the U.S.
  • NuVasive said all payments may be made in up to 50 percent of NuVasive stock, at the company's discretion. The buyout will be dilutive in 2009.
The main issue with NuVasive is always its valuation [Jul 25, 2008: NuVasive - At What Price Growth? It Seems "Any"] but since we are bidding up companies tied to the staggered US consumer at 40, 50, 60x forward earnings I suppose NuVasive is by comparison "dirt cheap".

NuVasive is a medical device company focused on the design, development, and marketing of products for the surgical treatment of spine disorders.

[Nov 19, 2008: NuVasive Hitting 2008 Lows]
[Nov 4, 2008: NuVasive in Investors Business Daily]
[Oct 23, 2008: NuVasive Earnings]
[Sep 2, 2008: Initiating NuVasive Position]

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