Monday, May 4, 2009

EOG Resources (EOG) Solid Execution in a Horrid Environment

The market has spoken and it wants the reinflation trade to work no matter what surfaces "in 6 months" as reality. Hence, I suppose we have to begin paying attention to the energy complex in much closer fashion - it's first half 2008 all over again. That whole Great Recession thing was just a 9 month blip I guess.

There are an avalanche of earnings this week in the oil and natural gas space - frankly, I don't know how much it matters either in this sector or most sectors. If you are in the right space you can post all the bad news in the world (see US Steel) and you will be taken up with the "rising tide lifts of all boat" trade soon enough. But I'll pretend that fundamentals matter and post some of the data points...

EOG Resources (EOG) was one of our holdings in 2008; this is a good sized ($18B market cap) exploration company that deals with both natural gas and oil, but I consider it more of a natural gas play. Unlike Chesapeake Energy (CHK) [similar size company] which reported a horrid $5.75 Billion Loss (give that CEO a raise! oh wait, he already was just granted another $100+ million after being washed out on margin calls - highest paid CEO of 2008), EOG actually did quite well. Oh yes to be fair, as long as you EXCLUDE 1x items, Chespeake did fine too; remember, 1x items don't count in analysis of American companies; even if they are $5 billion 1x items... otherwise we cannot punish management for making bad decisions. And then how would we grant them hundreds of millions in pay?
  • Chesapeake Energy reported a huge first-quarter loss Monday on write-downs in the value of its natural gas and oil properties, falling short of Wall Street's bottom-line forecasts by a narrow margin. The company announced that it lost $5.75 billion, or $9.63 a share, in the most recent quarter, compared with a loss of $142 million, or 29 cents a share, a year ago. Revenue rose 24% to just under $2 billion from $1.61 billion a year ago.
Here comes the magic
  • Excluding items, the company said it had adjusted net income of $277 million, or 46 cents a share. Analysts were expecting 48 cents on an EPS basis.
Too bad we can't all be judging our net worth and profitability once we exclude the bad things. So you know what to do on the 6% drop in after hours - buy Chesapeake hand over fist immediately. Myself, I have them in permanent Hall of Shame so I'd rather deal with EOG or XTO Energy (XTO) or Apache (APA). In many ways these are not based so much on earnings; the story is really their portfolios and the ebb and flow of prices.

Contrast "as long as you exclude our bad decisions we rocked a profit" Chesapeake with EOG Resources. Keep in mind all these firms hedge their pricing to some degree, some well - some not so well. This was a small miss, but small misses are the new "beats" - at least if you are in blessed sectors.
  • Oil and gas exploration company EOG Resources Inc. said on Monday that its first-quarter profit fell 34 percent. The company said it earned $158.7 million, or 63 cents per share, during the quarter that ended March 31, down from $240.5 million, or 96 cents per share, during the year-earlier period. Revenue rose 2 percent to $1.16 billion, from $1.13 billion a year earlier.
  • The company said it had mark-to-market hedging gains of $226.1 million after taxes, or 90 cents per share. If those gains were counted in the quarter in which the hedge settles, EOG said it would have had a first-quarter profit of 53 cents per share. Analysts surveyed by Thomson Reuters were expecting a profit of 59 cents per share on revenue of $976.9 million.
  • The company said it was raising its full-year 2009 organic production growth target from 3 percent to 5.5 percent. It said domestic crude oil and natural gas liquids volumes were running stronger than expected.
  • Chairman and CEO Mark G. Papa said the company is optimistic that crude prices will strengthen later in 2009 and that natural gas prices will recover in 2010.
I am surprised they are still expanding production to such a degree myself, but they seem to be able to make money, with the hedges at least.

We closed out our EOG Resources position in July 2008 [Jul 25, 2008: Bookkeeping - Closing EOG Resources] north of $100 - even with the massive rally of late the stock is in the low $70s, or a 30% haircut.

Basically buying these are a 2nd derivate play directly on your "bet" on the pricing of oil and gas in the future. I used to think there was some safety in subsectors such as oil services - deep sea oil drilling specifically but if this past year has taught us anything is that differentiation in subsectors is meaningless. Wheat = natural gas = oil = corn = potash = oil services = copper. It's all just a big sector move by institutional money in and out. Deep sea oil drillers are not much different than a copper producer to these guys.

Time to reaquiant myself with Bakken, Haynesville, and Marcellus! [Jul 9, 2008: Haynesville Natural Gas Plays Refuse to Sell Off] [Jul 10, 2008: Bakken Shale Making More North Dakotans Rich - Continental Resources +20%] Natural gas is ALL the way back to prices 2 weeks ago - and we have explosion after explosion upward in stocks related to it. Have to love the logic - stock prices are far higher than they were 3 weeks ago even if the underlying commodity is the same or lower. Magic. Clearly the US recession is over as shown by natural gas spiking back to where it was in mid April - just another green shoot. It's again... all a bit bemusing; the same prices that struck no excitement 2 weeks ago now are cause for speculative fever.

[Feb 29, 2008: Natural Gas Focused Exploration & Development Companies Continue to Shine]

No positions

Myriad Genetics (MYGN) Slight Miss on Revenue; Beats on Earnings

As always, you can tell a lot from the stock price action ahead of earnings because in the nearly SEC free Wild Wild West atmosphere "those in the know" act before you will. Myriad Genetics (MYGN) has been weak for the past two weeks, falling below the 50 day moving average 2 weeks ago on 3 days of high volume selling (see those 3 big red bars in the volume column in late April?). Ding ding - we have a winner; the "important people" were exiting the stage starting in the $44s....

Luckily for us, we know this game is not fair and balanced from years of seeing this same pattern & cleared the exits .. I had taken Myriad exposure down on April 23rd and this is what I wrote
Strange action in Myriad Genetics (MYGN) - I am conflicted over what to do here. The cynic in me says with the company reporting earnings the first week of May, with 3 days in a row of huge volume and terrible price action someone with inside information is getting out. (not that this ever happens on Wall Street).

...with such high volume out of the blue... and knowing how
Wall Street works with the asleep at the wheel SEC - this level of drop on this much volume has me going the 'better safe than sorry' route especially with such an expensive stock. So I'm going to reduce the position from a 1.6% stake to 0.6% with a sale here in the $37.30 range. If I'm wrong, all we lost was some opportunity at profit - with a forward PE >40 and a chart "talking" like this, I will err on the side of caution.

I see an ask now in after hours around $31 so we saved a few bucks by "sizing" the position appropriately, but the important people who got out in the mid $40s are the ones chuckling to themselves right now. But if you see such a weak chart in a market that ramps up day after day - you just have to ask what someone else knows; very similar situation to Sequenom (SQNM) in fact.

There was nothing awful about this report, a slight miss to revenue and a slight beat on the earnings but with this sort of multiple (north of 40) you have to do better than that to hold your own in this market. Or you have to be a consumer discretionary co. with massive amounts of debt, a shrinking customer base, losing money, etc. That too can make you a big winner in today's casino, err stock market. Myriad Genetics is not that company - unfortunately they make money and don't have masses of debt... no soup for them. Ironically, if it's valuation people are complaining about I now have a ton of shrinking businesses in various industries people are bidding up 10, 15% a day at 30, 35, 40x earnings. Ironic. Oh well, time to buy a natural gas company ...

Myriad was expected to make $90.5M in revenue and $0.24 EPS... the results
  • For the third quarter of fiscal 2009, the Company posted a record net profit of $25.3 million, or $0.25 per diluted share, compared with a net loss of $4.6 million, or $0.05 per share, in the third quarter fiscal 2008. The $25.3 million net profit for the third fiscal quarter represented a 19% increase over the prior quarter's net profit of $21.2 million.
  • The Company noted that these results were achieved in a difficult economy and with major expenditures toward Myriad Pharmaceuticals' three on-going phase 2 clinical trials and Myriad Genetics' direct-to-consumer marketing campaign in strategic southern states.
  • Total revenue for the 2009 fiscal third quarter increased to a record $87.5 million, compared with $61.8 million in the prior-year period. Molecular diagnostic revenues rose 47% to $86.5 million from $59.0 million last year. The improvement resulted primarily from an increase in the Company's sales and marketing efforts, including expansion of its women's health sales force, and the continuation of its direct-to-consumer marketing campaign, which the Company believes has resulted in improved physician acceptance and adoption of its molecular diagnostic products.
  • Molecular diagnostic cost of revenue for the third fiscal quarter was $11.2 million, or 13% of product revenue, compared with $8.3 million, or 14% of product revenue, for the comparable period in 2008, resulting from efficiency gains in the operation of the Company's molecular diagnostic laboratory.
  • Research and development expense decreased to $17.9 million for the fiscal third quarter, compared with $31.2 million last year, primarily reflecting discontinuation of the Company's Alzheimer's disease program in June 2008, which was partially offset by increased costs associated with Myriad Pharmaceuticals' drug development programs in metastatic brain cancer and AIDS.
By the end of this quarter the spin off should be complete as well
  • As announced on October 20, 2008, Myriad Genetics plans to spin off its research and drug development businesses from its molecular diagnostics business to form two well-capitalized, highly-focused, independent public companies. The molecular diagnostics business will operate under the name Myriad Genetics, Inc., and the research and drug development businesses will operate under the name Myriad Pharmaceuticals, Inc. Shareholders of Myriad Genetics, Inc. will receive one share of Myriad Pharmaceuticals common stock for every four shares of Myriad Genetics common stock owned. The transaction is expected to be completed by the end of the second calendar quarter of 2009.
Unfortunately the reaction after hours if it holds tomorrow morning will take the stock below the 200 day moving average of $35, at which point the stock could be stuck in purgatory for a long while. We'll assess if we plan to hold in the near term - but we'll revisit later in the year as this is a unique company.

[Mar 2, 2009: Starter Stake in Myriad Genetics]
[Feb 3, 2009: Myriad Genetics - Monster Results]
[Jan 20, 2009: Myriad Genetics - Another Diagnostic Heavy Hitter]
[Aug 25, 2008: Sequenom Flying off a Positive Investor's Business Daily Mention]

Long Myriad Genetics in fund; no personal position

Coal, Natural Gas, Solar, Chinese Small Cap - Throw a Dart

Not sure there is much to say here, a buying stampede - we pointed out all these groups on the weekly summary as the herd trading dominates and it is carbon copy of fall 2007. It's like a Roman Orgy of speculative buying right now. Zero fear.

Buy coal...

But buy the lowest price sub $5 stock for best results

Buy solar stock (my favorite group - lose money owning them 340 days a year, but triple your money the other 15 days), but buy the lowest priced for best results

Buy natural gas

Buy buy lowest priced ... well you get the picture

And this is not even touching on the multitude of Chinese small caps flying 20-30%+ - just one of countless many

Or rubber shoe makers

Bookkeeping: Selling Most of HDFC Bank (HDB)

On cue with our weekend summary, all commodities exploded to the upside this AM and this is the sector de jour along with emerging markets, off of a positive factory report from China. While I find it amazing investors cling to the veracity to China's data, it is what it is. Last fall as everyone was using FIFO (First In, First Out) to claim the US would lead the world back out of the recession i.e. be the first to recover; I said it would be Asia - specifically China. To think that a country hit by the twin towers of the (near) destruction of its financial system AND a deep recession would recover ahead of a country that only was facing (perhaps) a serious slowdown or worst case negative GDP would be the height of narcissism. But that was the daily talk of the punditry back then. Now they've changed their tune.

However, I thought first China's real estate bubble would have to deflate and this "recovery" would happen much farther into the future. But as we've outlined step by step, China has no qualms building things when there is no need for them and their loan growth is stratospheric and they shove money into the system in a way that would make Bernanke proud. With apparently far less corruption than here in the US, the money is getting where it needs to be much quicker than it is here (ironic isn't it). I still don't really believe the data myself based on a lot of what I'm reading EX government reports in China, but in the casino nowadays it's all about headlines and knee jerk reactions to government data. So it is pointless to argue it.

It is very difficult to buy coal stocks up 30% in 3 session or pile into all these fast moving groups. I am getting a whiff of parabolic desperation by under invested people. Now with that said, I've been repeating that same old song for a few weeks now, sounding ridiculous. But as I wrote on the weekly summary with so many people looking for a pullback, the natural course would be up to frustrate those people. And so we have done it again.

So many companies I follow are nowhere near any support line - just like 2 months ago they were nowhere near any resistance... it is remarkable what a 180 we've done. I am going to dump almost all of my HDFC Bank (HDB) here (Indian bank) on the piling into of all things Asian. This is approaching a double in under 2 months; I am cutting it back to a holding position.

HDFC had earnings last week, but really - fundamentals mean very little right now. Up here at $82 it's at 24x earnings - it was 13ish 2 months ago. Similarly, Shanghai (the entire index) is up from 13x earnings to 27x... etc. But people can't get enough.
  • India's HDFC Bank Thursday said strong loan growth boosted its fiscal fourth-quarter profit by 34% from the year-earlier period, in spite of a surge in loss provisions. The private-sector bank, which has a strong focus on the retail segment, said net income for the quarter ended March 31 jumped to 6.31 billion rupees ($125 million) from 4.71 billion rupees, although loss provisions climbed to 6.57 billion rupees from 4.65 billion rupees.
  • HDFC Bank's total deposits climbed 42% during the year to 1.43 trillion rupees ($28.4 billion) as of March 31, with low cost savings and current-account deposits consisting of more than 44% of total deposits.
  • Retail loans soared 55.5% during the year.
Long HDFC Bank in fund; no personal position

4820 CALPERS Retirees Receive Annual Pensions in Excess of $100,000

Looks like Mish Shedlock beat me to this one, but I just wanted to post this for its remarkable nature. Long time readers know our stance on public v private pay/benefits that eventually needs to come to a stand (perhaps when taxpayers educate themselves) but this is a staggering number. I'd love to see the source data but for now all we have is this article from California Foundation for Fiscal Responsibility. Apparenly over 6000 retired government workers get $100K+ pensions (4820 as of May 2008) and the number grows by 120 a month. Not surprising considering in 1 bankrupt city alone we saw a multitude of city employees making $100K+ [May 7, 2008: Vallejo California Votes for Bankruptcy] [May 8, 2008: It Pays to be a Firefighter in Vallejo]
  • In California there is one lucky group that doesn’t have those worries: state and local government retirees.
  • As of May, 2008, there were 4,820 CalPERS retirees receiving annual pensions in excess of $100,000. That didn’t include government retirees in 80 other plans in California—judges, UC, STRS, charter cities, and 1937 Act counties. About half of these retirees were public safety workers: cops, firefighters, prison guards. The remaining half includes former city managers, assistant managers, county executives, district attorneys, engineers, finance officers, personnel directors, computer scientists, and physicists.
  • Since May 2008, more than 120 new retirees have joined the “$100,000 Club” – each month - every month. That’s been going on for the last 12 months – more than 1,500 have joined that well-paid retirement group ; this rate of increase will accelerate as droves of retired public safety workers who are now in the $90,000 to $100,000 range receive annual cost of living increases.
The yawning budget deficits seem to be another issue that no longer seems to matter...

Again as I've been saying, momma have your kid grow up to a be a government worker. Forget private enterprise and risk taking - why bother.

If you are a California residence there is a handy database so you can search by city or indeed last name to see if any of your neighbors are enjoying your largess - go here. Thankfully we can now all subsidize these people (no matter what state you are in) via our "stimulus" plans.

New Commenting System Installed Reminder

Just in case you are not a weekend reader let me repost something from Saturday if you are not aware....

Also we've discovered if you register with IntenseDebate you can edit or delete a comment (I do this often once I see all the mispellings), otherwise you can make a comment but it won't be "edit-able" or "delete-able". I also added a commenter "leaderboard" to the right; this will only consider you if you are registered...

Just wanted to let everyone know we've installed a new comment system via Intense Debate. This should be more sophisticated than the stand alone commenting system from our platform via You need to sign up once but then you have a name that carries your comment history, and I do believe it will carry across to others blogs; certainly the ones that also have Intense Debate installed like Infectious Greed. The other nice upgrade is it allows for threaded conversations - i.e. in the old system every new comment just fell to the bottom of the list, but now if there are 8 comments and you want to reply to commentator #2, your reply will fall right below comment #2. I'll probably also install a "top commenter" widget. I am sure there are some other goodies but I have yet to fully explore the administration section.

We tried to install DISQUS, which is the other popular commenting system, but it seemed to not work with the template we've installed.

The one thing that goes away is the big cloud in the upper right that showed the number of comments - instead you will see the number of comments at the bottom of the post next to the date stamp i.e. Comments (4)

To read or make a post one can either just click on the title, click on "post a comment" or "Comments (#)" - should be straightforward.

As always, please feel free to comment and give your opinions and thoughts, even if in stark disagreement to mine - this is an interactive platform. Thanks, Mark

Taiwan Surges on First Investment from China in Six Decades

Some readers were asking about what had gotten into Taiwan last week; my first assumption was "semiconductors are the go to play for early cycle advocates, and some of the largest semi co's on the planet reside in Taiwan" but it is much larger than that. China is increasingly spreading its tentacles throughout the world, and now has launched into Taiwan. These are all things little noticed in the West, but will be dramatically creating shifts in the long term landscape. If you step back and think about how almost all the world's hopes rest not on the U.S. recovery but the Chinese recovery to stoke demand of everything... it should make you a bit startled about the shift going on. And China's economy is still much much smaller than the U.S.'s. Just imagine the powerhouse coming in 10, 15 years.

Via Bloomberg
  • Taiwan’s shares surged, with the key stock index posting its biggest two-day gain in more than 18 years, after Goldman Sachs Group Inc. raised its recommendation on optimism the island will further deepen ties with China. “The rapidity and scope of recent cross-strait initiatives are welcome signals that Taiwan may finally reap the economic benefits from a warmer relationship with China,” the note said.
  • Goldman Sachs raised its rating on Taiwan stocks to “overweight” after the island allowed Chinese investments for the first time since a civil war ended six decades ago. Shares also rose on expectations flights from China may be increased, and as Taiwan proposes tax changes to help shipping companies.
  • The benchmark Taiex index climbed 337.83, or 5.6 percent, to 6,330.40 at the close, bringing gains in the past two days to 13 percent, the most since Jan. 18, 1991. The measure has climbed 38 percent this year, the third-best performer among 90 indexes tracked by Bloomberg, trailing Peru and China.
  • “Taiwan will probably benefit more than the mainland stocks,” Mark Mobius, who helps oversee $20 billion in emerging-market assets at Templeton Asset Management Ltd., said yesterday in an interview. “But it will be good for both and you’re going to see tourism blossoming on both sides, you’re going to see companies getting investments on both sides.”
  • Ties between Taiwan and China have improved since President Ma Ying-jeou took office in May and dropped the pro-independence stance of his predecessor, Chen Shui-bian. The island has been under self-rule since Chiang Kai-shek’s Nationalists fled the mainland in 1949 after losing to Mao Zedong’s Communists in a civil war.
  • Taiwan shares are now rising on hopes that China will buy companies and properties in Taiwan,” said Shirley Yang, who manages $300 million at HSBC Asset Management in Taipei. “While China may start investing in Taiwan at first to build relations, it will be scrutinizing its investments in future to make sure the investments have great benefits.”
  • The Chinese government said last week it would end a ban on investments in the island on May 1 following an agreement to open cross-border operations for financial-services companies and more than double weekly direct flights to 270 from 108.
No position

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 39

Year 2, Week 39 Major Position Changes

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

Cash: 59.0% (vs 42.8% last week)
28 long bias: 31.4% (vs 36.6% last week)
11 short bias: 9.6% (vs 20.6% last week)

39 positions (vs 41 last week)

Weekly thoughts
It's been a remarkable 8 weeks in the market, and right now the mood seems buoyant... I am reading throughout the internets how a pullback is due, but when so many people are looking for a pullback the market would most likely go in the direction that would cause maximum pain. Hence we have a good chance of continuing up ... as hard as that is to believe. I see no real evidence to change any of my long term views but as we did in latter 2007 and all of 2008 the market has periods where all news is ignored or explained away, and we rally. Then in very sudden bursts news that matters not for months, is suddenly important and negative and the market crumbles in short periods of time. If S&P 666 is indeed the bottom, a test will be coming later in the year - whether that is in 1 week, 1 month, or 10 months - I don't know. My expectation looking at this chart is S&P 750 would the "bottoming out area" for the next move down - chart readers can see the obvious reasons for that assumption. So the higher we go, the sharper that eventual drop will be and like almost every serious drop in the market it should be sudden. But that's an issue for another day - for now each and every dip to the 20 day moving average has been bought....

I continue to see slivers of chicanery throughout this market... speaking of the S&P 500 chart - you see volume drop off even further this week, including Friday. You want to see volume pick up, not weaken. Yet we continue to "rally"... I put that in quotes because if you look at an intraday chart Friday you can see the all important S&P 875 level was breached, in a head scratching surge in the last 6-7 minutes. We went from 873 to 877 in a moment's notice; pure vertical. Certainly "someone" was very interested in buying in the last 5 minutes when they had no interest the rest of the day? Hmmm.... and then we can combine that with premarket moves that now almost relentlessly are upward in skew; I go to bed and see S&P futures down -5, -8, -12 and I wake up every morning to find them back to flat and by 9 AM , +5, +8, +10. I think one can make a living now buying futures at midnight and selling at 9:31 AM.

Discussing news flow is pretty meaningless - we have a fraudulent stress test coming this week.... if you "pass" you get to keep taxpayers money, and if you "fail" (wrong word - no one fails) you get more taxpayers money or a stock conversion from preferred to common, etc. And you keep the multitude of actions the Fed, Treasury, and FDIC have done to make sure any 4 year old could run a bank on current business (borrow at near zero, lend at any number over near zero = win). Previous business (balance sheet) doesn't seem to matter anymore... we FASB'd it away. We have an employment report Friday but really does it matter? If it's worse than expected we can simply say "can't get worse than this and/or backwards looking", and if it's better than expected we say "green shoot". You can't lose. Same for every other economic news item - it's a market wanting to find reasons to go up, so it will. Eastern Europe anyone? Remember when we actually cared? I guess they were cured. All our problems suddenly went away in the past 8 weeks because the stock market is up.

My short exposure is low just because of the reasons I listed above - anything negative can be explained away; so it's difficult to short anything. Valuation does not matter to these bulls; even when I take 2009 estimates, and say the current figures is 25% undershooting (which would assume quite the recovery in 2nd half 2009) I find stock after stock now trading 25-35x forward earnings. But still people want them. We switch from theme to theme, first the consumer is recovering and then when that wears out we're moving to the reinflation trade. My cash is high not so much out of caution but because of the knee jerk reactions that stock traders do nowadays - it is quite amazing. We had to exit the "housing recovery" trade with our pants on fire, and now apparently need to redeploy to this weeks "theme" (you will see below). Ants in your pants trading: Hotels, airlines sell off on swine flu Monday, then everyone piles back in Tuesday. The long term bonds sell off late in the week, and everyone piles out of anything housing associated. Everything is a "just in time" knee jerk reaction. We discussed the long term bond situation last week, and fearing the Federal Reserve we stepped aside of our short in this space.

The Fed did nothing and bond prices fell... actually with the "all hands on deck" strategy by government this does not surprise me in retrospect. Why use up a Fed action during a meeting when in 2-3 weeks the Fed can come in and "surprise" the market with a new larger purchase of mortgage backed securities or whatever the fiat money tsunami of the day is. Just ask the Treasury TA specialists what price we need to keep the market above, and have the trigger finger ready on the new announcement... and away we go in the new world order of managed markets. Let's see if the bond market "misbehaves" in the next 5.5 weeks if the Fed can stand aside...

So now of course we've been running for 2 months on the "worse is behind us, and the consumer is back". The consumer reliant on low mortgage rates to use his house as an ATM. Except the situation above in the chart throws some wrenches in that... I will be VERY curious what the 30 year mortgage rate rises to this week AND how it affects weekly mortgage applications. We've been in a refinance boom and of course that has been one of our portfolio themes, and that got smashed Thursday and Friday by the "knee jerk" reaction mob (apparently the WHOLE housing story ends at 5.2% mtg rates judging by the stocks' reactions) - hence I had to lighten up on those names. Now what is "funny" is that was a pillar of recovery - so if it's taken away are we now going to ignore it and say "the Fed obviously sees recovery and is allowing rates to float upward"? See how we can have it both ways? If the Fed keeps its foot on the throat of rates, it's good - because it lets everyone refinance at lower rates and new homes can be bought at generational low mortgage rates. And if the Fed lets rates up, well that's bullish too because that means they (who have been wrong on forecasting almost everything the past few years) are now seeing signs of strength. Which is a farce considering that even at 4.7%ish mortgage rates, with a plethora of homes across the country selling at 50%+ off (foreclosures) and affordability at multi decade highs.... ONLY a quarter of mortgage applications (not approvals) have been for purchases. That's how bad it is in "new home buying" world - just imagine how sick it would be at a natural rate of 6%+. So you want to sell me that it's a "good thing" if rates start to jump up from their manipulated lows? But I just want to show you how this "everything is good news" theorem works. ANYTHING can be construed as bullish if you want to only look at the half full cup. Higher rates are good (signals recovery), low rates are good (signals Fed is helping us). High unemployment figures are good (backwards looking, can't get worse), low unemployment figures are good (green shoots) We had these same discussions in fall 2007, I recall.... remember, the news DOES NOT matter; it's all about sentiment in the short to intermediate term. We are in a state of pure ecstasy right now.

So as I look at some of our positions, many of which we reduced severely on huge runs...

....I am trying to figure out what is left to run up.... most of last week was dominated by low priced, low quality stocks (again, as the previous week) It will be hard to do the housing complex this week unless bonds reverse ... but as I stated above, we can move from that theme to the next one: reinflation. Remember last week, we had an awful report by US Steel (X) but I thought it could pull an Alcoa (AA) and traders jump in on "it can't get worse" - sure enough by late in the week... George Costanza showed up.

In last week's summary I mentioned natural gas was not complying with the green shoot thesis - but sure enough late in the week what happened?

And with Chesapeake Energy (CHK) and EOG Resources (EOG) reporting Monday - you have an impetus to run into the natural gas complex. And lo and behold a raft of oil and natural gas stocks report this week; to each we can dismiss current earnings as backwards looking and point to the future of green shoots. Does this have any reasonable basis other than traders running in and out? I don't see it, but that's how you make money nowadays.... just remember, rampant speculation has nothing to do with these moves, as assured to us by speculators. It's supply and demand...

And remember, it's student body left / right trading the past few years - we can't just take 1 subsector of commodities ; it's all got to go up - so says HAL9000! We also are reinflating on the coal thesis....

And the iron ore thesis....

And the agriculture thesis...

All the world is inflating the past 2 days... every asset class suddenly has a huge surge of demand apparently Thursday morning. Or perhaps it's just speculators and hedgies whipping in and out of positions as HAL9000s pile in. Nah, as the speculators assured us - they had no hand in $145 oil - natural supply and demand of course.

Even in the midst of a global recession the big dog is showing fight now...

It's starting to feel all late 2007, 1st half 2008ish again. Again, not only am I bemused, I am outwardly applauding this. I hope Ben with help of speculators is able to inflate prices back to the same levels they were 12+ months ago. It will be an interesting "discussion" with the folks on Main Street when they face this sort of inflation on how exactly a central bank works its magic. It would actually be quite educational for Joe 6Pack.

So what casino chips to place next? Take your pick - the speculators will rotate... we had late last week the private equity firms explode, or take your choice of a myriad of Chinese small caps, then of course you have to have your solar stocks, and never forget your dry bulk shippers. So news is really not an issue anymore, try to figure out the "theme of the day" and buy the lowest quality stocks - if I could guess I would say Monday will be filled with skyrocketing $1-$3 oil and natural gas stocks... because global growth has turned on a dime.


Until of course that theme gets old, and by that time we should be able to run back to the tech stocks (remember buy $2-$5 stocks so you can start a rumor about how Oracle or Cisco wants to buy them)... or will it be restaurants, or perhaps the bond will have reversed on the next Fed intervention - and we can go back and do housing, retailers, et al. Or maybe back to the banks on the "stress test is behind us" thesis! It's all a bit amusing, but certainly has very little to do with investing. Roulette wheel? More like it. As long as we detach from fundamentals or any scope of multiples on earnings on the basis of "hope investing"; we can play this game for an indefinite period.

So for me, I guess I need to go heavy on the inflation trade for a few days until the next theme emerges, and then move onto that, and keep repeating every 3 days. I'll scoff at those silly economic reports or those Main Street cats... irrelevent. It's just a bunch of 3 letter and 4 letter symbols on a Bloomberg terminal and chase the ones with the momentum.

Sunday, May 3, 2009

The Disciplined Investor Podcast with Mish Shedlock and ZeroHedge

Andrew Horowitz over at The Disciplined Investor has a podcast with 2 of our favorite bloggers - Mish Shedlock from Mish's Global Economic Analysis and "Tyler Durden" over at ZeroHedge. The former was a blog I read long before I started my own, and the latter *dab tears from eye* was once just a little spot in the blogosphere we liked so much we wanted to help get him some notoriety [Feb 19 - Guest Post: ZeroHedge - Some More Bad News for Dry Bulk Shippers] He has since surged to star status.... and now is the home of all sorts of grassy knoll theories regarding financial markets.

You can listen to the hour or so here; I am still working my way through it.

Guests: Mish Shedlock and ZeroHedge present views on the markets and the mayhem. We review economics, fundamentals and basic flaws with the entire system. Andrew discusses the not-so-stressful stress tests and what is the probable outcome along with a few investment ideas.

Berkshire Hathaway's (BRK.a) Charlie Munger Says 'Venal' Banks May Avoid Needed Reforms

One thing about many quite old people is they have a lot of wisdom and are not afraid to speak their mind. Via this Bloomberg article we have Berkshire Hathaway's Charlie Munger following in the footsteps of Simon Johnson [Apr 21: Simon Johnson on Yahoo Tech Ticker] , Joseph Stiglitz and a few others who have called the financial system out for what it is; essentially America's Oligarchs. But that's ok - as long we can push this stock market up, we can look past all the handouts to those in a select few spots because we successfully "saved the system" (from them). I'm neither quite old, nor quite wise - but I share Charlie's views that nothing will ever change because the rule makers are beholden to the mightly dollar the oligarchs sway to make sure they stay in office. So we'll have superficial changes for a period, and then back to business as usual.

I am almost laughing that the solution to "too big to fail" has been to make our largest institutions "too bigger to fail". And trust me this does not just go for banks, but in the past decade they have really taken over the lead from other industries. (hat tip to reader Thomas for catching this one)

Main Entry:
ve·nal           Listen to the pronunciation of venal

1: capable of being bought or obtained for money or other valuable consideration
2: originating in, characterized by, or associated with corrupt bribery

  • Berkshire Hathaway Inc. Vice Chairman Charles Munger, whose company is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co., said banks will use their “enormous political power” to prevent changes to the industry that would benefit society.
  • This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.”
  • Munger said policy makers should seek to impose limits on banks that are deemed “too big to fail” after financial institutions worldwide suffered more than $1 trillion in losses. “We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.”
  • Munger said the financial companies spent $500 million on political contributions and lobbying efforts over the last decade. They have a “vested interest” in protecting the system as it exists because of the high levels of pay they were earning, he said. The five biggest U.S. securities firms, only two of which still exist as independent companies, paid their employees about $39 billion in bonuses in 2007.
  • They would like to get back as closely as possible to business as usual, and they have enormous political power,” he said.
I was scooting around TV this morning and lo and behold actually found something in plain English so that the "unwashed masses" can understand what exactly is going on, on Good Morning America. ABC in its 1990s thinking is still not allowing embedding of video but you can see a nice simple 5 minute video on "the banking system" (they even included the word oligarch) here. I think even a 2nd grader could understand when it's spelled out like this...

What the Fed (WTF)? I Want my 1%

This would be hilarious if not for the fact it's true. If you are paying 6%, 5%, or 4.6% for your 30 year... you are a sucker. Get the 1 to 2% mortgage.... anything to keep this scheme of easy money and Americans spending going.

Updated Position Sheet

Cash: 59.0% (v 42.8% last week)
Long: 31.4% (v 36.6%)
Short: 9.6% (v 20.6%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

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Saturday, May 2, 2009

WSJ: CEOs Need to Bring Investors Along for the Ride

This is one of my favorite subjects since the perverse short term incentives in public markets have disrupted the apple cart to such a degree - yet for 98% of companies it just continues to be business as usual. The completely broken Board of Directors system is another thorn in the side of any real resolutions and I have little confidence that it will ever change - every time we have a crisis, a lot of hen clucking goes on for a few quarters - then lobbyists begin to pull back on previous legislation that might be passed over the ensuing years... and we end up right where we started. Defenders of the system send out the "sell your stock if you are unhappy" old line, knowing the vast majority of shares are held by institutional accounts who have zero advocacy. Rinse. Wash. Insert Crisis. Repeat. Already you can hear the sharp pencils of compensation consultants trying to find ways around any limitations that might be pursued. I have to write an entry on the latest from Chesapeake's Aubrey McClendon (some awesome new details have come out in SEC filings) [Apr 3, 2009: Chesapeake Energy CEO Aubrey McClendon with New Shady Compensation Deal] but it's systematic - not any 1 company or industry.

I know, I know - if chieftans are not paid 300x (more) what the peasants who work for them, they will leave to go to another country to work for.... 22x the median. And only a select few humans on Earth could run two companies into the ground like Bob Nardelli (Home Depot / Chrysler) - or return on average -5% to -10%+ annually like many other companies have done this decade. I get it, it's a select skill set and it's an outrage my socialist take of rational equitable outcomes even hits the internets. I apologize in advance for the heresy - heads we win, tails we win [Sep 27, 2008: Heads We Win, Tails We Win] is indeed the correct course of action to put shareholders interests in line with the chiefs at the top.

Jeez, even the Wall Street Journal's Jason Zweig is talking heresy now. Don't worry Jason, the CEOs (and their top 3-4 confidants at the top of these reverse Robin Hood organizations) know they just have to keep their mouths zipped, stay low for the next 18 months and then when their stocks rebound to some degree, we can begin the "we are all in this together" chant - i.e. when your Etrade account goes up $8,000 and my compensation goes back to $18 million (with perks) - we all win together. Main Street = Wall Street... say it. Say it. Say it! :) Now where's my $87,000 rug so I can lounge Zenlike with legs crossed as I think this through further? [Jan 22, 2009: Merrill Lynch's John Thain Can Only Work on $87,000 Area Rugs]
  • From 2006 through 2008 (3 years), the 10 largest financial companies in the U.S. awarded their chief executives a cumulative total of more than $560 million in cash, stock and options. Those firms -- some of which are no longer among the 10 biggest -- have lost a total of nearly $1 trillion in market value since the end of 2006. (heads we win, tails we win - the shareholders interests are aligned with those at the top - long term value is being created - if we don't pay our CEOs this level they will leave and destroy other companies: keep repeating the dogma folks)
  • ... But it's hard to argue they deserved it all; something is dangerously wrong with a system that showers riches upon good and bad leaders alike. (not sure how much longer Zweig will be keeping his post at WSJ with talk like this)
Let's see how smaller companies, who still create very nice wealth for their top honchos but at least have some sense to their compensation structure do it...
  • Now consider Alleghany Corp. The small, New York-based insurance holding company hasn't awarded stock options to managers in decades, doesn't measure its performance against a peer group when calculating incentive pay and reserves the right to claw back bonuses if results are later revised downward. (shocking. How do they even keep a CEO with rules like that? Certainly they must have CEO turnover of immense proportion, since these rules are unfair)
  • Alleghany's proxy statement reports that the CEO, Weston Hicks, has earned (although not necessarily received) $28 million since 2005. That hardly puts him in the poorhouse. But his shareholders are unlikely to complain. From 2005 through 2008, Alleghany gained an annual average of 1.7%, while the Dow Jones U.S. Property & Casualty index lost 2.7% per year. (notice the "not necessarily received" part - some is held in reserve until years later when they can see if indeed gains are legitimate and not transitory)
  • What Alleghany and a few other exemplars in the world of corporate compensation do right says a lot about what the rest of corporate America does wrong.
  1. First, too many bosses get unconditional cash bonuses even when they push their firms to the brink of disaster. In 2006, Merrill Lynch's then-CEO, Stanley O'Neal, earned an $18.5 million cash bonus, and Charles Prince, then the CEO of Citigroup, got $13.2 million in cash. (oh yes, Stanley O'Neal - our friend who exited the stage for a cool $160M for his wonderful work at Merrill - even better he does not have to face Congress when they walk up the villians for their showboat hearings; I mean why bring the people who were there when the seeds of destruction were being born? That would make too much sense. Great timing in "being fired" Stanley) [Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain]
  2. Second, companies measure performance inconsistently, with a grab-bag of metrics that change over time. Lately, two measures have been popular: the stock's total return and the growth in earnings per share. Unfortunately, earnings in the hands of clever managers are like Silly Putty in the hands of an energetic second-grader. (truer words never said - remember, just toss all the bad things you've done to the company under "restructuring"; claim it's a 1x thing even though it happens constantly and then wink at analysts on which set of earnings to use - pro forma - and we can all point to earnings excluding '1x charges' and talk about the money being printed by these companies; we all win here in the Casino) Earnings per share can be stretched upward by stock buybacks, accounting changes, unrepeatable gains and a host of other ephemeral factors. (boo yah, just remember, stocks are "cheap" based on PE multiple - don't you dare use real earnings or how things used to be measured in the 70s or even 80s - notice a pattern here? Government and corporate America both skewing data measurement in an upward fashion to hide dirt? Sort of like a Ponzi scheme eh? If we did not resort to this we'd see the true growth measures across corporate America for the lowly 4-5-6% they are - can't have it; otherwise people would just sit in bonds)
  3. And instead of patiently measuring results, companies have ants in their pants. According to a survey by the National Association of Stock Plan Professionals and Deloitte Consulting LLP, 81% of companies tracked results over three years or less when granting stock incentives; 21% gave out "performance shares" based on a single good year. (yes for example look at all these quite excellent mergers such as AOL Time Warner that massive payouts were thrown about for "excellent synergies" - it would be wrong and unjust to wait 4-5 years to see how those talking points actually worked out over time. Just do something! Anything! And give me a bonus for doing it)
  • Alleghany, by contrast, looks at the long term, using measures that are hard to game. The firm bases incentive pay for its managers on the four-year average growth rate in per-share book value -- simply put, the surplus of what the company owns over what it owes. Book value, as Warren Buffett once wrote, is a "conservative but reasonably accurate proxy for growth in intrinsic business value -- the measurement that really counts."
  • Stock options? Forget it. "We don't want to be in the position of betting against the shareholders," says Mr. Hicks, Alleghany's chief. (Many CEOs who exercise options promptly sell.)
  • Alleghany pays its long-term incentive awards as "performance shares" that go up or down with the market. Last year, when the stock fell 28%, "the value of my total compensation was negative," Mr. Hicks says, "as it should have been, since the shareholders didn't make anything." (send this guy to continental Europe - pure socialist talk)
  • In the 1949 first edition of his book "The Intelligent Investor," after which this column is named, Benjamin Graham said "there are just two basic questions" that investors should care about: "Is the management reasonably efficient?" and "Are the interests of the average outside shareholder receiving proper recognition?" Unless investors pressure more companies to adopt smarter incentive plans, the answer will remain "Probably not."
[Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay]
[Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work]

Green Shoot Alert: Higher Unemployment Leads to Less Road Congestion

I am feeling left out by the Green Shoot Parade - so please let me add my own. The Wall Street Journal reports that the masses of unemployed Americans are leading to significantly shorter commute times for those that still have jobs. There you have it, always a silver lining - I am ready for my Kudlow Show appearance.

Now the irony is last spring and summer Americans were driving less miles because gas had shot up... now just imagine how much less congestion we will have if Ben Bernanke's master plan for stagflation works - printing money left and right to drive up the price of commodities while unemployment continues upward to 10%+ (using government figures). I might be able to bike on the freeways if Ben is successful at getting us back to $4 gas.
  • As unemployment rises and discretionary income shrinks, millions fewer Americans are driving. For commuters, that means some of the worst bottlenecks in the country are easing. Americans drove 8.6 billion fewer miles in January and February than during the same months in 2008, according to the U.S. Department of Transportation. Mileage has been declining since the end of 2007.
  • Rush-hour congestion -- defined as moving slower than free-flowing traffic -- in the 100 largest U.S. metropolitan markets fell 29% in 2008 versus 2007. It fell an additional 7% in this year's first quarter.
  • Also critical is the reduction of unpredictable traffic jams caused by fender-benders and vehicle breakdowns that frequently accompany congested commutes.
  • In some cities the drop is more pronounced. Congestion has abated 36% in Atlanta; 57% in Tucson, Ariz.; 68% in Colorado Springs, Colo.; and 70% in Daytona Beach, Fla. In Riverside, where Ms. Caldera lives, it fell by 57%. Among the largest 100 metropolitan areas, congestion shrank in all but Baton Rouge, La.
  • Amer Suifan has driven a taxi here for 17 years (Chicago), but said he has never zipped around the city this fast. He can make it from downtown to O'Hare International Airport during rush hour in 30 minutes; from Wrigley Field to Hyde Park after a Chicago Cubs game in just 22 minutes. "There's nobody on the roads," said the 43-year-old father of five. "Everywhere, it's empty." "After a game at Wrigley, there used to be 100 people waiting for a cab," he said. So far this season, he said, patrons are trying to save their cab fare. "Now they're all taking the bus."
  • "There's a major difference from last year," said Julie Caldera, a secretary in Riverside, Calif., where Inrix found congestion declined sharply last year. Ms. Caldera commutes 20 miles for work each way. Last year, her morning drive took 45 minutes; this year, she said she is at her desk in less than half an hour.
  • Among those hardest hit are the nation's turnpikes. Both public and private toll authorities are scrambling to counter declines in traffic with rate increases and employee layoffs, said Peter Samuels, editor of Tollroads News, which covers the industry. Mr. Samuels said about half of the 40 largest toll authorities in the country have raised rates in the past year.
  • The decline in miles driven began when gasoline prices crept above $3 a gallon in November 2007. By the time prices began to retreat from their $4-a-gallon high in mid-2008, the number of unemployed Americans began to rise.
I want you to think about the blurb below as you consider the veracity of government data on unemployment versus my (and others) contention of how skewed they have made it versus pre 1990s.
  • No drop of such significance has been previously recorded. With the exceptions of a few short-lived dips during previous recessions, Americans have driven more every year since national record-keeping began.
So even in the late 70s when we had GAS shortages, and double digit INFLATION, and unemployment rates (cough) "higher" than we do now, we did not see a drop like this. The talking heads continue to cling to government reports - which have been skewed the past 2 decades to the upside - to claim it's "not as bad" as the late 70s/early 80s because the data doesn't say so. Fed officials (who have missed almost every part of this downturn) now talk of how we won't reach levels of unemployment we saw in the double dip recession of 30 years ago. It's lies - we're already FAR ahead of the upper 10% unemployment rate we reached back then, and we're still headed up [Apr 3, 2009: Real March Unemployment Rate Reaches 12.5%] This driving data is just another coincident indicator of those lies.

Ever hear of garbage in, garbage out? That's how data works. But fellow Americans, we can't handle the truth. So this Friday we'll have another employment report, that is garbage - and understates what is happening in the real world. But as long as we close our eyes, click our heels together and state 3 times - there is no place like green shoots, there is no place like green shoots, there is no place like green shoots - we can take this S&P to new highs in a few more months. Let's do this.

New Commenting System Installed

Just wanted to let everyone know we've installed a new comment system via Intense Debate. This should be more sophisticated than the stand alone commenting system from our platform via You need to sign up once but then you have a name that carries your comment history, and I do believe it will carry across to others blogs; certainly the ones that also have Intense Debate installed like Infectious Greed. The other nice upgrade is it allows for threaded conversations - i.e. in the old system every new comment just fell to the bottom of the list, but now if there are 8 comments and you want to reply to commentator #2, your reply will fall right below comment #2. I'll probably also install a "top commenter" widget. I am sure there are some other goodies but I have yet to fully explore the administration section.

We tried to install DISQUS, which is the other popular commenting system, but it seemed to not work with the template we've installed.

The one thing that goes away is the big cloud in the upper right that showed the number of comments - instead you will see the number of comments at the bottom of the post next to the date stamp i.e. Comments (4)

To read or make a post one can either just click on the title, click on "post a comment" or "Comments (#)" - should be straightforward.

As always, please feel free to comment and give your opinions and thoughts, even if in stark disagreement to mine - this is an interactive platform. Thanks, Mark

WSJ: Debit Card Use Overtakes Credit

We spoke of this trend of debit v credit in the analysis of the Visa (V) report this week [Apr 30, 2009: Visa (V) Beats the Street] and it was part of the reason I hedged away from Mastercard (MA) going into earnings (although the valuation gulf between the two is now more than pricing this situation in). For the first time in history we saw debit volume surpass credit in Visa's business.

In one sense this is simply the secular move to a "cash-less" society. But in a broader sense it speaks to the delevering going on in the country (indeed, Western world), the push by credit card companies to get rid of "risk", and we could also ascertain some potential longer term behavioral changes. Again, MANY of my thesis for the next 12-36 months are based on a change in behavior by the American consumer. Where I could be shown wrong is if he/she judges what he/she has just gone through (and shall go through in the months ahead) as a 1 time blip and returns "to good ole times" in 2010. The irony is, if we step back 50+ years, the behavior of the past 10 was the abnormal - not the previous 40+. So the question is do we retern to the perverse behavior (which our government leaders are trying in every shape and fashion push us towards) or do we return to 1990s and earlier actions? It will be an interesting development either way. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?]

Via Wall Street Journal
  • The urge to not splurge by thrift-conscious consumers is giving the debit-card revolution a new push. On Wednesday, Visa Inc. reported that the total dollar volume of purchases made using its branded debit cards surpassed credit-card purchases for the first time during the last three months of 2008.
  • "The reality is that the vast majority of consumers want to pay as they go," said Stacey Pinkerd, who oversees Visa's debit-card business.
  • Brad Sagara uses a debit card to buy everything from groceries to climbing gear to bottled water. He barely uses his two credit cards anymore, and is trying to pay off a combined balance of $4,000. "The painful realization is that I need to be an adult, and this is a time to save," said Mr. Sagara, a 26-year-old consulting-firm analyst who lives in Tucson, Ariz. (Don't worry Brad, many adults don't bother to save either)
  • The surging popularity of debit cards largely reflects the growing use of plastic by American consumers. Credit- and debit-card purchases of retail goods and services vaulted past cash and checks in 2003. Now the recession is giving many consumers second thoughts about their credit cards. Lenders also are making it more expensive to charge purchases and lowering credit limits on credit-card users.
  • Revolving debt, which mainly reflects credit-card loans, fell 9.7% to $955.7 billion in February, the Federal Reserve said.
  • "A big group of consumers like the discipline that debit spending can bring them, and that is particularly relevant in this kind of environment," said Tim Murphy, who oversees MasterCard Inc.'s main payment products around the world.
  • Debit cards are especially popular with younger consumers. Debit cards are less profitable for banks than credit cards, but merchants still pay banks to accept the cards. In the past couple of years, banks have encouraged debit-card use through rewards programs. Those rewards typically are less generous than credit-card rewards.
  • To be sure, growth rates of debit-card transactions have slowed as Americans rein in their spending. Volume is widely expected to climb by a single-digit percentage this year, compared with more than 10% annually during the past few years. But credit-card usage is expected to keep declining.
Long Mastercard in fund; no personal position

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