Tuesday, June 2, 2009

Bookkeeping: Bought some Gafisa (GFA) on Share Offering

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I was wondering why Gafisa (GFA) was only one of a few of my small or mid cap international stocks on my watch lists that was down - apparently there is a share offering but I didn't see that until after I purchased some shares. I picked some additional shares up in the $17.40s as my pure play international exposure is lacking - this brings the stock up to a 1.5% stake.

Based on offering size - at a $2.3B market cap, a $300M offering would be 13% dilution so being down 6-7% isn't half bad.
  • Gafisa said it expects that the aggregate size of the offering will be between 600 million Brazilian reals (about $308 million) and 700 million reals.
Gafisa S.A., together with its subsidiaries, operates as a homebuilder in Brazil.

[Mar 30, 2009: Restarting Gafisa as Sam Zell Increases Stake]
[Oct 22, 2008: Sam Zell Increases Stake to Gafisa to 18.7%]
[Aug 17, 2008: Gafisa Earnings]
[Nov 19, 2007: Initiated a Position in Gafisa - Brazilian Homebuilder]

Speaking of foreign stocks... I sold almost all my HDFC Bank (HDB) post the Indian results (on the huge gap up) and people keep piling into it even at 30x forward earnings. I must live in a parallel universe called the fuddy duddy zone.


Momo trading is all the rage it appears - buy high, find greater fool, sell higher. Rinse. Wash. Repeat. I guess HAL9000 does not care about valuation - he just wants stock at any price. I continue to be amazed at the valuations I am seeing people pile into things across the board. Plus some of the junk people are piling in the sub $5 category... but until the music stops it works. So many of these throwaway stocks that trade 50K, 100K shares a day now trading 2-4M on speculative juices. Buy what's up 15-20% today - sell it to next 'investor' tomorrow 15-20% higher. "Investing". Today's hot Chinese small cap theme? Sheep semen... it's hot. Plus there are 1.3 billion Chinese (obligatory throw away line to explain why you love anything Chinese) It's October 2007 all over again.

The company also produces and sells sheep breeding products, including frozen semen, embryos, breeder sheep, and Primalights III hybrid sheep

Long Gafisa in fund; no personal position

The Economist: Outsourcing's 3rd Wave - Buying Farmland Abroad

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We rarely can talk about long term trends anymore since the stock market is all about the tree right ahead of you instead of the forest behind it. Caring about the forest yields you very little nowadays as 'long term' = 'next week'. But this piece in The Economist completely fascinated me as long time readers will know what I was preaching early in 2008. As the world population continues to grow [Jun 20, 2008: World Population to Hit 7 Billion by 2012] and more importantly as more people move away from abject poverty and into some form of "better class", I believe world food supplies will be strained. Year after year... after year... after year. I said if I had one very long term investment it would be arable farmland. I heard Jim Rogers say something similar in the past 6 months... but in this case I am going to take credit for being first. In January 2008 [Jan 21, 2008: Food... Food... Food] I wrote

I think food the next 5 years, will be what crude oil was the past 5. And it is not exactly a product one can cut back on when times get tough - hence my commentary that the potential for social strife if this continues is far far greater than anything crude oil could produce. (Remember those 1 billion rural Chinese)

In February 2008 in [Feb 1, 2008: Starting Position in Powershares DB Agriculture Fund] I wrote:

If I had a way to buy futures contracts on farmland I'd be buying that too. And yes I am very serious. I think values for farmland across the world are going to rocket in the next decade.

Last summer in [Jun 5, 2008: NYTimes: Food is Gold, So Billions Invested in Farming] I wrote

The way things are going, within a decade farmland is going to have more value than ocean front property.

I've said in the past if there was an easy instrument to purchase farmland, I'd like to be in it. Even more so in the former Soviet satellite nations where farmland is much cheaper than the American heartland.


While I am generally well read, I didn't know what a Malthusian was until I was well into writing this blog but this piece in early 2008 spoke to a lot of my own thoughts [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] Now as with all things, I do believe technological improvement will help alleviate shortfalls to some degree - many 2nd and 3rd world farming technology is 30, 50+ years behind what some 1st world countries utilize. For example India has the 2nd most arable land in the world but is producing well below potential [Jun 23, 2008: India Falling Below Potential in Farming]

With the right technology and policies, India could help feed the world. Instead, it can barely feed itself. India’s supply of arable land is second only to that of the United States, its economy is one of the fastest growing in the world, and its industrial innovation is legendary. But when it comes to agriculture, its output lags far behind potential. For some staples, India must turn to already stretched international markets, exacerbating a global food crisis.

The Green Revolution introduced high-yielding varieties of rice and wheat, expanded the use of irrigation, pesticides and fertilizers, and transformed the northwestern plains into India’s breadbasket. Between 1968 and 1998, the production of cereals in India more than doubled. But since the 1980s, the government has not expanded irrigation and access to loans for farmers, or to advance agricultural research. Groundwater has been depleted at alarming rates.

Family farms have shrunk in size and quantity, and a few years ago mounting debt began to drive some farmers to suicide. Now many find it more profitable to sell their land to developers of industrial buildings.


With with the stresses on our oceans, our 'potential' climate change, our urbanization of much of our "good land" (see example in India above)... I expect the stress in the food supply to be a big theme in the coming decades. [Nov 26, 2008: Food Crisis to Resume Next Year?] How it all plays out is unknoweable in terms of conflict or stresses across nations, but we saw a glimpse of what 'stress' can do last year. [Jun 29, 2008: NYTimes - Hording Nations Drive Food Prices Ever Higher] [Apr 14, 2008: WSJ - Food Inflation, Riots Spark Worries for World Leaders] [Mar 31, 2008: Reuters - Tensions Rise as World Faces Short Rations] [Feb 13, 2008: As Asia Food Prices Bite, Analysts Warn of Worse to Come] Now we have the attention span of 4 year old toddlers so as commodity prices fell all these ills were forgotten. But the structural issues were the same, and the central banks (especially ours) are creating even more potential pain for the worlds "non rich"... remember, inflation is the cruelest tax. So as worthless US pesos are printed and sent across the world in search of hard (or soft) assets to bid up, I expect food inflation to begin anew. I am sort amused at what I wrote in my Feb 1st (2008) piece that I referenced above.

I am as convinced today as I was in August the Fed will take every step necessary to bail out the US financial system by flooding the world with dollars.

The Fed is now creating it's 3rd bubble in just over a decade. This is our system now. It is a sad statement on what the Fed has become in my opinion. But that's neither here or there - as an investor I have to figure out where the next bubble will be. My early guesses are commodities or foreign markets. We'll know by 2013 as this bubble bursts and creates the next worldwide crisis.


Sound familiar kids? So please don't read my dismissive attitude of the Fed as anything new - I was calling them out and telegraphing what they would do long ago. How did I know? Because that's all they know how to do now. Kick the can down the road by creating ever bigger bubbles to hide the damage under the surface. Meanwhile we clap like seals because prices are going up - including stocks. But the damage is still happening; it is just a magic show on the surface.

But I digress....

As an investment theme what is old will be new again. And the few things we cannot live without are fresh water [Jun 18, 2008: The Ultimate Shortage --> Water] and food. A few institutional players began down this road last year as we wrote in [Jun 14: Bloomberg: Farmland Reaps Bonanza for TIAA]. As Americans, there is one thing we can lean on as we outsource almost everything else... it would be very hard to export our farmland (but I am sure if large corporations could find a way, they would do so to save on labor costs) [Aug 19, 2008: NYT - Export Boom Helps Farms, but not American Farmers]

Exports are the bright spot this year in an otherwise bleak economy. But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal.

This
helps explain why manufacturing jobs are continuing to disappear by the tens of thousands and factories are closing even during a miniboom in exports.


So with that intro, let me highlight some of the points from this Economist piece: Outsourcing's 3rd Wave - Buying Farmland Abroad. Basically it appears "rich food importers" have seized on the idea I advanced 2 winters ago. Food will be the new gold... and our world is flattening by the day.
  • Rich food importers are acquiring vast tracts of poor countries' farmland. Is this beneficial foreign investment or neocolonialism?
  • EARLY this year, the king of Saudi Arabia held a ceremony to receive a batch of rice, part of the first crop to be produced under something called the King Abdullah initiative for Saudi agricultural investment abroad. It had been grown in Ethiopia, where a group of Saudi investors is spending $100m to raise wheat, barley and rice on land leased to them by the government. The investors are exempt from tax in the first few years and may export the entire crop back home. Meanwhile, the World Food Programme (WFP) is spending almost the same amount as the investors ($116m) providing 230,000 tonnes of food aid between 2007 and 2011 to the 4.6m Ethiopians it thinks are threatened by hunger and malnutrition.
  • The Saudi programme is an example of a powerful but contentious trend sweeping the poor world: countries that export capital but import food are outsourcing farm production to countries that need capital but have land to spare. Instead of buying food on world markets, governments and politically influential companies buy or lease farmland abroad, grow the crops there and ship them back.
Pro
  • Supporters of such deals argue they provide new seeds, techniques and money for agriculture, the basis of poor countries’ economies, which has suffered from disastrous underinvestment for decades.
Con
  • Opponents call the projects “land grabs”, claim the farms will be insulated from host countries and argue that poor farmers will be pushed off land they have farmed for generations. What is unquestionable is that the projects are large, risky and controversial. In Madagascar they contributed to the overthrow of a government.
  • Investment in foreign farms is not new. But several things about the current fashion are new. One is its scale. A big land deal used to be around 100,000 hectares (240,000 acres). Now the largest ones are many times that. In Sudan alone, South Korea has signed deals for 690,000 hectares, the United Arab Emirates (UAE) for 400,000 hectares and Egypt has secured a similar deal to grow wheat. An official in Sudan says his country will set aside for Arab governments roughly a fifth of the cultivated land in Africa’s largest country (traditionally known as the breadbasket of the Arab world). (that's where all your gas money is going)
So if there is something to buy with America's money, you know China has to be involved
  • It is not just Gulf states that are buying up farms. China secured the right to grow palm oil for biofuel on 2.8m hectares of Congo, which would be the world’s largest palm-oil plantation. It is negotiating to grow biofuels on 2m hectares in Zambia, a country where Chinese farms are said to produce a quarter of the eggs sold in the capital, Lusaka. According to one estimate, 1m Chinese farm labourers will be working in Africa this year, a number one African leader called “catastrophic”.
How much is it in total? In just 3 years the size of all of France's agricultural land has been involved.
  • In total, says the International Food Policy Research Institute (IFPRI), a think-tank in Washington, DC, between 15m and 20m hectares of farmland in poor countries have been subject to transactions or talks involving foreigners since 2006. That is the size of France’s agricultural land and a fifth of all the farmland of the European Union.
  • Putting a conservative figure on the land’s value, IFPRI calculates that these deals are worth $20 billion-30 billion. (i.e. walk around money for China or in our case enough money for 1/6th of a bailout of AIG, or 1/5th of Citigroup or... well you get the idea)
So now we enter a new wave of outsourcing but since we cannot move farmland, it has a different twist. And it's not Americans doing the outsourcing, but it is a lot of OUR money ...
  • What is happening, argues Richard Ferguson, an analyst for Nomura Securities, is outsourcing’s third great wave, following that of manufacturing in the 1980s and information technology in the 1990s.
What else is different in this latest wave? This wave is not about exploiting 'non discretionary' foodstuffs - it is the necessities as the stresses I speak above emerge.
  • Several other features of the process are also new. Unlike older projects, the current ones mostly focus on staples or biofuels—wheat, maize, rice, jatropha. The Egyptian and South Korean projects in Sudan are both for wheat. Libya has leased 100,000 hectares of Mali for rice. By contrast, farming ventures used to be about cash crops (coffee, tea, sugar or bananas).
Private Investors are also getting into the game
  • In the past, foreign farming investment was usually private: private investors bought land from private owners. That process has continued, particularly the snapping up of privatised land in the former Soviet Union.
  • Last year a Swedish company called Alpcot Agro bought 128,000 hectares of Russia; South Korea’s Hyundai Heavy Industries paid $6.5m for a majority stake in Khorol Zerno, a company that owns 10,000 hectares of eastern Siberia; Morgan Stanley, an American bank, bought 40,000 hectares of Ukraine in March. And Pava, the first Russian grain processor to be floated, plans to sell 40% of its landowning division to investors in the Gulf, giving them access to 500,000 hectares.
But they can't match the scale of government; after all no private investor has millions of Americans sending them billions upon billions each month for products (petrol or manufactured). So as we smile about our consuming culture - those with products have our cash. And are doing out of the box things like... investing in the long run. Meanwhile our (borrowed) treasure is furiously bailing out and backstopping our financial oligarchs (and our commercial real estate ones as well). And are creating new bubbles for the populace to pay via higher prices (i.e. "prosperity"). Compare and contrast the policies.
  • But the majority of the new deals have been government-to-government. The acquirers are foreign regimes or companies closely tied to them, such as sovereign-wealth funds. The sellers are host governments dispensing land they nominally own.
  • Cambodia leased land to Kuwaiti investors last August after mutual prime-ministerial visits. Last year the Sudanese and Qatari governments set up a joint venture to invest in Sudan; the Kuwaiti and Sudanese ministers of finance signed what they called a “giant” strategic partnership for the same purpose. Saudi officials have visited Australia, Brazil, Egypt, Ethiopia, Kazakhstan, the Philippines, South Africa, Sudan, Turkey, Ukraine and Vietnam to talk about land acquisitions. The balance between the state and private sectors is heavily skewed in favour of the state.
  • That makes the current round of land acquisitions different in kind, as well as scale. When private investors put money into cash crops, they tended to boost world trade and international economic activity. At least in theory, they encourage farmers to switch from growing subsistence rice to harvesting rubber for cash; from growing rubber to working in a tyre factory; and from making tyres to making cars. But now, governments are investing in staple crops in a protectionist impulse to circumvent world markets. Why are they doing this and what are the effects?
KEY POINT:
  • Food security is not just an issue for Abu Dhabi or the United Arab Emirates,” says Eissa Mohamed Al Suwaidi of the Abu Dhabi Fund for Development. “Recently, it has become a hot issue everywhere.” He is confirming what everyone knows: the land deals are responses to food-market turmoil.
  • Between the start of 2007 and the middle of 2008, The Economist index of food prices rose 78%; soyabeans and rice both soared more than 130%. Meanwhile, food stocks slumped. In the five largest grain exporters, the ratio of stocks to consumption-plus-exports fell to 11% in 2009, below its ten-year average of over 15%.
And it all comes back to the ultimate commodity - water
  • Saudi Arabia made itself self-sufficient in wheat by lavishing untold quantities of money to create grain fields in the desert. In 2008, however, it abandoned its self-sufficiency programme when it discovered that farmers were burning their way through water—which comes from a non-replenishable aquifer below the Arabian sands—at a catastrophic rate.
  • Other Gulf states followed suit. So did China and South Korea, countries not usually associated with water shortages but where agricultural expansion has been draining dry breadbasket areas like the North China Plain.
  • Water shortages have provided the hidden impulse behind many land deals. Peter Brabeck-Letmathe, the chairman of NestlĂ©, claims: “The purchases weren’t about land, but water. For with the land comes the right to withdraw the water linked to it, in most countries essentially a freebie that increasingly could be the most valuable part of the deal.” He calls it “the great water grab”.
I will stick to what I said in 2007 and 2008... the wars of the future won't be over oil; they will be over fresh water.

Now why do the countries who have the land sell it? Well first and foremost politicians in all country are generally of the same stripe... worry about now, reap rewards now, and what happens in the future is for someone else to worry about. And some of these countries are extremely poor so any investment seems like mana from heaven.
  • For the countries seeking land (or water), the attractions are clear. But what of those selling or leasing their resources? They are keen enough, even sending road shows to the Gulf.
  • Sudan is letting investors export 70% of the crop, even though it is the recipient of the largest food-aid operation in the world. (makes sense no?)
  • In developing countries as a whole, the average growth in cereal yields has fallen from 3-6% a year in the 1960s to 1-2% a year now, says the World Bank. This reflects, among other things, a decline in public investment. In the 14 countries that depend most on farming, public spending on agriculture almost halved as a share of total public spending between 1980 and 2004.
  • The investors promise a lot: new seeds, new marketing, better jobs, schools, clinics and roads.
  • China has set up 11 research stations in Africa to boost yields of staple crops. That is needed: sub-Saharan Africa spends much less than India on agricultural R&D.
But in these nations, unlike ours - people seem to care about selling off their futures.
  • Politics of a different sort poses more immediate problems. In Madagascar this year popular hostility to a deal that would have leased 1.3m hectares—half the island’s arable land—to Daewoo Logistics, a South Korean company, fanned the flames of opposition and contributed to the president’s overthrow.
Thankfully, not all the world's sheeple are content to sleep away while they are plundered.
  • The head of the UN’s Food and Agriculture Organisation, Jacques Diouf, dubs some projects “neocolonialist”. Bowing before the wind, a Chinese agriculture-ministry official insists his country is not seeking to buy land abroad, though he adds that “if there are requests, we would like to assist.”
  • Objections to the projects are not simply Luddite. The deals produce losers as well as winners. Host governments usually claim that the land they are offering for sale or lease is vacant or owned by the state. That is not always true. “Empty” land often supports herders who graze animals on it. Land may be formally owned by the state but contain people who have farmed it for generations. Their customary rights are recognised locally, but often not accepted in law, or in the terms of a foreign-investment deal.
  • Customary owners are thrown off land they think of as theirs. Smallholders have their arms twisted to sign away their rights for a pittance.

To end and on a related note, I have not had time to dissect this piece from last month in the New York Times regarding how Smithfield Foods (SFD) is moving into Eastern Europe and completely transforming hog farming (read: destroying small farms and 'industrializing' the process) but if you want a hell of a read - please see here. I'm not one of those guys who show up to protest 'the evils of globalization' but when you read these sort of stories - you truly see the power of global multinationals and how they disrupt local communities. All in the common good (i.e. their profits) I am sure ;)

Old customs and jobs are dying and the air itself is changing, however, transformed by an American newcomer, Smithfield Foods. Almost unnoticed by the rest of the Continent, the agribusiness giant has moved into Eastern Europe with the force of a factory engine, assembling networks of farms, breeding pigs on the fast track, and slaughtering them for every bit of meat and muscle that can be squeezed into a sausage.

[Jan 18, 2008: One Lonely Voice Agrees with me on Food Inflation]
[May 2, 2008: Don Coxe on Food Crisis]

Bookkeeping: Selling 1/4th Powershares DB Gold Double Long (DGP)

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I am going to take a quarter of my Powershares DB Gold Double Long (DGP) off into a nice 2.5 week run, as gold approaches $1000. This is a nice round psychological number than generally causes some retraction. If it doesn't and we just continue up, I still have the majority of the position here. The Gold ETF (GLD) (DGP returns double GLD) has rallied from $90 to $97 in the past 2.5 weeks on 'reflation' and prominent hedge fund managers showing their hand. [May 16, 2009: John Paulson Continues to Pile into Gold]



I added to this stake on May 15th, so I am simply taking part of that purchase back and locking it in. Taking the position down to below 2% with this sale. I noted the silver ETF in that piece as very interesting (around $13.80 at the time) and indeed that was the slightly better play in retrospect.

Gold Miners (GDX) are also muy caliente



I see a lot of 'parabolic' action out there (esp in speculative Chinese small cap and commodities)- in normal times this would kick in my 'contrarian' antennae ... I also see a lot of complacency on the long side... that would also normally raise my 'complacency' radar .... but being contrarian has only gotten the stuffing knocked out of you the past 3 months. Even being a bond bear I'd like to go long bonds for a very short time as the downdraft seems very overdone near term - but I like keeping my stuffing inside of me. So unlike in the past when I'd say it feels like a keg party out of control and I can hear the police off in the distance, this time it appears the government has the police locked in their own jails while they do their "work" (notice the futures went from negative to flat again this morning? - so many "buyers" want in this market before 9:30 AM day after day) ;). Maybe we'll see them again at 3:30-3:45 PM! But only if we are good little bulls. Party on Garth.

p.s. historically the previous leaders (commodities) of a market, are not supposed to be the same leaders the next time around.

p.s.s. a lot of historical rules have been blown up the past 2 years

Long Powershares DB Gold Double Long in fund; no personal position

Bookkeeping: Closing Regions Financial (RF)

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This has been my 3rd foray into Regions Financial (RF) and all end up very much the same. Some big wins, some big losses. Regional banks are some weeks "favored" [Apr 16, 2009: Three Banking ETFs to Play your Taxpayer Money Funneled into Financials]and then a few weeks "hated" in this market who changes from thesis to thesis by the fortnight. Regions was one of the 19 stress tested and has not acted well of late. But generally when I've sold it in the past around this chart formation, it starts to fly higher... which means charting has not been helpful at all here. Management continues to say all the right things but the market does not seem to agree. So I'm lost in terms of what to do with it... there is commercial real estate exposure here as there are in many regional banks but hey! commercial real estate is just fine thank you. See the stocks for proof.

So if history repeats I will probably be buying it on the next spike over the 50 day moving average only to be disappointed ;) But for now it's a ratty chart. I am taking a $1300 loss on this last batch but had a big win on the name to more than offset it about a month ago.
  • On May 20, the Birmingham, Ala.-based bank said it would raise $1.85 billion in new capital through the public sale of 400 million common shares and 250,000 convertible preferred shares. The bank is trying to satisfy the U.S. Treasury Department's demand that it raise $2.5 billion to shore up its cash position.

No position


Secondary Technology Stocks Acting Muy Bueno

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While the main tech horsemen get all the press, the secondary names are acting very well. Instead of selling, since I only have about 40% long allocation I am placing trailing stops in case the market ever goes down for more than 3-5% again so I can lock in gains. I am changing these (moving them up) almost every day it seems but for now

  1. Starent Networks (STAR) trailing stop @ $21.50
  2. Riverbed Technology (RVBD) trailing stop @ $20.90
  3. Skyworks Solutions (SWKS) trailing stop @ $9.70
Strategy here is if there is any serious pullback to sell 1/2-2/3 at above prices then repurchase "some point" lower. In uptrending charts I like to make the first repurchase around the 20 day moving average, and then a larger batch at the 50 day. But generally stocks favored by the momentum players never even get back to the 50 day moving average. Risk is market swoops down just enough to take me out of positions and then reverses and I sit here with not much long exposure in my hands as we race to S&P 2500.



I had been debating adding Marvell Technology (MRVL) or former fund holding Broadcom (BRCM) a month or so ago; looks like Broadcom is the people's champ.


But frankly I should of just allocated much bigger positions into the 3 names we already own. In full intellectual honesty with a market that is so correlated between individual stocks and the overall index, I don't know what to make of these moves. Are they strokes of brilliance in stock picking? Or simply the rising tide lifts all boats. I tend to side with the latter case, and will continue saying this is NOT a "stockpickers" market - it is an "asset / sector allocation" market. So many charts of stocks in the same sector look almost identical - even broad sectors like 'technology'. For example - any brilliance in picking Riverbed Technology (RVBD) over F5 Networks (FFIV)? I doubt it - institutions are deploying money or hedge funds are buying up sectors and "we all go up". Throw your dart, and hit the right sector and we all feel 'smart'.

The "networkers" continue to act very well; this group was discussed 2 months ago [Apr 8: Stimulus Fire Hydrant (Worldwide) Should Benefit Networking Companies / Broadband] [Apr 9: Juniper Networks (JNPR) and F5 Networks (FFIV) Benefit from Low Expectations]

Long Riverbed Technology, Skyworks Solutions, Starent Networks in fund; no personal position

CBSMarketwatch: Can Sequenom (SQNM) Make it Back into Investors's Good Graces?

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Still keeping my eye on the Sequenom (SQNM) - but the whole idea with this name was to avoid the small cap "biotech" bipolar experience (either a huge win or a huge loss). Unfortunately, this is what this has now turned to, a coin flip. Probably the most bizarre disclosure I've ever been associated with, and I've seen many off the wall things in my years in the market.

Per CBSMarketwatch
  • Shares of beleaguered biotech Sequenom Inc. got a much-needed boost last week in the form of a somewhat favorable report issued by Lazard Capital Markets, but is the stock really that seaworthy?
  • Sequenom jumped nearly 15% on May 27, after Lazard analyst Sean Lavin upgraded the stock, now trading in the $3 range, to hold from sell, saying he believes it had more potential upside than downside.
  • While cautioning that the shares remain a highly risky play, Lavin asserted that if the company actually produced data to support the accuracy of its new Down syndrome screening test, Sequenom could soar past the $20 mark. (well yes of course! that's the whole premise of the stock; tell us something we don't know) If the test ended up being a flop, the shares could crumble to around $1. (and that's known as a lottery ticket, not an 'investment')
  • "The problem with the stock is you don't know if there's life there. It's just a huge black hole right now," said Leerink Swann analyst Bruce Cranna, who also tracks Sequenom, in a recent interview.
If you are not familiar with the saga, here are the Cliff Notes
  • Sequenom shares have soared -- and plunged -- over the past year on the market prospects of SEQureDX, its prenatal blood-screening test for Down syndrome that is not only less invasive that those out on the market but possibly more accurate. The rollercoaster ride began a year ago, when Sequenom announced that studies had shown the SEQureDx test was extremely effective in detecting the syndrome. The company added that it expected to be able to launch the test in the U.S. during the first half of 2009. Sequenom shares swiftly gained momentum after that announcement, reaching a peak at around $29 late last September. But then in late April, Sequenom dropped a bomb: Certain unnamed employees had apparently "mishandled" data used to support the test's accuracy, calling into question whether the test was valid at all.
  • Even in the long-shot game of biotech, the development bordered on bizarre. Sequenom management has since said it's been re diligently reexamining the data and moving ahead with additional planned studies. But under the best-case scenario, the earliest Sequenom would be able to produce a data-validated test would be by the fourth quarter.
  • Although analysts say Sequenom doesn't need FDA approval to market the product, it does need a body of credible data to win over obstetricians. Despite the embarrassing setback, Sequenom officials have said they still believe the science supporting the test is sound. Analysts are inclined to agree, albeit with varying degrees of reservation.
  • "The essential components of the test, in my mind, are still valid," Cantor Fitzgerald analyst Pamela Bassett told MarketWatch recently. Bassett said that before the April announcement, she had forecast a stock price target of $42 for Sequenom share's, with a buy rating. She has since lowered her rating to hold, with a target of $4. "I don't have grave doubts about the technology, it seems feasible," said Cranna. "But it's back to being sort of a 'blackboard,' early-stage technology."
  • Analysts have estimated test's market opportunity could be as high as $2 billion. "If thing had gone swimmingly, it would've been a sizable opportunity for them," said Cranna.
  • The biggest catalyst on the horizon for the shares should be the release of data from a large-scale Brown University study, which analysts say is still moving ahead. Analysts speculate data from this study will likely be released during the first half of 2010. If the data look sound, analysts say the SEQureDX product could be launched late next year or early in 2011.
  • On the other hand, if the data fail to pass muster, Sequenom could be facing a serious cash crunch. The company has said it plans to end 2009 with about $50 million in cash. Analysts say that the company might, however, need to start raising cash in the first half of 2010.
  • "There are really more negative catalysts on the horizon than positive," said Cranna. "It's like Watergate: Who knew what, where, when and how high up does it go?"
  • And how much would Sequenom be worth without the test? Lazard analyst Lavin said in his May 27 note that he sees the company's shares worth at least $3, even if it has spent all its cash. Lavin's valuation analysts assigns a worth of about $1 a share for the company's genetic mapping business, and its intellectual property assets is worth $1 to $2 a share.
  • "The stock has always been a high-risk, high-reward play, even at 20 bucks," said Cranna. "The risk now is the technology is just not there and they'll be a fire sale of some sort."
[Apr 29, 2009: Sequenom Bombshell]
[Mar 19, 2009:TheStreet.com - Sequenom Mulls Change to Down Syndrome Test]
[Feb 12, 2009: Sequenom Misses [Again] on Earnings]
[Feb 10, 2009: Sequenom on Front Page of Toronto Globe & Mail]
[Feb 4, 2009: Sequenom Restates Results]
[Jan 29, 2009: Sequenom Results Good]
[Jan 14, 2009: Some Muss and Fuss over at Sequenom]
[Dec 31, 2008: Sequenom Continues to Pick up Recognition]
[Dec 18, 2008: Sequenom in Investors Business Daily]
[Oct 30, 2008: Sequenom Misses But We Don't Really Care]
[Oct 7, 2008: Sequenom Down 8% on "Competition" Threat]
[Sep 23, 2008: Sequenom - All Systems Go on Down Syndrome's Test]
[Aug 13, 2008: Beginning Stake in Sequenom]

No position


Market Vectors Brazil Small-Cap (BRF): A New ETF for Exposure to Brazil

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I really like some of the products out of Van Eck Global's ETF lineup; we've covered quite a few in the past. One beef I've had is while we have a litany of individual Chinese companies to choose from with American ADRs, the choices in India, Brazil (and if you are are a gunslinging investor) Russia are far more sparse. In an increasingly flat world, I do believe demographics will be destiny as after we covered the 4th most populous country in the world two weeks ago [May 22, 2009: Guest Post - Indonesia; A Must Own Emerging Market] - let's now look at the 5th most populous.

For Brazilian exposure there are approximately 30-35 individual ADRs on American exchanges as best as I can tell - some of the more obvious big cap names are:
  • Petrobras (PBR)
  • Vale aka RIO aka CVRD (VALE)
  • Banco Bradesco (BBD)
  • Banco Itau (which looks like its changed its ticker from ITU to ITUB)
  • Gerdau (GGB)
  • Companhia Siderugica (SID)
and then the pickings get materially smaller from there. We've owned Brazilian homebuilder Gafisa (GFA) on and off for the better part of nearly 2 years [all Gafisa related posts click here] Embraer (ERJ), a builder of aircrafts, is another choicse we looked at last year [Jul 8, 2008: Has Embraer Hit Bottom?]

Now the typical state side investor will prefer an easier broad ETF - and the one choice for Brazil has been iShares Brazil (EWZ); while I've owned this ETF in the past I have not been a huge fan of it for diversification reasons as I stated in 2007 [Nov 8, 2007: Petrobras Soaring Today]
So I've talked today about 2 stocks in my iShares Brazil ETF (EWZ) - what exactly does this ETF hold? It's an interesting country ETF because unlike most countries it is DOMINATED by 2 companies - CVRD (RIO) and Petrobras (PBR) You can see the full holdings of iShares Brazil ETF here

Essentially
CVRD (RIO) is 24% and Petrobras (PBR) is 22%, so nearly half of the ETF is these 2 names - next come the 2 major non state owned banks, making up the next 11.5%. So nearly 60% of the ETF in 4 names. Something to keep in mind when you buy these country index ETFs... take a peak inside to see what they own.


I just checked today, and 1.5 years later VALE (which used to be be CVRD (RIO)) and PBR are now up to 50% of the ETF; so it has become even more concentrated of an ETF. Now Brazil is a very commodity heavy country and essentially buying the country is making a bet on commodities most of the time so maybe the heavy emphasis on 2 names is a relatively moot point. However, we appear to have an interesting candidate for those who are perhaps looking for a broader exposure to Brazil... Market Vectors Brazil Small-Cap (BRF). The fact sheet can be found here; this is a new introduction that came online May 14th. Per the description

The Brazil Small-Cap ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Brazil Small-Cap Index.

The Index provides exposure to publicly traded small capitalization companies that are domiciled and primarily listed on an exchange in Brazil or that generate at least 50% of their revenues in Brazil. As such, the Fund is subject to the risks of investing in small cap stocks in this country.



It seems each week we get new ETFs and frankly most are useless or die on the vine from "me too" status... so you have to look carefully at volume or you could be stuck in a very illiquid vehicle. I think the future could be promising in that regard in BRF as after trading in the 100K share range for part of the past few weeks, it tripled to nearly 300K yesterday. Since there are so few Brazilian ETFs this one has a chance to be a way for institutional money to play the country without such exposure to just two stocks.

The (net) expense ratio is 0.73% (for at least a year), and the ETF has gathered $11.1M in assets in short order. There are 53 constituents and I won't pull punches in implying I am familiar with these stocks - effectively you are buying this sort of ETF for country exposure. However, we can look at sector exposure and the main components are as follows:
  1. Consumer Discretionary: 31.7%
  2. Materials: 15.8%
  3. Financials: 11.7%
  4. Utilities: 10.7%
  5. Industrials: 10.5%
So effectively that is 3/4th of your exposure in those 5 groups; the weighted market cap in the entire ETF is $1.4 billion (range $250M-$3.8B) so the companies are still of a decent size. Let me reinforce what I said above - buying Brazil at this point (as treated by the institutional money which moves these markets) is simply a 2nd derivative play on China and/or commodities. The correlations among these groups are very close - so despite a very different sector exposure than say EWZ I'd expect this ETF to track oil / "global growth" bias very closely.

The track record thus far is very short, so I am not sure how much we can read into it - but I decided to take a quick look at the return in EWZ v BRF during the duration both have been around. Essentially one ETF returned 21% and the other 20%... which is at least an anecdotal support for the idea that "as goes commodities, so go all stocks in Brazil". I know this from my experience in Gafisa... when oil falls people trash Gafisa as if it has oil wells... and vice versa.

Once more, while I am a big believer in these markets in the long run - they have run hot and heavy so jumping in at this point might pay off, but risks of a substantial pullback increase with each parabolic surge higher.

[May 16, 2008: Brazil is Sexy]

Long Gafisa in fund; no personal position

Monday, June 1, 2009

SmartMoney: Monsanto's (MON) CEO on Growing in a Recession

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Below is a good look at the always controversial Monsanto (MON) from the CEO's chair. Timely considering the company warned on the quarter last week [May 27, 2009: Monsanto Pulls Full Year Earnings Guidance Down to Lower End on Roundup Weakness]


Amid the furious discounting among retailers, one firm has been able to raise prices as much as 25 percent on some products. What’s more, the company has supporters claiming it can cure world hunger and critics accusing it of endangering the global food supply and environment. Controversial but profitable, the firm is Monsanto (MON) and its CEO through all this has been Hugh Grant, a plainspoken 51-year-old who was raised in a coal and steel town in central Scotland.

Grant started with the firm in 1981 and took over the top office in 2003, when Monsanto was facing some fierce and well-publicized U.S. and European protests against its genetically modified crops. He took on critics by explaining that biotech crops were heavily regulated, focused the company on crops more for animal feed than the grocery store and proceeded to devote even more resources to seed development. Monsanto spends $2.6 million a day (more than 8 percent of its $11.4 billion in revenue) primarily on seed research.

Monsanto started as a chemical firm, and its Roundup herbicide still brings in about 30 percent of its profits. But today’s research is focused on how breeding and genetic engineering could develop corn, cotton and soybean seeds that yield more bountiful and nutritious crops and protect against bugs and weeds. Indeed, Monsanto’s sprawling campus in St. Louis is filled with lab-coat-clad researchers monitoring an array of test tubes, not to mention the robots (yes, robots) busy chipping off minuscule pieces of seeds to identify genetic markers. The spending has paid off: Monsanto generated $2 billion in profit last year, more than twice its take from the year before.

Grant’s current goal—doubling crop yields by 2030 while using a third less water and energy—has analysts skeptical. [Jun 5, 2008: Monsanto Plans to Double Grain Yields by 2030; Some Have Doubts] That means Monsanto’s crop yields need to increase 5 percent a year; historically, they have grown 1 percent in developed countries. “That’s probably not achievable” under any circumstances, says Maarten Chrispeels, director of the Center for Molecular Agriculture at the University of California, San Diego. Even if it is achievable, Bill Freese, science policy analyst at the Center for Food Safety, is among those calling for more testing. He says the technology is still new and can cause unintended effects in plants, like increasing natural toxins or creating new ones that have yet to be fully studied. Monsanto is also facing broader economic headwinds, lowering its earnings outlook for fiscal 2009 in part due to a faster than expected slowdown for its roundup herbicide. With commodity prices down sharply and a price war brewing, analysts question if Monsanto can keep growth on track.

SmartMoney: Monsanto has had phenomenal growth in recent years, but can you keep it up through the recession?

Hugh Grant: I’m very optimistic. By 2012 we think we can expand profits 2.25 times our 2007 base by doubling crop yields and the continued increase in demand.

But won’t demand fall given the global downturn?

It continues to rise, but noise around it fluctuates. Poultry production in India has risen to the point it’s exporting it. Recession notwithstanding, the Chinese are eating more wheat and less rice. That romantic first date now is more likely an Italian meal than Chinese.

But Chinese workers are getting laid off as growth slows. Are they still going out for Italian on their second date?

Time will tell, but I think yes. We talk about China as one country, but you have to dissect it. It’s urban China, not rural China. And within urban China, there is an emergence of fast food and the westernization of diets. It might slow down, but I don’t think we are going backward. When dietary habits shift, it’s hard to change back.

Rivals like DuPont are deeply discounting their seeds to take market share. How do you compete?

Farmers are literally harvesting profits on every square foot. So the conversation around the kitchen table is less about cost of seed and more about its performance.

Prices for glyphosate, your popular Roundup herbicide, are falling after a steady run-up in recent years. Doesn’t that cut into profitability?

When we made our 2012 profit target, we anticipated that business decreasing. But our seeds-and-traits business will continue to grow through that period. Our growth comes from continuing to deliver for farmers. The equation is that simple. When we launch a drought-tolerant seed that drinks less water and yields more corn, the grower will be happy to pay for that.

You’ve said biotech crops are a way to ease the growing demand for food. Do you see global food demand reaching crisis proportions?

Grain stocks are sitting at 20- to 25-year lows in part because of a drought in Australia, global warming and changing diets. Demand for ethanol is also part of it. We will need twice as much food—as much produced in the past 10,000 years—over the next 30 to 40. There are arguments on the slope of the curve, not the trend.

You can’t talk about the food crisis without talking about Africa.

I was in Malawi a couple of years ago, and a 70-year-old grandmother, raising four grandsons, was eager to show me her corn. She was benefiting from “new” technology—technology that farmers in the U.S. used in the 1940s. African farmers are just using old tools, things that would be familiar if you stepped out of the Bible. It’s going to take time. But if there is a way to get technology down to this local level, you make a big difference. And it’s the germ of a future business.

Some scientists are skeptical about Monsanto’s 2030 targets of doubling yield while using a third less water and fertilizer. Isn’t that a bit ambitious?

Ambitious is good. I’d be worried if you’d said it’s humdrum. This is not a moon shot. In December our researchers around the world spent a week laying out milestones. Our product cycle is seven to 10 years, so everything we do is long term. But the key is describing, step by step, the milestones.

What do you say to those concerned about the safety of biotech crops?

You have to look at what’s happened historically: Over the past 13 years, more than 2 billion acres in 25 countries have been growing these crops. There’s been more scientific evaluation of biotech crops than any other food technology. Each country has an independent regulatory agency grinding through the data. We supply the data, but the regulators evaluate it—and they’ve vouched for the safety.

Some crop scientists complain they can’t perform the comprehensive research on biotech seeds that they can with conventional seeds.

We’re sharing lots of data. We donated all of our biotech and know-how for white corn to Mexico and sub-Saharan Africa. In the next decade, for companies driving yields as significantly as we are, that becomes a prerequisite. If you are involved in something as basic as food production, the argument “you can’t afford this; you have to wait” is not acceptable.

Are you worried about piracy?

It’s in the places you would expect. We have some copying of our technology in India but still have a great business there. If you farm an acre, you want the best possible yield, and people who are copying are generally behind.

Is Monsanto recession-proof?

Food is one of the last things to suffer in a recession. Plus, we’re in good financial shape with a spotless balance sheet. The cash we generate means we don’t have to compromise our pipeline. And the pipeline is at the heart of what we do.


Bookkeeping: Cutting Back Meritage Homes (MTH) Pending this Week's Mortgage Applications

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While I think there is far too much knee jerk reaction to day to day economic reports, as if 1 number changes the face of the game - the bulls have been leaning heavily on the weekly mortgage application data as some sort of green shoot. Notwithstanding that applications are NOT approvals - most weeks 70%+ of the applications have been for refinancing; not home purchases. I will repeat what I said last week... despite the consumer discretionary stocks flying today, at some point higher commodity costs are a negative. Both for producers (it hurts their profit margins) and consumers (for obvious reasons). But obviously we are not at that point of cognizance now. In fact this feels very similar to the game in late 2007 when commodity stocks flying up was "great" because it signaled "decoupling" ... while we were typing it would be destructive for profit margins (and the consumer) in the coming quarters. That logic was ignored - until it showed up in the data in a very large way. Then it mattered. Starting to see a lot of parallels, and the economy is in far worse shape now that at that time... just remember this when the same folks jumping up and down and clapping at the strength in oil prices as a green shoot are whining about how its hurting the consumer at "some point" in the future ;) One of our favorite sayings in the stock market is "it only matters when it matters."

While I am not one for reliance on minutia economic reports that change week by week, I am going to be very curious how mortgage applications fared last week as interest rates finally moved away from Ben Bernanke's grasp. We wrote about this late Friday...[May 29, 2009: Bloomberg - Bernanke's Bid to Lift Housing Scuttled by Rising Rates]

While all news is good news in this current mood the past 3 months, if mortgage applications skewer downward just because 30 years went from an abnormal 4.7-4.8% up to a still historically low 5.2%ish maybe this will cause a point of recognition that higher interest rates and higher commodity prices are not just green shoots. But we'll see.

Ahead of this I am going to lock in gains in Meritage Homes (MTH) while I still have them (unlike the title insurers where a lot of gains were lost to the ether). I am basically cutting this back to a 0.2% stake and awaiting the mortgage data to re-assess. The homebuilders are not really participating in this melt up and last I checked one tenet of the 3 legged stool of recovery was "housing".

Here are a few leading names I picked randomly - any stock that is "red" today or near flatline you have to question what is going on. Same for any sector that is struggling. While MTH has a still fantastic chart compared to peers there is some relative weakness in the group.

Long Meritage Homes in fund; no personal position

Fortune: Wynn Resorts (WYNN) Bull or Bear?

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Fortune occasionally will run bull v bear arguments on specific stocks of interest - in mid April we pointed out one for Harley Davidson (HOG) [Apr 18: Fortune - Harley Davidson: Bull or Bear?] and I just happened upon this one for a name we speak about often: Wynn Resorts (WYNN). Keep in mind being bearish on anything is anathema so I suppose this is only a hypothetical exercise.

It is hard to believe if you've only followed these stocks for a year or less but there was once a time (not 2 years ago) these casino stocks traded like internet stocks of the late 90s. Why? The unending power of the US consumer... and even more important - 1 word: China. (in this case Macau) That should sound familiar in our current environment when this magical country of 1.3 billion people where only a sliver have the means to travel abroad and gamble - but all the world's economy shall be jump started by these folk. Almost every thesis in 2007 started with "yeh but you have 1.3 billion people who can (fill in the blank)". Recall the stock market jockeys love simple, dramatic themes. We see this now just as we did in 2007. Rigor? That's for bond nerds.

Specific to the 3 major public Las Vegas casino groups, we were negative on the group back "then"[Oct 3, 2007: A Top in Casino Names? Wynn and Las Vegas Sands][Nov 1, 2007: China Can't Save Las Vegas Sands - It's Getting Crox'd] ... 2 of the 3 have extreme levels of debt which put them in danger of bankruptcy. But as the banks have changed terms of covenants [Apr 22, 2009: Wynn Resorts, Las Vegas Sands Amend Credit Facilities] it appears Las Vegas Sands (LVS) and MGM Mirage (MGM) will live; although still suffocating under an avalanche of debt. On the other hand Wynn Resorts (WYNN) has had a manageable debt load and probably the best operator running a casino in Steve Wynn. [Apr 12, 2009: 60 Minutes - The King of Las Vegas; Steve Wynn]

That said, as I am doing a lot of reading on what is happening in Las Vegas, because just as in 2007 I think it's a great tell (canary in coal mine) for the US consumer - I am seeing occupency rates fly up as hotels slash rates to unseemly levels. [Dec 23, 2008: Wynn Encore Casino Struggling to Fill Rooms During Launch] So traffic is coming, but they are not spending like in the old days and the bargains they are receiving mark a level of budget minded awareness you don't associate with Vegas. Not to mention the CityCenter opening (a massive project) is going to put another massive wave of supply of hotel rooms into the market. So with these lower rates and strained consumer, should we be paying up? Even for the best operator? Wynn Resorts is projected to lose money this year and then "normalize" to $0.50 in 2010. So even if I discount not 6 months out but 18, I am paying 80x forward estimates... seems reasonable. Errr...

And this folks is what I am seeing in sector after sector where people are bidding up assets regardless of valuation. I know the argument - 2009 estimates are useless, and 2010 are understated.... the magic that is to come in the next 18 months as our old friend, the US consumer comes roaring back, plus our new friend - the Chinese consumer - joins the party will make all these numbers look useless. Sounds like a fairy tale to me but people are pushing each other out of the way to come feed at the trough of Kool Aid. For Wynn Resorts, please note the 50 cents is DOWN from 82 cents which was the consensus just 90 days ago... but the stock has doubled in that time. Let's say analysts are dead wrong... not for 2009 but 2010. Wynn comes in at DOUBLE the estimate, or $1.00. I am still paying 40x estimates 1.5 years OUT. Even at $2.00 in 2010, paying 20x estimates 1.5 years out for a sub 20% growth rate seems hefty.

So on valuation alone I'd like to rethink a short here, but on days like today I'd of been handed a 9% slap to the face. Which is why having short positions right now is a losing proposition - analytical work is useless. Just buy stock... they are good for you. At any price! :)

But let's turn to Fortune to see both the bull and bear case
  • Wynn Resorts is suffering as fewer gamblers visit its hotel casinos, and those who do visit bet less. In the first quarter Wynn (WYNN) lost $34 million, while the Las Vegas Strip recorded its 15th straight month of revenue declines, the worst on record.
  • But the stock has more than doubled from its 52-week low as the Macau market improves and the company reduces debt. Will the shares continue to rise?
Bull Case
  • We upgraded Wynn to a buy in April for two reasons: an improving balance sheet and gains in the Macau market. Wynn has no debt due in 2009 and relatively little due in 2010. When you can buy a strong operator like Wynn without balance sheet issues -- that's a good entry point.
  • In Macau, March gaming figures showed improvement, and several other casino projects under construction have been halted. So Wynn's Encore Macau, set to open in May 2010, is now one of only two new projects opening in the next two years. And it is a fully funded project, so it is not incurring delays.
  • At one point, Macau's gaming capacity was on track to increase 42% a year in 2009 and 2010. Now there will be only single-digit growth. (the 42% was back in the days of Kool Aid) Wynn is well positioned to capture any market growth that results from those next projects. Wynn has already done well in a competitive Macau market. That includes growing their market share over the last 12 months when more capacity was coming online.
  • Our upgrade was not based on assumptions that Vegas was improving. We believe Las Vegas will be down significantly, and we have those declines factored that in. But Wynn is well positioned for when that market starts to turn. We have a $50 price target for the stock.
Bear Case
  • To bet on this stock, you need to believe that visitation will be up significantly next year. That's the primary headwind Wynn faces in Las Vegas and Macau, its only markets. Visitation is down in 2009, and there's nothing to suggest that it will increase in 2010.
  • In Las Vegas, along with the slump in demand, Wynn has to contend with the CityCenter project, which will increase the supply of high-end hotel rooms by 28% when it opens later this year.
  • There's a difference of opinion on Wall Street about whether or not Wynn is going to be able to hang on to their high-end business in the face of additional supply entering the Vegas market. The answer probably lies somewhere between a categorical `yes' and a categorical `no'. But given that limited visibility, Wynn's valuation --17- or 18-times EBITDA, by our estimates -- is too much of a premium to pay.
  • In Macau, where Wynn earns the majority of its profits, 2008 was a fabulous year. But it's gone. And Macau's table volumes were driven higher last year by one junket consolidator that provided tremendous credit for VIP players. That consolidator is pulling back this year.
  • Certainly Wynn has executed extremely well since 2002. Its developments have opened and performed well, and it has proven itself to be among the best operators in the industry. But Wynn's markets are under pressure, and we don't think things will improve next year.
  • A game-changer for Wynn would be if business conventions to Las Vegas are back up sharply next year. But I don't know that anybody has that thesis or that notion at this point.
  • We think the stock can fall to $27.
[Feb 25, 2009: Wynn Resorts Misses by a Country Mile]
[Feb 13, 2009: Leaving Las Vegas.... Literally]
[Feb 5, 2009: Jaw Dropping Action in Casinos]
[Jul 11, 2008: Gaming Stocks Absolutely Destroyed Yesterday]

No positions

Dow Jones Industrial Average Changes: GM (GM), Citigroup (C), Replaced by Cisco (CSCO), Travelers (TRV)

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As most readers will notice, I rarely if ever talk about the Dow Jones Industrial Average (DJIA).... there are a few reasons - mostly it is only 30 stocks and the way it calculates price changes is nonsensical. Unlike most indexes the DJIA is price weighted... meaning a stock at $80 would have 10x the impact of a stock at $8. So in theory you could have 29 stocks trading at $10 and 1 stock trading at $300 and the $300 stock would be the majority of the daily movement. Hence, Google (GOOG) has no chance of being included in the DJIA! On the flip side when low price stocks go into free fall it doesnt effect the DJIA much... Citigroup going from $8 to $1 didn't do much damage.

Here are the changes to the index - for such a staid index it is remarkable to think that 3 companies have been replaced in just the past 12 mo (10% of the representation) and 5 in under 2 years. But we live in remarkable times don't we? I think at 20% technology is overweighted in the DJIA so adding Cisco Systems (CSCO) doesn't make too much sense in terms of how our economy is reflected. Travelers (TRV) does make sense as its a more conservatively run large insurer, but I thought Visa (V) would of been an excellent choice. To better reflect our society however, either a bubble maker or paper printing operation would of been the best choice ;) Or at minimum yet another retailer - after all consuming is 70% of the economy.

Via Bloomberg
  • General Motors Corp. and Citigroup Inc., crippled by the first global recession since World War II, were removed from the Dow Jones Industrial Average and replaced by Cisco Systems Inc. and Travelers Cos. GM, which filed for bankruptcy protection today, and Citigroup, the recipient of $45 billion in taxpayer aid, became the first companies since American International Group Inc. in September to leave the 30-stock average. Their shares have lost more than 90 percent since the start of 2007.
  • By replacing GM with Cisco, Dow Jones & Co. has removed automakers from the best-known benchmark for U.S. stocks, saying in an e-mailed statement that computers are as central to the economy as cars were in the previous century.
  • Citigroup, until last year the world’s biggest financial firm by assets, is being replaced by a company it jettisoned in 2002 and that was once run by its former chairman, Sanford “Sandy” Weill. (isn't that ironic?) Citigroup was formed in 1998 from the merger of Travelers Group Inc. and Citicorp. In 2002, Citigroup gave up control of Hartford, Connecticut-based Travelers Property Casualty Corp. through an initial public offering and subsequent spinoff.
  • “This announcement brings front and center the challenges facing the U.S. economy as it strives to remain competitive,” said Alan Gayle, director of asset allocation at Ridgeworth Investments, which manages $60 billion in Richmond, Virginia. “The Dow Jones Industrial Average is becoming less of an industrial average. It’s trying to reflect the broader economy.”
  • Thomson said Citigroup may be considered for the index again after it has “refashioned itself,” according to the statement.
  • Travelers, the second-biggest U.S. commercial insurer, joins JPMorgan Chase & Co., American Express Co. and Bank of America Corp. among financial companies in the Dow. Its higher price than Citigroup’s will boost the benchmark’s financial weighting from about 7 percent. (that is also ironic in terms of a small weighting considering financial industry profits were the lion's share of US profit growth in the 2000s)
  • Cisco, the world’s largest maker of computer-networking equipment, joins Microsoft Corp., International Business Machines Corp., Intel Corp. and Hewlett-Packard Co. in the Dow, boosting its technology weighting from about 17 percent. With the addition of Cisco, computer companies will surpass industrials including 3M Co. as the biggest category in the average. (shouldn't we rename it the Dow Jones Technology Index if that's the case?)
  • Kraft Foods Inc. was named to replace AIG in the Dow average on Sept. 18, the day after the nation’s biggest insurer was taken over by the U.S. government to avert its collapse.
  • Three companies left the Dow last year, including AIG. Altria Group Inc. and Honeywell International Inc. were replaced by Bank of America and Chevron Corp. Those changes were the first since 2004.


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