Sunday, January 31, 2010

Updated Position Sheet

Cash: 64.8% (v 65.4% last week)
Long: 12.7% (v 26.2%)
Short: 22.5% (v 8.4%) [long US dollar positions are considered "short"]

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.

*** Please note, I've added an options category for things I am holding longer than intraday. 

[click to enlarge]

LONG (2 photo files)



Bruce Berkowitz of Fairholme Funds (FAIRX) Slashes Pfizer (PFE) Stake, Exits Boeing (BA) and Northrop Grumman (NOC); Adds to Berkshire Hathaway

Fresh off his "Morningstar Manager of the Decade", we have some update's on the moves of the very schrewd Bruce Berkowitz in relation to his Fairholme Fund (FAIRX).  The biggest change is his massive stake in Pfizer (PFE) has been cut back severely; since the data is as of Nov 30th it looks like he sold a bit early but as always, you need not catch the top or the bottom in a stock.  If you are correct, you can make a lot of money over the long run simply capturing the middle of the move.

While completely opposite in style to me, I laud the concentrated portfolio style and excellent long term record - one of the few funds I have recommended to people in my offline life the past 3-4 years.  [Feb 3, 2009: Fairholme Funds (FAIRX) 2008 Report]  My only worry now is the "herd effect" - asset growth is going to explode as he has done very well, and at some asset level it becomes nearly impossible to keep up performance.  FAIRX is up to $11B and I am sure getting tens of millions a week.

His latest fact sheet can be found here.

Top 10 holdings:
  1. Sears Holding (SHLD) 10.6%
  2. Berkshire Hathaway (not sure which share class) 10.1%
  3. AmeriCredit (ACF) 7.0%
  4. The St Joe Company (JOE) 5.4%
  5. Humana (HUM) 5.4%
  6. Wellpoint (WLP) 5.2%
  7. Burlington Northern Santa Fe (BNI) 4.6%
  8. Hertz Global Holdings (HTZ) 4.6%
  9. General Growth Properties (GGWPQ) 4.2%
  10. Citigroup (C) 4.2%
A quite fascinating group of holdings - and his top 10 holdings are about 60% of his portfolio.  With the acquisition of BNI, his top holding is actually Berkshire.  Sears Holdings is headed by the now controversial Eddie Lampert who many call the next Warren Buffet.  AmeriCredit is a smallish ($2B) auto financing company - that's a big stake relative to the company size.  St Joe is effectively a company that owns land in Florida - we discussed that stock in 2007 I believe.  Despite slashing Pfizer, he still has good exposure to healthcare which was far and away his largest sector holding the past year or two.  Hertz was one of the hardest hit stocks during the downturn and has had a huge run.  And then to finish it off he has two high risk / high reward plays in General Growth and Citigroup; the latter everyone knows the story but the former was a REIT forced into bankruptcy [Nov 11, 2008: General Growth Properties Looks to Join Its Tenants] [Jan 13, 2009: Logic Behind Bill Ackman's Purchase of General Growth Properties] but in a rare case looks to have more assets than liabilities.  With his long term, patient view those last 2 could be among his 2 biggest winners if everything falls into place - it is sort of a barbell approach with lower % of assets into "high risk" risk mixed in with higher % of assets in "value".

Via Bloomberg:
  • Bruce R. Berkowitz, named this month as U.S. stock mutual-fund manager of the decade, scaled back on former top holding Pfizer Inc. and increased his stake in Berkshire Hathaway Inc. at the $11.2 billion Fairholme Fund.  Fairholme slashed its investment in New York-based Pfizer to 17.3 million shares from 76.5 million in the three months ended Nov. 30, according to a semi-annual report filed yesterday with the U.S. Securities and Exchange Commission. The drugmaker comprised almost 13 percent of Fairholme’s net assets as of Aug. 31.
  • The Miami-based fund raised its stake in billionaire Warren Buffett’s Berkshire Hathaway to 10.1 percent of net assets on Nov. 30 from 5.8 percent. Fairholme also acquired a $493 million stake in Burlington Northern Santa Fe Corp., the railroad Berkshire is buying for cash and stock.
  • Fairholme sold much of its defense and drug holdings during the three months through November. In addition to the Pfizer sale, the fund divested all of its stock in Boeing Co. and the Northrop Grumman Corp., the filing shows.
  • Sears Holdings Corp. was the Fairholme fund’s largest stake as of Nov. 30, at 10.6 percent of assets, while Omaha, Nebraska- based Berkshire Hathaway ranked second, the SEC filing shows. Berkshire Hathaway would become No. 1 if Fairholme elects to take stock in Buffett’s holding company as payment for its Burlington Northern shares.
  • The fund returned 39 percent in 2009, compared with the 26 percent gain by the Standard & Poor’s 500 Index, including dividends. It beat 74 percent of similarly managed funds, according to data compiled by Bloomberg. Fairholme, as a non- diversified fund, can invest in fewer securities and devote a larger percentage of its assets to a specific company than a diversified fund is allowed to under U.S. securities laws.
Position: Admiration

Paul Volcker Op-Ed: How to Reform Our Financial System

A very easy to read op-ed piece by Paul Volcker which just about any competent American should be able to understand.  Now, if only they would...

Let us hope this thing is not full of mack truck sized loopholes, and consider this "too big to fail" is only 1 part of a larger mosaic of issues the financial sector has to deal with.  But it's among the most critical.

Via NY Times, some highlights below - full piece here
  • PRESIDENT OBAMA 10 days ago set out one important element in the needed structural reform of the financial system. No one can reasonably contest the need for such reform, in the United States and in other countries as well. We have after all a system that broke down in the most serious crisis in 75 years. The cost has been enormous in terms of unemployment and lost production. The repercussions have been international.
  • A large concern is the residue of moral hazard from the extensive and successful efforts of central banks and governments to rescue large failing and potentially failing financial institutions. The long-established “safety net” undergirding the stability of commercial banks — deposit insurance and lender of last resort facilities — has been both reinforced and extended in a series of ad hoc decisions to support investment banks, mortgage providers and the world’s largest insurance company. In the process, managements, creditors and to some extent stockholders of these non-banks have been protected.
  • The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.  (incredibly key point that we raised a long time ago - this point is often lost in the discussion.  We effectively have a small cadre of "Fannie Mae" like institutions in our banking system who all the world knows will be bailed out, and hence have massive advantages in funding costs, and ability to take risk.  We know how that ended up with the GSEs)
  • As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. We need to find more effective fail-safe arrangements.
  • In approaching that challenge, we need to recognize that the basic operations of commercial banks are integral to a well-functioning private financial system.  Combining those essential functions unavoidably entails risk, sometimes substantial risk. That is why Adam Smith more than 200 years ago advocated keeping banks small. Then an individual failure would not be so destructive for the economy.  That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.
  • The further proposal set out by the president recently to limit the proprietary activities of banks approaches the problem from a complementary direction. The point of departure is that adding further layers of risk to the inherent risks of essential commercial bank functions doesn’t make sense, not when those risks arise from more speculative activities far better suited for other areas of the financial markets.
  • The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading — that is, placing bank capital at risk in the search of speculative profit rather than in response to customer needs. Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five. (it is truly amazing the power of the oligarchs - we are resisting common sense change so that 4-5 companies can take advantage of the US taxpayer, and play in their own sandbox)  Only 25 or 30 may be significant internationally.
  • Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest with customer relationships, conflicts that simply cannot be escaped by an elaboration of so-called Chinese walls between different divisions of an institution. The further point is that the three activities at issue — which in themselves are legitimate and useful parts of our capital markets — are in no way dependent on commercial banks’ ownership.
  • To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals of the Obama administration and other governments point to the need for a new “resolution authority.” Specifically, the appropriately designated agency should be authorized to intervene in the event that a systemically critical capital market institution is on the brink of failure. The agency would assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization.  (this is exactly what should have happened in 2008 - the American depositors should of been the only thing backstopped, not the ENTITIES.  The corporate shell that houses said deposits is irrelevant. A temporary takeover, and then over the course of 12-18-24 months - only due tot he complicated nature of these monster institutions - sell off the assets to stronger players.  This happens every Friday night in America with smaller banks, when the weak are handed over to the strong.  Reward those who did well, instead those who did poorly.  That's how "capitalism" used to work, rather than our current "corporate socialism".   But such a thought would harken to the Swedish plan and *be still the heart* it would mean temproary nationalization - ahhh, no larger slur in Ameircan culture than to be called "European")
  • To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts.  To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.
  • I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. (i.e. the only socialism the US practices, is socialism for the corporate - it's ok when they benefit, otherwise don't use that word or you might have some French blood in you) They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.  In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.
  • I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.  The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.
I don't know how anyone can argue with this - in almost any other industry bad decisions simply would lead to bankruptcy.  Since the banks hold a special "utility" value, they know they play by a different set of rules, and have flaunted it. 
Be thankful, unlike the Larry Summers and Tim Geithners of the world, there is one person looking out for someone other than their future employers.  He is akin to the one covert agent we have in our "representative" government that actually works for the people...which is why Wall Street has thrown a massive hissy fit from the moment the "Volcker Rules" were presented by Obama.  As we noted last week, the oligarchs were blind sided by this one; they are used to having their hands held each step of the way - and apparently given information before the rest of us...  hence there current reaction.   [Jan 27, 2010: Bloomberg - Financial Oligarchs Completely by "Volcker Rules"]  The first real proposal that potentially has teeth, and they don't like it - while wrapping themselves in the US flag and screaming "an affront to capitalism!".  Dogma.

Again, this is only 1 step of perhaps 10 that need to be taken ... and even this one is causing massive cries & whining.  Yves Smith at Naked Capitalism talks of all the things, even this one step, lacks - can you imagine the outcry by the oligarchs if we actually did a full sweep?  Let us see what even this most basic of common sense reform looks like after the banking lobbyists have helped to "educate and guide" the lawmakers on what little Paul Volcker knows. 

Friday, January 29, 2010

Game Plan from Here - Currently 43% Short

Let me lay out my thoughts ahead of time in terms of strategy.  I am currently 43% short as of that break of S&P 1085, than 1080.  That includes the dollar long positions; without them it is probably closer to 36% short.  (technically it is more than 43% short since I am using options which provide me with a lot of leverage but I am keeping it simple)

Now that S&P 1078 is broken I want to see 1071.50 filled; which is the gap from November 2009.  If that happens today, I will let go of some of my puts and short 3x ETFs positions.  Maybe 1/3rd - maybe 1/2 ... I am not going to edit this post with all the details.  Instead I am giving you my marching orders ahead of time.

The best thing for the bulls (perversely) is a very bad open in the market Monday morning to flush out and panic people.  Then a reversal from that flush.  I don't know if the powers that be will allow futures to do bad things Monday morning but let's see.  If that happened I would get rid of a lot more of my short exposure of all sorts, but keep my dollar longs for the long(er) run.

As long as we hold below S&P 1080-1085 I won't reverse any position until I see the gap filled.  I cannot see any brave sucker soul buying long into the close here, but who knows.  It now seems very much certain that the 200 day moving average on the S&P 500 will be a very probable target in the weeks to come. It's just a question of trying to avoid the oversold bounce that surely is not that far away, and locking in our very hearty gains before the bulls come and take them away.

A very fun week... makes up for the boredom of November and December 09.  This is the type of week our relative performance versus the market and mutual fund peers will go off the charts.

EDIT: S&P 500 hit 1071.59; I did my deed.  Goldman Sachs style.

The Market Loses its General; Apple (AAPL) Gives Up the Ghost

One term I used a lot in 2008 was the "market generals" i.e. the leadership stocks.  I mentioned about a week and a half ago that almost all the momentum hedge fund filled "momo" (momentum) stocks were showing very bad signs of rolling over.  [Jan 20, 2010: Can Google Change the Tide for Hedge Fund Momo Stocks?] Except Apple (AAPL) aka "the teflon stock".

These are our generals - places institutional money hides out in while other things fall apart.  Their importance waned in 2009 (post February) since every stock in the universe went up, in the babies with the bathwater rally - in fact some of the worst junk rallied the most - heck even Fannie Mae and AIG enjoyed rallies and those are zombies. 

Unfortunately having general status creates very crowded trades and despite having among the best fundamental stories, when X amount of instutional money flees en masse the emergency exit door tends to leave lemmings crushed.  We saw that throughout 2008 and early 2009.

Today the market has lost Apple, as the 50 day moving average has been broken.

On the positive side, as patient buyers we might be able to soon start picking away at some excellent companies at far lower prices then the "momo boys" have been buying at.  Of course that is knife catching action so buys will need to be layered into at a prudent pace. The 200 day moving average for Apple is around $175 where one would assume the bulls make a huge stand when and if we get there.

But overall you do not want to lose your leader - it is not looking good for bulls here...

EDIT: I just went back to look closely at the data from November 2009 and S&P 1071.5 is "the gap" that needs to be filled.

No position

S&P 1080 is the New 1085

Thus far S&P 1080 has been a brick wall to bears.  I don't see the long term significance of this level but we've now bounced twice off it on an intraday level today, and it's very close to the low of yesterday which was just below 1079.

This is a much shorter time frame than we bother to analyze but for daytraders and such, an intraday chart is their mana.  We can see a "double bottom" formed, so if bulls are going to get their groove on, buying off of an intraday double bottom like this would be the precursor.  I'm not sure how useful it is, because I don't do much intraday charting but I am trying to see both sides and find technical reasons to be hopeful if I had a bull hat on.  It won't change my intermediate view that the S&P 500 appears cooked....

We'll move down the "line in the sand" from 1085 to 1080 for now - let's see how these last 100 minutes of the day play out.  I assume many people would not want to carry risk over the weekend as we've seen so many weak Fridays followed by strong Mondays, but I won't feel confidant until 1078 breaks.  I can see it going either way right now.  Victory seems so close... yet so far away.

Wall Street 2 - Money Never Sleeps - New Trailer (Video)

Fingers crossed that the sequel is half as good as the original.  The casting of Shia LaBeouf scares me...really of all the young actors in Hollywood, other than the guy from Spiderman I cannot think of another guy who would least fit the typecast of a  testosterone laden Wall Street jock.  That said, in this era of quant domination I suppose the typical "jock" now is more like the Silicon Valley guy tinkering with his new social media site, rather than the trader of the 80s.

Apr 23, 2010... I await you.

{email readers will need to come to website)


Let us only hope that like the original, this glamorizes "the Street" so that a new era of America's smartest youth is drawn away from taking their skill set to sciences, math and engineering (the Chinese and Indians do it cheaper anyhow) and draws them to the hallowed halls of Goldman, JPMorgan, Morgan, and the quant hedge funds!

A Picture is Worth a 1000 Words

Some key thoughts on the S&P 500 below... keep in mind usually downturns will finish by a large swoon day, followed by an intrday reversal back upward.  Unfortunately with the "urgent buyer" pushing futures up almost every morning it is hard to have a very bad start to the day nowadays, so these conditions are difficult to fulfill.

If we can have a cleansing panic attack selloff we might finally get our oversold bounce.  Thus far this has simply been a grinding slow motion selloff.

Downside targets - S&P 1078 (yesterday's low)
If that breaks, the gap just below S&P 1070.
If that breaks, the 200 day moving average, roughly S&P 1045
If that breaks....

Certainly there will be countertrend rallies back up to shake off bears before we have to worry about those lower targets - for now yesterday's low is the key, along with 1085.  I don't know if we rally first, but with some very bearish technical situations setting up (i.e. the 20 day moving average about to cross below the 50 day) the rallies will be selling opportunities until proven otherwise.  Technically this is the worst the chart for the S&P 500 has looked since summer 2009 (July).

Wouldn't it be ironic (don't you think?) after 16 of 18 Mondays in a row where the markets finished in the green, if the 19th Monday was the knife that finally cut the legs out of the bulls glee?

[chart with comments below - click to enlarge]

Here We Go Again....

Hello S&P 1085... I've missed you.

EDIT 11:55 AM - another minor bounce off S&P 1085.  I am not the only hand that knows this level is key... so does the invisible one.  But as we wrote yesterday, each time you run into a support or resistance - you weaken it.  Waiting patiently for the free market to overwhelm the hand....

The gap at 1070 is whispering "let it happen Larry (Summers)"

EDIT: Back in our SPY Puts...

Notice how since the White House did its first real attack on the prospects of Goldman Sachs (i.e. the Volcker rule) and threatened to separate the taxpayer backstopped free money from their trading desk, the market has only gone down?  The quid pro quo of "look we won't do any real regulation, just keep the stock market elevated (allegedly) & no one will actually ask how you have a 98% winning percentage"  seems to be gone. 

The cynic in me says this is not un-related. 

Bookkeeping: Long US Dollar (UUP) with ETF and Calls

Currency is generally "slow money" not "fast money" but I love the technicals on the dollar here.

I am going to go, for the second time in the past few months, long the dollar - this time via both UUP ETF and UUP Calls.  I am putting 3% into the ETF, and 4% into the calls - we will use March 23's (UUPCW) - in the real world I'd most likely be using March 24's (UUPCY) as they will provide much more upside as a % gain, but the volume in the 23's is much higher so it's easier for me to move in and out of, in the simulator I use to track my moves (which does not work well in lower volume instruments).  The 23's are trading in the low .50s while the 24s are around 14 cents.  Which means if UUP breaks over $24 those 24 calls will explode higher in value, while the 23s will move up, but more of a 1:1 relationship... I am going to mark the price point of both here in the post so at the end of the trade I can show you what we would really have gained (or lost) in a real world environment when I sell the calls.

We had a very successful long trade on the dollar from thanksgiving (just before Dubai) - that lasted about 5 weeks.  Now we are breaking out over and above that level, and a "double top" is being cleared.  If this were a stock I'd be buying hand over first, so I shall consider it the same.

For purposes of tracking I will place these instruments in the "short" bin simply because of the inverse relationship we've seen for 2 years between the dollar and the markets.  It did not use to be this way.  But I suppose much like I did in November, this is a "low risk" way to hedge against the market due to the recent relationship.  Maybe Greece is our new Dubai.  Ah yes, don't forget Spain, Portugal, Italy, Ireland... and Japan, UK, and the US.  All in good time - the world is full of irresponsible governments; the piper is waiting to be paid in the next decade.  (I only wonder if people will still run into the US dollar for "safety" as the US flails around like Greece in about 10-12 years? That would be the greatest irony of all time)

This is the chart of the dollar with 1 DAY DELAY - it is now up to $79.25... so the set up is even better than the chart below looks.

Here is the ETF that reflects the dollar - UUP.  I am not worried about the gap because you should chart the underlying product (the US dollar) not the ETF...

Long UUP ETF and calls in fund; no personal position

Do You Dare Bet Against Magical Mondays?

S&P 1085 continues to be the current floor - while we have a bounce, thus far it's pretty contained.  We are right back to where we were mid afternoon yesterday where we are at an unattractive place to short, just being a 5ish points above the 1085, with an oversold bounce expected.

Further, we soon face "the market can only go up on Mondays".  [Jan 25, 2010: Mondays Continue to be Wonderful]  I am going to cull half of the TNA short which was our insurance policy in case of some sell off late yesterday, with the exact same logic mentioned 24 hours ago.  I want to be short (a) below 1085, not "hovering above it" OR (b) somewhere quite a bit higher i.e. S&P 1100-1110.  I don't find this area to be attractive to be short...

The only question is do you go very long for the now expected Monday bounce?  Something so obvious as 16 of the past 18 Mondays in the green should stop working.  But it has yet to relent.  I am hoping to see a bounce Monday (and today) so I can get a lot more attractive short set ups on individual equities.

As for Freeport McMoran Copper & Gold (FCX) that we mentioned yesterday - bounced smartly off the 200 day.  Despite a stronger dollar.  That is not unexpected - what it does after the cursory bounce is important.  Continues to be a name I am watching while everyone else focuses on Apple (AAPL).

The dollar continues to look excellent as mentioned earlier this week.

We're heavily in cash now, our hands being sat on.

EDIT: Well as I was writing this piece, the S&P fell from 1092 to 1086ish... interesting.  Will be aggressively short on the indexes below 1084ish.

No positions

Bookkeeping: Selling AsiaInfo Holdings (ASIA) on the Open After Guidance Disappoints Street

I will be selling the last of our AsiaInfo Holdings (ASIA) on the open as the stock will be gapping down after tepid guidance.  The price is irrelevant as we only kept about $1000 worth (0.05%) of exposure, simply to keep it on our sheets so we keep a closer eye on it.   Quick history - we began the current position about half a year ago, and it briefly became our largest position just as one of its competitors was about to IPO in American markets in early December.  In a surprise move, the companies merged the day before the IPO and ASIA jumped 25% overnight where we sold half the position in the low $30s. 

The stock then went sideways for a month, peaking in the $32s, and was consolidating the huge move it made so there were no issues technically other than a massive 'gap' in the chart created by the overnight surge from the merger.  If you are new to technical analysis, and want to see what a "double top" looks like see the chart below - ASIA made a perfect double top with mid December and Jan 1 intraday highs, and it has been all downhill from there. [double tops are bearish] 

We were willing to buy back some exposure we sold off as the stock drifted back down near the 50 day moving average - taking a chance the stock would bounce. But it obviously did not and about a week and a half ago, our stop loss in the $27.30s took us out of almost the entire position.  Here is what we wrote on January 20th.

This morning a stop loss that had been placed in the $27.30s - which would indicate that thisthe 50 day had been penetrated - triggered... and now there is a a good chance to fill the "gap" around $26.00.

The problem with buying the stock around $26.00 is the chart is much more troublesome so we'll keep our smaller position and monitor it from here. As a buyer of relative strength I would probably be far more interested in adding back to the position north of $28/$29 rather than $26...

Obviously the stock never jumped back up to a position of strength on the chart, so we had no reason to "catch a falling knife".  And our discipline to cut back sharply on a stock that broke support saved us a good amount of money as ASIA looks to be opening in the mid $22s area if last night's after hours action is a good reflection.  This would push the stock right against the 200 day moving average which should provide some support.

Last night AsiaInfo Holdings reported earnings and the stock's recent weakness can now be explained as "those in the know" knew before us that guidance would be relatively tepid. (ASIA had been weak for a few weeks before the rest of the Chinese small/mid cap stocks broke down)  I still find the company very attractive for the long run and the merger helped it become a dominant player in various niches it plays in.  However, the chart is a disaster and aside from an oversold bounce along the way, it's going to take some time to repair the damage.  There are many other companies right now who have far less issues so we'll revisit ASIA perhaps in 60-75 days; there is no reason to keep an extra close eye on it, so we'll exit the entire position and retain that slot in the portfolio for something else.

I thought results were pretty darn solid, and for those with a 3 year time horizon today's selloff should proivde an attractive entry.  While not particulary cheap the company has some excellent growth metrics and the merger creates a powerhouse in its niche(s).

  • Total revenues for the fourth quarter of 2009 were US$76.3 million, an increase of 42.1% year-over-year and 20.0% sequentially. Exceeding guidance, net revenue (non-GAAP) for the fourth quarter of 2009 was US$72.3 million, an increase of 41.8% year-over-year and 18.7% sequentially. The year-over-year and sequential increases were primarily driven by the strong demand from all three of China's major telecom carriers.
  • In the fourth quarter of 2009, the AsiaInfo Technologies business unit, which focuses on telecommunications software and services, contributed 80.4% and 80.0% to total revenue and net revenue (non-GAAP), respectively.  Total revenues for the AsiaInfo Technologies business unit increased 46.9% year-over-year and 16.7% sequentially to US$61.3 million.
  • In the fourth quarter of 2009, the Lenovo-AsiaInfo business unit, which focuses on IT security products and services, contributed 19.6% to total revenues and 20.0% to net revenue (non-GAAP). Total revenues for the Lenovo-AsiaInfo business unit increased 25.1% year-over-year and 35.9% sequentially to US$14.9 million.
Both business lines are performing well.

Gross Margins:
  • Gross margin for the quarter was 57.7%, compared to 53.5% in the year-ago period and 54.6% in the previous quarter. The year-over-year and sequential increases in gross margin were primarily due to a strong contribution from higher-margin software solutions and services. Gross profit as a percentage of net revenue (non-GAAP) was 60.9% in the fourth quarter of 2009, compared to 56.4% in the year-ago period and 57.0% in the previous quarter.
  • Total operating expenses for the fourth quarter of 2009 increased 41.5% year-over-year and 21.1% sequentially to US$29.7 million.
  • (1) Sales and marketing expenses for the fourth quarter of 2009 increased 18.2% year-over-year and 11.2% sequentially to US$12.5 million. The year-over-year and sequential increases were mainly due to higher sales commission expenses incurred upon signing new contracts.
  • (2) General and administrative expenses for the fourth quarter of 2009 increased 25.4% year-over-year and 21.8% sequentially to US$4.6 million. The year-over-year increase was largely the result of increases in share-based compensation related to the performance stock unit awards granted to key employees on March 16, 2009 and the non-recurring merger transaction related fee of US$2.1 million.
  • (3) Research and development expenses increased 86.5% year-over-year and 16.2% sequentially to US$12.6 million. This increase primarily reflects a US$3.3 million R&D expense in the fourth quarter related to a government contract from the Company's Lenovo-AsiaInfo business unit and R&D expenses related to the development of Next Generation Business Operation Support Systems and Next Generation Business Intelligence systems.
Net income:
  • In the fourth quarter of 2009, net income attributable to AsiaInfo Holdings, Inc. (non-GAAP)(4) was US$18.4 million or US$0.38 per basic share. Net income attributable to AsiaInfo Holdings, Inc. (non-GAAP) in the year-ago period was US$10.2 million or US$0.23 per basic share. Net income attributable to AsiaInfo Holdings, Inc. (non-GAAP) in the previous quarter was US$13.0 million or US$0.29 per basic share.
  • Net income attributable to AsiaInfo Holdings, Inc. (non-GAAP) increased 80.4% year-over-year and 41.5% sequentially.
Management comments:
  • "We recorded 42% year-over-year non-GAAP net revenue growth in the fourth quarter and 47% year-over-year non-GAAP net revenue growth for the year. This is especially noteworthy as it comes on top of nearly 40% full-year non-GAAP net revenue growth in 2008. Additionally, in the fourth quarter we announced a merger agreement with Linkage that upon closing will create a market leader in the IT software and solutions space in China, providing a more comprehensive product and service offering to the telecom operators."
Guidance (this is what is causing the stock to sell off as people seem to be expecting continued sequential growth, whereas seasonality will kick in)
  • AsiaInfo expects first quarter 2010 net income from continuing operations per basic share to be in the range of US$0.19 to US$0.20, an increase of 46% to 54% year-over-year.
  • The Company expects first quarter 2010 net revenue (non-GAAP) to be in the range of US$61 million to US$63 million, an increase of 28% to 32% year-over-year. The Company noted that this guidance includes an estimated US$2.7 million merger-related expense.
Analysts had a median estimate of 22 cents, with a range of 19 to 24 cents so the guidance is a bit light on EPS, as it is on revenue ($63.8M on revenue estimated).  With that said, the selloff is in my opinion extremely overdone as 2-3 cents for a company that will be earning roughly $1.20 on the year should not cost so much market capitalization (and this can simply be conservative guidance they plan to beat) but I am not going to argue with the market.  These type of reactions are exactly why I find earnings season to be bemusing / annoying.  The stock will need time to fix the damage done but the fundamental story remains compelling.

[Aug 11, 2009: Bookkeeping - Beginning Placeholder Stake in AsiaInfo Holdings]
[Aug 7, 2009: Niche Play on China Telecom - AsiaInfo Holdings]

No position (within the hour)

Cavium Networks (CAVM) Continues to Show Strong Growth

I am continuing to read over earnings reports and developing lists of companies that are hitting the cover off the ball in a very tough environment & I am interested in additing to the portfolio . Sharp revenue growth in this type of economy is impressive and all we can do is try to peck at those type of companies exhibiting secular growth, while realizing nothing is immune from the greater market.

Cavium Networks (CAVM) is another in the pantheon of "wireless / networking / storage equipment vendors"; we highlighted the name about a month ago as it was breaking out.  [Dec 18, 2010: Cavium Networks Raises Guidance, Breaks Out of 4 Month Range]   This broad sector of the technology space in doing so well, even companies like PMC Sierra (PMC) are back from the dead (you have to be a veteran from the bubble days of 1999 to remember that one)

Cavium Networks is a leading provider of highly integrated semiconductor products that enable intelligent processing in networking, communications, storage, wireless and video applications. Cavium Networks offers a broad portfolio of integrated, software compatible processors ranging in performance from 10 Mbps to 40 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access & service provider equipment.

With the recent sell off Cavium has now done a full round trip from where it originally broke out, and yesterday's action finally caused it to flush below the 50 day moving average.  There is also a gap at $22.

The company is growing revenue very well and its non-GAAP earnings growth is solid; however as with just about all American public corporations its numbers using traditional accounting are not quite so pleasing.  As always stock payouts to management (in this case $3.3M for a company that only "earned" $4.5M) sucked up the vast portion of profits.  And that is before we get into the other "1x" costs that Wall Street ignores (acquisition costs, ammortization).  To repeat, we talk about this issue - I am not picking on this specific company.  Almost every company now does this, and the wink wink nature of Wall Street where using the corporation as a public trough for rewarding management while diluting shareholders - and pretending those costs do not exist, is par for the course.  We'll use the "Wall Street accounting" below but the reality is Cavium lost $4.5M (11 cents a share) using "real accounting".  In Wall Street's world, they earned 8 cents.

Full report here, the stock was up a percent or so in after hours after beating recently increased guidance by a penny.  There was no guidance in the press release but apparently it was discussed on the conference call which led to a larger move up.
  • Revenue in the fourth quarter of 2009 was $32.1 million, a 24% sequential increase from the $25.9 million reported for the third quarter of 2009 and an increase of 45% from the $22.2 million reported for the fourth quarter of last year. Our results for the fourth quarter were slightly favorable to the positive pre-announcement we made on December 17, 2009 regarding expectations for the quarter.
GAAP data (which everyone ignores)
  • Net loss for the fourth quarter of 2009, on a GAAP basis, was $4.5 million, or $0.11 per share, compared to a net loss of $4.2 million, or $0.10 per share in the third quarter of 2009, and net loss of $4.4 million, or $0.11 per diluted share in the fourth quarter of last year.
  • Gross margins were 51.5% in the fourth quarter of 2009 compared to 51.5% in the third quarter of 2009 and 49.8% in the fourth quarter of 2008.
Non-GAAP (i.e. wink wink Wall Street numbers)
  • Net income for the fourth quarter of 2009, on a non-GAAP basis, was $3.8 million, or $0.08 per diluted share, compared with non-GAAP net income of $0.8 million, or $0.02 per share in the third quarter of 2009 and net income of $0.7 million, or $0.02 per diluted share in the fourth quarter of last year.
  • Gross margins, on a non-GAAP basis, were 58.9% in the fourth quarter of 2009 compared to 55.7% in the third quarter of 2009.
  • Non-GAAP operating margins increased from 4% in the third quarter to 12% this quarter.
  • Non-GAAP financial measures in the fourth quarter of 2009 exclude expenses totaling $8.3 million related to stock-based compensation and related payroll expense, amortization of acquired intangible assets and acquisition related compensation expense and other acquisition related expenses.
  • Sales at network equipment maker Cisco, Cavium's top customer, rose 49 percent sequentially.
  • The share of enterprise and data center segment rose to 61 percent of revenue from 51 percent in the third quarter.

Management talk:
  • "We had record sales this quarter due to growth across multiple markets, especially in the enterprise and data center markets. We had record bookings and design wins during the quarter. New product ramps are in early stages at a number of tier-1 customers and this is driving higher revenue and growth rates for us."
No guidance in the earnings release (why???) Instead it was on the conference call.
  • ....the company on its post-earnings conference call said it sees Q1 profits of 11-12 cents a share, well above the Street, which had been looking for 7 cents.
  • Cavium expects its adjusted gross margins to improve to 61 percent to 62 percent from the current 58.9 percent.

I like the growth metrics here but the stock is quite expensive and we have similar names we've been in which have similar or better growth metrics but are cheaper.  That said, I like it's positioning in the market and will continue to consider it - at a lower price it would be more appealing.  Perhaps if the market continues to correct we can snag it at the "gap" near $22.

No position

Thursday, January 28, 2010

Bookkeeping: Replacing Index Puts with Some Levered ETFs on Short Side - Temporarily

With S&P 1085 looking like it might hold at this time (50 minutes to go) I have taken profits on all index (SPY) puts, and rolled the exposure into short TNA ETF (3x small cap) - which is actually a less levered hedge.  (In the real world I'd use TZA, but for record keeping purposes "short TNA" helps to separate what is long v short)  I am using a 6% allocation.  Willing to take some losses on that instrument if the market goes up to get some insurance, but with the bounce off 1078 the bulls look to have held their level.  Further, the "urgent buyer" who appears almost every overnight session to push futures up can make a lot of gains on the short side disappear overnight so I want to secure a profitable day  That said each time we run into a support or resistance we weaken it, and we continue to pound against 1085.  I continue to believe it breaks for good, but we just don't know if there is an oversold bounce first.  With so many stocks cratered I'm surprised we have not seen a stronger bounce the past few sessions.

Either way, technically I want to be short on (i) a close below 1085 or (ii) after some moderate bounce in the index i.e. closer to 1100 as we were afforded this morning.  A move near S&P 1110 would be even more attractive.  4-5 points over 1085 is not as compelling of place to be aggressively short, so we'll dial things down pending the action into the close.  I will reacquire some puts on a decent sized oversold bounce, or a breakdown below 1085 on a close... which of course could happen in the next 45 minutes.  Watching and waiting for now.

Amazon (AMZN) and Microsoft (MSFT) will be the 2 big names reporting earnings tonight.

No positions

Senate Votes to Increase Debt Limit to $14.3 Trillion

Hmmm, I thought we were taking steps to rein in the deficit?  Oh wait, that was last night... today is a new day. 

As always watch what they do, not what they say. 

I was reading about today's vote last night and it appears politicians did not want to vote twice before November elections on increasing the debt limit, so rather than an incremental approach of "only" $900 BILLION now (with another increase later in the year) they decided to just do a massive increase of $1.9 TRILLION in one fell swoop.  That way, there is only one bad news story instead of two, with the latter coming near to elections.  This way Americans will have forgotten about the increase by November.  Or so they think. And with that our national debt ceiling nor surpasses the size of the entire US economy. 

Anyhow remember this story as we celebrate the "bought and paid for by our grandchildren" GDP figures tomorrow morning.
  • Senate Democrats passed a $1.9 trillion increase in the federal debt limit Thursday, seeking to push off another politically painful debt vote until after the midterm elections.
  • All 60 Democrats and no Republicans voted for the debt limit increase. The measure, which the House has yet to vote on, would put the debt ceiling at roughly $14.3 trillion.   Sen. Paul Kirk (D-Mass.) voted for the debt increase. Sen.-elect Scott Brown (R-Mass.), his replacement, has not been seated.
  • Democrats said the move is necessary because the debt is approaching its current ceiling of $12.4 trillion. If the debt breaches the limit, the government would lose its borrowing authority and risk default.
  • If the House agrees to the $1.9 trillion debt ceiling hike, lawmakers won't have to make another debt vote until 2011.  (aka - AFTER the November 2010 elections)
  • "We have gone to the restaurant, we have eaten the meal; now the only question is whether we pay the check," said Sen. Max Baucus (D-Mont.) in urging his colleagues to increase the limit.

Respectfully Mr. Baucus, we've hoisted a tent at the buffet line and only leave the restaurant for shopping trips.

It's Greece you're worried about?  Put those off balance sheet liabilities (hello Medicare) back on the US balance sheet along with our "unlimited liabilities for the next 3 years) @ our new friends Fannie and Freddie and you've got Greece right here.  Tick Tock. []

[Jan 14, 2009: First Quarter Fiscal 2010 US Deficit 16% Higher than Record 2009 Levels]
[Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]
[May 29, 2009: In 1 year, US Taxpayer on the Hook for $55,000 More per Household]

Freeport McMoran Copper & Gold (FCX) Hits 200 Day Moving Average

Freeport McMoran & Gold (FCX) probably represents the "early cycle recovery, weak dollar" story in 2009 better than any other stock.  It was to 2009 what oil was to 2007.  Despite 5 year highs in copper inventories, and 1 country doing just about all the marginal buying - speculators rushed in and FCX is definitely an institutional plaything.  This is a very well run company but much like US Steel (X) yesterday it has experiencing a Demon Drop.

More than any stock this is the on I will be watching for a "bounce".  It sits right at its 200 day moving average so this would be a logical area to lead an oversold move in its bretheren.  US Steel is in a similar spot and is holding in very well considering the damage today.  Let's see what HAL9000 does with FCX here but this is a very attractive risk/reward long play (with tight stop) for those with short term trading time frames.  The intermediate term situation is not that promising but a relief rally could lead to some 'fast money' if the market continues this bounce (9 S&P points off the bottom already).  I can hear Larry Summers sweating from here as his fingers push "buy buy buy" (allegedly)

No position

1085 Broken, Computers Rush In

If you don't believe in the powers of technical analysis need I only show you the intraday chart.  The line in the sand broke (1085) and a vertical plunge ensued with 5 S&P points lost in minutes (seconds?) as the computers did their thing.

The gap near S&P 1070 is now firmly in play... direct stop or some tourist attractions first is the only question.

Our puts are exploding up in value (only a 4% allocation since we shed so much long exposure there was not much to hedge against), if 1080 breaks convincingly we'll most likely add more and look to sell some around 1070ish, but certainly more danger lies ahead if 1085 is not recaptured soon.  The 200 day moving average in the 1040s is now an intermediate target and probablility.  As always the close is more important than the intraday action but so far, so ugly.  For now we'll focus more on the short side, until/unless 1085 is regained,.... if the textbook is in play we should drift up to test 1085 from the bottom and if we're ready to put some bull horns on the mantle, we'll sell off from there.  If not, this was all a bad dream (for now).  You know the invisible hand will show up here soon to at least try to move things in the "right direction".

*If you plan to invest in my mutual fund this summer, please take evasive actions with any funds headed my way ;)

p.s. this action is all the more ironic since tomorrow we will hear great tidings of how excellent the US economy is doing with the government inflated 4-5% GDP for fourth quarter 2009.  Rejoice.

S&P Seems Likely to Break 1085

The "action" this morning is poor; especially coming off a night where S&P futures surged based on... a speech.  I am a bit surprised the S&P was not run up closer to resistance i.e. S&P 1110 but certainly that adds another arrow to the quiver of "the action stinks".

S&P 1085 remains the line in the sand, and the reflexive bounce yesterday off those levels made a lot of sense.  S&P 1110 (50 day moving average) and 1115 (the previous low) are the 2 top side targets - we're in a new range for now and it's still white noise.  Rome was not burnt down in a day; it will take a few attempts if the eventual fate is to break S&P 1085.. 

I looked at countless charts last night to see what was holding this market up i.e. areas of strength, and aside from Apple (AAPL) there are only 3 areas I could find (a) almost anyting healthcare (b) oil-gas pipeline stocks (not sure why - maybe their yield?) and (c) about 10-12 small to medium sized regional banks.  I assume the last group is due to (a) the first real potential reform of the oligarchs and (b) incredibly favorable deals many of these banks are getting when the FDIC takes over failing banks and hands over assets to their peers.  This was exactly the reason we bought Regions Financial (RF) over a year ago - but the market was not ready to accept this logic at the time.  In many deals the FDIC is handing over these assets and accepting 80%+ of the future losses; talk about handing out free money to the banks - more socializing losses.

But those 3 legs are not much of a stool to stand on.  In my pockets of interest I only have a handful of stocks I would be interested in as the vast majority of stocks I like are breaking down technically.  Just a month ago I ran a screen of stocks over the 20, 50, and 200 day moving average and over $300M in market cap - there were over 2000.  Now its around 400.  (of those who have any real volume)  I'm effectively tabled on the long side except for a few specific situations until the charts firm.  Our stop losses have done their job and we've been liquidated on almost the whole long portfolio - a lot of "minor" positions with only a handful that matter anymore.  I have placed a few limit short orders in individual equities as well, but I was hoping to see more of a bounce in the S&P 500 so my targets would jump 3-5% higher to provide lower risk entry points.  No such luck.  So all we have is an enormous amount of cash and some index puts to hedge off our long exposure - until we exit this small range.

Unless your time frame is much shorter than mine, it is not a place to make long entries - unless they are based on a timeline of a few hours - 48/72 hours.  You have to be quick and fast ... in and out... there will eventually be a bounce (at which time I expect the Chinese and commodity stocks to rally hard) but catching these falling knives is best left to those who wear a few layers of gloves.  Or have 6 hands.... like a (vampire) squid for example.  On the plus side, unlike much of 2009 this market feels much more traditional and normal in behavior... I hope it continues.

Pawn Shops Continue to Impress

I highlighted the relative strength in the pawn shop sector about 5 weeks ago [Dec 16, 2009:  Pawn Shops Breaking Out] - despite the recent selloff these stocks are among the best acting stocks in the market. 

Looks like we were about a year early on our thesis with the pawn shops - the "jobless recovery" would do little for many on Main Street.  Or put another way - whatever political influence / fears in this sector (for their cash advance portions of the business) no longer seem to be the issue that they were when the Dems first took over the White House.  Both of the players we are most interested in - EZCORP (EZPW) and First Cash Financial Services (FCFS) - reported in the past week, and shot the lights out.  [please note both these companies have less exposure to the cash advance business versus industry heavyweight Cash America (CSH)]   EZCORP still strikes me as dirt cheap at just over 10x 2010 estimates - I am leaning towards giving it another whirl in the portfolio despite the nice move in the stock of late.  Certainly not a "fast money" sort of stock but hard to pass up this value - for some reason the company is the Rodney Dangerfield of the sector: "No respect".

1) FCFS reported last night:
  • First Cash Financial Services, Inc. today announced record-setting revenue, net income and earnings per share for both the three months and the year ended December 31, 2009. Earnings per share from continuing operations for the fourth quarter were $0.44, an increase of 26% over the prior year, and $1.39 for the year, as the Company's core pawn operations continued to post strong growth in revenue and operating profits.  Fourth quarter revenue increased 26% over the same quarter last year, totaling $111 million.
  • The earnings results for both the quarter and the year were at the top of the range provided in the Company's updated forecast earlier this month, when it raised earnings guidance for continuing operations by $0.05 per share.
  • Same-store revenue increased by 17% for the quarter and 9% year-to-date, on a constant currency basis, in the Company's U.S. and Mexico pawn stores.
  • The Company completed the previously announced sale of its West Coast payday lending and check-cashing operations as part of its ongoing strategy for increasing focus and growth on the Company's core pawn operations. (we like that a lot)  The Company's storefront payday operations have been essentially reduced to only two states, Texas and Illinois, and will represent less than 13% of revenue in 2010.
  • The Company has initiated guidance for its fiscal 2010 earnings from continuing operations at a range of $1.53 to $1.59 per share.  (could be conservative based on recent history of growth)
  • ....sales of scrap jewelry increased significantly during the quarter based on the strength of high transaction volumes and increased gold prices. Growth in pawn service fees continued to reflect strong consumer lending demand in the U.S., where fees were up 23%, and continued expansion into new and developing markets in Mexico, as fees grew by 31%.
2) EZPW reported late last week:
  •  EZCORP's net income for the quarter ended December 31, 2009 increased 73% to $25.7 million ($0.52 per share) compared to $14.8 million ($0.33 per share) for the quarter ended December 31, 2008. Total revenues for the quarter increased 44% over the prior year period to $184.8 million.
  • For our 2010 fiscal year ending September 30th, we are raising our earnings guidance to approximately $1.81 per share, compared to $1.42 per share for fiscal 2009. We remain on track to open 40 to 50 Empeno Facil pawn locations in Mexico and 35 to 45 CASHMAX payday loan stores in Canada, as well as six domestic pawn stores by fiscal year-end."
  • Revenue from jewelry scrapping surged 89 percent, while pawn service segment saw a 55 percent growth.
I think part of First Cash Financial's premium is their significant reduction of payday / cash advance stores - it is probably the closest pure play on pawn shops in the sector after corporate changes in the past 12-18 months.  That said, EZCORP will earn more in 2010 (per guidance from the 2 companies), grow its EPS faster, yet trades for $4 less.

As a larger commentary, the huge (and growing) income disparity in the country, along with the structural problems we speak of every week - especially of the debt and employment kind - continue to make this sector attractive in the long run.  [Nov 29, 2009: NYT - 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps] [Sep 11, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated] Once more, we have a far better reality check about what is happening on Main Street by listening to companies rather than government fluff economic reports.  (remember this when we see fourth quarter GDP hit somewhere between 4-5% and the CNBC anchors high 5 each other). [Dec 15, 2008: The Economic "Recovery"]  The move into Mexico by both companies is also interesting.

No position

Potash (POT) Beats But Guides Down for Q1 and Full year 2010

I have not been expecting anything particularly strong out of Potash (POT) - it was a lower risk way to play the "weak dollar, commodities must go up as the economic boom returns" thesis.  Today's results were so-so, a small beat versus estimates but lowering of guidance for 2010.  I had not realized a limit order for our stop loss in Potash had hit yesterday at $107.71, which we had mentioned Tuesday [Jan 26, 2010: Overview of Remaining Material Long Positions] so we only had a 0.4% exposure coming into the day.  Looks like the low of the day was $106.90.
Potash (POT) - stop loss is in the high $107s area; just missed executing this morning. The chart is not good, but has held up much better than coal, steel, copper and other such areas which have been trounced lately

Premarket action shows the stock around $104 and certain to test that 200 day moving average.


Commodities have been hit so hard the past 6-7 sessions, I expect an oversold bounce sooner or later - but at this point with the weak action we've been stopped out of most of what little commodity exposure we had.

  • Potash Corp of Saskatchewan (POT), the world's largest fertilizer maker, said on Thursday that fourth-quarter earnings fell almost 70 percent as pricing of key crop nutrients like potash and phosphate have declined sharply from a year ago.
  • Fourth-quarter earnings fell to $243.6 million, or 80 cents a share, from $788 million, or $2.56 a share, a year earlier.  Revenue fell 41 percent to $1.10 billion, the company said in a statement.  Analysts on average had forecast earnings of 78 cents a share on revenue of $1.07 billion, according to Thomson Reuters I/B/E/S.
  • The company also forecast first-quarter and full-year 2010 earnings below analysts' current consensus levels, but expressed optimism that fertilizer demand would bounce back strongly this year. (the same optimism they've been expressing for about 5 quarters in a row - eventually the broken clock will be correct)
  • The Saskatoon, Saskatchewan-based company said it expected global potash shipments of about 50 million tonnes in 2010, well above 2009 levels. But it cautioned that this rebound in demand was contingent on strong grain prices.
  • Potash Corp forecast earnings of 70 cents to $1.00 a share for the first quarter and $4.00 to $5.00 for all of 2010.
Frankly Potash the stock is expensive if $4 is all they will be able to do in 2010.... consensus is $5.89; but as we explained yesterday in the piece about US Steel (X), people have been piling into any "cyclical" stock on presumption of some grand recovery - which in theory would make very expensive stocks suddenly cheap a year or 18 months out.   Potash remains a very well positioned company in the long run - but I continue to believe people are way ahead of themselves on "cyclical recovery" stocks.

Full report
here - a required read if you are an agriculture bull.

 Long Potash in fund; no personal position

WSJ: Mortgage Bulls Say Mortgage Rates Won't Soar when Fed Ends Buying Spree

Conventional wisdom states that mortgage rates shall increase once the Federal Reserve retreats from its unprecedented move into the market March 31st.  However, if this were to be true - you'd think the market would be sniffing it out ahead of time and we'd already see a moderate increase.  Instead, long term rates remain fixed near 5%.    Aside from the bullish views below, some very smart people are speculating that the Christmas Eve massacre [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] was an under the table way to hand off the responsibility of suppressing mortgage rates from the Federal Reserve to Fannie & Freddie. (aka FanFredron)  

If the left hand or the right hand is buying mortgage backed securities (MBS), it really doesn't matter; it's just a matter of what shell the MBS are hiding under.  Further, if *everyone* believes that if rates jump "too high" (as judged by a small cadre of people, rather than the market) the Fed will come back to the rescue, it tends to self fulfill.   Which in and of itself will help to surpress rates. Showing once again how "free markets" are nothing more than a cool bumper sticker in the US nowadays.

Via WSJ:
  • Conventional wisdom holds that the end of the Federal Reserve's $1.25 trillion mortgage-buying spree will be catastrophic for housing. But a growing number of investors are betting that the fears are overstated and mortgage rates won't soar when the Fed leaves the market in just over two months.
  • Fed officials believe they can pull back successfully. And a growing group of optimists are joining their camp. They argue that investors, searching for higher-yielding securities, will find government-backed mortgage-backed securities a bargain relative to other investments, like corporate debt, that have rallied for much of the past year.
  • The optimistic view hinges on the government remaining an enormous presence in the mortgage market, both through its mortgage-backed securities holdings and the widespread expectation that it could jump back in if the market falters. (moral hazard at it's finest - if anything goes wrong, the Uncle Sam shall unfurl his nipple for the speculators to suckle on, yet again)
  • Pessimists worry spreads could rise a full percentage point, which could take 30-year conforming mortgage rates to 6% from 5%, a potentially crippling blow to a still-shaky housing market.   But spreads mightn't have to widen nearly that much to attract private investors hungry for yield at a time when cash yields nothing.
  • So far, the numbers support the optimists. In recent weeks, the Fed has slowed its average weekly net purchases of mortgage-backed securities from $21 billion to about $12 billion. Despite this, the "spread" between mortgage-backed securities yields and risk-free Treasury yields is thinner than last September, when the Fed said it was extending its mortgage buying program by a quarter.  This spread is the basis for the rate people pay when they borrow to buy a home. Any widening typically pushes mortgage rates higher by an equal amount almost immediately.
  • Large bond mutual-fund managers, such as Pimco, have dialed back on their mortgage investments in the past year and now may be short of their usual allocations to mortgages by up to $350 billion, estimates Ohmsatya Ravi, head of U.S. securitized products research at Nomura Securities International.  Their buying could be enough to replace three or four months' worth of Fed purchases, notes Mr. Ravi, who said he doubts mortgage spreads will widen more than 0.2 percentage point when the Fed stops buying.
Another key point below:
  • Meanwhile, the government will remain an enormous presence in the mortgage market even after the Fed stops buying.   The Fed will have a $1.25 trillion mortgage-backed securities portfolio after March. Unless the Fed sells its securities, its holdings mean a lot of supply is being held off the market, at a time when new mortgage originations are anemic, keeping prices from falling too far.
Basic supply and demand.  If an artifical force (the Fed) comes in and warehouses massive amounts of supply - this keeps prices from falling too low since you relatively consistent demand but far less supply.  Economic 101 says prices then must go up over levels that would exist in a market free of interference.

And another way to keep supply off the market -
  • Meanwhile, the Treasury Department in December said it would provide unlimited support to Fannie Mae and Freddie Mac and wouldn't require the agencies to reduce their $1.5 trillion mortgage holdings, as previously planned, a show of government commitment that has lifted mortgage prices.
Coming full circle to the "which shell is the Mortgage Backed Security under?" idea presented in the first paragraph of this piece...
  • Some analysts even suggest that Fannie and Freddie, now with greater government backing, could buy more mortgages if spreads widen drastically and the Fed declines to help.

Wednesday, January 27, 2010

US Dollar (UUP) Looking Increasingly Bullish

The chart for the US dollar is looking better by the day... currently it sits near mid December highs but looks poised to close slightly above - potentially leading to a chance to break north of this "double top" pattern. 4 separate closes out of 5 sessions over the 200 day moving average also bodes well.

In the "old days" a strong US dollar was generally good (or at worst, benign) for the US markets, but with almost all recent market strength coming from (a) weak dollar plays or (b) US multinational exporters who service Asia & who rely in part on a weak dollar for increased price competitiveness - it will be compelling to see what a stronger dollar does in the intermediate term if this action continues.  Is the US dollar foreshadowing future weakness for "risk markets" as has been the inverse relationship for much of the past 2 years?  Or foreshadowing higher interest rates?

That said, I view this as a counter trend rally in a long term swoon in the dollar (-40% since 2003, -97% since 1913).  But these moves can certainly last months or a few quarters; if the strength continues Americans may yet again be able to travel to Europe without taking a 2nd mortgage out on the house.

No position

WSJ: EU Sees Dreams of Power Wane as 'G-2' Rises

As expected the Fed announcement is a non event, and as long as Apple (AAPL) keeps announcing new products every 3-6 months, the US economy is alive and kicking.  Carry on...

The next decade will be very interesting for the European Union as certain member states (Greece, Italy, Portugal, Ireland, Spain) struggle under mighty debt loads.  How the richer members - namely France & Germany - deal with potential sovereign debt defaults by weaker nations will be compelling theater especially since they are now bounded by a common currency.  Hence, unlike what other countries try to do (that is devalue their currency to reduce their effective debt load) - the debt loaded EU countries don't have that "out".  Demographics also are not working in most of Europe's favor; [Nov 13, 2009: Sao Paolo, Mumbai, Shanghai to Join New York, London, Paris as World's Dominant Cities by 2025] frankly the debt laden portions of the EU look like Japan 15 years ago at this point.

Via WSJ:
  • This year, the 27-nation European Union was supposed to come of age as an actor on the world stage, bolstered by the Lisbon Treaty, which streamlines the EU's cumbersome institutions. Instead, Europe is starting to look like the loser in a new geopolitical order dominated by the U.S. and emerging powers led by China.   When the world's policy and economic elite gather Wednesday in Davos, Switzerland, for the annual World Economic Forum, much of the talk will be about the rise of a "G-2" world where the U.S. and China are the most important players.
  • When the world's policy and economic elite gather Wednesday in Davos, Switzerland, for the annual World Economic Forum, much of the talk will be about the rise of a "G-2" world where the U.S. and China are the most important players.
  • Europe, of course, remains a major global player. Its $16 trillion economy accounts for 28% of global output, more than the U.S. The EU's integrated consumer market is the top destination for Chinese goods. Its industrial engine, Germany, remains the world's fourth-largest national economy and exports nearly as much merchandise as China.
  • Britain and France can still deploy significant military power abroad, and have permanent U.N. Security Council seats. Europeans are well represented in global institutions and committees, including the International Monetary Fund and the Financial Stability Forum, where EU officials are influential in negotiating new banking rules.
  • Europe also has "soft power," in its ability to attract and co-opt others by offering EU membership to neighbors, and in representing a model of welfare capitalism to people around the world who dislike the more-individualistic American version.
  • The EU suffered a deeper economic contraction than the U.S. in 2009, even though the U.S. was the epicenter of the economic crisis. It faces a slower recovery thanks partly to onerous public debt in many countries.
  • Europe's longer-term economic prospects are dimming: Ageing and, in some countries, shrinking populations will compound budget strains, while a growing retiree vote could entrench resistance to economic overhauls.
  • Europe's strong representation in international forums is under fire. Critics from developing countries say Europeans still have too many votes at the IMF and U.N. Security Council, reflecting post-World War II reality rather than today's.
  • Many Europeans have long dreamt of a multipolar world, in which diplomacy and international law replace American dominance and military muscle-flexing. But EU-style soft power is turning out to be less useful than expected in dealing with China and other rising powers.
  • "China and Russia see the world in totally realist, zero-sum terms," says Mr. Grant, adding: "If we want China to take us seriously we have to have hard power," or the ability to twist arms through economic, military or other means.  The EU is inherently unsuited to wielding hard power "because it is not a state,"
  • EU members such as Germany, Britain and France retain their own foreign and security policies, which are often at cross purposes, analysts say. China and Russia have each exploited such divisions to play off EU members against each other on issues such as human rights and energy supplies.

Open Question to Our Leaders

Again let me ask in the "it wasn't me" game currently going on in our Capital....

If Tim Geithner as head of NY Fed was not responsible for the AIG Bailout....

And Ben Bernanke as head of the Fed was not responsible for the AIG Bailout...

And Hank Paulson as US Sect Treasury was not responsible for the AIG Bailout...

Who exactly was?  Edith in accounting?

Further, if you folks are *SO* important to the health of the US economic system.  And *SO* irreplaceable in your roles, that the mere thought of you being replaced brings vieled threats by Wall Street strategists of "great dislocations in the markets" (i.e. their prop trading desks will crush this market if their demands are not met)- what exactly are you doing each and every day?

You apparently are not involved in any major decision - or at least the ones that are politically harmful.  But are more than ready to pat yourself on the back (especially you Mr Bernanke) for making decisions that saved the economy.  So you do make decisions apparently - but only the ones that worked out, right?  As for pissing away billions of taxpayer money and making your friends "whole" - that was "not me"'s decision.

What a bunch of losers.  The buck stops here?  Taking responsibility for your organization?  Anyone?

*crickets chirping*

As I think of your shameful avoidance of any responsibility today, I recall the Family Circus cartoon where "Not Me" always was the culprit. 

But on second thought a much better representation can be found below.

Sorry for interupting your busy day gentleman - I'll let you get back to doing important work; that you won't be responsible for in a few years.  Unless it works out.

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