Tuesday, August 3, 2010

Priceline.com (PCLN) Rides Foreign Markets for Huge Earnings Beat

While William Shatner gets all the press (and why not?) perhaps many people do not realize Priceline.com (PCLN) gets a huge portion of revenue overseas, especially in Europe.  It seems (wait for it) foreign strength combined with cost cutting ("expense control") buoyed yet another domestic company.  The stock is surging 17% in after hours and scraping against yearly highs at the $270 range - we've cut our position size ahead of earnings so this is the flip side of missing out on big selloffs post earnings.

Full report here.

Per Briefing.com:

4:10PM Priceline.com beats by $0.44, beats on revs; guides Q3 EPS above consensus, revs above consensus (PCLN) 230.67 +3.29 :

Reports Q2 (Jun) earnings of $3.09 per share, excluding non-recurring items, $0.44 better than the Thomson Reuters consensus of $2.65; revenues rose 27.1% year/year to $767.4 mln vs the $733 mln consensus. Gross booking were $3.4 bln, up 43% y/y. 

Co issues upside guidance for Q3, sees EPS of $4.78-4.98 vs. $4.18 Thomson Reuters consensus; sees Q3 revs growth of 29-34% y/y (~$941-978 mln) vs. $863.28 mln Thomson Reuters consensus. For Q3 sees y/y increase in total gross travel bookings of ~33% - 38% (approx $3.6-3.75 bln); y/y increase in international gross travel bookings of ~46% - 51% compared to 59.5% in Q2; y/y increase in domestic gross travel bookings of approximately 13% compared to 19% in Q2.

Via Reuters:
  • Online travel agency Priceline on Tuesday posted quarterly profit above analyst forecasts as bookings jumped 43%, led by international bookings and hotel reservations as the industry recovers from a downturn.  "The stronger international growth, combined with better expense management, led to the strong upside," said Aaron Kessler, an analyst at Thinkequity.  "The guidance looks pretty strong as well," he said.
  • International bookings rose 63.6% to $321.8 million. The company said global hotel reservations increased by 48%.

Long Priceline.com in fund; no personal position

Action Very Constructive All Things Considered

There were some weak earnings in some larger companies more tied to the U.S. consumer this morning, along with a slew of disappointing economic data.  While it caused a minor selloff to S&P 1117, the key 1114 level held (200 day moving average - simple) and we've cleared 1120 as of this writing.   When the market ignores bad news that is constructive.  I also am advancing the cause that we might be back to 2009 thinking where bad news = good news.  Bad news - more easy money policies from the Fed and to Wall Street that matters more than the economy.  That would take us back to the "heads you win, tails you still win" market of summer 2009 through spring 2010.  I am still looking for this (long awaited) clearance of S&P 1130 to get fully on board with Kool Aid cooler in hand.

That thesis of bad news = good news was true in China overnight, as I was scratching my head why the weak PMI news was greeted so happily.  Apparently the Wall Street logic is the weaker data from China means the government will back off on the tightening policies they have advanced to burst a real estate bubble.   So they have now bestowed the Larry Kudlow "Goldilocks" theme circa US 2005-2007 to China.  5 men (and a baby) will be able to control the 2nd largest economy on Earth and softly guide it wherever they need in near perfect formation.  How convenient.  And these are "free market" advocates who populate Wall Street?

So in a perverse way the Chinese market has been hammered the past 3 months as economic data was "too good" (leading to inflation fears).  Now that the data is weaker, that is better.  While I understand it, I sort of laugh a little inside.

Either way we have jam packed data in the week ahead - ISM Services Wednesday, employment data Friday and now the Fed meeting where instead of telling us the exact same thing they might be changing the language to get even EASIER... this of course in relation the easiest levels of monetary policy in our lives.  (p.s. where are all those folks who told me 7-8 months ago that the big uptick in temporary workers ALWAYS presages big employment gains?  It *is* different this time comrade)  Oh wait, time to roll out the 17th month of "it's a lagging indicator" excuse.  [Feb 16, 2010: USA Today - Use of Temps to Fill Jobs May No Longer Signal Permanent Hiring].

In relation to the market, I want to see how the market reacts to more bad news - in the past few weeks, the bad news has been ignored or embraced.  Today as well.  Hence, I'd like to see a bad report Friday with employment to see if the reaction is aggressive buying after the knee jerk reaction.  If so, we are all back on the Ben Bernanke train of (even more) free money as far as the eye can see.  And we should expect the dollar short trade to be back on.

Caption: Bernanke thinks I am toilet paper.

If this is green shoots, I'd hate to see brown.  But as we saw in 2009 through early 2010 when the Fed shoots a trillion+ into the banks, who use it to buy Treasuries and risk assets (since there is little end demand in the 'real economy'), you don't want to fight it.  I tried for 6 weeks in spring/early summer 2009 and I got Bernanke'd.

Wheat Continues to Surge as Russian Droughts Drive Prices

Two and a half weeks ago I mentioned that wheat was flying [July 16, 2010: Get Your Wheat On]  This subindex below was priced at just over $20.  Yesterday it was actually making a run for $25, and well into the $24s, tacking on another 20% in just the past few weeks.

[click to enlarge]

I listed some ETFs that would benefit in the July piece but in theory as prices for crops go up, farmers should be willing to open up the pocketbooks for fertilizer, so that's an easier second derivative play on this move.  Aside from the devastation in Russia, it appears there are even issues in Canada.

  • Wheat prices opened August with another big jump, hitting a 2-year high Monday as worsening weather conditions ravaged Russia's grain crops.  Wheat prices soared 42% in July, the biggest monthly gain in at least 51 years, as a severe Russian drought destroyed one-fifth of Russia's wheat crop. Fires are now raging in the fields of the world's No. 3 wheat exporter, hurting more crops and increasing expectations that Russia will have to curb or even stop its exports.>
  • Estimates from Russian grain growers' unions and economists range from a 30 to 44% drop in exports this year from 2009.
  • Canada, another major exporter of wheat, expects the lowest wheat yields since 2002 because of crops that were destroyed by heavy rains or left unplanted.  That is great news for American farmers, who expect a strong yield from U.S. wheat crops. They will likely sell more of their wheat for higher prices to meet the shortfall from abroad.
  • Expectations for an increasingly smaller world stockpiles of wheat helped push prices for September delivery up 31.75 cents, or 4.8%, to settle at $6.93 Monday. It's the highest wheat close since September 2008.
  • Prices earlier Monday touched above $7 a bushel for the first time since September 2008, which was the tail end of a record-busting run-up in commodity prices that began in spring of 2007. Wheat prices topped out at an all-time high above $13 a bushel in February 2008.  [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators]
  • If the huge rally in market prices continues in August, U.S. shoppers could pay 5 to 10% more for products made of wheat at the grocery store starting in fall.

Unlike the 2007-2008 run up caused by levered investment banks and hedgies, this one actually seems to have basis in fact.  But perhaps with QE2, Bernanke can help these same 2 groups make 'mad money' by driving the price back to "super cool" 2008 levels.

As an aside, one of the most recession proof areas of the country is the farm growing Midwest -  Nebraska has the 3rd lowest unemployment rate in the country at 4.8%, following North Dakota's 3.6% and South Dakota's 4.5%.  So if you can't live in the ring around Washington D.C. where the federal spending spigot is creating a taxpayer funded boom, go (mid)west young man.

Bookkeeping: Cutting Back Polypore International (PPO) By 2/3rds Ahead of Earnings

I sold 1/3rd of Polypore International (PPO) to lock in profits within a hair of its 52 week high a week ago today.  The very next day it fell 9% from where I sold so I bought that exposure back (plus some).  However thus far there has been no bounce.  I was hoping to see something soon knowing I'd have to cut back ahead of earnings.

With earnings out tomorrow, I'm selling this position down by 2/3rds and as long as the earnings report does no harm to the chart, will be looking to buy back after the release.  This will temporarily drop it from a 2% exposure to roughly 0.6%.

Long Polypore International in fund; no personal position


Jeremy Grantham GMO July 2010 Letter - Summer Essays

One of Wall Street's must reads is Jeremy Grantham's quarterly letter. Below is this quarter's, entitled "Summer Essays"  (hit 'full screen' for easier reading)  Often Grantham and I agree - in fact in this letter he throws in the towel on inflation - and points to deflation, says U.S. multinationals are a great play, and points to foreign emerging markets over Western developed.  This all sounds quite familiar.

Jeremy Grantham, GMO - Summer Essays - 071910

[Apr 26, 2010:  Jeremy Grantham GMO April 2010 Letter]
[Jan 26, 2010: Jeremy Grantham GMO January 2010 Letter]
[Oct 27, 2009: Jeremy Grantham GMO October 2009 Letter]

Continued Weaker Economic Data in U.S. Offset by Further "Leaking" of Federal Reserve QE2 Actions

More signs of weakness in the U.S. economic data - continuing the pattern seen in about 80% of the reports over the past 60 days.  But does it matter anymore?  Not if the Fed is intent on force feeding money into the system that there is little demand for.  Instead it will go into capital markets to manipulate asset prices upward.  So from here on out any dip buying can be justified with "but the Fed is behind the market and will bail me out like they did in 2009!"

Remember, we currently have a bunch of apples on the store shelve that no one is buying.  Solution to the problem?  Put more apples on the store shelves.  That's the logic (I use the word loosely) of an increasingly desperate Fed who as recently as the June FOMC meeting was not saying a word about Quantitative Easing 2, but now is flooding the airways with "papers" and leaks to the media.  Managing by the seat of your pants with no vision or plan?  Sure.  But if it makes shorts panic knowing Ben Bernanke is on the other side of the trade, it's all good.

The only positive today is the savings rate continues to go up - but that is a long term positive, not one in the near term in a new paradigm economy that is based on (over) consumption.

For today's leak from the Wall Street journal please visit:  Fed Mulls Symbolic Shift

The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook.

And after the symbolic shift, and more importantly once the elections are out of the way can come the next 'shifts'.

Via AP:
  • Consumers did not boost their spending in June and their incomes failed to increase, further evidence that the economic recovery slowed in the spring. And Americans saved at the highest rate in nearly a year.
  • Personal spending was unchanged in June, the Commerce Department reported Tuesday. It was the third straight month of lackluster consumer demand. Incomes were also flat, the weakest showing in nine months.

None of the above is surprising... remember Americans with jobs hurt corporate profits.  Record profit margins demand less people working, hence to keep spending up record level of transfer payments need to be maintained or increased.  Or apples need to be shoved down people's throats.

  • The personal savings rate rose to 6.4% of after-tax incomes in June, the highest reading in nearly a year.

Factory orders were not much better:

  • Factory orders dropped 1.2% in June to a seasonally adjusted $406.4 billion, the Commerce Department said. It was the second consecutive decline after nine straight months of gains. Lower demand for steel, construction machinery and aircraft dragged down the figure.

Housing?  Don't worry about it - once we engineer the 3.5% 30 year mortgage nationally (hopefully married to a $20,000 tax credit to anyone with a heartbeat), the Cramer bottom in housing will be here.  Please note housing should always be looked at year over year since it is seasonal, and this latest measure is "only" down 19% versus a period in 2009 when things were at their worst in the economy. 

  • And the number of buyers who signed contracts to purchase homes fell in June. The National Association of Realtors says its seasonally adjusted index of sales agreements for previously occupied homes dipped 2.6% to a reading of 75.7. That was the lowest on records dating back to 2001 and down nearly 19% from the same month a year earlier.

Monday, August 2, 2010

Bookkeeping: Adding to Monsanto (MON)

Unlike some stocks which are now looking completely egregious - yet still have people chasing after them as if there will be no stock to buy ever again after today, see these punks for example...

I feel more comfortable with stocks that make a nice move, consolidate, churn a bit, and then start a new leg up... this seems to be the case with Monsanto (MON) after resting for 2.5 weeks.  I don't see much resistance until mid $64s so I'll throw on another 1.8% exposure to my 2.4% I already have.

Game plan with this one is to sell material exposure if and when mid $64s is reached, and if the stock is strong enough to just burst through, get the shares back I sold and keep riding it. 

Long F5 Networks, Monsanto in fund; no personal position

Bookkeeping: Cutting Priceline.com (PCLN) Ahead of Earnings

Today is a very strange day - very little in my portfolio is up materially and aside from commodities a lot of stocks in my watch lists, while green, are not up tremendously.  I am not sure where the 'action' is today outside of commodities (and to a lesser degree financials); but something is taking the indexes up 2% so it must be groups I don't traditionally spend time in.  I do see auto suppliers (which I highlighted Friday) flying.

Scanning the earnings schedule, Priceline.com (PCLN) is set to report tomorrow; to avoid any chance of getting Vistaprinted I am going to sell down my exposure from 1.9% to 0.6%, taking some modest gains.  This company usually always plays the Wall Street game of under promise and over deliver so we'll see if they can do it again.

Long Priceline.com in fund; no personal position


Bookkeeping: Starting a Commodity Basket - Freeport McMoran & Gold (FCX), Potash (POT), Walter Industries (WLT), and Cleveland Cliffs (CLF)

I wrote a week and a half ago that the algos were moving into the commodity trade... [Jul 23, 2010: HAL9000 Starting to Get his Commodity Play On]  I should have listened to myself.  It looks to me like a huge allocation trade is happening where the big money is moving from the tech stocks they rode for a few months, into anything in the CRB index (i.e. commodities).  Since the individual names mean nothing to HAL9000, I wish there was an ETF with the top 8-10 hedgie favorites.  Instead I have to build my own basket so I am going to put together a 4 prong approach with hedge fund favorites FCX, POT, WLT, CLF.  I picked these 4 but feel free to throw a dart at any number of 100-200 commodity stocks and you will get almost the identical chart. 

It is almost meaningless to tell you what they do, since it means nothing to HAL but respectively they are copper, fertilizer, coal (met and steam), and iron ore.  I am streamlining as a few of these names have other businesses. 

Since I am "chasing" here I am going to simply put 0.5% into each of the 4, to build a 2% allocation and since they all have almost identical charts will add and subtract from them as 1 big allocation trade.  As if I were HAL9000 myself.  If they all begin to break down below their recently cleared 200 day moving averages, you know the script... back to the curb they will go.

Long all names mentioned in fund; no personal position

Bloomberg: New "Silk Road" Built by China Connects Asia to Latin America

Quite a comprehensive piece on Bloomberg, tying together some themes we've touched on in various stories over the years.  We tend to get caught on in the day to day micro, but it truly is amazing when you step back and think about how so much has changed in the macro in under 2 decades.

  • The high-speed rail link China Railway Construction Corp. is building in Saudi Arabia doesn’t just connect the holy cities of Mecca and Medina. It shows how Asia, the Middle East, Africa and Latin America are holding the world economy together.   Ties between emerging markets form what economists at HSBC Holdings Plc and Royal Bank of Scotland Group Plc call the “new Silk Road” -- a $2.8-trillion version of the Asian-focused network of trade routes along which commerce prospered starting in about the second century.
  • Today’s world-spanning web is insulating markets such as China from the drag of weak recoveries in the advanced world and providing global growth with a new power source. Stephen King, HSBC’s chief economist, predicts the relationships will strengthen and lists them as a reason for his forecast that emerging markets will grow about three times faster than rich nations this year and next on average.
  • The potential for inter-emerging market trade is ginormous,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, who coined the term BRIC in 2001 to describe the rising role of Brazil, Russia, India and China. “That makes it quite difficult to see how you get a sustained global recession because of what’s going on in the west.”
  • The BRIC economies hold a 13% share of world trade and have been responsible for about half of global growth since the start of the financial crisis in 2007, according to O’Neill.
  • Gene Grossman, who succeeded Federal Reserve Chairman Ben S. Bernanke as head of Princeton University’s economics department, sees a repeating pattern of what he called the “home market effect,” in which countries at similar income levels increasingly trade because their consumers have similar tastes and spending power.
  • Royal Bank of Scotland Chief China Economist Ben Simpfendorfer in Hong Kong says emerging Asian and Middle Eastern economies will account for 75% of every extra barrel of oil consumed or produced in the next decade....

A remarkable statistic; from 1/10th of global end demand to nealry a third in 2 decades:
  • ....growing trade between emerging markets helps explain why they now account for about 30% of global final consumption, about the same as the U.S. and up from 10 percent in 1990.

We've touched on this in the past in a series of posts - China has been especially aggressive in Africa, investing in securing future resources while the U.S. is busy with wars and making sure its oligarchs are taken care of.  Obviously China will have an advantage in southeast Asia but again, the growth in just 2 decades is astounding.
  • Of the foreign direct investment flowing into south, east and southeast Asia alone, China was a source of 13.3% in 2008, compared with the U.S.’s 7.9% and up from 0.4% in 1991.
  • China, the world’s fastest-growing major economy, dominates the push into fellow emerging markets, passing the U.S. as the biggest exporter to the Middle East in 2008.

  • Elsewhere in Asia, a group led by Korea Electric Power Corp., South Korea’s largest utility, beat off competition from General Electric Co. and France’s Areva SA to win a $20 billion UAE nuclear contract.
  • The Saudi Railways Organization last month awarded a contract to China South Locomotive and Rolling Stock Corp. to supply 10 cargo locomotives.
  • The Mecca-Medina rail contract went to Beijing-based China Railway as part of a Saudi- Chinese consortium.

And Brazil is getting into the actm behind powerhouse Vale (VALE)
  • In Latin America, Brazil’s Vale SA has been on an international spending spree, helped by booming commodities demand from China and a currency that has doubled against the dollar since 2003. The company estimates that its $1.3-billion coal mine in Mozambique will have a capacity of 11 million tons per year three to four years after it enters production in the first half of 2011.
  • Vale in 2009 acquired stakes in three copper projects, in Zambia, Africa’s largest producer of the metal, and the Democratic Republic of Congo. In April this year, the company agreed to pay $2.5 billion for iron ore deposits in Guinea, including assets the country confiscated from the Rio Tinto Group.
  • In December 2009, 32 percent of the backlog of orders for (Brazil's) Embraer’s (ERJ) medium-range E-Jet airliners was from emerging markets, up from 1 percent in 2005. Over the same period the company’s backlog of orders from North America and Europe fell to 53 percent of the total, down from 91 percent.
  • We saw the same phenomenon with American and European companies 50 to 100 years ago as they went global,” said Shane Oliver, head of investment strategy at AMP Capital Investors, which manages about $95 billion in Sydney. “Emerging-market companies are now big enough and they have the choice of going to developed countries where they may be more constrained or to the emerging world where the growth potential is.”
  • Since taking office in 2003, Brazilian President Luiz Inacio Lula da Silva has visited about 68 developing nations, more than any of his predecessors.

  • India said in May that it will open an economic division at its embassy in China’s capital as the two countries seek to increase bilateral trade to $60 billion this year from $43 billion last year. (these 2 countries were not exactly 'friends' in the past)
  • India’s Tata Group was the second-largest investor in sub- Saharan Africa in the six years through 2009.

Quick history lesson:
  • Royal Bank of Scotland’s Simpfendorfer, whose book “The New Silk Road: How a Rising Arab World is Turning Away from The West and Rediscovering China” was published last year, says the trade ties between China and the Middle East alone make for a modern Silk Road.
  • The original was more than 4,000 miles (10,200 kilometers) of trade routes crossing Asia and into southern Europe and north Africa. Based around China’s silk industry and once traveled by Marco Polo, the commerce it enabled also helped power the growth of civilizations from Egypt to Rome.

[Jun 10, 2010: China's Thirst of Any Commodity that Moves Leads to Thawing of Relations with Russia]
[Apr 13, 2010: China's Quest for Resources Makes Billionaires Out of Some Australians]
[Feb 16, 2010: India Worries as China Builds Ports in Southeast Asia]
[Dec 15, 2009: China's Economic Power Unsettles Neighbors]
[Nov 11, 2009: China Continues Expanding "Infrastructure for Resources" Policy with Agreement in Malaysia]
[Sep 30, 2009: China Attempting to Secure 1/6th of Nigeria's Proven Oil Reserves]
[May 13, 2009: Commodities - It's China's World: We Just Live in It]

Missed Opportunity to Get Back into Currency Shares British Pound (FXB)

I closed out Currency Shares British Pound (FXB) July 23rd when it was at an inflection point - it was either about to make a double top OR a double top breakout.  (I am ignoring the weird spike on the 22nd)  This is the "then" chart:

When stocks/etfs break out over a double top they are generally good options to purchase, as we can see clearly was the case last week when FXB broke over the "double top" area of $154.  In fact I did that exact same trade over and over (and over) on the S&P 500 in summer 2009 through early 2010 as we had double top breakout after double top breakout.  Missed the signal to get back into this one however.

This is the "now" chart

So much for the cheap European vacations....

No position

July ISM Manufacturing Weaker than June but "Better than Expected"

I am wondering if we are going to repeat the mantra of early-mid 2009 now that several Fed minions have hinted at Quantitative Easing 2.0.  That is, good news is good news and bad news means more free money i.e. good news for Wall Street.  That seems to be the attitude today as a "meh" Chinese report was bought hand over fist without any fear of what will be coming out of the U.S. ISM Manufacturing report.  If this indeed is the new attitude (or return to the old attitude) we're in for another round of Kool Aid as it no longer will matter what the economic data say since we know we're headed to a happy place where Ben Bernanke will hook up the IV to the market's arm, and inject us with more steroids. 

As for today, ISM Manufacturing weakened fom June's levels but since it beat expectations all is good in the world.
  • An industry trade group says growth in the manufacturing sector weakened in July to the slowest pace this year.  The Institute for Supply Management says its manufacturing index slipped to 55.5 in July from 56.2 in June.  Economists polled by Thomson Reuters had forecast a lower reading of 54.1.
Construction spending also gained based on (wait for it) government spending.
  • Construction spending in the U.S. unexpectedly increased in June, boosted by gain in government programs that made up for declines in private residential and commercial projects.  Economists forecast construction spending would decline 0.5 percent. 
  • The 0.1 percent increase in outlays followed a revised 1 percent drop in May that was larger than previously estimated (shocker, a revision downward) ;)
  • Private construction spending dropped 0.6 percent following a 1.4 percent decrease in May. Homebuilding outlays fell 0.8 percent. Private non-residential projects decreased 0.5 percent, reflecting declines in construction of factories, commercial dwellings and communications stations.  (enough with the private sector... give me more government)
  • Spending on public construction increased 1.5 percent from the prior month.  (ahhhh...yes)
  • Federal building climbed 4.6 percent to $31.7 billion, the most on record. (mmmm... steroids)

The S&P 500 is at last week's highs of 1120; once those clear the next target will be 1130.   I'll probably try a quick index trade to see if we can capture those 10 points. EDIT 10:15 AM - I am buying this TNA ETF on the break over 1120.

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 52

Year 3, Week 52 Major Position Changes

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

Cash: 79.6% (v 69.9% last week)
16 long bias: 17.8% (v 26.9% last week)
1 short bias: 2.6% (v 3.2% last week)

17 positions (vs 21 last week)

Weekly thoughts
Year 4 for FMMF begins!

Not much was accomplished last week as an early week push through the 200 day simple moving average of 1114 (Tuesday) was taken back the same day, and a few days of selling followed.  The action Thursday and Friday were almost complete opposites with 2 very volatile days, led by surge Thursday (that was sold) followed by a big drop to start Friday (that was bought).  The action was particularly tricky those 2 days.  The U.S. multinationals continued their dominance but the "beat the estimate" game seemed to be 'in the market' by mid week, and a return to focus on economic data - which was mostly weaker - caused much of selling mid week.

Below is the S&P 500 chart with simple moving averages shown, as the 200 day simple moving average has been an important level to observe - it remains near 1114 as we enter this week.  As we've mentioned this past week there are 3 key levels: S&P 1100, 1113/1114 (200 day simple moving average) and 1130 (June intraday highs)  A move over 1130 and I'll be more apt to feel comfortable being long.

In other markets, we have received a mixed and sometimes contrary tale.  Copper held onto its breakout, while China - still weak in the big picture - continues its bounce, but precious metals show weakness, and the 10 year bond faltered late in the week as Q2 GDP came in light.  Head scratching cross currents - while the 10 year bond action scares me, it is telling us a completely different story than copper so I hesitate to put any serious bets against the market until the S&P 500 breaks support, and China stops going copper shopping.

One market I wanted to highlight this week is Brazil, up a resounding 10 sessions in a row!  Indeed in this world of almost perfect correlations where ETFs and HFTs conspire to make almost every stock and commodity trade identical, look at how closely Brazil and copper have been trading since May 1!


This is a very big week for economic data with multiple ISM reports and the monthly employment reports.  Chinese PMI also is released this week but the initial reaction to further weakening in the Chinese data seems to be "bad news is good news" or "it's backwards looking, and copper is telling us something different".  Earnings season continues but it mostly moves now to smaller companies who are either more domestic leaning and/or foreign companies; the multinationals are more or less done at this point.

Monday:  ISM Manufacturing and Construction Spending - the former will suck up most of the oxygen
Tuesday:  Personal Income & Outlays, and Factory Orders - the latter will get more attention.
Wednesday:  ADP Employment and ISM Services - both reports should have some impact
Thursday:  Weekly Jobless Claims
Friday:  Monthly Employment Data in the morning and Consumer Credit in the afternoon


For the portfolio it was not a great week as my attention was on fund launch, and I missed a few earnings reports - of which one (Acme Packet) hurt some.  That said, the S&P 500 remains in a large range of largely S&P 1040 to "the 200 day simple moving average" and I want to look at intermediate plays at new intermediate highs or lows.  On the top side that would be a move over S&P 1130.  Many traders have complained of being "chopped up" in trading the past few weeks and I don't blame them; some of these days have been extremely volatile and the market continues to have little memory from day to day, swinging from 'end of days' action to 'all is well in the world' - sometimes within hours.  When the action is that violent I 'get smaller' and wait to see how things turn out; best case you protect against the volatility and potential losses - worse case you miss some opportunity cost.  Many of the names of interest for us also reported last week or will report in the next 2 weeks so we don't want to stick our next out ahead of earnings.

On the long side:

  • Monday, I closed a position in Direxion Small Cap Bull 3x (TNA) as the S&P 500 ran to the 200 day simple moving average of 1113, that I had bought the previous Friday on a break over S&P 1100. This was just a quick trade which garnered 6% in under 24 "market hours".  In retrospect, while the market peaked the next day at 1120 it ended up being a good trade considering the chop fest that was to occur the rest of the week.
  • I closed out the rest of Netflix (NFLX) which had been cut back the previous week, as the stock struggled post earnings.  Still like the story and I expect a dead cat bounce, but I need to see the chart firm up OR a drop lower to re-enter.  I replaced Netflix with Chinese semi stock Spreadtrum Communications (SPRD) as money was moving into Chinese small caps after months of underperformance by this group.
  • I closed the last of a gold position held since March 2009; Powershares DB Gold Double Long (DGP) as the technical condition weakened. 
  • Tuesday as the market surged over 1113 to 1120 I took 1/3rd off the table in Polypore International (PPO) and Tibco Software (TIBX) to lock in some profits as their charts were very overbought.  Polypore dropped 9% from where I sold within 24 hours, so I bought back what I sold (plus a bit more) Wednesday. 
  • Thursday, after the stock was punished post earnings I cut back half of my modest Akamai Technologies (AKAM) position; with the other half I was willing to give the name some more rope to see if it could regain key support levels quickly.  In the morning selloff Friday when it looked like the market was going to fall apart, I sold out the other half portion of AKAM, closing the position.
  • I restarted NetLogic Microsystems (NETL) which reported a great quarter, but still sold off sharply.  Unlike some other stocks which were punished post earnings it still held support as of when I bought so I began a 1.7% stake and decided to watch to see if it could hold support.
  • Acme Packet (APKT) reported stellar numbers but the stock was priced for perfection.  With the work on the mutual fund this week and on pledges, I did not monitor earnings releases closely and had a pretty good sized position on - which was hammered Friday morning - taking away all my unrealized gains along with giving some capital losses.  A big 'red candle' was formed, so I sold 2/3rds to right size until I see how the stock reacts and if it is quickly able to regain support.   

On the short side:

  • A long standing limit order to short Energizer (ENR) hit Tuesday - since the price was not that bad (the stock gapped up to fill my order) I let it stand for a few days to see how the stock fared on any selloff... later in the week when ENR held up well during a selloff, I closed out the position for 'flat'.
  • In the Friday morning selloff, I added a hedge on the indexes with a short of TNA - this was to be held if the S&P 500 stayed below 1093/1094.  That drop was quickly bought and I just as quickly got out of the short for a loss.
  • I closed out a long held short of iShares Barclays 20+ Year Treasury Bond (TLT) as bond yields continue to plummet, causing this position not to work.

Sunday, August 1, 2010

Now that Alan Greenspan is Free to Speak the Truth, He is Doing So

Amazingly accurate commentary from a man who loved to hide his thoughts in shadows as Fed head.  It makes me wonder if these people in public eye play dumb, and sing the company line while knowing the dark truth all along... or are truly clueless.  Not sure which is more evil in fact.

Any reader who has been with FMMF for more than a matter of weeks will see these words parallel much of what we have been saying.
  • Former Federal Reserve Chairman Akan Greenspan said the slowing economic recovery in the U.S. feels like a “quasi-recession” and the economy might contract again if home prices decline. 


Bravo for these next words; it's a recovery of the large multinational business and well off individual* (which increasingly is dominating consumption as the middle class is drowned); small business can be damned as they don't have a lobbyist arm that matters.  Hence little say in government handouts. Even the investment banks say so in hushed whispers of their research reports [Sep 7, 2009: Citigroup 2006 - America, A Modern Day Plutonomy]

In a "plutonomy", according to Citigroup global strategist Ajay Kapur, economic growth is powered by and largely consumed by the wealthy few.

*ex public sector, which has thus far been largely immune.  [Sep 8, 2009: The True "Middle Class"]

  • “Our problem basically is that we have a very distorted economy,” Greenspan said. Any recovery has mostly been limited to large banks, large businesses and “high-income individuals who have just had $800 billion added to their 401(k)s, and are spending it and are carrying what consumption there is.” 
  • The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long term unemployment -- that is pulling the economy apart,” Greenspan said. 

The legacy of a few decades of 'trickle on down economics' perhaps?


As for those green shoots?
  • There’s nothing out there that I can see which will alter the trend or the level of unemployment,” Greenspan said. 
How about a census every 6 months?

[Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?]

    Chinese Manufacturing Grows at Slowest Pace in 17 Months

    Futures thus far Sunday evening are ignoring the continued slowdown in Chinese economic figures.  I'm a bit surprised by that since the driver of almost all global growth the past 18 months has been centered in China.  There are actually 2 reports from China each month; one from government and one from the private sector but they have directionally been relatively close to each other, each month.  At this point, the data point to near break even in expansion v contraction in China so it will be interesting if the magicians who run the economy can turn at a 180 degree angle.

    Via Bloomberg:
    • China’s manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories.  The Purchasing Managers' Index fell to 51.2 from 52.1 in June, the Federation of Logistics and Purchasing said on its website. A reading above 50 shows an expansion. 
    • A separate China PMI is due to be released by HSBC Holdings Plc and Markit Economics.  A deeper Chinese slowdown could weaken a global recovery already constrained by the debt burdens and unemployment of advanced economies.
    • July's PMI was the lowest since China’s manufacturing stopped contracting in March 2009 and was less than the median forecast of 51.
    • At Morgan Stanley, economist Wang Qing said the slowdown seemed concentrated in heavy industry, partly reflecting a government campaign to close inefficient businesses to meet energy-saving goals. This “does not necessarily reflect weakening in the underlying economic fundamentals,” he said.  
    • The data showed contractions in indexes of stocks of raw materials and finished goods, suggesting “a quite aggressive inventory correction” as business confidence weakens, said Tao Dong, a Hong Kong-based economist at Credit Suisse AG.
    • The PMI, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.

    Another thesis could be that China properly tried to prick a growing bubble in real estate  due to their easy money policies the past quarter, but have in the past 3-4 weeks changed course again, as shown by the uptick in many commodity prices.  (and their market)  If Chinese PMI spikes next month it would appear the spigots of money from the central overlord have been turned back on.

    • Investors may be betting that the government will alter policies if necessary to sustain the pace of growth
    • The Chinese economy is slowing down mainly due to the ongoing property tightening measures,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch. “Beijing will surely ramp up spending on public housing and other public works to stabilize growth.” 

    Updated Position Sheet

    Cash: 79.6% (v 69.9% last week) 
    17.8% (v 26.9%) 
    2.6% (v 3.2%) 

    This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on thewebsite. 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. 

    [click to enlarge]

    LONG (1 photo file)




    Saturday, July 31, 2010

    Goldman Sachs (GS) Projects Material Weakening in July's ISM Reports

    It will be interesting to see if Goldman Sachs nails this one.  Outside of the monthly employment reports, the ISM reports (Manufacturing and Services) have served to become the most important reports on domestic economic activity.  As I've written many times the market still seems to focus much more on ISM Manufacturing as if we are still living in 1977 (Mfg is now only 13% of US economic output and 9% of employment) whereas I focus much more on ISM Services, as services is the dominant 'output' in the new paradigm US economy.   Ironically even as the country de-emphasizes manufacturing, due to Asian demand and inventory restocking the manufacturing figures have been the much stronger of the two the past 15 months, with the service data really only kicking it into gear the past 3-4 months.

    While Asia is still rolling, much of the inventory restocking looks to be completing, hence new inventory build is going to focus much more on end demand.  Which ex-Asia is not exactly booming.  ISM Manufacturing is released Monday 10 AM, and Services Wednesday 10 AM.  Outside of the Chinese ISM which will be released Sunday night, these should be the big market moving events of the week until Friday's employment report.  Whatever happens, it is like buying ahead of an earnings report - bipolar risk and just pure gambling to try to guess which way it goes.  Let's see if Goldman's proprietary outlook is accurate; if so it could portend a rough week.

    (please note any figure over 50 is still expansionary but to truly add to job growth we need to be churning far above 50)


    From BusinessInsider

    The next U.S. ISM manufacturing and services reports, to be released by the Institute for Supply Management this Monday, could be pretty ugly, says Goldman.
    How do they know? They've built their own 'GSAI' indicator that shares much of the same data that goes into the ISM release, and thus provides a potential early warning:
    Goldman's Jan Hatzius:
    The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in JuneThis decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009.
    Most of the movement in the GSAI this month is attributed to significant declines in the sales and new orders indices, which fell 12.3 and 9.7 points respectively. The new orders index is now at its lowest level since July of last year. In this context, July’s slight increase in the inventories index may not be a good sign as it suggests production may have moved ahead of demand at a time when orders may be flagging. The gap between the new orders and inventories indices, which provides a rough leading guide to future strength in industrial output in ISM-style surveys, is the narrowest it has been since May of 2009.
    The only reminder here is that their indicator remains in growth territory, indicating continued economic expansion, but just of a far slower nature.

    Friday, July 30, 2010

    BorgWarner (BWA) Beats, Raises - Auto Supplier Base Continues to Look Interesting

    The auto supplier base is a huge ecosystem from large to small; most of the public companies are the larger firms who have some good economies of scale.  In my post about the potential General Motors IPO [Jun 16, 2010: What to Expect from a General Motors IPO], I mentioned how before the implosion of 2008 the unions had truly made some sea changes in their contracts both in terms of truly being able to fire people (rather than putting them in a room and paying them 90% of their wages), as well as a 2 tier pay system (new hires being paid just over what the average Walmart worker now gets).  These companies have very levered models so with the dramatic cost cuts both now and those that should be rolling onto the books the next 5-10 years as the old guard retires, these companies are all quite interesting.  (The supplier base already went to much lower wages in the blue collar far in advance of the Big 3 since competition is so much more cuththroat).  

    In a parallel sense the auto industry of 5-10 years ago was a lot like our local, state, and federal government is today - bloated and not adjusted to the new world order.  . [Jan 24, 2010: For the First Time, More Union Workers Work in Government versus Private Sector]  Since government can be run as a money losing operation (at least at federal level, and to some degree at the local level as federal government hands taxpayer money out as "stimulus") for apparently an infinite amount of years, we are still not seeing any true reform or adjustment in the public sphere.  Certainly not when compared has happened in the auto sector where a wrenching period of adjustment has been happening not just the past 3 years, but the past 10 (ask a multitude of Midwest towns)

    Hence these auto companies can now be profitable even with smaller revenue levels due to a far smaller labor base, with many employees paid far less than 5, 10 years ago....and many names in the sector are also benefiting from huge growth overseas in emerging markets.  That should be a familiar theme by now across many industries - the main difference is other reasons i.e. global wage arbitrage (i.e. outsourcing) -  is causing the lower labor costs in non automotive.  Once again all these development are not so great for the American consumer or former middle class (many of which won't be able to ever buy a new cars at their new wages) but as the "cold hearted speculator class" who only cares about profits no matter what expense to a society (which is the hat we are forced to wear as a fund manager), believe it or not even at current levels of annual auto volume (which is about 70-75% of peak!) these companies are pumping out profits.  We own BorgWarner (BWA) which reported today but many names that reported (including Ford) in this sector the past week have put up some impressive figures.  See Tenneco (TEN) for an example.

    BWA is now approaching a retest of 52 week highs; I don't have a huge position due to earnings and taking some profits earlier in the month, but if I had a larger position what I would do is take another round of profits here and then buy back if the stock can show enough strength to clear the old high.  Otherwise, buying on a pullback to support works.  Since my position is not very big I am just going to keep what I have and add once I see how the stock and the general market acts in the weeks ahead.

    Obviously despite the ability to mint money at far lower volumes than in the past, this industry is still cyclical and if the next leg of the Great Recession is a deep dive, these companies will suffer but I think instead we are just going to have years of malaise (the "square root" economy rather than V's, W's, U's)- until/when fears of sovereign debt levels strike at one of the big 3: Japan, UK, USA.

    A quick look at earnings and the 11 cent beat.
    • Auto parts maker BorgWarner Inc (BWA) posted stronger-than-expected quarterly earnings on Friday and raised its full-year earnings forecast due to stronger vehicle production in North America, Europe and China.
    • BorgWarner, which produces turbochargers, transmission components and other parts, said it expects its growth to outpace the market overall and for company record earnings for the year.
    • The auto parts maker reported net income of $82.8 million, or 68 cents per share, in the second quarter, compared with a net loss of $35.9 million, or a loss of 31 cents per share, a year earlier.  Excluding nonrecurring items, BorgWarner earned 78 cents per share.
    • Sales rose to $1.42 billion in the quarter from $916.2 million a year earlier. (+55%) BorgWarner said it expected sales to rise 32 percent to 35 percent in 2010 from last year.
    • Analysts on average expected it to earn 67 cents per share on that basis, according to Thomson Reuters I/B/E/S.
    • A "volume shift in Europe toward vehicles with higher BorgWarner content, including diesels, also boosted results," Chief Executive Timothy Manganello said in a statement.
    Guidance up substantially:
    • BorgWarner raised its 2010 earnings forecast to a range of $2.60 per share to $2.80 per share, from a prior forecast for $2.20 to $2.50 per share.
    • Analysts expect $2.42 per share.

    [May 10, 2010: Beginning Stake in BorgWarner]
    [Jun 15, 2010: Morgan Stanley & UBS Upgrade Auto Sector; Including BorgWarner]

    Long BorgWarner in fund; no personal position

    Steve Madden (SHOO) Young Women's Shoes Apparently Nearly Recession Proof

    My favorite stocks are companies who have a solid growth component combined with a positive technical condition.  Steve Madden (SHOO) is a name that has impressed me quite a bit during the past year and a half, as it would often - like J Crew (JCG) - stand out amongst the consumer discretionary crowd in terms of fundamentals.  Despite that I was short the name (for technical reasons) for a day or three before being stopped out in late May.   However, now both the fundamentals and technicals are aligned quite nicely, although the stock looks to be quite overbought in the very near term.

    The company reported yesterday morning, and continues to impress with a 13 cent beat on EPS and mid 30% growth rates in revenue.  If they can expand their footwear brand into a full line of clothing (always a risk) there could be even more growth potential for a much longer period of time.  Looks like accessories already made up 16% of sales this quarter. At 16x forward estimates for 2010 it is not cheap but not necessarily expensive considering the growth rate.

    Via Reuters:
    • A fast-growing accessories and men's business helped Steve Madden (SHOO) top market expectations in the second quarter, and the shoemaker said it was seeing a lot of potential for growth outside footwear
    • Steve Madden's solid quarterly results prompted it to raise its 2010 outlook for the second time this year  The company, which primarily sells to 12- to 25-year-old girls, said it now expects 2010 earnings of between $2.45 and $2.55 a share, up from an earlier view of $2.30 to $2.40 a shareThe company also raised its full-year view on sales growth to 22% to 24%, from 17% to 19% forecast earlier.
    • For the second quarter, the company reported earnings of 70 cents a share, up from 44 cents a share, a year earlier.   The company, whose lines include flagship brand Steve Madden, Stevies and Candies, saw sales jump 36% to $158.7 million during the quarter.
    • Analysts were expecting the shoe maker to earn 57 cents a share, on revenue of $144.4 million in the quarter.  
    • Net sales at Steve Madden's wholesale unit grew 46.5% to $129.2 million, during the quarter.
    • Operating margin reached 20.2% of sales in the second quarter of 2010, compared with operating margin of 16.6% in the same period of 2009. 
    • The company's wholesale accessories business grew 79% to $25 million during the second quarter ended June 30, driven by strong sales of its hand bags and private label belts, Chief Executive Edward Rosenfeld said on a conference call with analysts.   The segment got a major fillip from Steve Madden's acquisitions of Madden Zone last year and Big Buddha hand bags in February this year, he added.
    • "We are also bullish about the prospects of our licensing business," Rosenfeld said, adding that the company would launch a new category of "special occasion dresses" to be sold for $90 to $200 at 50 of Macy's top dress stores in the spring of 2011. 
    No position

    Research in Motion (RIMM) to Introduce BlackPad, an iPad Competitor; Might Finally be Turning Things Around

    Research in Motion (RIMM) intrigues me.  For a growth-y stock it is very cheap (just over 10x 2010 earnings), but is being priced as if Apple (AAPL) is just toying with it before killing it.  Unfortunately, technology wise RIMM has been behind the times as it lacked that "touchy feely, squeeze the screen" functionality that all the kids (and apparently parents) love on their phone screens.  But they are finally coming out with one of those (Blackberry 9800).. not just to compete with with iPhone but the upper end Android phones like the Droids from Motorola (MOT).  While offering solid products, the company has lacked the sex appeal seem from Apple and Google O/S based product.  And today, a shot out of left field; RIMM has plans for an iPad competitor this November.  It will be interesting to see how it stacks up (especially where they price it versus iPad) but if these new RIMM products begin to take off, maybe the market will begin to see that RIMM is going to hold its own over the long run. 

    Technically the stock has been in the desert for many moons; ever since that gap down in October 2009 it has struggled (other than a 30 day period in March 2010).  But it is showing some signs of life here - too early to make a definitive call but time to keep an eye on it, as long as the greater market can stay benign.

    Via Bloomberg:
    • Research In Motion Ltd., maker of the BlackBerry smartphone, plans to introduce a tablet computer in November to compete with Apple Inc’s iPad, according to two people familiar with the company’s plans.
    • The device will have roughly the same dimensions as the iPad, which has a 9.7-inch diagonal screen, ....the device will include Wi-Fi and Bluetooth wireless technology that will allow people to use their BlackBerry smartphones to connect to the Internet, the two people said.
    • Apple, based in Cupertino, California, last month said it sold 3 million iPad tablet computers in 80 days after they debuted in the U.S.
    • “They can’t wait for a second generation of devices from Apple or they’ll fall too far behind,” said Ashok Kumar, an analyst with Rodman & Renshaw Inc. in New York.
    • RIM plans to call the tablet Blackpad, according to one of the people familiar with the company’s plans. RIM, based in Waterloo, Ontario, acquired the Internet rights to blackpad.com this month, according to the Whois database of domain names.
    • The company is hosting an event in New York Aug. 3 at which it will debut its BlackBerry 9800 slider phone, according to one person familiar with its plans. The device will feature a full touchscreen like Apple’s iPhone and a slideout Qwerty keyboard to allow for easy e-mail typing, the person said.
    • The company plans to use the phone to regain the market share it has lost recently to its U.S. rival. RIM’s share of the smartphone market fell to 19.4 percent of global shipments in the first quarter from 20.9 percent a year earlier, according to researcher IDC, based in Framingham, Massachusetts. Apple claimed 16.1 percent of the smartphone market, up from 10.9 percent a year earlier.

    Expect tablets to get very crowded very soon...
    • Korea’s LG Electronics Inc. said this month it plans to introduce a tablet computer in the fourth quarter that runs on Google Inc.’s Android software.
    • Microsoft Corp. Chief Executive Officer Steve Ballmer said yesterday the software company plans to increase its focus on tablets.
    • Hewlett-Packard Co., the world’s biggest personal-computer maker, said it plans to produce a tablet device that runs on Microsoft’s Windows operating system.

    No position

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