Sunday, October 31, 2010

[Videos] 60 Minutes: (a) Anger in the Heartland (b) Deficits: Taxing the Rich

Two nice stories tonight on 60 Minutes having to do with the economy

First, the dichotomy between fantastic corporate profits in large companies - especially that of the multinational kind - versus the scorched earth left behind in the ecosystem, once the large companies move jobs offshore; this story is specific to Iowa and Maytag but of course is symptomatic of so many others as Ross Perot's "great sucking sound" plays out.   A tangent in this piece is the utter despair the voters in the piece have with both parties, and how few believe their children will do as well as they did.  All themes discussed at length the past 3-4 years on FMMF pages.

(13 minute video)

Two years ago, most Americans voted for change, and if the polls are to be believed, they're about to do it again.

In the latest CBS News/New York Times Poll, 80 percent said they want most incumbents out of Congress regardless of whether that incumbent is a Democrat or Republican.

There's a grim mood among people who were counting on a recovery that has now fallen flat. The economists who decide such things say that the Great Recession ended in June 2009. But since then, we've lost another half million jobs - which helps explain why there is so much anger in the land.

We saw a lot of it right in the middle of the country, among the people who've endured the recession longer than anyone.


Second, can we fix the deficit just by "taxing the rich?" - this is like asking can we build a dam with 20 bags of concrete.  In a broader sense this piece is again political - one side of the 2 headed monster handing away every benefit known under the sun, without having a way to pay for it.... while the other side of the 2 headed monster believing cutting taxes (to perhaps zero) will be fine in that environment.  This story is told mostly through the context of a Washington state initiative to initiate an income tax on the upper income, and the normal dogma ensues.  Special appearance by former Reagen budget director David Stockman who calls out his own party for ... well, dogma.  [Jan 20, 2010: What Can (Scott) Brown Do for You? Not Much... if you are an Incumbant]

(13 minute video as well)

When Congress returns after the elections on Tuesday, it will face one of the most hotly debated issues in the campaign: raising taxes on the rich.

That's President Obama's position: to keep the Bush tax cuts in place, except for those on the wealthiest two percent as a way to reduce the dreaded deficit.

It's an idea already percolating among the governors: eight states have increased so-called "millionaire" income taxes so far, as a way of avoiding drastic budget cuts on health and education. And on Tuesday, voters could make Washington State the ninth.

But with our national debt in the trillions, budget experts will tell you that just taxing the rich isn't enough.

Updated Position Sheet

Cash: 69.0% (v 69.2% last week) 
27.6% (v 26.3%) 
3.4% (v 4.5%) 

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)



Friday, October 29, 2010

Prices Paid in Chicago PMI Escalate at "Unimaginable Rate and Pace"

Inflation continues to be non existent in Bernanke's eyes (otherwise he'd have no cover for QE2).  However the real world continues to scream otherwise.

In this morning's Chicago PMI prices paid surged from 55.0 to 68.9!

The verbiage:  “Raw material prices escalating at unimaginable rate and pace.”


Most of us focus on the CRB commodity index for an inflation gauge, which is not near 2008 highs due to its energy weightings.

However, there is another index called CRB Rind (hard to find a symbol I can chart) but this essentially excludes energy (nat gas & oil) and as of late September was already above mid 2008 highs (which was the peak of the speculative commodity blow off top)...

The CRB RIND is a Raw Materials Index published by the Commodity Research Bureau. The index consists of the following 22 raw materials:

Burlap, Butter, Cocoa beans, Copper scrap, Corn, Cotton, Cottonseed oil, Hides, Hogs, Lard, Lead scrap, Print cloth, Rosin, Rubber, Steel scrap, Steers, Sugar, Tallow, Tin, Wheat, Wool tops and Zinc.

"The Spot Market Price Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes in business activity.

So to review - as long as you don't eat, use energy, clothe yourself, [Oct 17, 2010: Get Your Cotton On] pay healthcare premiums, pay tuition at a university....or require any minor or major commodity in your life (excluding natural gas) you are good.  There is no inflation in your life.  Go forth and buy homes - they are in deflationary mode.  Otherwise, you're out of luck.  Unless you live in the Federal Reserve ivory tower textbook, where all this data is just a mirage. 

Again, I will stress this is a repeat of late 2007 to mid 2008 - the only thing missing is the $140 oil.  Profit margins are going to be squeezed as this begins to filter through the system - the Chicago PMI is already showing it.  (remember, my outlandish theory is as corporations work to protect profit margins, as input prices surge they will begin a new round of labor cuts - thanks Ben!)  And we have not even BEGUN QE2 yet.  Watch the restaurant stocks [Sep 19, 2007: Tough Times Ahead: Restaurants?]  [Oct 31, 2007: Food Inflation Starting to Hit Restaurants] and others that don't have pricing power, but must continue to absorb higher prices; they were my canary in the coal mine in 2007 as the market raced along confident Ben had the solutions to all our problems.  Sound familiar?

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

Speaking of.... remember 2003 and the last man who had the solutions to all our problems?  The Fed was fighting a phantom called deflation with 1% interest rates.  How did that turn out the next 5 years?  That is a cupcake compared to what Ben is doing.  Boy oh boy, we're going to have a fun decade ahead.  Onward guinea pigs. 

Bookkeeping: Restarting Silver Wheaton (SLW)

I mentioned yesterday gold was looking a bit tired, but silver was hanging in there.  It appears the news of Japan moving up their BOJ meeting to "fight the Fed" immediately with more money printing of their own [Japan Outlines Plan for Newest QE, and Moves Up Next BOJ Meeting to Combat Helicopter Ben]  has put some life back into this group after it consolidated some huge moves.  Gold suddenly is back en vogue.

Rather than buying the silver ETF (or Ultra Silver as I usually do) I decided to go with an old favorite Silver Wheaton (SLW) which is a neat little leveraged company which does not have direct mining risk.  Before the silver ETF was around this was my main way to play silver 'in the day'.  I have not been in this stock since May 2008.  The negative with buying a stock rather than a commodity ETF is the stocks usually trade with the market, so if there ever is a selloff allowed again by the central bank, 'equities' (even of the precious metal kind) can fall even as the precious metal might rally.  The last time I played Silver Wheaton I ended up paying for it [February 14, 2008: Silver 3 Months Later - I Picked the Wrong Horse]  So it's another flip of the coin which direction you go - commodity versus stock that specializes in commodity.


What is interesting today is these precious metals are rallying WITHOUT a materially weaker dollar.  Which is why I believe this news has a lot to do with the Bank of Japan's meeting change... we have central bankers across the developed world acting out of reaction to each other - so as each devalues, then the other .... well you already heard the spiel this morning.

I started a 2.1% exposure on the 'breakout'.

Here is silver....

Here is Silver Wheaton

[Feb 25, 2008: Silver Wheaton Ok Results but some Massive Expansion Opportunities]

Long Silver Wheaton in fund; no personal position

Power-One (PWER) Remains a Heartbreaker

I like to keep track of positions sold in the previous few months to see what has become of them.  Power-One (PWER) was an adventure - a warning by a competitor decimated shares and we were forced out of the stock quite a few weeks ago.  Last evening, the company reported stellar earnings and in after hours was touching recent highs.

It opened this morning even better, jumping over $13 .... before giving it all away today.

An incredibly volatile stock and on many levels I feel bad for longs in this stock as I've been in their shoes many times - I don't know what the market wants with this one.  Too hot for my tastes - any stock that can do all this in one day is not in strong hands of any type.  If you have the stomach for it, it's fallen to key support, so with a tight stop you can play from here.    On many levels I'm tempted, but I'm also tempted to keep my Antacid usage at a minimum.

  • For the quarter, the company reported revenue of $314 million and profits of 40 cents a share, well ahead of the consensus at $264.7 million and 23 cents.  
  • For Q4, PWER sees revenue of $340 million to $360 million; the Street has been projecting $298 million.

No position

Bookkeeping: Starting Eastman Chemical (EMN)

One group I've completely missed on this run from late August are the chemical companies - not my usual area to play in, but a deeply cyclical group benefiting from many of the multinational trends I've outlined in countless pieces.  A lot of these multinational names are starting to show fatigue, so I am doing any purchase between here and "the next correction" with tight stops since I am seeing a narrower market in many ways ... while people continue to pile into some names at any price, a lot of stocks are actually beginning to break down.  So consider buying anything long at this point as something I am doing with gun (bazooka in Bernanke's case) to head.   And I'll be out in a jiffy as there are huge air pockets below so many stocks now.

Eastman Chemical (EMN) is a new name to the portfolio, and this is the first time I've ever bought it.  It has had a monster run for a 'slow money' type of stock, up some 20% since late August - even after this recent small pullback.   This is a $5.6B company that is more or less your typical diversified chemical producer.

Eastman Chemical Company engages in the manufacture and sale of chemicals, plastics, and fibers in the United States and internationally. The company operates in five segments: Coatings, Adhesives, Specialty Polymers, and Inks (CASPI); Fibers; Performance Chemicals and Intermediates (PCI); Performance Polymers; and the Specialty Plastics (SP).

Is it trading at 10x earnings on the year but with cyclical companies, always tough to buy on valuation since you normally want to buy when they are 'rich' and sell when they are 'cheap', due to the cyclical nature of EPS.  Obviously commodity costs are the big thing here - many chemical processes use nat gas as an input so the bear market in that one commodity is a big benefit, and then on the other side of the equation, pricing power is important.... if they can pass along higher prices, margins expand and we're all happy.   If not, we're not happy.

In terms of geography the company is still North American dominant but does have good Asian exposure and even some Latin American - obviously one would prefer those two dominate but here is the revenue breakdown for the quarter

  • US/Canada $946M
  • Asia Pacific $369M
  • Europe $291M
  • Latin America $123M

The fundamental picture is bright in terms of the earnings report it offered yesterday, and the technical picture is solid (but could turn on a dime).  As the stock pulls back to the 20 day moving average, I have begun a 2.2% exposure.  If this level breaks, I will have a tight stop because that gap down at $67.50 (mid September) scares me - indeed I might go short the name if the overall market finally relents.

With my entry in the $78.20s I'll give this about a 2.5% berth, or downside to the low $76 area for a stop loss.  Rather than chasing momo stocks, I actually prefer to buy charts like this where you have a breakout and a small pullback to support.  This way I have a line in the sand where a tight stop loss can get me out if I am wrong.  But I seem to be in the minority nowadays as "buy whatever is up 6% so I can sell it to someone tomorrow ever highr" is the prevalent trend among silicon and carbon based traders.

(full report here)

An overview of the earnings report, via Reuters

  • Eastman Chemical Co (EMN) said its quarterly profit rose 68 percent to beat expectations as sales of packaging and plastics jumped.  Demand for Eastman's products continues to rebound around the world, and the company estimated fourth-quarter profit in a range that is mostly above analysts' consensus forecast.
  • "Other than normal seasonal declines, we expect strong volumes will continue across the company and in all regions," Chief Executive Jim Rogers said in a release.  Rogers warned, though, that higher raw material costs could squeeze margins in the fourth quarter.
Financial data:
  • For the third quarter, Eastman posted net income of $170 million, or $2.33 per share, compared with $101 million, or $1.38 per share, in the year-ago period.  Analysts expected earnings of $2.23 per share, according to Thomson Reuters I/B/E/S.
  • Revenue at the Kingsport, Tennessee-based company rose 29.3 percent to $1.73 billion. Analysts had expected $1.71 billion.  Sales spiked in all units, including specialty plastics, which makes Tritan, a brand name plastic used to make drinking water bottles and related items.
  • For the fourth quarter, Eastman forecast earnings of $1.40 to $1.50 per share. Analysts expect earnings of $1.41 per share for the period.
Long Eastman Chemical in fund; no personal position

Based on Recent Trends Alone, Monday Should be a Monster Day Up

If you closed your eyes and just looked at statistical data Monday should be a monster day.  Not only is it a Monday which (without having the data in front of me) I'd guess accounted for anywhere from 60-70% of the gains from the March 2009 lows, but the first day of the month has been a wicked good day for the market for well over a decade.  [Sep 30, 2010: Amazing Stat - Over 12 Year Period You Made More on 1st Day of the Month then All Other Days Combined]  Therefore next Monday, which is a combination of both situations would appear to be a 'no brainer' eh?  Did I mentioned it's a POMO day as well? (icing on the cake!)  "The sun'll come out POMOrrow....."

Of course we have elections Tuesdays and the Fed's gift giving announcement Wednesday, so it will be interesting to see if people get off their hands and do their normal front running ahead of these now ridiculously obvious trends (that just keep on working, despite being discounted to no end).

p.s. the PCE deflator in today's GDP report (which I won't even bother to 'analyze' as it is revised 3x to Sunday in the coming few months) is 2.3%... that is supposed to be the Fed's TOP tool for gauging inflation.  And that was a reading as of Sep 30 - commodities have continued to ramp through October. So therefore if the guise that Ben wants inflation is the true reason for QE2, what more does he want?  Of course that's if you believe the things coming out of his mouth.  Which you shouldn't.  [Sep 22, 2010: Bernanke Lied to Us]  Ben has found his weapons of mass destruction and will act accordingly, regardless of the facts on the ground.  Screwflation is alive and well.


Acme Packet (APKT) with Small Beat, and Raised Guidance - Adding a Bit

In retrospect my flip of the coin last week would have been better served to land on tails (F5 Networks) rather than heads (Acme Packet) but what can you do.   Since I was restarting a position going into earnings the size was small enough that no real damage would be done if it had imploded, so my upside (in F5) would have been limited in dollar terms, but still would be nice to always be right. ;)  The reaction to earnings for the 2 were immensely different; Acme reported last night and actually has sold off on the news.   Damage is quite limited and the chart still looks fine.  But this is yet another "not cheap" stock at 50x forward 2010 year end EPS.  It is becoming increasingly distressing trying to find any value among the 'go to' stocks.... these are not trailing PEs we are talking about, but a host of companies at 40-60x FORWARD that people keep piling into.

I am going to add a tad (about a 0.6% exposure) here simply because I am struggling to find new places to put in long exposure.

Today has actually been quite wild and woolly day with the stock all the way down to the 20 day MA on the downside, and a new breakout high on the upside... but right now smack dab in the middle. (the high price was the print for about 1 second at the open today)

A quick look at earnings shows 20c v 19c expectation (NON GAAP of course)
Guidance for the year raised from $214-$218M to $220-$221M, and EPS from 72-74 cents to 76-77 cents.

Gross margins 81.4%, similar to that of some of the other 'superstar' stocks in "networking".

(full report here)

Via AP:
  • Acme Packet Inc. said Thursday that its third-quarter profit nearly tripled as sales of its communications equipment grew.  The company, whose results came in ahead of analyst estimates, also raised its forecast for the rest of the year. H
  • For the quarter that ended Sept. 30, Acme Packet earned $10.5 million, or 15 cents per share, up from $3.6 million, or 6 cents per share, in the year-ago quarter. Excluding one-time items, the company earned 20 cents per share -- a penny higher than what analysts polled by Thomson Reuters expected.
  • Revenue jumped 56 percent to $56.6 million, also beating analyst estimates of $55 million.
  • Acme Packet said product revenue rose nearly 64 percent to $45.3 million, while maintenance, support and service revenue rose 31 percent to $11.3 million.
  • Acme Packet also raised its outlook for the rest of the year. The company now expects a profit of 59 cents or 60 cents per share, or 76 cents or 77 cents excluding one-time items, on $220 million to $221 million in revenue. 
  • Previously, the company predicted a profit of 72 cents to 74 cents excluding one-time items, on $214 million to $218 million in revenue.
  • Analysts are looking for an adjusted profit of 73 cents per share on $218 million in revenue, on average.
Acme Packet, Inc. is the leader in session border control solutions, enables the delivery of trusted, first-class interactive communications—voice, video and multimedia sessions—and data services across IP network borders.

Long Acme Packet in fund; no personal position


This Day in Taxpayer Abuse - Buffalo Teachers Skim $9M in 2009 Alone for Cosmetic Surgeries

One positive from the fiscal disasters hitting our governments of all levels (ex-federal which can just print, borrow, and print some more to its hearts content), is a FRACTION of the egregious abuse of taxpayers is being rooted out. You know, sort of like what happens in a private enterprise that actually needs to post break even (or heck a profit) to stay in business?

I literally could devote an entire blog to this subject from some of the things I read on a weekly basis, but I can only pick and choose some of the most outrageous (hello Bell, CA) [Jul 23, 2010: California City Seeks Dismissal of Highly Paid Officials] or the most fanciful incidents. (hello New Jersey!) [Dec 4, 2009: Public Workers Continue to Live the Good Life in New Jersey] That said, it still pays to be a government worker (at ANY level) in relation to those suckers in the private sector as 'free market' forces have a huge lag. Not to mention being the last major hideout for pensions and "France like" retirement ages. This caste of society is also buffeted by 'stimulus' after 'handout' after 'jobs program' (we don't call it stimulus anymore - dirty word) to subsidize pay/benefits in the state and local government branches. And when all else fails, what a few more mills on the property tax amongst friends? After all, we don't want our teachers looking ragged... here is a toast to the (increasingly) beautiful teaching class of Buffalo.

Via CBS News:
  • Buffalo teachers rang up nearly $9 million worth of taxpayer-covered cosmetic surgery in 2009, according to the state-appointed authority overseeing public school finances. 
  • The Buffalo Fiscal Stability Authority found that last year's costs for elective procedures such as chemical peels and other skin treatments were up $8 million over 2004's $1 million tab for cosmetic surgery
$1M to $9M in a span of 6 years?  Nice!
  • The procedures, provided under the teachers' union contract, accounted for 9 percent of the district's total spending on health benefits for employees and retirees, The Buffalo News reported Thursday. 
Impressive - 1 in 10 dollars on health benefits going for cosmetic surgery.  This is the point in the story the union head should shout that if we care about our children we need happy teachers, and we should be very satisfied with this arrangement.

  • About 10,000 school employees are eligible for the benefit. District officials said teachers or their dependents accounted for 90 percent of the approximately 500 people (average $18,000 per person) who received cosmetic surgery last year.  
I don't know much about cosmetic surgery but $18,000 seems a bit pricey for (ahem) "chemical peels and other skin treatments".  but that's the story and we're sticking to it.

Certainly in this time of duress - when districts are dropping programs, crowding more kids into classes, and cutting non critical classes like say... math & science (let the Asian countries do it), certainly the union could voluntarily give this up for 12 months, right?  Because it's "all about the children" right?
  • Smith said the issue of the rider came up during the district's budget talks last spring. "We asked the unions to forgo the cosmetic surgery rider for one year, so we could use the money to reduce the number of layoffs," she said. "They weren't interested."

  • Board of Education member Christopher Jacobs said the cost increase "smacks of abuse" and is asking the district and the city comptroller to investigate. 
  • Most procedures were performed by eight doctors, the newspaper said, including one who billed the district $4.3 million.
Talk about 'transfer payments'!  From taxpayer to 8 doctors ... not too shabby.


A few local stories on the subject here and here.   (p.s. it appears the police have the same benefit) :)  Look folks, America may be broke but no one looks better broke than we do.  NO ONE.  (circus and bread, circus and bread!)
  • All of them were elective procedures that required a doctor's approval.
  • Because the district is self-insured for its cosmetic surgery rider, taxpayers cover the entire cost directly, district officials said.

[Aug 11, 2010: . Federal Worker BENEFITS now Approaching Parity with WAGES in the Private Sector]
[Mar 11, 2010: America's 3 Wealthiest Counties Now Ring Washington D.C.]

[Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You

Japan Outlines Plans for Newest QE, Including Purchases of Corporate Bonds and ETFs; Moves Up Next BOJ Meeting to Combat Helicopter Ben

We continue to see some amazing things out of the developed world's central bankers in the global 'race to the bottom'.  Early in the month Japan's central bank (BOJ) announces a sweeping new QE - not so much in size, but in terms of what they would buy.  Details were made clear in the past 36 hours and it's quite astounding... they are trying to out 'banana republic' Bernanke.   But if the U.S. continues down it's current path, just as we have followed Japan down the path of QE, I expect the central bank to begin buying many of the same sort of things.  Indeed, one might argue it is already happening - the Fed just uses the primary dealers as the middle man and to keep their hands "clean".

[Please note, a few astute commentators - and indeed a few of our own commentators - believe QE2 is laying the groundwork for the next backdoor bailout, that is buying MBS and CMBS from the banks during the next leg of 'don't call it a recession' & 'housing recovery'.]

The latest Japanese QE (I have no idea which version they are on, as it's been going on for a decade) is $61B USD; a 'modest' sum (as we've become numb to large numbers) in a $5T economy.  To put into perspective this would be equivalent to QE of $150B in US economy terms.  We should get $150B in a month and a half of QE2.  But it's not how much that is astounding, but "what".

Via AP:

  • ....the Bank of Japan left interest rates untouched and offered new details of a $61 billion asset purchase program intended to spur lending to companies. 
  • The BOJ's governor, Gov. Masaaki Shirakawa announced a "comprehensive monetary easing policy" on Oct. 5 that consisted of the rate cut and a pledge to maintain the zero rate policy until prices start rising again. It also included the creation of a temporary 5 trillion yen ($61 billion) fund to purchase financial assets such as government securities, commercial paper and corporate bonds in an attempt to stimulate the economy by lowering longer-term interest rates and risk premiums. 
  • The Bank of Japan outlined details of the program Thursday. It will buy up to 3.5 trillion yen of Japanese government bonds and treasury discount bills. The rest will be used for commercial paper, corporate bonds, exchange-traded funds and Japan real estate investment trusts.

So there you go - rather than transferring money into the primary dealers and letting them do 'what they see fit' with the liquidity (wink wink) as in the U.S. - Japan is removing the middle man and going full Argentina.  One should pause here and think how remarkable of a point we have reached.


Almost as fascinating is the change in the next meeting date to immediately after Ben launches QE2 onto the world.
  • The central bank also moved up its next meeting from Nov. 15-16 to Nov. 4-5, a couple days after a Federal Reserve meeting
  • "The change of the policy meeting schedule clearly indicates the (central bank) may react promptly once the Fed's decision has a significant impact on the markets, especially on accelerating the yen's appreciation," said Junko Nishioka, chief economist at RBS Securities Japan, in a note to clients.
As readers know, Japan intervened in the currency market for the first time in 6 years in the past month - it has done little to stop the relentless rise in the yen.  Japan is an export dependent economy, much like Germany.  The rise in yen is crippling any recovery as exports become uncompetitive.  

The world has 3 major currencies - yen, dollars, and euros.  The fact the US dollar is the most weak amongst these 3 losers says a lot about the state of the United States and Bernanke's reckless nature.  On one hand we have a region full of countries which require an IMF backstop and a central bank buying sovereign debt (Europe).  On the other hand, we have a country that has effectively been in a 2 decade recession/depression and has "QE'd" itself to "prosperity" for a decade.  (Japan). And the currency of the U.S. is seen as worse than the other 2?  Nice!

In truth it means to me, the world views Bernanke as the most hell bent on using the world as an experiment for his infamous "helicopter drop" paper of 2002.  Or, depending on your view, they view this man as the most reckless of the group.  Either way, it is amazing that Japan feels it will need to respond immediately to the hell Bernanke unleashes - watch these currency markets, they will be fascinating.  

As you pull back from staring at the trees and looking at the forest you should be able to make out where this is all heading and why many smart people are wedded to gold as a 'store of value'.  To compete with the U.S.'s constant devaluations, Japan needs to go bigger and bigger.  They will be desperate to weaken the yen.  Then the U.S. will need to respond.  At some point the ECB needs to respond if the euro begins to ramp substantially further.  Which will mean Japan needs to print.  Which means.... 

Well you get the picture... somehow every country thinks it is going to export its way out of this mess, in a zero sum game.   Simply hard to be bearish on gold long term in this environment of mad scientists.  What might be truly scary is what happens if the major developed markets ex-Germany actually HAVE a recovery.... if the velocity of money in USA, Japan, UK et al begins to pick up, the inflationary aspects are going to be astounding as we know central banks are always late at response.  I don't expect this type of recovery, but frankly I don't know what to fear more, nowadays.

Anyhow, back to drinking Kool Aid, attaching myself to the matrix, repeating dogmatic nonsense, and buying stocks in mindless manner ... not thinking is so much less taxing mentally.  Ahhh....there we go: "QE will save us all."

Long Powershares US Dollar Bullish (and sweating) in fund; no personal position

Thursday, October 28, 2010

Insider Sales to Buys in Top 10 Holdings of QQQQ, SMH, and RTH at 3177:1

I saw a story on this subject a day or two ago but did not have time to write a piece.  I could not track the news story down today via the Google but instead found a writer on Minyanville who wrote it much better than I could have anyway.
  •  The corporate insiders running our country’s publicly traded companies have been heavily selling their stock, which some market pros say speaks volumes about the veracity of the current rally.
  • ... even as hedge funds and prop traders at the big commercial banks might be buying, one group of investors has carefully side-stepped this rally: corporate insiders.  Alan Newman, editor of the Crosscurrents newsletter, recently surveyed insider activity in three sectors. Newman says the selling he’s seeing among the C-suite crowd right now is some of the most dramatic in years.

Now let me preface this by saying that corporate selling of stock is a path to riches and does not usually indicate much.  U.S. public corporations are feeding troughs for insiders and in the wink wink financial arena we don't even consider option expensing to be a real expense.   Meaning if a company has $18million in income (say 23 cents of EPS) and we hand the corporate insider 14 million of that (say 18 cents of EPS), leaving the shareholder with $4M (say 5 cents of EPS) - well that is called 'reality'.  But in the Wall Street world we ignore the 18 cents we handed to corporate insiders, call it a "1 time expense" (even though it happens EVER QUARTER), wink at each other and cluck about non GAAP EPS and cheer about how much money our corporations are making.  (Don't hate the playa, hate the game)

Whatever the case, this has been happening for years - especially as options have become the primary way to reward the upper hierarchy - and is not changing anytime soon.  It's essentially a massive transfer of wealth from shareholder (thanks for your 401k contribution!) to corporate insider, but since we value stocks as if it is not happening I guess we all win here (as long as we close our eyes).  The "cheap" stock market would look far less so if we dealt in reality.  I referenced a piece on this early last year (another pet peeve of mine of life within the Matrix) [Apr 24, 2009: Operational Earnings v Reported Earnings]  At the time, the valuation difference was 14x (our make believe world where handing profits to the corporate chiefs doesn't matter) v 30x (the real world, when the corporate coffers are emptied into the pockets of the 'chosen ones').... and that 30x was within a month of a decade low market bottom!!  You can only imagine how "cheap" the market is today if we lived in reality based accounting. 


Anyhow, within 3 major ETFs - QQQQ (NASDAQ), SMH (semis), and RTH (retail) the top 10 holdings consist of 30* stocks that make up a good cross section of companies.  Within those 30* companies insiders (who supposedly know best about prospects of a company) are selling at a ratio of 3177 to 1.  (over the past 6 months)

Now I won't give you the normal clucking about how this represents a lack of confidence... in my eyes it is part of the game.  The best way to get true wealth in this country is to reach that top end level in our corporate feeding troughs and stick your lips to the teat.  From there - suck.   Quarter after quarter... don't worry, per non GAAP accounting it doesn't even happen.

Please note - unlike insider selling, insider buying I actually care about.  It is so rare for someone to fork over their own money to buy corporate stock it actually means something.  (That said, many of these CEOs get low or no interest loans from their own corporations to fund the purchases, but that's another story altogether).  For example:
  • That lone buy in the 10 semi companies in SMH was for just 1,000 shares while insiders sold 5.7 million shares. 
  • In the retailer top 10 companies (RTH) close to 23 million shares were dumped versus 27 thousand bought
  • As for those top 9 NASDAQ companies - many of which are market darlings?   Share purchases totaled 9,500 against a total sold of 88.9 million 
Summary: in 29 of the top stocks in America insiders have bought just over 37,000 shares of stock.  And sold close to 120 million shares.  Keep in mind we are not talking Joe6packs here, but some of the most highly compensated folk in America... so buying a few thousand shares in their own company would be a few weeks work :P   (I know I know, they have college tuition bills to pay - wink wink)

To put this in numbers... in just 29 companies, if the average stock price is $30 (maybe its higher) that is $3.6 Billion transferred to corporate insiders from company coffers.   Not bad for 6 months 'work'. We can see Bernanke is succeeding in the wealth effect..... for these folks at least.

    The lack of corporate insider buying probably would say something in a normally functioning economy and stock market.   But thankfully we exist in a Ponzi where these factoids mean little.  Just buy stock (hand over fist, with eyes closed)... there will be a new buyer at a higher level, per Fed printing press.

    Anyhow here is how it looks in graphics...

    (only 9 companies in QQQQ because #10 is TEVA, not U.S. based)

    50 Best Performing Stocks Year to Date

    To flush out the more speculative fry on this list (although Rare Element made it despite zilch in revenues and I believe 2 employees)  I've put these filters on
    1. Market cap >$300M
    2. Average trading volume >200K
    3. Stock price >$10
    (screen at
      Here are the top 50 performers year to date; essentially 100% return was required to make the list.  Highlighted names we've owned or discussed.  Frankly as I look at this list, I am thrilled with stock selection in 2010 - however my weightings were not high enough.  The year should have been even better as we own a ton of these stocks for parts of their runs.  Blue shade are current holdings; green previous holdings.

      Ticker Company  Market Cap Performance (Year)
      VHC VirnetX Holding Corp 843 504%
      KEI Keithley Instruments Inc. 340 368%
      ISLN Isilon Systems, Inc. 1,882 317%
      APKT Acme Packet, Inc. 2,507 266%
      MSB Mesabi Trust 548 260%
      REE Rare Element Resources Ltd. 410 229%
      MIPS MIPS Technologies Inc. 676 228%
      NFLX Netflix, Inc. 9,328 224%
      IDT IDT Corporation 340 210%
      MBI MBIA Inc. 2,441 206%
      MCP Molycorp, Inc. 3,172 200%
      ACTG Acacia Research Corporation 936 198%
      PPO Polypore International Inc. 1,549 192%
      NZ Netezza Corporation 1,692 178%
      JKS JinkoSolar Holding Co., Ltd. 2,650 177%
      LVS Las Vegas Sands Corp. 27,130 175%
      BIDU Baidu, Inc. 39,279 174%
      SOL ReneSola Ltd. 1,074 160%
      SPRD Spreadtrum Communications Inc. 669 160%
      PWER Power-One Inc. 1,183 156%
      RVBD Riverbed Technology, Inc. 4,244 155%
      NXTM Nxstage Medical, Inc. 1,010 149%
      LCC US Airways Group, Inc. 1,938 148%
      CROX CROCS Inc. 1,229 147%
      OPEN OpenTable, Inc. 1,436 147%
      KRA Kraton Performance Polymers Inc. 1,019 143%
      CMG Chipotle Mexican Grill, Inc. 6,605 141%
      RDWR Radware Ltd. 686 138%
      TRS TriMas Corporation 541 135%
      HNR Harvest Natural Resources Inc. 415 133%
      SIGA SIGA Technologies, Inc. 618 133%
      LCAPA Liberty Capital Group 4,860 133%
      UAL United Continental Holdings 9,363 129%
      QCOR Questcor Pharmaceuticals, Inc. 674 128%
      GGAL Grupo Financiero Galicia S.A. 1,615 126%
      MOTR Motricity, Inc. 837 126%
      RES RPC Inc. 2,268 123%
      FFIV F5 Networks, Inc. 9,462 122%
      BFR BBVA Banco Frances S.A. 2,206 120%
      BORN China New Borun Corporation 394 119%
      AHT Ashford Hospitality Trust Inc. 514 117%
      XXIA Ixia 1,054 114%
      ME Mariner Energy, Inc. 2,565 114%
      EZCH EZchip Semiconductor Ltd. 641 111%
      IGTE iGATE Corporation 1,128 106%
      ARMH ARM Holdings plc 7,675 106%
      MMR McMoRan Exploration Co. 1,530 105%
      ARUN Aruba Networks, Inc. 2,127 105%
      ADCT ADC Telecommunications Inc. 1,229 104%
      EXXI Energy XXI (Bermuda) Limited 1,198 103%

      Bookkeeping: BorgWarner (BWA) Performs Nicely; Raises Guidance - Added Some Exposure

      Auto supplier stocks continue in an under the radar bull market... yesterday morning BorgWarner (BWA) reported another impressive quarter, and raised guidance.  EPS of 71 cents vs analysts 63 cents.  Technically, the stock looks very similar to Las Vegas Sands (LVS) six weeks ago but BWA will have a difficult time putting on any sort of similar run as it is not the target of speculative traders, nor does the market have much chance of having a 6 week run as we have just exited.  That said, it broke out nicely over a two week range late in the day yesterday so I've added about a 1% stake since I've sold some long exposure in other areas this week.

      As much as I have liked this sector, we have an issue of commodity inflation to deal with - much like in late 07 through mid 08, we are starting to see a host of companies in various sectors complain about increasing commodity prices.  Remember this?  [May 17, 2008: WSJ - Fast Rising Steel Prices Set Projects Back]  As Ben "succeeds" in causing a ramp in commodities, we can now begin to think about all the names we were shorting 3 years ago as candidates to face the fire again - restaurants are the first group that come to mind.  Some clothing companies already are starting to whine as well about their input costs.   Oil has remain contained thus far, and nat gas is in a complete dump - which is the main difference thus far from the speculator, margin driven excess in commodities 2.5-3 years ago.  Energy costs are the broadest tax on the economy.

      As I said about 5-6 weeks ago when QE2 was being celebrated (of course it still is) it's a short sighted euphoria.  In fact, if corporations truly want to maintain profit margins in an environment where they cannot pass Bernanke's commodity inflation onto the end consumer (which I doubt they can), the great irony will be Ben will contribute to a worsening labor situation in the U.S. as companies cut labor to keep margins flat.  Someone needs to eat this cost - its either going to be the consumer or the producer.  The U.S. consumer simply cannot handle large scale inflation anymore, since wage pressure has decimated the middle class; hence companies will have difficulty passing along cost increases.  Ben seems to live in 1978 still where he thinks inflation in goods will be passed to the consumer, who will demand higher wages, and companies will be happy to comply.... rather than to send that job to Chindia.  But for now the market remains in ignorant bliss other than the individual corporate reports where costs have already risen to a point they are infecting profits....let's check back next summer; if commodities continue at current pace we have a stagscrewflationary mess on our hands. [Oct 19, 2010: Doug Kass Unveils "Screwflation"]

      (cartoon courtesty of reader Anthony Freda -

      Anyhow I digress...


      Back to this sector, there are a few companies that aside from the cyclical rebound (however mild) in the auto sector, are benefiting from secular changes in their sub sector.  BorgWarner is one of them as more and more content finds its way into autos, so hopefully some of that secular growth can offset the coming cost pressures.
      • BorgWarner makes turbochargers and transmission parts that are in demand due to increases in fuel-economy standards.
      • Sales in the business segment that makes turbochargers and timing components rose 38.6% in the third quarter, while sales in the unit that produces transmission components were up 33.8%

      Including the 8 cent beat for this quarter EPS for the year should be closer to $2.90 (perhaps higher) versus the consensus $2.80.   This gives a forward PE of 19 for the year (which ends shortly) - not cheap for an auto related stock.  Next year's $3.50 however should be closer to $3.75 assuming QE2 does not cause another 50-100% ramp in every commodity on Earth.  Also impressive to find a company in this sector actually purchasing back shares.

      Full report here.

      Via AP:
      • Auto supplier BorgWarner Inc. on Wednesday said its third-quarter profit rose more than sixfold, as sales of its powertrains shot higher, particularly in Europe and China. The strong results led the company to raise its forecast for the year.
      • For the three months ended Sept. 30, BorgWarner posted net income of $106.7 million, or 87 cents per share, compared with 17.2 million, or 15 cents per share, a year ago.  Excluding a $21.2 million gain related to foreign tax credits, adjusted earnings were 71 cents per share.  
      • Analysts polled by Thomson Reuters, on average, expected profit of 63 cents per share.
      • Revenue shot up to $1.41 billion from $1.03 billion last year. Wall Street projected revenue of $1.28 billion.
      • Chairman and CEO Timothy Manganello said the quarter's results reflected new business growth. "We grew in every major region of the world, most notably in China where our sales were up nearly 70 percent," he said in a statement. China now accounts for about 6 percent of the company's overall sales and sales there have nearly doubled in the past year.
      • Shifts in Europe toward vehicles with higher BorgWarner content, including diesels, also drove sales higher..
      • The company said it repurchased about 1 million shares of its common stock during the quarter.  (they have 114M outstanding, 112M floating)

      • BorgWarner now expects to post profit for the year of $2.85 to $2.95 per share, excluding one-time items, up from its prior forecast of $2.60 to $2.80 per share.  Wall Street is expecting $2.80 per share.
      • The company said it now expects revenue growth of 40 percent over 2009, when it reported $3.96 billion in sales. That's up from a prior forecast for growth of 32 to 35 percent, and implies $5.54 billion in sales for 2010. 

      Long BorgWarner in fund; no personal position

      Bookkeeping: Closing Kinder Morgan Energy (KMP)

      Reason: Boredom

      Reason #2: Chart looking iffy

      Reason #3: Chart of oil weaker then when I bought, stuck below resistance after making a go of it 2 weeks ago

      Reason #4: Commodities are overbought and due sooner or later for a correction

      Reason #5: "Breakout" has reversed

      Taking a 2% loss.

      No position


      Gold (GLD) Looks Tired, and Silver (SLV) Continues to Outperform

      [please note, as always I am using the ETFs for charting purposes, since the commodities themselves chart with a 1 day delay]
      One of the more crowded trades on earth (along with short dollar) looks tired at this point - that is gold.  While I agree for the reasons for the move, and with a Fed intent on printing us to oblivion this continues to look to have a multi year move ahead, I have not liked the short outlook as evidenced by my 'long dollar' exposure.  As I look at the gold chart it has broken below the 20 day and has been stuck near it of late.  The problem is support is not that far away, down there at the 50 day moving average so a short position does not have much upside.... UNLESS the 50 day can be broken.  If that happens than a floodgate of selling could occur as many of the recent buyers are 'weak hands' and just momentum chasers.

      Silver on the other hand, not only performed better than gold on this run up (what a breathtaking run) but has yet to break below the 20 day.  This precious metal is more extended than gold so if the 'long dollar' trade catches on, a short position could actually be a bit easier here than gold.  

      That said we know QE is coming, and from all accounts it will be some sort of front loaded turbo blast of $500B through end of year to early Q1 (next 3-6 months).  And then from there it appears Ben will hang a guillotine over the dollar by saying something like "we'll monitor it from there and see how much more dollars we'll add to the system each and every month from now to infinity....or when we see inflation.... or the bears are eradicated from earth" (translation: look at my bazooka Hank Paulson)  Hence I am unclear just how much these precious metals can fall under an administration hell bent on debasing a currency, and with an open ended commitment to it.  After Ben blasts through that first $500B, I could see him just doing another $50-$100B indefinitely (or maybe to the $1.5T+ level) as we "print to prosperity", since I don't see anything wonderful on the horizon in the real economy for 2011.

      But in the short run, let us see how these 2 metals react to next week's fireworks.  I'm long gold in very small amounts just as a residual trade.

      Long DB Double Long Gold in fund; no personal position


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