Tuesday, January 25, 2011

What's Good for GM is Good for.... China?

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Time to toss out another old saying that once referenced America, as yet another milestone is passed.  For the first time ever, General Motors (GM) is selling more cars in China than the U.S.



Via AP:

  • General Motors Co. sold more cars and trucks in China last year than it did in the U.S., for the first time in the company's 102-year history
  • GM's global sales figure for 2010 was a dramatic 12 percent increase from 2009, a year in which it closed factories and was forced to take aid from the U.S. government to survive.
  • Its sales in the U.S., including heavy-duty vehicles, rose 6.3 percent.  But it did even better in China, selling 2.35 million vehicles there, up 29 percent as an expanding middle class gained wealth, making it the world's largest car market
  • The showing in China was about 136,000 more than what GM sold in the U.S.
  • GM said it achieved double-digit jumps in five of its top 10 markets last year, including China. GM marked a 12.4 percent sales rise in Russia and a 10.4 percent rise in Brazil.

No position

Key Wheat Growing Regions in China Hit by Drought

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Yet another example of how water will ultimately be the most important resource on earth [Jun 18, 2008: The Ultimate Shortage ---> Water] and why arable farmland is most likely the best long term (40-50 years+) investment possible.  Shorter term.... after the Russian droughts/fires of last year, Australian floods this year, and now the Chinese situation, American wheat farmers should be handed a bonanza. 

 

Via AP:

  • China's key wheat-growing province of Shandong is facing its worst drought in at least 40 years as a result of unusually dry weather across northern and eastern China that stands to put further pressure on surging food prices.
  • Drought has hit more than half of the land in the province normally used to grow wheat -- about 5 million acres (2 million hectares) -- and that number is rising, according to a notice posted Monday on the provincial water bureau's website.
  • Many areas have seen no precipitation in four months, and 870,000 acres (353,000 hectares) of spring wheat has already dried up or is beginning to fail, it said. More than 240,000 people and 107,000 head of livestock already have lost access to drinking water and are forced to rely on deliveries from fire trucks.
  • China is the world's largest grain producer at about 500 million tons per year.
  • Unusually dry conditions have spread across much of China's northeastern bread basket, including the provinces of Henan, Shanxi, Hebei, Jiangsu and Anhui. Beijing hasn't been spared and has yet to receive snow this winter. Scientists say it is a result of the La Nina effect that is also responsible for the harsh winter weather still gripping large parts of China's south.
  • But in some areas water shortages can also be blamed on burgeoning populations. In Beijing, for instance, demand has outstripped supply for the past decade, and the capital has now decided to supplement drinking water supplies with water pumped from the Yellow River. The city's water bureau said Monday that current sources are only sufficient for half of the city's population of 17 million.
  • Not only do hundreds of millions of Chinese rely on farming to make a living, but good harvests are crucial to keeping meat, grains and vegetables affordable for the vast majority of lower-class Chinese who spend one-third or more of their income on food.
  • Hypersensitive to any signs of potential unrest, the ruling Communist Party is expected to respond by raising interest rates to tame price rises, potentially hitting consumption levels and slowing the global economy in 2012.

[Nov 15, 2010: Farm Economy Headed for Record]
 [Jun 20, 2008: World Population to Hit 7 Billion by 2012]
[Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears]
[Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators]

Coach (COH) - Good Earnings but Market not Interested

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Following up on yesterday's short Coach (COH) call, the company put out a fairly impressive earnings report this morning, but the market is having one none of it.  It is very important to watch when the market fails to react to good news - think foreshadowing.   As I stated a few weeks ago, so many stocks have had such enormous runs, the propensity for selloffs on news is far greater than a normal earnings period.   Longer term I do continue to like this stock as the aspirational customer - especially of China - becomes an increasing part of the business, and the U.S. upper end consumer is supported by The Bernank.   If you are investing in United States retail, over a 5+ year horizon you have to keep in mind the accelerating bifurcation of American society.  One wants to be focused on the top end affluent retailers (as more wealth is concentrated in the upper end), OR the low end where many more Americans are migrating as their jobs are moved overseas and they take lower paying replacements... or none at all.
  • Luxury sales in the U.S. surged 6.7% in the 50 days before Christmas, according to MasterCard Advisors’ SpendingPulse. 

But shorter term, I outlined my reasoning yesterday for trade set ups to the dark side due to the technical condition.  On a fundamental basis some of the cost pressures we saw in 2008 also will begin to bear fruit due to The Bernank. This morning's action is only reinforcing those thoughts.


As for earnings, the company beat by 3 cents but based on the parabolic run since October - that was already baked in.  Gross margins also weakened, which is always a concern.
  • Gross margins missed estimates, coming in at 72.4% compared with expectations of 73.2%.

Via Reuters:

  • Coach Inc (COH) reported a larger-than-expected quarterly profit as U.S. luxury spending rebounded over the holiday season, but the company faces pressure from rising leather costs.
  • Coach Chief Executive Lew Frankfort told Reuters that a higher percentage of shoppers visiting Coach stores made purchases over the holidays, and that handbags up and down its price spectrum had sold well.  But Frankfort told Reuters that Coach is "feeling inflationary pressures" from rising labor costs overseas and leather prices. Coach's gross margin rate, which gauges how profitable its products are, held steady at 72.4 percent.  Frankfort said Coach was diversifying where it makes its products and experimenting with different types of materials to contend with those rising costs. 
  • He added that consumers were still being cautious, despite the improving economy.  "The consumer is gaining confidence that economy is recovering though they are being judicious," Frankfort said in an interview.  (don't worry Frank, at Dow 40,000 due to QE7 all caution will be thrown to the wind)   The best-selling handbag worldwide during the holiday quarter was one that can cost as much as $598.
  • Coach has positioned itself in the "affordable luxury" segment in the past two years as shoppers have cut back on the most expensive items. It has lowered average prices on its handbags about 10 percent by introducing new, more affordable lines and expanding its outlet stores. But it also never cut prices in its stores during the recession and has never had to wean shoppers off of bargains.
  • Sales rose 18.7 percent to $1.26 billion, fueled by a 12.6 percent increase at stores open at least a year in North America, which account for 70 percent of the company's business.  Coach, best known for its high-end handbags and wallets, reported net income of $303.4 million, or $1 per share, for the second quarter that ended Jan. 1, up 26 percent from $240.9 million, or 75 cents per share, a year earlier.
  • In China, where Coach is still new to the market, but now operates 52 stores, sales rose by double digits on a percentage basis. Sales there make up less than 5 percent companywide, but Frankfort said that would rise to 10 percent by 2014.

There is a large multi year stock buyback authorization to boot (as always, authorization is not the same as actually doing it)
  • Coach said its board had authorized the repurchase of up to $1.5 billion of its outstanding common stock.  Coach has until June 30, 2013, to complete the stock repurchase. That would amount to about 28.1 million shares, equal to about 9.5 percent of the stock outstanding.
No position

U.K. Appears Headed to Double Dip as Q4 GDP Turns Negative as Government Printing Presses Go Cold - More BOE QE Seems Assured Go Forward

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The United Kingdom, which I call the mini me of the United States, has taken a stark contrast in public policy versus the U.S. the past year.  While domestically we have deficit reduction commissions (which release reports on a Friday, followed by a massive $900B tax cut and spending bill the following Monday), the electorate in Britain went full 'Tea Party' last May, and their elected officials responded in dramatic fashion.  In a bid to reign in American like fiscal deficits....aside from what are massive spending cuts (almost every government department to be cut by 20%) that could not even be conceptualized in the United States [Oct 21, 2010: UK Unveils Serious Austerity Measures - Potentially Slashing Half a Million Public Workers], an increase in their Value Added Tax also hit Jan 1, 2011. 

Contrast and compare with "fancy talk" of deficit reduction (expect a heap of it tonight) in the States, but a political body that cannot even find $100B of actual cuts in a fiscal government that now sucks up 24% of GDP (up from the traditional 20%).  Hence, the paths of the 2 countries are diverging drastically as the U.K. is already seeing what an economy looks like without massive steroid injections every 9-12 months, whereas the U.S. is self injecting at a historic pace.  In short, the U.S. is 'buying" prosperity (kick the can forever) running a now permanent fiscal deficit of roughly 10% of GDP (remember, we do not do cost-benefit analysis here, there are only benefits because the costs are somewhere in the future and hence not anything to worry about), whereas the U.K. is going in the other direction.  Obviously the solution overseas is far more painful in the near term (2-5 years), but it will be interesting to see how the 2 countries prospects look in 5-10 years.  Frankly both countries are probably at extremes, and there should be some happy medium - for the U.K. instituting such severe austerity measures when organic economic growth is so poor seems over the top, but in the U.S. one stimulus after another in non stop fashion creates a fantasy world and sets the stage for complacency when (if!) the gravy train of government support ever slows.  This will also be an fascinating time politically as the will of the people of the U.K. will be tested as it is easy to say "we want budget cuts", but the impact of them will only now (in 2011) begun to be felt.  

In the nearer term, what appears obvious is the next round of Western banking quantitative easing should be coming out of the Bank of England as worries begin about a European double dip.  Especially if we don't see a turnaround about 90 days from now. Fourth quarter U.K. GDP was released today and it surprised economists by going negative.  The one hope by the bulls is that much of this was weather related - the region saw snowfall of the type rarely seen this winter, so maybe that grounded construction projects and caused shoppers to not hit the stores.  Or so the theory goes.   U.S. GDP on the other hand will be released Friday and expect a number between 3-4%.  Pundits will clap and gasp in awe without mentioning how inorganic much of this growth is.  Remember.... steroids, they do the body good.


Via Bloomberg:
  • Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest December in a century hampered services and retailing. Gross domestic product fell 0.5% after increasing 0.7% in the previous quarter. The median forecast in a Bloomberg News survey of 33 economists was for an increase of 0.5 percent.  None of the economists in the survey forecast stagnation or contraction.
  • The pound dropped after the report, which shows the U.K. recovery faded even before Prime Minister David Cameron's government increased sales tax to 20 percent this month, which may damp consumer demand this year. The data may reinforce calls for the Bank of England to hold off increasing its key interest rate to curb inflation. Governor Mervyn King, who leads the bank’s divided policy committee, delivers his first public speech of the year later today.
  • The pound fell as much as 0.9 percent against the dollar after the data and was at $1.5790 as of 11:12 a.m. in London. It was down 1.2 percent since yesterday, the most since Dec. 15. U.K. 10-year gilts rose, with the yield falling to 3.58 percent.
  • While these are “obviously disappointing numbers, there is “no question of changing” the fiscal plan, U.K. Chancellor of the Exchequer George Osborne said. “We will not be blown off course by bad weather.”
  • The recovery faces further headwinds from government cuts to tackle a deficit that widened to 15.3 billion pounds ($24.4 billion) in December from 14.3 billion pounds a year earlier. The shortfall is projected to hit 10 percent of GDP this year
Speaking of "mini me", services which make up 70% of the U.S. economy are even more dominant in the U.K. at 76%
  • Services, which make up 76 percent of the economy, shrank 0.5 percent in the fourth quarter from the previous three months. 
  • Industrial production rose 0.9 percent, including a 1.4 percent gain in manufacturing. Construction slumped 3.3 percent.
As for the BOE
  •  “Any notion that interest rates were going to be put up earlier than the fourth quarter this year, this is the final nail in the coffin for that sort of talk,” said Hetal Mehta an economist at Daiwa Capital Markets Europe Ltd. in London. “The government will have to rely on the Bank of England to keep interest rates very low for a very long time in order to allow them to continue with their fiscal tightening.” 
  • "This is a horrendous figure. An absolute disaster for the economy," said Daiwa economist Hetal Mehta.
  • "We have been of the opinion that the Bank of England should not raise interest rates until the first quarter of next year," said Stuart Green, economist at HSBC. "I think the data really confirms the idea that, given the headwind the economy is facing, that this monetary stimulus is still required.
Bigger picture this is indicative of the generational changes happening in the world economy - production (and increasingly intellectual work) is moving away from the West and to the East.  Without housing bubbles (Spain, U.K., U.S., Ireland) to keep busy tens of millions of construction workers as well as housing ATMs to keep consumer deficit spending going, the government spigot is the main replacement.  When that spigot is going full blast (U.S.) we just continue to live in a new fantasy world, not much different than the last - but when the gushers slows down (U.K. Ireland, Spain) you start to see the ugly underneath.  Which is why we are going to be living in even more interesting times at any point the U.S. decides to go off 10%+ annual deficits, and/or the Fed is forced to raise rates.  But until that day - we dance!

Remarkable Reversal of Fortue in Commodities as 2010's Laggards Turn into 2011's Winners; Ivory Coast Bans Cocoa Exports

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2010 was very much the year of commodities as almost any on earth ex natural gas, cocoa, and rise shot through the roof.

Year to date performance as of Dec 23, 2010:

[click to enlarge]



As if a switch was flipped on Jan 1, 2011 - speculators have migrated from the winners of 2010 and into the laggards.  Who are the 3 leaders this year thus far?  The 3 laggards of 2010.  It's as if speculators ran from the overbought names to the oversold name physical supply and demand suddenly changed between Dec 31st and Jan 1st.



A couple key developments - first Ivory Coast's government has put forth a one month ban on exports as of yesterday.  Now this is not a stable government so we'll see how it goes, but with the country's dominant position in the commodity (one third of global exports) it will be interesting to see what develops.  But chocolate is a treat for the world's well off; more worrisome is the action in rice.  Remember, for all the wheat, corn, and soybeans surging that is more of an issue for the relatively rich West.  The staple food in the East is rice, where many more are in poverty, and that commodity was shielded from The Bernank in 2010.  This was the commodity that caused all sorts of troubles overseas in 2008; so if the current path continues expect some 'excitement' in the coming months. [Mar 19, 2008:  Philippines Brace for Rice Shortage]  [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]  This certainly could be another reason we are seeing such weakness in many emerging market stocks as the U.S. and Europe whistles Dixie.

More on the cocoa situation:
  • Cocoa prices are surging after a one-month export ban was imposed in the Ivory Coast, where there is an escalating struggle for control of the government.  
  • Cocoa futures on the Liffe commodities' exchange in London were up 3.9% Monday to 2,223 pounds per ton, the highest since early August, after trading as high as 2,290. Cocoa traded as low as 1,770 pounds in November.   Prices have risen 12% since Jan. 5th.
  • Alassane Ouattara, the internationally recognized leader of the African nation, on Monday imposed the export ban as he tries to take control of the government away from incumbent president Laurent Gbagbo, who is refusing to step down.  
  • The export ban was proposed .... as a move to choke off funding for the incumbent.  It is unclear whether the ban will be heeded by cocoa growers or how it will be enforced.  
  • In Washington, the Obama administration announced it was supporting the ban on cocoa exports.
  • Ivory Coast was divided into a rebel-controlled north and a loyalist south by a 2002-2003 civil war. The country was officially reunited in a 2007 peace deal, but the long-delayed presidential election was intended to help reunify the nation. Instead, the U.N. says at least 260 people have been killed in violence since the vote.
  • Ivory Coast exported $2.53 billion worth of cocoa in 2009, according to government statistics. Ivory Coast's production has been declining, from 38 percent of global production in 2007-2008 to 33 percent in 2009-2010.
  • "The real risk is that if this escalates into military conflicts, which is distinctly possible, the first things to be targeted will be cocoa trees and cocoa fields," said Spencer Patton, founder and chief investment officer for hedge fund Steel Vine Investments LLC.
  • Marcia Mogelonsky, U.S.-based global food analyst for Mintel, said retail chocolate prices are destined to rise even if the political situation in Ivory Coast stabilizes in the next few weeks.  "The prices will go up because cocoa is now more expensive," and the price of sugar is also rising,Mogelonsky said.
  • More recently, she said, some manufacturers have, in effect, been raising chocolate prices by shrinking the size of their products.

Conclusion?  If you are an American time to start hoarding that 24 oz chocolate package, before it turns in the 18 oz package (same great price!).  [Jan 5, 2011: [Video] ABC News - Consumer Reports Shows People are Paying for Less]  One of the hundreds of millions poor in Asia who need rice?  Just log in to your Etrade account and invest in the U.S. stock market to make up for the inflation in foodstuffs.  The Bernank can make us all rich.... you just need a brokerage account.

Monday, January 24, 2011

Cursory Bounce Over in F5 Networks (FFIV) - Now the Fun

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The traditional mini dead cat bounce in a beaten down stock occurred as the over eager jumped in with both one hands on F5 Networks (FFIV); frankly it was a pretty weak bounce as the stock opened in the low $110s after the earnings implosion and peaked near $115.  Not much there unless you were among the more nimble who bought later in the day when the stock dipped below $108, and flipped it immediately.  There is no way a stock is going to fall this much and not fill the gap - in this case the $104s so that appears to have an excellent chance of happening today.  Under a dollar away.



The larger picture is what is next?  Of course in a market where the index moves have tended to dominate individual moves for the greater part of the past few years - if there is ever going to be a real correction again, this - and a lot of charts - are at serious risk.  It would be interesting to see how F5 reacts in a market that goes down 5-7%; I would doubt the 200 day moving average near $101 will hold, and we'd most likely get a test to the $90 level of mid October.  At that point, after a 38% peak to trough drop, you'd have a very busted chart but a more compelling valuation argument.

The problem right now is who is going to sponsor this stock. The "momo" players are long gone as the momentum has exited stage right, while the 'value' players won't be touching this anywhere near these levels.  So all you have are the 'growth at a reasonable price' types and those (hand raised) are a small niche in a world dominated by momentum.  With the market still refusing to enjoy a selloff of any proportion it is hard to figure what the outcome will be in the near term.  Tough one, especially with names the market considers peers (even though they are not) reporting in the coming weeks.  It is pretty clear investors in those stocks are shooting first and asking questions later - which ironically might create some UPSIDE surprises during their earning reports.  Baby.  Bathwater.



No position

ICICI Bank (IBN) - Another Fine Report

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Indian stocks have kicked off 2011 in horrid fashion, with fears of inflation - especially of the food kind - pressuring equities intensely, as a campaign of rate hikes that started in 2010 by the central bank looks to have no end in sight.  Due to the dearth of Indian equities that trade in U.S. markets, I've long used the 2 banks HDFC Bank (HDB) and ICICI Bank (IBN) as my main method to get exposure to the market.  As expected both have taken it on the chin of late, but not unexpectedly, as valuations had expanded far too high.  Even last September in the mid $170s I wrote this about HDFC

its valuation has been extreme.  It is now at 30x FORWARD PE ... for a bank.  Yes a dominant bank in a fast growing country but still...

The stock traded up another 15 points, at which point I wrote in November

On year end (which is next March) the stock is already trading at 30x+ forward PE.  But in a bubble environment I suppose we need to relax valuation metrics or miss the party.  

That is more or less where HDFC Bank topped out.  So at least this pullback has created somewhat better valuation metrics for both names - HDB down 21% from peak.


IBN down 22%.



(please note being foreign equities the 'gaps' in these charts are less helpful, as when the U.S. market opens many times these stocks will immediately jump or fall in similar fashion to how the stock acted in its home market)

On a fundamental basis the story continues to be attractive although of course banks prefer their cost of funding to be as low as possible (an ultra easy central bank) - a huge gift given to domestic banking interests day after day.

ICICI Bank reported another solid quarter overnight.  Via Reuters:

  • ICICI Bank Ltd , India's second-largest lender, beat quarterly profit estimates on growing demand for credit in the country and rising fee income, but climbing interest rates are a worry for the sector's growth. 
  • ICICI Bank and its rivals State Bank of India and HDFC Bank are seeing a surge in loan demand and asset quality improvement in an economy growing at 8.5 percent, the fastest pace among major Asian economies after China. 
  • "The sector is likely to see some margin pressure going forward as the impact of higher deposit rates in the last quarter start to have an impact," said Binay Chandgothia, chief investment officer at Principal Global Investors in Hong Kong. Principal owns shares of the top three Indian banks including ICICI in its portfolio. "The Reserve Bank of India will keep hiking rates in the short-term and that will slow down the nominal economic growth next year, impacting credit growth," Chandgothia said.
  • India's central bank is widely expected to raise key rates by 25 basis points on Tuesday to cool accelerating inflation. It would be the seventh increase in the past 12 months. It had raised its main lending rate by 150 basis points in 2010.  
  • Net profit at ICICI Bank rose to 14.4 billion rupees ($316 million) in the quarter that ended on Dec. 31, its fiscal third quarter, from 11 billion rupees a year earlier
  • Net interest income rose 12 percent to 23.1 billion rupees. A Reuters poll of analysts had forecast net profit of 13.5 billion rupees on net interest income of 22.9 billion rupees. 
  • ICICI Bank said on Monday its advances grew 15 percent to 2.07 trillion rupees ($45 billion) as of end-December. The bank's net non performing asset ratio dropped to 1.16 percent as of end-December from 2.19 percent a year ago. The net non performing advances to net advances ratio was 1.4 percent at end-December.  
 
No position

Trade Idea - Potential Short Candidate: Coach (COH)

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While still not ready to bet against the indexes until I see the S&P 500 close below the 20 day moving average, there is finally over the past few months some change from the 'student body left' trading (everything up! everything down!) we have experienced for much of the past 3 years.  Some stocks are going down while others go up, a near miracle.  After a heroic run in latter 2010, retail stocks have materially weakened in 2011, even those that cater to the relatively insulated upper end of the income spectrum.  One stock catching my eye due to weakness is Coach (COH) - a company I actually like fundamentally over the long run.   But technically we have a defined entry for a short near these levels.  The stock has sold off to the $53-$55 range over the past two weeks.  Two ways one could approach this trade (a) try to short the stock near the high end of its recent range (i.e. last Tuesday) or (b) wait for it to break the lows of the past month ($51s).  



Since the stock has been closing below the 20 day moving average every day since late December, I find option (a) to be a solid choice even if a bit more aggressive.  The spike intraday over the 20 day last Tuesday was the one head fake the past month but Coach did not *close* above the 20 day and the close is always more important than the intraday action.  Long time readers will see a very obvious ultimate downside target - that late October gap below $45.  Achieving that would bring a gain of nearly 16%.  On the flip side, a close over the 20 day moving average for perhaps 2 sessions would mean a change in character a reason to take a moderate loss and take your marbles home.

The fly in the ointment AND potential catalyst is the earnings report slated for this Tuesday morning - I don't like to play the earnings game, but if there is a benign reaction to the data (i.e. the stock does not jump significantly) you have the main upside catalyst out of the way, and in a sideways (or heaven forbid downwards) market, this would be an appealing hedge.

No position

Sunday, January 23, 2011

Barron's: Shade of Dot Com Bubble (through the eyes of Salesforce.com)

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I wrote a piece a few years ago titled  [Jul 2, 2008: Does Valuation Matter?]   and I used Salesforce.com (CRM) as one of the 2 poster children, as it has been an interesting stock over the past decade.  Certainly a name I've always struggled with being a 'GARP' (growth at a reasonable price) kinda guy.  The stock has vacillated from "crazy expensive" to "really expensive" in my eyes over the years - just really impossible to value using any normal metrics.  Indeed there was a hilarious video made last fall called "I want My Salesforce.com" set to 'Money for Nothing'  [Sep 2, 2010: [Video] I Want my Salesforce.com]




This is definitely what I call the greater fool type of stock, when you jump in you are hoping a greater fool shows up to take it off your hand (hopefully one who was watching Mad Money).  And that is no disrespect to the underlying company which is excellent and transformative - it is all about a valuation no one can really defend.  (unless you are an analyst trying to win investment banking business)

Of course with the 'Bernanke Put' bringing back memories of the 'Greenspan Put' back in 1999 we are starting to see very obnoxious valuations in parts of the market, along with of course massive moves in commodities as a liquidity tsunami that makes the Y2K gusher look like a leaky faucet has to find a home somewhere.  That does not mean the entire market is rich (although small caps are now trading at well over 30x earnings!), but I've posted a few stories the past few months of analysts who (just as in 1999) cannot make any sensible valuation call off traditional metrics so have to create new ones and/or use years like 2015 to justify their price targets.  This is the exact same behavior seen in 1999 - but when you have central bankers intent on blowing bubbles you have to play along on Wall Street since Ben is your friend.

Barron's has a pretty lengthy piece on this topic, using Salesforce.com as its centerpiece - it is quite a damning piece of poetry, and it brings up one of my other huge pet peeves, the use of nonGAAP earnings versus GAAP.  This market that is "reasonably priced" would be so much more expensive if we did not live in a fantasy land of saying ABC expenses don't really count in earnings reports.  The biggest one being options expensing.  A long discussion on that topic here [Apr 24, 2009: Operating v As Reported Earnings]  Needless to say S&P 500 earnings of "$95" for 2011 (or any year) would be a far lower number if we did not all wink and nod at each other as we ignored very real expenses that companies call "one time" (and hence we are told to ignore) but magically have each quarter. 



Anyhow, if you are a Salesforce.com (CRM) investor (or just want to see the reality behind the curtain) feel free to jump here.

  • Wall Street has been accused of many things, but rarely of a lack of imagination. Consider Salesforce.com. Its shares are amazingly expensive, when weighed by traditional valuation metrics. So analysts have come up with creative ways to gauge its results
  • The stock, which has risen 92% over the past year, recently was changing hands at $132—300 times the 44 cents a share in earnings that it's expected to report for its current fiscal 2011 year, which ends on Jan. 31, and 240 times the 55 cents likely for fiscal 2012
  • But most analysts dismiss those numbers as misleading, given their view of the company's prospects and revenue growth. Instead, they prefer—shades of the dot.com bubble!—to discuss cash flow or earnings that exclude the very real downdraft exerted by the company's huge employee-options expense.

No position

Saturday, January 22, 2011

Marketwatch's Chuck Jaffe - Absolutely No Reason to Buy 'Absolute Return' Funds

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An interesting article yesterday by Chuck Jaffe at Marketwatch.com deriding the absolute return strategy of mutual fund.  I would argue that his points are misguided because he is not capturing the essence of the strategy, but of course I am biased.  Ironically, if his thesis is correct there should be no reason to buy any hedge fund because in theory they are all (or mostly ... by definition) supposed to be absolute return funds.

Alternative investment strategies such as long-short or absolute return are still only a tiny fraction (perhaps 200 of 8000+ funds) of the marketplace, but exploding in popularity since 2008, after a decade of losses in the industry.  [Feb 5, 2009: Mutual Funds Have Tough Decade The great irony of course is "balls to the walls" long only traditional mutual funds have blasted any sort of hedged mutual fund since March 2009.

The main fault in his argument is that he believes an absolute return fund should "make a positive return in any market", or at least that is how he thinks they are being marketed. 

Absolute-return strategies purport to produce a positive return in all market conditions, no matter the direction of the market.

I don't know how they are being marketed but I do know you can't promise your fund can make any sort of future return in advertisements.  So I am not sure why he thinks fund families are saying they will make positive returns in all market conditions.

But the bigger problem is "making a positive return in all market conditions" is not what absolute return means.  It is essentially defined by a return (positive or negative) independent of a benchmark.  Of course in a perfect world that return would always be positive, but aside from Jim Simons at Renaissance Technologies, I don't think anyone is pulling that off.   Hence, absolute return is simply a return independent of a benchmark, while relative return is a return versus a benchmark.  Framed that way, Chuck would have a lot less ire towards the subject. :)

But let's see his main thoughts:
  • Investors absolutely want to make money regardless of the direction of the market.  That’s precisely why “absolute return” funds are one of the hottest and fastest-growing areas of the mutual fund world.  But just because something is easy to market to the public doesn’t mean it’s a good idea. 
  • The problem with absolute-return funds is not just how they are being sold, but how they work — or fail to — for the typical investor.  Absolute-return strategies purport to produce a positive return in all market conditions, no matter the direction of the market. (Mark's note - not in my world)  They typically try to do this by investing some of the portfolio in cash or low-volatility investments, and then taking long and short positions that, when combined, should deliver results that don’t really correlate to what’s happening in the broad market. (that is correct, but a different goal than the previous sentence)
  • The basic idea is preservation of capital. (agree) In down markets, the funds protect the investor, and in up markets they don’t keep up with the broad market, which is the price the investor is willing to pay in order to get their “absolute return.”  (again, correct)

Now this is where the story gets off the tracks:
  • The average investor couldn’t explain this strategy; what they hear is that they get an “absolute return,” which they take to mean a steady gain under all market conditions, something safe and secure, like a long-term certificate of deposit paying an oversized yield. 
I am not sure how he knows what the average investor is thinking, but apparently it is a Vulcan mind trick of some sort.  There is no strategy that involves stocks or bonds not named "money market" that is 'safe and secure'.  (heck even money markets broke the buck in 2008!)

  • In fact, Putnam Investments has a suite of absolute-return funds, the 100, 300, 500 and 700 series, all of which try to do their job by number. The 100 fund, for instance, “seeks a positive return that exceeds the rate of inflation, as reflected by Treasury bills, by 1% over a reasonable period of time, regardless of market conditions.” The 700 fund tries to do the same job, except that it expects to beat inflation by 7%.  Here’s the problem: If you think that each fund can deliver its absolute return, there’s no reason not to just go for the riskiest fund with the biggest return, the 700. After all, the return is “absolute.” 

Again, if an investor thinks that, then this investor better head over to a RIA to let them invest his/her money.

  • ....the average fund with the words “absolute return” in its name was up 3.34% in 2010, according to Morningstar Inc., compared to the 15% return from the Standard & Poor’s 500-stock index.  On the flip side, the average fund that had absolute return in its name in 2008 — and there were only about a dozen of them — lost 12.7% compared to a market loss of 37%.
Hence the 'average' absolute return fund provided a net positive return over the 3 year cycle of 2008-2010, without the huge drawdowns in 2008 that caused panic attacks and sleepless nights.  Further, knowing how human psychology works many humanoids pulled money out of the market between fall 2008 and early spring 2009 - at the market's lows.  If they had done this in a normal mutual fund they would probably sold at a trough of -40 to -50%.  If they had done it in the 'average' absolute return fund, they would have locked in a 12.7% loss.   Hence, 2 years later people looking back at their sales in late 2008, early 2009 in a traditional mutual fund are kicking themselves for locking in massive losses, whereas those who panicked in an absolute return fund took some losses, but not traumatic.  Making up 10-15% loss is a lot easier than 45-50%.  [Jan 15, 2010: WSJ - Despite Stellar 2009, Only 3% of Stock Mutual Funds are Positive Since 2008]

  • While the funds did their job in a down market, they still posted losses — which hardly seems an “absolute return” — and the typical investor would have walked away from that experience feeling let down by the fund. 
Again, it's all in your definition of absolute.  I don't think it is being sold as "only gains each and every year", but I guess we'd have to sample 500 investors for their view of it.  
  • What’s more, if the strategy works, it will still be disappointing enough of the time so that most investors will not be able to stick with it
That once more goes to human psychology.  Just as investors tend to panic at bottoms, they also tend to performance chase and lose interest if "Balls to the Walls Fund" is making 32% annual for 2 years - while their fund is 'plodding' along at +12% those 2 years.  Then just as they move their monies to "Balls to the Walls Fund" that fund suffers a -40% year.  At which time they of course sell...

So I could make the same argument that investors will be disappointed in "Balls to the Walls Fund" during the now Fed created bubble crashes every 5-6 years.

Anyhow, an interesting discussion.  With some of the big boys like Blackrock moving hot and heavy into these alternative strategies I'll have to look at their ads closely - but I sincerely doubt any of them say "our fund only goes up! Absolutely!"

[June 11, 2010: CBSMarketwatch - More Investors Turn to Flexible Mutual Funds
[Nov 24, 2009: Bloomberg - Investors Rushing into Alternative Mutual Funds
[Nov 12, 2009: WSJ - More Mutual Funds Attempt to "Time" the Market
[Aug 4, 2009: WSJ - Mutual Funds Try "Hedge" Approach in Effort to Trim Stock Losses]
[Apr 10, 2009: More Stock Mutual Funds Declare Cash is King]

Friday, January 21, 2011

[Video] CNBC - Interview with F5 Networks (FFIV) CEO John McAdams

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This was not the highest quality of questioning by the CNBC anchors... comparing F5 Networks (FFIV) to Apple (AAPL)?  Asking the CEO to comment on if the stock price is correct?  Cmon now folks - you can do better than that.  Anyhow for those interested here is a 6 minute piece with the CEO of F5, John McAdam.  I still think that gap in the $104s needs to fill :)





No position

Solid Earnings Report from Skyworks Solutions (SWKS) but Tepid Reaction

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I am a bit surprised by the lack of reaction to what appears to be a very nice report from Skyworks Solutions (SWKS) last evening.  Beat by a penny and raised guidance for next quarter by 1-3 cents over current expectations.  Perhaps it has to do with the huge run (almost 100% from trough to peak) the stock has enjoyed the past 6 months, which has discounted some of the news.



Via Reuters:
  • Cellphone chipmaker Skyworks Solutions Inc (SWKS) posted better-than-expected quarterly results and forecast second-quarter above market estimates on firm demand for smartphones, tablets and a shift to 4G.
  • For January-March quarter Skyworks forecast second-quarter earnings of 38-40 cents a share, excluding items, on revenue of $310-$320 million. Analysts were looking for earnings of 37 cents a share, before items, on revenue of $306.5 million.
  • In the October-December quarter, Skyworks net income doubled to $60.9 million, or 32 cents a share, from $28 million, or 16 cents a share, a year ago. Excluding items, it earned 41 cents a share, above analysts' view of 40 cents a share. 
  • Revenue at the company rose 37% to $335.1 million, above analysts expectation of $334 million.


Cramer had the CEO on last evening - 8 minute video





Skyworks Solutions, Inc. is an innovator of high reliability analog and mixed signal semiconductors. Leveraging core technologies, Skyworks offers diverse standard and custom linear products supporting automotive, broadband, cellular infrastructure, energy management, industrial, medical, military and mobile handset applications. The Company’s portfolio includes amplifiers, attenuators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, mixers/demodulators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, receivers, switches and technical ceramics.

[May 4, 2010: Skyworks Solutions Impresses the Street]
[Jan 21, 2010: Skyworks Solutions Beats Estimates, Raises Guidance - But Still Sold Off]
[Sep 9, 2009: Skyworks Solutions Raises Guidance, CEO Visits Mad Money]
[Jul 23, 2009: Positive News Out of RF Semi Space - TriQuint Semiconductor, Skyworks Solutions]

No position

[Video] David Tepper Still Bullish, but "Not Everything Will go Up" This Time Around

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CNBC went "balls to the walls" with a commercial free 40 minute interview with Mr. David Tepper.  Actually there was a lot more talk about general broad economic themes, and less about the stock market, but big picture he is still quite bullish based on earnings expectations for 2012 along with some modest P/E multiple expansion.  He believes with a 4% (max) rate on the 10 year bond, multiples should be closer to the 14-15 range and you can cross reference that to expected S&P 500 earnings at year end 2012 of somewhere over $100.  With analysts believing $95ish for 2011, if we put 10% growth on that you are close to $105 for end of year 2012.

$105 x 14.5 PE multiple = S&P 1522 in about 2 years.

Of course the caveat to all this is we had huge expectations for 2007-2008 earnings based on analysts' expectations and those did not come to fruition.

He has pointed out the same thing I have often said, people should not confuse the U.S. economy with corporate profits; and even more important "American" companies are increasingly not reliant on the U.S. economy with a large proportion of sales and profits now coming from overseas.  Of course that raises other issues, if those markets slow down. It also does not mean great things for the American worker, but as a hedge fund manager that is an afterthought to corporate profits.

As for Europe, it is clear he believes the ECB should be doing everything the Fed is doing and going 'balls to the wall' by handing money out in every direction.  He chose not to say much about it because his mom said if you don't have nice things to say about people who don't print money so the speculator class can get massively rich, then don't say anything.

Generally he came off much more bullish than I thought - after such a huge run since August 2010 I thought he would have be more constrained, but aside from saying this time around not "everything" will go up, he still was very positive.  [Sep 24, 2010: [Video] Appaloosa David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment] I did not see him walk on water as was promised.

The two main difference I had with him was (a) his take on the dollar and (b) that there is really no downside to the Fed's actions.  If he is correct on the latter, then why does the Fed not just do a permanent Quantitative Easing program forever and we never have to worry about the stock market ever falling again.  As for the former, if you look at the dollar versus the 2 other main currencies of the world (yen, euro) yes it has not fallen.  But the reason for that has nothing to do with "no effects by Fed actions"; all 3 regions are in a race to the bottom, trying to devalue themselves to "buy" growth and increase exports.  Instead, when you compare the dollar to countries who are fiscally sound (or gold) the story changes dramatically.  See [Dec 23, 2010: Is the U.S. Dollar Weak or Not?] for a full explanation of that concept.  This is the "out" that anyone who just looks at the dollar index (which heavily weights the euro versus the dollar) have when they say the dollar is "holding up".

11 minute video (the first 11 minutes were spent discussing the Pittsburgh Steelers, and food bank)




17 minute video


"Correction" Over?

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Is that it? A whopping 1.2% correction and back off to the races?  If I knew that, I'd be David Tepper who apparently every manager in the world will be tuning into at 8 AM to let us know how to position ourselves for the next 6 months.

All we can do is try to put probabilities in our favor, so let's go to the chart(s).  [the first time we've even had an opportunity to as the 'boring market that only goes up' made any analysis useless the past 7 weeks]

Looking at the S&P 500, normally I don't focus much on the 10 day moving average but we have come off an incredible moment of weeks on end without a break of that very light support level (on a closing basis).  Despite the 2 day "sell off" the stick save yesterday afternoon actually pushed the index right near the 10 day, give or take a rounding error.  The dip buyers still feel immune.  More important to me is the 13 day moving average (not on the chart) because that is the level this index bounced off continuously in Sept and Oct 2010.  And we have not even come within smelling distance of it since Dec 1st (until yesterday).  As you can see we had a perfect bounce off the 20 day moving average yesterday, and until this level is broken on a closing basis there is really nothing here for the bears to get excited about.



Small caps have been the leadership group since Bernanke adding a new Federal Reserve mandate of manipulating asset values upward over what they "otherwise would be", at Jackson Hole Wyoming in late August.  Indeed the Russell 2000 has rallied from 600 in late August to over 800 earlier this week (over 33% for those playing at home).  This index did break the 20 day moving average so finally showing some wear and tear - something to take note of.



NASDAQ?  More similar to S&P 500 than Russell 2K at this point, by holding the 20 day moving average.



-----------------------------------

So at this moment, we've just had a minor blip of a massively overbought stock market; but that does not mean throw caution to the wind.  Dip buyers will keep doing their thing until it stops working, and then based on how the market has worked the past 2 years, once it stops working - any meaningful drop should happen in a very short amount of time.  Thus far (if I was up and running) the only major hedge I would have on is the VIX April calls I mentioned 2 weeks ago, mentioned in the low $17s (I would have added some in the $16s as VIX fell in the ensuing week)   We *could* have a potential double bottom in this index as seen below.  But for now we're at least back to positive on the trade and all it took was 1.33 days of actual selling after 7 weeks of none.  If all of the major indexes above break below the 20 day moving average on a closing basis, then other hedges would definitely be considered.



Other than that, it is off to listen to David Tepper to tell me exactly what the market will do the next half year!  Can't wait to see if they put water on the set of CNBC, to see if he can walk on it.  I'll report back shortly.

Wednesday, January 19, 2011

F5 Networks (FFIV) Implodes After Hours on Disappointing Guidance

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I am usually cautious around earnings season since the bipolar knee jerk reactions to a company based on 90 days of business and/or a few phrases on future guidance, are not something I like to be whipsawed with.  But the past few weeks I wrote quite a few times this earnings season is especially fraught with danger.  Many stocks have run up since their last earnings report without pause, to the tune of 30, 40, 50%, and valuations have gone ballistic.  The type of investors who pile in at this stage (rather than 18 months ago) are the momo chasers who often do little research other than to see which stocks are the top of the Investors Business Daily Top 100 list (or Cramer is shouting about), and away they go.  Everything is wonderful, when stocks only go up week after week... until they don't.  Indeed just this afternoon I warned on one of the companies I've been a big proponent of the past few years - F5 Networks (FFIV).

Meanwhile, story stocks like Cree (CREE) are being crushed, which is another warning for those who are playing high multiple and/or story stocks right now - so many have put 1-2 years worth of gains in 120 days, it's a very dangerous environment for blow ups as expectations are off the chart.  I'd be very wary of even favorites like F5 Networks (FFIV) which reports tonight...
 

This comment had nothing to do with any special insight into F5 Networks, and everything to do with the conditions outlined above.  Priced for perfect (in this case 40x forward earnings) does not work well, when the company does not continually raise the bar.  Guidance was just not good enough to satisfy the tribe... heck they even stumbled a small bit on this quarter's metrics.

So what happened to FFIV investors this evening?  They are facing a haircut of nearly 1/4th of their investment.  Easy come .... easy go.  Poof - 3 months of gains, gone in a few minutes.  The stock is down to $106/$107 in after hours and we have another "fill the gap, the hard way" candidate.  You can expect that late October 2010 gap of $104 to be 'filled' tomorrow. 


Look for knock off effects on such high fliers as Riverbed Technology (RVBD) and Acme Packet (APKT) tomorrow. (even though they don't do the exact same thing as F5 Networks, but most "investors" in these names nowadays don't understand the differences)  RVBD is actually already down 10% in after hours... Acme Packet nearly 7%, I am sure there are quite a few others in the internet infrastructure space being taken to the woodshed tonight.

Still a quality company with lots of potential? Yes.  Still a company I plan to own at some point in 2011.  Yes.  More of a value now than it was a few hours ago? Yes.  But near term?  Ugly.  All the momentum chasers will exit, and all the technical traders are will scurry like roaches once the kitchen light is on.  It is going to take some time for a new positive technical setup to be created here.  Perhaps an interesting entry can be created at the 200 day moving average just over $101.

There are a lot of F5 Networks out there as the Bernanke put has created an air of immortality amongst investors.  Indeed many others have even more air pockets in their chart that FFIV has.  As we discussed today - be careful out there, you don't want to be trampled by elephants.

(full report here)

---------------------------------------

Via Reuters:

  • F5 Networks (FFIV) forecast weak second-quarter revenue, knocking down network equipment stocks on concerns that the market for managing the explosion in Internet traffic may not be growing as fast as expected.
  • Shares of F5 Networks, which has outperformed market expectations for the past seven quarters, plunged 23 percent after the company forecast lower-than-expected revenue for the January-March quarter. 
  • F5 Networks, a leader in the network optimization market, has been benefiting from the need to manage network bandwidth as millions of smartphone and tablet users exponentially grow data traffic.  "Expectations were running a little high given that the company had performed so well over the last few quarters," said Thinkequity analyst Rajesh Ghai.  (a little Rajesh?)  
  • "However, the performance on an absolute basis is nothing much to complain about. They have become a victim of their own success." (agreed)
  • For the January-March quarter, Seattle-based F5 Networks forecast revenue of $275-$280 million, below Wall Street's consensus of $280.7 million.  The company, expects earnings of 84-86 cents a share, excluding items, for the period. Analysts are expecting 85 cents a share, according to Thomson Reuters I/B/E/S.
  • October-December profit almost doubled on a 40 percent jump in revenue.

Via AP:
  • F5's net income in its latest quarter topped analyst forecasts, but its revenue fell short, as did its revenue forecast for the current quarter.  The company's CEO, John McAdam, called the revenue and earnings growth "solid" and said the results were particularly strong in Asia. He added that the company hired 120 workers in the quarter.
  • The company's net income was $55.7 million, or 68 cents per share, or 88 cents per share excluding the cost of stock-based compensation. Analysts expected 83 cents per share, excluding one-time costs.  Revenue was $268.9 million, a 41% increase over the previous year but short of the $270.6 million that analysts expected.

[Oct 27, 2010: F5 Networks Enjoying a "Riverbed" Day on Good Earnings & Small Buyback]
[Oct 8, 2010: Goldman Sachs Moves F5 Networks to "Sell"]
[Sep 7, 2010: [Video] F5 Networks on the Rise]
[Aug 27, 2010: IBD - F5 Networks Leads in Key Cloud Market]
[Jul 22, 2010: F5 Networks Earnings]


No position

In Honor of President Hu's Visit

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Abbott & Costello pay tribue to President Hu.




[Video] CNBC - Jeff Gundlach of Doubleline Capital

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CNBC had an interview today with the rarely seen bond guru Jeff Gundlach, lately of his new firm Doubleline Capital but previous to that TCW.   Along with Loomis Sayles' Dan Fuss, and PIMCO's Bill Gross, Gundlach would be considered cream of the crop in the bond game - despite an uhhh, 'eclectic' background that led to his ouster at TCW.  (for the sordid details see this Fortune story)

I would have liked some better questions but basically it was a "what do you think of corporate bonds?", "what do you think of munis?" "what do you think of high yield?" sort of deal.  He does make some interesting points, especially the psychological aspects of what he thinks is going to hit the muni market, but the interview sort of ran too short. 

Here is a 9 minute clip, one can skip to 0:45 to get started.  I've added some text from a Reuters article last week below.  Being a bond guy I am not sure his accuracy with stock market calls, but he certainly offers his view.



  • As far as U.S. stocks go, Gundlach said: "I am not predicting a negative 38 percent 2011, but I deeply believe that stocks bought today will show double-digit losses at some point in 2011." He added: "The quantitative easing II impact on risk assets seems to have pretty nearly run its course, in my view."
  • During DoubleLine's December client call, Gundlach said the then-rapid rate rise in the 10-year Treasury note's yield of 3.50 percent would hit "exhaustion" in the weeks to come and that investors should purchase Treasuries and bond funds
  • ....Gundlach reiterated that he sees stagnant wage growth, highly indebted consumers and a weak job market.

Still Gliding

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If the S&P 500 closes where it is right now it would be only the second drop (on a closing basis) of over 0.5% since Dec 1st.  Remarkable in itself.   A 0.6% drop is a nothing day in a normal market - part of the ebb and flow.  But these down days are so rare now in the new paradigm market, it 'feels' as if is a much more important event than it is.

Recall, this market can not even drop below the 10 day moving average on a closing basis (back in Sept & Oct, it was the 13 day moving average).  Until it can prove to break even those traditionally weak supports, every dip is just a scuff mark.

[click to enlarge]


Keep an eye on reactions to earnings - if you start seeing selloffs to good news, you know "everyone is in".  You'd think with the sentiment indicators at records for weeks on end, that would already be the case but price action is the ultimate tell.  Apple had a tremendous report yesterday and the reaction is muted.  We have a host of multinationals coming up in the next 2 weeks, and I expect them to continue to shoot the lights out - but at what point is this discounted?  Many are up 30-40%+ in 3-4 months.  Meanwhile, story stocks like Cree (CREE) are being crushed, which is another warning for those who are playing high multiple and/or story stocks right now - so many have put 1-2 years worth of gains in 120 days, it's a very dangerous environment for blow ups as expectations are off the chart.  I'd be very wary of even favorites like F5 Networks (FFIV) which reports tonight...

----------------------------

While we're at it, some sage words from Jeff Saut over at Raymond James - recall, this is the strategist who points out most bull move buying spurts in history are of the 25-30 day variety.  He mentioned this was the first one he has ever seen (in 40 years of experience) at 80 days.  That was 3 weeks ago!  (we're at 95 days if you are keeping track at home)

But in a different vein, you have to step outside your own mindset and see how others are thinking (or not thinking, just hitting buy every morning believing in the omnipresent Fed put) and Saut describes the group think.  Agree or disagree with it, you have to respect it - especially with countless computer programs now doing the work that once took 1000 humans.

Indeed, the current mantra reigning on the Street of Dreams is – “I don’t look at so-called values, I look at price action; if they are going up I buy them and if they turn down I sell them” – it sounds simple, and it is. The only difficulty is that game has caught on and is being played among an increasing community of professional players.


He cites a quote from an old hedge fund from the early 90s (when there were relatively few around)

The name of the game most investors play is momentum and relative strength: Buy the strongest stocks and sell them after they have topped. Occasionally I will ask of my friends, “How can a rational person pay 60 times earnings and 10 times book value for a growth company with dubious long-term prospects?” The reply: “How high is high? If a stock can sell at 60 times earnings, it can sell at 80 times or 100 times. I don’t prejudge anything. I don’t look at so-called values, I look at price action. If they are going up, I buy them. And if they turn down, I sell them.” It sounds simple and it is. The only difficulty is that the game has caught on and is being played by an unwieldy number of individuals and institutions. An individual with a few thousand shares in each crazily valued position can get out, but an institution with hundreds of thousands of shares in each position will not be so fortunate. As fast as stock markets go up, they always go down faster. And despite the many trading innovations that have recently been developed, it nevertheless remains difficult to push the proverbial elephant through a keyhole – when everyone wants to sell and there aren’t many buyers.

That was written in 1991, but for those who were around in 2008 you see it still applies.  If anything the elephants try to move at light speed now.  But a lesson I have to keep reminding myself is valuation is relative. What looks ridiculous to me, means nothing to many others. If we all believe in greater fool theory all that matters is someone is willing to pay more than I did.  So I can buy at any valuation, as long as I have someone willing to buy from me at a higher price.

That works.  Until it doesn't.  Then you get trampled by elephants. 

No positions

Tom DeMark - Stocks Near Significant Top

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In full disclosure, I've seen a lot of "DeMark" timing indicators on the internets (sic) the past few years, but have never studied it nor know much about it - more or less it is Greek to me.  But in case the market has a 11% or so drop in the coming month(s) let's put this out there so we can look back and realize we need to study up on the subject.  In normal times, with a market up 7 weeks in a row, it would seem sensible to say we get at least a 3-5% correction.  11% seems almost unthinkable in the current 'teflon' environment.  But with short sellers wiped out and cowering in fear, any significant selling won't have short sellers covering to buttress the move.

On a not so related note David Tepper returns to CNBC this Friday.  Hence much like Groundhog Day if he repeats what he said last fall (the market will either go up from improving economic outlook or the Fed will QE until the market goes up - you can't lose!) I guess we get 6 more weeks of rallying.  If he says anything cautious will the market shudder? [Sep 24, 2010: [Video] Appaloosa David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment]


Back to Demark

  • U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 percent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.
  • DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 percent plunge from a record in October 2007.
  • “I’m pretty confident that in one to two weeks, the market will be in a descent,” said DeMark, founder and chief executive officer of Market Studies LLC. “It could be pretty sharp.”
  • Steven A. Cohen, founder of Stamford, Connecticut-based SAC Capital Advisors LP, which manages $12 billion, and John H. Burbank, founder of San Francisco-based Passport Capital LLC, which manages $4.2 billion, are partners in Market Studies, DeMark said. The firm has its headquarters near Scottsdale, Arizona.
  •  On a weekly basis, the two indicators signaled on Jan. 14 that a reversal is imminent as the S&P 500 closed at its highest level since August 2008. DeMark expects a decline of at least 11 percent because his work shows that markets move in increments of 5.56 percent, he said. Assuming a drop twice that size is “a conservative estimate,” he said.
  • The indicators are based on comparisons of the current closing level of the index with closing and intraday levels over previous periods. The reading Jan. 14 was the first signal of a reversal in the S&P 500 since March 2009, when the indicators showed a rebound was imminent, he said. That month the S&P 500 fell to a 12-year low from which it has rebounded more than 90 percent.

U.K. Facing Inflation Near 4%, Central Bank Keeps Rates Ultra Easy, Raising Public Ire

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Interesting developments across the pond as the U.S. mini-me, the United Kingdom is facing many of the same issues developing here.  (err, if you distrust government data that is)  I have never researched how the U.K. measures inflation, or more importantly how it differs from how the U.S. measures it, but there appears to be quite a contrast as somehow "they" have inflation and "we" do not.  This despite 2 countries chock full of unemployment, rolled over by a financial sector gone berserk, with housing sector disasters, and credit implosions.   If anything with the massive federal government fiscal stimulus that has no end in the U.S. in stark contrast the austerity measures in the U.K.,  [Oct 21, 2010: UK Unveils Serious Austerity Measures - Potentially Slashing Half a Million Public Workers] not to mention near permanent QE by our central bank, we should in theory be seeing more inflation then they are.   But through the magic of American government statistics we are inflation free, while the consumers in the U.K. are suffering from rising prices.  Whew! Glad domestic consumers have no such issues.

Either way, what is developing over there might foreshadow political pressures locally if Bernanke and our merry band of speculators on Wall Street are successful in inflating oil to $120+.   Or more likely, our astute representatives will drag the "big bad oil CEOs" up to Capital Hill for a grilling on all the evil things they are doing.  While Bernanke chuckles.

If you are unfamiliar with the process, in the U.K. if inflation is over target (2%) by more than 1%, the Bank of England Governor must write a letter to their version of the U.S. Secretary of Treasurer.  (you can see the letters here)  So we have letters in Britain, revolts in northern Africa, food riots in Africa and now parts of the Middle East, but thankfully we are the one country on earth devoid of any inflation.  Lucky us - keep pressing the accelerator Ben - Goldilocks baby.

Via Bloomberg:
  • U.K. lawmakers who scrutinize Bank of England officials including Governor Mervyn King said they’re concerned about accelerating price gains and want reassurance the central bank isn’t losing control of inflation.  “This is a big test for them now and they need to weather this to ensure that credibility is maintained,” John Thurso, a Liberal Democrat member of the British Parliament’s Treasury Committee. “I’m looking for reassurance” that “we’re not just quietly abandoning the inflation target.
  • U.K. price growth soared in December and economists forecast it may accelerate again this month after an increase in sales tax. King is due to face the committee after the bank publishes new forecasts in February, and lawmakers are stepping up public pressure on him to justify why policy makers are holding the key interest rate at a record low after inflation exceeded the bank’s 2 percent target for more than a year. (hint to British government statisticians: when the data is disagreeable, just change the way you compute the data to make the number "say" what you want it to... problem solved.  Working miracles the past 2 decades stateside)
  • “My constituents are writing to me -- this is the one big thing in my mailbag,” Treasury Committee member Mark Garnier, a lawmaker in the ruling Conservative Party based in England’s Midlands, said of inflation. “It’s especially a problem outside London where people rely on their cars to move around.” (again, clearly the Brits do not understand the "substitution" effect that works wonders in U.S. inflation reporting - if cars become too expensive, than a consumer will move to bikes.... or horse carriage, hence no inflation.  Although horses are becoming expensive to feed with all the run up in wheat - hence let's stick to bikes.)
  • Consumer prices rose an annual 3.7 percent last month, driven by fuel and food costs, data showed yesterday. On the month, prices jumped a record 1 percent. (So ex food and energy, inflation was only 1%? Stop the whining, have everyone from the smaller towns move to London for public transport and start fasting - no more inflation.)
  • A decision by King and his colleagues on the bank’s Monetary Policy Committee to change tack and raise the interest rate might make life difficult for Prime Minister David Cameron and his plan to cut the record budget deficit. Higher borrowing costs may put an additional restraint on economic growth just as spending cuts by the governing coalition of Conservatives and Liberal Democrats start to bite.
  • “The recovery has enough problems with the spending cuts and growing unemployment,” said Treasury Committee member George Mudie from the opposition Labour Party. “If the MPC lost its nerve at this moment, I really think that would be the final straw. We would be in danger of going back into recession.” 
  • Andrew Tyrie, chairman of the Treasury committee and a Conservative lawmaker, said the pickup in inflation is a “source of concern” and policy makers’ decisions will be “subject to full scrutiny.” Fellow Tory committee member Michael Fallon said this week that officials should start a series of “gradual” rate increases now to avoid sharper moves later.
  • King told the panel at his last appearance in November that inflation, ....will remain “elevated for another year or so,” though taking “strong action” risked destabilizing the economy. He has also said the bank’s “central view” is that slack in the economy will put ‘downward pressure on inflation.” (the same "slack in the economy" logic employed in the U.S. as if we do not live in a global economy where capital can run from 1 country to another.)
  • Economists at Investec Securities and Ernst & Young LLP’s Item Club say inflation may accelerate to 4 percent after the government increased value-added tax to 20 percent from 17.5 percent on Jan. 4.
  • A report by Aviva Plc published today showed that increasing costs is the biggest fear among 57 percent of U.K. households.
  • “To some extent, they’re between a rock and a hard place and I don’t envy their task,” Thurso said. “If inflation drops back, that’s that. If on the other hand it does not, then I think the MPC will be obliged to come to the conclusion that rises in interest rates are necessary.”


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