Tuesday, February 1, 2011

ARM Holdings (ARMH) Continues to Squash Critics with Latest Earnings Report

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I won't talk about the valuation of ARM Holdings (ARMH) because you don't talk about fight club, but needless to say it's 'Salesforce.com' like.  The company beat estimates of $161.4M in revenue and 10 cents EPS, with a quarter of $179.6M and 14 cents.  After pulling back from highs via the CES hysteria ($28) the stock settled in a range of $24-$25 the past 2 weeks.  However it was SO stretched from any meaningful support that pullback did not even take it to the 20 day moving average.  Anyone trying to catch the name near that level missed their chance....



Gross margin's remain insane in the mid 90% range, as this is essentially a licensing company- and backlog is great.
  • Gross margin in the quarter edged up from 94.3% to 94.9%.
  • ARM said its backlog at the end of the fourth quarter was up about 35% sequentially and about 75% higher than a year earlier
The royalty rate did fall both sequentially and year over year - which puts a blemish in Goldman Sachs' view that somehow ARMH will be increasing royalty rates (when you are trying to justify a valuation, you come up with all sort of rainbow and butterfly scenarios)   [Jan 18, 2011: 65x Forward Earnings for ARM Holdings? No Problemo says Goldman Sachs]


Via Barron's:

  • Q4 revenue was up 28%, year over year, at $179.6 million, beating the average $161.4 million estimate. EPS of 14 cents was better by 4 cents. The company said it expects to gain share and revenues for the full year will “be at least in line with market expectations.
  • ARM’s processor division recorded a 51% jump in licensing revenue, and a 29% jump in royalty revenue, year over year. 
  • The “Physical IP” division saw a 26% jump in licensing and an 8% jump in royalties.
  • The only potential blemish was the decline, quarter over quarter, of the company’s royalty rate: from 4.7 cents in Q3 to 4.6 cents. The rate was also below the year-earlier quarter’s 4.9 cents. ARM cited the increase in sales of low-cost microcontrollers as being a cause.
  • The company expects to have “normalised” operating expenses — meaning, on a constant currency basis — in Q1 lower than in Q4, at a projected £57 million to 59 million, versus £61.2 million in Q4.
  • ARM, in a statement Tuesday, said it signed 35 processor licenses in the fourth quarter for a range of applications including smartphones, mobile computers, servers and smartcards.


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

A nice interview with the CEO at All Things Digital

The conventional wisdom right now is that Intel’s longest-term strategic threat is ARM. Is that fair? Will ARM become the rival camp to Intel and x86?

The two markets have been very separate and so they’ve been coming together. Intel has acknowledged that computing has to go lower-power, and they’ve done some work with the Atom processor. They’re still a long way off in terms of power consumption from where we are today. They’ll get closer, and ARM will move higher up in terms of computing performance. Inevitably there’s going to be a clash. Some thought it would happen in the netbook space, but that fizzled out in my mind.
----------------------------------------

I believe the CEO will also be making an appearance tonight on the 'Mad Man's show.

No position

[Video] CNBC - Michael Lewis on Ireland and His New Vanity Fair Article

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Michael Lewis is one of the most prominent authors on the inner workings of 'the Street' and the financial crisis they - with central bankers aiding and abetting - create.  It looks like he has a doozy of an article coming in March's Vanity Fair in relation to Merrill Lynch and the crisis in Ireland titled 'When Irish Eyes Are Crying'.  If you recall, the Irish taxpayer (like the British, and lesser degree American taxpayer) was made to socialize the losses of private entities, whereas a country like Iceland basically gave a big middle finger to the banking establishment.  [Dec 9, 2010: Should Sovereign Nations Pursue the Iceland Solution or the Irish Solution?]  How Ireland got there, and the aftermath seem to be the focus of the story.  Lewis wrote about Greece last year.

While it is too far ahead to be published on the website there is a lengthy Q&A on the website here, and below I've embedded a video from CNBC this afternoon.  As I've long decried the combination of central banks fixing every problem with a flood of easy money and incredibly broken incentive systems herks and jerks the global economy from bubble to bust, in increasingly fast time frames.

For the March issue of Vanity Fair, Michael Lewis traveled to Ireland for the third leg of his Euro DisasterLand adventure (preceded by Greece and Iceland). In Iceland, Lewis found that the country was brought down by Icelandic Alpha males who wanted to be investment bankers; in Greece, he found that the country was brought down by spectacularly generous social services coupled with rampant tax evasion; in Ireland, Lewis finds a housing bubble the likes of which even we Americans struggle to fathom. “In an era when capitalists went out of their way to destroy capitalism,” he writes, “the Irish bankers set some kind of record for destruction.” 

Amazingly, finance minister Brian Lenihan convinced the Irish government to nationalize the private debts of not one but three of Ireland’s biggest banks. And the ruling political party, Fianna Fail, has been allowed to stay in power just long enough to firmly set the hook in every Irishman’s mouth—having recently accepted a bailout worth 85 billion euros from the E.U. and I.M.F. 

Lewis spoke with VF Daily about being accosted by Ireland’s reigning bare-knuckle boxing champion, why Greek people don’t care about what he has to say, and why Irish people do.

6 minute video - email readers will need to come to site to view






[Jun 1, 2010: NYT - Michael Lewis Op-Ed on America's Financial Reform, plus Audio Interview]
[Mar 15, 2010: [Video] 60 Minutes- Michael Lewis, Inside the Collapse]
[Jun 14, 2009: Fareed Zakaria with Michael Lewis]
[Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn]

Cummins (CMI) - Strange Non Reaction to another Very Good Quarter

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A lot of interesting earnings the past 24 hours, and yet another head scratcher of sorts.  Cummins (CMI) despite what appear to be excellent metrics and a market ripping to the upside, is not reacting to its earning report in a positive manner.  Could be valuation, although that has not stopped countless other companies - perhaps some worry of cost metrics, perhaps the fact North American market is just not keeping up, or guidance was just not high enough (basically "in line" on revenue).  At this moment the stock is trading right at its 50 day moving average, after falling below it earlier today. 



Longer term this continues to be a fantastic way to play the emergence of the new kids on the global economic block, although it would certainly help if North America pulled its weight.  The company believes NA will rebound in 2011.  Frankly, considering how putrid sales in its home market were, the aggregate results globally stand out even more.

Sales were $4.14B vs analysts $3.92B; earnings at $1.84 vs analysts $1.72.  For the year Cummins achieved $5.17 EPS.  Despite an enormous run the past year, if the company can create the $7.00 of earnings projected in 2011 there should still be some upside ahead, although not at the pace we've been spoiled at the past 12-18 months. [Jan 3, 2011: Cummins Gained 140% in 2010]  Definitely a name I should not have been trading so much last year, and just "bought and held"!   Full report here.


Via Marketwatch:
  • Cummins Inc. on Tuesday reported a record year of profitability, but shares of the diesel engine maker slipped as investors likely wanted more from the company’s outlook.  The Columbus, Ind.-based company said fourth-quarter earnings rose 34% to $362 million, or $1.84 a share, from $270 million, or $1.36 a share, in the year-ago quarter.
  • Sales climbed 22% to $4.14 billion, despite a big drop in its key North American truck engine market.
  • Analysts polled by FactSet Research were looking for fourth-quarter earnings of $1.69 a share, on average, with sales of $3.9 billion.
  • Cummins’s big-rig business continues to be affected by weakness in the U.S. economy and a change in emissions standards. In fact, engine shipments to the North American heavy-duty truck segment plunged 61%.
  • However, international markets, particularly in China, India and Brazil more than made up for the problems in Cummins’s home market, where the company is looking for some improvement.  “Given our strong balance sheet, the expected recovery of our North American markets and the global growth opportunities in front of us, we are forecasting further significant growth in 2011 and beyond,” Chairman and Chief Executive Officer Tim Solso said.
  • Earnings were fueled by record sales in its engine, components and distribution segments, with sales up 15%, 25% 44%, respectively, partially offset by declines in its power generation unit.

  • Cummins forecast sales to grow to $16 billion in 2011, up from $13.2 billion in 2010, which was the second-best revenue year on record.
  • Jefferies & Co. analyst Stephen Volkmann said margins concerns and a lackluster outlook drew in the sellers.  He reiterated his hold rating on the stock, pointing out that “other machinery companies have traded off on strong top line coupled with weaker margins during this earnings season." Volkmann had expected more from the company’s bottom line than the Wall Street consensus, though sales topped his target.

Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins employs approximately 40,000 people worldwide and serves customers in approximately 190 countries.

[Nov 19, 2010: Bloomberg - Oldest Truck Fleet Since 1979 May Mean 56% Jump in North American Output]
[Oct 26, 2010:  Cummins Misses on Top and Bottom Lines, but Foreign Sales up to 63% of Revenue]
[Jul 27, 2010: Cummins Demolishes Estimates]
[Feb 11, 2009: WSJ - Cummins Engine Shifts Gears Amid Stall]
[Sep 23, 2007: Stock to Watch: Cummings Hitting on all Cylinders] 
 

No position

S&P 500 Breaks to New Highs, Change in Technical Condition in 2 Market Days

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Amazing what 2 solid back to back days can do for the technical condition of the market (S&P 500).  From closing below the 20 day moving average (for the first time since November) Friday, to a break out over yearly highs Tuesday at noon.   Unlike November, when a small technical break led to some weakness for a number of weeks; this time around it was not even a glancing blow.

Now the question returns, do we start a new "V-shaped" rally that has marked so many of the upside moves since March 2009?  Next clear resistance (not that resistance matters anymore) appears to be August 2008 highs around S&P 1350.  Long side traders can now play the market from the long side using S&P 1302 as their base....

.....it remains the remarkable, unshortable market.


ISM Manufacturing Breaks Over reading of 60

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A very bullish report on the ISM Manufacturing front as a reading of 60.8 was hit.  While manufacturing is only 11% of the economy, and 9% of employment (and employs less people today than anytime since the early 1940s) [Nov 29, 2010: America Has Less Manufacturing Jobs Today than Before the War] it still has a good halo effect, as a better outlook for manufacturing workers feeds into associated service workers around them.  Thursday's ISM Non Manufacturing is more pertinent to the greater economy.

As we have seen in other recent reports, prices paid jumped sharply.... as in 2008 this should begin to cut into profit margins. However, backlog and new orders were very promising in this report.
  • A gauge of prices paid increased to 81.5 from 72.5

The data has the S&P 500 back to yearly highs as the "correction" (1 day) is already a distant memory. Hope you did not blink. :)


Via AP:

  • Factory activity expanded in January at the fastest pace in nearly seven years, as manufacturers reported a sharp jump in new orders.  The Institute for Supply Management said Tuesday that its index of manufacturing activity rose last month to 60.8.  January's reading was the highest since May 2004. Any reading above 50 indicates expansion.
  • The manufacturing sector bottomed out at 33.3 in December 2008, the lowest point since June 1980. It has helped drive growth since the recession ended in June 2009.
  • Factories healthy pace of expansion is likely to continue in the coming months. Manufacturing firms surveyed by ISM said their backlog of orders jumped in January, pushing an index measuring that activity to 58 from 47.
  • U.S. factories are also benefiting from rising overseas sales. The index of export orders jumped to 62 in January, from 54.5 the previous month. That matches a recent peak reached in May.
  • The prices paid index, which measures whether manufacturing companies are paying more for raw materials, jumped sharply. That's a sign that inflation could pick up soon.  If manufacturers are unable to pass on the higher costs, it could cut into their profit margins.

Cavium Networks (CAVM) Attracts Hot Money with Solid Quarter & Chinese Acquisition

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It appears Cavium Networks (CAVM) was completely off the map for hot money, as the company reported a quarter with very nice metrics but not much off what analysts expected.  For whatever the reason (perhaps the announcement of a purchase of a Chinese company) the stock is exploding higher this morning... after actually trading down in after hours yesterday.  Which yet again shows how arbitrary reactions to earning reports are - even the same report can create a reaction 180 degrees different 15 hours apart.



Analysts were in for $59.1M in revenue and 27 cents EPS; Cavium had a slight beat on the top line at $59.8M and bested estimates by 2 cents on the bottom - not normally something I'd associate with a 12-13% surge the next day in a normal market.  Gross profits were pretty flat at 65.2%.  Full report here.
  • Net income for the fourth quarter of 2010, on a non-GAAP basis, was $14.9 million, or $0.29 per diluted share, compared with non-GAAP net income of $12.5 million, or $0.25 per share in the third quarter of 2010.
  • Revenue in the fourth quarter of 2010 was $59.8 million, an 8% sequential increase from the $55.2 million reported for the third quarter of 2010 and an increase of 86% from the $32.1 million reported for the fourth quarter of last year. 

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

I have to assume the stock is surging due to this very small acquisition:
  • Cavium Networks (NASDAQ: CAVM), a leading provider of semiconductor products that enable intelligent processing for networking, communications and the digital home, announced today that it is has signed a definitive agreement to acquire China-based privately held Celestial Semiconductor, a fabless semiconductor company headquartered in Beijing, China with centers in Shenzhen and Shanghai. Celestial is a fast growing provider of ARM-based system-on-a-chip (SoC) processor solutions for a range of digital media applications
  • The net purchase price of the acquisition will be approximately $55 million, to be paid in a combination of cash and stock.   Cavium Networks expects this acquisition will be non-GAAP earnings neutral during the first half of 2011 and modestly accretive by the second half of 2011.
One analyst weighs in
  • "The new acquisition will grow their presence in television along with wireless high-definition multimedia interface (HDMI) products," Stifel Nicolaus analyst Kevin Cassidy told Reuters.  "It could open up new markets for them. They don't have a lot of market share in TVs in general."
Cavium Networks is a leading provider of highly integrated semiconductor products that enable intelligent processing in networking, communications, storage, wireless and video applications. Cavium Networks offers a broad portfolio of integrated, software compatible processors ranging in performance from 10 Mbps to 40 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access & service provider equipment.  

[Apr 27, 2010: Cavium Networks - Another Good Quarter, with Raised Guidance - Still Pricey]
[Jan 29, 2010: Cavium Networks Continues to Show Good Growth]
[Dec 18, 2009: Cavium Networks Raises Guidance; Breaks Out of 4 Month Range]


No position

Baidu (BIDU) Please the Street with Slight Beat on Earnings, Raised Guidance and Most Important,Talking of Move into Hottest Investment Bubble - Social Networking

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Baidu (BIDU) did it's normal thing last night in earnings, and with Google (GOOG) effectively neutered in China has little to fear in the near to intermediate term in the Chinese search engine space.  However, with the global buzz about social networking now reaching the same fever pitch we heard in the late 90s during the original internet revolution, Baidu waved a green flag to investors saying "we're gonna be a social networking company too!"  Of course investors are giddy because just like in 1999 they think every company will thrive and there will be no competition or crowding out. :)  [I too shall be starting a social networking site; the details don't matter - I just want my own valuation to rise 20x overnight]  That said, Baidu is dominant in search - no way around it.

Technically the stock has not participated in this nearly half year rally led by The Bernank, which led many (me included) scratching our head.  But with a huge multi month base to work with, the stock has an excellent technical condition to break out from, as long as the greater market remains benign.



Via Reuters:

  • Baidu Inc beat fourth quarter estimates and painted a bright near-term outlook as it bets on large advertiser spending and new Chinese Internet trends, such as social networking, to spur growth.
  • "The key attractiveness of Baidu is that they are the one and only one in China, they rely on the China story, the high growth Internet market and in particular search, and there's no other key competitor in the market," said Benjamin Tam, a Hong Kong-based portfolio manager with Investors Group.
  • Baidu, which has increased its focus on e-commerce and online video, grabbed more market share last year after rival Google Inc curtailed its operations following a high-profile fallout with Beijing over censorship. Baidu is the No. 1 Internet search engine in China with a 70 percent market share.
  • The company breezed past Wall Street financial targets in the fourth quarter and reported a higher-than-expected first-quarter revenue outlook.  Beijing-based Baidu's fourth-quarter net income rose to $175.9 million, or 50 cents a share, from $62.7 million, or $1.80 a share, a year ago, before a 10-for-1 stock split. That beat analysts' average forecast of EPS of 45 cents.
  • Total revenue in the fourth quarter totaled $371.3 million compared with $184.7 million a year ago. Analysts, on average, had expected revenue of $360.3 million.
  • One of the key focuses for Baidu in 2011 will be in social search, executives said at its call with investors.  "Social search products represent a significant portion of our total traffic and it continues to grow at a rapid speed," said Baidu's CEO Robin Li said. "As time passed by we realised the commercial value of this product...So we are developing commercial products or ad products for social search services and going forward we expect to better monetize this kind of traffic," Li said.
  • Local media reported over the past month that Baidu might invest into Sina's hot microblog product Weibo. Baidu declined to comment on market speculation but Li said on the call that the firm was open to opportunities that "make sense" strategically for Baidu.

  • Despite the upbeat outlook, some analysts warn of risks.  For the fourth quarter, Baidu had 276,000 customers, a 24 percent increase over a year ago but only a 1.5 percent increase from the previous quarter.  
  • "This quarter only grew by 4,000 (customers) it's not the lowest. In Q4 2008, it grew only 3,000 additional customers, but having said that, we had the financial crisis back then," said Wallace Cheung, a analyst with Credit Suisse.  "I wouldn't say (the numbers) are very bad, but it's definitely not good enough," Cheung said.
  • Analysts also see an increasingly competitive landscape in China's search market in the coming years, as players like Sohu.com , Alibaba Group and Tencent Holdings wrestle for market share.
Acquisition costs dropped:
  • Baidu’s cost to acquire traffic during the quarter declined, perhaps reflecting less competition from Google. Traffic acquisition cost (TAC) was 8.1% of revenue in Q4, down from 8.9% in Q3, and well below 16% in the year-earlier Q4. TAC for the full year was 9.6%.

Guidance:
  • Baidu said revenue for the first quarter will come in between $360.6 million and $371.2 million, ahead of the average analyst forecast of $354.2 million.  
  • Baidu cited continued improvement in "monetization" for nearly doubling fourth-quarter revenue from a year ago. Baidu's revenue per online marketing customer increased roughly 56 percent in the fourth quarter.

    [Nov 21, 2010: BW - How Baidu Won China]
    [Oct 22, 2010: Baidu Continues to Execute]

    No position

    Chinese PMI Holds Relatively Steady, while European Measure Rebound a Bit as Germany Impresses - First Day of the Month Rally Looks Guaranteed (Again)

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    Before we get to the economic figures overnight, futures have us set up for the traditional first day of the month rally.  This has now reached a point bears will not make bets against the market on the last day of the month because it has become ingrained that we'll surge on the first day of the following month, (with a lot of the move happening in premarket of course).  The last first day of the month that has been down was back in July 2010 (a whopping 0.3% loss).  Since then the market has added 8.7% in the six first day of the months since, for an average gain of 1.45%.   Going father in time we see a similar pattern, as I've mentioned often.  e Barring a disaster in U.S. Manufacturing ISM at 10 AM, we are guaranteed to see yet another positive to the data set, as intraday reversals (barring riots in foreign lands) have gone the way of the dodo bird in the HFT dominated market - once a market is in motion, HAL9000 almost never reverses it.

    With the S&P 500 back over 1280, the bears have had their 1 day of candy stomped on, as the "first day of the week" rally followed by the "first day of the month" rally back to back, simply is a force too difficult to fight.  Hence my caution late last week on making bets against the broader market despite the first break of support in months.

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

    As for the economic data, I think U.S. bulls had a "no lose" situation in China - if the Chinese Purchasing Managers Index was strong we would clap that "China is impossible to stop" and if the PMI was weak, we would clap that "China is doing a great job slowing down their economy to contain inflation".  It's a David Tepper viewpoint - we can't lose no matter what the data.   As always, there are actually 2 figures one private (via HSBC) and one public (via the ministry of propaganda government).  Since there is actually a private survey, this is the one report from the land of perpetual 10% growth with "little" inflation, that I pay some heed to.  Inflation continues to be an issue even though the government insists it is contained, and indeed now dropping.

    With the Chinese New Year starting up soon, the data next month will be not as useful.

    (over 50 = expansion, below 50 = contraction)

    Via AP:
    • China's manufacturing boom eased further in January as authorities tightened controls on credit, though inflationary pressures continued to rise, according to data released Tuesday. The state-affiliated China Federation of Logistics and Purchasing said its purchasing managers index, or PMI, dipped to 52.9 last month, from 53.9 in December and 55.2 in November.
    • A second, competing survey issued Tuesday, the HSBC China Manufacturing Purchasing Managers Index, edged up in January to 54.5 from a three-month low of 54.4 in December.
    • The HSBC survey covers 400 companies, while the federation's monthly reports measure data from 820 companies across a range of industries and is an indicator of future trends.
    • Inflation measures within the purchasing managers index reflected strong increases, especially for energy, raw materials and food-related commodities, the report said.
    Here is where the fun starts - the government indicates its inflation fighting measures are doing a great job slowing down the economy.  HSBC survey?  Not so much.
    • The government-sponsored survey showed steady demand for imports and strong purchasing by manufacturers. But indicators for new export orders, production and inventories fell, it said, suggesting caution among many manufacturers over prospects for future demand.
    • The HSBC survey appeared, however, to show more robust support for continued strong growth, suggesting further room for credit tightening.
    • Goldman Sachs Group Inc. said the divergence between the studies may reflect sampling differences and said the government-backed PMI shows seasonal effects even after “supposed” seasonal adjustment. (note the quotation marks around supposed - i.e. even Goldman is chuckling at the government data) Barclays Capital said the HSBC PMI was “a more reliable seasonally adjusted series.” 
    M2 (broad measure of money growth) continues to explode in China, with a 19.7% gain 2010, and the government aiming for another 16% in 2011.  But with little inflation of course. Ahem.

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

    Over in Europe we have a nice bounce in economic data that counteracts some of the slowdown seen in other reports from the region the past 2 months.  Germany continues to be a superstar, with unemployment now down to its lowest levels since 1992, as government, corporation, and worker band together for the greater good. (what a concept)   [Oct 1, 2010:  German Unemployment Rate Down to 7.2% after Peaking at 8.7%; Can We Learn Anything?

    Via Bloomberg:
    • European manufacturing growth was stronger than initially estimated in January, accelerating to the fastest pace in nine months on stronger output in Germany.   A gauge of manufacturing in the euro region rose to 57.3 from 57.1 in December, London-based Markit Economics said. That’s the highest since April.  In Germany, output growth hit 60.5.
    • A gauge of services advanced to 55.2 in January from 54.2 in December. A composite index of manufacturing and services rose to 56.3 from 55.5. A sub-indicator of new orders remained at the highest in eight months, today’s report showed. 
    • European manufacturers have helped bolster the region’s economic expansion as export growth countered the impact of austerity measures on consumer demand. 
    • In Germany, Europe's largest economy, business confidence jumped to a record last month.
    • German unemployment has fallen to second lowest among the Group of Seven nations after Japan.  According to OECD data, Germany’s jobless rate was 6.7 percent in November. The equivalent rate in France was 9.8 percent, the U.S. rate was 9.8 percent and the Group of Seven average was 8.2 percent. 
    Instead of Jeffrey Immelt (how many jobs has GE sent overseas the past few decades, while simultaneously taking massive amounts of government subsidies?) perhaps Obama should have hired away a top official from Germany to learn how to create a favorable environment for job creation in Cramerica.

    [Jan 13, 2011: Germany Puts Finishing Touches on Impressive 2010]
    [Jan 6, 2010: China Passes Germany as World's Largest Exporter
    [Jun 30, 2009: Will Germany Transform Itself?  Does it Want to?]
    [Jun 16, 2009: As Euro Zone Unemployment Spikes; Job Saving Measures Emerge - Completely UnAmerican]

    Monday, January 31, 2011

    Blue Light Special - Egyptian Shares

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    Who doesn't love Mondays!?  Almost always up Monday keeps working like a charm... even better almost always up first day of the month comes tomorrow.  Egypt is so last week.

    Until this morning, I did not even know Market Vectors Egypt (EGPT) existed.   Based on the average volume of sub 50,000 shares a day and less than $12M in assets, I was not the only one.



    But for those with cast iron stomachs and 5 year time horizons I would assume barring a fireball in Egypt, a position today might offer some nice upside a few years down the road.

    The Egypt Index ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Egypt Index.  The Market Vectors Egypt Index is a rules-based, modified capitalization-weighted, float-adjusted index intended to give investors exposure to Egypt.


    Top 10 Holdings

    Holding
    Shares
    Market Value (USD)
    % of net assets
    Commercial International Bank Egypt SAE COMI EY160,224989,192
    8.49%
    Orascom Construction Industries ORSD LI25,572883,325
    7.58%
    Orascom Telecom Holding SAE OTLD LI269,451845,746
    7.26%
    Talaat Moustafa Group TMGH EY685,124758,821
    6.51%
    Egyptian Financial Group-Hermes Holding HRHO EY151,426676,970
    5.81%
    Telecom Egypt ETEL EY238,577648,384
    5.56%
    Egyptian Kuwaiti Holding Co EKHO EY470,748589,569
    5.06%
    Juhayna Food Industries JUFO EY631,632584,550
    5.02%
    Ezz Steel ESRS EY202,446548,028
    4.70%
    ElSwedy Cables Holding Co SWDY EY69,322539,060
    4.63%



    Link to the product here for those interested.

    No position

    Sohu.com (SOHU) Results Should Bode Well for Sina.com (SINA)

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    Sohu.com (SOHU) reported earnings overnight and thus far the results seem to ironically be driving competitor Sina.com (SINA) more than Sohu itself.  Sohu has a bigger gaming component that Sina but both its brand advertising and gaming (combined 87% of the company's revenues) showed nice 30% year over year growth metrics.
    • Brand advertising revenues were US$60.1 million, up 31% year-over-year and 2% quarter-over-quarter. 
    • Online game revenues reached US$91.7 million, up 30% year-over-year and 7% quarter-over-quarter.  
    The other 2 business lines are really too small to matter (search) or shrinking (wireless) .  Gross margin flattish year over year.  EPS for quarter $1.07 versus estimated $0.99.  The company is actually a pretty solid value at these levels, at 21x the just completed year of 2010, and 17x next year's estimates. Full report here.

    Via Bloomberg:
    • Sohu.com, owner of China's fourth-most visited website, posted a better-than-estimated 41 percent gain in profit after the company raised prices and boosted services such as video sharing. Fourth-quarter net income jumped to $41.5 million, or $1.07 a share, from $29.4 million, or 76 cents, a year earlier. The Beijing-based company was expected to post profit of $38.6 million, based on the average of eight analysts’ estimates compiled by Bloomberg. Sales rose 27 percent to $173.2 million.
    • Sohu has increased spending on services such as its Sogou Internet search-engine to add users and counter competition from websites including Tencent Holding's Soso.com. and Youku.com. China’s more than 450 million Web users are downloading more content using their mobile phones as wireless network speeds increase, the government said. 
    • Changyou.com,  the online-games unit of Sohu, increased fourth-quarter profit 23 percent to $47.8 million, according to a separate statement today. Sales rose 30 percent to $91.7 million, helped by games such as “Tian Long Ba Bu,” it said.
    • Sohu raised advertising rates on some sites by 15 percent in October, according to a Jan. 13 report by Morgan Stanley. 
    • Sohu ranks behind only Baidu Inc., China’s biggest search- engine, Tencent’s QQ.com, and Sina Corp. in user traffic

    Guidance
    • Sohu forecast first-quarter revenue may rise to between $164.5 million and $169.5 million. This compares with the $161.5 million average of eight analysts’ estimates compiled by Bloomberg.



    No positions

    [Video] CBS News - Even More Millionaires Strategically Defaulting

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    Hmmm... according to this CBS News report, 1 in 7 with loans over $1M are in default versus 1 in 12 with loans under $1M.  Must be all those darn ACORN loans to millionaires!   Some 15 months ago I flagged the 'self created' stimulus plan Americans are fashioning for themselves, before it became well recognized which is yet another steroid to stoke the 'recovery'.  [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]  Obviously the banks need to make up the losses from said 'stimulus' plan one way or the other - and that's where The Bernank comes in and our savers our ripped off to the tune of $750B a year (per analysis by Chris Whalen)   [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors] [Apr 20, 2009: How Banks will "Outearn" their Losses]  

    That said, it is quite fascinating to see it play out this heavily in the top end ... and you wonder why Tiffany's is doing so well? [Oct 8, 2010: No Recession in High(er) End Retail]  This one gentleman in CA has saved $240,000 in 2 years by living 'rent free' in his ocean view home.  That buys a lot of Mercedes, European trips, and Tiffany earrings.  Would you give up 200 FICO points on your credit report for $240,000 (and counting?) I'd say it's an easy decision. 

    I contend that the worst thing for consumer spending in the U.S. is for the foreclosure disaster to wind down.... if all these households (7M+ and counting) had to actually pay for a roof over their head, just imagine how much money would be sucked out of the economy. ;)

    (In case you are wondering, yes it is a very viable action to default on your mortgage loan per our non recourse laws - big businesses do it, so people can do it too.  That is not the argument.  The difference is when businesses pull the trick they vacate the premises, unlike our fellow citizens who are enjoying the high life sitting in their a home, playing the system.  More frightening is what bad condition the country would be if we were like Ireland or Australia where you cannot walk away from your mortgage debt.... ever. )

    2 minute video - email readers will need to come to site to view




    • In wealthy communities like La Jolla, Calif., living near the ocean is a privilege that many homeowners are willing to pay millions for.  For Darren Thomas that ocean view was quickly losing its value. He says, "I bought it for [$1.385 million]. It is worth less than [$800,000], maybe less."   Thomas bought his townhome in 2006 but after seeing its value drop steadily he stopped paying. 
    • "I haven't made a payment in two years," he says. "It was business decision. It was an easy decision. I have a property worth six or 700,000 less than when I bought it. I was making payments of 10,000 a month." 
    • Thomas has gone into strategic default. He could make payments but is refusing to put more money into a home that is worth less than his mortgage. Among luxury homeowners he is not alone.
    • One in seven homeowners with loans over $1 million are seriously delinquent compared to one in 12 with mortgages below $1 million
    • The more you owe, it seems, the better off you may be. Darren Thomas continues to live in his home because banks are often slower to foreclose on million-dollar homes. "Banks are less willing to take those homes back because they are harder to move on the market, harder to sell and much more of an up-keep," says You Walk Away Real Estate's Chad Ruyle. "These properties come with maintenance costs." 

    This is the part Mr. Thomas is just not getting - as if there are no costs to the rest of us for his actions and the banks (and the Fed) are not taking actions to make sure they are made whole, in full, elsewhere in the system.
    • "People like myself, business people, are going it is silly to throw good money after bad," says Thomas "The loss is not mine. The loss is the banks."  When it comes to real estate, the rich are different. They can be just as ruthless as the bankers.



    [Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]
    [May 4, 2010: Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures v One Fifth a Year Ago]
    [Apr 15, 2010: More on Anecdotal Benefits of Strategic Default]
    [Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]
    [Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending]

    BW: Japan Learns to Live with Deflation

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    Quite amusing to see the dogma differences in Germany vs the Europe.  Due to the Weimar experience, any tendency to high(er) inflation is met with horror overseas, whereas the exact opposite happens hear when a whiff of deflation is in the air, due to the Great Depression era.  Meanwhile, the country with the oldest records of inflation (Great Britain) ruled the world during a period that inflation and deflation took turns... unfortunately, central banks are run with their countries specific dogma, and there is no changing that.  A couple years ago we highlighted a well thought out piece stating that the deflation genie is being sold as the bogeyman [Aug 18, 2009: Deflation Theory is a Lemon We've All Been Sold] due to the belief once you experience deflation there is no escaping it ala what Japan has experienced.   Even if one subscribes to that view (which is highly simplistic) there is an interesting story in BusinessWeek showing that many Japanese have adjusted, or indeed embraced, deflation in prices of good - especially since wages have held up ok - in many cases cost of goods have fallen far quicker than wages.  (hence their purchasing power goes farther)  Of course as a nation of debtors, versus the Japanese people which has a very high savings rate, deflation is a more difficult concept in the States since we cannot inflate away our debts (i.e. give people who we owe money to, devalued currency).

    My take of course is large swathes of the country needs deflation in price of goods because they have fallen off the track in terms of wage growth (non college educated men make as much now, inflation adjusted, as they did in the 1970s while cost of goods/services have skyrocketed_).  Hence to combat that people have turned to borrowing - whether credit card or house ATM.  When the buck stopped on those 2 avenues, in has come the government and we're in the last stage - the government ATM.    [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High So we'll continue with the same wage pressures across society with a government and central bank intent on an inflationary warpath - which in the long run will cause ever more stress for those with stagnant incomes, and in a self reinforcing pattern require the government to hand out even more money to keep people on the gerbil wheel.  It's quite circular really.

    Of course I am not calling for a 25 year cycle of deflation, but certainly once an adjustment period was over people would have a much better match of incomes to cost of goods.  Indeed, to use housing as a simple example if the average American would only be forced to spend 22-25% of income for a roof over head, rather than 33-45%+, life would be far more comfortable and heck, they might be able to consume due to savings rather than government handout, or indeed save money for the long run.  The increasing amount of Americans on fixed income (or no income!) would fare better as well.  But I'm a rogue economic thinker in terms of inflation v deflation, in a country where ever higher inflation is a "great" thing.


    Via BW:

    • Ben Bernanke has been lecturing on deflation's perils since he joined the Federal Reserve in 2002 and has often held up Japan as Exhibit A.  There's something curious about the way the deflation syndrome has played out in Japan, though. The Japanese don't feel that threatened anymore. "Everyone knew deflation was bad for jobs and bad for the economy, but gradually households and companies just got used to it," says Martin Schulz, a senior economist at Tokyo's Fujitsu Research Institute.
    • Deflation—the steady drop in prices of goods, wages, and services—has many ill effects. Households are stuck paying off mortgages, car loans, and other debt even as their take-home pay has declined. Also, as housing values fall, consumers have smaller nest eggs for retirement. Companies, meanwhile, are unable to raise prices, which puts pressure on profits.
    • Yet the Japanese have discovered the benefits of deflation as well. Monthly pay dropped to an average 315,294 yen ($3,800) in 2009, the lowest level since the government began tracking wage data in 1990. "It's not like I'm promised any pay raises," says Momoko Noguchi. The 24-year-old Tokyo resident gets by on two part-time jobs by shopping for everything from nail polish to dinner plates at her local 100-yen outlet (the Japanese equivalent of an American dollar store), and she pays 400 yen or less for lunch. "I hope prices keep falling." Four out of five Japanese say higher costs would be "unfavorable," according to a central bank survey.
    • Faced with consumers such as Noguchi, companies in Japan have actually accelerated deflation. Retailers "have poured a lot of energy into offering products that are cheap but still have high value," says Naozumi Nishimura, an analyst at TIW in Tokyo. "We're seeing some good effects from that."
    • Price cutting by companies has helped Japanese consumers adjust to deflation. The average household owns 1.4 cars and 2.4 color TVs, about a quarter more than in 1990, a Cabinet Office survey shows. Deflation has helped home buyers, too, by forcing prices down from their peaks in 1990: According to calculations based on yearly Land Ministry data, Japan's residential land prices have dropped by an average of 2.9 percent a year over the past two decades.
    • All told, the proportion of people content with their standard of living was 63.9 percent last year, compared with 63.1 percent in 1989, a government report said.
    • In Japan, where 23 percent of the population is over 65, a sudden rebound in prices would hurt pensioners and retirees especially hard. "It's amazing what you can buy with 100 yen now. We didn't have 100-yen stores before," says Sachiko Enokida, 80, who lives on her bimonthly pension checks from the government. "I would hate for things to get expensive again."

    Now for the counterpoint - and once again this assumes once deflation is embedded it never goes away.
    • So is deflation a blessing in disguise? Not to analysts such as Richard Jerram, head of Asian economics at Macquarie Securities . He points out that as businesses cut prices to compete, it becomes harder to borrow and invest. "It's extremely corrosive," he says. Deflation, adds Jerram, will steadily sap Japan's nominal growth and deprive the government of tax revenue. 
    • Eventually, Japan may no longer be able to finance its borrowing. The country will then either have to default on debt that's about twice the size of the economy or devalue its currency to reduce the real value of liabilities. "That's the unavoidable endgame," says Jerram, who has analyzed the Japanese economy since 1987. "As long as it's in the future, everybody can pretend it's someone else's problem."

    Sunday, January 30, 2011

    [Video] Bank Bailouts Explained by the Cartoon Bears

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    From the guys who brought us 'Quantitative Easing Explained" Comes Bank Bailouts Explained.  While not quite as funny as the QE explained video, we do get introduced to some new characters over and above The Bernank such as The Timothy Geethner, and some new terms such as Tarpee.

    One item they should have added when discussing The John Thain (who is not named in the video), is that in addition to his $70,000 desk he had a $87,000 area rug to work on.   [Jan 22, 2009: Merrill Lynch's Thain Can Only Work on $87,000 Rugs]  I am not sure how you office drones out there work on commercial carpet, and $200 desks - your productivity must be awful.  But that's why you are not a banking CEO ;)






    Interesting Week Indeed

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    The market has been on a seemingly autopilot path for months on end; aside from a hiccup due to sovereign debt issues in Ireland, there has been no respite for bears since late August when Bernanke added "pushing asset prices up" as the third mandate of the Federal Reserve.   Almost no economic news has mattered since investors believe the Bernanke Put is in play and whatever the data, the Fed stands behind the market.  Indeed aside from 8 sessions in November we've seen extraordinary strength with the S&P 500 closing above the 13 day moving average throughout the rally.   Even Friday's weaker than expected GDP and some disappointing earning reports by bellweather companies (following Thursday's spike in weekly unemployment claims) were completely ignored as the market started the day in the green.  Only as the Egyptian worries unfolded on TV did speculators seem to think there might be a potential risk to their P&Ls.  By the end of day we had a sharp reversal in U.S. markets, and indeed a close below not only the 13 day moving average, but the more commonly used 20 day.  Bears finally have a bogey to trade against.



    Small caps, which have led the market since late August are in a weaker position of late, with the recent bounce not even taking the Russell 2000 to recent highs - hence more vulnerable.



    Aside from that technical change in course, we also are entering the 1 week each month that economic data is paid attention to by market participants.  The fluid situation in Egypt and other potential Middle Eastern hotspots also stands above the market, as does another week of earning reports.  To make things more interesting, so much of the rally from March 2009 has come in premarket - and indeed on Mondays; while the first day of the month (Tuesday) has been an almost constant winner for years on end.  [Dec 1, 2010: More First Day of the Month Effects][Sep 30, 2010: Over 12 Year Period You Made More Money on First Day of the Month, than All Other Days Combined]  So after months of snoozefests, market participants may actually need to stay awake and not let their head fall on the "buy" button as they doze off this week.

    On the economic news front these are the market movers - please note if any report is bad you can be sure bulls will be blaming the snow.

    Monday - Chicago PMI, expectation 64.5 vs prior 66.8
    Monday night - Chinese PMI figures
    Tuesday - U.S. Manufacturing ISM, expectation 58.0 vs prior 58.5
    Wednesday - ADP Employment
    Thursday - U.S. Non Manufacturing ISM, expectation 57.0 vs prior 57.1
    Friday - Employment Data.  Unemployment Rate expectation 9.5% vs prior 9.4%.  Payrolls 140,000 vs prior 103,000.

    The last 2 monthly employment reports have been head scratchers - the ADP and U.S. data have varied significantly, and weak data in government data in November led me to believe December would be a 'make up' period.... instead job creation was barely over 100,000.  Meanwhile the unemployment rate dropped from 9.8% to 9.4% but mostly due to even more people dropping out of the workforce - another 0.2% of the entire U.S. workforce last month.  It remains boggling where all these American workers have disappeared to - if we had a traditional workforce participation rate in the country the 'official' unemployment rate would be close to 12%.

    Despite Excellent Year, Ford (F) Pummelled by "What Have You Done for Me Later?" Speculator Class

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    Ford took a beating Friday, showcasing some of the positives of being a private company versus a public.  In the public eye you must manage to the quarter - every 90 days is a whole new period - and anything over 91 days old or 91 days forward might as well be a parallel universe.  The company missed versus analysts expectations (30 cents vs 48 cents), mostly due to what appear to be miscommunication on costs, plus the CEO Mulally did "horrible" thing by giving union workers $2000 more in year end bonus checks ($5000 v $3000) than required by contract.  Remember, in America if you don't maximize everything for shareholder gain, you might as well move to Europe and be like one of those socialist  CEOs - sharing any spoils with the worker class above the bare minimum is frowned upon! ;)

    On a more serious notes this quarter does bring up some of the challenges that we've outlined would come in the future - first, higher commodity costs as The Bernank drives up prices, and second, as the company does well, the unions are going to want some of the spoils after being slashed and burned the past half decade.

    Technically, the chart of the stock now looks a mess, after a high volume red candle Friday.  There is an obvious gap in the low to mid $15s to fill from early November 2010, it would seem extremely likely this gets filled.  If one believes this the name is a short on any cursory bounces until/if/when that gap is filled, at which time the long side looks more interesting.  If the overall market can sustain any meaningful selloff (long overdue) there might be a chance for some prints in the $14s where the name would look very attractive.  Poised to make over $2 in 2011, the stock trades at 8xish forward earnings - there is a good chance Ford trades to mid $20s within 18 months in my opinion.  Again Ford was able to create nearly $2.00 in profits in a North American market that is substantially below "normal" annual run rates, so any 'recovery' in the economy should be boosting annual sales closer to 14M versus the 11-12M we've seen of late.



    Via AP:
    • Despite reporting a profit for 2010, the Ford's stock fell more than 13 percent to close at $16.27. Investors were disappointed that the results fell short of expectations. Ford also posted an 80-percent drop in fourth-quarter net income, missing forecasts and ending two years of better-than-expected results.
    • "When a company consistently beats expectations, analysts and investors start pushing. They raise the bar to the extent that eventually they're going to miss it," Standard and Poor's analyst Efraim Levy said.
    • Ford earned $6.6 billion, or $1.66 per share, last year, more than double the $2.7 billion, or 86 cents per share, it made in 2009. That was the most it's made since 1999, when it earned $7.2 billion.  But excluding charges from debt reduction and other items, Ford earned $1.91 last year, below the $2.05 analysts expected.
    • Ford said it should have kept analysts better informed about potential problems in the fourth quarter, including a loss in Europe and a $1 billion increase in costs in North America, partly to fund the launch of new products like the Ford Explorer.
    • Ford's U.S. sales jumped 20 percent in 2010, double the rate of the rest of the industry. The Ford brand was the top-selling brand in the U.S. last year, besting Chevrolet and Toyota for the first time since 2003.
    • Another potential drain on Ford's income could be the United Auto Workers union, which negotiates a new contract with Ford this fall. Ford's U.S. factory workers turned down a 2009 agreement that would have frozen entry-level wages and limited their ability to strike. With an eye on Ford's healthy profits, workers also may demand that the company restore some of the wage cuts they agreed to in their last contract.
    • Ford made a peace offering to its 40,600 U.S. factory workers Friday, announcing that they would get $5,000 profit-sharing payments this year. It's the first time Ford has handed out the checks since 1999. 
    • Mulally remains upbeat about 2011, saying the company expects profits and cash flow to improve. Chief Financial Officer Lewis Booth said debt reduction efforts also will continue, aiming to get Ford back to investment-grade status. Debt fell from $33.6 billion to $14.5 billion during the year, lowering Ford's interest payments by a little more than $1 billion. A $960 million charge related to debt reduction was one reason for Ford's weak fourth-quarter results.
    • Fitch Ratings, unfazed by Ford's earnings miss, raised the company's corporate debt ratings to "BB," or two notches below investment grade.  Bill Selesky, an analyst with Argus Research, remains bullish on Ford.  "There are too many good things going on at Ford to say that the story's over," he said.
    [Dec 13, 2010: Merrill - Ford Headed to $24 
    [Oct 5, 2010: Starting Ford on Impressive Quarter]


    No position

    Saturday, January 29, 2011

    Alpha Natural Resources (ANR) Near Bid of $7B for Massey Energy (MEE) - It Sure Looks Like "Smart Money" Knew

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    Massey Energy (MEE) has been rumored to be on the block for a few months, and today we have news that Alpha Natural Resources (ANR) seems close to finalizing of a bid of $7B or $68-$69 per share.  It appears based on the price action Friday, and volume explosion in the closing 15 minutes of the day this was not a secret to 'smart money'.  What was it Gordon Gekko said?

    The most valuable commodity I know of is information. 

    Indeed.  One would only hope the SEC could spend 3 minutes into looking into such matters of "information" that seem to always fall into the laps of certain "smart money" types.  Or of course it was just happenstance the stock surged in the last 2 hours Friday on a very down day for the market... on a volume spike no less.  Ahem.

    Friday's intraday action in Massey----

                                    (smart money at work.... please wear your hard hat)



    All sorts of February calls were bought Friday as well (over 10% of open interest was bought Friday in most strike prices between $55 and $65) - congrats guys, you just made a killing.   Hopefully ZeroHedge does a posting on this, because it seems the only time the SEC investigates anything of this manner, it requires public embarrassment by 'rogue' blogs with huge amounts of traffic.  Otherwise it is just another day at the fair and balanced casino in NYC.

    Via Bloomberg:
    • Alpha Natural Resources the third-biggest U.S. coal producer, is close to an agreement to buy Massey Energy for about $7 billion, according to a person familiar with the situation.  The stock and cash offer values Massey, the largest Central Appalachian coal producer, at $68 to $69 a share, said the person, who declined to be identified because the talks are private. An agreement may be reached as early as today and announced on Jan. 31, this person said. The Wall Street Journal reported the deal earlier
    • Massey shareholders will receive about 1.025 Alpha shares, plus $10 in cash for each share held, representing an almost 20 percent premium from Massey’s closing share price yesterday, according to the person. The boards of Alpha and Massey have been briefed on details of the deal, the person said. 
    • Massey is the nation's fourth-largest coal producer by revenue. It operates 19 mining complexes in Virginia, West Virginia and Kentucky. The Richmond, Va.-based company has struggled with two money-losing quarters since last spring's deadly explosion at its Upper Big Branch mine in West Virginia killed 29 men and prompted a regulatory crackdown that Massey blames for cutting production.


    Position: Very Stupid Money

    [Video] Flash from the Past - Katie Couric, Bryant Gumbel in 1994 "What is this Internet Thing?"

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    A bemusing video on my twitter stream this morning, flashing back to 1994 when on the Today Show Bryant Gumbel and Katie Couric were confused about what exactly the internet was.  The second lady might be Elizabeth Vargas? - whomever it is, she had some clue at least.  I guess we should not be surprised when the leader of the free world, a decade later was still calling it "the internets". (still a laugh out loud moment all these years later)

    In 16 years I guess we'll laugh at anyone who did not know what a Facebook account is (was) in 2011.




    Friday, January 28, 2011

    Trade Idea - Take Some Profits on VIX Calls

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    Back on January 7th, I said one way to hedge the 'unshortable' market was to buy some calls on VIX (at the time in the low 17s, falling to 16s later in the day) - I offered April 20 or 22.5

    But at minimum a hedge like VIX calls out a few months (April) seems sensible after a 4+ month run.  This is where I would be starting today in the low 17s.  One day people will believe the market can go down again and I would expect VIX to reflect that by popping into the low 20s.  So some April 20 or 22.5 calls make some sense to me.

    Three weeks have passed, so with today's action I'd be taking a third of the position off the table here to lock in profits, with the VIX spiking nearly 20% on the day. The price is just short of my call for a pop into the low 20s but when you see a one day spike like this, volatility (hence the premium) on the calls will jump and it's a good time to bank some coin on a call or put, and play with house money.


    I would reassess on a break below S&P 1280 on a closing basis, but until proven otherwise the Bernanke Put bid rules everything.  Plus Mondays are almost always up in the morning ... and then Tuesday is the first day of the month which almost always is up as well.  That said, in a normal market I'd expect selling to continue as traditionally buyers will not want to step in on a Friday with so much uncertainty.  But we no longer live in a normal market, so we'll see if the old rules apply ....for at least the day.

    If the S&P closes below 1280, I believe 1250 comes into play and one can finally take shots at index shorts, for the first time since November.

    No position

    Always Amazing How it Does Not Matter Until it Matters

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    Long time readers know one of my favorite sayings is "it does not matter until it matters".  Today's selling is being blamed on Egypt, because the series of disappointing earning reports this morning were completely ignored, as was the miss in GDP.   But Egypt was not a surprise.   We noted when Tunisia flared up in a post on the 16th.

    What will be interesting to see go forward is if other countries in the region rise up against their 'elected' leaders.

    We waved the flag on Egypt Wednesday.  No one cared.  Indeed, oil was down yesterday even as the Suez Canal happened to be in... well, Egypt.  Today, oil is surging on the same issues that the 'efficient' market ignored yesterday.

    Some facts about Egypt, 40% of the population live on $2 or less a day.  They have had 30 years of dictatorship, so what suddenly triggers these things?  The rise in food prices is not the ENTIRE cause but a large cause....

    The TeeVee is saying the Kuwait government is quickly running to hand citizens $5000 each to make sure nothing like that happens there.  Amazing what desperation does for both constituents and governments.  Unfortunately many of these countries are not oil rich and can't afford what Kuwait can.

    Again this is not *all* about food, but its a trigger.  Egypt has been under dictatorship for 30 years - they did not suddenly decide to push leadership out last week because of corruption at the top.  And the surge in food prices is not ALL about QE2 and our financial speculators running rampant with nearly free Fed money, but it's a substantial factor - reasonable people can argue about it, but the huge run up in commodities in 2007 til mid 2008 and then a huge drop off immediately after argues that the wild prices movements have less and less to do with supply and demand, than the 'financialization' of every commodity on earth.  I wrote in Sep 2010 when Bernanke made it clear he was going to flood the world with another Quantitative Easing program we were going to sell ill effects. 

    We saw in late 2007 to mid 2008 the effect of food price inflation on 2nd and 3rd world countries. Mud cakes anyone?  [Jan 30, 2008: Hungry Haitians Resort to Eating Dirt]  But who the hell cares about pricing foodstuffs out of the reach of "those people" [Apr 14, 2008: Food Inflation, Riots Spark Worries for World Leaders]- we have speculators to please in the U.S.  The biggest sin in American policy is "making the markets upset".  As long as the speculator class can take primary dealer money, lever it up 7:1 (down from 20:1 in 2008) and run up the price of any soft or hard asset - it's all good. [Apr 28, 2008: Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin] Heck who the hell cares about Americans affordability of food either [Nov 14, 2008: Wall Street Journal - A Run on (Food) Banks]... thats what the food stamp program is for right?  [Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps]  [Oct 30, 2009: Costco to Roll Out Food Stamps Nationwide]   As long as the banking oligarchy and stock pickers on CNBC are pleased, I am pleased.  [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]  Cramerica style.

    It is no coincidence when the speculator class levers up with easy money, we have dislocations in pricing.  Those dislocations exist in every part of our market as central banks and governments have created a parallel reality.  But when gold flies up it doesnt really hurt anyone other than those who enjoy buying jewelry.  However, when it causes foodstuffs (and energy) than you begin to affect the lives of billions.  But who cares right?  As long as everything is cool in Davos, that's all that really matters to the 'important people'. The fact these events are happening as the world's elite spend hundreds of thousands a ticket so they can strike business deals solve the world's problems, is a dichotomy of epic proportions.

    As an aside, as rich as America is, if we did not have our modern soup lines (food stamps) which now suppress 1 in 7 Americans you'd be seeing Tunisia and Egypt in our streets, I truly believe that.  Nothing pushes people to desperation like a hungry family.  For those who believe otherwise, you are watching the John Galt "free market" at work overseas... having 40M+ desperate people is not what you'd want in this country. 

    As for the market, somehow we are below the 13 day moving average - perhaps an emergency Fed meeting will happen this afternoon.  The 20 day moving average is my bogey and that is S&P 1280; a close below that would require a change in risk tolerance as the utterly complacent market might actually have to deal with something other than POMO every day, all day.  All the shorts have been cowered and eviscerated so there is no natural support than exists in a normal market where bears fell like they have a fighting chance.  Hence once the tide turns, it can go very fast. Egyptian black swan eh?


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