Monday, January 31, 2011

Blue Light Special - Egyptian Shares

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

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

Link to the product here for those interested.

No position (SOHU) Results Should Bode Well for (SINA)

TweetThis (SOHU) reported earnings overnight and thus far the results seem to ironically be driving competitor (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:
  •, 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 and China’s more than 450 million Web users are downloading more content using their mobile phones as wireless network speeds increase, the government said. 
  •,  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, and Sina Corp. in user traffic

  • 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

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

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

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

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

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

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?"

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

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

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?

For Those New to the Market....

TweetThis the old days we called this "selling".   You can Wikipedia it, as I realize it is very unfamiliar to many new entrants to stock market investing winning.  Selling was largely thought to be eradicated in late summer 2010, much like smallpox, but it appears a virulent strain has escaped a lab deep inside the Federal Reserve.  We will work to contain this menace and our normally schedule "only up" market shall resume soon.   Authorities are mobilizing.  Please take this opportunity to buy the dip.


Until the 20 day moving average is broken on a closing basis, these so called "dips" are all just detours to Dow 40,000.

WSJ: John Paulson Bests $4B Gains of 2007, with $5B Year in 2010

We'll leave the societal discussions of our currently structured financial incentives for another day [Apr 8, 2008: Hedge Fund Manager - Good Work if You can Get It], but the WSJ reports that John Paulson has surpassed his legendary 2007 haul of $4B, with a $5B payday in 2010.  As we've outlined in the past, after betting against the mortgage market, Paulson turned around and bet with the government big time, as moral hazard is the new way to gain epic generational riches.  What is interesting is the largest hedge funds have now grown so immense in size, [Mar 8, 2010: List of Largest Global Hedge Funds] they don't even have to have exceptional performance to create once unheard of wealth.  Indeed, the average hedge fund in 2010 lagged the S&P 500's performance - by about a third.   And lagged the average mutual fund by nearly half. Indeed, once you become a certain size it becomes increasingly difficult to beat the market.  [Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]  Whatever the case, with this incentive program, expect a continued march of the country's best and brightest minds into this one niche field.

  • Hedge-fund manager John Paulson personally netted more than $5 billion in profits in 2010—likely the largest one-year haul in investing history, trumping the nearly $4 billion he made with his "short" bets against subprime mortgages in 2007.  Mr. Paulson's take, described by investors and people close to investment firm Paulson & Co., shows how profits continue to pile up for elite hedge-fund managers. 
  • Appaloosa Management founder David Tepper and Bridgewater Associates chief Ray Dalio each personally made between $2 billion and $3 billion last year, according to investors and people familiar with the situation. James Simons, founder of Renaissance Technologies LLC, also produced profits in that range, say investors in his firm.
  • Mr. Paulson and his fellow managers seldom take much of their profits in cash. Some of the profits are so-called paper gains, which reflect the rising value of their firms' holdings, and could erode if those investments sour. Other gains come from selling investments, and most of those are rolled back into their funds.
  • Assets managed by hedge funds have grown to a near-record $1.92 trillion, up 20% over the past year. Assets jumped almost $150 billion in the fourth quarter alone, the largest quarterly growth on record, according to Hedge Fund Research, Inc. 
  • Still, the average fund gained just 10.49% last year. That's well below the 15% gain of the Standard & Poor's 500 stock index, including dividends, and the 19% return of the average stock mutual fund, raising questions about whether the industry can profitably invest the influx of new cash.
  • Indeed, the enormous gains by Mr. Paulson and the other managers resulted from solid, though not spectacular, performance. Their personal gains came in part from the sheer scale of assets under their control. The largest hedge fund in Mr. Paulson's $36 billion investment portfolio, Advantage Plus, grew 17% last year, while another big one rose 11%, falling below returns for the broader stock market.
  • Part of Mr. Paulson's more that $5 billion profit came from his firm's 20% cut of his funds' profits, known in the industry as the "performance fee." Those fees amounted to roughly $1 billion last year, according to a person familiar with the matter. An added plus for Mr. Paulson: A chunk of those profits are treated as long-term capital gains and taxed at a far lower rate than the standard income-tax rate. More than $4 billion came from gains on Mr. Paulson's investments in his funds.
  • The performance last year.....paled in comparison to his 2007 returns, when Mr. Paulson made a huge wager against subprime mortgages and his funds scored gains of as much as 590%.
  • The hedge-fund business now is so big that some managers are hinting they'll return money to clients instead of investing it. Handling so much cash can make it hard to generate big gains in some trading strategies.
  • Mr. Tepper, for example, has told some investors to expect to receive some cash back in 2011. He returned $500 million to investors last year. This year, he may return several billion dollars, according to people close to the matter.  Other firms, such as Paulson & Co., have closed certain funds to new investors, but are actively raising new money for other funds.
[Nov 18, 2008: Paulson Buying Mortgage Backed Securities]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]
[Feb 17, 2009: Hedge Funds Pile into Citigroup; as does Bruce Berkowitz of Fairholme Funds]
[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]
[May 16, 2009: John Paulson Continues to Pile Into Gold]
[Jul 9, 2009: Latest Picks and Pans from John Paulson and George Soros]
[Aug 12, 2009: John Paulson Makes Bank of America 2nd Largest Holding after Gold]
[Aug 26, 2009: Citigroup Surges on John Paulson Investment]
[May 18, 2010: John Paulson's Q1 2010 Moves]

First Pass Q4 GDP Comes in a Bit Light Versus Expectations at 3.2% and vs 2.6% in Q3

The GDP figures are backwards looking and revised to the moon so generally not something that important other than for economists - and in this market where none of the data matter (i.e. yesterday's heightened weekly unemployment claims were forgotten within 3 minutes), the data is especially irrelevant. But for the sake of commenting, the first pass at Q4 2010 came in this morning at 3.2% versus expectation of 3.5%.   There will be 2 more revisions to this figure and for all we know it could end up being 2.1% or 4.3% by the time they are finished.

Real final sales at 7.1% will be the eye catcher in this report.  Household purchases rose 4.4% - important in an economy that is 70% dependent on consumption.  Lots of government assistance in this figure as 1 in 5.5 dollars of income for the average American is now coming from the government... and 7M households don't pay their mortgage but live in the home 'rent free'.  In 2011 the payroll tax holiday of 2% is going to juice this figure even further over the natural organic rate.

The price deflator was only 0.3% versus expected 1.6%. - effectively this is 'inflation' as measured in the GDP.  If you believe you faced 0.3% inflation in 2010 feel free to raise your hand.

If this GDP figure for Q4 holds, the finally tally for the year 2010 will be a gain of 2.9%, versus the drop of 2.6% of 2009.  Again the "costs" (federal spending, Federal Reserve actions) involved in getting GDP even to this 'trend' level of 3%ish were immense - it is a very inorganic figure.

Report here.


Riverbed Technology (RVBD) Appeases the Street after F5 Networks (FFIV) Lowers the Bar

While F5 Networks (FFIV) doesn't operate in the same space as Riverbed Technology (RVBD) the simplistic herd has pushed these 2 stocks into the same space due to 'cloud' or 'mobile internet' exposure.  Therefore the implosion of the former stock after earnings in the past week, lowered the bar (and stock price) for Riverbed Technology.  At its worst, RVBD dropped 20% from peak to trough in reaction to the FFIV report.  Indeed I wrote Monday that the deflation in 'related' stocks due to FFIV could create the potential for upside surprises in other stocks that are associated (rightly or wrong) to that company.

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.

The issue in all these names is not performance - they are all doing excellent; it is all about trying to beat heightened expectations and somehow fitting into the increasingly elevated valuations.

31 analysts were in for $158.6M in revenue and $0.18 EPS.  Riverbed came in at $165.4M and $0.19 - a slight beat, but it seems to be enough for the market, especially with the drop in stock price.  It is likely this would not have been the case if the stock was at $40+ and the weak hands had not been shaken out.  Guidance for next quarter came in at 18 cents a share, on revenue of $159-$161 million, both slight upgrades to current consensus.  Full report here.

As to valuation the stock has (non GAAP) EPS of $0.77 estimates for end of year 2011, so we'll call it 80 cents.  This gives a very pricey 44x forward estimates for a company which is going to be facing much more difficult year over year comparisons in the year ahead.

Riverbed Technology is the IT performance company. The Riverbed family of wide area network (WAN) optimization solutions liberates businesses from common IT constraints by increasing application performance, enabling consolidation, and providing enterprise-wide network and application visibility – all while eliminating the need to increase bandwidth, storage or servers.

[Oct 22, 2010: Riverbed Technology Crushes Estimates; Announces 2:1 Split]

No position

Thursday, January 27, 2011

Potash (POT) Beats by 12 Cents, Guides 2011 a Bit Higher but Excites Crowd with 3-1 Split

It is always bemusing to watch stocks jump on stock splits which are nothing but an accounting change.  2x more stock at half the price.  Nothing changes but back in 1999 you'd see stocks jump 15-20% on a stock split as long as it was on the NASDAQ.  Some of that behavior still lives.  Potash (POT) reported a solid quarter, with not that exciting guidance, but the 3-1 stock split has helped to stoke excitement.

For the quarter $1.77 v $1.65 expectation, revenues up 65% to $1.81B.  For 2011 the company guides to $8.40 to $9.60, vs current $8.89.  Based on how poorly these fertilizer companies guided in 2008 and 2009 versus a quickly changing market, take everything with a grain of salt. Even assuming Potash hits $10 EPS in 2011, this is a forward PE of 17.5 (forward, not trailing) for an extremely cyclical company.  But increasingly valuation is becoming moot across the market as it was in 1999 - all the central banker liquidity has to go somewhere.  Indeed we shall see that same dilemma in (AMZN) in a few hours.
  • The company said it expects global shipments of potash to reach 55 million metric tons to 60 million metric tons in 2011, up from 52 million tons in 2010. 
  • Potash Corp now expects 2011 potash shipments of 9.5 million to 10 million tonnes. It had earlier forecast sales shipments of 9.3 million tonnes.
  • The company has earmarked $2.0 billion for capital expenditures in 2011, with $1.4 billion going to potash expansion projects.
  • The company will pay out the stock split to shareholders in the form of a stock dividend, with each receiving two additional shares for each one owned on the record date of Feb. 16. 
No position


Gallup Poll: Americans Want Federal Budget Cut... Just Don't Cut Anything that Affects Them

A quite enlightening poll by USA Today/Gallup showing that while Americans are saying they want to see spending cuts, it gets much tougher when you get to specifics.  Indeed, aside from foreign aid (a tiny fraction of the budget) there is no major expense line item that at least 50% of the country agrees needs to be cut.  Indeed the 2 biggest expenses finish at the very bottom of the list.

As you can see - foreign aid is a huge proportion of the yearly outlays.  You can see it right? Squint.  Harder.

In summary - cut the budget deficit, just don't cut anything that affects us.  Carry on.
  • The largest slices of the current government spending pie, other than interest on the debt, are the entitlement programs and national defense. Entitlement programs are of particular concern, given the looming impact of the aging baby boom generation, the oldest members of which are now turning 65. 
  • Despite this, 64% of Americans interviewed in the Jan. 14-16 USA Today/Gallup survey are opposed to cutting government spending for Social Security, and 61% oppose cutting Medicare. Meanwhile, 57% of Americans oppose cutting government spending for national defense. 
  • A majority of Americans also oppose cutting education, anti-poverty programs, homeland security, aid to farmers, and funding for the arts and sciences. Foreign aid is the only area out of the nine measured that a majority of Americans agree should be cut.
If you are curious how it works across political lines here is another chart

[Aug 26, 2009: US Federal Budget in Pictures]

DetNews: Metro Detroit Home Prices Back to 1994 Levels.... Before Accounting for Inflation

Pardon me for my sometimes overly negative take because I am tainted by my Michigan economic bias.   [Jun 25, 2008: I have Michigan Economic Bias][   When you live in a 1 state Depression, you have to remember times are fantastic in Washington D.C. [Mar 11, 2010: [Video] America's 3 Wealthiest Counties Now Ring Washington D.C.] and there has been no recession in the Dakotas and Nebraska.  One does wonder if this region is the canary in the coal mine for the nation as "making stuff" becomes uncool, but we won't know for a few decades and for now as long as we can drill baby drill print baby print, it is impossible to tell what is going on in the real economy.

While we often get disturbing headlines locally, such as 13 of the 25 cities with the largest income plunge the past decade being in this 1 state [Sep 30, 2010: Michigan Sees Sharpest Income Plunge in Nation in Decade], every so often you read something that even rocks your numbed senses.  Yesterday in the Detroit News we saw a story that home prices are back down to 1994 levels.... before accounting for inflation.  If you take into account inflation a $100K home bought in 1994 is $34,000 in the hole.  Did I mention I have Michigan economic bias?  What is amazing is how far behind we are from even the 2nd to last city - Cleveland, which is back to 2000 price levels; that's a 6 year variance.  Those of us in Michigan are really going to need The Bernank to get the Dow to 40,000 just to make up for our homes.

Via Detroit News:
  • After slowly ticking up, home prices are falling in most of America's largest cities, but nowhere is the drop as huge as in Metro Detroit, where November home values were at their lowest point since the summer of 1994.
  • The latest Standard & Poor's/Case-Shiller index released Tuesday showed November home prices in eight major markets hit their lowest levels since the housing bust began. Still, prices in all but one of the 20 markets surveyed are at or even above where they were in January of 2000The exception: Detroit, where home values are off by 34 percent during the past decade.
  • According to Case-Shiller, Detroit home prices dropped 2.7 percent from October, and are 48percent off their February 2006 peak. That's much worse than markets such as Tampa, Fla., where values more than doubled during the housing boom.
  • But home values in Tampa remain more than 30 percent above their January 2000 level. That big gap in home values illustrates the big difference between the Detroit economy and the rest of the nation, said Dana Johnson, chief economist for Comerica Bank.
  • "What Detroit experienced is plausibly a depression, rather than the sharp recession most of the country had to go through," Johnson said. "There were several years of downturns in Detroit and Michigan before the national recession ever got going."
  • The news gets even worse when inflation is factored in. According to Case-Shiller, a Metro Detroit home worth $100,000 in 1994 would be worth, on average, the same today. But a home that fetched $100,000 in 1994 would have to bring $147,136 today just to keep pace with inflation. So instead of breaking even, the buyer of a $100,000 Detroit home in 1994 has lost more than $32,000.

  • "Along with unemployment, we've got a pretty substantial backlog of homes," he said. For values to increase, he added, "We've got to work through both of those, and I don't see that turning around any time soon."
  • As home prices do begin to pick up, banks holding on to foreclosed properties and homeowners who've been waiting for values to rise could flood the market, pushing prices down again, Walters added. Another issue is the larger number of Michigan homeowners who owe more on their homes than the properties are worth, which prevents them from selling to buy another home. In addition, more foreclosed homes are expected to hit the market this year, experts say.

  • Nationally, the Case-Shiller figures suggest a double-dip in home values is here. The 20-city composite index had been improving steadily since June 2009, rising from around 142 to almost 148. But it's dropped for five months, to 142.7 for November.
  • The uptick in Metro Detroit was less pronounced in 2009, climbing close to 72 in January 2010 then wavering before showing five straight drops since June.  "Detroit never had the run-up in prices most cities did," said Johnson of Comerica. "Detroit had a similar downswing, but it never had the upswing. That has repriced housing around Detroit in a brutal fashion."

China Hikes Minimum Wage Again

We continue to see a lot of items that strike a very similar tone to late 2007 to mid 2008; the latest is an increase in minimum wages in China.  Go back 3 years and ... [Feb 27, 2008: China Raising Minimum Wage]  As I wrote back then when I asked "why do you care?" - it's about importing inflation.  The U.S. has been a huge beneficiary of lower prices for decades as jobs are moved to lower cost locales - but at some point those other countries workers will want a higher standard of living.  Hence over the long term we need to (a) continue a race to the bottom of global wages and the work needs to move to Vietnam, Indonesia, Africa, et al or (b) we need to expect to pay higher prices for imports. 

Ironically, as The Bernank prints on a daily basis it is not really causing much inflation inside our country because there simply is not that much demand for loans, hence our traditional transfer mechanism for inflation is weak.   We can put as many apples on the shelf as we want, but someone needs to want those apples. Instead that liquidity tsunami is leaking into capital markets, and overseas.  Therefore, we are in a way exporting inflation via our central bank... and eventually (via things such as wage increases abroad) we'll eventually import that inflation back via goods.   Unless Walmart decides to eat the costs.

Certainly this is not the traditional model of inflation creation, as the global transfer of capital changes so many dynamics.  To The Bernank there can not be any inflation because without wages of Americans going up significantly, people can't pay higher prices - which would be very true if the U.S. was the only country on Earth.  However we have a much more complicated picture with the global interconnections.

Going back to China itself, this is indeed the traditional wage push inflation from the textbooks - prices going up, so wages go up to compensate, which feeds on itself - sorta of 1970s U.S. style, when workers still had some level of bargaining power on wages. Now the question begins how high wages can go before the Chinese corporations threaten to move the work offshore to cheaper countries. ;)

Via AP:
  • Many Chinese cities are raising minimum wages for workers, fanning inflationary pressures while also seeking to soothe frustrations over price hikes. The double-digit increases in major manufacturing centers like Guangdong, and the cities of Shanghai, Tianjin and Beijing follow wage hikes last year that have further raised labor costs, accelerating a shift by makers of inexpensive goods to lower cost places like Vietnam and Indonesia.
  • Shortages of workers in some areas and strikes and other protests by disgruntled young workers have also prompted authorities to push minimum wages higher, with most localities expected to follow suit.
  • China retains massive advantages such as the standard of its infrastructure and its own huge market, which increasingly is the focus of foreign companies manufacturing there. But surging costs for labor, land, energy and materials have prompted many making low-cost items such as toys, shoes and clothing to move some production to other parts of the developing world.
  • Tianjin's labor bureau, in a statement seen Wednesday on its website, said it is preparing to raise the city's minimum monthly wage to 1,070 yuan ($160) from the current 920 yuan ($140). Shanghai's mayor, Han Zheng, confirmed last week that the city was preparing for an April 1 increase in the city's minimum wage, by more than 10 percent over the current monthly 1,120 yuan ($170). Han described this as an effective way to ensure a "rational income distribution."
  • "It is our responsibility to raise wages in Shanghai because people living on those wages are having a really hard time," he told reporters during an annual news conference. "It is important for every worker to share the fruits of progress and harmonious labor relations are conducive to healthy businesses," he said.
  • Beijing has announced its minimum wage will rise by 20.8 percent this year. Jiangsu, an affluent region adjacent to Shanghai, is hiking its minimum monthly pay by 15 percent and Guangdong, by about 19 percent in March to 1,300 yuan (about $200) -- the country's highest.
  • Mindful of past links between surging inflation and political unrest, the authorities have sought to reassure consumers that they have prices under control.

[Rising Factory Costs Erode China's Edge]
[China's Inflation Hits American Price Tags]

Caterpillar (CAT) - Another Home Run Report

Caterpillar (CAT) continues to showcase the strength of being a cyclical industrial U.S. multinational.  Especially in an environment where government's worldwide are stimulating with 'infrastructure' buildouts.  Year over year sales are up an astounding 64%, and with a materially smaller workforce (despite recent hires) versus a few years ago, the profits are surging.  The company came in at $1.47 vs analysts $1.27, on $12.81B in sales.  This puts the year of 2010 in the books at $4.15; the company is guiding for $6 in 2011.   Even going out an entire year, the valuation is quite rich at 16x forward estimates (23.5x trailing) for a company with some nice secular headwinds, but at its core a cyclical.  That said, the EPS estimate for 2011 does not include Bucyrus (BUCY) so there should be some upside depending on when this transaction closes.  (CAT believes this to be mid 2011, depending on Dept of Jutice inquiry)
  • We expect sales and revenues in 2011 to exceed $50 billion and profit to be near $6.00 per share.  That is an increase from sales and revenues of $42.588 billion and profit of $4.15 per share in 2010.  The outlook for 2011 includes the acquisition of Electro-Motive Diesel, Inc. (EMD), but does not include the acquisitions of Motoren-Werke Mannheim Holding GmbH (MWM) or Bucyrus International, Inc. (Bucyrus) because they have not yet closed.

Full report here.

The company provides one of the most comprehensive earnings reports in the entire market, including a lot of good nuggets in its outlook.


We expect most governments will maintain economic policies designed to extend the economic recovery through 2011.  We are forecasting that the world economy should grow more than 3.5 percent—a growth rate similar to 2010.  In addition, we expect construction activity to improve in most countries.  Key factors and assumptions underlying our forecast include:
  • Industrial production is recovering throughout the world but has not returned to pre-recession levels in most countries.  We believe that incomplete recoveries in industrial production, coupled with high levels of unemployment in many countries, indicate that the world economy has capacity for above average growth.
  • Inflation increased in most countries from lows reached during the financial crisis but remained well below prior peaks.  We believe that excess capacity and generally moderate rates of money growth suggest inflation problems will be largely confined to some of the faster growing developing economies.  
  • Most governments and central banks are expected to regard job creation rather than inflation fighting as their dominant economic problem.  Central banks in many developing countries are expected to increase interest rates but keep them below 2008 peaks.  Major developed economies, faced with high unemployment, will likely be cautious about tightening economic policies. 
  • Most energy and metals prices have increased since early 2009, and most are currently very attractive for new investment.  We expect average prices to be higher in 2011 than in 2010.  Our forecast assumes copper prices will average $4.25 per pound; West Texas Intermediate oil, $92 per barrel; and Central Appalachian coal, $72 per ton.
  • Growth in consumption of most commodities is concentrated in Asia/Pacific, and meeting that demand will likely require increased commodity production and investment.  We project worldwide production of key metals will increase, ranging from approximately 2 percent for copper, which faces production constraints, to 9 percent for iron ore.
  • Higher commodity prices, particularly for oil, are expected to drive inflation concerns similar to those that occurred prior to the financial crisis.  Our analysis suggests that higher prices are a result of insufficient production capacity to meet the needs of a growing world economy.  The recent recession showed that sharply lower demand provided only temporary price relief at a cost of delaying needed capacity investment.
[Oct 21, 2010: Caterpillar Scores with Now Redundant Playbook: Slashed Domestic Labor + Emerging Market Growth = Mad Money]

No position

Netflix (NFLX) Crunches Bears in Green Bay Packers Fashion

The heavily shorted stock of Netflix (NFLX) is once more going to create some pain for the bears in the name this morning, after a surge last evening in after hours following its earning report.  While gross margins were pressured, and the churn rate increased, investors are overlooking any warts due to outperformance on net subscriber additions.   For instance, this quarter the company actually had less gross profit ($205M v $209M) than it had last quarter, despite revenue jumping $43M.  When those type of things are ignored by the investor masses, that's what drives a short nuts.  Marketing expense dropped by nearly $20M this quarter, which helped the EPS keep growing.

In terms of guidance, Netflix is pulling an interesting tactic in terms of going much more vague go forward.  Usually this is seen as a red flag but for now the company is getting the benefit of the doubt.   As the company surpasses 20M subscribers, it will be important to move into foreign countries not named Canada to keep up the growth rate, as the law of large(r) numbers will begin to kick in.  As with all growth stories, eventually a wall will be hit - deceleration of growth momentum begins - and the stock takes a beating.  Only then will valuation truly matter. But the shorts in this name have been making that bet for quite a few quarters, only to be kicked in the teeth.

The stock is indicating $206 in premarket, with $209s being the 52 week high.  EPS came in at 87 cents versus 71 expectation; at this premarket level the stock will be trading at 60x-ish 2010 earnings.  2011 estimates are just under $4.00; assuming they can beat that significantly and do $4.50, this is still a premium 45x forward estimates.

Full report here

Via AP:
  • Netflix Inc.'s video subscription service topped 20 million customers during the fourth quarter to help push its earnings beyond analyst expectations and burnish its reputation as a stock-market star. Its shares surged 10 percent on the news.  The shares tripled last year to give Netflix a market value of nearly $10 billion -- more than some of the studios that supply the content for its DVD-by-mail and Internet video streaming service.
  • The lofty valuation has intensified the pressure on Netflix to keep attracting subscribers at a rapid pace. Netflix delivered in the fourth quarter by reeling in 3.1 million subscribers, by far the most during any three-month period since its service launched in 1999.  The company, based in Los Gatos, said it believes the current quarter could be even better. It expects to gain as many as 3.7 million more subscribers in the U.S. and Canada by the end of March.
  • In a departure from its past practice, Netflix didn't provide a full-year forecast, partly because executives say it's becoming more difficult to accurately forecast the company's rate of growth over such an extended period.
  • Another variable clouding the outlook: Netflix unveiled plans to enter its second international market during the second half of this year after expanding into Canada last fall. The company didn't identify which new market it's targeting, but said it anticipates an operating loss of about $50 million on its international operations in the second half of the year.  The Canada service is supposed to start making money during the third quarter.
  • Netflix earned $47.1 million, or 87 cents per share, during the final three months of last year. That was a 52 percent increase from $30.9 million, or 56 cents per share, last year. Analysts surveyed by FactSet expected earnings of 71 cents per share.
  • Revenue rose 34 percent to $596 million from $445 million a year earlier. That figure merely matched analyst estimates.
  • For all of 2010, Netflix earned $161 million, or $2.96 per share, on revenue of $2.16 billion. That compared with net income of $116 million, or $1.98 per share, on revenue of $1.67 billion in 2009.
  • Netflix spent $174 million on video streaming rights in the fourth quarter, a nearly eight-fold increase from $23 million at the same time in the prior year. 
  • It also raised its DVD prices and introduced an $8-per-month plan for U.S. subscribers who only want to stream Internet video. The company said about one-third of its new customers are signing up for the streaming only plan, with most others opting for a $10-a-month plan that includes one DVD rental at a time. Most existing subscribers are sticking with the plans they already had.
  • As Netflix has prospered, it has turned into a bigger threat to cable TV services, particularly premium channels such as HBO and Showtime. HBO has steadfastly refused to sell its streaming rights to Netflix and Showtime isn't making as much material available as it once did.
No position

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