Monday, July 25, 2011

Netflix (NFLX) Barely Beats on EPS but Warns of Slowing Growth - Finally Shorts Get a Day of Victory

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Finally the poor bears on Netflix (NFLX) catch a break.  Revenue came in light by a few million, although EPS beat.  But the guidance is probably the main issue here plus a whole lot of churn in subscribers.  Raw numbers are superlative but measured against super high expectations.... not where they need to be.




Via Barrons
  • Netflix (NFLX) this afternoon reported Q2 revenue below expectations but earnings per share that beat estimates.  Revenue in the three months ended in June rose to $788.6 million, yielding EPS of $1.26 per share.  Analysts on average had been expecting $791.5 million and $1.11 per share.
  • The company ended the quarter with 24.6 million subscribers, it said, which was toward the high end of the company’s own forecast of 24 million to 24.6 million, but below some Street estimates for 24.8 million.
Major issue on this area
  • For the current quarter, the company sees revenue of $780 million to $805 million, and EPS of 72 cents to $1.07 per share. Analysts have been modeling $846.5 million and $1.09.
  • Netflix says it expects subscribers to rise to be in a range of 24.6 million to 25 million in the current quarter.

Netflix shares are down $22.18, or almost 8%, at $259.35 in late trading.

Obviously the price change we discussed recently caused a backlash - quicker than anticipated it appears :)
  • "It is expected and unfortunate that our DVD subscribers who also use streaming don't like our price change, which can be as much as a 60% increase for them from $9.99 to $15.98, when it goes into effect for each subscriber upon their renewal date in September," Netflix said in its earnings release.
  • The company acknowledged that "some subscribers will cancel Netflix or downgrade their Netflix plans, [but] we expect most to stay with us."

No position

WSJ - High Crop Prices are Doing What Politicians Can't Do: Reduce Farm Subsidies

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Interesting story in the Wall Street Journal on the effect of surging crop prices on the federal restribution of wealth (remember, it's not called socialism if it goes to corporate farm interests) in the heartland.  [May 27, 2008: Farm Lobby Beats Back Assault on Subsidies]


  • Land prices are way up and so are bank deposits, as high corn and soybean prices mean local farmers are making the most money in their lives. At Sloan Implement, which sells John Deere tractors, "This could be our best year ever," says chief executive Tom Sloan.
  • An exception to the boom is the local office of the U.S. Agriculture Department, the dispensary of federal payments to farmers from an array of arcane programs with names like "loan deficiency" and "milk income loss." On a recent afternoon, the parking lot in front of the squat brick building behind a Chinese restaurant was nearly empty.  The reason: Payments from America's primary farm-subsidy program, dating from the 1930s, have stopped here. Grain prices are far too high to trigger payouts under the program's "price support" formula. The market, in other words, has done what decades of political wrangling couldn't: slash farm subsidies.
  • There remain other types of subsidies, which continue to pay out because they aren't linked to market prices. But high prices are undermining political support for those programs, especially as Congress and the White House get serious about restraining federal spending, amid trillion-dollar deficits and a political brouhaha over the federal debt ceiling.



  • Government checks to farmers have shrunk to about $11 billion annually—half what they were six years ago—and they could shrink by roughly half again if Washington goes through with calls to eliminate a second major type of farm aid that costs the government about $5 billion annually.
  • Critics have long attacked farm subsidies as wasteful and obsolete. Some $760 billion in federal spending ago, they were created to tackle rural poverty during the Depression era, when a quarter of Americans lived on farms. Today, less than 1% of the population is in farming. The typical farmer works many more acres than in years past, thanks partly to ever-more-powerful tractors and harvesting combines, the newest of which steer themselves.
  • The bulk of the federal subsidy money flows to farmers who are wealthier than the typical U.S. taxpayer. The Environmental Working Group, a Washington activist organization that wants subsidy dollars shifted to conservation programs, maintains a database that shows 10% of farms getting 74% of the federal money. Small farmers receive smaller payments simply because they work fewer acres.
  • The programs long were protected by one of the few bipartisan coalitions left in Washington—politicians of both parties from major farming states.
  • Farmer groups, resigned to deep cuts, are pitching alternative subsidy programs that they say would cost taxpayers less.
  • That is a matter of concern to some. While the current crop prices mean subsidy checks aren't much missed by farmers, some agricultural economists worry about what will happen next time the historically volatile farm economy contracts.
  • For decades, while crop prices languished but operating costs rose, many growers counted on these subsidies to survive. For most of their careers, farmers in Shelby County, 200 miles south of Chicago, depended on government payments for roughly half of their income.
  • Today's target prices reflect the largely depressed crop markets that prevailed from the late 1970s until 2005—corn averaging roughly $2 a bushel year after year, and soybeans around $6. But corn now sells for about $7 a bushel in Shelby County, far above the subsidy program's target price of $2.63. Soybeans fetch about $13 a bushel here, versus a $6 target price. So no price-support checks are going out.


  • The USDA still ships billions of dollars annually to farmers for various other programs, such as payments for keeping highly erodible land in grass rather than row crops. It subsidizes crop insurance. Still, federal payments to farmers are expected to fall to about $10.6 billion this year, compared with $24.4 billion in 2005.
  • The other major subsidy program, unrelated to market prices, is a remnant of a failed 1996 experiment by a Republican-led Congress to wean farmers off federal aid. Farmers were supposed to receive fixed, but declining, checks for seven years and then be left to the whims of the market. But in the seventh year, instead of letting the payments expire, Congress turned them into a program of set payments, based on the amount and type of crops that particular farms had historically produced.

[May 16, 2011: U.S. Plains States Farmland Boom Continues, with 20% Year over Year Gains]
[Mar 11, 2011: [Video] Former FDIC Head Bill Isaac Talks about the Dud that is Dodd-Frank, and the Potential for a Farmland Bubble]
[Mar 7, 2011: NYT - In Prices of Farmland, Echoes of Another Boom]
[Feb 16, 2011: WSJ - Midwest Farmland Surges Double Digits in Q4 2010 Alone]
[Nov 15, 2010: Farm Economy Headed for Record]


[Video] Hilarious Clip from MSNBC When Host Questions Economics Background of Congressman ... Who Happens to be an Economics Major

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While economics is the dismal 'science' (I use the word science loosely), and has many different interpretations this clip is quite priceless showing the group think by journalists.  Essentially whatever Ben Bernanke says must be right, because after all ... he works at the Fed.  If he says the world ends tomorrow, it will - by royal decree. Psst... Contessa, check out the "Ben Bernanke Was Wrong" video before following the company line.

I will give her some credit - she barely blinked an eye after being run head first into a wall.

30 second clip - email readers will need to come to site to view







Brooks "graduated from Duke University in three years with a double major in political science and economics, with highest honors in economics.

GMO's Jeremy Grantham's Q2 Letter: Separating the Dangerous from the Merely Serious

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I missed Grantham's quarterly letter Friday but for those who read it, here it is.  It is an in depth exploration of his Q1 letter.

Summary points (full letter below embedded)

Summary

  • We humans have the brains and the means to reach real planetary sustainability. The problem is with us and our focus on short-term growth and pro ts, which is likely to cause suffering on a vast scale. With foresight and thoughtful planning, this suffering is completely avoidable.
  • Although we will have energy problems with peak oil, this is probably an area where human ingenuity will indeed eventually triumph and in 50 years we will have muddled through well enough, despite price problems along the way.
  • Shortages of metals and fresh water will each cause severe problems, but in the end we will adjust our behavior enough to be merely irritated rather than threatened, although in the case of metals, the pressure from shortages and higher prices will slowly increase forever.
  • Running out completely of potassium (potash) and phosphorus (phosphates) and eroding our soils are the real long-term problems we face. Their total or nearly total depletion would make it impossible to feed the 10 billion people expected 50 years from now.
  • Potassium and phosphorus are necessary for all life; they can not be manufactured and cannot be substituted for. We depend on finite mined resources that are very unevenly scattered around the world.
  • Globally, soil is eroding at a rate that is several times that of the natural replacement rate. It is probable, although not certain, that the U.S. is still losing ground. The world as a whole certainly is.
  • In particular, a significant number of poor countries found mostly in Africa and Asia will almost certainly suffer from increasing malnutrition and starvation. The possibility of foreign assistance on the scale required seems remote.
  • The many stresses on agriculture will be exacerbated at least slightly by increasing temperatures, and severely by increased weather instability, especially more frequent and severe droughts and floods.

  • Capitalism, despite its magnificent virtues in the short term– above all, its ability to adjust to changing conditions – has several weaknesses that affect this issue.
  • It cannot deal with the tragedy of the commons, e.g., overfishing, collective soil erosion, and air contamination.
  • The finiteness of natural resources is simply ignored, and pricing is based entirely on short-term supply and demand.
  • More generally, because of the use of very high discount rates, modern capitalism attributes no material cost to damage that occurs far into the future. Our grandchildren and the problems they will face because of a warming planet with increasing weather instability and, particularly, with resource shortages, have, to the standard capitalist approach, no material present value.



Grant Ham

Twiddling Thumbs Awaiting Debt Ceiling Resolution

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The S&P 500 put on a few % last week during the 'rumor' of a debt ceiling resolution and did not give much of it back when no such resolution came to be.  So much like Greece.... we can rally on every development or rumor of said development multiple times.   Things were not looking so well a week ago Monday with the chart of the index, but at this time headlines are dominating technicals, and by Tuesday everything was reversed back upward.


There were rumors Saturday that a "framework" HAD to be agreed to by 4 PM EST Sunday or all the world would end, as Asian markets would revolt!  Well no Mayan 2012 event yet.  Yawn.

We have another heavy week of earnings, but we begin to move into more of a mix of the big S&P 500 types with some mid cap names that are more interesting (but less influential on the major indexes). 

As for economic data - its another lighter week as we await the first week of the new month which is always the blockbuster.  Some home sales data tomorrow (new home sales, Case-Shiller), and the first run of Q2 GDP Friday (remember if its good you celebrate it and buy stocks, if it is bad you say it is backwards looking).  Some lesser reports like durable goods, Chicago PMI fill out the week.

Friday, July 22, 2011

Congrats to Brave Buyers of Acme Packet (APKT) in After Hours

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I was scratching my head at the treatment of Acme Packet (APKT) last nite - down to the mid $50s on a beat on both top and bottom line.  Anyone who took the plunge and bought in the mid $50s has a nice 15-18% gain in half a session.



The trouble with having the 'guts' to buy that strange action is you are looking around thinking 'what does everyone else know that I am don't.'  In this case - apparently nothing.  Just a massive head fake.

No position

Blast from the Past: Skyworks Solutions (SWKS)

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One of the top gainers of the day is a name we used to talk about quite a bit - Skyworks Solutions (SWKS).  It is up some 19% today, and is taking some of its friends (such as Triquint Semi +8%) up with it.  It is certainly not a name I would be in ahead of earnings, as the chart was a horror show, but as a reader said in comments - we most likely have one very nice short squeeze going on here.  Based on the segments it is in, the stock action has been quite poor.



  • Revenue in the three months ended in June rose 27% to $356 million, yielding EPS of 49 cents per share.  Analysts had been expecting $345 million and EPS of 46 cents.
  • For the current quarter, the company sees revenue of $400 million and EPS of 53 cents, ahead of analysts $370 million and 50-cent-per-share consensus.
No positions

Down/Up Action the Previous 8 Days Quite Rare - Only 42 Instances Since 1928

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For some reason the action the past few weeks 'feels' much more bullish than it has been.  The S&P 500 is only about 20-25 points (less than 2%) above where it was about two weeks ago - perhaps the shaking off of a lot of neutral to poor news is what is causing me to feel like the bulls are winning.  The fact we also rally on the exact same leaks (rally 182 on Greece, rally 23 on debt ceiling) seems to be cute as well.  Could also be the leadership stocks ala Apple, Netflix, Lululemon are strong like ox.



Coming into today, the S&P 500 had done something it only had done 42 times in the past 85 or so years per Bespoke... .put in a serious of eight consecutive up/down days.  The knee jerk reactions to every political headline, or even rumor of a coming political headline are causing whiplash.

Going back to 1928, the S&P 500 has had a down,up,down,up,down,up,down,up pattern just 42 times.  Below we highlight the 21 times that it has occurred since 1990.  



As I said coming into the week it is dangerous territory to short ahead of what will definitely be some sort of agreement on the debt ceiling as market participants will "be surprised" and rally the market.  Even a rumor of a deal yesterday caused a surge.  I'd like to see bulls get over 1360, and then of course 1370 - maybe "M&A debt ceiling deal agreement Monday" will do the trick.

Washington D.C. as Nation's Landlord? Why Not - Everything Else Has been Thrown Against the Wall

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There were (and continue to be) so many programs and bailouts proposed and engaged in to try to "help" the housing market in 2008-2009, that I have lost count.  However, with Freddie and Fannie now owning an impressive amount of the housing stock in this country, central command has even more power to 'affect change'.  It appears the powers that be are mulling becoming the world's largest landlord!

Frankly I find this cool - I mean when a renter doesn't pay their rent, wouldn't it be super awesome to get a call from Obama demanding payment?


Via WSJ

  • The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter. While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.
  • "Adding more stock simply increases that overhang. If that can be avoided, it should be," says Jared Bernstein, an economist who left the White House in April and is now a senior fellow at the Center on Budget and Policy Priorities, a liberal think tank in Washington. Because rents are firming up, "this idea could have some legs," he said.
  • But scattered-site rental programs could require the government to become a national landlord, an area where the mortgage firms have little experience. They also pose accounting challenges that could produce big upfront losses.
  • One proposal winning support among some federal officials would sell thousands of foreclosed federal properties to private investors who agree to rent them.  Investors would rehab homes, run the leasing process, and contract with national property management firms to handle day-to-day tenant demands.
  • The government could keep a stake in the venture, modeled on loss-share transactions by the Federal Deposit Insurance Corp. Officials have received interest from around a half-dozen private investors, according to people familiar with the matter. (translation: private investors see a way to bilk the taxpayer)
  • HUD owned about 69,000 homes at the end of April and sold 11,000 homes in that month. Fannie and Freddie held another 218,000 at the end of March.
  • But the Obama administration can't enlist Fannie and Freddie's participation in a wider rental program without the approval of the firms' regulator, the Federal Housing Finance Agency. An FHFA spokeswoman says the agency is "open to considering initiatives that are consistent with the goals of the conservatorship." 
[click to enlarge]


    [Nov 5, 2009: Fannie Mae's New Deed for Lease Program - Rent Your Home from the Government]
    [Jul 15, 2009: Reuters - Obama Mulls Rental Option for Homeowners, along with Paying Mortgages for Unemployed]

    Caterpillar (CAT) Misses EPS Estimates, but Beats on the Top Line and Raises Guidance

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    Caterpillar (CAT), which essentially has become the Apple (AAPL) of heavy machinery, is out this morning and while reporting stellar numbers - was a tad short on the bottom line.  The stock is being punished in premarket to the tune of 5% since expectations are now very high going into every Caterpillar quarter.  Technically, it is sitting just over the 50 day moving average.


    CAT is blaming some missed revenue opportunities on Japan, so this seems to be a bit of an overreaction, but the stock is quite rich.

    • The disaster in Japan had a $200 million negative impact on second-quarter sales, was negative on costs and efficiency and lowered operating profit nearly $60 million.  However, the negative impacts from Japan are now behind us," Oberhelman added.
    Estimates were for $1.79, and $13.52B in revenue. Full report here.

    • Caterpillar said net income rose to $1.02 billion, or $1.52 per share, in the second quarter, compared with $707 million, or $1.09 per share, a year earlier.  However, the latest period included certain acquisition-related expenses. Excluding those items, Caterpillar earned $1.72 a share.
    • Analysts had expected Caterpillar to report earnings of $1.74 a share on revenue of $13.56 billion.
    • Revenue at the economic bellwether rose 37 percent to $14.23 billion from $10.4 billion a year ago. 

    Guidance raise:
    • Excluding the impact of Bucyrus, we are raising expectations for 2011.  We expect sales and revenues in a range of $54 to $56 billion and profit per share of $6.75 to $7.25.  That is an improvement from our previous outlook of $52 to $54 billion of sales and revenues and profit per share of $6.25 to $6.75.
    • We expect that Bucyrus will add about $2 billion of sales in 2011 and negatively impact full-year profit by about $0.50 per share.  In total, including Bucyrus, we expect sales and revenues in a range of $56 to $58 billion and profit per share of $6.25 to $6.75

    Caterpillar general economic views:

    • "While the economic recovery in the United States continues to be weaker than many expected, we're forecasting continued moderate economic expansion.  That, coupled with stronger growth in the developing world, is driving higher sales for Caterpillar.  
    • There's been quite a bit of concern in the media over the past few months centered on China.  While we've seen some softening of growth in China, dealer deliveries to end users were up in the second quarter of 2011 compared with the second quarter of last year and grew at a faster rate than the overall industry in China.  In our view, China is doing a good job of balancing growth and inflation, and our expectations for China remain positive.  
    • That said, we can't lose sight of the significant growth that's going on around the world outside the United States and China.  Economic activity and our business in Latin America, the Middle East, Africa, CIS and greater Asia are robust," Oberhelman added.  
    No position

    Thursday, July 21, 2011

    Market Being Tough on Almost Entire Networking Space - Acme Packet (APKT) Selling Off in After Hours Despite Earnings Beat

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    There has been a sour taste in this general space with the likes of F5 Networks (FFIV) and Riverbed Technology (RVBD) the past 48 hours.  While these companies are not exactly 'related' perfectly they all fall under a wide umbrella called 'networking', and Acme Packet is the latest to report this afternoon.  Despite a 2 cent beat, and $2M+ beat on the top line, the company is off another $3 $5 from the level it closed at - which was a substantial loss in itself.



    Expectations were $76.9M in revenue and 27 cents EPS.

    Full report here.

    • Total revenue in the second quarter of 2011 was $79.7 million, compared to $53.3 million in the second quarter of 2010 and $74.0 million in the first quarter of 2011. 
    • Net income in the second quarter of 2011 was $14.0 million, or $0.20 per share, compared to $9.7 million, or $0.14 per share, in the second quarter of 2010 and $13.7 million, or $0.19 per share, in the first quarter of 2011. Net income on a non-GAAP1 basis in the second quarter of 2011 was $20.4 million, or $0.29 per share, compared to $12.5 million, or $0.19 per share, in the second quarter of 2010, and $18.9 million, or $0.27 per share, in the first quarter of 2011. 

    Guidance was also raised (slightly) for the year - part of it being this quarter's better than expected report.

    No position

    UBS Rolls Out 1x, 2x Internet IPO ETNs - EIPO, EIPL

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    Step by step we're getting closer to mimicking the NASDAQ 99 era, although in a much narrower group of companies.  The next wave taking us closer is the type of ETFs/ETNs we are seeing such as what UBS has just rolled out, both a straight forward, and double leverage Interent IPO ETN.

    While I suppose this is an easy way to play a lot high beta stocks in 1 instrument, I assume its really going to act almost as a levered play on the NASDAQ.  When "risk is on" it will outperform, and when "risk is off" underperform.

    Now if they could ever come up with a product that gets me access to IPOs of the 'hot stocks' before they come public... call me.

    Per UBS

    The UBS Internet IPO Index (NYSE ticker symbol "NETIPO") is intended to measure, on a total-return basis, the performance of a subset of Internet companies listed on the New York Stock Exchange or The Nasdaq Stock Market, Inc. that satisfy specified market capitalization and other eligibility requirements (the "Index Constituents"). The Index provides exposure specifically to those Internet companies that have been publicly traded for less than three years. 

    Fact sheet here: 0.65% expense ratio

    Top holdings

    10% each: LNKD, AWAY, YNDX, RAX

    Then P (9.6%),  RENN (9.2%), OPEN (6.5%), ACOM (6%)....

    No positions

    [Video] Profile of Michael Burry

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    Interesting video from Bloomberg on former hedge fund manager Michael Burry.  Quite an interesting guy who started from nothing, got his own hedge fund running, made a huge subprime bet (with far less fanfare than John Paulson), and then called it quits after victory.

    25 minute video, email readers will need to come to site to view




    hat tip Marketfolly

    Things to Do When You Have So Much Money You've Run Out of Ways to Spent It - Write Your Name 2 Miles Long in the Sand So It Can be Seen from Space

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    Sometimes you just wish you had won the genetic pool.  If for no other reason, here is yet another story on why we need to become energy independent.  Sheesh.

    Via Forbes blog

    On a sandy island in Abu Dhabi Sheikh Hamad bin Hamdan Al Nahyan has inscribed what is in effect the biggest graffiti tag the world has ever seen. Hamad, 63, a scion of the billionaire Abu Dhabi royal family, has gouged his name in capital letters two miles across and half a mile wide.



    His moniker is so big it can be seen from space (as this Google Earth pic demonstrates). The tip of the “H” reaches into the strait that leads to the Arabian Gulf, allowing Hamad to fill the first two letters of his name with water. The “M” looks partially filled as well.





    Hamad has shown a penchant for excess in the past. He is said to own more than 200 cars, including seven Mercedes 500 SELs painted in the colors of the rainbow. Indeed the man known as the Rainbow Sheikh has even created the Emirates National Auto Museum, home to a custom-built globe-shaped motor home said to be one-millionth the size of the Earth itself. If he weren’t so rich, we’d call this guy an artist.

    Credit Card Usage in U.S. Up 10.7% But an Increasing Amount is Going to Basics Like Gas and Food

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    Looks like we are celebrating the 1,827th rescue of Greece this morning.  The good thing about this story, is it we should have rescues for years to come across the Eurozone - which of course should lead to rally after rally via Bailout Infinity.

    Coming back to domestic affairs, the increase in credit card usage has been seen as a 'positive' by the Street; however looking under the surface we see some troubling trends; especially in growth in credit for purchases of gasoline and food. To which of course the Fed says - at least you can buy the second generation iPad for less than the first generation - no inflation here. [Nov 10, 2009: Walmart Executive - "There are Families Not Eating at the End of the Month"]


    Via Bloomberg:
    • Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel pricesThe dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor.
    • Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.”
    • After-tax income adjusted for inflation fell 0.1 percent from January through May, according to figures from the Commerce Department. (and if you believe inflation is HIGHER than 'reported' by government, its worse than -0.1%
    • The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent.
    • The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said.  (wonder how that will work out in the end?)
    • The use of credit cards is a “smoking gun” that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto.  “People on the margin are putting necessities on their credit cards and this is a trend that’s very consistent with what lower-end retailers have been saying about their paycheck cycles,” Rosenberg said.
    • Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash strapped,” William Simon, U.S. stores chief, said at a June 15 conference hosted by William Blair & Co. “The paycheck cycle is severe.”
    • Similarly, customers of Matthews, North Carolina-based Family Dollar Stores Inc. (FDO) are living “paycheck-to-paycheck,” so when gas or food prices go up, “they don’t have the cushion that many others might have,” Chairman and Chief Executive Howard Levine said on a June 29 conference call.
    • For people to think that this rebound in credit-card usage is actually a sign of resurging consumer confidence, I think they’re looking at the situation backwards,” Rosenberg said.

    Chinese Flash Reading on Manufacturing Contracts for First Time in a Year, Falling to 28 Month Low, While Eurozone Slows; Markets Shrug

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    Sometimes you really wonder how little news matters to markets ... according to a flash survey the driver of global growth the past 3 years, China, will report its lowest PMI reading in manufacturing in 28 months on August 1.... and essentially we have seen a yawn in response.  While I do expect corporate earnings to dominate at this time, along with the continuing drama in the sovereign debt arena, this (non)reaction is surprising.

    Europe also reported some poor data this morning... more yawning.

    Via Reuters:

    • Growth ground to a halt in the euro zone's private sector this month while China's factory sector contracted for the first time in a year, surveys showed on Thursday, deepening evidence of a sharp slowdown in the global economy.
    • In the latest sign economic growth is dwindling, Markit's Eurozone Purchasing Managers' Indexes showed growth in the 17-nation bloc's factory sector came to a standstill in July while its dominant service sector grew at its slowest rate in 22 months  "The large fall in the flash euro zone PMI in July provides further signs that the debt crisis may be starting to take a heavy toll on the economic recovery in the region," said Ben May at Capital Economics.
    • The flash services PMI sank to 51.4 this month from 53.7 in June, its lowest level since September 2009 and falling far short of expectations for 53.0 but has been above the 50 mark that divides growth from contraction for nearly two years.  The flash manufacturing PMI fell to 50.4 from 52.0 in June, its lowest reading since September 2009 and missing consensus expectations in a Reuters poll for 51.5.
    • Output in the euro zone's manufacturing sector, which drove a large part of the recovery in the bloc, shrank for the first time in two years, with the index falling to 49.5 from 52.5, its lowest since July 2009.  Factories also saw new orders falling for the second month running, with the index sliding to 47.6 from 49.8, its lowest reading since June 2009.
    • An earlier release from Germany, Europe's largest economy, showed its composite PMI staging the biggest one month fall since late 2008, slumping to 52.2 from June's 56.3.
    • "There is no doubt that the free fall in the PMIs of the last three months comes as a negative surprise. We believe that external factors remain predominant, in particular the ongoing softening in the global factory cycle, as shown by further signs of weakness in China this morning," said Marco Valli at UniCredit.

    Via NYT:
    • The vast Chinese manufacturing sector appears to have contracted in July for the first time in a year.  The initial results of a closely watched survey of purchasing managers produced reading of 48.9 in July, the lowest level in 28 months — down from 50.1 in June, said HSBC, which published the index.
    • HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. Output in July contracted at a faster rate, export orders shrank at a slower pace and the gauge of new orders dropped below 50, the dividing line between expansion and contraction, today’s data showed

    Travelzoo (TZOO) Crushed on Earnings Miss

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    An ugly morning for Travelzoo (TZOO) longs as the earnings report did not make investors happy.  I try to avoid any momo names on earnings for this reason, even if it means missing a big move upward post earnings.  Waking up to a -22% loss is not a great way to start a morning.



    That said, the rise in Travelzoo has been so spectacular, this drop to $67 has only taken the stock back at the beginning of the month.  (while nicely filling that gap)

    Expectations were for $39M in revenue, along with $0.38 EPS.  TZOO came in light on the top line at $37.6M, while disappointing mightily on EPS at $0.30.  Not a good job by management to guide analysts to the typical lowball game that almost all of Wall Street plays.  They appear to be blaming the lion's share of the miss on TV advertising, but that should have been communicated better to the Street.

    Full report here.

    • Travelzoo Inc., a global Internet media company, today announced financial results for the second quarter ended June 30, 2011, with revenue of $37.6 million, an increase of 34% year-over-year. Operating profit was $7.6 million, up 29% year-over-year. Net income was $4.9 million, with diluted net income per share (EPS) of $0.30, up from $0.20 in the prior-year period.
    • “We achieved record revenues and our fastest growth rate in 4 years. We accelerated our investment in future growth, adding 27 new Local Deals markets, 800,000 new subscribers and we grew our headcount faster than in any prior quarter,” said Chris Loughlin, CEO of Travelzoo. “We also ran a television advertising test, which negatively impacted earnings per share by approximately $0.07. We are pleased with our accelerated growth rate and confident that our investments will fuel future growth.”
    • North America business segment revenue grew 25% year-over-year to $27.7 million. Operating profit was $6.5 million, or 24% of revenue, down from $6.7 million, or 30% of revenue, in the prior-year period.
    • Europe business segment revenue grew 67% year-over-year to $10.0 million. In local currency terms, revenue grew 53% year-over-year. Operating profit was $1.1 million, compared to an operating loss of $808,000 in the prior-year period.
    • Travelzoo had a total unduplicated number of newsletter subscribers in North America and Europe of 20.7 million as of June 30, 2011, up 13% from June 30, 2010, and up 4% from March 31, 2011. In North America, total unduplicated number of subscribers was 15.3 million as of June 30, 2011, up 9% from June 30, 2010 and up 3% from March 31, 2011. In Europe, total unduplicated number of subscribers was 5.5 million as of June 30, 2011, up 29% from June 30, 2010 and up 7% from March 31, 2011.
    No position

    Wednesday, July 20, 2011

    F5 Networks (FFIV) Taking Some Damage in After Hours on Earnings

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    F5 Networks (FFIV) had already been weak today, on collateral damage from Riverbed (-6%).  It is down another 6% in after hours after posting its earning report.  Expectations were $290.7M in revenue with $0.91 EPS.  Revenue (amazingly) came in exactly at $290.7M with EPS of $0.97.  For some reason that is not good enough for the Street.  (in line revenue, with a 6 cent beat)

    EMEA (essentially Europe) was weak for FFIV just as it was with RVBD.  Government sales were also weak, a signal we saw from Cisco a few quarters ago.

    Guidance is just about exactly where analysts currently are at:
    • For the current quarter, ending September 30, management has set a revenue goal of $307 million to $312 million with a GAAP earnings target of $0.75 to $0.77 per diluted share. Excluding stock-based compensation expense, the company's non-GAAP earnings target is $0.97 to $0.99 per diluted share.

    • For the third quarter of fiscal 2011, F5 Networks, Inc. (NASDAQ: FFIV) announced revenue of $290.7 million, up 4.7 percent from $277.6 million in the prior quarter and 26.1 percent from $230.5 million in the third quarter of fiscal 2010.
    • Excluding the impact of stock-based compensation net of tax, non-GAAP net income was $79.4 million ($0.97 per diluted share), compared to $71.5 million ($0.88 per diluted share) in the prior quarter and $53.3 million ($0.66 per diluted share) in the third quarter of fiscal 2010.
    • "Strong sales in APAC and Japan, in particular of our high-end products, accounted for most of the revenue growth during the quarter," said John McAdam, F5 president and chief executive officer. "EMEA revenue was down from the prior quarter, and Americas revenue was up only slightly, due in part to a slowdown in U.S. Federal sales.
    • "During the third quarter we added 95 employees, roughly a third of them in sales and sales support. At the same time, productivity across the organization enabled us to achieve a non-GAAP operating profit margin of 38.2 percent," McAdam said.
    No position

    Zillow (Z) Continues Trend of Nonsense IPO Valuations for Internet Stocks

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    While Zillow (Z) is a nice utility on the internet, we are seeing complete and utter nonsense in a stock market starved for domestic growth stories.   After upping its IPO price from $12-14 to $16-$18... and then $20 this morning - the stock opened around $47 (maybe one print at $60?) and has gone on to ruin any retailer investor participating to the tune of currently sitting at $34.



    Winners? Those institutions given the shares at $20 who can flip to the retail crowd.  Great to be 'smart money'.
    • The company has a history of losses, spanning the past five years. In 2010, it lost $6.8 million on revenues of $30.5 million, and in the first three months of 2011, it lost $826,000 on revenues of $11.3 million. 
    This morning the company was valued at some $1 Billion plus, for annualized revenue of $45Mish.  Even with the drop into the mid $30s, it's still outlandish on even price to sales.

      No position

      Barron's: Analysts Mixed on Buying the Riverbed (RVBD) Dip

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      As mentioned late yesterday, Riverbed Technology (RVBD) was going to take the boot today - something that usually happens once every 4-6 quarters with this name.   Analysts have a mixed opinion on whether to buy this dip.  Obviously the technical makeup is damaged, but we can see this area of $31ish has generally held during 2011.  So if it holds again in the coming days this could be an attractice long term entry...



      The bullish crowd:

      • Scott Zeller, Needham & Co.: Reiterates a Buy rating while lowering his price target to $41 from $48. “Our sense from field discussions is that demand for software is unchanged in EMEA, and we attribute this miss to “company specific” issues. The acquisitions of Zeus Technology and Aptimize are complementary as they offer capabilities in Application Delivery Control (ADC) and Web Content Optimization (WCO), and are EPS neutral then accretive in CY12. We don’t view these acquisitions as “buying revenue” as some might suspect; our view from the field is that WAN acceleration and data center refresh remain strong secular trends (e.g. US +50% y/y in JuneQ).” Zeller cut this year’s estimate to $725.9 million in revenue and 87 cents EPS, from a prior $737.6 million and 90 cents, and cut 2012′s estimate to $900 million and $1.16 per share from a prior $912 million and $1.17. 
      • Daniel Ives, FBR Capital Markets: Reiterates an Outperform rating and a $43 price target. “While the weakness in the quarter is confined to mostly macro headwinds in the EMEA region, which resulted in some deals slipping into 2H, we believe this is more of an air pocket quarter, which should smooth itself out during the next few quarters.” Ives raised his 2011 estimate to $725.9 million and 89 cents per share in profit, from a prior $722.3 million and 88 cents to account for the addition of revenue from the two acquisitions. His estimate for 2012 goes to $906 million and $1.17, from a prior $887 million and $1.14, again, to account for acquisitionsRyan Hutchinson, Lazard Capital Markets: Reiterates a Buy rating, while cutting his price target to $40 from $45. “Riverbed missed its revenue guidance for the first time since 2Q09 amid broad expectations, ours included, for another strong beat and raise quarter. We get the sense that deeper execution problems have not been anticipated […] But strong fundamentals underpinning our positive view are unchanged. The stock will face an uphill battle against sentiment for the time being.” Mansky cut his 2011 estimate to $720 million in revenue and 89 cents EPS from a prior $738 million and 95 cents. 
      • Paul Mansky, Canaccord Genuity: Reiterates a Buy rating and a $44 price target. “Although less crisp than we’d prefer, European organizational changes have been broadly known and are a “fixable” issue in our view given the company’s demonstrated product/technology lead – evidenced by continued strong growth in more established domestic markets.” Mansky actually raised his 2011 revenue estimate to $721.7 million from a prior $720 million, while sticking with 89 cents in EPS
      • Michael Genovese, MKM Partners: Reiterates a Buy rating and lowers his price target to $40 from $43. “Weviewthepullback in the stock as overdone and recommend buying on what could be temporary weakness.” Genovese cut his 2011 estimates to $730 million and 88 cents EPS from a prior $741 million and 94 cents.

      And the not so much group:
      • Mark Sue, RBC Capital Markets: Reiterates a Sector Perform rating and cuts his price target to $33 from $35. “We don’t think Riverbed is losing share and its products provide a strong ROI case. Nevertheless, we do think the sales execution changes may take more than several quarters to fix and, with Federal to increase sharply as a percentage of revenues in 3Q, we’re waiting for an investment horizon when the linearity improves.” Sue cut his 2011 estimate to $727.9 million in revenue and 86 cents EPS from a prior $733.6 million and 91 cents. He also cut his 2012 view to $896 million and $1.15 from a prior $942 million and $1.25. 
      • Ittai Kidron, Oppenheimer & Co.: Reiterates a “Perform” rating. “. While we believe Riverbed is well positioned long term, the company faces multiple headwinds near term including tough macro trends in Europe, uncertain government spending and dilution due to the acquisitions. Thus, we remain on the sidelines until the growth story takes shape.” Kidron raised his 2011 revenue outlook to $724.6 million from a prior $716 million, while cutting his EPS estimate to 88 cents from 90 cents.
      No position

      Existing Home Sales Fall in June? That's Bad

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      Wow.  With all the 'excitement' yesterday when new home starts rocketed up 14% from the previous month (but still at a level that is about 50% below what economists would consider healthy) today's housing number is awful.  June should be the busiest month of the year, or at worst the 2nd busiest, for moving yet somehow existing home sales (roughly 90% of all transactions) were down on the month 0.8%.

      We are not even getting our annual "the housing market has bottomed since anything housing related is spiking in the summer - as it does EVERY year, since its SEASONAL" move this year.  Quite putrid.  I remain of the mind we are YEARS away from a real rebound in housing.

      Ironic data for the day Zillow (Z) comes public.

      • Home sales fell 0.8% last month to a seasonally adjusted annual rate of 4.77 million homes, the National Association of Realtors said Wednesday. That's far below the 6 million homes per year that economists say represents a healthy housing market.
      • Through the first six months of this year, the sales pace is behind last year's 4.91 million homes sold -- the weakest sales in 13 years. Sales have fallen in four of the past five years.
      So why does Wall Street get excited about signed contracts?  It's nonsense.
      • The Realtors' group said a record number of people who signed contracts canceled deals last month.  Roughly 16 percent of home deals were canceled last month, the highest level since such records began being kept more than a year ago. Some buyers have canceled purchases after appraisals showed that the homes were worth less than the buyers' initial bids. A sale isn't final until a mortgage is closed.

      Doctor Copper Improving

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      It appears China is beginning to restock copper the global economy is improving, if you believe in doctor copper as a play on economic growth rather than the actions of the Chinese.  Nice job Goldman, [Jun 15, 2011: Goldman Calls for a Substantial Rally in Copper Prices in 2nd Half 2011, as Chinese Stockpiles have Potentially Fallen 50%]




      No position

      Tuesday, July 19, 2011

      Chipotle Mexican Grill (CMG) With a Slight Disappointment

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      While every eye is transfixed on the Apple (APPL) beat, lowball, and then beat again game (wondering if Apple will miss a quarter in my lifetime), quite a few other interesting names reported.  In the restaurant biz, we have the top momo name of the past few years - Chipotle Mexican Grill (CMG).  The numbers look decent (as usual) - revenue beat, EPS missed -  but the stock is off only 4%ish in after hours.  Frankly I am surprised this 'miss' did not punish the stock more.  ''



      The current price won't hurt the technical set up of the chart much at all, since the stock has run so much and is above all key levels.  Just a glancing blow.

      • Chipotle posted $1.59 in EPS, 9 cents worse than expectations. Revenue came in at $572 million (+22%) against expectations for $558 million
      • Comparable store sales rose 10%, but operating margin fell 110 basis points to 25.8%.  “The decrease was primarily driven by food cost inflation partially offset by leverage from comparable restaurant sales growth.”
      • The company raised its comparable store sales forecast for the year to high-single-digit to low-double-digit growth from its prior forecast of mid-single-digit growth.
      No position

      Cloud Talk: VMWare (VMW) Good - Riverbed Technology (RVBD) Bad

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      Two key names in the 'cloud' space (VMWare more than Riverbed which is more of a networking stocks) reported this afternoon.  VMWare (VMW) has pleased the Street on first glance, while Riverbed Tech (RVBD) has been taken behind the barn to be shot.

      First VMWare, up about 10% as I type this in aftermarket.  Expectations were for $873M in revenue and 47 cents of EPS.  VMW came in at $921M and 55 cents ex items (51 cents with items).  There was also a guide up in Q3 to $915-940M versus expectations of $899M.  Earnings report here.
      • U.S. revenues for the second quarter of 2011 grew 35% to $450 million from the second quarter of 2010. International revenues grew 38% to $471 million from the second quarter of 2010.
      • License revenues for the second quarter of 2011 were $465 million, an increase of 44% from the second quarter of 2010 as reported, and an increase of 40% measured in constant currency. Service revenues, which include software maintenance and professional services, were $456 million for the second quarter of 2011, an increase of 30% from the second quarter of 2010.



      Riverbed Technology is down over 17% 20% as I type.  Expectations were for $173M in revenue and 21 cents of EPS.  RVBD missed by $3M in revenue while coming in line on EPS.  A harsh reaction in my eyes especially in light of record gross (non GAAP) and operating margins.... but any stock with momo investors in it must continue almost always continue to show outsized results vs expectations or get punished.   Earnings report here.



      • Riverbed Technology today reported financial results for its second quarter ended June 30, 2011 (Q2’11). Revenue for Q2’11 was $170.3 million, up 35% compared to the second quarter of fiscal year 2010 (Q2’10).
      • Reporting on a GAAP basis, net income for Q2’11 was $11.3 million, or $0.07 per share. This compares to GAAP net income of $6.6 million, or $0.04 per diluted share, in Q2’10. Non-GAAP net income for Q2’11 was $34.9 million, or $0.21 per diluted share, as compared to non-GAAP net income for Q2’10 of $19.2 million, or $0.13 per share. 
      • Non-GAAP product gross margin reached an all-time high of 81.5%, and we achieved a record non-GAAP operating margin of 29.6%
      • We experienced softness in the EMEA region, which we attribute to both the regional economy and our own execution. Looking ahead, we have confidence in our ability to improve our execution in this region with new EMEA sales leadership announced last week.

      No positions

      Choppy Action

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      The S&P 500 has really gone nowhere the past week or so, but the action certainly is choppy.  If you are a technical trader who utilizes moving averages this is one of those difficult times as we keep moving up, down, and around a key level - i.e. the 50 day moving average.  Yesterday's breakdown would have had you reducing risk and raising cash.  Only to be confronted with a surge in the market that takes the S&P 500 right back over that key level.  It definitely is bipolar action the past month or so....


      Market Volatility Pushes George Soros' Quantum Fund to 75% Cash Level

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      With a market so dominated by headlines - often political ones - this market has been a bit of a bucking bronco the past few months.  It appears quite a few hedge funds - after a poor June showing for the group [Jul 6, 2011: Average Hedge Fund Down on the Year] - are moving into higher cash levels.  George Soros and Keith Anderson are taking it to the extreme with a 75% cash level in the $25B Quantum Fund per Bloomberg

      • Keith Anderson, who runs the $25.5 billion Quantum Endowment Fund for Soros Fund Management LLC, has seen enough of choppy global markets.  In mid-June, Anderson told his portfolio managers to pull back on trades as the hedge fund’s losses hit 6 percent for the year, according to two people familiar with the New York-based firm. As a result, the fund is about 75 percent in cash as it waits for better opportunities.
      • Soros and Moore Capital Management LLC are among hedge funds that have reduced the amount of money they’re investing in stock, bond and currency markets as they look for clarity on global events ranging from the debt crisis in Europe to China’s efforts to control inflation to the debate over the U.S. debt ceiling. About 18 percent of asset allocators, including hedge funds, are overweight cash, the highest level in a year and up from 6 percent in May, a Bank of America Corp. survey showed last month.
      • Even Anderson’s boss, billionaire George Soros, who made $1 billion betting against the British pound in 1992, is perplexed.  “I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,” Soros, 80, said in April at a conference at Bretton Woods organized by his Institute for New Economic Thinking. “The markets are inherently unstable. There is no immediate collapse, nor no immediate solution.”

      And it's not just Soros...
      • Louis Bacon’s  Moore Capitalwith $15 billion in assets, cut risk as its flagship Moore Global hedge fund dropped 6 percent this year through June 30, with all the declines coming in May and June, according to investors who asked not to be named.
      • Funds such as Moore’s and Soros’s, which chase macroeconomic trends by buying stocks, bonds, currencies and commodities, have been the worst performing hedge-fund strategy this year. They fell 2.25 percent through June 30, according to Chicago-based Hedge Fund Research Inc., as managers made losing bets that the euro would fall against the dollar and that the yield on U.S. Treasuries would rise. Some managers also got caught when prices for oil and other commodities dropped in May.

      • The aversion to risk is reflected in trading volumes. Trading in the 50 companies in Goldman Sachs Group Inc.’s index of stocks most commonly owned by hedge funds fell to 4.11 billion shares in June, the lowest monthly level since August 2008, according to data compiled by Bloomberg.
      • Part of the uncertainty stems from the fact that so much of what happens in global markets is dependent on government actions, which can distort prices and affect supplies.
      • Most of our funds are in an uncomfortable position in that the fundamentals are bearish, but the governments are intervening,” said Harold Yoon, chief investment officer at Hong Kong-based SAIL Advisors Ltd., which invests in hedge funds on behalf of clients. “Instead, managers have focused on tactical trading; shorting when markets are getting bullish and then covering into panic-driven selling.”
      • “2011 has been a trendless year,” said George Papamarkakis, co-founder of North Asset Management LLP in London. “Policy makers are dictating markets, which means we’re operating in an environment where fundamentals just don’t apply.”

      Harley Davidson (HOG) Gaps Up on Earnings, Improved Shipment Forecast

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      Back in 2007-2008, Harley Davidson (HOG) was a good 'tell' on the weakening U.S. consumer, especially those which relied on the house ATM to fund their toy purchases.  It has been a rough few years for the company, but with expectations far lower than the mid 2000s, the stock has rebounded nicely, including today's gap up on  this morning's earning report.  Guidance for 2011 shipments was also pushed up.
      • Harley said it now expects to ship 228,000 to 235,000 motorcycles, an increase of 8 percent to 12 percent from last year. It had said in April that it planned to ship 215,000 to 228,000


      Via AP:

      • U.S. retail sales of new motorcycles grew 7.5 percent to 53,599 bikes, marking the company's first domestic sales increase since the fourth quarter of 2006. Overseas, sales rose just 2.4 percent to 29,797 bikes.
      • The sales mark a big change from just two years ago when Harley was shuttering plants and cutting thousands of jobs as it tried to ride out one of the toughest economic slumps in its history.
      • They also helped the company's profit. Harley-Davidson Inc. earned $190.6 million, or 81 cents per share, more than double the $71.2 million, or 30 cents per share, it earned in the same quarter last year.  Motorcycle and related product revenue rose 18 percent to $1.34 billion.  Analysts, on average, expected a profit of 72 cents per share on $1.26 billion in sales, according to a FactSet survey.
      • Harley's new bike sales plunged 23 percent in 2009, as its customers put off purchases or opted for a used bike instead. Sales fell the next year too, before picking up in the first quarter of this year, boosted by stronger consumer confidence and demand from outside of the United States.
      No position

      Wynn Resorts (WYNN) Continues Its Winning Streak

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      Thus far 2011 has been another excellent year for Wynn Resorts (WYNN) both on the profit side, and the stock appreciation angle.  The stock has advanced some 60% despite a quite heady valuation.  Wynn currently trades near 35x FORWARD earning estimates, even accounting for yesterday's substantial beat on the bottom line - but as part of the golden child crew, valuation does not seem to matter to fund managers who constantly pile in.



      Last night the company did not disappoint with another very good earnings report.  Keep in mind this is essentially an Asian play at this point, with a U.S. kicker.  That said, Vegas. is finally showing some signs of life.

      • Wynn Resorts Ltd posted second-quarter profit and revenue that handily topped Wall Street estimates as revenue at its Wynn Macau  unit soared 36.7 percent and business in Las Vegas improved.
      • Driven by robust demand from mainland Chinese, gambling revenue in Macau, the only place in China where gambling is legal, surged 52 percent in June from a year earlier, according to government statistics. 
      • "They had stupendous results in both Macau and Vegas," said Janet Brashear, an analyst with Sanford C. Bernstein & Co. "Vegas is the biggest surprise," she said, with earnings "a lot more solid for the balance of the year than we might have expected."
      • Adjusting for one-time items, Wynn earned $200.8 million, or $1.60 per share, beating analysts' average forecast of $1.04 per share, according to Thomson Reuters I/B/E/S. 
      • Wynn operates two casino-resorts in Las Vegas and two in Macau, where it is poised to begin construction on a third property on the Cotai Strip, pending final government clearance. 
      • Quarterly net revenue rose 32.4 percent to $1.37 billion from $1.03 billion last year. Analysts, on average, had expected $1.27 billion. 
      • Wynn's revenue in Las Vegas rose 22.8 percent to $390.8 millon. Adjusted property earnings rose 103.7 percent to $132.7 million. The rise was due to higher margins "really across the board," CFO Matt Maddox said on the call, including in gambling revenue, VIP services, and non-gaming segments including nightclubs, catering, and restaurants.
      • The company's Macau revenue climbed 36.7 percent to $976.5 million, while property earnings rose 45.4 percent to $314.3 million in the second quarter. 
      • The shares have risen 59 percent so far this year. 

      No position

      Monday, July 18, 2011

      On U.S. Grade Inflation

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      Quite fascinating study highlighted by NYTimes Economix on the rampant grade inflation in the USA the past 50 years or so.  A huge amount of 'C's' have migrated to 'A's'.  The reasons for this are subjective but the implications are quite obvious.

      • We’ve written before about some of the work of Stuart Rojstaczer and Christopher Healy, grade inflation chroniclers extraordinaire. They have put together a new, comprehensive study of college grading over the decades, and let me tell you, it is a doozy.
      • The researchers collected historical data on letter grades awarded by more than 200 four-year colleges and universities. Their analysis (published in the Teachers College Record) confirm that the share of A grades awarded has skyrocketed over the years. Take a look at the red line in the chart below, which refers to the share of grades given that are A’s:




      • Most recently, about 43 percent of all letter grades given were A’s, an increase of 28 percentage points since 1960 and 12 percentage points since 1988. The distribution of B’s has stayed relatively constant; the growing share of A’s instead comes at the expense of a shrinking share of C’s, D’s and F’s. In fact, only about 10 percent of grades awarded are D’s and F’s.
      • As we have written before, private colleges and universities are by far the biggest offenders on grade inflation, even when you compare private schools to equally selective public schools. Here’s another chart showing the grading curves for public versus private schools in the years 1960, 1980 and 2007:



      • As you can see, public and private school grading curves started out as relatively similar, and gradually pulled further apart. Both types of institutions made their curves easier over time, but private schools made their grades much easier.
      • By the end of the last decade, A’s and B’s represented 73 percent of all grades awarded at public schools, and 86 percent of all grades awarded at private schools, according to the database compiled by Mr. Rojstaczer and Mr. Healy. (Mr. Rojstaczer is a former Duke geophysics professor, and Mr. Healy is a computer science professor at Furman University.)
      • Southern schools have also been less generous with their grading than institutions in other geographic regions, and schools that focus on science and engineering tend to be stingier with their A’s than liberal arts schools of equal selectivity.

      What accounts for the higher G.P.A.’s over the last few decades?

      • The authors don’t attribute steep grade inflation to higher-quality or harder-working students. In fact, one recent study found that students spend significantly less time studying today than they did in the past.
      • Rather, the researchers argue that grade inflation began picking in the 1960s and 1970s probably because professors were reluctant to give students D’s and F’s. After all, poor grades could land young men in Vietnam.
      • They then attribute the rapid rise in grade inflation in the last couple of decades to a more “consumer-based approach” to education, which they say “has created both external and internal incentives for the faculty to grade more generously.” More generous grading can produce better instructor reviews, for example, and can help students be more competitive candidates for graduate schools and the job market.
      • The authors argue that grading standards may become even looser in the coming years, making it increasingly more difficult for graduate schools and employers to distinguish between excellent, good and mediocre students.

      • More disturbing, they argue, are the potential effects on educational outcomes. “When college students perceive that the average grade in a class will be an A, they do not try to excel,” they write. “It is likely that the decline in student study hours, student engagement, and literacy are partly the result of diminished academic expectations.”

      Bridgewater Associates - How Ray Dalio Built the World's Richest and Strangest Hedge Fund

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      If you are into the world of hedge hoggers, the New Yorker has a pretty fascinating piece on Ray Dalio and Bridgewater Associates.  Technically, Bridgewater is the world's second largest hedge fund 'firm' behind JP Morgan but JPM has a few other (minor) businesses like being the country's largest TBTF.  We almost never see Dalio speak, but I've referenced his March 2011 CNBC interview. [Mar 3, 2011: Rare TV Interview with Manager of World's Largest Hedge Fund - Ray Dalio]

      This is quite a lengthy piece, but I'll post some of the items that are investor specific; much of it runs parallel to thoughts I've published on FMMF.  Indeed, he might be more dour than I am. ;)

      • This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration’s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.
      • Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said.
      • Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. (where I differ is I believe eventually the ECB will be backed into a corner and "print" and follow the Fed model)  The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”
      • Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.

      Still Weak but Danger on Both Sides

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      As I mentioned Friday the action was not too impressive, considering the normal 'beats' plus the Google outperform on the earnings front.  While technical analysis loses some of its mojo when headlines are thrashing the market around, we can see the S&P 500 has firmly broken both the 50 and 20 day moving averages, an area it was having a lot of trouble with Friday.



      Interestingly, this is happening as the 'go to' stock of growth fund managers across the globe, Apple (AAPL) is breaking out ahead of earnings.  Generally you don't see this sort of disassociation.



      One worry for the bears here is whenever the debt ceiling is passed, we're going to see a quite dramatic knee jerk reaction rally.  If it happens during market hours, one can be stopped out quite quickly but if it happens overnight it's going to be a rough go for it.  Hence hedging is tricky here.

      No positions

      Key Earning Reports this Week

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      This week we enter the heart of earnings season.  Normally this would be the main focus of markets, but with the debt ceiling issue in the U.S. (a lesser concern), and the never ending mess in Europe (a larger concern), the typical market machinations to earnings data are most likely going to be less prevalent.   This morning is a great example as was Friday.  We had some of the typical 'beat the low ball analyst earnings' along with legitimate surprises such as that which came from Google (GOOG) - but it did little for the market,save for that late day hockey stick rally in the closing hour.

      Bespoke Invest once again has a very nice summary for us of the key earnings reports of the week - along with YTD stock performance of said stocks, plus the typical earnings beat rate (which again is nonsensical considering the game that earnings have become). 

      The most interesting reports we'll focus on below are (Monday) IBM, (Tuesday) Apple, Chipotle [momo stock] Harley (reflection of bigger ticket item sales), (Wednesday) American Express, (Thursday) Baidu, (Friday) Ford, Caterpillar.


      No position

      Friday, July 15, 2011

      Consumer Confidence Falls Back to March 2009 Lows

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      Usually I don't take much stock in consumer confidence, but this figure has never really jumped anywhere close to levels usually associated with recovery the past 2 years.  Today's figure is downright putrid, falling back to areas last seen in March 2009.  Ironically that was the low in the market, but the economic situation was quite awful back then.  Obviously for those not enjoying the Ben Bernanke wealth effect [Nov 10, 2010: Who Will the Any Form of Intermediate Wealth Effect Really Help? Not the Masses] the economic 'recovery' of the past two years is not 'trickling down' much.

      Again, normally I focus on what people are doing - not saying - but these figures are so awful they should be noted.

      Via Reuters:

      • Consumer sentiment deteriorated in early July to the lowest level since March 2009 on increasing pessimism over falling income and rising unemployment, a survey released on Friday showed.
      • Confidence in government economic policies also curdled, the Thomson Reuters/University of Michigan survey showed. U.S. lawmakers are wrangling over a budget deal that would allow the government to raise the debt ceiling -- needed so the United States can fund its obligations next month.
      • The preliminary reading for the consumer sentiment index dropped to 63.8 in July from 71.5 the month before, falling far short of expectations of an increase to 72.5, according to a Reuters poll of economists.
      • The survey's barometer of current economic conditions fell to 76.3, the lowest since November 2009, from 82.0. The gauge of consumer expectations was also at its lowest since March 2009, tumbling to 55.8 from 64.8.
      • "Whenever the Expectations Index has been this low in the past, the economy has been in recession," survey director Richard Curtin said in a statement.
      • Overall, the data suggests real consumer spending in the second half of the year may be barely higher than the first half, the survey said.
      • Twice as many consumers reported hearing about new job losses compared with job gains, while half of all consumers said the economy had recently worsened. Last week, data showed the economy added a scant 18,000 jobs in June.
      • "We remain in a very slow recovery with extraordinarily grudging employment. The public at large still feels the recovery is, at best, a neutral factor," said Patrick O'Keefe, director of economic research at J.H. Cohn in New York. "They're not seeing a lot of benefits."

      [Video] David Rosenberg - One Small Shock Away from Another Recession

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      While considered a perma bear by many, David Rosenberg has been quite correct on his economic views the past few years.  However, market calls have been lacking.  His latest views per CNBC this morning.

      4 minute video 



      8 minute video


      Not too Impressive

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      Not that impressive of action considering some of the earnings beats and M&A action happening out there today. We've broken slightly below the 20 and 50 day moving averages, and there have been a lot of late day sell the news reactions this week.



      It remains strange how quickly the mood has been changing in this market - a month ago we were in panic mode... then it was followed by 2 weeks of unadulterated euphoria... then random choppy action dominated by the phrasing of a Bernank comment.

      Google (GOOG) - Like the Good Ole Days, with a 13% Surge in Premarket off Earnings Beat

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      Google (GOOG) is surging 13% in premarket on a quite impressive beat on both the top and bottom line last evening.  It's almost like 2007 again.  Obviously near $600 the stock will be well clear of the 200 day moving average, and at its highest levels since early March.



      Via Reuters:

      • Google Inc's results soundly trounced Wall Street's most bullish expectations easing concerns that its battle with Facebook and Twitter is costing too much and hindering growth. The Internet giant's flagship search advertising business, combined with new efforts like display and mobile advertising, boosted the company's revenue by 36 percent in its first three months under the helm of new Chief Executive Larry Page.
      • Page told analysts the company had signed up more than 10 million people for Google+: the company's biggest foray into the hot social networking arena and the vanguard of its battle with Facebook and Twitter for websurfers' time and attention.
      • "Google should be viewed as a growth company again this quarter," said Stifel Nicolaus analyst Jordan Rohan. "The combination of mobile search, Android, ad exchange, YouTube, and the core search businesses, they're all doing well. Google is no longer a one-trick pony.""The number to focus on is really the GAAP earnings number. Google spent aggressively, hiring just as many people this quarter as the did last quarter."
      • Investors had feared Google's ever-increasing spending would eat into margins. Operating expenses leapt 49 percent to $2.97 billion in the second quarter, to about a third of revenue.
      • Analysts said the big increase in sales more than compensated for the rise in costs, but Google might find it increasingly difficult to shore up margins while it continues to hire, acquire and invest.  "Revenue growth overrides the hiring and the expense issues," BGC Partners analyst Colin Gillis said in response to the share price jump.
      • Net income in the second quarter climbed to $2.51 billion, or $7.68 a share, from $1.84 billion, or $5.71 a share, in the year-ago period.  Excluding certain items, it earned $8.74 a share, ahead of analysts' average expectations of $7.85 a share. 
      • Over 135 million Android smartphones or tablets -- made by the likes of Motorola and Samsung Electronics -- had been activated in total, Google executives said. And its Chrome browser is now employed by more than 160 million users.



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