Thursday, December 31, 2009
Considering the last 10 years was the worst decade for holding stocks, it's only logical that the next 10 years should be strong. You'll note that most people don't agree as they've been rushing into bond funds at record levels. By the way, Energy was the best performing sector up some 600% last decade. Any guess where it'll be this decade? Technology and Communications were nowhere on the top performing list after huge gains in the '90s. Neither was retail or financials on the list. Hmm! We're bullish on commodities and materials as the decade starts, but it makes me wonder if some time mid decade that those sectors don't crash as technology takes over and retailers gain from the growth of the global middle class. At some point those consumers will move from buying houses to clothes and tech gadgets.
Wednesday, December 30, 2009
Liz Claiborne(LIZ Quote): Nothing has changed since I recommended apparel maker Liz Claiborne earlier this year at $4.38 per share, and again on Sept. 16 at $6.27. With the stock trading at $4.37, it's an easy pick for the top 10 list. The company is worth far more than its current market cap of $380 million. By this time next year, the earnings power of this company will become evident. With $3 billion in sales and a diversified cadre of brands, I expect the earnings rebound will increase its value to a minimum of $1 billion to $1.5 billion, or $10-$15 per share.
Monday, December 28, 2009
Sunday, December 27, 2009
Our biggest holding is Apple (AAPL) and it closed out last week with an all time high over $209. Its bounce back from the $80s along with other big moves in large holding like the Hartford Financial (HIG), US Steel (X), and Freeport McMoran (FCX) not only shows the explosive growth in the market but also the different sectors and hence the reduced risk not being totally reliant on just commodities or financials like alot of top portfolios.
For 2010, we still see decent gains in the market as the melt up continues into the 1,200s. After that it really depends on what the Obama administration attempts to push into regulation and how the 2010 elections work out. Higher taxes and more regulation could easily put an end to the rally by early spring or signs that Obama will lose power in Congress could push the market higher.
On individual stock basis, we see huge gains ahead for names like AerCap Holdings (AER), Alvarion (ALVR), Liz Caliborne (LIZ), and Terex (TEX) as the global growth story continues and the market becomes more comfortable with these small cap stocks somewhat ignored in the 2009 rally. For example, AER has earnings potential of roughly $2 next year after completing it's merger with GLS, but the stock only trades in the $8s right now. A PE in the 8-10 range seems historically reasonable. All these other stocks have fundamental reasons for much higher prices that we think the market will finally realize.
In general, after the market finishes its melt up to the 1,200 to 1,250 range it'll likely become much more of a stock pickers market. The indexes might flounder for a while but some individual names might double or triple as investors finally realize their true potential.
Will post the performance table later Mon.
Monday, December 21, 2009
SP 400 Mid Cap Index
Russell 2000 Index
The deal transfers about 20% in sales or roughly $1B from 2009 totals, but only 15% of sales back in the boom times of 2008. The mining segment was also requiring over 20% of working capital expenditures even though in normal times it doesn't produce more then 15% of revenues.
On the Conference Call this morning to discuss the deal, the CEO announced that TEX has a goal to double revenues to roughly the $8B level and EPS to $6 by 2013. Impressive numbers for a $20 stock with a $2.2B market cap if they can achieve those numbers. This is all before redeploying the $1.3B in cash whether via paying down debt or buying other business lines trading at huge discounts. Remember TEX had $9.9B in sales in 2008 or $8.5B excluding the product lines sold so reaching back to $8B isn't much of a stretch. We'd actually look for $10B assuming around $500M contributed from acquisitions from some of the cash they just got.
Suddenly the future of this stock seems very bright. TEX now has the cash to wait for markets to turn or take advantage of other cash strapped businesses. With the infrastructure boom set to continue all over the emerging world, TEX should be a winner and now trades at a ridiculous Enterprise Value of .5x to revenue.
Some highlights from Reuters:
The unit being sold, which includes hydraulic mining excavators and electric drive mining trucks, has 38 facilities around the world with approximately 2,150 employees.Terex will redeploy the capital from the sale within its existing businesses, as it focuses on its crane, construction equipment and aerial work platform businesses. It said the mining business would have required substantial investment in order to grow, including in its distribution network, which Bucyrus already has in place.
"This is one of those unusual circumstances where this transaction is a win-win for both companies," Terex Chief Executive Ron DeFeo said on a conference call. "The potential to double our business exists by 2013, and that is what we're targeting."
Terex, said it aimed to double its net sales by 2013 and could reach earnings of $6 per share even without doing acquisitions. Sales totaled $9.9 billion last year and $3.9 billion in 2009 so far.
The mining segment accounted for about 15 percent of Terex's 2008 sales and 23 percent of its operating profit, according to presentation materials. But Terex said mining accounted for a higher percentage of its working capital over the past five years.
TEX has been a large holding of our Growth Portfolio for a while and we fully expect them to return to much higher levels. Maybe not the $90+ level of mid 2007, but clearly TEXs stock price still remains one of the most impacted since the crisis and that could change real soon.
Heck, the momentum of 2 years where earnings grow on aggregate by 52% would probably be enough to force stocks above those highs. At Stone Fox Capital, we've remained very bullish, but this is probably beyond where we expected the economy to be and this is the average analyst not the outlier. This definitely bodes well for our 'melt up' theory.
Back to the M&A premiums as that news is almost as astonishing as the earnings picture. Paying record premiums especially in this economy definitely backs up the earnings picture in the future. When somebody like Buffett is willing to pay a 23% premium for a railroad, then the market should take notice that earnings a few years out might just rebound to previous highs.
- Chief executive officers are so sure the economy will keep recovering they’re agreeing to prices that are 37 percent higher than the average since 2001, when Bloomberg started compiling data. While stocks in the S&P 500 are trading at the most expensive valuations in seven years compared with profits in the last 12 months, buyers are looking out to 2011, when analysts say earnings will have risen 52 percent.
- American companies are paying the biggest premiums on record in takeovers, a sign executives are growing more bullish about profits and stocks even after the biggest rally for the Standard & Poor’s 500 Index in 73 years.
- Executives say they’re finding bargains based on projected earnings. Analysts predict per-share income for companies in the S&P 500 will jump to $94.98 a share in 2011 from $62.52 this year, according to the average estimates in a Bloomberg survey.
Thursday, December 17, 2009
Stone Fox Capital definitely agrees with the points that stocks will be positive because of higher profits and that small caps are likely to outperform. We're not so agreeable that the dollar will rally and end the carry trade with the massive government spending and debt planned.
Below we give out opinions of his points.
1. Stock and bond market returns in the US will again be positive.
2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise. [When they do rise it'll be long after most other countries and the rate will be much lower. We just don't see the dollar rising against most currencies unless that country is exceptionally weak]
3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.
4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently. [The curve can't get much larger so by nature it'll be flatter, but that doesn't mean that it'll be flat. Moving the Fed Funds rate to 2% isn't bearish just because its a higher short term rate. 2% is still historically low]
5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits. [This is where we completely agree. Investors are underestimating corporate profits as evidenced by NKE, ORCL, and RIMM last night. In the worst economy in 70 years, corporations are still generating significant profits and margins. That should only soar as the weakness of last year is left behind]
6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors. [True. The economy will likely add jobs beginning at least January. Don't be surprised by a weak December as corporations look at one final cleansing before the new year. Consumer Discretionary stocks will likely rally strong, but then look for years of underperformance like the techs in the mid 2000s. A stock like LIZ could easily double or triple this year and still be down 50% from recent highs]
7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified. [Rates can only go up from these low levels. Treasuries should be avoided]
8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks outperformance might be the biggest surprise for 2010. [100% agree that small cap financials and other value plays are still down 50-75% from highs. It won't even take a good company for the stock to double. AER trades at 4x expected 2010 earnings so doubling to 8x would only be expected in a normal markt]
9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010. [We're more concerned about other new regulations like healthcare and cap and trade and especially increases to capital gains taxes. Taxes that Democrats will likely justify if the market remains strong]
10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works. [Maybe if the job market improves by then. If not, the Dems would be mangled for focusing on new regulation that has clearly hurt jobs in the small business area]
Below are the results of the poll attached to the article on CNBC. Its still very interesting to note how bearish the people sophisticated enough to follow CNBC are these days. 57% of the people reading that post don't agree with him. All these polls seems to smack against the conventional wisdom of most polls that suggest people are bullish about the stock market.
|Do you share Richard Bernstein's bullish outlook for 2010? * 5071 responses|
|Yes, we're out of the woods and stocks are going higher.|
|No, the economy is weak and trouble overseas will send markets tumbling.|
Not a Scientific Survey. Results may not total 100% due to rounding.
Demand for mined commodities continues to be dominated by strong imports from the emerging markets, and from China and India in particular, with improving but still weak fundamentals from the industrialized countries. For the past year, China has been the major source of increased demand for commodities as it deployed a more effective stimulus program and more constructive credit policies. However, the China economy is primarily driven by exports to the United States, Europe and Japan, and continued growth in commodity demand from China requires the return of industrial production in the industrialized countries.
Industrial production outside of China has improved more recently as inventory de-stocking reaches completion. However, demand growth beyond the de-stocking effect remains sluggish. Trends in U.S. steel production can be indicative of broader ex-China industrial trends, and steel production in the United States bottomed at just under 40 percent capacity utilization in April. By July, extensive de-stocking had reduced steel inventories by over half to about 2.2 months of supply. Since the completion of de-stocking, steel production has improved to above 60 percent capacity utilization as sales out of production replace previous sales out of inventory. Beyond the effect of completed de-stocking, end use demand in the U.S. remains soft.
Seaborne metallurgical coal and iron ore demand remains strong as China steel production continues at high levels and imports are starting to move into other steel producing regions. Total China met coal imports were almost 30 million metric tons through ten months, about six times higher than last year. As a result, the seaborne met coal spot market is thin, with some producers already sold out for 2010. China imports, plus an increase in global steel production have pushed met coal spot prices well above this year’s benchmark of $129 to as much as $180 (thats why ANR hit new highs today) per metric ton. Iron ore is under similar demand pressure, and its spot prices are above $100 per metric ton, up from $92 in October and a low of $60 in February.
The thermal coal outlook varies dramatically between the seaborne markets and the U.S. market. China and India are major factors in the seaborne market. China imports this year are already 100 million metric tons through ten months, double last year. Imports increased significantly this year due to rapidly improving electricity demand and the process of restructuring small mines in the Shanxi (we've identified a potential play on this consolidation) and Heibei provinces. Much of the increase is considered structural, with the electricity generators along the southeastern coast expected to rely increasingly on imported coal to avoid rail capacity constraints and because strong domestic prices are making imports competitive.
India’s coal imports also continue to increase. India’s coal imports could reach 50 million metric tons in 2009, up 28 percent from 2008, and are expected to increase to above 60 million metric tons in 2010. Coal India expects this trend to continue, and has projected that imports could increase to 200 million metric tons by 2014. (Some of the first signs that India demand could really hit supply)
Based on this continued strong emerging market demand, seaborne thermal coal spot prices have risen above $80 per metric ton. Supply shortages are expected to continue, with seaborne thermal coal being contracted for 2011 and 2012 at even higher prices. (now why has the CLD IPO been so weak. These prices will flow to them)
The thermal coal markets in the U.S. continue to be weak, with demand from coal-fired electricity generation down 13 percent year to date. There has been some seasonal improvement, and the most recent data shows coal-fired generation up more than 20 percent from its low in April. As a result, generator stockpiles were reduced in both tons and days in the most recent report. However, stockpiles remain at historically high levels, and will delay recovery in the U.S. thermal coal market for 12 to 18 months. On the positive side, higher natural gas forward-month prices are reducing the economic incentive to dispatch natural gas-fired plants, and 22 gigawatts of new coal-fired plants should add 70 to 80 million tons to thermal coal demand by 2012. (again the domestic market is picking up and the surging nat gas prices should make CLD more attractive)
Copper demand has been increasing as China has strategically restocked, but with inventories high copper imports are expected to moderate. However, China imports are expected to remain above their import levels of 2007 and 2008. Based on a continued healthy demand from China and the expectation that demand from the rest of the world will turn positive later this year, the 2010 price forecast for copper has been revised up several times and is now well over $3.00, with the expectation of further supply shortages and price increases in 2011. (basically as the US starts using more copper, world supplies will be scarce. FCX or SLT in India are the plays we like. FCX seems to trade more off gold of late)
Seaborne traded commodity prices are strong and improving based on the strength of current demand from the emerging markets, the start of demand improvement from the industrialized countries, and the realization that mining will run out of excess capacity well before the industrial sector reaches its full capacity. Mining companies see the need to restart expansion projects and have been announcing significant increases in their capital expenditure budgets for 2010.
“We see 2009 as the cyclical floor for incoming orders based on consistency of the order rate over the past four quarters, the continuation of strong commodity demand from the emerging markets complemented by improving commodity demand from the major industrialized countries, and the limited upside in current mining capacity,” continued Sutherlin. “Our customers are increasing their capital expenditure budgets for 2010, and are also validating equipment specifications and confirming production slots to enable them to reactivate some of the projects they previously put on hold. As such, we expect 2010 to be a year of improving order rates.”
“We expect original equipment orders to return to their typical lumpy pattern due to the timing and size of each project. Based on commodity fundamentals and discussions with customers, we expect that copper, international coal, iron ore and oil sands to have the greatest potential for original equipment orders during 2010. Original equipment orders for the U.S. coal market will be limited to met coal demand and otherwise to machine replacements based on the higher productivity of new technology. Aftermarket orders in our second half of fiscal 2009 were up 6 percent from the first half, and we expect this trend of steady improvement to continue as our international customers bring production back on line during 2010.”
“We have previously stated that our revenues in 2010 would converge to the rate of incoming orders, which has been relatively stable at an approximate $2.8 billion run rate for the last four quarters. We do not expect significant upside potential to revenues in 2010 because original equipment orders booked in 2010 will primarily become 2011 shipments and because the aftermarket will be limited by its more steady rate of improvement.”
“We have previously indicated that we were targeting decremental operating leverage for 2010 to be in the lower 30 percent range. Although we anticipated pension expense increase in 2010, we subsequently determined that pension expense would increase by $36 million, or $0.23 per share more, due primarily to a lower discount rate. Our guidance will reflect decremental operating leverage of approximately 33 percent despite the added pension impact on earnings, and it dips into the 20 percent range without this added expense. Either measure represents extremely good cost control as we enter a lower revenue year.”
“With those explanations, we are guiding our fiscal 2010 to have revenues of $2.8 to $3.0 billion and earnings per fully diluted share of $2.65 to $3.05. We expect cash flows to be stable, and are budgeting capital expenditures of $100 million as we reactivate strategic projects to get their benefit early in the up-cycle.”
On to the report since we have it already. The Conference Board reported today that the leading indicators actually increased by 0.9%. This was above the expectations of 0.7% as mentioned earlier. The 6 month growth rate is now 4.7% or a 9.4% annual rate. Just slightly below the 5% numbers reported the last 2 months.
The interest rate spread (what we've harked on for a while), Average weekly jobless claims, Average workweek, building permits, and stock prices continue to remain very positive. Easily off setting the declines in supplier deliveries and consumer expectations. Money supply and Manufacturers orders were both basically flat.
What really sticks out to us is that even though most of the numbers are extremely bullish and have been for over 6 months now, consumer expectations remain extremely low. This number will be positive in Dec and could be set up for a bullish trend that will last for a while.
The market is down nearly 0.7% as of writing this report which continues to show how the market ignores one of the most important reports around. Does a bad pricing my Citigroup (C) really matter? Does sandbagging by FedEx (FDX) really matter? Does a debt downgrade of Greece really matter? Well, it might if it was new news versus just a 2nd rating agency repeating what the 1st one already told us. What should really matter is what the leading economic indicators tells us about the future. They tell us the future is bright. They tell us that C and FDX will have a wind at their back and not to worry about the spin going on today.
Wednesday, December 16, 2009
China's land mass is vaguely on par with the same distance from the equator as US so if on can assume the same temperatures then this is a powerful number. August is a high air conditioner month and November is typically cool, but not cold enough for massive heat needs. Even assuming that the world stood still for a while in November, the massive 28% increase is amazing. China appears to be kicking its growth engine into full speed. If the US ever gets back to demanding higher amounts of coal, copper, oil and other commodities, prices could soar. Everybody seems to forget that the last surge in commodities happened while the US had declining demand for copper and to a lessor extend coal and oil. The dynamic could change to where the US is bidding against China for that extra ton of coal or pound of copper.
Highlights from Chinadaily.com:
China's power consumption in November rose 27.63 percent year-on-year to 328.39 billion kilowatt-hours (kWh), up for the sixth consecutive month since June, China's National Energy Administration (NEA) announced Monday.
The growth is 11.76 percentage points higher than the October level, which was 5.63 percentage points higher than that in September, said a statement on the NEA website.November consumption was 4.77 percent up from October.
Total power consumption from January to November was 3.299 trillion kWh, up 4.77 percent from the corresponding period last year.
China's industrial sector used 2.44 trillion kWh during the period, up 2.62 percent, according to NEA statistics.
Check out our performance at marketocracy.com. Then watch the clip and move your money into our portfolio or a similar one.
Monday, December 14, 2009
It clearly supports our case that the market is about to breakout of a range between the 1,085 and 1,110 on the S&P500 that its been stuck in for the last 5 weeks or so. A clear move in any direction after such a consolidation will likely be very powerful. Possibly running all the way to 1,200 before stopping. Confirmation tomorrow will be key. As you can see from the below chart, the SP500 has made a clear new high close and any run tomorrow could easily post a new intraday high as well signaling a clear breakout following the Transports. A close above 1,120 sinalling the all clear for computer programs and hedge funds.
Friday, December 11, 2009
marketsshould rise again next year driven by strong earnings growth. Our $80 S&P 500 EPS forecast for 2010 is 27% higher than this year’s $63, implying a much faster rise in earnings than nominal GDP, i.e., an expansion in profit margins. Our forecast suggests that by the end of next year, US profit margins are likely to approach the historic highs reached earlier this decade.”
This earnings assumption backs our view that the market is about to breakout of the tight range its been in for the last 5 weeks or so. Should be easy to conjure up valuations in the 1,200 to 1,300 level with earnings at that level. Then as the calendar turns into March/April I'd expect some profit taking, tax selling, and then flat out fear over Obama raising taxes to finally cause a correction of 10% or more. It would be long overdue at that point. Still I won't see any downturn much below the current levels. More like a surge to 1,250 and then back down to 1,110.
As always though, we'll let the markets guide us when we get to that position. For now our portfolios are still close to fully invested.
Thursday, December 10, 2009
Bloomberg had an article today about the Yield Curve being the highest since 1992. Now they use the difference between the 30 Yr and the 2 Yr securities, but it's still the same philosophy with different versions of long term versus short term yields.
No matter which version you use, when the Yield Curve is 368 basis points banks are literally printing money by borrowing it for next to nothing and lending it at much higher rates. Just think how your savings account pays next to nothing, but a 30 year mortgage is around 5%. One major problem though is that banks are having a hard time finding qualified borrowers of that cheap cash. As the economy begins to recover that issue will be worked off. Count on the Yield Curve remaining high until those problems are solved though which is one of the major backstops for the economy and market.
- Treasuries fell, with the gap in yields between 2- and 30-year securities near the widest margin in 17 years, before today’s $13 billion bond auction.
- The so-called yield curve touched 368 basis points, one basis point below the 369 level it reached in 1992, with the Federal Reserve’s target rate anchored at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of government debt being sold. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.
- The “historically wide slope” between 2- and 30-year debt “should help entice investors and arbitrageurs to consider bidding for today’s supply against shorter issues on the curve,” Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut at UBS AG, wrote in a note to clients.
Edit - after the close: Just noticed that the closing Yield Curve jumped to a 29 year high of 373 basis points. This weakness explains why risky assets such as the Russell 2000 stocks have been weak lately. Some flight to quality or large cap stocks is taking place. Oddly though, this yield curve is most bullish for small caps and risky assets. Ideally you buy them when the yield curve is high and sell them when its flat.
- Treasuries fell, with the gap in yields between 2- and 30-year securities reaching the widest margin since at least 1980, after a $13 billion offering of 30- year bonds drew lower-than-forecast demand.
- The so-called yield curve touched 373 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent, compared with an average forecast of 4.483 percent in a Bloomberg News survey of five of the Federal Reserve’s 18 primary dealers. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt.
Wednesday, December 9, 2009
Taxable money market fund assets rose by $10.4 billion to $2.88 trillion, while tax-free assets rose by $2.6 billion to $408.7 billion, according to the report, published by iMoneyNet.
Yields on taxable money market funds held at a record low of 0.03 percent for a third consecutive week. Tax-free and municipal money-market fund yields set a fresh all-time low of 0.03 percent, down from 0.04 percent a week ago.
X is one of our larger holdings in the Growth Portfolio.
2:07PM U.S. Steel notches a fresh session high of 46.30, hovering slightly under its Dec/two month high at 46.40 (X) 46.27 +2.04 : (closed at 46.74)
Tuesday, December 8, 2009
The earnings run rate is now on a $.40+ level with expectations for at least 24% revenue growth next year. Analyst still report earnings on a GAAP basis which is bizarre for a small tech company. Since the average analyst expects GAAP eps to grow by $.30 in 2010, we feel comfortable that adjusted net income could easily top $.70 on a conservative basis. Slap at least a 20 PE on that estimate and the stock zooms to $14 from the current high $5s.
- The company now expects total revenue for the fourth quarter to be between $16.2 and $16.6 million, which at the midpoint would represent an 8% sequential increase over the third quarter of 2009. The company expects net income (loss) for the fourth quarter of 2009 to be between ($100,000) and $150,000 or between ($0.01) and $0.01 per diluted share, and to include the following items:
- Excluding the above items from net income, fourth quarter Adjusted Net Income is now expected to be between $1.5 million and $1.8 million or between $0.10 and $0.12 per diluted share.
- The company expects fourth quarter 2009 revenue to be between $15.3 and $15.6 million, which at the midpoint would represent a 2% sequential increase over the third quarter of 2009. The company expects net loss for the fourth quarter of 2009 to be between $100,000 and $0 or between ($0.01) and $0.00 per share, and to include the following items:
- Excluding the above items from net income, Adjusted Net Income is expected to be between $1.4 million and $1.5 million or between $0.09 and $0.10 per diluted share for the fourth quarter of 2009.
LOCM has now made a habit of over delivering on promises which is something that should really begin catching on with the investing community. They were always long on potential with an attractive website name in local.com and short on results but that has apparently changed during the worst economy in 70 years. 47% growth rates are unheard of these days and soon LOCM will be discovered. Trading at about 13x its run rate earnings seems incredibly cheap.
Monday, December 7, 2009
UPS should see a decent gain for our Net Payout Yield and Hedged Growth portfolios. They still sport a 3% dividend yield plus expected stock buybacks making a very attractive investment even with further gains. Significant growth in international markets will be a constant theme that our stock picks will be aligned to take advantage.
“FedEx will exceed previous earnings guidance in the second quarter primarily due to better-than-expected growth in FedEx International Priority® and FedEx Ground volumes, coupled with the benefits of our continuing cost control programs,” said Alan B. Graf Jr., FedEx Corp. executive vice president and chief financial officer. “Year-over-year growth in our U.S. overnight express and FedEx International Priority services increased each month during the quarter, aided by inventory restocking and our successful sales efforts. Demand for our international services has improved significantly since the first quarter, particularly in Asia and Latin America.”
According to these 2 guests on CNBC the expectation is for rate increases in August 2010 and even later. That seems absurd considering the sub 1% Fed Funds rate. It also highlights the issue with rate policy change. Too much focus is on the trend (increasing/decreasing) versus the absolute number. Raising the rate to say 2% would still be very low on historical norms and likely still conducive to asset bubbles. So why the sweat over the trend? Beats us as any rate increases 6 months from now won't impact the economy until mid 2011. It could easily be late 2011 before the Fed Funds rate hits 3% or the level at which we'd become concerned that rates have moved high enough to crimp growth. A lot depends on how the yield curve reacts.
One of the reasons that stocks have done well in a rising rate environment off a low interest rate base is that companies might look to borrow money and expand sooner before rates rise much higher while in a high rate environment companies probably eliminate all borrowings and expansion plans. The relatively low rates even after 3 or 4 hikes will still lend conducive to high GDP growth at least in the short term. In the last couple of tightening cycles it's usually not until the Fed raised rates 10+ times without even waiting for the impact that the economy got smoked. Does the Fed even understand it's own advice that it takes 9+ months for a rate hike to fully impact the economy?
For now, don't fear rate increases!
Bernie has several points that have backed our belief that the market will continue to rally. Namely, money on the sidelines still aren't moving into cash and investment experts remain negative.
His main points for the market moving up from here:
- The Dumb Money: Through October, equity mutual funds had net outflows of $1.9 billion year to date while bond funds had inflows of about $312 billion, according to the ICI. Furthermore, there's been about $10 billion of inflows into inverse funds that short the market, Schaeffer notes. "It not even that money is not coming off the sidelines - [investors are] betting against the market."
- Magazine Indicators: In 1982, a Business Week cover declared "The Death of Equities", perhaps the most famous contrarian indicator in history. More recently, Time proclaimed "Why it's time to retire the 401(k)" in October, while Newsweek weighed with a "Boom and Gloom" cover story, which basically dismissed the validity of the market's recovery. Such covers in general interest magazines suggests how negativity about the markets permeates popular culture, Schaeffer says.
- Guru Chatter: There's a lot of talk these days about the "New Normal," characterized by high unemployment and sluggish economic growth. That may well prove true but to Schaeffer, it's a mirror image of the "New Economy" chatter circa 2000. Similarly, there's a lot of talk now about the "death of buy and hold." Schaeffer is a market timer but says now probably is a better time for buy and hold-type investing vs. 10 years ago.
Friday, December 4, 2009
This portfolio has beaten the SP500 each year over the last 3 years since we began tracking. For that time period, we're up 14.5% versus the market. FYI....only the last 16 months or so are being tracked on marketocracy.com, but the results have been better since we began using their system.
Investments in CSX and Agrium (AGU) have been very profitable with gains around 40% since purchases earlier this summer. A solid rally in our biggest investment, Banco Itau (ITUB), has definitely helped results. In general though, the solid dividends and stock buybacks by the stocks we invest in continue to benefit the stocks as the market recovers. Companies that have cash to give to shareholders tend to be much better investments long term.
Please contact us at firstname.lastname@example.org for more information or review the section on the right for more information on investing with us.
** all returns are shown assuming 2%+ fees while Stone Fox Capital only charges 1%. All numbers should be adjusted according. For example, the Annualized number would be 1% higher or 8.2%.
Overall, just about all the metrics in the jobs report were very bullish: job losses much lower then expected, revisions to previous months up 159K, and workweek increased the most in months.
- The average workweek, which closely correlates with overall output and gives clues on when firms will start hiring, rose to 33.2 hours from 33 hours in October. That was the highest since February. Average hourly earnings inched up to $18.74 from $18.73.
- The economy shed only 11,000 jobs in November, well below the 130,000 loss financial markets had braced for, while the unemployment rate unexpectedly dropped to 10 percent from October's 10.2 percent, a government report on Friday showed.
- The labor market improvement was broad based and 159,000 fewer jobs were lost in September and October than previously thought, according to the Labor Department data.
Canada actually showed strong jobs growth showing how even though the US is improving, its still trailing a lot of countries around the world including our neighbors to the North.
- Canadian employment increased by a net of 79,100 jobs in November and the unemployment rate edged down to 8.5% from 8.6% in October, Statistics Canada said Friday.
- The unemployment rate was expected to rise to 8.7%, according to the median estimate from a survey of economists by Dow Jones.
- There were 16.87 million jobs in the Canadian economy in November, which is 321,000 jobs, or 1.9%, below the employment peak in October 2008.
Thursday, December 3, 2009
All of the different categories were weaker though New Orders remained relatively strong at 55. The really confounding numbers are that Production was slightly negative at sub 50 and New Orders were up at 55, but somehow Backlog dropped to 48.5.
"The NMI (Non-Manufacturing Index) registered 48.7 percent in November, 1.9 percentage points lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two consecutive months of expansion. The Non-Manufacturing Business Activity Index decreased 5.6 percentage points to 49.6 percent, reflecting contraction after three consecutive months of growth. The New Orders Index decreased 0.5 percentage point to 55.1 percent, and the Employment Index increased 0.5 percentage point to 41.6 percent. The Prices Index increased 4.8 percentage points to 57.8 percent in November, indicating an increase in prices paid from October. According to the NMI, six non-manufacturing industries reported growth in November. Respondents' comments remain cautious about business conditions and reflect concern over the length of time for economic recovery."
Month NMI Month NMI Nov 2009 48.7 May 2009 44.0 Oct 2009 50.6 Apr 2009 43.7 Sep 2009 50.9 Mar 2009 40.8 Aug 2009 48.4 Feb 2009 41.6 Jul 2009 46.4 Jan 2009 42.9 Jun 2009 47.0 Dec 2008 40.1 Average for 12 months — 45.4
High — 50.9
Low — 40.1
Wednesday, December 2, 2009
This news is clearly long term bullish for the natural gas industry and bearish for coal. Though I think alot of expectation already existed that domestically we'll continue to push more into natural gas, solar, and wind. This isn't completely bearish for coal though because places like China and India will continue to heavily rely on coal because that is the resource that they have.
Not sure how this impacts Cloud Peak (CLD) and may explain the IPO weakness. Clearly though any impact will only be years away at the earliest. We're currently working on another article that discusses the importance that coal expects to grow over the next decade even with all of these pushes to replace it.
In a report filed with the N.C. Utilities Commission today, the utility outlined its plan to close a total of 11 coal-fired units, totaling nearly 1,500 megawatts (MW) at four sites in the state:
- The 600-MW L.V. Sutton Plant near Wilmington.
- The 316-MW Cape Fear Plant near Moncure.
- The 172-MW W.H. Weatherspoon Plant near Lumberton.
- And the 397-MW H.F. Lee Plant near Goldsboro (retirement announced in August).
Tuesday, December 1, 2009
The market has been stuck around 1,100 for several weeks now so its likely to either move quickly higher to the 1,200+ level or finally have that 10%+ correction that everybody on Wall St wants. The below chart from Ciovacco Capital highlights that potential. It seems unlikely that this surge off the bottom will end in a whimper but rather a blow off top with money rushing in from the sidelines. Since we've highlighted that such huge rallies off a bottom after a major market decline never end at year end and usually last more then a year, it seems unlikely that a correction is pending. The more likely scenario is the sudden 'Melt Up' that would lead to the Fed unwinding liquidity finally leading to a market correction.
Until the data suggests otherwise, our model portfolios are fully invested.
Monday, November 30, 2009
The Chicago PMI number bodes well for the ISM Manufacturing Index to be released on Tuesday and the ISM non-Manufacturing number on Thursday.
Gains in new orders and a slowing in deliveries hightlight November's Chicago purchasers' report, offsetting further losses in employment and further draws in inventories. Chicgao's headline index rose nearly 2 points to 56.1 to indicate a month-to-month increase in the pace of overalll business activity in the area. New orders rose 1.4 points to a very strong 62.8, a plus-60 level that, because of its strength, will be hard to match in the coming months. Supplier deliveries rose 6.7 points to 57.4 to indicate a significant slowing in deliveries and congestion in the supply chain. Production, at 56.1, rose in the month but at a slower pace than October's very strong 63.9. Employment, at 41.9, indicates substantial month-to-month contraction but at a less severe pace than October's 38.3 level. Prices paid showed a mild month-to-month increase at 52.6, a result that raises no concern.
This graph probably highlights the current market better then any other. The Chicago PMI is now at levels not seen even prior to the financial implosion. If that isn't a 'V' then I don't know what it would be?
Tuesday, November 24, 2009
Part of the reason could be that a lot of the smaller cap stocks are more domestic plays and the more international exposure you have the better. Its also been the case that financial stocks such as regional banks have been weak during that period. Regardless its led our Growth Portfolio to underperform the last month after a huge outperformance this year - up nearly 70%.
A lot of the smaller investments such as Liz Claiborne (LIZ) have been hit hard after surging. LIZ is down from a high around $7.5 all the way to $4.5. Many other examples exist as well.
Hard to explain why the smaller stocks have been so weak with the world economy showing signs of growth. They should do better in a recovering economy. Maybe people were just fearful they'd run too far, too fast. Though we've got examples of stocks like AerCap (AER) that trades at a PE of 4. Hard to argue why that stock would remain at such a compressed multiple no matter how far it has run since the bottom. Most of the small caps fell too far, too fast as well.
For now we're keeping our bets on the Russell 2000 sector. In most cases, they still appear to have the cheapest valuations even considering the YTD gains and any risk of further economic risk.
Monday, November 23, 2009
Companies that we like such as Alpha Natural Resources (ANR) and the new IPO Cloud Peak Energy (CLD) were all hit hard today especially in comparison to the strong gains in the market. ANR was down 5% from its high around the opening bell.
- U.S. coal mining shares fell on Monday after data showed China's coal imports dropped 11 percent in the last month, even though exporters expect a booming market in the Pacific region for the next few years.
- Indeed, the latest official Chinese customs data showed coal imports rose 219.5 percent from a year earlier to 11.14 million tonnes in October.
- But the October volume was 11.2 percent lower than in September, Reuters calculation showed. China's coal imports hit a record high of 16.07 million tonnes in June.
- Just this month, Peabody Energy (BTU.N) Chief Executive Greg Boyce said he expects seaborne coal trade in the Pacific region to grow by more than 7 percent annually for several years, underpinned by robust demand from China and India.
- China began importing huge volumes of coal due to the shutdown of many unsafe mines in the country.
- The death toll from China’s worst coal-mine disaster in almost two years rose to 104 as authorities criticized safety lapses and dismissed senior management of the pit in the country’s northeast.
Stay long and strong as this was a massive buying opportunity. The trend didn't change because of this report and should've been further enhanced by the safety issues in China pushing them more towards imports.
4:59PM Atwood Oceanics beats by $0.06, beats on revs (ATW) 37.96 +0.97 : Reports Q4 (Sep) earnings of $0.75 per share, $0.06 better than the First Call consensus of $0.69; revenues fell 18.5% year/year to $131 mln vs the $128.4 mln consensus.
Sunday, November 22, 2009
On Wednesday, the consensus estimate for Weekly Jobless Claims by Bloomberg is 495K. The low estimate is an incredible 460K with the high only 500K which would happen on its own to be a low for this cycle. So while the market sweated the number reported last Thursday, it was without doubt that the next sequence of numbers would be lower and possibly much lower just the next week. Don't fight the trend by sweating weekly nuances. Especially considering we're most likely to see sub-400K numbers before the trend even becomes a question.
Released on 11/25/2009 8:30:00 AM For wk11/21, 2009
|New Claims - Level||505 K||495 K||460 K to 500 K|
Friday, November 20, 2009
This really seems like Wall St playing games with a forced seller. RTP needs the money to reduce it's debt load. CLD is clearly not overvalued as both BTU and MEE sport PEs in the 20s while CLD starts in the 7-8 range. If anything CLD is extremely undervalued.
Jim Cramer came out earlier this week pushing the IPO which we thought might juice the stock and force us to sit out this deal. Oddly though, maybe the 4 day delay from his show on the 16th to the opening today was enough for this fickle market to forget. A lot of people don't like Cramer, but he seems to have more sound analysis then the average analyst. Take it from him in the below clip that CLD is cheap. Oh, and don't forget Uncle Buffet just bought Burlington Northern Railroad (BNI) which happens to get a large percentage of revenue from the Powder River Basin where CLD operates.
Gillette, Wyoming-based Cloud Peak raised about $459 million but almost all of the proceeds will go to Rio Tinto, which will retain a 48.3 percent stake in Cloud Peak.
Rio Tinto is saddled with debt stemming from its 2007 acquisition of Canadian aluminum maker Alcan.
"There's investor push-back because it's (money) not going back to the company and it's not for growth. It's just a Rio Tinto bailout," said IPOdesktop.com president Francis Gaskins.
Analysts expressed concerns last week that Cloud Peak's IPO was overpriced relative to its peers' stocks and that it could face uncertain demand for coal.
Cloud Peak is the third largest U.S. producer of coal and owns surface mines in Wyoming and Montana.
The disappointing pricing sent Rio Tinto shares down about 1.9 percent in early trading in Australia.
Remember you want to buy an IPO where the seller is distressed and not where the seller is cashing out. The analysts are confused on this matter thinking they are cashing out. RTP is keeping roughly 48% of the outstanding shares to profit from any gains.
Thursday, November 19, 2009
SHLD continues to be a very cheap stock compared to the asset base. See our previous posts on the details. Everybody will come out and scream how SHLD is a big short in the $70s because they make limited amounts of money. The PE is too large.... yada, yada, yada. SHLD is extremely cheap. Period!
6:09AM Sears Hldg beats by $0.28, beats on revs (SHLD) 75.77 : Reports Q3 (Oct) loss of $0.81 per share, excluding non-recurring items, $0.28 better than the First Call consensus of ($1.09); revenues fell 4.4% year/year to $10.19 bln vs the $9.92 bln consensus. Domestic comparable store sales declined 2.3% in the aggregate for the quarter, and included an increase at Kmart of 0.5%, offset by a decline at Sears Domestic of 4.6%. The Kmart quarterly increase in comparable store sales was primarily driven by the toys and home categories, as well as the impact of assuming the operations of its footwear business from a third party effective January 2009. Declines in sales for the quarter at Sears Domestic include decreases in the home appliance, lawn & garden, tools and home electronics categories, although sales in the home appliance category declined to a lesser degree as compared to previous quarters this year. Co reports $101 million reduction in selling and administrative expenses, adjusted for significant items discussed below, during the third quarter of fiscal 2009 as compared to the same quarter in 2008. Co reports cash balances of $1.5 billion at October 31, 2009 (of which $505 million was domestic and $1 billion was at Sears Canada) as compared to $1.2 billion at November 1, 2008 and $1.3 billion at January 31, 2009.
CLD is completely focused on the Power River Basin (PRB) area in Wyoming and Montana. The surfice coal in the PRB is much easier to mine then the mountaintop mines in the East and especially in Central Appalachia. Also, the coal is 'cleaner' then the East because of lower sulfur amounts. Now honestly just about every other energy option is 'cleaner' then coal such as natural gas, solar, and wind. Unfortunately coal is the cheapest option and the US along with emerging economies like China and India are somewhat stuck using it so demand is expected to grow.
Another issue with the Central Appalachia is that it has declining reserves and faces regulatory issues. The government is currently suspending 79 mine applications to research environmental issues. The PRB is expected to fill the loss of production from this area going forward.
What we don't like about CLD is that it's completely tied to steam coal used for energy and lacking the much more attractive metallurgical coal used in making steel. This might somewhat impact the multiple comparisons.
Watch the roadshow presentation for all the details - Roadshow.
CLD expects to price on Thursday so anything close to the current price range is very attractive. It is hopefully being overlooked though Cramer has been pumping it all week so it seems unlikely that the market will ignore it.
Wednesday, November 18, 2009
The expectations for Oct is that the indicators increased by 0.4% and First Trust estimates 0.5%. Lower then the 1% in Sept but still very solid growth.
Until this number turns negative, it's difficult to turn negative on the stock market or the economy. Especially with the indicators growing substantially and the yield curve remaining very high. That combination is a recipe for huge growth and market gains.