Friday, January 30, 2009

Julian Robertson for the Bad Bank Plan

Hedge fund legend Julian Robertson, chairman of Tiger Management, and David Roche, of Independent Strategy, discuss the best ways to fix the banking mess on CNBC. Finally some smart people on Wall Street. Obama and his administration along with other government officials need to quit discussing the plans and get on with them. The only way to solve this problem is to get the toxic assets off the balance sheet at market prices. In theory, as the market opens up the prices would move towards a more real level then the current overly depressed levels. Other buyers would join in with the government. These banks wouldn't be forced to sell, but it would give them a way to clear these assets from their balance sheets so that they could move forward.

The main confusion I have is on the mark to market issue. Its very unclear in my mind what banks have marked down and how hard they would get hit if they sold at these levels. In general though, the plan will have issues if banks are forced to sell at prices lower then the economics generated by the toxic loans. Would you sell your house for less then the rent it generates just because you found one party willing to buy it? If the government really wanted to solve this crisis, they'd just go ahead and pay up and get this over with. In general though, Robertson and Roche are correct that this is the only way. Obama get it done already!

Rigel Pharma Downgraded

RIGL stock is down 8% now after a big downgrade from RBC. Still haven't found the info, but its amazing that after all this time and access to information that analysts can have such a huge impact on a stock. So far RIGL is holding the support that has existed in January and it's bounced up since the opening. Positive signs that buyers were happy with this price. Might turn out to be the typical contraian play. Ah, the analysts play such games.

Nortel Cancels WIMAX deal with Alvarion

Not a huge shock considering the bankruptcy filing by Nortel (NT) a while back. After hours last night Alvarion (ALVR) issued a PR detailing the break and the financail impact. It's disappointing because ALVR had hoped to use the scale of NT to allow them into bigger deals, but this cancellation doesn't end the dominance of ALVR in the Wimax market. Guess we'll find out more details from the breakup on the Q4 call. With ALVR trading near cash now, the stock is a huge buy. NT had hardly become a big part of the business and won't leave a huge wake when they leave.

  • The joint strategic WiMAX agreement covers, among other things, the resale by Nortel of the Alvarion platform of WiMAX access products and Nortel’s contribution of resources and funding to accelerate Alvarion’s development of its portfolio of WiMAX base stations. Under the terms of the agreement, Nortel is obligated to pay Alvarion for certain research and development services beyond Q4; however, collection of these payments is uncertain and subject to Nortel’s creditor protection proceedings.
  • As a result of the foregoing, Alvarion will not be able to recognize approximately $2.4 million of revenues from the sale of products to Nortel during the fourth quarter of 2008.
  • Richard Lowe, President, Carrier Networks, Nortel. "Planning is underway to transition our joint mobile WiMAX customers to Alvarion and ensure there is no disruption to service or support."

Tuesday, January 27, 2009

Trade: Added Rigel Pharma

Rigel (RIGL) is an intriguing biotech stock. It has the potential for a blockbuster drug in RA and the biotech sector is compelling with the big pharma companies on the prowl. PFE would've been wiser to buy up somebody like Rigel (RIGL) or some other favorites like Onyxx Pharma (ONXX) or Savient (SVNT). If you want to develop a pipeline, then why not buy all 3 and get access to several potential blockbusters. Regardless, these companies are solid without them.

Not being a biotech expert, check out this story on Rigel from Hammer Stock.

  • Rigel’s lead drug, R788, is currently being evaluated in two comparative trials in patients with rheumatoid arthritis (RA), a $14 billion indication. During most of 2008, R788 was considered to be one the most promising drugs in the biotech industry, but an update at last year’s ACR meeting raised doubts regarding the safety profile of R788, as reviewed in my recent article on Rigel. According to the company, the safety data from the ACR meeting did not affect its negotiation leverage, as the potential partners had access to the data before it was published, so nothing came as a surprise to them.
With a market cap of only $270M and the potential of a blockbuster drug, Rigel is very speculative with a lot of potential reward. Just what I'm for in a very depressed market.

Monday, January 26, 2009

Stat of the Day: Dec Existing Home Sales Rise 6.5%

The news surrounding Home Sales continue to improve. Existing home sales rose unexpectedly in December. As we've reported in the past, home sales in areas such as California have been increasing at a dramatic rate. This is whats needed to stem the bleeding. Prices have finally gotten low enough to increase demand. Combine that with fewer houses being built and we'll soon enough work off the inventory. So the negative is the record drop to housing prices to $175K, but at the same time the inventory dropping to 9 months is very encouraging that the housing market is about to reach equilibrium.

  • The National Association of Realtors said Monday that sales of existing homes rose 6.5 percent to an annual rate of 4.74 million in December, from a downwardly revised pace of 4.45 million in November.
  • The results were better than expected. December's sales had been forecasted to fall to a pace of 4.4 million units, according to Thomson Reuters.
  • The nationwide median sales price plunged to $175,400, down 15.3 percent from $207,000 a year ago. That was the lowest price since May 2003 and the biggest year-over-year drop on records going back to 1968.
  • And another encouraging sign -- the number of unsold homes on the market in last month fell nearly 12 percent to 3.7 million. At the current sales pace, it would take 9.3 months to sell all the properties, down from 11.2 months in November.

Thursday, January 22, 2009

Chart of the Day: Exxon Worth more then Financials

Exxon is now worth more then all of the Financials in the KBW Bank Index.

From Bloomberg:

Is Exxon Mobil Corp. really more valuable than Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and 21 more of the largest U.S. financial companies combined? Yes, according to stock investors. The CHART OF THE DAY shows the total market capitalization of the KBW Bank Index’s two dozen stocks dropped below the value of Exxon Mobil, the world’s largest oil company, during the past week, according to data compiled by Bloomberg. . . . Companies in the KBW index have lost about $1 trillion in market value since February 2007, when it climbed to a record 121.06.

Apple Posts Great Q4 Numbers

Apple (AAPL) continues to be one of our favorite stocks. After the bell last night they reported numbers that beat analyst estimates by $.40. Thats an incredible number during a very weak environment. What impresses us the most is that they generated $3.6B in cash and now have over $28B on the balance sheet. Apple could open a bank with that cash.

Plenty of news on Apple on the net so I'll keep this short. I'd be a big buyer at the current qoutes below $90. Incredible value!

Wednesday, January 21, 2009

Chart of the Day: Financials back to '96 Level

Ouch! Financials have now lost the gains of the last 12 years. This chart tells it all. If they are anything like tech stocks from 2000, they'll have a decent bounce but won't reach that peak level for a long time. Eight years later and tech is no where near that 2000 high.

Riverbed Announces Positive Results

Riverbed (RVBD) announced after the bell last night that they would easily exceed Q4 estimates. Very impressive considering the environment. Even more impressive their revenue was up 20% as compared to last year. Like another of our favorites FCStone (FCSX), it's very impressive when a company can still grow in this environment. These stocks should rally strong when the market turns around.

RVBD focuses on WAN optimization which helps workers be more productive and reduces costs. All important concepts when every company is laying off employees left and right.

  • expects fourth quarter fiscal 2008 revenues of approximately $91 to $92 million, representing a Riverbed® record for quarterly revenue, and approximately 20% growth over the same period one year ago. Fourth quarter GAAP EPS is expected to be in the range of $0.29 to $0.33 per diluted share. GAAP EPS estimates benefit from the expected reduction of the valuation allowance on Riverbed’s deferred tax assets. Fourth quarter non-GAAP EPS is expected to be in the range of $0.18 to $0.19 per diluted share. Non-GAAP EPS excludes the impact of stock-based compensation, stock-based payroll expenses and related income tax effects, and the reduction in the valuation allowance related to deferred tax assets.
  • These preliminary fourth quarter revenue and non-GAAP EPS results exceed the guidance the company provided on October 23, 2008. At that time, the company estimated revenue between $87 and $90 million and non-GAAP earnings between $0.15 and $0.17 per share.

Also, they announced the purchase of Mazu Networks. Another similarity to FCSX in that having a strong balance sheet allows these companies to snap up competitors on the cheap. Much better to buy at depressed levels then when the market is booming.

  • Mazu Networks provides a unique, powerful and flexible analysis and reporting software that provides a holistic, real-time view of application usage and performance. This perspective is critical to understanding the application environment and taking the right steps to validate and ensure delivery of business-critical applications across the wide area network (WAN).

Monday, January 19, 2009

Did Bank Lending really Increase in 2008?

Seems difficult to fathom, but according to this repot at lending actually increased 5.7% last year. Now I think the catch is that this only includes Commercial Banks so the likely credit available to the markets declined as a lot of finance companies disappeared last year. As the article points out, why is Congress so busy harassing Com'l Banks on lending amounts as they seem to have held up well?

  • Contract law and political posturing aside, since the recession began in December 2007, commercial bank lending rose 5.7%, impressive given the sharp economic contraction. Moreover, lending increased in all categories but home equity lending. And compared to the prior year? Commercial and industrial loans grew at about half the 11% rate in 2007, but total real estate lending grew just 0.6% less, and consumer loans grew at the same 8.9% rate, according the Federal Reserve.
  • the Fed’s recent Consumer Credit Report (January 8, 2009) suggests that commercial banks are taking market share from finance companies, savings institutions, and especially securitized asset pools, which continue to contract materially. Until confidence is restored, closed securitization markets will inhibit improved residential mortgage and consumer credit availability.

Sunday, January 18, 2009

Oct 2012 Oil Trades at $70

Future oil contracts continue to trade at extreme prices compared to the current month. Check out Nymex Oil for up to date prices. Most of the media focuses on the current contract trading in the 30s, but the long term plans in the energy market are more based on future contracts. Companies can already lock in prices in the $60s and $70s. If anything, the current weakness in the markets will ensure that we reach these future prices.

Some of our favorite stocks would be FWLT and ATW. FWLT for their huge backlog of energy related projects unlikely to get canceled with high prices in the future. ATW for it's deepwater drilling focus. ATW has more risk being a small cap with debt, but it currently trades at $15 with earnings in the $4-5 range expected for next year. The company is also on an aggressive growth plan with its 9th ship to begin work in February and 2 ultra-deepwater ships being built for 2011 and 2012. This provides for huge growth for this sector, but also high risk considering the uncertainties in both the credit and oil markets.

If your a bull on the oil market as suggested by future oil prices, then FWLT and ATW provide great investment opportunities at these levels. Especially, ATW that trades close to its recent lows.

The Coming Obama Rally

It's just starting to look like the perfect setup. The markets have been in a downward spiral since Oct '07 - 16 months. The economy has been in a recession for 14 months (counting January already). The media is very pro Obama and has been anti-Bush. Wouldn't it just be a great story if the markets rallied on Obama's inauguration. Wouldn't the media just love it.

From a technical standpoint, the markets had a perfect setup last week. On Thursday, the S&P had a reversal at 820. Basically the low of this market except for the brief 2 day drop below 800 and dramatic snap back. Then on Friday, the S&P closed over 850 which a lot of technical traders consider the low of the trading range. Otherwise, buy at 850 and sell when the market reaches 920-940. Currently the 50 day EMA is at 904 so a move above this level would also encourage buying.

From a psychology standpoint, the situation couldn't have been dire the last 6 months. Of course, partly from the fear of changes coming from the Obama presidency such as higher capital gains taxes. Now that Obama will actually be in office I suspect we'll see some of that fear dissipate. He's already made it clear that the capital gains taxes will likely not be changed until 2010. Plus the huge stimulus plan about to be finalized. Not to mention, the media is likely to point a much rosier picture now that the anointed one will be in office. It won't surprise me to see consumer confidence rise quickly as 2009 progresses.

The market wanted to rallied shortly after Obama's victory to the 1,000 range. Don't be surprised if it happens again. At this time, don't be surprised when the media begins pointing to a bright future. Something they dare not do when Bush was still the President. This story wouldn't be so ripe if the markets had already rallied to say 1,200. Hence, it just seems like the perfect setup. This week shall be fun to watch especially if you've covered most of your shorts.

Go Obama!!!

Copy from a Don Hays article on 12/19. Predicted back then that the inauguration would be the perfect rally time following how the markets bottomed in ‘42 and ‘74.

Our 1974 rhyme that we hummed to you for the last week or two has not been destroyed yet, but even if right is definitely only a rhyme, not a reprint. We’ve also presented 1942 as a possible model, and in many ways we think 1942’s situation is a little more similar to today’s market than 1974. But again, we are only searching for some historical wisdom that can be translated into today’s market expectations. We’ll show you those two historical examples in today’s report. In both of the two previous examples, at the current time-scale the markets took at least a couple week’s sabbatical. In 1942, it took almost a month off. I guess in relation to the condition of our overbought/oversold indicators we would opt for the 1942 4-week sabbatical example. Also, that would almost perfectly line up with the Inauguration of Barack Obama as President. Hollywood couldn’t plan a better script. We continue to hold out, however, that a significant bottom has been made, and based on the line-up of super-strong Psychological, huge monetary liquidity, and stock market valuation that ranks right up there with the bargain basement values recorded at the bottom of those bear markets in 1974 and 1982, we believe it will be the final bottom of the bear market and a launching pad for tomorrow’s strong bull market.

Monday, January 12, 2009

FCStone still Growing!

Maybe it's the fact that FCStone (FCSX) kinda rhymes with Stone Fox that we've liked this stock since it's IPO. Or maybe the fact that they are a commodity risk management company that came public during the great commodity boom. FCSX has generally reported strong results since that IPO but the stock is substantially lower now. Whether because of the credit crisis and counter party risks or bad debt exposure to clients, FCSX was hit extremely hard in 2008. The once highflying stock dropped from $53 all the way to $1.90. Sounds like a stock with huge growth problems, but the market might be surprised to learn that revenue grew by 16% last quarter YoY. Now how could a stock drop 96% yet still grow revenues? The only answer is FEAR.

In all fairness the company did report a not loss of $3M in Q4 due to a $25.7M bad debt expense. Of course that impacted the stock and caused undue FEAR that all of their customers would default leaving FCSX holding the bag. Over 2 months have passed since that original announcement of exposure to bad debt so the market should be a lot more comfortable that the problem was isolated and now contained then again why is the stock price still in the low $4s.

  • Total revenues were $85.6 million in the three months ended November 30, 2008, an increase of 16.3% compared to $73.6 million in the prior year quarter.
  • net loss for the first quarter of $3.0 million, or $0.11 per diluted share, compared to net income of $13.1 million, or $0.45 per diluted share, in the prior year quarter.
  • Bad debt provisions totaling $15.6 million, net of tax, or $0.56 per diluted share, in the first quarter 2009.

Netting out this bad debt expense along with other one time gains and losses, FCSX would've earned $.34 in Q4. Very impressive for a company focused on the commodity sector in the midst of a horrible bear market. Yes, thats correct expectations are for solid profits in 2009.

My concern for a while has been that customers would pull back on commodity trading/hedging if commodities dropped to lower prices. Maybe it will happen if the volatility drops leading to complacency. So far the opposite has happened even with some customers limited by credit lowering their ability to hedge. For now, it appears that the huge swings in prices have sent more customers rushing to risk managers. With many a pundit exclaming that the commodities will soar again, FCSX is a good bet to gain from the volatility in the market.

After the close today (1/12), FCSX announced the buyout of Elders Risk Management in Australia. This adds yet another cog to the gobal force that FCSX has developed. In a increasingly global market place, having a global risk management firm will be beneficial to customers. Also, buying when everybody else is selling is very smart as well.

  • Elders Risk Management Pty Ltd, an Australian-based company that specializes in risk management for the producers and users of agricultural commodities, including grains, livestock, cotton and wool.

Monday, January 5, 2009

Hedged Growth Portfolio Ended 2008 Positive

The Hedged Growth Portfolio started in Oct 2008 was actually able to end the year at $1,003,451 for a gain for $3,451. Not bad considering how bad the environment was in Q4 of 2008. The S&P500 was down 22% during that period.

Alot of the reason for the outperformance is that the fund is designed with up to 1/3 of the portfolio in short positions. Using the UltraShort Real Estate ETF (SRS), the portfolio was able to offset some of the losses in the 2/3s long positions. Unfortunately though, its been well documented of late that these Ultrashort ETFs aren't good for long term investments and the remaining position in SRS and the original position in the Ultrashort Oil & Gas ETF (DUG) have provided negative returns. In fact the position in DUG is now down 44% proving you can have the right thesis but the wrong vehicle and still lose money in this market.

Another saving grace is that the portfolio invested in short term Bond ETFs that provided nice returns compared to likely losses in stocks. Also, timely investments in BMY and NYX helped offset the weak market.

Friday, January 2, 2009

Are Gold Stocks the Best Shorts?

According to Carter Worth on Fast Money's 12/29 show, the gold stocks are set up to test a huge long term declining trend line. After a 100% gain off the bottom, gold stocks such as Goldcorp (GG) are set up for pretty entriguing shorts. During this time gold is only up 25%.
This report by Carter intriqued me because alot of infrastructure/commodity stocks are up way too much on back of the 'expected' Obama plan. These seem as good shorts as any. Today's decline in the face of a 3%+ market rally adds to the appeal. Any breakout above $33 for GG should be covered.

Stat of the Day: Manufacturing Index Drops to 28 Year Low

Not to surprising to see this report on manufacturing. Just reaching lows not seen since 1980 is actually either encouraging or signs that this sector has farthur to fall. When stock losses are the worse since 1931, 1980 isn't all that bad. The early 70s recession along with 1980 had worst readings so maybe we should expect a pretty bad January or February numbers as well. Though 32 on this report is pretty horrific. The market has taken this report in stride though. Starting to be encouraging to see the market rally with such weak economic reports.

  • The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December, a greater-than-expected decline from November's reading of 36.2. Wall Street economists surveyed by Thomson Reuters had expected the reading to fall to 35.5.
  • New orders fell to their lowest level on records going back to 1948.
  • Prices fell as the number of respondents saying they had paid more in December than in November sank to its lowest monthly reading since 1949.
  • Only three recessions in the history of the index have showed weaker manufacturing readings, said John Ryding, of RDQ Economics. Those recessions were in 1948 to 1949, 1973 to 1975 and 1980.

A-Power Energy Stinks It Up

A-Power (APWR) posts what has to be one of the worst warnings I've ever seen. They wait until nearly the last day of the Q to issue a release saying that revenue will be 50% less then expected. This from a company that still have a lot of believers thinking they were isolated from issues and might possibly make the Qs numbers. In reality, the reported numbers aren't that bad compared to the stock price, but whats really confounding is the reasoning. What contracts were postponed? And which ones could've generated $80M in revenue by being signed during the last week of the quarter? Potentially some of the wind customers could generate that level of revenue because the power customers couldn't just be counted as revenue until parts of the project are completed.

This stock will be in the penalty box for awhile. They still have a compelling story, but until they do a much better job of handling the Street it'll have a difficult time moving. They do have a good balance sheet and were still profitable so it isn't all bad. Just difficult to trust now.

For the 2008 fourth quarter, the Company now expects revenue to be approximately $76 million and net income to be approximately $5 million. Both revenue and net income guidance are now lower than previous guidance of $158 million and $15.5 million, respectively.
Mr. Jinxiang Lu, A-Power's Chairman and CEO, commented, "Due to the unusual current macro economic conditions, a few of our key potential contracts, which we expected to close in the fourth quarter, were postponed. As our projects are highly capital intensive, we always require a sizeable down payment as a key component of our standard contract. Under today's environment, we believe that it is even more important to exercise prudence on customers' payment terms and to continue to focus on our cash flow management.