Thursday, February 19, 2009

Doug Kass is Net Long?

Oddly one of the most perma-bears known in the financial world has become net long. This is not the first time that he has become bullish as I wrote about on Oct 7th. That turned out to be close to the internal bottom of the market on Oct 10th. Peronally I put more faith in a investor like Kass then an academic like Roubini.

In this long article on theStreet.com, Kass outlines why the negativity in the markets has become so great that he has become bullish. He still expects the recession to last until Feb '09 making it the second longest on record. I'm still optimistic that the LEI (Leading Indicator Index) will lead us out months before that. Its interesting that he mentions a whole list of stuff that he wants to see before becoming overly bullish, yet not one entails this predictor of the future.


The average recession in modern financial history has lasted 10.5 months. The longest recession was between 1929 and 1933 -- real GDP dropped by over 25%! --and lasted 43 months; the shortest (1980) lasted only six months. I expect The Great Decession, which began in November/December 2007, to end in early 2010, or about 12 months from now. If accurate, the current recession will be the second worst on record, having lasted about 27 months.

Despite the fear and loathing on the part of investors, I am beginning to find value and, for the first time in several years, I am in a (slightly) net long position.


Gun to my head, my baseline expectation is that the S&P could end up with a mid- to high-single-digit return for the full year, or about 15% above current levels.

His main reasons for stocks being undervalued. (if the recession lasts until Feb '10 it seems logical to wait several more months to invest).


  1. The risk premium, the market's earnings yield less the risk-free rate of return, is substantially above the long-term average reading.

  2. Using reasonably conservative assumptions (most importantly, a near 50% peak-to-trough earnings decline, which is over 3x the drop in an average recession), the market has discounted 2009 S&P 500 earnings of about $47.

  3. Valuations are low vis-à-vis a decelerating (and near zero) rate of inflation. Indeed, the current market multiple is consistent with a 6% rate of inflation.

  4. Stock prices as a percentage of replacement book value stand at 1x, well below the 1.4x long-term average.

  5. The market capitalization of U.S. stocks vs. stated GDP has dropped dramatically, to about 80%, now at the long-term average. Warren Buffett was recently interviewed in Fortune Magazine and observed that this ratio was evidence that stocks have become attractive.

  6. The 10-year rolling annualized return of the S&P is at its lowest level in nearly 75 years, having recently broken below the levels achieved in the late 1930s and mid 1970s.

  7. A record percentage of companies have dividend yields that are greater than the yield on the 10-year U.S. note. At 46% of the companies, that is over 4x higher than in 2002 and compares against only 5% on average over the last 30 years.

Stat of the Day: Leading Economic Indicators Up Again

One of the most overlooked yet very important stats is the Leading Economic Indicators (LEI) produced by The Conference Board on a monthly basis. According to the January report, leading indicators were up 0.4% in January after a 0.2% rise in Decemeber. The Lagging Indicator (LAG) decereased by 0.1%.

Ironically most of the media and even alot finanical reporters and anlayts focus on the lagging indicators. as they indicate what has happened in the past. They are actual hard facts about what took place in the economy while leading indicators only suggest what could happen. Unfortunately or fortunately depending on how you view it, these indicators are pretty good at predicing the future economic cycle. Money Supply and Interest Rates are 2 indicators that are typically overlooked by the gernal market. They have a huge impact on how businesses and consumers act in the future but they take a while for the indicators to have an impact on the economy and its not very tangible.

As an example of how the LEI predicted this downturn, the LEI turned negative in July '07 and has remained pretty much negative until Dec '08. The stock market peaked in Oct '07 and the economy supposedly began its recession in Dec '07. Sure seems like the LEI predicted the problems that were about to occur in the market. Two postive months probably don't predict a complete change in the markets and the economy, but throw in another positive month combined with a positive stock market and we've got the makings for a turnaround. One predicted by this report, but typically overlooked by the media as it focuees on the LAGs such as labor costs, inventories, and outstanding commercial loans. Next month could be very importants as a 3rd positive month in a row might just be what the economy and market needs.

Highlights of the report:


  • The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 0.4 percent, The Conference Board Coincident Economic Index™ (CEI) decreased 0.5 percent and The Conference Board Lagging Economic Index™ (LAG) decreased 0.1 percent in January.
  • The LEI increased for the second consecutive month in January, but November and December values were revised down as new data for manufacturers' new orders became available. Between July 2008 and January 2009, the LEI decreased 1.9 percent (a -3.7 percent annual rate), faster than the decline of 1.1 percent (a -2.1 percent annual rate) during the previous six months. In addition, the weaknesses among the leading indicators have remained widespread in recent months.
  • Although the LEI has risen during the past two months, it is too soon to say the contraction in the LEI that began in July 2007 is coming to an end. The LEI has continued to decline over a six-month period in the second half of 2008, with continued widespread weakness among its components.
  • Five of the ten indicators that make up the leading economic index increased in January. The positive contributors — beginning with the largest positive contributor — were real money supply*, the interest rate spread, index of consumer expectations, manufacturers' new orders for nondefense capital goods*, and manufacturers' new orders for consumer goods and materials*. The negative contributors — beginning with the largest negative contributor — were average weekly initial claims for unemployment insurance (inverted), building permits, average weekly manufacturing hours, stock prices, and the index of supplier deliveries (vendor performance).

Edit: S&500 closes down 1.2%. Just more proof that the markets ignore this very important economic indicating report.

Sunday, February 15, 2009

Stat of the Day: China Credit Grows by 101% in January


Staggering Credit growth from China as reported by Money Matters in this Seeking Alpha report. A major force for the loan growth, is the economic stimulus plan approved in November that allowed for 30% government funding on infrastructure projects. Hmm... maybe the US should've done something like this. Instead of giving away money to pork projects of specific Congressmen maybe they could've given an incentive to implement valid projects at a discount.

The amazing growth in lending has lead to economists actually raising the growth rate for 2009. Now that is shocking and not widely reported in the media. The stock market has been strong lately and such indexes as the BDI have surged off lows. Oddly though, stocks listed on US exchanges such as BIDU, APWR, and FMCN are still hanging around recent lows. While more infrastructure related US stocks such as NUE and SGR have seen big jumps.

Based on the lending stats, I'd expect all these stocks to see pick up in demand. Either from infrastructure related demand in China or growth in the domestic market in China. Other favorites would be coal stocks like ANR or oil drilling stocks like ATW or copper stocks like FCX.

Saturday, February 14, 2009

Missing the Bottom on Anadigics



Having watched the market fall apart the last 16 months, it's no surprise that a small cap tech stock like Anadigics (ANAD) has been hit hard. The amount of the fall might be surprising though considering they have an impressive balance sheet. So many professionals scream on CNBC all day that they want to invest in companies that don't need cash yet stocks like ANAD and another favorite of Stone Fox Capital, Alvarion (ALVR), have fallen to levels that equal cash. Basically the remaining company was valued as worthless.

As survivors of the tech bust in 2000, you'd think investors would give these companies a greater benefit of the doubt. Much more willing to look beyond the current climate and realize that they will be survivors. Times may be bad, but with their balance sheet they'll clearly survive and maybe thrive when we come out of this as the competition might be greatly reduced with the weak competitors not surviving. Recessions aren't always bad if a company can garner market share.




  • ANAD had roughly $2.5 in cash after the Q3 report. This has likely declined and the results could've been worse then expected considering the environment in Q4.


  • As of September 27, 2008 cash and short and long-term marketable securities totaled $152.2 million compared with $161.4 million at June 28, 2008.

  • Net sales for the fourth quarter 2008 are estimated to be in the range of $44 million to $46 million. Net sales at this level would represent an approximate 32% to 35% decrease on a comparable basis with fourth quarter 2007. Net loss per share on a GAAP basis for the fourth quarter 2008 is expected to approximate $0.19 to $0.21. Pro forma loss per share, excluding non-cash stock compensation expense, is expected to be in the range of approximately $0.12 - $0.14. The net loss and pro forma loss per share are based on an estimated diluted weighted average outstanding common share count of 61 million.


Though the numbers seem bad the stock got down into the $1s making this stock trade for an Enterprise Value in the $0 range. Unfortunately we missed that bottom, but it currently looks very tasty at $2.38. From a technical standpoint the stock is bouncing along above the 20 day ema and a nice rising 50 day ema. The earnings report on the 26th will be volatile so be careful, but the valuation and technicals on ANAD are very appealing.

Icahn Snoops around Williams again

According to the Tulsa World, Carl Icahn and his firm has significantly added to his purchase in Williams Cos (WMB). WMB is now his 5th largest holding according to the article behind the likes of Yahoo (YHOO), Biogen (BIIB), Motorola (MOT), and Anadarko (APC). The investment more then doubled his holdings in WMB to $250M and increased his position to 3%. This isn't necessarily a sign that he plans on being an activist as he held shares back in 2006 that he mostly sold in May of 2008. Seems that maybe Icahn is just a trader in WMB stock, but he might have other plans this time. His more recent investments haven't been that stellar as both YHOO and MOT have bombed since his involvement.

WMB is an anchor of the Tulsa community and would be a shame if Icahn were to force changes. They've historically been a strong natural gas company though they lost there ways in 2000 with the debacle that was Williams Communications that is now a part of Level 3 (LVLT). Its interesting that Icahn evidently sees some huge value in WMB. They have been over shadowed in this industry and even in the state by more aggressive firms like Chesapeake (CHK), Devon (DEV) and even Bakken oil producer Continental Resources (CLR).

WMB doesn't seem to have any interests in some of big name areas such as the Marcellus Shale, Haynesville Shale, or even the Bakken oil area. This may cause investors to overlook this company but not Icahn. Its unclear what Icahn finds so appealing about this stock other then its solid reputation and value.

From a technical view, WMB stock has recently held above the 50 day ema and the 20 day ema is quickly approaching the 50 day. Any bounce off the 50 day would be very bullish so Icahn is definitely buying at a promising juncture in the stock price. His purchase might just signal that the recent lows might be a thing of the past for WMB. At the current price of $15, this move by Icahn is very appealing unlike some of his other top 5 holdings.


Edit: Just realized that these purchases were made in the 4th quarter so it isn't exactly new purchases though the information hasn't been widely known since Icahn just filed with the SEC. It also appears that his holdings have drastically changed as he sold out of MOT, but WMB is still a good buy at these levels and based on Icahn loading up.

Wednesday, February 11, 2009

Millicom continutes to Post Strong Growth


Even with the horrible economic environment and a stronger dollar impacting their foriegn operations, Millicom (MICC) continues to post strong growth. Having mobile operations in Latin America, Asia, and Africa does help as the economic malaise isn't as impacting in those countries and the demand for wireless to improve productiviy and provide for basic communications will continue growing.


For those willing to look you can still find companies posting 18% revenue growth and 31% EBITDA growth even in this environment. So why is the stock price down 66%? Good question! The results would suggest that the stock would be trading at all time highs. From a technical perspective, MICC looks like it could be breaking out to the upside as its bounced nicely above the 50 ema. We recently purchased more stock in the funds and personal accounts. Looks like good timing considering the 8% rise after the results this AM.




  • 38% increase in subscribers** for Q4 08 versus Q4 07, bringing total subscribers to 32.0 million*


  • 18% increase in revenues for Q4 08 to $907 million* (Q4 07: $766 million*)


  • 31% increase in EBITDA for Q4 08 to $406 million* (Q4 07: $309 million*)


  • Net profit† for Q4 08 of $66 million (Q4 07: $113 million)


  • Basic earnings per common share for Q4 08 of $0.61 (Q4 07: $1.11)

  • Our net profit excluding one-off items in 2007 and 2008, namely Paktel, Colombian deferred taxes and Sierra Leone increased by 36%.


Friday, February 6, 2009

Hartford Insurance is Compelling



Hartford Insurance (HIG) suffered a huge drop after reporting earnings after hours yesterday. The company continues to be hit by losses in it's investment portfolio. Regardless the company guided to roughly $6 in operating income for 2009. Book Value currently stands around $50 as well assuming that most of the bonds they hold rebound as expected.

Considering the stock is not far away from trading at $100 these income and book value projections make this stock very appealing at these levels. Its definitely one to trade using a technical perspective as the fundamentals are off the charts, but worst case fears could come true sending the stock back to the lows of $4 or even lower. Closing above $12 looks very solid so an entry point next week above $12 is tempting dependign on how the Stimulous and Bad Bank Plans go. Assuming a positive start, might be time to load the boat on HIG.

Foster Wheeler gets Iraqi Contract




Or at least thats the word from Dow Jones. Iraq is the process of increasing production of oil to over 6M barrells per day from roughly 1.5M barrells. The complete project is expected to cost over $5B and take several years to complete. This could be one of the mega projects that the FWLT CEO continues to talk about to anybody that will listen. Unfortunately most people in the market have been unwilling to listen to him. Demand for these mega projects that take 3-4 years to complete just isn't eroding. FWLT is a huge buy at these levels and based on the continued strong order flow and backlog. Makes me wonder why the stock even sold off in the beginning.




Of DOW JONES NEWSWIRES AMMAN (Dow Jones)--Foster Wheeler Ltd. (FWLT) and two other international firms have won contracts to boost Iraq's export capacity from its southern oil terminals on the Persian Gulf, an Iraqi Oil Industry source in Basra said Thursday. U.S.-based Foster Wheeler was awarded a front end engineering and design contract for the project, he said. A U.K. company and one from the United Arab Emirates, which he didn't name, were awarded contracts to lift mines and sunken ships from the Iraqi waters in the Gulf and carry out a survey of the seabed to build new underwater pipelines, he said. He gave no details about the cost of these three deals, but he said they were worth millions of dollars and signed late last year. The three contractors are expected to start work this year, he said but he didn't specify when. As part of the project, the ministry and the South Oil Co. will award more contracts to international companies to set up four new loading berths in the Gulf, lay three underwater pipelines to replace the old and eroding ones and build large crude oil onshore reservoirs, he said. "The total cost of the project would be no less than $5 billion and it would take three to five years to complete," the source told Dow Jones Newswires by telephone from Basra. The project would quadruple Iraq's export capacity from its southern terminals, he said. Iraq's two terminals in the south, Basra and Khor al-Amya, could handle up to 1.6 million barrels a day of the country's crude oil exports. Iraq is currently exporting the bulk of its crude oil from southern terminals, selling around 1.5 million-1.6 million barrels a day. Last October, the U.S. State Department said that aging underwater pipelines, which link storage facilities near Basra to offshore tanker fueling terminals, are in such poor condition they could rupture at any time and need of back-up or repair. The source said the old underwater pipelines would be used as a back-up for the new three pipelines which would be laid. Boosting capacities of southern export terminal is needed to cope with an increase of production the country is planning to achieve in the next few years, the source said. The country is planning to boost its crude oil production, particularly from southern oil fields, to around 6 million barrels a day in five to six years time from 2.4 million barrels a day now. Iraq recently embarked on its first and second oil licensing rounds and hopes to have part of the contracts signed by June 2009, and rest by the end of the year. -By Hassan Hafidh, Dow Jones Newswires; + 962 799 831 831; hassan.hafidh@dowjones.com





Wednesday, February 4, 2009

Atwoods Post Strong Results

Atwoods (ATW) beat results yet again. Offshore contract drilling remains a strong part of the economy due to long term locked in contracts. As typical with this market, the guidance will be key because ATW does lack locked in contracts for some ships in 09/10. Regardless, ATW along with others I've detailed continue to show how plenty of stocks are still reporting strong numbers.

  • earned net income of $78,363,000 or $1.22 per diluted share, on revenues of $165,504,000 for the quarter ended December 31, 2008 compared to net income of $38,549,000 or $0.60 per diluted share, on revenues of $111,048,000 for the quarter ended December 31, 2007.
  • Atwood Oceanics beats by $0.07, beats on revs (ATW) 16.95 +0.35 : Reports Q1 (Dec) earnings of $1.22 per share, $0.07 better than the First Call consensus of $1.15; revenues rose 49.1% year/year to $165.5 mln vs the $162.9 mln consensus.

Monday, February 2, 2009

Central European Distribution Hit by Currency

How to play a company hit by currency impacts when reporting in US Dollars, but still thriving in local currencies. Central European Distribution (CEDC) probably has the biggest impact that I've seen so far. The company is still forecasting as much as 25% growth in Poland and Russia, but due to the significant jumps in the Polish Zloty and Russian Ruble the company has cut 2009 forecasts by 35%. The stock price has crumbled and is now down nearly 90% yet the company still maintains huge growth. Maybe as an investor we should hedge our positions with a currency trade. Or maybe we should just buy on the inevitable rebound. Absent the currency impact this company would report $4 eps for '09 to go along with 25% growth. A good market would pay at least $100 for this stock, but it now trades for nearly $10. Or 4x the lowered estimaets of $2.5-2.80.


  • reconfirming full year 2008 net sales guidance of $1.65-$1.80 billion and full year comparable fully diluted earnings per share guidance of $2.85-$3.05.
  • revising full year 2009 net sales guidance from $1.93 - $2.03 billion to $1.25 - $1.40 billion which is based upon an approximate 35% weakening of local currencies (zloty and ruble) since the company's last guidance given in November 2008.
  • fully diluted earnings per share guidance is being revised downward from $3.75-$4.00 to $2.50 - $2.80, due to the above mentioned 35% weakening of local currency
  • guidance given in November 2008 was based upon exchange rates of Polish Zloty to USD of 2.50 to 2.60 and Russian Ruble to USD of 26.00 to 26.50; the revised guidance is based upon exchange rates assumptions of 3.30 to 3.50 for the Polish Zloty to USD and 35.00 to 37.00 for the Russian Ruble to USD.
  • highlights the strong underlying earnings growth of our business of approximately 25% in local currency.
  • We have not experienced any material slow down in our receivables in Russia and Poland to date and continue to see positive cash flows

CEDC is an incredible steal at the currnt price, but it could continue to get cheaper.