Thursday, May 28, 2009

Trade: Bought TerreMark Worldwide and Hartford Financial

Made a few purchases in our accounts today when the market was testing 890 which I think will be the low at least for now.

Terremark Worldwide (TMRK) is a new stock we've started following based on the $20M purchase of shares by VMWare (VMW). VMW is a very respected technology company and its impressive that they made an investment in TMRK. Its also important to note that the stock currently trades below that purchase price of $5. That purchase price was somewhat above the stock price at the time of the announcement as well. VMW wanted into this stock so we've followed. TMRK also reported nice Q1 results which surprised me to see that basically a hosting (ok, managed IT infrastructure services) company actually had a solid report. Actually reporting earnings which is impressive for a sector that typically only focuses on EBITDA. EBITDA can only take you so far. The other thing that impressed us was that TMRK provides the 'infrastructure' services for both usa.gov and data.gov. Since almighty Obama has a plan to move a ton of government data to the data.gov site it is worth noting that they are working with TMRK. Combine the 2 moves and I'm willing to invest without doing as much homework. VMW has the ability to push alot of clients to TMRK and has good visibility into the company. Its alsow worth noting that they had the largest quarterly booking in Q1 of $32M (not significantly above) and deal sizes were 50% higher then last year. Impressive considering the economy. Added shares to the Growth fund and client accounts.

  • “VMware has worked closely with Terremark for years, and during that time it has distinguished itself as a leader in delivering VMware virtualization, security, and business continuity to customers of all sizes and in all industries,” said Dan Chu, Vice President of Emerging Products and Markets. “This investment in Terremark underscores the importance of this partnership and our belief in their ability to leverage our technologies as part of the VMware vCloud initiative to develop reliable and scalable cloud computing solutions.”

Hartford Financial (HIG) was added with the stock hitting the 20ema. This has been a solid entry point for a while. Any break below and we might jump back out. FastMoney reported a large about of put buyers suggestion that somebody expects downside pressure. Or it could just be longs adding protection. We'll see. Added to client accounts.

FCStone Monthly Metrics Seeing Stability

Finally seeing a bottom in the numbers for FCSX. As reported after the close last night, FCSX saw improvements in OTC volume and segregated assets. As a reminder, FCSX made the majority of its income in 2008 on the interest income from customer assets. Seeing that bottom is a promising sign.

* OTC volume (in thousands) of 30.8 contracts, compared to 25.7 contracts in March 2009 and 78.5 contracts in April 2008;

* Exchange-traded contract volume (in thousands) of 4,151.9 contracts, compared to 5,008.8 contracts in March 2009 and 9,512.3 contracts in April 2008; and

* Customer segregated assets (in millions) of $818.4 as of April 30, 2009, compared to $754.2 on March 31, 2009 and $1,556.4 on April 30, 2008.

Tuesday, May 26, 2009

Stat of the Day: Consumer Confidence Expectations Soar

Just as was reported on the 15th [Stat of the Day: Consumer Confidence Soars], the markets are again soaring because of good consumer news. This time its from the Conference Board which typically has more influence then the Michigan Survey on the 15th. Still the market should've expected a huge jump. The Index soared beyond estimates of 42.3 by a wide margin to nearly 55. What were those analysts thinking?

As the Michigan Survey showed, future expectations are soaring. Expectations were at 72 while the Present Situation came in at 29. So basically the Consumer Confidence number is going to continue to soar. Michigan expectations were at levels not seen since October 2007 and while not noted in this report I'd expect them to come close to that time frame. Its definitely higher then the number a year ago.

Retailers such as SHLD and TWB are soaring on this news while DKS is doing pretty good. Both SHLD and TWB are worth considerably more if the consumer returns.

  • The Conference Board said Tuesday that its Consumer Confidence Index, which had dramatically increased in April, zoomed past economists' expectations to 54.9 from a revised 40.8 in April. Economists surveyed by Thomson Reuters were expecting 42.3. In February, confidence levels had hit a new historic low of 25.3.
  • The reading marks the highest in eight months when the level was 61.4. The levels are also closer to the year-ago's 58.1, though the widely watched barometer is still below 100, which indicates a healthy economy.
  • The Present Situation Index, which measures how shoppers feel now about the economy, rose to 28.9 from 25.5 last month.
  • the Expectations Index, which measures shoppers' outlook over the next six months, climbed to 72.3 from 51.0 in April.

Monday, May 25, 2009

Performance Review - May 22

Below are the results of the 3 primary portfolios offered by Stone Fox Capital. Each portfolio continues to beat the SP500 since inception as tracked by 3rd party marketocracy.com. See the links to the portfolios on the right hand side under the Portfolio Management column.

Hedged Growth

This fund continues to maintain its sizeable gains since inception on 10/1/08 of 26%. It has handily beat the market in down markets and slightly outperformed in up markets.


MTD QTD YTD
SFCHG 2.13% 10.78% 2.48%
S&P 500 1.86% 11.61% -0.68%
DOW 1.34% 8.78% -5.69%
Nasdaq -1.47% 10.69% 7.29%



Net Payout Yield


MTD QTD YTD
SFCNP 3.28% 15.31% 0.85%
S&P 500 1.86% 11.61% -0.68%
DOW 1.34% 8.78% -5.69%
Nasdaq -1.47% 10.69% 7.29%



Growth

The Growth fund continues to impress this year. It's outperformed every major average significantly and is nearly 24% above the SP500 YTD and over 42% the last 6 months. The fund is now up 6.2% since inception.


MTD QTD YTD
SFCG 9.00% 35.21% 23.09%
S&P 500 1.86% 11.61% -0.68%
DOW 1.34% 8.78% -5.69%
Nasdaq -1.47% 10.69% 7.29%

Thursday, May 21, 2009

The Missing Tween

The owner of the Justice and Limited Too brands that focuses on the tween girls category (7-14 year olds) has been crushed by the markets and the weak economy. Oddly though, Tween Brands (TWB) has been crushed much more by the markets then the likes of Childrens Place (PLCE), Gymboree (GYMB), and Pacsun (PSUN). Was it because of the the move to transition all of the Limited Too stores to the much better performing Justice brand? If so, the market was placing a huge execution discount on the stock.

All 4 stocks recently reported Q1 numbers through the end of April and clearly TWB and PSUN had the worst numbers and they consequently have the lowest market caps. Both GYMB and PLCE reported pretty decent numbers and hence they have the highest market caps. But thats where the market quits making sense. PSUN has a market cap nearly triple that of TWB - $275M vs $100M - even though TWB posted better results actually recording an operating profits versus the $8M loss at PSUN. With comparable sales, stores, and square feet, you'd expect a slightly higher valuation for TWB. Look for this to happen over the next few weeks has investors clue in that TWB is a survivor.

Now GYMB and PLCE are definitely solidly profitable and better off then TWB, but its hard to imagine that they are worth 10x that of TWB. GYMB has similar revenue, but my much higher profits owing partly to much lower square feet and hence costs. TWB has 3.8M to the 1.7M at GYMB. TWB did have higher volumes prior to the last year so they'll need to get the revenue back to justify theis much square footage. Some pruning of the base not help margins. PLCE on the other hand reported nearly double the revenue including higher numbers YOY, but not much more in income then GYMB. GYMB definitely has the margins down while PLCE makes thh profits off of volume. Either way, they are both performing much better then TWB.

Its very possible that TWB will see a snapback in revenue as the transition to Justice has very possibly hurt sales in the former mall based Limited Too locations. The off mall Justice locations are definitely attractive with the mall no longer the top destination for alot of people. On the recent Conference Call, management talked about the huge savings in Marketing expenses last quarter that will be ramped up now that the transition is basically complete. A return to growth could stock rocket this stock. Based on the competition, I'd have to estimate the valuation of this stock more correctly in the middle of these other stocks or roughly $500M or $20 per share.

Looking at Tween's prospects, they use to generate in the $2-3 range of earnings per share. They also forecast back in August that they would generate savings of $20-25M from the transition to Justice. This would put earnings closer to $4 assuming they don't lose customers that really just wanted the Limited Too concept. Even assuming they really get zero benefit from the transition they could just be back to $2.50 in earnings placing the stock back to the $30s. Now they also seem to have the opportunity to up margins from reducing the square footage.

Sears Holdings Popping after Huge Earnings Beat

Unfortunately we missed the chance to buy at $50 before the close. Looks like the perfect double bottom on the chart. After Hours, Sears Holdings (SHLD) reported earnings of $.38 ex items with an analysts estimate of minus $.88. That's a whopping beat of $1.26. CEO Lampert seems to have this company back on track and the real story has never been earnings and retail. The huge buybacks and fund ownerships leaves the float very low hence the huge jump after hours to $57. See previous articles for more details on that issue.

SHLD is a big investment in our funds expecially the Growth and Net Payout. Its probably a great buy at these levels but disappointing to have missed it prior to earnings. I'd expect a run to new highs and that run has already taken place in AHs hitting $62. Lampert was buying back the last couple of years with the stock in the mid $100s so getting back to $60 is hardly the end of the road.


  • Net income attributable to Holdings' shareholders for the quarter of $26 million ($0.21 per diluted share) as compared to a net loss attributable to Holdings' shareholders of $56 million ($0.43 loss per diluted share) in the first quarter of 2008;
  • Adjusted EBITDA increased 73% to $359 million in the first quarter as compared to $208 million in the first quarter of 2008;
  • Gross margin rate increased by 130 basis points to 28.6% for the first quarter of 2009;
  • Reduced domestic selling and administrative expenses by $168 million (or 6.7%) during the first quarter of fiscal 2009 as compared to the same quarter in 2008;
  • Maintained a strong balance sheet with $1.2 billion in consolidated cash while reducing consolidated debt to $3.0 billion at May 2, 2009 from $3.5 billion at May 3, 2008
This inventory number is one of the huge positives for SHLD. They have $10.7B in cash and inventories, but only $3B in debt. Thats $7.7B net some what higher then the current market cap. Monetizing that inventory will continue to provide the cash for buybacks.
  • Merchandise inventories were approximately $9.5 billion at May 2, 2009 as compared to $10.3 billion at May 3, 2008. Domestic inventory levels declined from $9.4 billion at May 3, 2008 to $8.7 billion at May 2, 2009 due to efforts taken to improve inventory management noted previously. Inventory levels at Sears Canada decreased $136 million largely due to the impact of foreign currency exchange rates.
Diluted shares is now down to 121M. This continues to drop though at a slower rate in Q1 due to liquidity fears. They've got enough cash to reduce the count to the 114M level which just about matches the shares held by big long time holders as reported back on 8/31. Unfortunately time hasn't allowed to update those totals. Even assuming some reduction took place, the trading float is getting close to zero. This means that anybody short would technically have to be borrowing from strong holders and not real sellers. When they are forced to buy back, it's come with very few shares open to sell.
  • During the first quarter of 2009, we repurchased approximately 1.0 million common shares under our share repurchase program at a total cost of $40 million, or an average price of $41.04 per share. As of May 2, 2009, we had remaining authorization to repurchase $465 million of common shares under the share repurchase program.

Stat of the Day: Disappointing Jobs Data

The weekly jobless claims continue to hang in the low 600K range, but the hoped for break into the 500s has to wait a while longer. A break below 600K in weekly claims would finally signal a serious change in direction. For now, the jobless numbers have definitely bottomed out, but its just bottoming along at the bottom. The numbers did peak at 670K in March so it's definitely dropped from the highs, but after such a huge run in the stock market we really needed that big drop to convince the market that the turn is for real. For now, this just gives the shorts more fuel to hang tough.


New Jobless Claims Slowing - CNBC

The U.S. Labor Department on Thursday said that initial claims for state unemployment benefits fell to a seasonally adjusted 631,000 in the week ended May 16, compared to a high of 674,000 in late March.

Analysts polled by Reuters had forecast new claims at 630,000.

Still, continuing claims—workers who remain on the rolls of the unemployed -- rose by 75,000 to a record 6.662 million in the week ended May 9. The most severe U.S. recession in decades has already claimed over 5 million jobs since it began in December 2007.

Despite recent declines in the weekly claims data, the labor market remains in perilous shape.

"We need a more convincing decline (in new claims) to signal from the jobless claims perspective that the recession has bottomed out," said John Ryding, chief economist at RDQ Economics in New York.

Employment is often seen as a lagging indicator, and many companies are likely to wait for sustained evidence of an economic revival before hoisting help-wanted signs.

In that vein, the Congressional Budget Office said on Thursday that the economy will likely start growing again in the second half of 2009, but that the jobless rate could peak at more than 10 percent against the current 8.9 percent.

"The companies that bring their costs under control will be the first to start hiring, but I don't think we'll see that a lot until the third or fourth quarter," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

Tuesday, May 19, 2009

Stat of the Day: German Investor Confidence at 3 Year High

The confidence numbers globally continue to soar much higher then expectations and much higher then the last couple of years. According to Bloomberg, The May report was dramatically higher then April. It's not that shocking to see a sharp rebound in investor confidence considering the rebound in the markets, but it is surprising to see how its soared to 2006 levels. Not that I know much about German confidence numbers, but in the US we've argued for a while that in 2007-2008 the markets were depressed more then earnings suggested. Alot of people discuss the prospects of returning to the 2007 peak in the market which we continue think won't be that difficult to reach.

To surpass the 2007 levels when global markets were still soaring higher shows how low confidence was at that time.

  • The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, increased to 31.1 from 13 in April. Economists expected a jump to 20, according to the median of 35 forecasts in a Bloomberg News survey.
  • “It’s another sign that a recession will weaken substantially with a return to economic growth toward year- end,” said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. “Investor confidence has room to improve further over the coming months.”

Monday, May 18, 2009

Another Look at FCStone

FCStone (FCSX) is a compelling story that fell off the face of the market in 2008. They went from reporting a $78M profit in the year that ended in August 2008 to being worth hardly more then $30M. This was largely due to a trading account hit of over $100M that put serious doubts into the future of this company. FCSX has also taken a big hit from greatly reduced interest income due to the swooning short term interest rates.

The need for risk management and hedging in the commodities sector has never been greater. Once FCSX gets past the issues created by the huge trading loss, I'd expect FCSX to regain its luster that saw the stock trade above $50 last year. The company has stayed afloat in this turbulent times without the need for dilutive financings. Somehow FCSX has been more impacted in the stock market then the major banks like Bank of America (BAC) and regional banks like BBT or STI. FCSX has no exposure to the mortgage or commercial real estate market. Yes, they were hit by one bad trading account, but they've shown no signs of systemic issues. The future of this company seems bright considering the prospects for this growing company that has bought 3 competitors in the last year. Consolidation of the sector will allow them to become a global leader with operations now in Australia, Brazil, and China. Brazil was actually an issue last quarter, but I'd expect a quick rebound this year with the rebound in commodities.

Also, the news from the Federal Govt looking to regulate the OTC derivatives markets is bullish for FCSX. Their 80% owernership of Agora-X is square in position to take advantage of this expanding market. See the home page for testimony by the CEO to the U.S. House of Representatives Committee on Agriculture concerning legislation to bring greater transparency and accountability to derivatives markets

From the 10K recently filed. Looks like the NASDAQ investment was roughly $7.5M for a 20% stake. NASDAQ recently completed that investment with the launch of Agora-X in December. That'd place the FCSX portion at roughly $30M. Based on the direction of the OTC markets this investment could eventually be worth more then value of FCSX currently.
  • Minority interest. On March 3, 2008, the Company executed an agreement with NASDAQ OMX Group, Inc. ("NASDAQ") in which NASDAQ contributed cash of approximately $5.0 million in exchange for preferred units in the Company's subsidiary, Agora-X, LLC ("Agora-X). The NASDAQ's initial interest associated with the preferred units is 13.33% ownership in Agora-X, and NASDAQ has agreed to contribute additional cash consideration, upon the completion of certain conditions, for a potential ownership interest of 20%.

Another point of view just as a second opinion to my thoughts. FCSX is considered a top sleeper stock by him.


Needham Asset Management's Bernard Lirola – 5/7/09

Lirola: FCStone(FCSX Quote) is our favorite sleeper stock. This commodity adviser/broker trades at its cash value of $90 million. Yet, it currently earns about $15 million yearly pretax in its core advisory segment even though it earns at present virtually no interest on its customers' deposits. It earned $48 million in interest income in fiscal 2008.

It is a way to play an uptick in commodity prices as FCStone would benefit from increased customers' transactions. FCStone is being penalized for the major mistake it made in losing over $80 million from an energy account. I believe it was a one-time event in extraordinary illiquid market conditions and that FCStone has substantially lowered its risks. Tangible book exceeds $5 a share.

theStreet.com link

Trade: Trimming Back on ICICI Bank

While the elections may usher in huge change in India its likely to take years to develop. This jump of 30% in ICICI Bank (IBN) is way overdone and will likely consolidate giving us time to buy back lower. The move had made IBN the largest holding in the Growth portfolio. Selling 33% of the shares in the Growth portfolio at just over $30. The Sensex is up 17% which is unheard of for a mojor index. Wow!

Sunday, May 17, 2009

Review of Kona Grill




Now that the CEO that has successfully run this promising restaurant concept into the ground, Stone Fox Capital is ready to review a potentially larger position in this concept. Kona Grill (KONA) just opened its 22nd restaurant in Woodbridge, NJ. KONA has longed seemed a promising concept with its modern blend of an American grill with a sushi bar. They've been public for a few years now and they've largely been off the radar of Wall Street though they've had fast store growth and for a while strong comps. Lately the comps have fallen off the wagon posting -9.6% (yes thats negative) which was horrible considering that some of the competition actually posted positive numbers. KONA is definitely on the slightly upper end of casual dining so its not too surprising that they posted weak results but those results were jaw dropping. Mill Road Capital claims in the Q1 Conference Call (see SeekingAlpha transcript) that KONA had the worst comps in the 15 company universe they follow. Hence it was time for the CEO to go. Not to mention all the drama surrounding the recent plan to raise additional funds. Not really sure that Mill Road Capital is accurate in their claims, but its clearly obvious that the CEO was misguided in offering such a sweat deal to his father without offering it to all shareholders. Hence the rights offering.

Now how will KONA perform with the CEO gone. Lots of questions have existed with this company since the suspicious promotion of the ex-hedge fund manager to the permanent CEO back shortly after the IPO. He was an original investor, but he never seemed qualified to run a fast growing restaurant concept. The results have suffered mightily since he took over. Can they be turned around now if they find a industry veteran? Its also possible that the massive growth plan caused management to take the focus off the opened restaurants and allowed them to suffer. On an operating margin, KONA still delivers strong 17% margins on the comp base and over 15% on the whole chain. What would these numbers look like with flat comps as some competitors achieved? KONA also has a strong balance sheet with net cash and has yet to lever the company up with debt. Though they now lack liquidity at the worst time since they've continued moving forward with expansion without long term financing locked up. Hence a dilutive rights offering at just $1.35 a share.

My gut feeling is that too many 'friendly' execs were brought into the fold. Some seemed to have impressive experience, but that so far hasn't translated to better sales or more Wall Street coverage. The stock only traded 2,800 shares on Friday, 3/15. That's absurd for a company posting $80M+ in sales. Hopefully though the new guys will either prosper with Jundt out of the way or the board will move to bring in better management now that shareholders will likely have a stronger say then Jundt and his buddies.

For all the problems KONA has undergone the last couple of years, they still have posted positive growth of 7.5% in Q1 - because of the new stores. Only one store in Lincolnshire, IL has negative cash flow. That store has seen a couple of competitors go out of business of late consequently margins have improved. More on that later. And as I mentioned before, the comp store base had operating margins of 17%+ even in this horrible economy. So one wonders what the results would be with slower expansion and better focus on execution at existing stores? It sure would reduce the stress to obtain further capital in this environment. KONA is still a net cash concept with the potential of hitting $90M in revenue this year.

Speaking of competition, the closings of competitors in this rough retail environment has been a boon to the likes of Best Buy. The restaurant business has seen multitudes of closings such as nationally known chains like Steak & Ale and Bennigans. In reviewing the local papers, I've read of dozens of closings in Phoenix and Houston which surely must benefit KONA in some form in those areas. Undoubtedly every area should be facing reduced competition on a grand scale. Though the Q1 results and Q2 forecast of another -9% comps sure doesn't inspire much hope, KONA is at least surviving in order to play another day. Would be nice to find a regional or national database to analyze the amount of competition destruction that has taken place. Places like Chipotle (CMG) and Buffalo Wild Wings (BWLD) sure are taking advantage of the reduced competition and maybe trade downs. KONA should see trades downs as well from the ultra high end dinners. It just didn't seem that Jundt had an answer. It sure didn't have a plan for making KONA a household name. Heck I'm headed to both Kansas City and Dallas in June and I'll guarantee that the parties traveling with me have never heard of KONA. I'm sure they've heard of the competition whether Cheesecake Factory or McCormick and Schmidts. A few years back when KONA went public, I envisioned the day when my post IPO investment would pay off in a big way when the general public became aware of the concept. Its mostly just become an unkown commodity 3 years later. The store base is up some 150% in that time, but the stock is down dramatically.

Q2 will be a telling quarter as the market has clearly turned, but has KONA? The now ex-CEO hinted at results improving in April but he still forecast dour results ahead. Investors will rejoice with the exit of the CEO that has spent more time protecting his position in KONA, then enhancing shareholder wealth. The company could just as easily falter with this shakeup in management unless the current COO is exceptional or the BOD quickly finds a suitable replacement. At $2 and change and trading .25x revenue, KONA is an exceptionally cheap stock if they can turn around the prospects. Its probably worth a speculative investment at this level, but keep a close eye on financing and whether it appears that separation from the former CEO occurs. Mill Road Capital was interested in gobbling them up at $10 a few months back. Now without the CEO in the way and the poison pill gone this could open the door for some quick gains.

Update: Before I could even publish this article, Mill Road Capital has already submitted an offer to take KONA private for $4.60 per share. While this is an impressive 100% premium over the Friday close, I'd be hesitant to let them acquire the shares at such a low level. The concept is not in disarray. All it needs is some better management.

Friday, May 15, 2009

Kona Grill CEO Resigns, Shareholders Rejoice

Finally! Everybody has wanted the CEO gone for the last 1-2 years since Kona Grill (KONA) began underperforming. Whether this opens up KONA for a takeover by Mills Road (they offered $10 last year) or not will be seen soon enough, but it definitely can't hurt the performance of the company. KONA has a great concept, but bad management. Its yet to be seen whether this will turn change management b/c presumably the left overs are Jundt players. The new COO was hired by Jundt so while I'm much more bullish I'm still hesitant.

More later on KONA as the story develops.....

Strategists Plugs Africa and Millicom

In this interview, David Riedel, president of Riedel Research Group, spoke with Erin Burnett about the benefits of investing in Africa. Not familiar with this guy, but his thesis ties into ours on the continent. Millicom (MICC) has been a favorite of Stone Fox because of its exposure to Africa. The wireless market is just exploding accross the continent and MICC is the best way to play it.

Stat of the Day 2: Empire Strikes Back

More good news on the economic front overlooked today from the Empire Fed Manufacturing report. Another 'best since Oct 2007' reading for future expectations. The number was a remarkable 44 which is way above zero and considerably more bullish then any other reading in the index. Shipments were positive for the first time in months. Inventories remained considerably negative which is actually bullish because they'll need to restock in the near future.

The only major negative was a decline in orders. Though the number was still better then the March lows. The huge bounce in April probably contributed to the slack in May.


  • The New York Fed's "Empire State" general business conditions index climbed to minus 4.55 in May--its highest since August 2008--from minus 14.65 in April. In March, the index sagged to minus 38.23, its weakest since its launch in July 2001.
  • the regional Fed's index on future business conditions rose to 43.8, its highest since October 2007.
  • The regional Fed's employment index climbed to minus 23.86 in May from minus 28.09 in April, while its shipment index rose to 1.29, the first time it was above zero since last summer, prior to the peak of the financial crisis.
  • Its inventory reading increased to minus 21.59 from a record low of minus 35.96 in April.
  • The report's new order index retreated to minus 9.01 from minus 3.88 in April when it posted a huge 40-point jump from March.

Stat of the Day: Consumer Confidence Snaps Back

According to the preliminary Michigan Surveys of Consumers, consumer expectations are at the highest level since Oct 2007. The consumer sentiment is at the highest levels since Sept 2008. That's pretty amazing considering the stock market was at 1,200 back in September and the housing and job markets have continued to plunge. Based on these numbers, I'd expect some more snap back in retail spending. For the first time in 20+ months, consumers actually see a brighter future. Now this doesn't always impact spending short term it ultimately will have an impact.

Surprising that the market is down so far today with rather upbeat news on the consumer front. Normally I'd not pay attention to this report because it doesn't always translate to consumer spending but expectations have reached a reflection point. When psychology turns it doesn't turn back that easily.

  • The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence for May rose to 67.9 from 65.1 in April.
  • This was above economists' median expectation of a reading of 67.0, according to a Reuters poll.
  • The index of consumer expectations jumped to 69.0 in early May, its highest since October 2007 and up from 63.1 in April.

Thursday, May 14, 2009

Poll of the Day: Bespoke Investor Sentiment

It's always interesting to see what the sentiment of the active retail investors/bloggers is now that the market has had a 5% pullback. The market is just 1-2% above major resistance in the 870-875 level. Its unlikely a normal market would see a break of those levels after having such a hard time breaking above that level going back to October. Based on that I'd think at least 60-70% would expect the market to hold. After all, it was the inability to hold 870 that sent the market off the cliff all the way to 666. So what are the results?

According the poll as of making this post, only 12% expect the market to bounce from here. So 87% expect the market to go lower. Now nearly half or 43% expect only a 10% correction which would be around 840 Thats pretty reasonable, but a full 45% expect a least a 20% correction which equals a new bull market and even worse 27% expect a return to the lows at 666. Extrapolating the results I'd likely guess that the 43% only expecting a 10% drop would likely have selected 15% if it was an option. I'd guess that at least 60% of the people expect a 15%+ correction.

Now thats just down right bearish. Oh wait, thats actually very bullish. So many people negative just proves that very few people are left to sell this market It confirms the view I got from watching the Fast Money show on CNBC. Volumes on a lot of stocks were very low today. People expecting a downside move are already short or out of the market. The pullback is healthy, but don't expect the majority to be accurate. Doesn't appear to be many bulls left these days. Its been easy to be a short that people have forgotten this historical market moves.

I'm expecting a slight pullback, but this seems to easy and expected. Not sure it'll happen as all the experts expect.

Wednesday, May 13, 2009

Meredith Whitney's Move Called the Bottom

Looking back, this move by the Glamour Girl of the Financial World to create her own advisory firm was right at the bottom of the market. She has long to the harbinger of bad news for financial so I had speculated at the time that this was a sure sign of the bottom. Of course alot of people thought the same thing when she appeared on the cover of a mainstream magazine I believe back in October. Though some do claim that October was the internal bottom of the market as that was the day when the most stocks made new 52 week lows. The following lows in November and March were made with much less conviction. Guess in eccense she book ended the time period with those 2 moves.

ClusterStock has a little article highlighting her move and appearance on CNBC that day. Note the negative 600 points on the DOW that day. That was Feb 20th just weeks prior to the end of the bear market. Also, gotta love that Henry Blodgett posted the piece. He will go down as being a pivotal point in the irrational exuberance in 2000 and now the exhorbiant fear in 2009. He clearly knows how to market his name to take advantage of the greed and fear cycles. Does he ever get that trends end?

Looking at Whitney Advisory's website its intriguing to note the first research report listed was on March 4th just 5 days prior to the bottom. So she basically got the ball rolling right at the bottom. Hmm... Also gotta love that the 'Team' is just her and the home page is mainly selling her pic as much as anything else. The face of the downturn.

What hasn't really made the rounds yet was that such was pushing clients to sell bank stocks into this huge rally. During a quarter where most in general reported solid profits. Whitney was right for a while but typical of the market gurus during one period become the outcast during the turn.

Fast Money Halftime Negativity Fest

Watching this CNBC Fast Money video made me want to take the opposite side of the trade. These guys are very smart especially Gartner, but when everybody in the room on Wall St is on the same side of the trade your typically better off taking the other side of the trade.

The S&P500 pulled back close to the 20ema which isn't overly surprising. We added to some hedges at the end of last week including buying the SH (Short S&P 500) for the Hedged Fund. They typical pundit on CNBC still expects this market to roll over so it gives me more confidence to buy on any slight dip tomorrow. Looking to add back to GFA, DKS, RVBD, MS, HIG and start X. All of these stocks trade around the 20/50 emas with huge upside potential. These stocks were over extended but now they've pulled in for a great trade.

Sunday, May 10, 2009

Performance Review

Quick review of the fund performances for each period versus the major indexes as reported on marketocracy.com


Hedged Growth
This portfolio is up 7.3% since inception versus the 18.6% loss of the S&P500. Outperforming the index by 25.9% and over 26.0% when eliminating the higher fees assumed on the site.



Today MTD QTD YTD
SFCHG
0.00% 6.57% 15.60% 6.94%
S&P 500
2.41% 6.52% 16.72% 3.87%
DOW
1.96% 4.98% 12.69% -2.30%
Nasdaq
1.33% 1.26% 13.76% 10.27%



Net Payout Yield
This portfolio is down 23.9% since inception versus the 31.0% loss of the S&P500. Outperforming the index by 7.0% since 3/1/07 when eliminating the higher fees assumed on the site.



Today MTD QTD YTD
SFCNP
-3.97% 7.33% 19.83% 4.81%
S&P 500
2.41% 6.52% 16.72% 3.87%
DOW
1.96% 4.98% 12.69% -2.30%
Nasdaq
1.33% 1.26% 13.76% 10.27%


Capital Growth

This portfolio is down 26% since inception versus the 29.2% loss of the S&P500. Outperforming the index by 3.2% and closer to 4% when eliminating the higher fees assumed on the site.



Today MTD QTD YTD
SFCG
0.00% 10.69% 37.32% 25.01%
S&P 500
2.41% 6.52% 16.72% 3.87%
DOW
1.96% 4.98% 12.69% -2.30%
Nasdaq
1.33% 1.26% 13.76% 10.27%

Net Payout Yield: CSX

The railroad stocks like CSX (CSX) have been out of favor for awhile because of declining shipments. CSX though continues to maintain a 2.8% dividend while attractive, its not overwhelming in this environment where stocks move up or down by 20% sometimes in a day. We like to look at the Net Payout Yield as its been deemed more reliable in studies as a predictor of a stocks potential. View my old articles for more detail.

The stock buyback portion of the Net Payout Yield makes this stock more enticing. For 2008, CSX bought back $1.5B of net stock. For a company with a current market cap of $12.1B thats an impressive amount. Unfortunately for Q109, CSX didn't purchase any stock with the turmoil in the markets. That leaves the trailing 12 month buyback at $1.2B or 10% of the current market cap for a whopping yield of 10%. Combine that with the 2.8% dividend and the Net Payout Yield is an impressive 12.8%. Obviously CSX will need to get back to buying up stock for this yield to remain high.

Since we don't suggest investing blindly on this measurement, its always best to review the prospects of the company. Railroad shipments and revenues were down 17% YOY in Q1. Not too surprising considering the economy. The good news is that CSX still managed to earn $0.62 in the quarter so the quarterly dividend of $0.22 has very good coverage assuming the economy bottoms out. From a competitive position, we also like their position going forward as railroads tend to be cost effective compared to other forms of transportation and their isn't any new competition coming on board. Unlikely to see much in the way of new railroads especially in main shipping areas due to congestion and lack of space.

This all adds up to Stone Fox initiating a position in CSX. As the economy picks up so will the demand for CSX services and the additonal earnings will lead to higher dividends and more buybacks.

Long CSX in Net Payout and Hedged Growth Funds

Thursday, May 7, 2009

Regions Financial Rebukes Treasury Findings

From the PR on Regions (RF) website, RF isn't too happy with the stress test results showing they need to raise $2.5B of additional capital. For the most part, RF has been relatively quiet during the whole turmoil in the financial markets. It's encouraging to see them put up a fight today. Heck, it's encouraging to see any financial company put up a fight. Specifically RF doesn't think the loan loss expectations for Commercial Real Estate made by the government reflect what they'll likely report down the road. 3x the current loss ratio does seem excessive. They also show how if RF was treated similar to other banks tested that they would need little to no capital.

The company questions why they should be forced to raise capital for a adverse economic scenario when Bernanke is positive about the 2nd half of 2009. Whats odd about these tests is that even if the adverse scenario happened it wouldn't be like RF would have zero capital. It would just place them below the well capitalized threshold. And if thats the worst that happens during the worst economic storm in 70 years, why force such a dilutive capital raise at the bottom? I'm glad to see RF fire back at the government. They've had lower losses then the industry, but some how they've been subjected with higher test standards. Assuming the economy continues to improve, I wonder if RF will have to raise the $2.5B in capital? The argument by the government could easily lose steam in 3-4 months.

Some of the arguments from RF:

  • the company believes the estimated losses even in the more adverse scenario are unrealistically high given Regions’ actual loss experience during the current recession. The assessment’s estimated losses of $9.2 billion during 2009 and 2010 would require a loss rate of almost triple Regions’ actual first quarter 2009 loan losses of $390 million.
  • Regions believes that the SCAP results do not accurately reflect the loan losses that Regions is likely to experience even in the “more adverse” economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% on commercial real estate is sharply higher than both Regions’ actual annualized loss ratio on this portfolio in the first quarter and sharply higher than that projected for the other banks. If Regions’ projected cumulative two-year losses on this portfolio were at the 8.5% aggregate level for the 19 tested banks, the capital raise commitment would be approximately $500 million; if the projected cumulative losses were 50% higher than the bank’s annualized first quarter commercial real estate losses, Regions would not be required to raise capital.

Disclosure: long RF in client funds and personal account

China on the Hunt for Distressed Assets

According to this NY Post article, China plans a massive North America tour with over 400 executives to research and view distressed assets. Noteworthy that they plan to spend almost as much time in Canada as the US. Hmm....

  • Hoping to take advantage of cheap prices on struggling American businesses, a group of 400 executives from state-owned and private Chinese companies will be visiting the US next month on the hunt for distressed assets.
  • China's Ministry of Commerce is behind the tour, and is planning visits to New York, Washington, Chicago and Salt Lake City. The trip also includes stops in Toronto, Vancouver and Montreal.

Wednesday, May 6, 2009

Trade: Bought CSX

The market has been too crazy to keep up with posts. Both the Hedged Growth and Net Payout Funds bought CSX at the close yesterday - May 5th. The stock has a good 2.9% yield and over a 10% buyback last year giving it an incredible new payout yield approaching 15%. Of course, the buyback might be lower in 2009 lowering the yield, but we'd expect the rails to start benefiting from a recovery in the economy and growth in China. More to come later.

Tuesday, May 5, 2009

Is the Recession Over Already?

Just seemed like yesterday that the US economy was headed to a 2nd Depression, but now some people including Brian Westbury in this Forbes article think the Recession will possibly end this month. Its hard to argue his points though logic and the current media makes it difficult to believe that the Recession could really be over so soon. Didn't the financial system just about collapse? Hasn't our favorite professors talked over and over about zombie banks?

Brian is also forecasting a V shaped recovery which is clearly not of the norm. Even Bernanke spent today talking about a slow recovery of only 2% in 2010. That little growth a year after a major Recession ends sure doesn't sound like a V shaped recovery.

Lets explore some of his claims:

  1. New claims for unemployment insurance are probably the very best single indicator of the end of a recession. The monthly average for claims normally peaks one or two months before the economy bottoms--and it appears to have peaked in March, at 658,000, versus April's 635,000. Now new claims are clearly a leading indicator, but I'd say that a drop from 658K to 635K doesn't warrant proclamation that a trend has changed. It's a good start and an investable start, but any trader better ready if the trend changes. Dropping below 600K in May would signal a trend.
  2. Also, given that the September recession was marked by consumer spending falling off a cliff, we look at this measure to signal a rebound. Consumer spending grew at a 2.2% annual rate in the first quarter, and it looks set to rise again in the second quarter. Meanwhile, both major measures of consumer confidence (from The Conference Board and University of Michigan) shot upward in April. This is a clear signal of a change. Most experts used the severe drop in Q4 as signs that the consumer was tapped out. That he'd now save a huge amount of his check sending us into a Depression. You should never doubt the US consumer. We know how to stimulate an economy unlike Japan.
  3. The housing market is also showing nascent signs of life. New home sales bottomed in January at a 331,000 annual rate, but the pace of sales in February/March averaged 357,000. After falling 80% from January 2006 to January 2009, the rate of construction of single-family homes has remained essentially unchanged for the past two months, although (thankfully) it is at a level where builders are still rapidly cutting into excess inventories. In all likelihood, a bottom has been reached for both home sales and housing starts. Though a turn, it's still not enough to write home about. Pricings are still falling and the change isn't enough like in unemployment claims to signal a change. It'd be difficult to build fewer homes so we're not likely to see further drops, but moving make above 400K builds would signal a real turn.
  4. April's month-to-month jump in the ISM Manufacturing Index--the second largest in the last decade--and recent sharp increases in the Chicago PMI, the Philadelphia Fed Index and the Richmond Fed Index. All show the manufacturing recession is rapidly losing steam. 2nd largest jump in the last decade does indeed seem bullish, but in a time period where we've regularly dealt with the worst and now even best so and so in the last 50 years its not surprising to see the best move in the last 10 years. Still its a much more significant move and very much a signal that the economy is snapping back.
Brian had some other good points in the article, but in general it seems unlikely that the recession will end this month. With the ISM at 43, we're unlikely to see growth in May. Also, the market didn't snap back until March. If the Recession ends this month, the market sure wasn't forward looking. What happened to our 6-9 month warning? I'd predict something around July as this point.

Big Player Buys into Commodities

A manager of close to $100B moves into overweight on commodities. AMP Capital moves into commodities b/c of the strength in China according to Bloomberg. Surprising that they are making the move into copper and oil after 50% runs. We agree that these sectors will be a great place to invest over the next 3-5 years. Just more proof that a lot big money has completely missed these runs. Freeport (FCX), Foster Wheeler (FWLT), Atwoods (ATW), and Alpha Natural Resources (ANR) are our favorite plays on the commodity boom. 2010 could be the first in a while that both China and the US show growth in the demand for copper. This at a time that gobal supplies have shrunk due to the recession with some $200B in projects delayed.

More from AMP:

  • AMP Capital Investors, which manages close to $100 billion, is plowing cash into commodities on expectation demand will strengthen with a China-led recovery in the global economy.
  • The company yesterday switched from an “underweight” allocation in commodities future contracts to “overweight,” said Nader Naeimi, an AMP investment strategist in Sydney. Oil and metals were AMP’s top priorities.
  • AMP boosted its investment in a basket of commodities and assigned an “overweight” allocation to primary metals and energy and “underweight” to precious metals and soft commodities, such as wheat and soybeans.
  • “Rather than making money out of financial engineering, people are going to be making money out of making things,” said Naeimi. “So there’ll be a lot more upside pressure on commodity demand, while there is still limited supply.”
  • Mining companies have delayed about $200 billion of projects, according to an estimate by iron-ore producer Cia. Vale do Rio Doce, as the recession has sapped demand for raw materials. Global oil supplies will be “severely constrained” by lower prices and investment, the International Energy Agency said in a report last month.