Friday, October 30, 2009

More on the Tax Loss CarryBack Legislation

The Wall St Journal is reporting that the proposal to allow Tax Loss Carry Backs for 5 years is poised to be approved next week. It's been difficult to find information on this subject as we originally wrote about it on Wednesday[Tax Loss Proposal Gains Support] and hadn't seen any news about it until finding this article.

The proposal is significant because it will provide immediate capital to a lot of struggling small cap stocks such as Liz Claiborne (LIZ) mentioned in the article. Basically any company losing money now would immediately be able to receive a portion of the taxes back that they've paid the last 5 years. The more they've lost the better. The article doesn't mention financials so we're still wondering what the impact will be on companies such as Regions Financial (RF) or Synovus Financial (SNV) that both received TARP money. If those companies were to get a refund, Congress might come under fire. If excluded, LIZ or Terex (TEX) would be our favorite plays off this legislation.

Maybe that's why this proposal has gotten so little discussion from the media. Nobody wants to highlight a handout for financials and corporations in general. The media is fixated with the housing credit and the extension of the unemployment benefits, but ultimately providing a tax refund of $33B to companies that badly need funds might prove more meaningful.

Considering this legislation, the big selloff today is more confusing. Alot of questionable balance sheets would see immediate improvements leading to higher stock prices. Some of the limited details:

Large and mid-sized companies battered by the recession are on the verge of securing as much as $33 billion in refunds from the federal government for taxes paid as far back as 2003.

The firms won support for the plan from Senate Majority Leader Harry Reid (D., Nev.), who added the tax refunds to legislation extending unemployment benefits and headed for Senate approval as early as next week. The tax provision would allow businesses to carry back losses incurred in either 2008 or 2009 to offset taxes paid up to five years before.

There is also broad bipartisan support in the House for the tax loss carryback provision. If the Senate passes the jobless-benefits bill in its current form, House leaders are expected to bring it directly to the floor and vote on it without modification.

Wednesday, October 28, 2009

Is the Market Correcting? NYMO Suggests Its Over Already

Contrary to our posts of the last few days, the market seems to be in the midst of a big correction finally. Or at least that's what the market and media tells us as the market closed today. Polls on CNBC showed that 60%+ plus investors expect a 10%+ correction and nearly 30% expect a 20%+ loss. Just another indication of how bearish the market has become. Down 6 of 7 days and 7 of 9, its surprising how few 'experts' have suggested buying this dip.

One indicator that highlights the extreme negativity is the NYSE McClellan Index. At the close of today it ended at -114 or basically the same level as the end of February which is right before the market bottomed. The low number in the last year plus was just below -125 in October of last year. Those were some brutal moments in this market and indicative of how negative the market tone has become now.

Its no clear cut indication that the market will turn tomorrow, but it does provide support to the theory that the market is short term very oversold. With markets such as the SP500 technically breaking below key resistance levels, it does add up to an interesting trade. A lot of traders closed out long positions or initiated short positions based on that breakdown. Since the market tends to trade against conventional wisdom, it wouldn't surprise us one bit if it turned on a dime tomorrow and closed back above the support levels leaving traders stuck after assuming the long last correction was upon us. Even though, it's been clearly shown that new bull markets last along time and they never correct at year end.

Will this be the trend breaker? If it isn't the correction, look for hedge fund managers to really chase into year end. Anybody out of the market will be forced to join in setting up the final 'melt up' that we've been expecting to at least 1,150 or 1,200.


Tax Loss Carryback Proposal Gains Support

According to some news reports yesterday, the U.S. Congress is gaining support for a Tax Loss Carryback proposal. We're not seeing a lot of news about this proposal but it seems to be something that would be very bullish for the worst off stocks in this economy. Any corporation that made a ton of money in 2004-2007 and is now losing truckloads of money would be able to reclaim some taxes paid in those previous years.

It could be a huge boon to financials struggling to raise capital or manufactures that saw boom years and now are struggling to make ends meet in these lean times. It seems odd that Congress would inact such a law to help the hated banks, but then again a lot of the smaller banks could use some help to stay afloat and continue lending. On the flip side it would further help to support companies not allowing the best players to gain deserved market share. Some of the banks in strong capital shape might to see less growth potential with such a bill.

Some of our favorite financial plays such as Regions Financial (RF), Synovous (SNV), and Phoenix Companies (PNX) are all down big today and this week yet they'd probably stand to be the most to benefit. A manufacturer like Terex (TEX) would see some benefits though not to the same extent since they don't appear to face capital issues. A retailer like Liz Claiborne (LIZ) would probably see some decent benefits like the financials.

Its always interesting how the markets seem to ignore or maybe just not notice these proposals. Every article seems to focus on the housing tax credit instead. Or maybe they just need somebody to tell them the benefits before understanding. Now if I just had a large research staff that could determine the biggest beneficiaries of this proposal. Stay tuned to the news to see if this proposal gains steam and be prepared to buy the beaten down stocks. The lack of reaction could just be that insiders know it won't pass. We shall see.

All companies, no matter what size, would be able to apply losses in one of those years to full year taxable income for the prior four years and to 50 percent of income in the fifth year, according to a summary of a plan backed by Senate Majority Leader Harry Reid and Senate Finance Chairman Max Baucus, both Democrats.

The proposal will be offered as an amendment to an unemployment insurance bill working its way through the Senate. Negotiations are still ongoing so the details could change.

Tuesday, October 27, 2009

Stat of the Day: New Construction Project Inquiries at Highest Level Since Sept '07

Ok this stat was actually from last week, but I'm just now reading it. The AIA (American Institute of Architects) reported last week that the Architecture Billings Index creep up to 43.1 in September still showing an industry in decline. Like other industrial sectors, the index is clearly off the lows, but this one is definitely struggling more to regain growth.

The encouraging part of the index is that project inquiries grew to 59.1 showing signs that future demand will pick up. Its the highest level since September 2007 which is when the financial crisis really began.

It'll be interesting to see how this index progresses in the next few months. The stimulus bill clearly didn't meet the needs of this country if ABI is still negative this many months later. If we could only learn from the Communist in China.

Washington, D.C. – October 21, 2009 – As the nonresidential construction industry continues to struggle, the Architecture Billings Index (ABI) showed a nominal improvement in September. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the September ABI rating was 43.1, up slightly from 41.7 in August. This score indicates a decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 59.1, its highest level since September 2007.

“The fact that inquires for new project are so high is an encouraging sign that we may be seeing new construction activity entering the design phase,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “But that optimism has to be tempered by the fact that the marketplace is so competitive that firms are broadening their search for new projects, thereby inflating the number of inquiries that they are reporting. However, some larger stimulus-funded building activity should be coming online over the next several months, partially offsetting the steep decline in private commercial construction.”

Correction-less Rallies

Great report from Ciovacco Capital Management. It shows that bull market rallies from corrections of 35% or more tend to last alot longer then most people think. In fact everybody clamoring for a market correction of 10% have been amazingly off based from the historical norms. Clearly a correction for corrections sake isn't how the market works.

On average the market rallies 270 days or nearly 9 months after a major correction in the markets crosses back above the 200 MA. This means that the rally will last at least until early spring as the SP500 didn't cross back above the 200 MA until July 10th meaning the rally has really just begun. It's important everybody catches that part. Its not the market low of March 9th, but rather the point where the market became technically strong by crossing the 200 MA.

Probably the most likely comparison was the 1942-43 rally that lasted a whopping 372 days. In a lot of ways this economy has been compared alot to the depression. Since we never reached a depression level, the rally will likely not last as long, but could still easily hit the 2nd longest so somewhere between 328 and 372 days.

Its also worth noting that of the 4 historical examples that exist, the first significant correction began in either early spring or mid July. A couple of reasons probably lead credence to this outcome. First, taxes must be paid in April so its not odd to see the market rallies end because of forced selling to pay taxes. The '71 and '04 rallies both ended in the March/April time frame. Not to mention that the great internet bubble ended right around tax selling time. Might not be as likely of a scenario if most people won't need to raise cash from tax gains created in '09. Second, the major rallies in '43 and '75 both broke down in mid July. Typically traders head to the beach come mid summer so the markets might have been hit by traders cashing out positions before heading on vacation. The path of least resistance would've been down after such long runs.

So for the market to correct now, it would take historical prescience. Now that's highly possible with the market especially when a theory becomes common knowledge and everybody tries to game it. In this case, as we reported earlier today most of the top analysts are bearish on the markets hence giving more validity that the market will continue to rally into year end. The rhyme of history predicts it as in all 4 cases the market holds its gains way into the next year either spring or mid July.

Maybe history won't rhyme this year but with money managers chasing performance and tax theory always suggesting that investors wait until next year to cash in gains it very much backs up the theory of a correction-less rally. Now if it becomes certain that capital gains taxes will indeed increase in 2010, then that might throw a curve ball encouraging more sales in '09. If not, investors will hold gains into '10 and depending on the level of market gains will either cash in to pay taxes in the spring or they will likely hold until vacation time.

Regardless, it's definitely a buy the dips market until the spring until the trend breaks.

Monday, October 26, 2009

Contraian Analysis Suggests Market Goes Higher

After the last week or so in the market and todays 1% drubbing, its difficult to remain overly bullish. Just about everybody claims the market is ready for a sizeable pullback and the drops in the SP500 in 5 of the last 7 days seems to bolster those thoughts.

According to the recent report from Mark Hulbert, the evidence suggests that the market remains too bearish for a big correction. Hulbert has long been a tracker of the sentiment in the financial newsletter circuit. When this group gets too bearish, the market typically rallies as it did in Mar/April until. After such a long rally the market tends to get too bullish and hence a correction happens. Oddly and maybe not really that oddly, the average newsletter is more bearish now then it was in April. Everybody continues to expect the correction that won't happen as long as everybody expects it. After big recessions and bearish markets there has been a tendency towards long rallies without a 10% correction.

Based on the Leading Economic Indicator report we wrote last night, its difficult to grasp why these so call financial experts are so bearish. All indicators suggest a good economic recovery. It looks like the 'Wall of Worry' will once again be climbed. When these guys turn bullish, watch out. Until then, keep buying the dips!

  • On April 13, the average recommended equity exposure was 34.6% among a subset of short-term market timing services tracked by the Hulbert Financial Digest. The Dow that day closed at 8,058.
  • Monday (10/19), in contrast, the Dow closed at 10,092, more than 2,000 points higher. And, yet, the average recommended equity exposure among this same subset of short-term investment newsletters is today just 32.3% -- 2.3 percentage points lower than where it stood six months ago.
  • Or consider where this average recommended equity exposure was at the end of August, when the Dow was trading below 9,500: It stood then at 46.3%. In other words, the last six hundred Dow points have led to a net decrease in average equity exposure of 14 percentage points.

Friday, October 23, 2009

Leading Economic Indicators Show Impressive 6 Month Gain

Still amazes me how little attention the Leading Economic Index from the Conference Board gets from the market. The Conference Board reported a September number with a 1% increase and a 5.7% 6 month growth rate. This forecasts huge growth in Q4 and Q1 but oddly the head of the Conference Board stills tells a cautious tale. With a 6 month rate at the highest since 1983, its difficult to see any negative scenarios for the economy.


The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.0 percent in September, following a 0.4 percent gain in August, and a 1.0 percent rise in July.

"With the sixth consecutive increase, the LEI's six-month growth rate has improved to its highest pace since 1983," says Ataman Ozyildirim, Economist at The Conference Board. "Except for average workweek and building permits, all the leading indicators contributed positively to the index this month. At the same time, the contraction in the coincident economic index has halted in recent months, but the continued downtrend in employment is keeping this index of current economic conditions from rising faster."

Says Ken Goldstein, Economist at The Conference Board: "The LEI has risen for six consecutive months and the coincident economic index has increased in two of the last three months. These numbers strongly suggest that a recovery is developing. However, the intensity of that recovery will depend on how much, and how soon, demand picks up."

Riverbed Drops on Downgrade by Whom?

Its always comical to us how stocks continue to trade based on analyst recommendations. Especially ones without street credibility. After all we've seen in over the last decade that takes place on Wall Street, its difficult to read some of these reports with a straight face.

Last night, Riverbed (RVBD) reported great numbers with earnings beating estimates by 28% and reporting 18% Year over Year growth. They also guided higher then the Street. Also considering how easily they just beat the Q3 guidance they gave back in July its hard to take their numbers as anything other then the baseline - $104-107M and $.18.

So how could any analyst downgrade a stock after that report? Well, it turns out that one of the analysts with highest numbers decides to take management at face value. Management says $.18 so now he all of a sudden thinks they'll hit that number exactly. He does maintain the high end of the revenue. All in all he recommends a sell with a $20 target.

See report at StreetInsider.com for amusement purposes only. Its pretty diffcult to come away from RVBD's Q3 report with a negative view. They talked about a new product being demanded by customers for cloud computing (buy TMRK) to replace the Atlas product that they canceled. The Auriga guy was down on that, but didn't mention the potential of the new product.

What I don't understand is how the market reacts to just one analyst. The numbers on average for RVBD will be rising. It isn't uncommon to see one analyst lower number, but what about the 5 that will raise them. After the Q2 report the stock floundered for a couple of weeks before refilling the gap. Don't be surprised if it happens again. These numbers definitely didn't scare off JNPR or HPQ (see old news for deal rumor) and in fact the drop in the stock price might make management more willing to sell. The results make it easier to justify the price.

Thursday, October 22, 2009

TerreMark Jumps on Competitors Buyout

Good news for one of our favorite stocks that has been lagging of late. Competitor Switch and Data Facilities (SDXC) got a buyout offer from Equinix (EQIX) last night providing nearly a 30% premium for the share price of SDXC. In addition, EQIX beat earnings estimates by 57% providing more support for investing in TerreMark (TMRK).

Remember, Stone Fox Capital invested in TerreMark Worldwide because it has a great connection with the Federal Govt and VMWare (VM) making it our top pick in the sector. The news from EQIX suggests that the sector as a whole is improving dramatically from last year.

Details on the merger:

  • entered a definitive agreement for Equinix to acquire Switch and Data in a transaction valued at approximately $689 million in cash and stock, based on yesterday’s market close. The combination of the two companies will further strengthen Equinix’s leadership position in the global data center services market by extending the company’s presence to 16 new markets across North America. Equinix will integrate Switch and Data’s data center business and operations, including the company’s 34 data centers in 22 markets in the U.S. and Canada. The acquisition will add more than one million gross square feet of data center capacity, bringing Equinix’s total global footprint to 79 data centers in 34 markets and more than six million square feet across the North American, European and Asia-Pacific markets. It will allow Equinix to immediately expand into new strategic markets, including Atlanta, Denver, Miami, Seattle and Toronto, as well as provide a platform for future expansion of Switch and Data assets.
  • Under the terms of the agreement, Switch and Data stockholders will have the opportunity to elect to receive either 0.19409 shares of Equinix stock or $19.06 in cash for each share of Switch and Data stock.

Equinix earnings:

  • The company earned $18.8 million, or 47 cents per share, up from a profit of $5.6 million, or 15 cents per share, in the same period a year earlier.
  • Revenue rose 24 percent to $227.6 million from $183.7 million.
  • Analysts, on average, were expecting a profit of 30 cents per share on sales of $224.1 million, according to a poll by Thomson Reuters.
  • For the full year, Equinix forecast sales of $875 million to $880 million. Analysts are expecting $872 million.

Trade: Added KHD

Added more KHD Humboldt Wedag to our Growth Portfolio today when the stock plunged down to the 50ema. Can't find any news to explain the plunge so hopefully it's just a technical move and the stock will recover nicely.


Wednesday, October 21, 2009

F5 Networks Points the Way for Riverbed

After the close today, F5 Networks (FFIV) posted earnings that easily beat analyst estimates. Considering that F5 Networks has had a much rougher recession then Riverbed (RVBD) its encouraging to see the turnaround. F5 Networks reported an increase in their pipeline and movement of project on hold. All very promising for RVBD even though they aren't exactly the same business they somewhat track each other.

If you recall, RVBD had a disappoint Q2 even though sales were up 17%. They were hit somewhat by customers delaying projects and this report by FFIV hints that RVBD might see that those projects ramped up in Q3. That supposed buyout around $34 that we talked about last week might not be enough if RVBD shows similar results.


Comments from Reuters on F5s earnings report:

Oct 21 (Reuters) - Network-equipment maker F5 Networks Inc's (FFIV.O) quarterly profit beat market estimates on increased bookings and improved customer spending, sending its shares up 8 percent.

The company also gave a strong outlook for the first quarter.

Fourth-quarter net income increased to $28.4 million, or 36 cents per share, from $19.7 million, or 24 cents per share, a year earlier.

Revenue rose about 2 percent to $175.1 million.

Excluding items, earnings were 50 cents a share.

Analysts expected earnings of 41 cents a share, excluding exceptional items, on revenue of $163.9 million, according to Thomson Reuters I/B/E/S.

For the first quarter, the company -- whose rivals include Cisco Systems (CSCO.O) and Juniper Networks (JNPR.O) -- forecast earnings of 47 cents to 49 cents, excluding items. Analysts were expecting 43 cents a share.

Shares of the Seattle-based company, were up $2.87 at $44.40 in trading after the bell. They closed at $41.53 Wednesday on Nasdaq. They have gained about 84 percent this year. (Reporting by S. John Tilak in Bangalore; Editing by Saumyadeb Chakrabarty)

Freeport-McMoRan Surgess to 52 Week High on Earnings

Freeport-McMoRan (FCX) is a big miner of copper and gold and a favorite of Stone Fox Capital. They are possibly one of the best run mining companies in the world. With China being the largest user of copper, it stands to reason that copper will benefit from their rapidly expanding economy. Not to mention that FCX has a large gold operation and $1,000+ gold prices is a big help.

Today FCX reported earnings that easily topped analyst estimates and even soared 77% above last years results. Even more impressive is that they achieved the earnings gain with lower revenue. Its also amazing how the CEO talked so much about the weakness in the marketplace and yet they made huge profits. Imagine what it'll be like when the US economy is good enough to start building houses.

Some snippets from an AP report:

  • Freeport-McMoRan cut production and delivery costs by 40 percent over the past three months, generating gains that more than offset a quarterly decline in revenue.
  • Sales fell 10 percent to $4.14 billion, down from $4.62 billion last year.
  • Earnings jumped 77 percent to $925 million, or $2.07 per share, from $523 million, or $1.31 per share, a year ago.
  • That easily beat analyst expectations of $1.34 per share, according to a survey by Thomson Reuters.
  • Argus Research analyst Bill Selesky said the company's higher gold prices offset lower year-over-year copper prices.
At $82 this afternoon, we're clearly not looking to add more shares, but its definitely a stock to hold even at a 52 week high. This stock shows every sign of approaching the old high around $120. Sterlite Industries (SLT) is another copper play that is a big holding of our portfolios. Not sure what to make of the stagnant trade in SLT today.

Tuesday, October 20, 2009

Is KHD Humboldt Wedag the Ultimate Value Play?

Until this article at Realmoney.com, I'd never heard of KHD Humboldt Wedag (KHD). KHD owns companies that operate internationally in the industrial plant engineering and equipment supply industry, and specializes in the cement processing industries. They have a negative enterprise value meaning that cash in the bank outnumbers the market cap. This is a pretty rare situation especially considering they are basically a emerging markets play with 95% of their backlog in Russia, Eastern Europe, Asia (mainly India), and the Middle East.

Back to why this stock made my radar. They fall into the same sector as Liz Claiborne (LIZ), Terex (TEX), and Manitowoc (MTC) that we've owned this year and still own LIZ and TEX. What sector is that you ask? They are all still down roughly 80% from their recent highs and were 'blistered' alot more then deserved. The author suggests stocks deserving to be down 20%, but that dropped 80%. We're not so sure about just 20%, but even 50% would still provide for a huge gain from here. TEX for example would trade closer to $50 instead of the current $24.

Cement may not be the most glorious infrastructure material like copper, but it'll be in high demand for decades to come as Eastern Europe, India, China, and Africa look to buildout infrastructure.

One of the main reasons for the weak valuation is the concern over the very weak orders from Q2 that amounted to just 10% of the total from last year and down significantly from Q1. If anything the weak orders are an indication of the liquidity crisis that hadn't abated at the end of Q2 and hence the lack of financing for large projects that consume cement. Q3 orders and discussion about Q4 and 2010 I would imagine will be much more positive now that emerging markets are ramping back up as we heard on Monday from the Caterpillar (CAT) CEO.

KHD recently sold their coal processing operations in order to focus on the cement industry. This will bring in even more cash to the balance sheet and further lower the Enterprise Value.

According to their September presentation, 89% of cement consumption in 2010 will be in developing/emerging markets making KHD one of the best emerging market plays around. Based on their cash reserves and solid balance sheet, it's also one of the lowest risk stocks in this universe to own if we were to have a double dip recession. Especially amongst the group listed in the RealMoney.com article where the other 3 stocks are heavily indebted.

All this makes for a solid decision to invest in KHD which we've already done for the Growth Portfolio. Todays close around $10.68 provides for a good entry point trading just above the 20ema with it poised to surge above the 200ema.

Regions Financial Builds Provisions

Today, Regions Financial (RF) reported Q3 results. The results were to some degree worse then expected, but in the crazy world of banking stocks RF rallied today after an initial selloff.

Looking at the numbers and reading the transcript of the CC, it appears that RF largely reported a bigger then expected loss due to dramatically increasing the provision for losses. In fact the loan provisions were some $300M greater then charge offs and up over $100M from the linked quarter.

  • Net loan charge-offs increased to $680 million or an annualized 2.86 percent of average loans, driven by value-related write-downs and problem asset dispositions
  • Allowance for credit losses increased to 2.90 percent of loans with $1.025 billion provision for loan losses, exceeding net charge-offs by $345 million


It appears that alot of investors see Q3 as the peak in provisions especially considering the comments about the inflows of non-performing loans stabilizing. Moreover the talk about the homebuilder, condo, and Florida home equity portfolio peaking and trending down in 2010 gives more credence to the thought that loan loss provisions have peaked at RF.

Meanwhile, we continue to reduce our homebuilder and condominium portfolios which declined another $498 million in the aggregate during the quarter. Given the lower levels of these portfolios and the significant charge-offs that we've already booked, this source of losses will decline as we move through 2010.
Encouragingly RF saw a record increase in new checking accounts leading to higher low cost deposits and market share gains. All the while they cut 1,700 employees over the last year. Both good signs that RF has been able to cut costs while maintaining service and gaining market share as weaker competitors retrench from their markets.

The main remaining issue appears to be the CRE portion where a large percentage of the problem loans are income producing. Considering that the properties generate a certain level of income, RF sees a lot of opportunity to restructure these loans.

All in all, RF continues to be a small investment in our Growth Portfolio. If loan loss provisions have indeed peaked, RF will likely rally until year end. Considering they've seen the light at the end of the tunnel for most of their loan markets, investors will have less and less to fret about.

Wednesday, October 14, 2009

Trade: Bought KHD Humboldt Wedag International

Just getting around to posting that Stone Fox bought KHD Humboldt Wedag (KHD) for the Growth Portfolio at $10.35 on 10/13. More to come on this play, but to summarize its a great value play in the Engineering & Construction segment with a huge focus on emerging markets like India.

Sold the Natural Gas ETF (UNG) to make room for this trade. Not much positive to say about this ETF. Just read any of the stories on popular financial websites to see why this ETF has turned out to be a huge bust.

Riverbed Supposedly has $34-35 Offer on the Table

Rumors of buyouts fly around all the time, but its interesting to see that the one involving Riverbed Technology (RVBD) has been so persistent. Now seeing reports that an offer for $34-35 in now on the table from both Hewlett Packard (HPQ) and Juniper Networks (JNPR). RVBD has been one of the best performing companies during this recession having actually grown revenue YOY. That list is very small so it isn't surprising that they'd become a takeover target.

That offer would be nearly 40% above the $24-25 level today and would be very enticing to Stone Fox Capital. We have no doubt that RVBD would reach these levels themselves within the next year, but why take the chance. Better to have the money on merger Monday, then wait for the hard work. Also as the stock market melts up to our targeted 1,200 range we'll be looking for stocks to cash out of and this deal would just make it easier.

Now wouldn't it be funny if that analyst from Wells Fargo places a Market Perform ranking on RVBD right before they get a huge buyout. We seriously doubt all the positives are already in the stock.

  • Wells Fargo analyst Jess Lubert today launched coverage of the company with a Market Perform rating and a valuation range of $23-$25. “We are positive on Riverbed’s positioning in the $1 billion WAN optimization market and we believe the company should benefit from its growing distribution channel,” Lubert writes, while adding that “positive developments in the company’s business are fully reflected in the stock price.”

Stay tuned for more noise on this potential deal. Options continue to fly in the Oct $25 and Nov $30 strikes so something is brewing. RVBD is a core position of our Growth Portfolio.

Monday, October 12, 2009

Net Payout Yield Focus: Yum Brands

Yum Brands (YUM) has been a desirable investment over the last few years because of its presence in China with KFC. As of September 30th, YUM caught our attention as a potential Net Payout Yield stock. On that day, YUM announced a 11% dividend increase and a $300M buyback. Anybody following our Net Payout Portfolio knows that we love stocks that generate plenty of cash to make dividends and buybacks.

With a market cap of over $16B, the buyback is only roughly 2% so not too impressive. Combined with the 2.4% dividend YUM is getting close to a 5% net payout. Somewhat below average but not too bad for a company forecasting 12% profit growth this year. Considering the buyback was higher in 2008, its also possible they'll up the buyback amount as the recovery takes hold.

Considering that YUM provides the unique opportunity of a decent Net Payout Yield and access to the growth of the Chinese consumer this is an ideal candidate for both our Growth and Net Payout Yield Portfolios. With a forward PE around 14, it isn't particularly cheap considering the environment. For that reason we're looking to load up on any dips.

Poll of the Day: Is the Recession Over?

This is a pretty stunning result from a CNBC poll. While Stone Fox Capital has been claiming that the recession was likely over in the June/July time frame, this poll suggests that only 20% of the people on CNBC think the recession is over 3 months later. On a purely technical basis, the recession is clearly over as Q2 GDP will likely grow at a 3-4% level.

I'd guess that the respondents to this poll follow the jobs market which is one of the biggest mistakes made my investors. The jobs market is a huge lagging indicator. The ability for companies to regain growth while still cutting jobs creates gains in margins leading to higher profits. Those profits lead to jobs growth. Not the other way around. Nobody hires people until they can make money with what they have.

To us this is yet another bullish sign as investors still aren't convinced that the economy has turned even after the NABE calls the recession over.




Did the NABE make the right call, is the recession over? * 2139 responses
Yes
20%
No
73%
Not sure
7.1%
Not a Scientific Survey. Results may not total 100% due to rounding.

Friday, October 9, 2009

Barton Biggs Backs our Melt Up Theory

Stone Fox Capital has been adamant that we expected the market to continue to melt up the rest of the year. From both a technical and fundamental view, it appears that the market needs to hit at least 1,200 to brush off the huge falloff from last year. Now when we get to that level it doesn't mean that we'll rush off to new highs above 1,550. Heck we won't even be close to the old highs and that is the part that so many shorts continue to miss. Yes, the market is up 50% off the lows but it's still so far from the highs. The level of the rebound is determined by the size of the drop.

Barton Biggs of Traxis Partners went on CNBC today and discussed this issue. Hes in the camp that the rally has plenty more room













Thursday, October 8, 2009

Airplane Lessors to Benefit from Exploding International Growth

Anybody just focusing on domestic US traffic would miss how the rest of the world is seeing explosive growth in airplane traffic. For airplane lessors it's mostly about international growth and with Boeing continuing to struggle to get their new plane out it just makes the planes owned by lessors like AerCap (AER) and Genesis Lease (GLS) more valuable. Below is a couple of examples of the explosive growth seen outside the US and in places other then China and India.

LAN Airlines (IFL) is one of the leading airlines in Latin America with a dominant position in Chile and Peru plus operations in Argentina and Ecuador. They reported a huge 11.9% increase in system traffic for September.

  • System passenger traffic for September increased 11.9% as capacity rose 9.3%. As a result, the Company's load factor increased 1.8 points to 78.8%. International passenger traffic accounted for approximately 71% of total passenger traffic.
  • Domestic passenger traffic in Chile, Argentina, Peru and Ecuador rose 17.5% as capacity increased 15.0%. As a consequence, the domestic load factor for the month increased 1.6 points to 77.0%.
  • International passenger traffic for September rose 9.8% as capacity increased 7.1%. Accordingly, the international passenger load factor for the month increased 1.9 points to 79.6%. International capacity was mainly driven by an increase in operations on routes to Europe and the South Pacific, partially offset by a decrease on certain regional routes.

Both Dubai and Abu Dhabi show strong growth as well. Dubai has shown more then 10% Year over Year growth the last 3 months. They also forecast a greater then 13% growth in 2010. Abu Dhabi is showing much slower growth, but still decent growth non the less.

  • Dubai International Airport saw passenger traffic climb 10.7 percent in August, while cargo volumes edged up 2.9 percent, its operator Dubai Airports Co said on Monday.
  • Traffic was slightly down on the 12.6 percent growth witnessed in July, but up from the 10.3 percent growth seen in June.
  • Dubai airport has projected passenger traffic growth of 8 percent this year to 40.5 million, with growth rising to 13.6 percent in 2010.
  • Abu Dhabi International Airport saw passenger traffic climb just 2.5 percent in August, a significant decline on the 10.3 percent growth recorded in July, its operator Abu Dhabi Airports Co (ADAC) said on Sunday.
AER is in the process of buying GLS and the combined companies will be the largest independent airplane leasing company. Based on this growth in non-BRIC locations, it just shows the demand that exists for modern airplanes. With both Boeing (BA) and Airbus struggling to deliver new planes, these lessors will be alot more attractive. Considering both AER and GLS trade below $9 and forecast over $1.70 in earnings they are must buys.


Disclosure: Long AER, GLS, and BA

Atwoods Oceanics Hits 52 Week High on Upgrade

Ironically though it was only an upgrade to a Neutral. Another analyst that has missed the run and yet still not bullish. The time to unload Atwood Oceanics (ATW) is when this guy goes to a Buy. For now Stone Fox continues to hold it's position while the stock remains in a beautiful technial position.

Pritchard Capital Partners analyst Brian Uhlmer upgraded the company to "Neutral" from "Sell," based on a belief that all the company's bad news is known and baked into the current share price. Also, he noted that the company has helped its margins by cutting operating costs in recent months. Uhlmer held to his fourth-quarter profit estimate of 59 cents per share, assuming the company was not able to further cut operating costs in September. Analysts polled by Thomson estimate a profit of 66 cents per share, on average.

Wednesday, October 7, 2009

Interesting Comments on LIZ

Options Edge from Schaffer Research put this out about the jump in Liz Claiborne (LIZ) today. I'd place some stock in the Mexx sale, but selling a prime brand like Juicy seems unlikely. Assuming they could get a good deal, reducing the debt would be ideal. Stock prices is still too low for the assets they own.


Liz Claiborne, Inc.

Liz Claiborne, Inc. (LIZ: View sentiment for LIZsentiment, chart, options) rallied 8.6% on Tuesday as speculation swirled that the company is preparing to sell one of its brands. The apparel issue is struggling under a $718 million debt load, and the sale could help ease LIZ's burden. The company declined to comment to Dow Jones, but analyst Brian Sozzi of Wall Street Strategies said that such a move could help assuage investors' anxiety.

"I continue to believe Mexx, with its new brand president having considerable retail experience and exposure internationally, would be first on the block," commented Sozzi, adding that Juicy Couture would be another likely candidate.

LIZ is on the upswing again this morning, with the stock preparing to challenge the $5 level -- the site of its descending 10-day moving average.

Meanwhile, call volume has been heavy on LIZ in recent weeks. The stock sports a 10-day International Securities Exchange (ISE) call/put volume ratio of 20.62, which ranks higher than nearly 82% of other such readings taken during the past year. With a hefty 12.7% of the security's float sold short, some of these calls might have been purchased as hedges.

Tuesday, October 6, 2009

Alvarion Signs Two Impressive Deals

Alvarion (ALVR) is the largest 'pure play' WIMAX equipment maker and should be a big beneficiary of the worldwide move to mobile internet. Early Tuesday, they announced 2 significant contract deals that the market has only modestly responded too by the close. ALVR signed deals with Safaricom in Kenya and Clearwire (CLWR) in Spain. Some people have probably heard of Clearwire (or maybe not), but not likely Safaricom. This highlights the typical problems ALVR faces. Customer name recognition isn't usually that high and explains why ALVR trades around an EV of .5 to Sales. They also have $130M in cash and only a $270M market valuation.

The Safaricom deal was significant both financially and strategically. Financially the deal is $12M for the initial phase of a 36 month deal. So already its likely a $30-40M deal over 3 years. Strategically the deal places ALVR in alliance with Vodaphone since they are part of the Safaricom joint venture. It also place them with an aggressive mobile operator with over 14M customers in Kenya and East Africa. This partnership could easily be expanded down the road.

  • With a subscriber base of over 14 million and about 2,000 base stations across the country, Safaricom is Kenya’s leading total telecommunications services provider with a huge investment and market leadership in both voice and data services.
  • Formed at the turn of the decade as a joint venture between Vodafone and Telkom Kenya, the firm has built a solid reputation as a hot-house for innovation. Two years ago, it pioneered M-PESA, the first mobile money transfer service, anywhere in the world. Only recently, Safaricom, in another global first, became the first firm to commercially launch a solar-powered phone, Simu ya Solar.
The Clearwire deal could be a game changer. Clearwire is the largest WIMAX operator in the world with aggressive growth plans in the US and now outside as well. This deal with ALVR is for only one city in Spain, but I can't help but think this is a test to see if ALVR has the goods to be a worldwide supplier for them. The test also includes ZTE for another city so they clearly are checking out the competition as well. With all the talk of the big boys continuing to pull out of the WIMAX sector, CLWR surely has some concerns about the suppliers they are using and might potentially be looking for more of a kindred spirit. ALVR is a WIMAX centric provider and helping elevate them to a global supplier might be a requirement for ensuring they have advanced future supplies.

  • Clearwire International, LLC, a holding entity of Clearwire Corporation (NASDAQ:CLWR - News), offers a robust suite of advanced high-speed Internet services to consumers and businesses. As part of a multi-year network build-out plan, Clearwire’s 4G service, called CLEAR™, will be available in major metropolitan areas across the U.S., and bring together an unprecedented combination of speed and mobility. Clearwire’s open all-IP network, combined with significant spectrum holdings, provides unmatched network capacity to deliver next-generation broadband access. Strategic investors include Intel, Comcast, Sprint, Google, Time Warner Cable, and Bright House Networks. Clearwire currently provides 4G service, utilizing WiMAX technology, in 16 markets and provides pre-WiMAX communications services in 40 markets across the U.S. and Europe. Headquartered in Kirkland, Wash., additional information about Clearwire is available at www.clearwire.com.

As we posted yesterday, ALVR has remained one of our most frustrating investments. They've signed some impressive deals this year including the ones with Open Range and France Telecom. It just never seems to help the stock. ALVR trades at ridiculous EV/BV and EV/Sales ratios, but that is nothing new for this stock. Too many fear the demise of WIMAX and therefore are unwilling to place any reasonable valuation multiple. For a company that primarily focuses on emerging markets, its surprising that they struggle to grab the momentum traders. They have reported sporadic earnings over the last few years having continually decided to invest highly in R&D, but with a pristine balance sheet that shouldn't be a huge concern to investors. As WIMAX continues to grow in places like Latin America and Africa, ALVR will easily be able to cover those expenses and grow to a very profitable company.

Anybody wanting to buy should've jumped in yesterday, but at $4.30 its still way too cheap to let pass by.


Disclosure: Long ALVR

UBS Upgrades Hartford Financial and Restarts Phoenix Companies at Buy

This just further highlights why you have to be careful when following analyst calls. UBS today resumed coverage of the insurance group with Buy ratings on 2 of our Growth Portfolio stocks in Hartford Financial (HIG) and Phoenix Companies (PNX). The HIG call is just mind boggling as the target goes from $13 to $35. Basically by following UBS, investors missed over a 100% gain already. Yikes!

  • And Hartford shares jumped $1.41, or 5.4 percent, to $27.66 as Kligerman raised the insurer to "Buy" from "Neutral" and hiked his price target to $35 from $13.
  • He said the company has the means to "absorb adverse equity markets, higher capital requirements and investment losses." The company has a new chief executive, Liam McGee, who is "coming into a good situation," he said. "We think HIGs near-term roadmap seems clear and extremely positive in terms of top-line life and P&C initiatives, as well as risk mitigation and capital management," the analyst wrote.
Both stocks remain huge buys trading below book value.

Monday, October 5, 2009

Zacks Still High on Alvarion

Alvarion (ALVR) continues to be one of the most disappointing stocks in our universe. ALVR is a mobile internet play for emerging markets. How doesn't it just soar based on that thesis? Even considering you need more then that, ALVR is a dominant player in the WIMAX market and continues to have huge potential in the emerging markets.

Zacks has remained bullish on ALVR over the last month or so. ALVR is extremely cheap but issues remain with the future of WIMAX. Nothing really new in that camp. Regardless, we agree with Zacks and would recommend buying at these levels.


Trade: Added Phoenix Companies and Synovus Financial

Both Phoenix (PNX) and Synovus Financial (SNV) are small cap financials trading below book value. PNX being a badly beaten down insurance company left for dead and SNV being a regional bank that recently did an offering 10% higher. For SNV we have added to a position began at $2.8. If the economy continues to recover, these 2 financials will be big winners.


Edit 11PM: PNX closed above the 20EMA which remains above the 200EMA. If the stock gets follow thru tomorrow, its a must buy with a book value close to $8.




Disclosure: Long in client and personal accounts


Stat of the Day: ISM Service Index Growing

After nearly 1 year of shrinking, the ISM Service Index finally shows signs of growing in September. The index reported at 50.9 for September beating estimates of a 50.0 report and 48.4 in August. For a market that has been weak due to supposedly concerning economic reports, this report is a reminder that the economy and recovery is clearly still in an uptrend. Too much emphasis has been placed on whether such and such report beat estimates and not enough on the trend. Just look at the monthly trend in the table at the bottom. The July report was slightly below the June report giving fears of a top in the recovery. Yet 2 months later and the report is much higher. If a similar pattern were too happen in Q4 then October would be around the mid 49s followed by say 52 and 54 reports. Would you sell stocks on the 'weak' October report or buy more knowing its still going higher?

This months report saw substantial growth in Business Activities, New Orders, and Backlog. Consistently with the recent past, Employment and Inventories were among the weakest. With lean inventories and higher productivity, corporate profits should be soaring. Companies will soon be forced to add employees as the backlog mounts and inventories must be replenished.

  • "The NMI (Non-Manufacturing Index) registered 50.9 percent in September, 2.5 percentage points higher than the 48.4 percent registered in August, indicating growth in the non-manufacturing sector after 11 consecutive months of contraction. The Non-Manufacturing Business Activity Index increased 3.8 percentage points to 55.1 percent. This is the second consecutive month this index has reflected growth since September 2008. The New Orders Index increased 4.3 percentage points to 54.2 percent, and the Employment Index increased 0.8 percentage point to 44.3 percent. The Prices Index decreased 14.3 percentage points to 48.8 percent in September, indicating a significant reversal and decrease in prices paid from August. According to the NMI, five non-manufacturing industries reported growth in September. Even with the overall month-over-month growth reflected in the report this month, respondents' comments vary by industry and remain mixed about business conditions and the overall economy.


Month NMI Month NMI
Sep 2009 50.9 Mar 2009 40.8
Aug 2009 48.4 Feb 2009 41.6
Jul 2009 46.4 Jan 2009 42.9
Jun 2009 47.0 Dec 2008 40.1
May 2009 44.0 Nov 2008 37.4
Apr 2009 43.7 Oct 2008 44.6
Average for 12 months — 44.0
High — 50.9
Low — 37.4

Performance Review - Hedged Growth Year 1

Not sure what happened to the one I posted last week, but somehow the 3rd column was cut off. Unfortunately the numbers below from marketocracy.com include the extra 2 days from last week so it's slightly more then the first year.

Hedged Growth had a phenomenal performance in Year 1 beating the SP500 by nearly 27% (take the annualized amount and add 1% for the smaller fee). As of 9/30, the fund was also close to a 20% gainer with the SP500 down 7%. So just being positive would've been a good year on a relative basis with a weak market in the way.

Hedged Growth is a portfolio that hedges the downside of a portfolio with at least 1/3 of its portfolio either in cash or short stocks. Another 1/3 is either long Growth Portfolio stocks or like wise in cash while the last 1/3 is consistently in high Net Yield Payout stocks. This formula allows for the portfolio to excel in weak markets and maintain with the market in up trends. By preserving capital in weak market the portfolio out performs big time.



RETURNS
Last Week -1.88%
Last Month 4.11%
Last 3 Months 11.75%
Last 6 Months 20.83%
Last 12 Months 16.37%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 16.68%
(Annualized) 16.58%
S&P500 RETURNS
Last Week -1.80%
Last Month 3.20%
Last 3 Months 14.98%
Last 6 Months 23.07%
Last 12 Months -5.52%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -9.31%
(Annualized) -9.26%
RETURNS VS S&P500
Last Week -0.08%
Last Month 0.92%
Last 3 Months -3.22%
Last 6 Months -2.24%
Last 12 Months 21.89%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 25.99%
(Annualized) 25.84%