Sunday, January 31, 2010

Financials Default Risk Soars

The Bespoke Investment Group has an incredible chart on the dramatic rise in the CDS default risk of financials in the SP500. It's not surprising to see periods of rising default risk as the recovery gathers steam but this is really unexplainable. The Obama/Volker plan is concerning for a small portion of profits but it surely doesn't provide this level of risk to the system. Rather it seems like spoiled 'Wall Street' crowd is using the 'fear' of these new regulations to scare the system into trading profits. After the Brown victory and the healthcare plan defeat, I'm not sure why anybody gives these plans such credence. We all know it'll likely be bogged down in Congress due to its complexity.

The VIX also spiked the last couple of weeks. A similar bounce took place in November as well. Will it rollover like November or are we talking about issues similar to 2008 when the VIX spiked in the 80s. Maybe this is related to the so called tightening in China as well, but it's hardly a scare at this point. The market is so easily spooked these days. China will do whatever it takes to achieve 9% growth. It seems illogical to bail on the market based on them.

We're still not convinced this market has seen the highs for either this bull market or 2010. The Yield Curve is still around record highs and levels that predict huge future growth. Though we're watching the market for a scenario that a serious correction could lead to a double dip recession. It doesn't seem likely as corporation after corporation reports very strong profits and the Fed remains very accommodating. The Fed will likely remain easy until a much stronger stock market finally overheats the economy. After all it won't be housing that pulls us out of this weak economy.

Wednesday, January 27, 2010

Legendary Investor Bill Miller Sees Values Hidden in Plain Sight

Bill Miller is the legendary investor from Legg Mason Capital Management that beat the SP500 for 15 straight years (CNBC claims it was a record) before the financial crisis just about destroyed Legg Mason and his reputation. Bill has basically been in the investment wilderness for the last couple of years as the doom and gloomers took over the media. Recently he appeared on CNBC (see video below) and penned this interesting commentary for January.

One of the biggest issues I've noticed with Bill is that he seems clearly focused on just US stocks. He wasn't a big investor in commodities in the 2000s which is what lead to his under performance. Now after a good 2009 he seems to be regaining some of the spotlight so it's interesting to see what he says now especially since Stone Fox Capital has similar views in valuing assets and the stock market.

Like us he seems clearly more bullish on profit growth and higher GDP then the general market expects. Anybody watching CNBC will see numerous people coming on TV claiming how over valued stocks are these days. What they don't mention is that current estimates now are that corporate profits will growth 25% in 2010 and the SP500 will reach $95 in 2011. Slap a 15 PE on that and the SP500 would reach 1,450ish by the start of 2011.

Bill also makes the point that we've made since back in October that the financial crisis is long over yet the stock market still trades 10% below the 1,255 reached after the Lehman collapse.

He also points out some of the real obvious psychology issues that the market faces. Bonds crushed stocks over the last 10 years so investors have piled into bonds. Now just when stocks should be more attractive nobody is listening. Also, Treasuries are probably the biggest bubble around (or should be) as the Fed rate can't remain this low.

As he says 'values are hidden in plain sight'. Bill seems to favor names such as Merck and IBM trading at 12x 2010 earnings. Very cheap indeed but we favor smaller cap names like a AerCap (AER) trading at less then 5x earnings and faster growth. Or even a Terex (TEX) that could double/triple as the cycle rebounds. In a rebounding market, small caps should out gain large caps but the size of his funds might preclude investing in small caps.

We're in complete agreement that the fed funds rate should be in the 2.5% range to be neutral. It should've never gone below say 1.5% or so and the market shouldn't react negatively to a funds rate increasing until it gets above the 2.5-3% level or causes a inverted yield curve.

Our biggest disagreement is in the commodities sector. He is negative about materials stocks and industrial metals. He makes a great point that China is 'structurally short' oil therefore they have a desire for prices to fall. Unfortunately I'm not sure they have that choice. For prices of coal, copper, and oil to fall it would require much lower growth and hence demand out of its consumers. For that to happen, the Communist party would face social unrest so while they do a lot to keep prices down such as buying resources during the crisis they can't afford to keep demand down. He might be correct that growth in the stock prices might not be as high in 2010 though I'll still argue that a stock like Alpha Natural Resources (ANR) is still extremely below its 2008 high. To me most of those stocks haven't run too much yet.

All in all, Bill Miller is an investor that should enjoy equal followings with the doom and gloomers and even the 'new normal' guys at PIMCO. The latter have become more popular after this crisis, but if anything it should have taught us that the likely accurate forecasters will not be the ones from the crisis. Would you follow the call of Meredith Whitney or Bill?

Below are the results for the last 10 years of his fund - Legg Mason Value. This includes the last 8 years of the 15 years he beat the SP500 plus the 3 years that he underperformed. Very interesting how he got the 2000 recession correct (ok only on a relative basis), but completely missed this one. 2009 was a stellar year so maybe hes back for another 15 year run.








Clip from his recent appearance on CNBC:

Tuesday, January 26, 2010

Regions Financial Builds Provisions Again

Regions Financial (RF) is one of the smaller holdings in our Growth Portfolio, but its worth following considering its proximity to the important housing markets in Florida and Atlanta. RF reported 'disappointing' results this morning causing the stock to plummet over 7% today. Earnings were indeed lower then expected (.46 vs .35), but it was largely driven by a large build in provisions and not chargeoffs. In fact, provisions exceeded chargeoffs by $487M or nearly 40% of the $1.2B provision was to build for future write offs. That seems excessive considering the stage in this credit cycle and considering that gross inflows of non-performing assets declined for the second consecutive quarter.

If we had to guess, this would appear to be the peak loan provision Q. Hence, future quarters will see declining costs. Its possible this was the kitchen sink Q making 2010 much cleaner. Time will tell but the regional banks appear alot more attractive now. They aren't on the target list of the government and they will now benefit from the credit crisis ending but still having high net interest margin. From a technical perspective RF is looking appealing if it can hold these levels around $6.

Key points for the quarter included:

  • Loss of 51 cents per diluted share for the quarter ended December 31, 2009, reflects the company’s continued actions to improve the risk profile of its balance sheet. Full-year results reflect a net loss available to common shareholders of $1.3 billion or $1.27 per diluted share.
  • Sold $1.3 billion of primarily non-agency investment securities for a loss of $96 million, further de-risking the balance sheet. As adjusted for the securities loss impact, the quarterly loss per diluted share would have totaled 46 cents.
  • Continued active lending and efforts to assist consumers and businesses. Made 166,639 new or renewed loan commitments totaling $65.0 billion in 2009; proactive outreach efforts have helped over 23,500 families stay in their homes.
  • Record account and deposit growth continues. Average low cost deposits increased for the fourth consecutive quarter, growing over 3 percent linked quarter and up nearly $8 billion, or 14 percent year-over-year.
  • Exceeded goal of opening one million new retail and business deposit checking accounts in 2009, up 27 percent versus last year, with 246,000 new accounts opened in the fourth quarter
  • Net interest margin remained steady at 2.72 percent
  • Non-performing assets, excluding loans held for sale, increased $376 million, or 10 percent, linked quarter – the lowest quarterly increase in 2009; gross inflows of non-performing loans declined for second consecutive quarter
  • Net loan charge-offs stabilized at $692 million or an annualized 2.99 percent of average loans
  • Allowance for credit losses increased to 3.52 percent of loans with $1.2 billion provision for loan losses exceeding net charge-offs by $487 million
  • Tier 1 Capital ratio an estimated 11.6 percent. Estimated Tier 1 Common ratio at 7.2 percent.

Interesting comments from typically conservative analysts at S&P:

(Standard & Poor's)
Q4 loss per share of $0.51 vs. a loss per share of $9.01 is wider than our per share estimate of $0.40 loss, largely on a $96M loss on securities. The tangible common equity ratio, one measure of capital, fell to 6.03% from 6.56% in Q3, a negative. However, one major positive, in our view, is that Q4 formation of new nonperforming loans, at $964M was sharply lower than in Q3 and Q2, and we expect this downward trend to continue in '10, which should result in lower provisions. We keep our target price of $8, based on a discount to peers $1.15X Q4 tangible book value per share.

Disclosure : Long in Growth Portfolio and personal account.

Trade: Bought UltraShort Real Estate

Based on the weakness in the stock market from Obamamania and China banking restrictions, we bought some protection for the Growth and Hedged Growth portfolio today. The UltraShort Real Estate (SRS) was the selection for this hedge. Assuming the market craters thru strong resistance in the 1,085 level, SRS should see huge gains. In addition, the constant slamming of the banking system by Obama should help doom this industry as banks slow lending and commercial real estate companies lose the ability to roll over massive amounts of debt.

Now we're not completely set that the market is about to rollover, but SRS should provide us some protection in case it happens especially with the timing of the Obama State of the Union speech Wednesday night. This trade will likely only be kept for the week unless the situation changes.

Trade: Sold U.S. Steel

U.S. Steel (X) reported a dismal Q today. Revenue handily beat estimates ($3.4B vs $3.1B) yet earnings missed consensus numbers. All while competitors Nucor (NUE) and AK Steel (AKS) both easily beat number and reported profits. If that wasn't discouraging enough, X forecast that Q1 would be similar to Q4 while analysts (us too) expected a much improved number. Evidently input costs such as coking coal have increased much more then prices. This could be partially because of the demand in China. All in all, this tells us to stay with the Alpha Natural Resources (ANR) and the new pick in Puda Coal (PUDA). The coking coal companies seem able to benefit from the rising demand without the rising supply.

Key line from the report:
"We expect to report an overall first-quarter 2010 operating loss in line with the fourth-quarter 2009 as gradually improving business conditions are not yet fully reflected in our operating results," said Chairman and Chief Executive Officer John Surma.

Sold all shares in the Growth portfolio and personal accounts around $51 this morning.

Thursday, January 21, 2010

Fears Overblown?

Wow... What a difference a couple of days can make. On Tuesday, the SP500 closed above 1,150 signaling a potential breakout to 1,200-1,250. Then Republican Scott Brown won the Senate seat in very Democratic MA suggesting that the market would see the breakout rally. Guess what? At the same time that Brown was giving his acceptance speech, news was leaking in China that some banks were requested to stop lending for the remaining of January. Any since China seems to rule the world economy and not the US anymore, the market got spooked an so after 2 trading days the SP500 is barely above 1,115. Now its on the verge of a breakdown signaling the possible correction is finally here. Its seems that everybody is already on board with the drop so that gives me hope that we'll pull out of this tailspin.

Pisani has a good article on CNBC regarding the issues:

Oh, calm down. Worries about an imminent correction are a bit overblown, at least at this point.

The S&P 500 hit a 15-month high of 1150—on Tuesday! It is currently trading at 1125*, which is a decline of 2.1 percent from its recent high. (closed just above 1115)

*(as of this writing.)

A correction is a decline of 10 percent—the S&P would have to drop to 1035 to be in that territory.

There are two reasons for the decline today:

1) nervousness over the Obama speech at 11:40am ET is hurting financials (See Art Cashin: Bank Investors Are 'Worried' Now); (seems way overblown as Obama has a lot more bark then bite. Besides this regulation isn't going to cost these banks money. In fact, it'll likely unlock value as banks like Citigroup and Bank of America are 2 Big 2 Understand anyway. Most financial institutions aren't impacted.)

2) continuing selloff in materials, energy, industrials (global stocks) on a belief China will soon be raising interest rates to cool off their economy. (so what? It'll take more then a rate hike 2 months from now to slow down that economy in 2010. Did the market rise when the Fed started easing in 2008? No! It took a long time before the easing had an impact)

China's GDP grew at a 10.7 percent rate in the fourth quarter compared to the same period a year ago. Deutsche Bank told clients they believe China will likely hike interest rates in the second half of March.

Philly Fed much weaker than expected (15.2 vs. 18.0 expected) may also be a factor at the margins.

As you can see we have great issues with this being anything but a technical failure of not breaking the 1150 mark on Wednesday. The $NYMO indicator is down to -49 which is the lowest level since early November. Clearly suggesting an oversold situation already. Could get worse tomorrow though. We'll see. Also the Yield Curve remains very positive and will remain that way until the Fed raises interest rates at least 100 to 150 basis points. The chances of a major market correction seem unlikely until that happens and that isn't going to happen with Fear in the markets.

Tuesday, January 19, 2010

Future Stat of the Week: Leading Economic Indicators to Soar Again

If we've had one theme since starting this blog, its that the leading economic indicators and its primary leader over the last 12 months, the yield curve, is completely thrown aside by most economists and market experts. It shouldn't be though as it continues to forecast a strong recovery. You can fret about a double dip recession all you want, but it isn't going to happen while the LEI and the yield curve is this positive. So why invest for the correction if the signal isn't pointing that way?

Anybody following these indicators should know that the yield curve expanded to record levels recently and hence it should be no surprise that the LEI for December expanded at a fast clip yet again. Initial jobless claims also will juice the number. Economists expect a 0.7% rise after 0.9% in November. Two very solid gains.

Market Consensus Before Announcement (Bloomberg)
The Conference Board's index of leading indicators rose a strong 0.9 percent in November, following a 0.3 percent boost the month before. November's increase was led by the yield curve component which had a 0.33 percentage point contribution, followed by initial unemployment claims, 0.26 percentage points, and the average workweek for manufacturing, 0.19 percentage points. Also making positive contributions were building permits, stock prices, and money supply. The coincident indicator rose 0.2 percent in November, following no change the month before. Looking ahead, the leading index should post another advance with the yield curve likely the strongest contributor. A sizeable positive contribution is also expected from initial jobless claims with a number of other components having marginally positive contributions. Real money supply may tug down slightly on the December leading index.

Friday, January 15, 2010

JPMorgan Results were Stellar

The market might have sold off today 'due' to the results at JPMorgan (JPM) and the fears of higher credit costs, but if anything it was a buy the rumor and sell the news. Or maybe just the media reporting the results in such a negative way that it scared the market. We'd bet that come Tuesday, all the buyers will be back as they realize that JPM could easily earn $3.5 next year making the stock clearly cheap.

JPM reported net income of $3.3B or $.74 per share easily beating the $.61 estimates. Revenue was lower then expected, but that's nothing to get excited about in this recovery. Earnings rule revenue any time of the day. They beat estimates by 20% after all but that got quickly brushed aside.

  • reported fourth-quarter 2009 net income of $3.3 billion, compared with net income of $702 million in the fourth quarter of 2008. Earnings per share were $0.74, compared with $0.06 in the fourth quarter of 2008. For the full year of 2009, net income was $11.7 billion, or $2.26 per share, up from $5.6 billion, or $1.35 per share, in 2008.

The big key to the earnings report is that JPM added $1.9B to the provision for loan losses. Or basically earnings could've been $5.2B based on net charge offs level. Its easy to assume that loan losses should start to moderate or drop so it seems overly conservative for provisions to continue increasing at this rate. (hmm, maybe they wanted to keep earnings down to avoid the Obama TARP tax from gaining steam)

  • Credit costs remained high: added $1.9 billion to consumer loan loss reserves, resulting in firmwide credit reserves of $32.5 billion and loan loss coverage ratio of 5.5%
  • Commenting on the firm’s balance sheet, Dimon added: “In the fourth quarter, we further strengthened our credit reserves to nearly $33 billion, or 5.5% of total loans. Our earnings generated additional capital, and we ended 2009 with a very strong Tier 1 Capital ratio of 11.1% and a Tier 1 Common ratio of 8.8%. We remain confident that this capital and reserve strength, combined with our significant earnings power, will allow us to meet the uncertainties that lie ahead and still continue investing in our businesses and serving our clients and shareholders over the long term.”

Interesting video from CNBC regarding asset quality stabilizing. Dick Bove is on a high horse regarding the economic comments from the CEO as he was clearly low balling. Oddly he says to buy the stock even after his rant. More evidence that we're likely to see a couple big upgrades come Tuesday sending the stock and market to new 52 week highs.

No position in JPM at this point, but this makes us more comfortable about other financial positions like Regions Financial (RF) and Synovus Financial (SNV). Morgan Stanley (MS) is concerning on whether the new TARP tax will hold it down for a while.

Wednesday, January 13, 2010

Trade: Bought Puda Coal

Bought less then a 1% position in Puda Coal (PUDA) in the Growth Portfolio. PUDA is a Chinese company and a play on the ever expanding demand for coal in China. It's also a play on the coal consolidation project going on in China where they are in the process of taking over 8 mines and expanding the output. Will likely add more shares if the stock holds at support. A full write up on this investment to follow later this week.

Tuesday, January 12, 2010

Trade: Sold Portion of Baidu

A little late reporting this sale, but we sold another 25% of the Baidu (BIDU) shares we owned in Growth and Hedged Growth portfolios on the opening Monday. The reason was posted over on my page. That account sold all of its shares in the after hours on Friday. To some extent i got lucky from reading of the COO resignation after the close and thinking it happened after hours. Guess it is better to be lucky then good as BIDU is down $17 since those trades were made. Losing the COO is still negative regardless of the timing.

It's never a good sign when the COO resigns especially on a Friday after the market close. I'm surprised that BIDU didn't trade down, but it's likely that all of the influential traders were gone when the news hit. In addition, BIDU is technically on the verge of breaking down so it was only prudent to exit this position before the market clues in to the news.

Its very possible that the conversion to the new software hasn't gone very well. Why else would the COO leave BIDU for 'personal reasons' and not a big new job? If the stock does breakdown, we'll look to re-enter the position around the 200ema of $350.Stay tuned for more news!

Hartford Financial 'Surprises' on Earnings

Or at least that's the headlines and synopsis of the day regarding Hartford Financial (HIG). HIG has now easily surpassed estimates for the 3rd quarter in a row. The analysts estimates for Q4 were around $.80 and HIG now expects something in the range of $1.45 to $1.60 per share. Doubling of estimates is nearly similar to what they reported in the last 2 quarters and the earnings will be in the same range as last quarters $1.56. Hard to understand why the model was so low even with HIG management providing such hideous guidance in the $.70 range. Don't analysts get that HIG was being overly conservative.

HIG has now posted over $5 in earnings for just 3 quarters and over the last 2 quarters is on a anual run rate of roughly $6. Book value is quickly approaching the $40 range. So you'd probably guess that HIG trades around $40-50 wouldn't you? If so, you'd be wrong by nearly a mile as HIG barely cracks $28 today. Sure they still have to pay back TARP funds, but at this point they can easily earn there way out without having to dilute shareholders. They don't seem to have any of the pressure that the big banks felt.

HIG has now jumped to the 2nd largest of weighing in our model Growth Portfolio at 6% of assets. In the Hedged Growth it remains a solid position at a little over 2% of assets. Considering that the stock has intrinsic value of at lest double the current price it should be aggressively bought at these levels and will continue to be held in our portfolios.

  • it expects its fourth-quarter adjusted profit will be about twice as big as it had projected earlier, driven by strong results from its insurance and financial businesses.
  • Hartford now estimates its core earnings, which exclude certain investment gains and losses, will range from $1.45 per share to $1.60 per share for the quarter. The company had previously forecast a range of 65 cents per share to 80 cents per share.
  • Analysts surveyed by Thomson Reuters, whose estimates typically exclude one-time items, were expecting a profit of 82 cents per share, on average.

Thursday, January 7, 2010

Fund Manager of the Year Remains Bullish on Sears Holdings

Sears Holdings (SHLD) remains one of the most debated stocks in the universe of investing. Shorts claim that the PE is too high. Longs (like Stone Fox Capital) claim that the assets (those on and off the balance sheet) are so valuable that the stock is very cheap. Who is right? In situations like this its key to research the involvement of bigger investors. Would you short a stock that Buffet is buying or buy a stock that Buffett is selling?

The main investors in SHLD are Eddie Lampert whose ESL hedge fund via RBS Partners owns a whopping 57% or 66M shares and Bruce Berkowitz's Fairholme Funds that owns 13% or 15M shares. It is the 2nd largest holding in his fund. The fund has done so well that Berkowitz was just named the Morningstar Domestic Fund Manager of the Year. Both are guys that investors should be happy to invest along side. Ironically though SHLD has a ton of shorts.

In the below interview on CNBC today, Bruce was gleaming from ear to ear on his SHLD investment. Today they announced guidance that doubled the estimates for the year ending in January. Also, notable was that SHLD had positive comps for December and KMart had a strong 5% number. No wonder he was beaming with the timing of this interview being nearly perfectly orchestrated.

Its difficult to see the point of the shorts. SHLD has assets such as the commercial real estate and brands like Diehard and Kenmore that far surpass the current $11B market cap. Not to mention SHLD has roughly $7B in net inventory (cash + inventory - debt) making it a deep value play. It's easy to ponder up valuations in the $20, 30 and even 40B range on this stock, but the point of this article is to follow the steps of the genius investors that continue to pile into this stock. Let them guide you if you don't have a gigantic research department.

Eddie just announced last month $500M more stock to be bought by SHLD which at some point will leave the public float next to nothing as Eddie and Bruce squeeze every last short. The float could technically be next to zero depending on whether some large mutual funds hold onto their shares, but just assuming what Eddie and Bruce control the float is only 30M. On Dec 15th, the short level was 14.4M shares meaning that 50% of the float is short. All while Eddie is buying up shares on a daily basis (5.8M more planned at these stock prices). The simple math doesn't add up for the short story. At some point, people are going to be short with no willing sellers.

Be careful buying at these levels as today opened a huge gap in the charts. SHLD is going higher ultimately, but a lot of stocks eventually fill gaps so load up if it does around $90.

Wednesday, January 6, 2010

Almost Perfect Risk Adjusted Return for Growth Portfolio

This month has been beautiful so far, but today was almost perfect. The Growth Portfolio made a 1.29% gain while the market was basically flat. Heck the Russell 2000 and the Nasdaq were both down. This portfolio made more today in a flat market then most people piled into short term treasuries will make in years. Just hope I haven't jinxed the trade the rest of the week.

Beating Today MTD QTD YTD
1.29% 4.60% 4.60% 4.60%
S&P 500 0.05% 1.93% 1.93% 1.93%
DOW 0.02% 1.38% 1.38% 1.38%
Nasdaq -0.33% 1.74% 1.74% 1.74%

Cloud Peak Energy Surges on Contract Cancellation

That might sound counter intuitive especially considering that the utility canceling the contract was just about all of the 2011 and 2012 production for the Decker Coal partnership. As I'm writing this, Cloud Peak Energy (CLD) is up 6% to a a new high of $16+. Stone Fox Capital was very bullish on this IPO even after it cratered into the $13s from a original expected range of $16-18. [Buy Cloud Peak Energy as it Trades in the Valley] This was mainly due to this expected contract cancellation with an eastern utility company.

Of course on face value it seems bad that the only customer of this partnership would cancel services (ok its a buyout), but in reality in the commodities sector its all about the resources and not the contracts. In fact, the lack of a contract can be beneficial as prices continue to soar and your able to sell into the spot market. Coal might not have a big spot market, but places like China are cutting electricity use due to a lack of coal supplies. You telling me CLD coal couldn't end up in China or at least won't benefit from this development?

The sell off post IPO was just absurd. CLD is one of the best run coal companies in the US if not the world. Anybody that has a commodity will undoubtedly find a buyer and in most cases for more then what they would get from a contract. Get in today and you'll still buy CLD for less then the original IPO range.

By the way, the Decker Coal partnership is just a small percentage of the CLD revenue in the first place (I'd look it up but it doesn't matter as I'm sure they'll sell this coal for more then the original contracted amount).

  • announced an agreement that Decker Coal Company, in which Cloud Peak Energy is a 50% partner, has accepted a buy-out offer from an eastern utility company for a coal supply contract originally scheduled through 2012.
  • The customer’s contract accounted for approximately 30 percent of production for 2010 and the majority of the production for 2011 and 2012. The arrangement is mutually beneficial to both the utility and the Decker Joint Venture as it allows the utility to avoid purchasing coal it no longer requires, and Decker to pursue more favorable sales opportunities. Decker Coal Company currently holds no firm sales contracts beyond 2011, but continues to seek market opportunities for the approximately 42 million tons of non-reserve coal held by the Company.

China Daily article on the lack of coal causing power outages. CLD is going to be just fine without this contract.
  • With people turning up the heat indoors to fight the extreme cold across the country, many provinces are reducing electricity supply due to the shortage of coal.

    Since December, power has been cut or reduced to more than 2,000 factories in Wuhan, Hubei province, to ensure supply for household use, while most parts of the south face electricity shortages, Han Xiaoping, an energy analyst, said yesterday.

    With power demand surging this winter, coal stocks in 349 power plants across the nation have decreased to around 27 million tons, or barely enough for 12 days of generation, while stocks in the north have declined to less than a week, the Shanghai Securities News reported last month.

    Generally, coal stocks should be enough for at least 20 days, Han said.

    But in Hubei province, things are much worse. The local electricity supplier faces a shortage of 760,000 tons of coal before March this year, Yang Yong, assistant chief engineer at Hubei Electric Power Company, told China Business News yesterday.

Tuesday, January 5, 2010

Future Stat of the Week: ISM Non-Maufacturing to Show Growth

While all eyes will be on the Jobs report on Friday, the Non-Manufacturing Index will likely show a return to growth after a dip in November according to Bloomberg. The Jobs report on the other hand is expected to come in around -1K which could easily hop over to the positive column. That would probably cause some excitement, but I think having the ISM service report hit over 50 (the estimate is 50.5) and possibly the highest for the recovery would be crucial to signaling this recovery is for real. Till December, the recovery has been all about the rebound in Manufacturing caused by the global recovery in places like Asia. Now if the service sector hits full stride we'll definitely start looking for that strong 4%+ economy. Something that's not in the market yet.

Market Consensus Before Announcement
The composite index from the ISM non-manufacturing survey weakened in November, declining nearly 2 points to a sub-50 and sub-par 48.7. This composite had been marginally positive in September and October. However, the November dip appears to be temporary as the new orders index remained clearly above break-even, coming in at 55.1. Also, the Chicago PMI hints at a rebound in the ISM non-manufacturing index. However, the Chicago index is based on both non-manufacturing and manufacturing company survey responses.

 Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
ISM Manu Index 1/4 Dec. 53.6 54.0
ISM Prices Index 1/4 Dec. 55.0 58.8
Construct Spending MOM% 1/4 Nov. 0.0% -0.5%
Pending Homes MOM% 1/5 Nov. 3.7% -3.0%
Factory Orders MOM% 1/5 Nov. 0.6% 0.5%
Vehicle Sales Mlns 1/5 Dec. 10.9 11.0
Domestic Vehicles Mlns 1/5 Dec. 8.4 8.3
ABC Conf Index 1/5 Jan. 4 -44 -43
MBA Mortgage Applicatio 1/6 Dec. 26 -10.7% n/a
ADP Payroll ,000’s 1/6 Dec. -169 -75
ISM NonManu Index 1/6 Dec. 48.7 50.5
Nonfarm Payrolls ,000’s 1/8 Dec. -11 -1
Unemploy Rate % 1/8 Dec. 10.0% 10.1%
Manu Payrolls ,000’s 1/8 Dec. -41 -35
Hourly Earnings MOM% 1/8 Dec. 0.1% 0.2%
Hourly Earnings YOY% 1/8 Dec. 2.2% 2.1%
Avg Weekly Hours 1/8 Dec. 33.2 33.2
Whlsale Inv. MOM% 1/8 Nov. 0.3% -0.3%
Cons. Credit $ Blns 1/8 Nov. -3.5 -5.0

Sears Holdings is Off to the Races

Sears Holdings (SHLD) is one of the most hated retails stocks, but if anybody has followed this blog they'd know that SHLD isn't a retail stock. Buy it for the assets that aren't fully accounted for on their balance sheet. Today is broken near term resistance in the $86-88 range. Sure looks like $100 is the next stop around the Oct 2008 highs and then likely much higher.

SHLD remains one of our top value picks (read opportunistic) in the Growth Portfolio and a selection for the Net Payout Yield Portfolio because they buyback so much stock.

11:05AM Sears Hldg extends current intraday strength of its morning lows up to last week's December peak of 86.53 (SHLD) 56.00 +2.58

Sunday, January 3, 2010

Poll of the Day: Double Dip Recession?

Calculated Risk had an interesting poll over the weekend showing how pessimistic people remain. Over 57% of people that voted in the poll expect a double dip recession which appears absurdly pessimistic at this point in the recovery. The only likely scenario to cause a double dip would be massive tightening from the FED. Until that happens, it doesn't seem logical to invest with that expectation.

Now I think Calculated Risk is typical for internet blogs in that they tend to bring out the pessimistic people. This ratio though is off the chart. Only 2% expect a GDP growth of over 4% for next year completely going against history of substantial growth in years following serious recessions. Is that because the last 2 recessions were very weak on historical norms so people are expecting a repeat of recent norms? Or are the facts really suggesting an economy with sub par growth? Seems that the facts suggest a 4% growth so we don't really comprehend the rational for such negativity. Look at any economic number from 2009 and you'll see a v shaped recovery and one that will lead to much stronger growth.

2010 will be an interesting year to say the least. Pessimism like the ones in this report make us more and more bullish about the first half of this year. Investors continue to remain very negative and completely oblivious to the strong economic numbers coming out around the globe. How long it lasts depend on how quickly the Fed turns off the free money spiget. Until then, it does no good to predict a double dip or invest like it. Stay bullish until the turn takes place, then you can be negative to your hearts content.

Friday, January 1, 2010

Performance Review: 2009

Net Payout Yields

Last Week -0.76%
Last Month 0.64%
Last 3 Months 12.15%
Last 6 Months 31.76%
Last 12 Months 35.38%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 1.26%
(Annualized) 0.89%
Last Week -0.97%
Last Month 0.71%
Last 3 Months 9.33%
Last 6 Months 25.70%
Last 12 Months 26.47%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -8.27%
(Annualized) -5.90%
Last Week 0.21%
Last Month -0.07%
Last 3 Months 2.82%
Last 6 Months 6.06%
Last 12 Months 8.92%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 9.53%
(Annualized) 6.79%

Growth (Opportunistic)

Last Week -1.25%
Last Month 3.32%
Last 3 Months 8.40%
Last 6 Months 32.17%
Last 12 Months 73.80%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 2.93%
(Annualized) 1.89%
Last Week -0.97%
Last Month 0.71%
Last 3 Months 9.33%
Last 6 Months 25.70%
Last 12 Months 26.47%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -13.74%
(Annualized) -9.17%
Last Week -0.28%
Last Month 2.61%
Last 3 Months -0.93%
Last 6 Months 6.47%
Last 12 Months 47.33%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 16.67%
(Annualized) 11.07%

Hedged Growth

Last Week -1.16%
Last Month 0.70%
Last 3 Months 5.72%
Last 6 Months 18.15%
Last 12 Months 23.08%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 23.35%
(Annualized) 18.25%
Last Week -0.97%
Last Month 0.71%
Last 3 Months 9.33%
Last 6 Months 25.70%
Last 12 Months 26.47%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -0.85%
(Annualized) -0.68%
Last Week -0.19%
Last Month -0.01%
Last 3 Months -3.61%
Last 6 Months -7.55%
Last 12 Months -3.39%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 24.21%
(Annualized) 18.93%