Friday, July 30, 2010

Stat of the Day: Chicago PMI Backlog and New Orders Jump

As everybody frets over a soft patch in the US economy and the backward looking Q2 GDP report today, the Chicago PMI for July came in at a very robust 62.3. A full 6 points above the 56 consensus and even 4 points above the most optimistic economist at 58.4. The markets initially sold off based on the GDP report, but some sanity has returned after the Chicago PMI. Actually the market is still somewhat acting like a lunatic considering the GDP report should be meaningless and the Chicago PMI + earnings reports are so bullish that the market should be soaring today.

Why does the market even care about the GDP report? Do we now go back and adjust the terrific earnings reports of Intel (INTC), Caterpillar (CAT), or FedEx (FDX) because GDP was weak? Does it in any way impact guidance? The answer is a resounding NO! Besides, most of the SP500 doesn't even rely on the US for growth anymore.

Back to the Chicago PMI. New orders came in at a robust 64.6 with backlog jumping 7 points to 57.6. All signs of a market working itself out of a double patch. Have we ever worried about a double dip with a PMI this high?

The market is struggling for direction today, but the truth is undeniable. The forward looking data points to a bright path for corporate profits. Demand continues to outstrip employment. Very bullish indeed.

Just when you think the economic tide has sunk, Chicago purchasers report wide, deep strength during July. The Chicago PMI rose to 62.3, a level right at the top of the recovery and indicating very strong, if not robust, month-to-month growth.

Growth is centered where it should be, in new orders which jumped 5-1/2 points to 64.6. Backlog orders shot up nearly seven points to 57.6. Plenty of orders means lots of production and even, perhaps, demand for new employees. The employment index rose nearly 2-1/2 points to 56.6, well above break-even 50 to indicate hiring in the month. Other details also show strength in a report that shows no weakness.

The only question is the report's sample size which is often small. The data aren't definitive but do point to strength for next week's national purchaser reports from the ISM.

Thursday, July 29, 2010

Dynamite Results at Teradyne

Teradyne (TER) reported results last night that were explosive. Earnings of $.69 beat analyst estimates by $.22 or over 40% for the 2nd straight quarter. Revenue was up an amazing 38% sequentially. For Q3 they forecast earnings of over $.80 easily beating estimates of only $.46. TER continues to benefit from a fast expanding market in wireless (read smartphones) and smart power management.

So what did the stock do? What would you expect for guidance that nearly doubled estimates? Well, in this market at least the stock went up. The gain for the day ended up $.86 or a little over 8%. Not bad, but when you consider the guidance nearly doubled the estimate from back in April but the stock is still down nearly 20% from the highs above $13 it just doesn't add up. And this is even after the large cap semi stocks like Intel (INTC) and Texas Instruments (TXN) had blow out numbers.

In all fairness, the market should be concerned about cycle peaks and cyclical volumes in the semiconducter sector. Orders were down slightly, but from a bristling pace in Q1. Considering the economy just left a recession its difficult to see that the sector has already peaked. Too many people seem concerned about a slowdown in demand for a peak to have been reached.

2010 estimates now range around $2.3 leaving the stock at 4.8x eps. With over $2 in net cash, TER has an Enterprise Value of just $9 or a meager sub 4x eps. Would it be crazy for the valuation to triple to 12?

Summary from Q2 report:
- Q2’10 revenue of $455 million, up 38% from Q1’10 and up 168% from Q2’09

- Q2’10 diluted non-GAAP income of $0.69 per share, up from non-GAAP income of $0.33 per share in Q1’10 and up from a non-GAAP loss of $0.21 per share in Q2’09; Q2’10 diluted GAAP income of $0.55 per share

- Q3’10 guidance: Revenue of $490 million to $520 million: Diluted non-GAAP income of $0.75 to $0.83 per share; Diluted GAAP income of $0.60 to $0.67 per share

For now, 2010 appears to be the opposite of 2000. In 2000 a company with this much growth would trade at 40 or 50x earnings. Now we're lucky to see 4 or 5x. When would you rather be buying?

Disclosure: Long TER

Potential Breakout on TerreMark Worldwide

After consolidation in the $7 - $8.5 range since the beginning of the year, TerreMark Worldwide (TMRK) has finally broken above $8.8 a level they've struggle at a few times this year. Its now testing the 52 week high of $8.98 seen in late January. TMRK is a core holding of our Growth and Opportunistic Growth portfolios.

TMRK is our prime cloud computing investments and the move of the government to the internet. They provide managed information technology (IT) solutions with data centers in the United States, Europe, and Latin America. It delivers a suite of managed solutions, including colocation, managed hosting, managed network, disaster recovery, security, and cloud computing services.

Wednesday, July 28, 2010

China Watch: Markets Surge Higher

As we've been writing for the last month, the China economy and hence the local markets continue to rule the world. See China Market Rules the World on June 30th. Last night, the Shanghai market surged over 2% and made a very impressive jump off the 50EMA showing signs of more gains coming in August.

Copper has also been surging and met coal prices remain steady so the commodity stocks such as Massey Energy (MEE), Alpha Natural Resources (ANR) and Freeport-McMoran (FCX) continue to be our favorite domestic stocks to play this theme.

Additionally, we continue to follow China based commodity plays and mainly 3 companies that are dramatically expanding operations but remain at show me valuations. Puda Coal (PUDA) is acquiring and consolidating numerous coal mines and trades at a 4x '11 estimates. China Armco (CNAM) recently started up a steel recycling facility that should lead to $200M in revenue for a stock trading for $50M. Lihua International (LIWA) recently doubled its copper smelter capacity, but the stock trades at only 4.5x '11 estimates.

All 3 stocks have huge growth potential completely discredited by the markets. The tricky part of investing in these stocks is the reaction to earnings reports around the start up of these operations. Any slight pushes in production from Q2 to Q3 could cause an initial selloff though a likely huge buying opportunity.

See the Shanghai graph below. So far the domestic plays have seen some similar jumps, but the Chinese specific plays that should see a magnified move have lagged. They are risky plays but should be well worth the risk. Otherwise, dive into domestic copper and met coal plays that will benefit from a rebound of growth in China.

Disclosure: Long ANR, MEE, FCX, LIWA, PUDA

Trade: Bought Lihua International

Bought Lihua International (LIWA) at $8.76 for the Opportunistic Growth Portfolio. LIWA is a producer of refined copper products in China. Yesterday they announced the opening of a new copper smelter that will double capacity. Today the stock fell to below the opening price prior to the announcement so we used the weakness to buy right at the moving averages.

As I'm about to report on, the China markets have made a dramatic move off the bottom this month yet China stocks that trade in the US continue to lag. LIWA is a primary laggard and trades at roughly 4.5x the estimated 2011 earnings of $2. Considering LIWA makes around $1.2 on existing capacity I'd expect earnings for 2011 to double with capacity. Doesn't really matter with the stock price stuck below $9 whether they earn $2 or $2.5.

Tuesday, July 27, 2010

Growth Portfolio Beating 95.7% of Portfolios Over 2 Years

Over the last 2 years, the Growth Portfolio has beaten 95.7% of the portfolios tracked on Still leaves some room for improvement but still a very solid performance. The last 3 months through June were very disappointing, but its still encouraging that the portfolio beat all but 4% of the portfolios over that time period. Q3 is starting off very solid with a 12.5% gain with 3 days left in July. Counting normalized fees, the portfolio is beating the SP500 by roughly 12% per year.

Date 1 Month 3 Months 6 Months 1 Year 2 Year 3 Year 4 Year
Sep 30, 2008 27.4% 40.1%

Dec 31, 2008 88.8% 30.2% 33.7%

Mar 31, 2009 87.7% 33.4% 23.9%

Jun 30, 2009 93.0% 99.1% Q: Top Quartile 97.6% Q: Top Quartile 89.9% Q: Top Quartile

Sep 30, 2009 93.2% 94.5% Q: Top Quartile 99.0% Q: Top Quartile 98.5% Q: Top Quartile

Dec 31, 2009 76.1% 39.5% 90.3% Q: Top Quartile 97.9% Q: Top Quartile

Mar 31, 2010 91.2% 96.6% Q: Top Quartile 92.1% Q: Top Quartile 99.3% Q: Top Quartile

Jun 30, 2010 7.4% 7.2% 49.6% 85.4% Q: Top Quartile 95.7% Q: Top Quartile

Anybody interested in learning more about this portfolio, please see the info on the right side of the blog or contact me at

Monday, July 26, 2010

Sears Holdings Leases Prime Square Footage in Orange County

Today, Sears Holdings (SHLD) announced a deal to lease 43,000 sq/ft in their store at the South Coast Plaza in Costa Mesa, Calif to Forever 21. No terms were released on the deal, but anybody following SHLD knows that their biggest underutilized asset is their real estate. In so many cases, they'd be better off by leasing stores instead of operating them as a Sears or KMart.

Having a difficult time finding any solid details on the volume of leasing deals they've done. This appears significant in terms of finally moving forward on redeploying the valuable real estate in a more profitable manner though I haven't been able to locate any concrete data.
"This agreement is a great example of Sears Holdings selectively redeploying its asset base to improve the retail experience for consumers while working to create long-term shareholder value," said Jeff Stollenwerck, president, Real Estate for Sears Holdings.

Friday, July 23, 2010

Riverbed Technology Hits New 52 Week High on Not So Surprising Earnings

Ok, maybe the Q2 earnings report and movement was surprising to others, but it was clear from the F5 Networks (FFIV) report and 13% surge on Thursday plus other reports from the likes of VMWare (VMW) that Riverbed Tech (RVBD) would likely report a blowout quarter. Whats really surprising is the lackluster jump on Thursday and the monster 14% move on Friday.

After today, Riverbed Tech has become the largest position in both the Growth and Opportunistic Portfolios.

Details on the earnings report from Reuters:

*Q2 adj. EPS $0.25 vs est. $0.22

* Q2 rev $126.2 mln vs est. $119.4 mln

* Sees Q3 EPS $0.27 vs est. $0.24

Product sales rose more than 40 percent, marking its fourth consecutive quarter of product revenue increase, the company said in a statement.

After the results, S&P analyst Ari Bensinger upgraded the stock to "hold", saying that the networking equipment was experiencing a solid rebound in demand from the enterprise sector.

"While we still see a lagging recovery in Europe, we do not see weakness pronounced enough to impact strong operating trends in other geographies," he added.

Bensinger raised his price target on the stock by $10 to $33.

Always interesting to see what negative analysts do after a report that clearly surpassed their wildest thoughts. He upped his target by nearly 45% which is an incredible amount. This is so much more telling then a bullish analyst going from say $35 to $40.

Considering the size of the stock in our portfolios, we'll likely look for opportunities to prune the holding size. Otherwise, RVBD is in the sweet spot of the expansion of networks and the move to Cloud Computing. Considering its just the Q2 report and tech doesn't usually heat up until late Q3, this stock could have a big run ahead.

Thursday, July 22, 2010

Downtrend Broken (For Now)

It appears that the downtrend started on April 26th has finally been broken. Our at least for the moment because lately the market could just as easily whipsaw back down this afternoon. Bullish earnings reports from CAT, T, UPS, and others helped pushed the focus back to earnings and away from the rehashed story that Bernanke told yesterday. The key that most people seem to be missing is that corporate profits are based on what's going on in China, Southeast Asia, and South America as much as the US. So the economy can remain weak, but that doesn't mean that profits will follow the US. Stocks remain extremely undervalued because of the focus on valuing the market based on US weakness.

As of 12:20cst, the market has actually broken above the 200ema which would be extremely bullish. Lately though it hasn't been able to hold these bullish levels so we'll need a good close and a positive follow through.

Looking at the chart a close above 1088 breaks the downtrend and of course most people see 1100 as the strong resistance. Naturally any break above that level would bring along a ton of technical traders.

Wednesday, July 21, 2010

Dramatically Bullish Guidance from Cephalon

Prior to the opening Cephalon (CEPH) dramatically and surprisingly upped guidance by some 30%. CEPH didn't provide any details for the smashing results or provide full year guidance. The lack of details regarding the durability of these results is likely holding the stock down to minimal gains today.

Regardless of the details, CEPH already traded at a forward PE of just over 8 so any news on beating estimates should send this stock soaring. The market continues to discredit positive news. Great opportunity to buy on the cheap.

  • The company now anticipates that sales for the second quarter 2010 will be between $705-715 million, up from the previous sales guidance of $645-670 million
  • resulting in basic adjusted income per common share for the second quarter 2010 of between $2.17-2.22, up from the previous guidance of $1.65-1.75.
  • Due to the company's expectations regarding second quarter 2010 financial results, the company is suspending its previously issued full-year 2010 financial guidance.

Some analyst notes from Reuters:

  • JPMorgan analyst Chris Schott, in a research note, said the increased sales forecast was likely due to strong sales of the cancer drug Treanda and steep price increases for Provigil, the older of the two sleep disorder drugs and long Cephalon's flagship product.

    "The company's EPS target for the quarter is well above our estimates, suggesting lower-than-expected expense trend in the quarter as well," Schott said.

    "We expected a (earnings) beat, but not one this strong," said Robert W Baird analyst Thomas Russo in a note, also pinning the new forecast on Treanda sales, Provigil price increases and lower spending.

    Treanda prescriptions have picked up since positive data on the drug for non-Hodgkin's lymphoma was presented late last year.

Any significant revenue from Treanda would be a huge plus to this stock. The 27th should be interesting. Not that it'll matter in this market.

Tuesday, July 20, 2010

Trade: Added Texas Instruments and WellPoint

The Net Payout Yield Portfolio added Texas Instruments (TXN) and WellPoint (WLP) Both stocks have had huge buybacks in recent quarters providing a big boost to earnings going forward. The annualized yields would be easily over 10% so we used the weakness at the opening to add to positions in both stocks.

TXN was added around $24.20. Position size now 4.6%

WLP was added a round $52.00. Position size now 3.7%.

Higher Lows at Alpha Natural Resources

Alpha Natural Resources (ANR) appears to have hit the lows for now. The stock has had a couple of higher lows now based off trading today. Also, it has huge support in the $32-34 range having trading in that range for a couple of months now without breaking lower.

ANR and its met coal is a big play on the growth in coal demand in China and India. With the China stock markets turning around lately (up 2% on both Mon and Tue), its only natural that ANR would follow.

Massey Energy (MEE) is still lagging somewhat but we'd be buyers of them at this level as well.

Monday, July 19, 2010

Texas Instruments Ups Q3 Guidance

Texas Instruments (TXN) ups the midpoint of guidance for Q3 to .69 from .64 but the stock sells off 6% after hours based on a basically in line Q2 number. Our expectations would be for the stock to rebound by market opening tomorrow as the Conference Call likely calms the market concerned that revenues were a touch light in Q2.

What blows our mind is that TXN reported the highest quarterly operating profit on record, guided up for the next quarter and its not good enough for a market trading at low end valuations. The market appears to expect doom right around every corner yet its not happening. Q3 is going to be very strong for TXN even in the face of a dismal Q2 for the markets.

TXN is a 2.4% position in our Net Payout Yield Portfolio so we just love the part about the $750M used for share buybacks in Q2. Thats 2.5% of the outstanding float and 10% on an annual basis on top of a 2% dividend yield. Assuming the price action remains the same into the opening tomorrow, we'll likely add to this position.

Highlights from the Q2 report:

  • "Our Analog and Embedded Processing businesses turned in double-digit sequential growth, outpacing their respective markets and again confirming their ability to positively impact the financial performance of TI. As a result, we delivered our highest-ever quarterly operating profit," said Rich Templeton, TI chairman, president and chief executive officer.
  • "Orders were strong in the quarter, backlog increased and we expect to grow revenue again in the third quarter. Our steady investments in production capacity, even through last year's downturn, are now allowing us to meet higher demand levels from customers and simultaneously reduce lead times, which we believe is not only in the best interest of our customers, but will also help us gain share.
2Q10 additional financial information
  • Orders were $3.73 billion, up 33 percent from a year ago and up 2 percent from the prior quarter.
  • Inventory was $1.35 billion at the end of the quarter, up $286 million from a year ago and up $73 million from the prior quarter.
  • Capital expenditures were $283 million in the quarter compared with $47 million a year ago and $219 million in the prior quarter. Capital expenditures in the quarter were for analog wafer manufacturing equipment and for assembly/test manufacturing equipment.
  • The company used $750 million in the quarter to repurchase 29.7 million shares of its common stock and paid dividends of $147 million.


For the third quarter of 2010, TI expects:

  • Revenue: $3.55 – 3.85 billion
  • Earnings per share: $0.64 – 0.74

Disclosure: Long TXN

China Watch

Another strong performance from China overnight. Its now regained the 20EMA and starting to turn bullish. Some more follow through this week and we can get a lot more constructive on China and even the rest of the world.

Sunday, July 18, 2010

Chart of the Day: Earnings Yield

Earnings, earnings, earnings! Ultimately nothing matters more then earnings. You work for a paycheck or earnings. You invest for the earnings of the company. Unfortunately the stock market has become much more of a game of playing the technicals or riding the latest momentum trend when ultimately it should be about the future earnings potential of a company. That's the basic theme behind the philosophy of Warren Buffett.

Lots of other investors chase dividend yields or the safety of treasuries. Amazingly very little is talked about the earnings yield of stocks or investments. Good SP500 stocks can yield 3 or 4% and is some cases even 6 or 7% dividends. What does that really mean? Can they really afford to pay that dividend or can they afford to pay a ton more. Heck even our Net Payout Yield Portfolio that has beaten the market on average of 5%+ over the last 3+ years only focuses on buyback + dividends and nothing on the earnings yield. Sure its a sign of the cash flow coming plus the confidence of management down the road, but it never measures what the company should really pay out.

That's where the Earninsg Yield comes into place. In a way, its a version of the PE ratio, but when you place a yield on it you can compare investment classes such as bonds. Too much emphasis is placed on the PE ratio from decade to decade and a 15 is the historical average. So the current forward PE is getting closer to 11 which makes this market historically cheap. What about comparisons to other yields? After all, isn't a investment a choice between alternatives. Stock, bond, commodity, real estate, and money market/CD? In reality its usually just stock, bond, or money market for most people. So what about the bond rates? Well considering the 2 year government bond just hit a record low of around 0.5% I'd say that the PE ratio should hit a record high. Hence pushing the earnings yield down to match. Typically though investors compare the 10 year Treasury rate to the earnings yield and normally they trade in a tight range. That's why PE ratios were so low in the '70s. Why buy a stock if the Treasury yield was double digits?

The following chart shows how completely out of whack the markets have become regarding earnings. Intel (INTC) can report an all time record profits and the market basically shrugs it off. Amazingly though the only other option is historically low interest rates. I'd say more then a few financial advisors are going to be trying to explain to clients why they stuck their money in bonds at the lowest rates on record. The SP500 yields 8.75% while the 10 year comes in at 2.96%. Whats incredible is that so much fear exists that its even a question! When the market comes back to live it'll be another incredible ride.

Friday, July 16, 2010

So Much for Clarity!

Yesterday the market got most of the negatives holding it back solved.... Goldman Sachs, BP, and FinReg. Heck, even Apple resolved the issue with the iPhone4 today. So what happened other then a 200 point jump in the Dow? Oh wait, the market didn't even jump at all and had a nearly 3% drop. Huh? Were the earnings of Bank of America (BAC) and General Electric (GE) that horrible? Oh wait, they actually beat earnings and the news about the FinReg costs to BAC shouldn't have been that shocking. Consumer Confidence had a huge drop, but who was shocked by that? The markets saw a huge drop over the May/June peirod. What consumer could be confident?

Maybe today's huge drop was just a headfake from an overbought position. The news going forward will be bullish for a market run. Nothing to hold us back now and a lot of possible bullish moves by Obama and the Dems could be coming down the pipeline.

Next week will be interesting as everybody frets about the technicals of the SP500. Everybody is looking for lower lows to continue which means a drop to 1000 or lower on the SP500. The news doesn't suggest such a move, but we shall follow and make changes to our portfolios if the market doesn't hold.

Great clip from Cramer regarding the lifting of the clouds in the market.

Thursday, July 15, 2010


Today's trading was all about clarity. Though the market started weak and it appeared that the 200EMA was going to become major resistance, all of the troubles in this market seemed to clear up within hours.

First, BP caps the well and stops the oil from gushing into the gulf. This will improve confidence assuming of course it continues to work and passes numerous pressure tests. Second, Congress passed a Financial Regulation bill that lacks true to punishing power to the industry. While not a bullish bill by any means, its at least done and alot less harmful then feared. Third, Goldman Sachs (GS) settled with the SEC on fraud charges. The fine was only $550M which was considerably less then feared. With GS being such a market leader, this settlement will unleash the stock and one of the leaders that has held the market down since mid April.

The clarity on these subjects along with news overnight that China has been successful in slowing down the economy from torrid growth is also encouraging. Material stocks have been very weak of late and they should start to turn around as it becomes more evident that China has been able to engineer a soft landing. Something the Communist Capitalist are very good at these days.

All of this news leads to the other major headline of the day that Dems and President Obama have clearly lost the faith of the public. While people were in favor of healthcare and financial reform, they weren't in favor of just reforms impacting jobs and the economic recovery. If anything Dems have been seen as a major impediment to job growth and hence it appears that the political focus might now actually shift to the economy. Either that or they'll clearly lose power in November.

Both are very bullish for the stock market. Any more job destructive policies will be shot down by every Congressman up fore re-election. Gridlock or pro business legislation are the only options on the table going forward. Why else was the GS settlement finalized at such a low sum? Obama needs GS to start hiring people with their massive profits.

Everything is set up for an explosive rally now that Clarity is on the table. and the Dems out of the way whether now or in November!

Wednesday, July 14, 2010

Buy the Other Disaster Stock

With all the focus on BP, everybody has forgotten the damage done to the stock of Massey Energy (MEE) after the explosion at the Upper Big Branch Mine (UBB) in early April. MEE might be thankful for the attention focused on BP, but the stock price hasn't come close to recovering. All mining stocks are down over the last couple months so its not as though MEE has been harshly punished just for the explosion but it is down significantly more then industry leader Peabody Energy (BTU). The difference between MEE and BP and what interests us in the stock is that they've made several brilliant moves even in the face of the tragedy. MEE is working to enhance shareholder value while BP hopes to keep shareholder value from completely collapsing.

While the CEO of BP can't seem to catch a break, the CEO of MEE has made numerous moves that benefit his company. The damage to MEE seems to be in the past and recently they've done a decent job showing that the government is possibly responsible for the mine explosion that ironically killed many more people then BPs (29 to 11). Not that a tragedy should be completely defined by the lose of life, but that's usually a top focus of the public. The news releases are too numerous and detailed to outline, but I'd recommend any potential investor read through the May and June ones for more info.

I'd guess that a general survey of the public would result in very few people remembering the mine operator of the coal explosion. Not exactly the same case with BP. Of course it doesn't help that BP can't contain the spill and MEE has no ongoing damage. The explosion killed 29 people end of story. The key is that while BP immediately accepts all responsibility and rightfully so considering the ongoing leaks, MEE has continuously shown documentation to the contrary. In fact they've left reasonable doubt to the cause of the accident. Plenty of documents seem to exist suggesting that the MSHS is responsible for recommending a faulty method for releasing the methane gas. They may just be blowing smoke up this naive investors apron, but the differences in the 2 situations are night and day.

The curious part is that the stocks have taken similar paths. BP falling only 40% now and MEE down 47% since the tragedies. Interesting that they both now trade in the same range with every CNBC report debating on whether to buy BP or wait. What about MEE? Nobody mentions risk of MEE going BK like every other expert on BP. To us, MEE faces a lot less risk of extinction yet its faced a greater downward pressure. Doesn't that sound like a good recipe for a stock purchase?

In fact, MEE has done an excellent job of buying up the all important met coal assets that China will need (maybe even more so with the news on the yuan appreciation). They've also restarted several small mines to help cover the missed output from the UBB. Most importantly though they completed the purchase of Cumberland Resources that provides access to potentially 5M/mt of met coal per year. Naturally the market has completely missed the positives even if the media isn't as obsessed on the damage any more. Competitor BTU is only down some 15% from the April highs. Admittedly Alpha Natural Resources (ANR) is down 35% so some of the price action is related to the sector and fears of a China slowdown as a whole.

MEE also re-implemented the stock buyback plan of over $400M or over 10% of the market cap. Why would an investor interested in a oversold disaster play buy anything other then MEE? Why would you even discuss BP compared to the opportunity in MEE. The company is hopefully buying back 10M+ shares while BP will possibly issue more shares, borrow money at junk bond rates, and sell assets at distressed levels. MEE is extremely cheap selling at only 6x 2011 estimates. MEE is BP with much less political and damage expense. The investment decision seems obvious at this point though the debate focuses on BP.

Highlights of the bullish moves since explosion on April 5th:

4/19 - Completion of Cumberland Resources merger providing access to 216M tons of met coal and 416M tons in total. The deal also provides the opportunity to increase met coals by up to 5M tons of met coal per year without expanding capital expenditures.

5/6 - Reactivated service mines providing over 4M tons of steam coal over the next couple of years

5/7 - Expanded operations to provide over 750K tons of met coal over the next 1.5 years.

5/11 - Bought bankrupt met coal reserves in Pennslyvanica totalling over 8M tons.

5/11 - Re-initiated stock buyback with $420M available for purchasing over 10% of the outstanding shares.

6/15 - Issued a statement bringing the governments role in the explosion front an center. MEE points out that the explosion occurred shortly after changes were made to the venting of methane gas in the mine according to MSHA requirements.

7/8 - Purchases strategic River Terminal in West Virginia proviving cheaper access to exporting met coal

Monday, July 12, 2010

AerCap Continues Operational Progress

AerCap (AER) continues to develiver planes, sign leases, and buy new planes. The market continues to ignore the continous progress in growing operations. AER released its Q2 transactions report today showing 18 new deliveries and the purchase of 19 planes plus contracts to buy 9 more.

AER trades at 5.5x earnings and regularly trades in whipsaw fashion though the company continues to plod along with limited risk. The market percieves a much bigger risk then the reality. AER and Genesis Lease (GLS) survived the financial crisis with limited impact. They've had only slightly material impacts from the Great Recession and yet they can't get traction in the market. Not that its all that surprising considering the general market and Stone Fox Capital owns several other stocks with similar valuations.

The CEO continues to remain very positive on the economy and specifically Europe considering their Headquarters in the Netherlands. After all he was very bullish of Europe during the Q1 Conference Call and adamant that Greece wouldn't impact operations. So far he has been much more accurate then the hysterical economist on TV.

AER remains a top holding in both the Opportunistic and Growth Portfolios. Though the stock is volatile, the operations remain poised for continued steady growth. We expect the stock to continue bouncing higher and higher.

Friday, July 9, 2010

July Investment Report

Something I'll be doing monthly going forward and posted on my profile on the site. Any trading detail is specific for the Opportunistic portfolio.

July's report:

June was another very weak market leading to one of the weakest 2 months on record when combined with the huge drop in May. While most people were focused on the European debt crisis and the weakness it was leading to in US economic reports, it has become more evident then ever that China has clearly come to rule this market. During June, the Shanghai Index.traded down to 2,400 some 25% below it highs in mid April. The fears of a slowdown in China has roiled the industries that this portfolio focuses on whether via mining companies in copper or met coal or even construction equipment companies that need strong emerging market growth for higher stock prices. This presents great investment opportunities as the Chinese government can surely be relied upon to keep growth at least in the 8-9% range going forward.

Watching the China market will be key to stock market movements in the next few months. Signs that China is only pausing before taking the next step forward will likely turn the markets around. While the SP500 was swooning towards a bear market and fears are rampant of a double dip recession, global commodities like oil, copper, and coal have held up well after initial drops. Earnings growth and balance sheets of US companies are also strong suggesting that once stability returns to the economy growth could be strong for years to come providing the backdrop for significant price appreciation.

Though this portfolio was too far leveraged to an increasing market, a couple of stocks were shorted during June to provide some downside protection. Going into July the portfolio was fully leveraged to a snapback rally that is expected to be sustained. The market has become overly pessimistic even while the International Monetary Fund has upgraded global growth estimates. If a rally doesn't materialize, long positions will be discarded in favor of shorts. A repeat of 2008 is not out of the realm of possibilities, but the likelihood is very slim. Hence, this portfolio has remained very long to capture the outsized returns as multiples expand with the realization that the fears from 2008 far outweigh the realities.

Canada Creates More Jobs then the US

Amazingly a country roughly 1/10th the size of the US created slightly more jobs in June then the US. Canada added 93K jobs versus the 83K in the US. Its not a surprise to anybody that Canada would have a stronger economy due to its high dependence on resources needed by China and other emerging economies. But for Canada to create more jobs then the US is a direct indication of the policy issues in the US. The US should be creating 300K private jobs a month coming out of this recession, but various reforms in healthcare and finance have led to stop hiring. Not to mention that attack on offshore drilling will only help move jobs inland to places like Canada.

The interesting part is that most of the jobs were created in the services sector. Maybe all the banks are gearing up to take business from US banks weighed down by FinReg. Canada is also quickly approaching employments levels of before the recession while the US has hardly began adding jobs and possibly years away from reaching those employment levels.

Some interesting notes from The Canadian Press:

  • Statistics Canada said Friday that the economy had created a whopping 93,200 new jobs last month — almost all in Ontario and Quebec and all in the services sector.
  • That took the country's unemployment rate below eight per cent for the first time since the depths of the recession in January 2009, and now stands at 7.9 per cent. That is in contrast to a June retreat in jobs in the United States and flat readings through most of the other G7 nations.
  • Many expect bank governor Mark Carney to boost the central bank's key rate one-quarter point to 0.75 per cent — still a low level by historical standards.
  • According to Statistics Canada, the economy, which has been visible slowing this spring, has managed to create 227,000 new jobs in just past three months, and has now all but recouped the jobs losses of the 2008-2009 recession.

Wednesday, July 7, 2010

Doug Kass Calls Another Bottom

Doug Kass is one of our favorite bottom pickers. Though he claims to not be a permabear he is typically paid to short stocks. Whenever he calls a bottom its typically of more meaning then a bull. After all he called the Generational Low back in March of 2009 and now hes placed a bet that the lows have been hit for 2010.

Not a big fan of Yahoo! Tech Ticker but today they had OptionMonster's Jon Najarian as the guest host so it was worth checking out.

Monday, July 5, 2010

Future Stat of the Week: ISM Non-Manufacturing on Tuesday

The ISM Services Index is set to be reported on Tuesday and will be very crucial to the market direction. According to Bloomberg economists expect a whopping bullish reading of 55. Are they serious? The markets are down some 17% and the ISM Services will only fall slightly from the 55.4 in May. Sure July could easily fall off a cliff, but if June is still as strong as a 55 then I don't understand the fears in the market. What gets me is if the number comes in at 54 and the market acts all surprised. To us, even a 54 would be bullish and indicative that the selloff was unwarranted.

The consensus range is from 53.5 to 56. Take the low end of the range and don't act surprised. After all the only way to a double dip is for this index to fall consistently below 50. If June doesn't even drop below 54, this economy will need another shock beyond Europe or BP or the China slowdown.

Market Consensus Before Announcement
The composite index from the ISM non-manufacturing survey in May continued well into positive territory, coming in at a very solid 55.4 for the third month in a row and indicating a moderate rate of growth. Employment finally crossed above the breakeven point of 50 for the first time this recovery, but just barely at 50.4 for a 9 tenths gain. The 50.4 indicates, based on this report's methodology, a net gain in hiring. We could see another gain in the composite in June as the May new orders index posted at a healthy 57.1. This is down from 58.2 in April and the recent high of 62.3 in March but is still quite positive, indicating net growth. More recently, the Chicago PMI remained strong in June but showed signs of deceleration, coming in at 59.1, compared to 59.7 in May. The Chicago PMI is somewhat related to the ISM non-manufacturing index since it covers both non-manufacturing and manufacturing.

Edit 10:25AM: ISM came in at 53.8. Basically in line with our expectations and clearly in line with market expectations as the market rally continued. It appears that the market has finally come to grips that slower growth doesn't mean a double dip. The ISMs averaged in the mid 50s for June providing for very solid growth if maintained.

Watching China

Since China plays such a big position in the global trade, we've begun watching their markets alot closer. It also gives us something to watch with the US markets closed and China having 2 trading sessions since the US closed last Friday. Especially since Japan has for a long time lagged any US moves. China is the one market that seems to move prior to the US. Unfortunately its been all down for a long time now.

On Monday, Shanghai closed down .8% after another early plunge followed by an afternoon rally. This made a 2nd attempt to break down towards the 2300 level. As of today, the market is up some 1.7% at least signaling a short term bottom. It'll be worth watching to see whether a bottom was put into place. Expect the US markets to at least follow tomorrow. Any selloff in the AM should be bought. The US markets are very oversold so they are at least due for a bounce. Most think it should be sold but we'll see how it plays out first.

Sunday, July 4, 2010

Junk Bond Investors Say Not So Fast

Very odd to the Junk Bond Funds doing so well in the face of a recession. The iShares High Yield Corporate Bond Fund (HYG) has in fact held near recent highs. Much higher then even back in 2007 prior to the collapse of the economy.

What do junk bond investors know that equity guys don't? Surely these bonds would plunge if a double dip was imminent. Why is it holding up better then in mid 2007? Sure corporate profits are strong and the general balance sheet is strong, but these companies wouldn't have junk bonds if they feel into that category. A double dip should be disastrous to such a company.

Stocks of such companies like a Terex (TEX) or Liz Claiborne (LIZ) have just about been annihilated in this selloff but not the bonds of other high yielders? Thought bond traders always knew best.

Non confirmation of the Junk Bond Funds. First, the HYG has hardly budged from recently highs and has easily rebounded from the flash crash lows.

Another similar fund from Braclays (old Lehman) with the symbol of JNK has survived the recent crisis very well. Its even up over the last week and month. Why isn't it confirming the fear in the equity markets? Why are those investors willing to pay up?

So investors are piling into Treasuries pushing 10 year yields down to record levels, but they aren't selling the riskiest of bonds? Doesn't add up and one group will be eventually proven wrong.

Friday, July 2, 2010

Coventry Health Ups Guidance - Stock Limps Higher

Cheap, cheap, cheap. Amazing how truly bearish this market has become. All earnings expectations are scrutinized to the nth degree. Even a strong company like Coventry Health (CVH) can up guidance for 2010 by nearly 10% and see the stock barely react with the PE at only 6.7. The stock has been down 35% over the last couple of months.

How did we get to a point where investors are so bearish that they completely ignore fundamentals? Sure CVH is in the healthcare sector and Obama's new healthecare bill raises alot of concerns in the industry, but CVH has had a couple of months to study the impacts and they are comfortable enough to up guidance.

  • Excluding a beneficial impact from Medicare Advantage private payments of 28 cents per share, the forecast range of $2.47 to $2.62 is well above the consensus $2.31 analysts have been projecting. ($2.55 midpoint)
In addition they also recently made an accretive acquisition on 6/30. Mercy Health Plans has roughly 180K members providing CVH with a increase in customers. This is the 2nd deal they've made this year while the industry is in limbo likely allowing CVH the opportunity to snap up competitors on the cheap and reduce competition.

  • Mercy Health Plans is a diversified health plan with approximately 90,000 commercial risk members, 60,000 commercial self-funded members, and 30,000 Medicare Advantage Coordinated Care members throughout Missouri and northwest Arkansas.
  • expected to be slightly accretive to earnings in 2011.
So if we've got a stock that just provided much improved guidance for 2010, why did the stock price struggle to only a 1.8% gain? Any why have they fallen so far, so fast in a period where internally they were moving up projections? An investor no longer has to fear a potential hit on Q2 earnings and we think providing a solid entry point. Healthcare stocks remain very hated, but the price more then reflects that opinion.

Disclosure: No position (yet).

Monster Employment Index Jumps Again

Instead of rehashing the same data that Mark Perry reported on the Monster Employment Index I thought I'd just re-post it. Regardless of what the government data shows and is typically adjusted, the MEI is showing strong growth throughout this year.

Do you trust a report that is very manipulated and often adjusted later or one that shows the facts? Online recruitment is soaring.


From today's Monster Employment Report for June 2010:

1. The Monster Employment Index climbed 7 points in June and the annual growth rate, now at 21 percent (24-point increase), is at its highest since September 2006.

2. Online demand for workers rose in 17 and remained flat in 5 of the 23 occupational categories in June with healthcare support registering the largest gain on a month-over-month basis.

3. Demand rose in all U.S. Census Bureau regions with West North Central registered the largest monthly as well as 3-month gain. On an annual basis, Middle Atlantic exhibited the most improvement while Mountain registered the most sluggish expansion in demand which was nonetheless positive at 13 percent.

4. Online recruitment activity rose in all major metropolitan markets, with Detroit registering the largest monthly gain.

5. 49 states registered increased online job opportunities in June, with a number of states, such as the Dakotas and Wyoming, registering notable rises following somewhat sluggish recruitment trends in the earlier spring months.

Thursday, July 1, 2010

Japan Tankan Survey Turns Bullish

The 2nd largest economy finally turned bullish after 2 years. What Japan does hasn't been much of a factor in the markets for years. In the early 2000s, Japan was important to tech stocks but that market has been so stagnant for a long time that they've become irrelevant for nearly a decade. Whether or not this is a signal that the sleeping giant is about to awake is yet to be seen, but the growth in Asia ex-Japan could finally have a very positive impact on Japan.

Capital spending was also forecast up 4.4% which was significantly higher then the negative 0.4% forecast after March. Japan might return to a growth mode as the region around them soars. It might just be time to begin focusing on this lumbering giant again.

Growth in Japan could have a significant impact on Australia mining companies.. Japan lacks natural resources so just about all increases in GDP will require significant amounts of imported commodities. Stay tuned to this story as Japan could just as easily rollover yet again.

  • The headline index measuring big manufacturers' sentiment improved 15 points to plus 1 in June, the BOJ's closely watched tankan quarterly survey showed on Thursday. That was higher than a median market forecast of minus 4 and was the fifth consecutive quarter of improvement.
  • The index for September was seen at plus 3, showing firms expect conditions to improve further over the next three months.
  • In a sign the recovery was broadening, the survey showed big firms expect to increase capital spending by 4.4 percent for the year that started in April.
  • While that was smaller than the 4.9 percent rise forecast by economists, it was an improvement over the previous tankan that showed companies planned to cut spending by 0.4 percent. In the previous year that ended in March, big firms cut capital spending by 17 percent.