Sunday, January 31, 2010
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
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.
|ANNUAL TOTAL RETURN (%) HISTORY|
Clip from his recent appearance on CNBC:
Tuesday, January 26, 2010
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:
Interesting comments from typically conservative analysts at S&P:
S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF REGIONS FINANCIAL
(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.
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.
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
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.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.
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.
Tuesday, January 19, 2010
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
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
Tuesday, January 12, 2010
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!
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
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
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
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.
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
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
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