Thursday, September 30, 2010

Covestor Live Interview

Interview I completed with Covestor Live at the end of last week. Looks like they posted it yesterday - Interview with Covestor Model Manager Mark Holder.

China Market Jumps to Close September

After a few weeks of looking like the China market might just roll over and signal a move down in the market, the Shanghai Index jumped solid back into positive technical levels. Copper and oil have broken out as well so it appears that October is set up for some gains in the stock market as well.

The two smallcap China stocks we own, Puda Coal (PUDA) and Lihua International (LIWA) also appear to be getting a bid. Makes us more encouraged to look at a China IPO tomorrow. More on that as the story develops.


Stat of the Day: Chicago PMI Jumps With New Orders Surging

While the 'experts' expected a slight dip in the Chicago PMI to 56 from August's reading of 56.7 the number actually jumped significantly to 60.4. This backs our view that the economic data that slowed during the summer began picking up pace in September. Again another reason why the Consumer Confidence data is virtually worthless and a lagging indicator these days. With manufacturing data soaring along with the stock market, how could consumers be so pessimistic?

The PMI numbers were very bullish with orders and activity soaring and inventories remaining neutral below 50. Employment ticked up to 53.4, but sill way below the growth in activity. Good sign for corporate profits.


Highlights

This morning's rumors were right! The Chicago PMI did come in well over expectations, at 60.4 in September vs. August's 56.7. The reading relative to August points to accelerating growth this month, at least for businesses in the Chicago area.

Strength is right where it should be in new orders which jumped more than six points to a very strong 61.4. Production is very active, at 64.3 for a nearly seven point gain. Employment is moderately positive at 53.4 with inventories neutral at 49.5.

This report will ease concern that Friday's ISM manufacturing index along with Tuesday's non-manufacturing index may show a breakdown toward the neutral 50 level.

Tuesday, September 28, 2010

Bullish Market Bucking Off Bulls

It appears that this market can't even pull bulls along kicking and screaming. New report from Mark Hulbert (the expert on contrarian sentiment data from newlettes) shows that most advisors continue to doubt this rally. Appears that short term market timers are only recommending 22% of clients equity portfolios towards domestic stocks. That's down from 52% around the market top back in early May. While this is a short term 1-3 month indicator, it does show that advisors remain a lot more bearish then one would think considering the market rally during September. Clearly most advisors now worry about a October sell of and so the only path might be up.

  • Consider the average recommended domestic equity exposure among a subset of the shortest-term stock market timers monitored by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). This average currently stands at 22.1%, which means that the average short-term market timer is recommending that his clients allocate more than three-quarters of their equity portfolios to cash. 
  • This 22.1% equity allocation is surprisingly low, given the stock market’s strength in recent weeks, and suggests that there is widespread skepticism towards the rally. And that’s good news, on the contrarian grounds that the majority is usually wrong about the market’s direction. 
  • This reminds me of an analogy that some contrarians are fond of using: A bull market can be thought of as a bucking bronco in a rodeo, trying its darnedest to throw everyone off its back on the way to the other side of the ring. Clearly, this bull market is doing a pretty good job of doing exactly that.

Monday, September 27, 2010

Cramer Trying to Kill lululemon athletica Short

Luckily the Cramer (Jim Cramer host of Mad Money on CNBC) pop is far more subdued then it was back a few years ago. Back then stocks could jump 5-10% just on his mention on the show. LULU jumped 1-2% after hours with the Cramer pick, but assuming the stock doesn't close above $44 tomorrow it might help support the theory of a short term top. Tomorrow's trading will be telling.



Credit Sussie Suggests that a Canadian Bank to Buy Regions Financial

Regions Financial (RF) hasn't had a huge reaction to such speculation because it's been a common myth so far that the regional banks would be buyout targets. So far nothing has happened in this sector so the market has been lulled to sleep. Likely on the new financial regulation in the US not to mention Basel III has limited the desire of banks to go on acquisition sprees. This might change in the near future so the speculation by Credit Sussie is likely logical.

After all the Canadian Banks such as Toronto Dominion (TD) and Bank of Montreal (BMO) are relatively strong and would likely relish the opportunity to buy an American bank on the cheap. The price is likely a sticking point. Canadian Banks aren't likely to pay up and regional banks such as RF won't part with shares on the cheap. RF currently trades anywhere from 20-50% below book value depending on what number you use. Are Canadian Banks willing to pay a multiple of BV?

The analyst mentions the option of merging with BB&T (BBT) to avoid a buyout, but that doesn't make much sense to us. BBT has a $17B market cap and would greatly increase the size of RF and reduce the attractiveness. Ultimately it would depend on how the deal was structured, but just merging with BBT would be non-sense.

While we don't expect anything to happen in this sector for now, we would surely welcome a competitive offer. RF offers a great opportunity to enter into the SE region. At these levels, the network would have to be cheaper to buy then to build. Not to mention, snapping up RF reduces competition in the process.

RF remains a solid position in the Growth and Opportunistic portfolios. Stone Fox has been exploring more investments in this sector, but so far the buyout premium seems likely the main reason to invest and so far that isn't a valid option.

Technically RF is flat lining with a break either way likely signaling the future.


Southwest Airlines Buys AirTran to Spread Low Airfares, Not to Boost the Industry

Typically buyout news can be very bullish for the industry and competitors of the firm bought. Potentially less focused competition or even a higher premium for stand alone operators can be very positive. In the case of the airlines, that usually isn't the case. As soon as one airline leaves, another usually is born to take their place. Despite being a long term losing industry, airlines seem to never lack for new entrants.

Today's news that Southwest Airlines (LUV) is willing to buyout AirTran (AAI) for a roughly 69% premium is huge for shareholders of both companies and especially AAI. This deal allows LUV to more effective compete in the NorthEast not to mention to enter markets such as Atlanta. Does that make JetBlue (JBLU) or American Airlines (AMR) an attractive acquisition now that one competitor is gone? Hmm, more and stronger competition from LUV doesn't seem ideal. The headline of their press release says it all "Southwest Airlines to Acquire AirTran; Spreading Low Fares Farther". That doesn't make me want to run out and buy JBLU or AMR! The combined companies will be much more of a force on pressuring fares down.

Terms of the Deal:
At Southwest Airlines' closing stock price of $12.28 on September 24, 2010, the transaction values AirTran common stock at $7.69 per share, or approximately $1.4 billion in the aggregate, including AirTran's outstanding convertible notes.  This represents a premium of 69 percent over the September 24, 2010 closing price of AirTran stock.  Under the agreement, each share of AirTran common stock will be exchanged for $3.75 in cash and 0.321 shares of Southwest Airlines' common stock, subject to certain adjustments, based on Southwest Airlines' share price prior to closing.  Including the existing AirTran net indebtedness and capitalized aircraft operating leases, the transaction value is approximately $3.4 billion.

Comments from LUV CEO:
"Today is an exciting day for our Employees, our Customers, the communities we serve, and our Shareholders," said Gary C. Kelly, Chairman, President, and CEO of Southwest Airlines. "As we approach our 40th Anniversary of providing exceptional Customer Service at everyday low fares, the acquisition of AirTran represents a unique opportunity to grow Southwest Airlines' presence in key markets we don't yet serve and takes a significant step towards positioning us for future growth.

New or Expanded Hubs for LUV:
It offers Customers more low-fare destinations as we extend our network and diversify into new markets, including significant opportunities to and from Atlanta, the busiest airport in the U.S. and the largest domestic market we do not serve, as well as Washington, D.C. via Ronald Reagan National Airport.  The acquisition also allows us to expand our presence in key markets, like New York LaGuardia, Boston Logan, and Baltimore/Washington.  It presents us the opportunity to extend our service to many smaller domestic cities that we don't serve today, and provides access to key near-international leisure markets in the Caribbean and Mexico.

Note the focus on lower fares to more customers in more cities. AMR and JBLU have been warned! Don't get caught buying these shares on the 'HOPE' trade.

Sunday, September 26, 2010

Future Stat of the Week: Manufacturing Remains Strong

Haven't posted much lately in the 'Future Stat of the Week' column, but that's something I plan to post on more going forward. To determine the direction of the, it's crucial to foresee where the direction of economic data is headed and whether economists have accurately updated expectations.

For this week, the key economic stats are the manufacturing data of the Chicago PMI and ISM Manufacturing. Secondary are the consumer confidence reports of the Consumer Confidence Inex and the final University of Michigan Sentiment Index. While all of these numbers are expected to be lower in Sept then Aug, the Manufacturing numbers are sill relatively strong supporting a higher market. The consumer confidence indexes are expected to be lower which could provide an opportunity for an upside surprise. The stock market has been historically strong this September making an assumption of a jump in these indexes as possible. Don't see how they could drop even lower.

The jobless claims remain very important as well, but as long as the number remains between 425 to 500K its really not a market moving number. Now once the data breaks out of this range, it'll become one of the most important releases each week.

ISM Manufacturing remained relatively healthy at 54.5. Considering the large jump in durable goods reported on Friday, I'd expect this number to surprise to the upside as well though likely still a drop from last month.
  • The Institute for Supply Management’s factory index fell to 54.5 from 56.3 in August, according to the median of 63 forecasts in a Bloomberg survey ahead of the Oct. 1 report.
Chicago PMI is expected to come in at a strong 56. Doesn't seem like much of a cooling with Chicago manufacturing staying strong at 56 dropping only slightly from 56.5 in August.

Per the chart below the University of Michigan sentiment is roughly at the low levels since the end of the recession in June 2009. With the stock market breaking out, it doesn't seem likely that sentiment should remain this low and especially drop from last month. Maybe October numbers will show the improvement, but I can definitely see an upside surprise on these




Bloomberg Survey

================================================================
==
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
==
Case Shiller Monthly MO   9/28      July      0.3%     -0.1%
Case Shiller Monthly YO   9/28      July      4.2%      3.1%
Consumer Conf Index       9/28     Sept.      53.5      52.3
GDP Annual QOQ%           9/30      2Q T      1.6%      1.6%
Personal Consump. QOQ%    9/30      2QT       2.0%      2.0%
GDP Prices QOQ%           9/30      2Q T      1.9%      1.9%
Core PCE Prices QOQ%      9/30      2Q T      1.1%      1.1%
Initial Claims ,000’s     9/30     25-Sep     465       460
Cont. Claims ,000’s       9/30     18-Sep     4489      4468
Chicago PM Index          9/30     Sept.      56.7      56.0
Pers Inc MOM%             10/1      Aug.      0.2%      0.3%
Pers Spend MOM%           10/1      Aug.      0.4%      0.4%
PCE Deflator YOY%         10/1      Aug.      1.5%      1.5%
Core PCE Prices MOM%      10/1      Aug.      0.1%      0.1%
Core PCE Prices YOY%      10/1      Aug.      1.4%      1.4%
U of Mich Conf. Index     10/1     Sept. F    68.9      67.0
ISM Manu Index            10/1     Sept.      56.3      54.5
ISM Prices Index          10/1     Sept.      61.5      59.0
Construct Spending MOM%   10/1      Aug.     -1.0%     -0.4%
===============================================================

Friday, September 24, 2010

Red Metal Breaks out!

Looks like Copper is going to break above the 52 week high of $3.6 and likely head back to the $4 range last seen before the financial crisis. Stone Fox has been pushing copper and such stocks as FCX, LIWA, and SLT.

The interesting point about copper is that China now controls nearly 40% of demand and the US is around 20%. Assuming demand in the US rebounds it'll be the first time that the 2 biggest users are strong at the same time possibly putting a squeeze on the supply. See previous articles on the issues with supply.

Below is a video last night from Mad Money with Tom Collins of TangleTrade Advisors discussing the bullish technicals of copper. Very much backed up by the trade today.



Disclosure: Long FCX, LIWA, SLT

Time to Short the Airlines?

Listening to CNBC [Airline Profits Take Off] this morning and there feature on the airlines makes me think its about time to go short. Anytime people get bullish on them its time to get out or go short. US airlines have historically lost money and nothing has stucturally changed. Sure they charge a bunch of extra fees now, but that only offsets the lower ticket prices. There biggest issues continue to be that everybody wants into the industry and every time CNBC does a feature on profits the unions automatically line up for their portion. Airlines can lose billions for 5 straight years and the unions will want new contracts the year they make $50.

Reading through this article in the Ft Worth Star-Telegram just reminds me of the reasons you don't want to invest in domestic airlines. The CEO and upper management of American Airlines (AMR) is heavily engaged in discussing contracts with the various unions instead of working on developing and implementing a profitable growth plan. Any company engaged in such discussions can never be anything other then a trading buy.

Earlier this week the International Air Transportation Association (IATA) reported that worldwide airline profits would equal $8.9B this year up from a previously forecast of $2.5B. Most of this profit is suppose to come from Asia at $5.2B while Europe expects to still lose money the US will make around $3.5B. Unfortunately though IATA expects 2010 to be the peak of the cycle with 2011 profit falling to $5.3B. Highlighting the main issue with airlines: as soon as they make money more competition jumps on board or expenses jump from being unable to limit or reduce union benefits.

All in all, the only airlines worth investing might be in Asia or Latin America. Though Stone Fox would rather invest in airplane leasors and specifically AerCap Holdings (AER). AER expects to make roughly $2 this year and only trades around $12. They'll benefit from growth in Asian markets and the stability in the US market. So while CNBC can pump up the domestic players making a few dollars back after decades of losses, we'll stick with a company that even made money in the financial crisis in 2010.

  • Demand and Capacity: Rapidly improving demand has pushed traffic 3-4% above the pre-crisis levels of early 2008. Demand in 2010 is expected to grow by 11% (stronger than the previous forecast of 10.2%) while capacity will only expand by 7.0% (up from the previous forecast of 5.4%).
  • Fuel: The revised outlook maintains an average full-year crude oil price of $79/barrel. However, excess refinery capacity is pushing the “crack spread” slightly lower than previously anticipated resulting in lower prices for jet fuel. Even with stronger traffic the total fuel bill is now forecast to be $137 billion, $3 billion lower than forecast in June. Fuel continues to account for about 25% of industry costs. (if oil soars above $79 then the airlines will make a lot less leaving fuel as the largest risk factor)
  • Asia-Pacific: Asia-Pacific carriers are expected to post a $5.2 billion profit. This is better than the $3 billion recorded during the previous peak in 2007 and double the previously forecasted $2.2 billion. The strong improvement is based on strong market growth and yield gains.  Renewed buoyancy in air freight markets has been particularly important for airlines in this region, where it can represent up to 40% of revenues. The 23.5% improvement in high volume intra-Asia premium traffic, due to a surge in business travel, is another of the driving factors.
  • Europe: Compared to the June forecast, the prospects for Europe’s carriers improved from a loss of $2.8 billion to a loss of $1.3 billion. The gains are largely attributed to traffic into Europe, boosted by the low currency which has stimulated exports and improved the air cargo business. Continuing economic weakness in the European economy and faltering consumer confidence continues to depress originating passenger traffic.
  • North America: North American carriers are now forecast to make $3.5 billion (up from $1.9 billion).  US airlines cut capacity significantly as fuel prices spiked in 2008 and maintained a cautious approach to reinstating capacity to the market this year. The US economy and the resulting freight and air travel growth have grown at a better pace than in Europe. As a result, US airlines have seen a much larger rise in yields than other regions.
  • Latin America: Latin American carriers continue to benefit from very strong regional economic growth particularly in the south of the region, boosting freight, travel and profits. The profit forecast has improved slightly from $900 million to $1.0 billion.
  • Middle East: Middle Eastern airlines have benefitted from strong regional economies and an expanded share of long-haul markets. Unlike the previous two years, capacity has been added at a slower pace than demand growth in 2010, raising load factors and helping profitability. Carriers in the region are expected to see their profits rise significantly from $100 million to $400 million.

Thursday, September 23, 2010

Strong Day for Growth and Opportunistic Portfolios

Though both portfolios ended down for the day, I consider it a great day when they outperform the market by roughly 30 basis points. Its tough to have an aggressive portfolio that beats the market on down days. Especially when the Russel 2000 loses 1.2%. Typically the smaller caps and more aggressive stocks get hit very hard when the market drops nearly 1%.

A couple of hedging moves helped reduce the risk after a large run in the markets for the first 3 weeks of September. Shorting lululemon athletica (LULU) in the Opportunistic portfolio has hedged some of the loses from today though Cramer telling people to buy it on his Stop Trading segment yesterday has limited the downside. Also, the Drexion Small Cap Bear 3x (TZA) has been a significant gainer the last 2 days providing huge protection.

After 3 days of moderate losses, the market is finally in position to regain the upward trend. Any weakness tomorrow morning should likely be bought especially around 1120 in the SP500 or even closer to the 200ma around 1116.

Below are the end of day results from the Marketocracy.com virtual portfolio (see links in the right column) for the Growth Portfolio. The *TD totals don't include todays results and when adding back the roughly 1.25% of extra fees assumed by that platform, this portfolio is up some 12.5% versus a roughly 2.5% gain in the SP500. That's the type of performance this portfolio hopes to achieve.



Beating Today MTD QTD YTD
SFCG -0.52% 13.44% 18.62% 11.91%
S&P 500 -0.83% 8.23% 10.58% 3.23%
DOW -0.72% 7.24% 9.88% 2.98%
Nasdaq
-0.32% 10.43% 10.68% 2.88%








Stat of the Day: Leading Economic Indicators Continue to Rise

After a few months of basically stagnant numbers in June and July, the August Leading Economic Indicators (LEIs) jumped 0.3%. Still not a robust number, but one that signals the economy should continue growing at a moderate level.

The LEIs are likely the most under followed economic series around. It measures such mundane but very important economic stats such as interest rate spreads, M2 supply, weekly jobless claims, and average hourly work week. The markets sill seem more enamored with housing starts, monthly jobless report, or even the FED minutes.

For August the interest rate spread and the M2 money supply made the biggest positive impact. Two numbers not regularly followed by the media and especially small investors. Both signal future growth in the economy especially since the LEIs have mostly been positive this year other then the June minor drop. Definitely nothing that supports a double dip.

  • The Conference Board LEI for the U.S. continued to increase in August. The interest rate spread, real money supply, and the average workweek made the largest positive contributions to the index this month, more than offsetting the negative contributions from initial unemployment claims (inverted) and supplier deliveries. The six-month change in the index has slowed to 2.0 percent (about a 4.1 percent annual rate) for the period through August 2010, down from 4.8 percent (about a 9.7 percent annual) for the previous six months. In addition, the weaknesses among the leading indicators have become slightly more widespread than the strengths over the past six months.
  • Seven of the ten indicators that make up The Conference Board LEI for the U.S. increased in August. The positive contributors – beginning with the largest positive contributor – were the interest rate spread, real money supply*, average weekly manufacturing hours, building permits, stock prices, index of consumer expectations, and manufacturers’ new orders for nondefense capital goods*. The negative contributors – beginning with the largest negative contributor – were average weekly initial claims for unemployment insurance (inverted), the index of supplier deliveries (vendor performance), and manufacturers’ new orders for consumer goods and materials*.

Wednesday, September 22, 2010

Copper Spikes Higher - Pushes Towards 2010 High

Copper spikes to $3.55/lb today and is closing in on the $3.6 high from earlier in 2010 and will likely eventually push toward the 2009 high around $4/lb. Copper prices now has the benefit of lower grade production from the top miners [Copper Miners Underproduce Expectations By 6% a Year], high demand from a country like China that has little supply, and a recovering housing market in the US along with a FED that is pushing the dollar lower.

All in all the prices for Copper remain very favorable. Even in the face of rising prices this year, inventories continue to plunge at a fast pace. Mainly because top miners such as BHP and Freeport-McMoRan (FCX) continue to struggle to keep up with production expectations due to lower grade of ores. FCX in its recent Q2 conference call forecasted Copper prices just above the $3 range providing huge upside to any guidance they've provided.

Our Opportunistic and Growth portfolios have been heavily invested in the Copper trade via the fore mentioned FCX which is the headline Copper investment, but we've also made a smaller investment in China based Lihua International (LIWA). LIWA has been a disappointment as the market has fled these small cap China stocks due to fears that seem overdone. LIWA is a recycler of copper and producer of refined copper that is in high demand in China. Once investors become more comfortable with their financials the stock will perform very well.


Copper spot prices via Kitco:

Add caption




Copper 6 month inventories via Kitco:

Stat of the Day: Architect Index Improves Slightly

The American Institute of Architects Billings Index (ABI) improved slightly in August. It improved for the 3rd straight month..As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The score was only 48.2 and still remains below the 50 mark that designates growth in billings. Project Inquiries were a strong 54.6 signaling continued interest in projects.

The Index still isn't robust but it has improved dramatically off the bottom. 

“Project cancelations, regardless of when they happen in the design phase, continue to be the main road block to recovery for the construction sector,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Numerous projects have been put on hold indefinitely over the last several months with little hope that they will be resumed. Work that is being done is more likely smaller renovation projects, as opposed to new buildings.”

Key August ABI highlights:
    • Regional averages: Northeast (50.9), Midwest (49.2), West (45.8), South (45.3)
    • Sector index breakdown: commercial / industrial (50.6), ), multi-family residential (46.9), institutional (46.0), mixed practice (42.6)
    • Project inquiries index: 54.6 

Tuesday, September 21, 2010

Trade: Bought Drexion Small Cap Bear 3x

As the market remains in overbought levels, purchases the Drexion Small Cap Bear 3x (TZA) to hedge some of the long positions we have in the Growth, Hedged Growth, and Opportunistic Portfolios. This was done in order to protect and extend capital gains in stock that we expect to continue higher while providing some protection for a downturn back to the breakout levels around 1120 to 1130 on the SP500.

With the SP500 only having one major down day in the last 3 weeks, it was just time to hedge. This is on top of a short in LULU and some pruned positions in ICICI Bank (IBN) and Riverbed Technology (RVBD) over the last few days. Now looking at some positions to add to the portfolio on the next drop which we don't expect to be more then 2-3% before the market enters the traditionally strong November to April period of a mid-term election. Of course, you never know with October so keep a close high on whether support holds.

Agents Take Hartford Financial Out of the Penalty Box

At least that's the reasoning for an upgrade by Barclays of Hartford Financial (HIG) to a price target of $32. The stock current trades in the $23s and has a book value over $40 so that's not a huge stretch. Actually anything in the low $30s seems absurdly cheap.

Interesting news though to see that big agents that sell life insurance policies are restarting business with HIG. Not sure what took so long as HIG has been financially solid for a while now.

Info from Barclays:
Investment Conclusion
We are upgrading The Hartford to a 1-Overweight from a 2-Equal Weight and are increasing our price target by a dollar, to $32 from $31. There are two reasons for the upgrade. First, a survey of top-producing life insurance salespeople around the U.S. conducted in recent weeks by Barclays Capital Life Insurance Research -- a survey of agents who would be best positioned to write big policies for The Hartford -- found renewed interest by these agents in doing business with The Hartford. This is after several quarters in which The Hartford's weakened financial state led them to steer clear of the company. Second, recent conversations we've had with The Hartford's management have led us to conclude that the company did, indeed, learn lessons from the financial crisis about the importance of hedging risk. These conversations have led us to conclude that Chris Swift, The Hartford's new CFO, will likely be aggressive about purchasing new
financial hedges (if he hasn't done so already) for the company.

Our call today: The Hartford is serious about managing its risk and indeed may already have moved aggressively to further manage its exposure both to equities and to the Japanese yen. This was the main inference we drew from a recent 30-minute conversation we had with Mr. Swift, the company’s new CFO. Separately, the canvassing we did in the form of an informal survey of top life insurance agents around the U.S. revealed a renewed sense of openness, i.e. a renewed willingness on the part of agents to do business with The Hartford. Simply put, while our survey uncovered agents who continued to express reservations about The Hartford, and in some cases agents we interviewed said they remained unwilling to do business with the company, an even larger number of agents we interviewed told us they were warming up again to The Hartford after several quarters of having it in the “penalty box.”

HIG remains one of the top positions in all of our portfolios. Currently trading at a substantial discount to book value in a much more stable environment makes them too cheap to pass up. Chart has turned much more bullish recently as well.


Monday, September 20, 2010

Are Buybacks with Cheap Credit Good For Invesotrs?

Interesting report on Bloomberg today regarding companies using cheap credit to buyback stock. Our Net Payout Yield Portfolio favors companies with a buyback much more then the general market, but we're not sold on companies borrowing to buyback stock. In our opinion all buybacks should be made from operating cash flow. True, stocks are at historically low PE multiples and interest rates are at record lows providing a compelling opportunity for some financial engineering, but companies should never worsen their balance sheet unless they are investing in a new service or capital equipment that will provide higher earnings in the future. Buying back stock only increases earnings per share but not the total earnings. The company is not better off and in fact is worse off with the higher debt loads.

Its almost as if companies have learned nothing from governments. Once this cash is spent on buybacks, they'll then have to figure out how to pay back the borrowings and maybe at higher rates next time. Not to mention the corporate world doesn't reward one time ingenious buybacks. Our advice, resist the temptation and just buyback what you can out of your existing cash flow.

  • American companies announced $55.9 billion in repurchases since June, data compiled by Birinyi Associates Inc. show. That adds to $93.5 billion in the second quarter and $108.3 billion during the first three months of the year, compared with $125 billion in all of 2009. Corporations are using debt to pay for buybacks after the average yield on U.S. investment grade bonds fell to an all-time low of 3.70 percent last month, data from London-based Barclays Plc show.
  • Companies from Microsoft Corp. to PepsiCo Inc. and Hewlett- Packard Co. are taking advantage of low-cost financing, purchasing their stock to boost per-share earnings at a time when the Standard & Poor’s 500 Index trades at a 26 percent discount to its average valuation since 1954. At the same time, choosing buybacks may show executives are too concerned about the economy to invest in new projects or make acquisitions. 
  • U.S. companies have announced $258 billion in buybacks so far this year, compared with $52 billion in the first three quarters of 2009, according to data compiled by Birinyi. The almost fivefold increase is the largest for any January-to- September period since at least 2000, when the Westport, Connecticut-based research firm started tracking the data. 
  • Per-share free cash flow in the S&P 500, or earnings minus capital expenses, rose to $102.01 this quarter, the highest level since at least 2000, according to Bloomberg data. Excluding banks, brokerages and insurance companies, S&P 500 companies generated $682.2 billion in cash and near-cash items last quarter, the data show. (why borrow money instead of just using this cash flow?)
  • “Corporations are finally feeling a little bit more comfortable and realizing that their own shares are cheap and financing is very cheap, so why not issue some debt and buy back stock?” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “That’s a great way of distributing cash to shareholders and boosting stock prices.”(taking on more debt doesn't increase shareholder value)

Trade: Sold Portion of Riverbed Technology

Sold roughly 30-40% or Riverbed Technology (RVBD) in our portfolios after the stock has ramped from $30 to $45 in weeks. RVBD is now trading at over 30x 2011 earnings which is getting pricey. Not that other stocks like Open Table (OPEN) aren't more expensive, but its getting risky to hold onto such huge gains. Still keeping a good percentage of the shares so we're not negative on the stock just the short term valuation.

RVBD had become the largest position by far in both the Growth and Opportunistic portfolios so pruning some shares became prudent for diversification purposes. 

Goldman Sachs Upgrades Freeport-McMoRan on Copper Fundamentals

Looking at a chart of Freeport-McMoRan (FCX) and Copper (HGA) it would appear that Goldman Sachs (GS) is a little late to the party. Not that Stone Fox isn't appreciative that GS is pushing up one of our bigger investments. The stock trades at $83 now, but was available for only $57 when July started. Where was GS then? Not to mention that the new target of $94 doesn't provide that much upside from these levels so trade on this news with caution.
























Copper has also seen a huge rise and is now attempting to breakout and test the recovery highs around $3.60/lb. So again GS seems to have turned bullish long after a run has begun. Now to be fair, the copper inventory situation has become a lot more bullish over the last couple of months. LME copper inventories continue to plunge on a daily basis from 520k tonnes 6 months ago to 382K tonnes today.























GS comments:
  • Goldman Sachs was active in the metals segment on Monday morning. The firm upgraded Freeport-McMoRan (NYSE: FCX - News) to "Buy" from "Neutral" and lifted its price target to $94 from $79, citing a bullish outlook for the copper space. Meanwhile, gold, which accounted for about 17% of the firm's 2009 revenues, is trading at record highs. Goldman's price target represents a 15% premium to the stock's price at the end of last week.
  • Freeport-McMoRan gained 14.5% in the month ended Friday, ranking it first among Copper Stocks Index components, where aggregate performance has been in-line with the S&P 500 for the period. Other top performers include Southern Copper (NYSE: SCCO - News) and Sterlite Industries (NYSE: SLT - News), and it will be interesting to see how the sector responds to Goldman's copper commentary this week.
In other news, FCX made a $500M investment in McMoRan Exploration (MMR) to help them buy assets from Plains Exploration & Production (PXP) and invest in exploration and drilling in shallow waters off the US Gulf of Mexico. While MMR in its own right is an interesting investment, the ties between FCX and MMR have us questioning the arms length of this transaction. Something to keep any eye on as FCX should be investing in its own business rather then helping out its little brother. 

Disclosure: Long FCX

Friday, September 17, 2010

Trade: Shorted lululemon athletica

Shorted lululemon athletica (LULU) for the Opportunistic Portfolio mainly as a hedge for some short term over bought stocks. LULU also has a huge gap back to the $37 range so it provides a great opportunity for a stock likely to get whacked if the market sells off. The trade was made around $43.9 and any close above $44 would likely trigger covering this short.

Again nothing wrong with the company except being highly priced now at 30x earnings and wanting some hedge for a portfolio still levered at 1.5x.


Massey Energy Slammed By Q3 Operating Loss Forecast

That's the bad news. The good news is that 2011 targets remain intact and the all important met coal market remains strong.

After the close last night, Massey Energy (MEE) reported that Q3 production was lower then expected and operating costs were higher then expected. Not exactly an investor friendly combination. Of course that has always been the risk of investing in MEE after the Upper Big Branch explosion in early April as Stone Fox highlighted in July [Buy the Other Disaster Stock]. Management focused on the UBB investigation combined with regulators being extra cautious is never a good combination. Hopefully that will change as the year ends and 2011 starts.

Higher regulation has been a big issue in the US coal sector since the explosion. Short term that regulation just leads to higher costs and lower production impacting just about every company in the Appalachia region. See the Patriot Coal (PCX) news. Long term though it leads to higher prices because supplies will be reduced. Other then natural gas, just about all other commodities continue to face greater challenges in getting them out of the ground.

If you believe MEE management, and naturally most investors don't these days, most of the operational issues including restarting the Revolution longwall mine, restarting the Sprouse Creek processing plant, bringing the new state-of-the-art Zigmond processing plant on line and starting production at its Laurel Creek property will be resolved shortly.

MEE remains a favorite investment of our Opportunistic, Growth, and Hedged Portfolios especially since the stock tanked 7% today. Sure MEE is having operational issues, but mining companies should be valued based on assets and long term prospects of their commodities such as met coal. The story hasn't changed due to Q3 issues. Stock should be bought on this weakness. 

Snippets from the PR:
  • "Our operations have continued to struggle since April," said Don Blankenship, Massey's Chairman and CEO. "As we have noted earlier, increasingly stringent enforcement actions by MSHA across our operations and throughout the Central Appalachian region have resulted in lost shifts and loss of productivity. In addition, our Revolution longwall mine was idled in June for a planned longwall move but has remained down pending approval of its ventilation plan. As a result of these and other factors, we now expect our third quarter shipments to approximate 10 million tons and we expect to report an operating loss for the quarter."
  • "We remain confident that we will achieve operational improvements going forward," Blankenship stated. "As the Upper Big Branch investigation winds down, we have refocused management time and attention on our ongoing operations and we are initiating actions to improve productivity and re-establish operating consistency in all our mines. In addition, our early negotiations with metallurgical coal customers give us reason to expect pricing in 2011 will be favorable to what we have realized in 2010. Our guidance for 2011 remains unchanged."
Guidance Summary


(In millions except per ton amounts)
2010
Previous
Estimate
2010
Revised
Estimate
2011
Estimate

Shipped Tons
39.0 to 40.5
39.0
45.0 to 51.0

Average Price/Ton
$71.00 to $73.00
$71.00
$82.00 to $86.00

Cash Cost/Ton (1)
$56.00 to $60.00
$60.00
$57.00 to $61.00


Bernie Marcus: JOBS Stupid!

Bernie Marcus, Co-Founder of Home Depot (HD), had some interesting words on CNBC today. It's always nice to see somebody say how it is instead of being all political on TV.

Interesting idea on the reality show for Geithner..... 'Geithner Does Small Business'. Yikes, did he really say that? And the bumber sticker over Clinton's mouth that says 'Jobs Stupid'. Is that for Bill or Hillary? Lol...


Junk Bonds Continue Rallying Higher

As we've reported in the past, Junk bond funds such as the Lehman High Yield Bond ETF (JNK) continues to rally higher as the stock market pauses at the June and August highs. Sure its people desperate for higher yields then the absurdly low Treasuries and even high grade corporates. The reality though is that it signals too many people placing emphasis on the direction of the stock market has how it relates to the economy. Investors wouldn't rush into JNK unless they were confident of a stable economy. Weakness in the stock market has much more to do with structural changes away from stock investing.

This is just another signal that any pause at the 1130 range in the SP500 will likely be short lived. An assault on the April highs of 1220 is likely around the corner towards year end.




Thursday, September 16, 2010

Texas Instruments Dramatically Increases Buyback

Texas Instruments (TXN) stock is up some 4% after hours because of an announcement to increase the existing buyback by $7.5B and increase the dividend by 8%. Another example of why Net Payout Yield stocks provide very compelling investments. A company with an expensive stock or one that has very little cash flow could never provide this much money back to shareholders. Also, its very compelling to own a stock that increases the dividend by 8% a year which alone is much better then Treasury Yields with the 10 year below 3%.

Over the last 12 months TXN had a Net Payout Yield of 7.7% with roughly 5.7% coming from buybacks. Lately investors have been lashing back at buybacks, but it is much more efficient then paying taxes on those dividends. Its also worth noting that the Yield exceeds 12% when considering the buyback run rate in Q2. Considering this announcement it wouldn't surprise Stone Fox if TXN isn't keeping up with that pace of $700M in buybacks. Many companies reduced purchases during the Great Recession but TXN appears to be back in full force. TXN has reduced the shares outstanding by 31% since 2004. This company might be private before you know it if shares stay this low.

Details from PR:
  • repurchase an additional $7.5 billion of its common stock.  This is in addition to the $1.3 billion in repurchase authorizations remaining at the end of June 2010.  
  • TI plans to repurchase shares at times and prices considered appropriate by the company.  Including today's announcement, the Board has authorized the repurchase of $27.5 billion of stock since September 2004.  The company has reduced the number of its shares outstanding by 533 million shares, or 31 percent, from September 2004 through June 2010.  
  • Additionally, the company plans to raise its quarterly cash dividend $0.01 per common share.  TI's new quarterly dividend will be $0.13 per share of common stock, resulting in annual dividend payments of $0.52 per common share.  
  • The new quarterly cash dividend will be payable November 22, 2010, to stockholders of record on November 1, 2010, contingent upon formal declaration by the Board of Directors at its regular meeting in October.
  • This marks the seventh consecutive year TI has increased its dividend.  The company has paid dividends to its shareholders on an uninterrupted basis since June 1, 1962.

Covestor Opportunistic Model: Outperforming SP500 by 16.32%

Thought I'd just pass along the stats from the Covestor Opportunistic Model that has now been live for a little more then 7 months. So far the market has been virtually flat during that period only gaining 2.5% while the model is up nearly 17%. Looks like its adding another 40-50 bps today.

This model is a very aggressive model that attempts to make huge alpha via the use of leverage and shorts in addition to the traditional long positions in the Growth Portfolio tracked via Marketocracy.com that has out gained the SP500 by an average 12% per annum over the some 27 months of tracking. See info on the different Portfolio options on the right hand column under Portfolio Management.

Looking into the prospects of putting the Growth and Net Payout Yield Portfolios as investable options on Covestor.com. Targeting mid - October to have them active. While the Growth Portfolio is aggressive, both models will be open to IRAs with the Net Payout Yield Portfolio being a very attractive, conservative option for retirement money. Please email me at stonefox27@ymail.com with any questions or suggestions.

Below table pasted from Covestor.com. Please click on the link above to check it out.

Inception Feb 03, 2010 Manager*
S&P 500 Avg. Sub.
Month to date (%) 22.07 7.22 21.42
1 month (%) -13.46 -4.74 -13.07
3 month (%) -11.10 -3.68 -11.12
Annualized since inception (%) 28.89 4.16 -
Since inception (%) 16.85 2.53 n/a
Sharpe (since inception) 0.51 0.20 n/a

* Includes trades that fail Covestor Trading Rules
Past performance is not indicative of future performance





























Soros Makes Big Addition to Massey Energy Position

George Soros is a legendary investor so its natural a good sign when somebody like him buys into a stock in your portfolio in a big way. During Q2, Soros Management Fund bought 1.7M shares of Massey Energy (MEE) for a total position of 2.2M shares.

Anybody following this blog knows that MEE hit our radar after its huge drop following the mine explosion in April. See Buy the Other Disaster Stock for more details. MEE remains a very cheap stock having recovered very little from that post explosion drop so far.

According to Tickerspy.com Soros Fund Management was busy buying the following stocks in Q2. Looks like a big focus on material and ag stocks:

Soros Fund Management was adding to positions in agriculture giant Monsanto Company (NYSE: MON - News) and energy plays InterOil Corporation (NYSE: IOC - News) and Massey Energy Company (NYSE: MEE - News). The firm also hiked its bet on consumer technology giant Apple (NASDAQ: AAPL - News) and pharmacy CVS Caremark (NYSE: CVS - News).

Wednesday, September 15, 2010

Biotechs Finally Perking Up

Our Opportunistic and Growth portfolios aim to capture excess returns, but not without some diversification. Limiting portfolio sizes to 20-30 stocks allows for diversification without getting to levels of diworstification. Hence, the portfolios have always had a few 'risky' biotech stocks. Based on the results of Savient Pharma (SVNT) the rewards have clearly outweighed the risks. See previous post. Oh why didn't I include SVNT in the Opportunistic Portfolio????

Regardless the Growth Portfolio has seen some nice out performance demand on the back of SVNT being up 33%. Also noticed that the other biotechs in those portfolios have been perking up of late. All 3 stocks have seemed alot cheaper then the risk involved. Rigel Pharma (RIGL) and Cephalon (CEPH) have seen bullish trading of late. Not being predisposed to investing in this sector, we just found the valuations too compelling.

RIGL is a clinical-stage drug development company that discovers and develops novel, small-molecule drugs for the treatment of inflammatory and autoimmune disorders, as well as muscle and metabolic diseases. Rigel's pioneering research focuses on intracellular signaling pathways and related targets that are critical to disease mechanisms. Rigel's productivity has resulted in strategic collaborations with large pharmaceutical partners to develop and market its product candidates. Current product development programs include FosD (previously referred to as R788), an oral syk inhibitor that is expected to enter Phase 3 clinical trials for rheumatoid arthritis in 2010, and R343, an inhaled syk inhibitor that is in clinical trials for asthma.

FosD has major drug aspirations and could lead the stock much higher. After watching the stock languish below all the major moving averages, its recently had the 50EMA cross over the 200EMA. This is a very bullish move.






















CEPH is a global biopharmaceutical company dedicated to discovering, developing and bringing to market medications to improve the quality of life of individuals around the world.  Since its inception in 1987, Cephalon has brought first-in-class and best-in-class medicines to patients in several therapeutic areas.  Cephalon has the distinction of being one of the world's fastest-growing biopharmaceutical companies, now among the Fortune 1000 and a member of the S&P 500 Index, employing approximately 4,000 people worldwide.  The company sells numerous branded and generic products around the world. In total, Cephalon sells more than 150 products in nearly 100 countries.


CEPH is a well known biotech trading at less then 10x EPS estimates. True, they have a major drug coming off patent soon, but they also have a ton of cash and potential for replacing that drug as well. This stock has not only recently crossed above the 200EMA but the 20EMA has passed the 50EMA for the first time in months. Both bullish signs that future moves are likely to be up and not down.





















Diversification has again paid off by buying these out of favor biotech stocks and waiting for the market to recognize the inherent value at an unexpected time. Its possible that the Democrats losing power in November has lead investors back into this sector.


Disclosure: Long SVNT, RIGL, CEPH

Lihua International Confirms 2010 Guidance

Yesterday Lihua International (LIWA) confirmed its 2010 guidance of roughly $1.35 per share. The stock currently is having a difficult time holding onto $8. Market clearly doesn't believe the guidance as the company recently double its smelting capacity that should enable growth in 2011 and beyond.


LIWA is a leading Chinese developer, designer, and manufacturer of low cost, high quality alternatives to pure copper products, including refined copper products and superfine and magnet wire, as well as copper clad aluminum ("CCA") wire.

LIWA operates in a highly desireable area in the China market. China is deficient in copper reserves therefore requiring them to import large quanities. LIWA provides a solution by recycling copper products and developing copper alternatives. What isn't to like about this stock? Nothing except concerns over fraud in the smallcap China stocks.True their is concern over financial standards, but the issue seems to be overblown because of issues at a few other companies.

This stock remains a huge bargain but the unknown is when the market will catch onto and believe the reported results.The chart looks hopeless unless the current bottom holds.


Lihua also reiterated its full year 2010 financial guidance:

    -- Gross profit of $52.9 million to $55.7 million, representing 46-53%
       growth over 2009.
    -- Non-GAAP net income of $38.1 million to $40.3 million, representing 48-
       57% growth over 2009 (or $1.3 to $1.4 EPS based on 29.3 million fully
       diluted shares a/o 6/30/10).
    -- Based on its current growth initiatives, including investment in the
       completion of a new smelter that will effectively double its production
       capacity to 100,000 metric tons by YE 2011, Lihua expects its 2011 cash
       balance as of December 31, 2011 to be between $75 million to $85
       million.
 
 
Disclosure: Long LIWA 

Tuesday, September 14, 2010

Savient Pharma Finally Gets FDA Approval For Gout Drug

After Hours, the FDA finally approved the gout drug Krystexxa in what seemed like an eternity. Savient Pharma (SVNT) had originally gotten an FDA Panel recommendation by the count of 14-1 way back in , but final FDA approval was delayed in August 2009 principally due to manufacturing issues.

Gout is a common type of arthritis in which deposits of uric acid build up around joints, causing pain, swelling and stiffness.Considering the general lack of modern drugs for gout it has been generally accepted that this drug would have little issue in being put to use by doctors. There is a huge market waiting on the approval of this drug.

Though it seemed apparent that the drug would be approved today the stock has languished in the $15 range for months. It last traded up 20% to around $18 after hours. SVNT is a 2.7% position in the Growth Portfolio so Stone Fox has a keen issue in following the trading tomorrow.. Below are some details from analysts regarding buyout prices. Remember the company basically put themselves up for sale last year so an announcement is expected imminently. Any price in the $25 range would definitely draw us into selling. Something around $20 seems very low for drug with the potential of a $1B drug even if a realistic number is something north of $500M.

Tomorrow should be interesting with a CC scheduled prior to the market opening. The number 1 question would be what is the offer price on a buyout.

Acquisition Price via Bloomberg article:

Savient may sell for $21 a share, an 42 percent premium over the most recent closing price, based on an estimate of $900 million in peak sales for Krystexxa, said Gene Mack, an analyst at Soleil Securities in New York. Eric Schmidt, of Cowen & Co., projects $600 million in peak sales and an acquisition price of $20 a share. Salveen Richter, of Collins Stewart, is looking for $700 million in drug sales and $25 per share.
An offer of $25 a share would value Savient at $1.69 billion based on the company’s 67.6 million shares outstanding as of Aug. 3.

“They’ve placed their bet,” Richter said in a telephone interview. “They need approval to move forward. The next question is how many buyers.”

Novartis, of Basel, Switzerland, would be a logical suitor because its treatment for gout flares could be packaged with Krystexxa, Mack said. Amgen, based in Thousand Oaks, California; J&J, based in New Brunswick, New Jersey; or Abbott Laboratories of Abbott Park, Illinois, may also be interested because they have rheumatology products made from biotechnology, he said.

September Investment Report

The Bullish economic news from the last few weeks has completely knocked down the double dippers. Ok, maybe most of the news wasn't overly positive, but it clearly signaled the economy is recovering if even very slowly. With the US economy and even Western Europe at least holding steady, it should allow Emerging Markets to continue growing at rapid rates.

52 Week Highs
The banter in the media claims the market and most asset classes are trading as a group, but clearly some stocks and sectors continue to stand out providing opportunities to outperform the market. This leads us to several stocks in the model hitting 52 week highs because of global exposure or the latest hot technology like cloud computing. ICICI Bank (IBN), Riverbed Technology (RVBD), and Terremark Worldwide (TMRK) all reached 52 week highs recently. All while the SP500 is still down 110 points from the April highs. The correlation in the markets might be closer then ever, but leading companies will continue to outperform the market.


Obama Election Trade
Intrade.com continues to show that Democrats and Obama will clearly lose power in the mid-term elections in November. True Intrade very much matches more sentiment based polls, but the benefit to Intrade is that the site requires 'investors' to actually place money where they thing the vote will end up. Much better poll then a phone call to a random person. It now shows a 73% chance of Republicans taking control of the House of Representatives and a 67% chance of claiming 48+ seats in the Senate. Both numbers that would significantly reduce the ability of Obama to get his agenda passed. As these numbers move higher over the next month, expect the market to climb higher. Obama is already making more market friendly comments as these predictions are likely finally controlling his objectives.


China and Copper
China and copper remain strong markets and hence themes in this portfolio. Freeport-McMoRan (FCX), Alpha Natural Resources (ANR), Massey Energy (MEE), Lihua International (LIWA), and Puda Coal (PUDA) will continue to benefit. LIWA just confirmed 2010 EPS guidance of $1.35 yet the stock only trades at $8. With the high demand for refined copper in China, this stock will move higher once the market becomes comfortable with small cap Chinese stocks.

M&A Activity
Activity has picked up in M&A land. Several stocks in this model such as Hartford Financial (HIG), Regions Financial (RF), and Terex (TEX) continue to be mentioned as possible targets. While buyouts might add some quick gains, we'd rather see these stocks reach full valuation before agreeing to offers. The rumors clearly highlight the valuation proposition such as HIG trading recently at only 50% of Book Value. This model will be happy to see these stocks slowly regain appropriate values.

Summary
August was another rough month but hang tough as the market is headed to historically the best 6 months during a 4 year Presidential cycle. Typically the 6 months (Nov - Apr) following a mid-term election are the best 6 months during the full term. The rally might even start sooner this time with any further clarity on Obama and the Democrats losing power. Remain positive!

Atwoods Oceanics Announces Contract Extension for Eagle

Today Atwoods Oceanics (ATW) announces a contract extension with Chevron Australia for the Atwood Eagle ship for 6 months beyond the delivery date of the new Atwood Osprey. This move is notable for a couple of reasons.

First, demand must be improving considering that Chevron is willing to employ both ships during the initial 6 month period as opposed to just transitioning to the new ship. It also helps the financial outlook for ATWs as it keeps one of their biggest ships working for another 6 months. This now places it on contract through roughly the end of Q3 2011 leaving a long time to contract the ship out with a new customer. Atwoods currently only has 3 deepwater ships and a 4th to go into production in 2011 that earn more then $400K+ a day so its crucial that they be working.

Second, another interesting point is that the dayrate dropped down to $390K from $450K. Hard to tell if this is just a sweet deal with a customer using 2 ships at once or just the best deal that Atwoods can obtain for a older ship.

On another note, ATW announced that their newbuild due in 2012 with a depth of 10000' will be called the Condor. Not a big deal, but notable because its getting to the point that ATW should be finalizing a contract for this ship.Having a name is likely crucial for Marketing materials.

ATW remains a sub 10 PE as the market frets over global demand and deepwater drilling. Its worth noting that ATW only has 1 ship in the GOM that is relatively immaterial to their revenue stream. With contract extensions like the above, Atwoods should garner higher valuations in the future. 


Disclosure: Long ATW

Monday, September 13, 2010

World Industrial Production Hits All Time High Way Back in June

Amazing that while most people fretted about a double dip during the summer, World Industrial Production hit an all time high eclipsing the record high from back in 2008. Clearly people focusing on a double dip are stuck on the lackluster US Housing market and not the global economy.

Mark Perry provided this graph via the Netherlands Bureau for Economic Policy Analysis. Mark does a great job pointing out the facts surrounding global growth and this is yet another example of how economic data and graphs so much more useful then the talking heads on TV. Show me the facts not the spin!


Trade: Sold ICICI Bank

ICICI Bank (IBN) shot up 6% today placing the stock in a severe oversold position. Hence considering the market being up 8 of the last 9 days, Stone Fox used the jump to unload our stock in IBN in the Opportunistic Portfolio. The more long term focused Growth Portfolio cut back its position by roughly 15% as well.

IBN still has long prosperous future ahead, but the market and particular the stock were ahead of itself short term. The RSI was an off the charts 82 and the CCI hit 262. Both numbers that can typically signal a short term top. Hopefully the stock will swoon back to the low $40s soon and we'll re-enter the position.

2:20 Update:  Trade was just below $48. So far the stock and the market have held up better then expected from over bought conditions. Would imagine the stock does dip back to mid $40s, but at some point i'd expect a breakout above the current ranges in the SP500 to leave a lot of people expecting a pullback that doesn't happen.


Texas Instruments: Ignore the Headlines

Texas Instruments (TXN) provided updated guidance for Q3 last Thursday after the market closed and the headlines continue to suggest that TXN guided down or provided less then stellar results. The fact is that TXN guided to the exact midpoints as before - they raised the lower end and lowered the upper end by equal amounts. Why then does the media keep suggesting that TXN along with other semiconducter stocks like Intel (INTC) is forecasting a declining market? My guess is that nobody in the media actually read the TXN release. Here are the details from Q3 2010 Business Outlook:

  • Revenue:  $3.62 – $3.78 billion, compared with the prior range of $3.55$3.85 billion
  • EPS:  $0.66 – $0.72, compared with the prior range of $0.64$0.74.

Lets analyze the facts: The revenue mid-point was $3.7B before and now its $3.7B. The EPS mid-point was $0.69 before and $0.69 after. The average analyst estimate is $0.69 and TXN reported $0.62 in Q2.

Still looking for any negatives. Ok, the negative could be that TXN didn't guide up but honestly that stock should trade at something rich closer to 20x EPS estimates to warrant that. TXN maintained the mid-point which matches analyst estimates. Its some 10% higher than the previous quarter. Doesn't suggest that demand is falling rather then a market that wasn't as robust as some market participants hoped. Though if these investors hoped for higher results they sure didn't actually invest in the stock with those expectations. Less then a 10 PE isn't suggestive of a market expecting much growth or beating analyst estimates.

TXN remains a favorite of the Net Payout Yield portfolio with its 2% dividend yield and significant buybacks over the years. If the stock wants to sell off because the media along with most analysts can't read a press release, then TXN will take advantage of the situation and buy more stock at lower levels. The market will clue in at a latter date.

Sample Media reports:

Spending Sputters for Chipmakers - theStreet.com
Are storm clouds gathering over the tech sector? If recent comments from chipmakers Texas Instruments(TXN) and National Semiconductor(NSM) are anything to go by, all is not well -- especially with PCs. (No because TXN doesn't focus on just PCs)

Chip stocks drop amid signs of weakening demand - AP
Disappointing sales forecasts from National Semiconductor Corp. and Texas Instruments Inc. triggered the sell-off. Both those chip makers lowered their revenue targets for the current quarter after the market closed Thursday. (Huh... TXN did not lower its revenue target)

These were just a couple of snippets from 2 reports on TXN from last Friday. Examples of why investors must do their own homework or they will be whipsawed by the markets. The media seems to feed on misinformation without confirmation as these snippets were constantly repeated. The stock behaved very well after a mid morning sell off. Obviously the 'real' investors caught onto the fact that TXN actually talked about how industrial and wireless sectors were performing better then expected. Its very possible that the recent weakness in the PC sector has more to do with exceptional demand from the iPad as opposed to weakness in the economy. These days its too easy to say the economy is weak and seem rigorous even though in the case of TXN that clearly is a mistake.

TXN remains a great investment for the Net Payout Portfolio based on the facts and not the headlines.

Disclosure: Long TXN

Friday, September 10, 2010

Terremark Worldwide Hits 52 Week High as Well

How did I forget Terremark Worldwide (TMRK) on previous post discussing 52 week high stocks in our portfolios. TMRK is a leading investment in both the Opportunistic and Growth Portfolios. Ironically this stock hit a 52 week high back in August, then sold off big time. Whether this will be a breakout this time or eventually fail is still up for debate.

TMRK is caught up in the 'cloud computing' craze as it is a prime provide of cloud services in its data centers. Its interesting to note that Rackspace Hosting (RAX) is also breaking out today which has been unusual for these 2 stocks to trade in tandem. So much for the market trading in a herd and stock picking going out the window.


















RAX on the other hand hasn't broken its high from the beginning of the year. Its a much bigger company so potentially TMRK is being seen by the market has a takeover candidate.




















Both stocks and especially TMRK has become overbought and likely needs to take a break prior to advancing above $10.

Millicom Cellular & ICICI Bank Approaching 52 Week Highs

Everybody claims it's not a stock picker market because all stocks are theoretically trading together due to ETFs. Not sure what explains why some stocks are hitting 52 week highs and others are lagging. Other then Riverbed Technology (RVBD) which has consistently hit new highs recently, Millicom Cellular (MICC) and ICICI Bank (IBN) are at or approaching 52 week highs under the radar.

What do these 2 stocks have in common? Mainly a focus on business outside the US in fast growing markets.

MICC is a leading cellular provider in Latin America, South America and Africa. They operate in 14 locations in these fast growing areas providing much more opportunity then any domestic operator. MICC has continued to slowly creep up even during a flat to down market the last 4 months. Almost a perfect chart.























IBN is a leading bank in India. Having one of the largest banking networks in the fast growing country with the goal of growing beyond the borders of that country. IBN expects to one day become a Top 10 bank in the world by utilizing cheap bank end operations in India to run networks all around the world. IBN is now trying to break above its early April highs in the mid $45s.























Either way, both stocks will continue to benefit from global growth and the lack of exposure to the US economy. Both stocks will likely remain core positions of the Growth Portfolio.


Disclosure: Long IBN, MICC, RVBD

Thursday, September 9, 2010

Intrade Predicts 71% Chance of Republicans Taking the House

This naturally has huge implications to the stock market from now until the November mid-term elections. The market will continue to rally in whats suppose to be a typical weak Sept - Oct period if the odds remain above 70% of the Republicans taking the House of Representatives.

Intrade.com is the website where people bet their own money on outcomes such as elections. Right now you have to pay $72 to get $100 if the Republicans take the House. That's actually a lower % then I'd expect at this time. Anyway, as that number goes up the market will surely follow. Anything that pushes Obama towards the center that leads to him talking about business tax credits versus cap and trade taxes will be bullish.

Below is the current chart. As they say, people putting their money on the line are likely a lot more accurate then people on TV spinning the results whichever way suits their employer. Something definitely worth watching.